<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act.
For the transition period from _______________ to ______________
Commission file number 0-25678
MRV Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1340090
(State of other jurisdiction (IRS Employer
of incorporation or organization) identification no.)
8943 Fullbright Ave., Chatsworth, CA 91311
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (818) 773-9044
Check whether the issuer:(1)has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act 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 [ ]
As of June 30, 1999, there were 26,771,890 shares of Common Stock, $.0034 par
value per share, outstanding.
<PAGE> 2
MRV COMMUNICATIONS, INC.
Form 10-Q June 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998 (audited) 3
Condensed Consolidated Statements of Operations (unaudited)
for the Six Months and Three Months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited)
for the Six Months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION 20
Item 6: Exhibits and Reports on Form 8-K 20
SIGNATURE 21
</TABLE>
As used in this Report, "MRV" or the "Company" refers to MRV Communications,
Inc. and its consolidated subsidiaries.
2
<PAGE> 3
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
(unaudited) (audited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 26,061 $ 20,692
Short-term investments 16,509 30,493
Accounts receivable, net of
reserves of $8,322 in 1999 and $8,489 in 1998 57,073 54,596
Inventories 49,489 47,467
Deferred income taxes 4,867 5,035
Other current assets 6,037 5,508
- ------------------------------------------------------------------------------------------------------------------
Total current assets 160,036 163,791
PROPERTY AND EQUIPMENT - At cost,
net of depreciation and amortization 19,285 19,357
OTHER ASSETS:
Goodwill 29,484 26,666
Investments, principally U.S. Treasuries 101,649 100,138
Deferred income taxes 5,853 5,661
Loan financing costs and other 3,616 4,579
- ------------------------------------------------------------------------------------------------------------------
$ 319,923 $ 320,192
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of financing lease obligations $ 87 $ 185
Accounts payable 33,096 29,757
Accrued liabilities 13,475 13,606
Accrued restructuring costs - 82
Deferred revenue 2,002 4,398
Income taxes payable 451 445
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 49,111 48,473
LONG-TERM LIABILITIES
Convertible debentures 90,000 90,000
Capital lease obligations, net of current portion 1,056 1,400
Deferred income taxes 353 48
Other long-term liabilities 3,168 2,869
- ------------------------------------------------------------------------------------------------------------------
Total long term liabilities 94,577 94,317
MINORITY INTERESTS 2,988 2,973
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
1,000 shares authorized no shares outstanding - -
Common Stock, $0.0034 par value:
80,000 shares authorized
26,772 shares outstanding in 1999
and 26,639 shares outstanding in 1998 89 88
Additional paid-in capital 181,344 180,656
Treasury Stock (133) (133)
Retained earnings (deficit) (5,852) (5,471)
Accumulated other comprehensive income (loss) (2,201) (711)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 173,247 174,429
- ------------------------------------------------------------------------------------------------------------------
$ 319,923 $ 320,192
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
3
<PAGE> 4
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
-------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Revenues, net $ 143,367 $ 126,568 $ 73,251 $ 65,742
- ----------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 93,961 70,754 47,595 36,749
Research and development
expenses 17,037 10,525 8,572 5,282
Selling, general and
administrative expenses 31,737 23,926 15,892 12,326
Purchased technology in progress -- 20,633 -- --
Restructuring costs -- 23,194 -- --
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) 632 (22,464) 1,192 11,385
Interest expense related to
convertible notes 2,250 -- 1,125 --
Other income (expense), net 2,660 1,374 1,257 690
Provision (credit) for income taxes 1,409 363 782 3,531
Minority interests 17 240 17 16
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (384) $ (21,693) $ 525 $ 8,528
==========================================================================================================
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment (1,490) 66 (929) 146
- ----------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (1,874) $ (21,627) $ (404) $ 8,674
==========================================================================================================
NET INCOME (LOSS) PER SHARE - BASIC $ (0.01) $ (0.82) $ 0.02 $ 0.32
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.01) $ (0.82) $ 0.02 $ 0.30
- ----------------------------------------------------------------------------------------------------------
SHARES USED IN PER - SHARE
CALCULATION - BASIC 26,679 26,440 26,736 26,492
SHARES USED IN PER - SHARE
CALCULATION - DILUTED 26,679 26,440 29,163 28,536
</TABLE>
See accompanying notes
4
<PAGE> 5
MRV COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
------- --------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 3,059 $(13,553)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,325) (4,117)
Purchases of investments (1,511) (4,058)
Proceeds from sale or maturity of investments 13,984 64,231
Cash used in acquisitions and equity purchases, net of cash received (5,595) (41,936)
------- --------
Net cash provided by investing activities 3,553 14,120
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 689 451
Proceeds from issuance of convertible notes, net of loan
acquisition costs -- 96,423
Principal payments on capital lease obligations (442) 30
======= ========
Net cash provided by financing activities 247 96,904
======= ========
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (1,490) 72
======= ========
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,369 97,543
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,692 19,428
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $26,061 $116,971
======= ========
</TABLE>
See accompanying notes
5
<PAGE> 6
MRV COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Basis of Presentation - The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the requirements of
Form 10-Q and, therefore, do not include all information and footnotes which
would be presented if such financial statements were prepared in accordance with
generally accepted accounting principles. These statements should be read in
conjunction with the audited financial statements presented in the Company's
Annual Report or Form 10-K for the year ended December 31, 1998.
In the opinion of management, these interim financial statements reflect all
normal and recurring adjustments necessary for a fair presentation of the
financial position and results of operations for each of the periods presented.
The results of operations and cash flows for such periods are not necessarily
indicative of results to be expected for the full year.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of common
and common equivalent shares outstanding. Common Stock equivalents were not
considered in the calculation for the six-month periods ended June 30, 1999 or
June 30, 1998, as their effect would be anti-dilutive. The following schedule
summarizes the information used to compute net income per common share for the
three months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Six months ended Three months ended
--------------------------------- ---------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Weighted number of common shares used to
compute basic earnings (loss) per share 26,679 26,440 26,736 26,492
Weighted common share equivalents -- -- 2,427 2,044
---------------- --------------- ---------------- ---------------
Weighted number of common shares used to
compute diluted earnings (loss) per share 26,679 26,440 29,163 28,536
================ =============== =============== ===============
</TABLE>
3. INVENTORIES
Inventories consist of the following as of June 30, 1999 and December 31, 1998
(in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials $ 19,777 $ 17,409
Work-in-process 12,531 10,118
Finished goods 17,181 19,940
----------------- -----------------
$ 49,489 $ 47,467
================= =================
</TABLE>
6
<PAGE> 7
4. SEGMENT REPORTING
The Company designs, manufactures and sells data networking products and fiber
optic components and modules. Each of these is a business segment with its
respective financial performance detailed in this report.
Data networking consists of Ethernet LAN routing switches and WAN and remote
access devices. These products are sold to end user customers, distributors and
value added resellers.
Fiber optic components and modules ("Optical Access" products) include discrete
components such as laser diodes and light emitting diodes and integrated
components such as transmitters, receivers and transceivers. These products are
sold primarily to original-equipment manufactures and through distributors.
BUSINESS SEGMENT NET REVENUES for the six months and three months ended June 30,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
------------------------------------- ---------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Data networking $ 113,333 $ 103,942 $ 57,494 $ 54,077
Optical Access products 30,034 22,626 15,757 11,665
---------------- ----------------- -------------- ----------------
$ 143,367 $ 126,568 $ 73,251 $ 65,742
================ ================= ============== ================
</TABLE>
Intersegment sales from Optical Access products to data networking
were $2,718,000 and $1,235,000 in the six months ended June 30, 1999 and
1998, respectively, and $1,351,000 and $659,000 in the three months ended
June 30, 1999 and 1998, respectively.
BUSINESS SEGMENT PROFIT (LOSS) for the six months and three months ended June
30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
------------------------------------- ---------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Operating income (loss):
Data networking $ (3,770) $ (26,746) $ (1,113) $ 9,457
Optical Access 4,402 4,282 2,305 1,928
Other income (expense)
Interest expense related to
convertible notes 2,250 -- 1,125 --
Interest income 2,898 1,672 1,297 835
Interest expense 238 298 40 145
Other
---------------- ------------------ --------------- ----------------
Income (loss) before taxes, minority interest
and other comprehensive income (loss) $ 1,042 $ (21,090) $ 1,324 $ 12,075
================ ================== =============== ================
</TABLE>
5. PRO FORMA FINANCIAL DATA
On January 30, 1998, MRV completed an acquisition from Whittaker Corporation
("Whittaker") of all of the outstanding capital stock of Whittaker Xyplex, Inc.
a Delaware corporation (the "Xyplex Acquisition"). Whittaker Xyplex, Inc.,
(whose name the Company has since changed to NBase Xyplex, Inc.) is a holding
corporation owning all of the outstanding capital stock of Xyplex, Inc., a
Massachusetts corporation ("Xyplex"). Xyplex is a leading provider of access
solutions between enterprise networks and wide area network and/or Internet
service providers. The purchase price paid to Whittaker consisted of $35,000,000
in cash and three-year warrants to purchase up to 421,402 shares of Common Stock
of the Company at an exercise price of $35 per share.
The following unaudited pro forma summary sets forth results of operations
excluding the non-recurring charges for purchased technology in progress and
restructuring resulting from the Xyplex Acquisition:
7
<PAGE> 8
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (excluding non-recurring items)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended, Three Months Ended
- ---------------------------------------------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, net $ 143,367 $ 126,568 $ 73,251 $ 65,742
- ---------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 93,961 70,754 47,595 36,749
Research and development
expenses 17,037 10,525 8,572 5,282
Selling, general and
administrative expenses 31,737 23,926 15,892 12,326
- ---------------------------------------------------------------------------------------------------------------------
Operating (loss) income 632 21,363 1,192 11,385
Interest expense related to convertible notes 2,250 -- 1,125 --
Other income (expense), net 2,660 1,374 1,257 690
Provision (credit) for income taxes 1,409 6,629 782 3,531
Minority interests 17 240 17 16
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (384) $ 15,868 $ 525 $ 8,528
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE - BASIC $ (0.01) $ 0.60 $ 0.02 $ 0.32
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.01) $ 0.56 $ 0.02 $ 0.30
=====================================================================================================================
SHARES USED IN PER - SHARE CALCULATION - BASIC 26,679 26,440 26,736 26,492
SHARES USED IN PER - SHARE CALCULATION - DILUTED 26,679 28,493 29,163 28,536
- ---------------------------------------------------------------------------------------------------------------------
NOTE: PRO FORMA STATEMENTS ABOVE EXCLUDE THE FOLLOWING
Purchased technology in progress -- 20,633 -- --
Restructuring costs -- 23,194 -- --
</TABLE>
8
<PAGE> 9
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended, Three Months Ended
----------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Data Networking 79.1% 82.1% 78.5% 82.3%
Optical Access 20.9 17.9 21.5 17.7
- ----------------------------------------------------------------------------------------------------------------
Total Revenues 100.0% 100.0% 100.0% 100.0%
================================================================================================================
COSTS AND EXPENSES:
Cost of goods sold 65.5 55.9 65.0 55.9
Research and development
expenses 11.9 8.3 11.7 8.0
Selling, general and
administrative expenses 22.1 18.9 21.7 18.7
Purchased technology in progress -- 16.3 -- --
Restructuring costs -- 18.3 -- --
- ----------------------------------------------------------------------------------------------------------------
Operating (loss) income 0.4 (17.7) 1.6 17.3
Interest expense related to
convertible notes 1.6 -- 1.5 --
Other income (expense), net 1.9 1.1 1.7 1.0
Provision (credit) for income taxes 1.0 0.3 1.1 5.4
Minority interests 0.0 0.2 0.0 0.0
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (0.3)% (17.1)% 0.7% 13.0%
================================================================================================================
</TABLE>
The following table sets forth for the periods indicated statements of
operations data of the Company expressed as a percentage of revenues.
Revenues
Total revenues for the three and six months ended June 30, 1999 were $73,251,000
and $143,367,000, respectively, as compared to total revenues for the three and
six months ended June 30, 1998 of $65,742,000 and $126,568,000, respectively.
The changes represented increases of $7,509,000 or 11.4% for the quarter ended
June 30, 1999 over the quarter ended June 30, 1998 and $16,799,000 or 13.3% for
the six months ended June 30, 1999 over the six months ended June 30, 1998.
9
<PAGE> 10
o Data networking revenues for the three and six months ended June 30, 1999
were $57,494,000 or 78.5% of total revenues and $113,333,000 or 79.1% of
total revenues, respectively, as compared to data networking revenues for
the three and six months ended June 30, 1998 of $54,077,000 or 82.3% of
total revenues and $103,942,000 or 82.1% of total revenues, respectively.
The changes represented increases of $3,417,000 or 6.3% for the quarter
ended June 30, 1999 over the quarter ended June 30, 1998 and $9,391,000 or
9.0% for the six months ended June 30, 1999 over the six months ended June
30, 1998. Data networking revenues increased as a result of a larger sales
force, greater marketing efforts and greater market acceptance of the
Company's products, both domestically and internationally.
o Optical Access revenues for the three and six months ended June 30, 1999
were $15,757,000 or 21.5% of total revenues and $30,034,000 or 20.9% of
total revenues, respectively, as compared to Optical Access revenues for
the three and six months ended June 30, 1998 of $11,665,000 or 17.7% of
total revenues and $22,626,000 and 17.9% of total revenues, respectively.
The changes represented increases of $4,092,000 or 35.1% for the quarter
ended June 30, 1999 over the quarter ended June 30, 1998 and $7,408,000 or
32.7% for the six months ended June 30, 1999 over the six months ended June
30, 1998. Optical Access revenues increased as a result greater demand by
customers for components used in the deployment of broadband technologies
such as DSL and cable modems to consumers and for components that drive
data at high speed and long distance over single-mode cable.
International sales accounted for approximately 57.3% and 58.2% of revenues for
the quarter and six months ended June 30, 1999, respectively, as compared to
59.9% and 61.5% of revenues for the quarter and six months ended June 30, 1998,
respectively. International sales declined as a percentage of total sales
because of the strength of the U.S. dollar in Europe during the second quarter
of 1999 resulting in the Company's products becoming relatively more expensive
oversees. Also contributing to the reduction in international sales were
increases in domestic sales of Optical Access products.
Gross Profit
Gross profit for the quarter and six months ended June 30, 1999 were $25,656,000
and $49,406,000, respectively, compared to a gross profit of $28,993,000 and
$55,814,000 for the quarter and six months ended June 30, 1998, respectively.
The changes represented decreases of $3,337,000 and $6,408,000 for the quarter
and six months ended June 30, 1999, respectively, or a decrease of 11.5% for
both the quarter and six months ended June 30, 1999 over the quarter and six
months ended June 30, 1998. Gross Profit as a percentage of revenues decreased
from 44.1% during each the quarter and six months ended June 30, 1998 to 35.0%
and 34.5% during the quarter and six months ended June 30, 1999, respectively.
The decreases in gross profit margin resulted from continuing intense price
competition for networking products offset by increased sales of lightwave
components by Optical Access and the introduction of newer switching products
with lower cost structures than the models they were designed to replace.
Research and Development
Research and development ("R&D") expenses were $8,572,000 and $17,037,000, and
represented of 11.7% and 11.9% of revenues, for the quarter and six months ended
June 30, 1999, respectively. R&D expenses were $5,282,000 and $10,525,000 and
represented of 8.0% and 8.3% of revenues for the three months and six months
ended June 30, 1998, respectively. The increases of 62.3% and 61.9% in R&D
spending during the quarter and six months ended June 30, 1999 over the
comparable periods in 1998 were attributable to the continued development of new
networking and fiber optic products. Management believes that the ability of the
Company to develop and commercialize new products is an important competitive
factor, and the Company intends to continue to invest in the research and
development of new products.
10
<PAGE> 11
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased to $15,892,000
and $31,737,000, respectively, for the quarter ended and six months ended June
30, 1999 from $12,326,000 and $23,926,000, respectively, for the quarter and six
months ended June 30, 1998. As a percentage of revenues, SG&A increased from
18.7% and 18.9% for the quarter and six months ended June 30, 1998,
respectively, to 21.7% and 22.1% for the quarter and six months ended June 30,
1999, respectively. The increases in SG&A expense, both in dollar amounts and as
a percentage of sales, are due primarily to substantially increased marketing
efforts as well as increased personnel and overhead costs in expanded locations.
Purchased Technology in Progress and Restructuring Costs.
Purchased technology in progress during the six months ended June 30, 1998 of
$20,633,000 and related to R&D projects of Xyplex in progress at the time of the
Xyplex Acquisition on January 30, 1998 for which there was no alternative future
use. Restructuring costs during the six months ended June 30, 1998 were
$23,194,000. The restructuring costs in the first half of 1998 were associated
with a plan adopted by the Company in March, 1998 calling for the reduction of
workforce, closing of certain facilities, settlement of distribution agreements
and other costs. The Company did not incur these charges in first half of 1999.
Interest expense related to convertible notes.
In June 1998, the Company sold $100,000,000 principal amount of 5% convertible
subordinated notes due 2003 (the "Notes") in a 144A private placement to
qualified institutional investors at 100% of their principal amount, less a
selling discount of 3% of the principal amount. The principal amount of the
Notes was reduced to $90,000,000 when the Company repurchased $10,000,000
principal amount of the Notes at a discount from par during the last quarter of
1998. The outstanding Notes resulted in interest expense of $1,125,000 and
$2,250,000 for the three and six months ended June 30, 1999.
Net Income (Loss)
The Company reported net income (loss) of $525,000 and ($384,000) during the
three and six months ended June 30, 1999, respectively, compared net income
(loss) of $8,528,000 and ($21,693,000) during the three and six months ended
June 30, 1998, respectively. Net income for the six months ended June 30, 1998
would have been $15,868,000, excluding $43,827,000 of charges, associated with
the Xyplex Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
In June 1998, the Company sold an aggregate $100,000,000 principal amount of 5%
convertible subordinated notes due 2003 (the "Notes") in a private placement
raising net proceeds of $96,423,000. The Notes are convertible into Common Stock
of the Company at a conversion price of $27.0475 per share (equivalent to a
conversion rate of approximately 36.97 shares per $1,000 principal amount of
notes), representing an initial conversion premium of 24%, for a total of
approximately 3.7 million shares of Common Stock of the Company. The Notes have
a five-year term and are not callable for the first three years. Interest on the
Notes is at 5% per annum and is payable semi-annually on June 15 and December
15, commencing on December 15, 1998.
Cash and cash equivalents were $26,061,000 at June 30, 1999 as compared to
$20,692,000 at December 31, 1998. Net cash provided by investing activities for
the six months ended June 30, 1999 was $3,553,000. Net proceeds from the sale
of United States treasury securities accounted for the cash provided by
investing activities offset by cash used in the purchase of plant and capital
equipment.
11
<PAGE> 12
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation in the
United States over the past few years has not had a significant impact on the
Company's sales or operating results or on the prices of raw materials. However,
in view of the Company's recent expansion of operations in Israel, which has
experienced substantial inflation, there can be no assurance that inflation in
Israel will not have a material adverse effect on the Company's operating
results in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
As a global enterprise, the Company faces exposure to adverse movements in
foreign currency exchange rates. Thus fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive in
particular countries, leading to a reduction in sales in that country. For
example, management believes that the strength of the U.S. dollar to European
currencies contributed to the decline in international sales during the second
quarter of 1999. In addition, inflation or fluctuations in currency exchange
rates in such countries could increase the Company's expenses. The Company's
foreign currency exposures may change over time as the level of activity in
foreign markets grows and could have an adverse impact upon the Company's
financial results.
Certain of the Company's assets, including certain bank accounts and accounts
receivable, exist in nondollar-denominated currencies, which are sensitive to
foreign currency exchange rate fluctuations. The nondollar-denominated
currencies are principally Italian lire, Swedish krona and French francs.
Additionally, certain of the Company's current and long-term liabilities are
denominated principally in Italian lire, German deutschmarks and Swedish krona,
which are also sensitive to foreign currency exchange rate fluctuations.
To date, the Company has not hedged against currency exchange risks. In the
future, the Company may engage in foreign currency denominated sales or pay
material amounts of expenses in foreign currencies and, in such event, may
experience gains and losses due to currency fluctuations. The Company's
operating results could be adversely affected by such fluctuations.
POST-RETIREMENT BENEFITS
The Company does not provide post-retirement benefits affected by SFAS 106.
YEAR 2000
Many existing computer programs, including some programs used by the Company,
use only two digits to identify a year in the date field. These programs were
designed without considering the impact of the upcoming change in the century.
If not corrected, these computer applications and systems could fail or create
erroneous results by, at, or after the year 2000. The Company is currently
conducting a company-wide Year 2000 compliance program ("Y2K Program"). The Y2K
Program is addressing the issue of computer programs and embedded computer chips
being unable to distinguish between the year 1900 and the year 2000. Therefore,
some computer hardware and software will need to be modified prior to the Year
2000 in order to remain functional. The Company anticipates that Year 2000
compliance will be substantially complete by September 1999. [Update].
The Company's Y2K Program is divided into four major sections: Company
manufactured products, internal information systems, non-information technology
systems, and third-party suppliers and customers. The general phases common to
all sections are: (1) inventorying Year 2000 items; (2) assessing the Year 2000
compliance of items determined to be material to the Company; and (3) repairing
or replacing material items that are determined not to be Year 2000 compliant.
12
<PAGE> 13
The Company has completed the review of all its products for Year 2000
compliance purposes. The Company believes that its products are either Year 2000
compliant or at the election of the customer can be upgraded to be Year 2000
compliant.
The Company is currently evaluating and addressing Year 2000 issues associated
with its internal information systems. Most of the Company's information
computer systems are already Year 2000 compliant. The Company expects to finish
the evaluation by August 1999. Other internal information systems that have been
identified as non-compliant will be upgraded to be Year 2000 compliant by
September 1999.
The Company is currently evaluating and addressing Year 2000 issues associated
with its non-information technology systems. Most of these systems are already
Year 2000 compliant. The Company finished the evaluation in July 1999. Those
non-information technology systems that are not Year 2000 compliant will be
repaired or replaced September 1999.
The Company is currently assessing the possible effects on the Company's
operations of the Year 2000 compliance of its key suppliers and contract
manufacturers. The Company expects this assessment will be completed by
September 1999. The Company's reliance on suppliers and contract manufacturers
and, therefore, on the proper functioning of their information systems and
software, means that failure to address Year 2000 issues could have a material
impact on the Company's operations and financial results. However, the potential
impact and related costs are not known at this time.
Through December 31, 1998 the Company spent approximately $200,000 to implement
the Year 2000 compliance program. That amount has been expensed as incurred. The
Company estimates that it may spend up to an additional $500,000 for other
replacements or upgrades and for communicating with key suppliers and customers.
That amount will also be expensed as incurred.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Y2K Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material key suppliers and customers. The Company believes that, with the
implementation of new business systems and completion of the Y2K Program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced. The Company does not have a contingency plan to address the
Year 2000 problem.
Year 2000 compliance is an issue for virtually all businesses whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their information systems' spending to fund such
upgrades and modifications and divert spending away from networking or fiber
optic solutions. Such changes in customers' spending patterns could have a
material adverse impact on the Company's sales, operating results or financial
condition.
CERTAIN RISK FACTORS THAT COULD AFFECT FUTURE RESULTS
Risks of Technological Change; Development Delays.
The Company is engaged in the design and development of devices for the computer
networking, telecommunications and fiber optic communication industries. As with
any new technologies,
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there are substantial risks that the marketplace may not accept the Company's
new products. Market acceptance of the Company's products will depend, in large
part, upon the ability of the Company to demonstrate performance and cost
advantages and cost-effectiveness of its products over competing products and
the success of the sales efforts of the Company and its customers. There can be
no assurance that the Company will be able to continue to market its technology
successfully or that any of the Company's current or future products will be
accepted in the marketplace. Moreover, the computer networking,
telecommunications and fiber optic communication industries are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions, any of which could render the Company's existing products
obsolete. The Company's success will depend upon its ability to enhance existing
products and to introduce new products to meet changing customer requirements
and emerging industry standards. The Company will be required to devote
continued efforts and financial resources to develop and enhance its existing
products and conduct research to develop new products. The development of new,
technologically advanced products is a complex and uncertain process requiring
high levels of innovation, as well as the accurate anticipation of technological
and market trends. There can be no assurance that the Company will be able to
identify, develop, manufacture, market or support new or enhanced products
successfully or on a timely basis, that new Company products will gain market
acceptance or that the Company will be able to respond effectively to product
announcements by competitors, technological changes or emerging industry
standards. Furthermore, from time to time, the Company may announce new products
or product enhancements, capabilities or technologies that have the potential to
replace or shorten the life cycle of the Company's existing product offerings
and that may cause customers to defer purchasing existing Company products or
cause customers to return products to the Company.
Complexity of Product and Product Defects.
Complex products, such as those offered by the Company, may contain undetected
software or hardware errors when first introduced or when new versions are
released. While the Company has not experienced such errors in the past, the
occurrence of such errors in the future, and the inability to correct such
errors, could result in the delay or loss of market acceptance of the Company's
products, material warranty expense, diversion of engineering and other
resources from the Company's product development efforts and the loss of
credibility with the Company's customers, system integrators and end users, any
of which could have a material adverse effect on the Company's business,
operating results and financial condition.
Potential Fluctuations in Operating Results.
The Company expects that in the future its revenues may grow at a slower rate
than was experienced in previous periods and that on a quarter-to-quarter basis,
the Company's growth in revenue may be significantly lower than its historical
quarterly growth rates. As a consequence, operating results for a particular
quarter are extremely difficult to predict. The Company's revenue and operating
results could fluctuate substantially from quarter to quarter and from year to
year. This could result from any one or a combination of factors such as the
cancellation or postponement of orders, the timing and amount of significant
orders from the Company's largest customers, the Company's success in
developing, introducing and shipping product enhancements and new products, the
product mix sold by the Company, adverse effects to the Company's financial
statements resulting from, or necessitated by, past and possible future
acquisitions, new product introductions by the Company's competitors, pricing
actions by the Company or its competitors, the timing of delivery and
availability of components from suppliers, changes in material costs and general
economic conditions. Moreover, the volume and timing of orders received during a
quarter are difficult to forecast. From time to time, the Company's customers
encounter uncertain and changing demand for their products. Customers generally
order based on their forecasts. If demand falls below such forecasts or if
customers do not control inventories effectively, they may cancel or reschedule
shipments previously ordered from the Company. The Company's expense levels
during any particular period are based, in part, on expectations of future
sales. If sales in a particular quarter do not meet expectations, operating
results could be materially
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adversely affected. Moreover, in certain instances, sales cycles are becoming
longer and more uncertain as MRV bids on larger projects. As a result, MRV is
finding it more difficult to predict the timing of the awards of contracts and
the actual placement of orders stemming from awards. There can be no assurance
that these factors or others, such as those discussed in "International
Operations" or those discussed immediately below would not cause future
fluctuations in operating results. Further, there can be no assurance that the
Company will be able to continue profitable operations.
Competition and Industry Consolidation.
The markets for fiber optic components and network products are intensely
competitive and subject to frequent product introductions with improved
price/performance characteristics, rapid technological change and the continual
emergence of new industry standards. The Company competes and will compete with
numerous types of companies including companies which have been established for
many years and have considerably greater financial, marketing, technical, human
and other resources, as well as greater name recognition and a larger installed
customer base, than the Company. This may give such competitors certain
advantages, including the ability to negotiate lower prices on raw materials and
components than those available to the Company. In addition, many of the
Company's large competitors offer customers broader product lines, which provide
more comprehensive solutions than the Company currently offers. The Company
expects that other companies will also enter markets in which the Company
competes. Increased competition could result in significant price competition,
reduced profit margins or loss of market share. There can be no assurance that
the Company will be able to compete successfully with existing or future
competitors or that competitive pressures faced by the Company will not
materially and adversely affect the business, operating results and financial
condition of the Company. In particular, the Company expects that prices on many
of its products will continue to decrease in the future and that the pace and
magnitude of such price decreases may have an adverse impact on the results of
operations or financial condition of the Company.
There has been a trend toward industry consolidation for several years. The
Company expects this trend toward industry consolidation to continue as
companies attempt to strengthen or hold their market positions in an evolving
industry. The Company believes that industry consolidation may provide stronger
competitors that are better able to compete. This could have a material adverse
effect on the Company's business, operating results and financial condition.
Management of Growth.
The Company has grown rapidly in recent years, with revenues increasing from
$17,526,000 for the year ended December 31, 1994, to $39,202,000 for the year
ended December 31, 1995, $88,815,000 for the year ended December 31, 1996,
$165,471,000 for the years ended December 31, 1997 and $264,075,000 for the year
ended December 31, 1998. The Company's recent growth, both internally and
through the acquisitions it has made since January 1, 1995, has placed a
significant strain on the Company's financial and management personnel and
information systems and controls, and the Company must implement new and enhance
existing financial and management information systems and controls and must add
and train personnel to operate such systems effectively. While the strain placed
on the Company's personnel and systems has not had a material adverse effect on
the Company to date, there can be no assurance that a delay or failure to
implement new and enhance existing systems and controls will not have such an
effect in the future. The Company's recent growth through acquisitions and its
intention to continue to pursue its growth strategy through efforts to increase
sales of existing and new products can be expected to place even greater
pressure on the Company's existing personnel and compound the need for increased
personnel, expanded information systems, and additional financial and
administrative control procedures. There can be no assurance that the Company
will be able to successfully manage expanding operations.
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<PAGE> 16
Risks Associated With Recent Acquisition.
On January 30, 1998, MRV completed the Xyplex Acquisition from Whittaker. Xyplex
is a leading provider of access solutions between enterprise networks and WAN
and/or Internet service providers ("ISPs"). The purchase price paid to Whittaker
consisted of $35,000,000 in cash and three-year warrants to purchase up to
421,402 shares of common stock of the Company at an exercise price of $35 per
share. In connection with the Xyplex Acquisition, the Company incurred charges
of $20,633,000 and $15,671,000 for purchased technology and restructuring during
the year ended December 31, 1998. While the Xyplex Acquisition added 11 months
of Xyplex' revenues to those of the Company, the charges resulting from the
Xyplex Acquisition resulted in MRV incurring a net loss of $20,106,000 or $0.86
per share during the year ended December 31, 1998.
MRV originally recorded charges of $30,571,000 related to research and
development projects in progress at the time of the Xyplex Acquisition. Although
MRV reported these charges and its first, second and third quarter results of
1998 in accordance with established accounting practice and valuations of
Xyplex' purchased technology in progress provided by independent valuators,
these valuations have been reconsidered in light of very recent Securities and
Exchange Commission guidance regarding valuation methodology. Based on this new
valuation methodology, MRV has reduced the value of the purchased technology in
progress related to the Xyplex Acquisition to $20,633,000 and has increased the
amount of goodwill by $9,938,000. This has resulted in additional charges during
1998 of $759,000 for amortization of intangibles, including goodwill, resulting
from the Xyplex Acquisition and will result in charges of approximately $828,000
annually as these intangibles are amortized through January 2010.
Recent actions and comments from the Securities and Exchange Commission have
indicated that the Commission is reviewing the current valuation methodology of
purchased in-process research and development related to business combinations.
Unlike the case of many other companies, the Commission has not notified MRV of
any plans to review MRV's methodology for valuing purchased in-process research
and development. The Company's action to reconsider that valuation of in process
research and development related to the Xyplex Acquisition has been voluntary.
The Company believes it is in compliance with all of the rules and related
guidance as they currently exist. However, there can be no assurance that the
Commission will not review MRV's accounting for the Xyplex Acquisition and seek
to apply retroactively new guidance and further reduce the amount of purchased
in-process research and development expensed by the Company. This would result
in an additional restatement of previously filed financial statements of the
Company and could have a material adverse impact on financial results for
periods subsequent to the acquisition.
Risks Associated with International Operations.
International sales have become an increasingly important segment of the
Company's operations. Approximately 53%, 60% and 59%, respectively, of the
Company's net revenues for the years ended December 1996, 1997 and 1998,
respectively, were from sales to customers in foreign countries. The Company has
offices in, and conducts a significant portion of its operations in and from,
Israel. MRV is, therefore, directly influenced by the political and economic
conditions affecting Israel. Any major hostilities involving Israel, the
interruption or curtailment of trade between Israel and its trading partners or
a substantial downturn in the economic or financial condition of Israel could
have a material adverse effect on the Company's operations. Sales to foreign
customers are subject to government controls and other risks associated with
international sales, including difficulties in obtaining export licenses,
fluctuations in currency exchange rates, inflation, political instability, trade
restrictions and changes in duty rates. Although the Company has not experienced
any material difficulties in this regard to date, there can be no assurance that
it will not experience any such material difficulties in the future.
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As a global enterprise, the Company faces exposure to adverse movements in
foreign currency exchange rates. Thus fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive in
particular countries, leading to a reduction in sales in that country. In
addition, inflation or fluctuations in currency exchange rates in such countries
could increase the Company's expenses. The Company's foreign currency exposures
may change over time as the level of activity in foreign markets grows and could
have an adverse impact upon the Company's financial results.
The Single European Currency (Euro) was introduced on January 1, 1999 with
complete transition to this new currency required by January 2002. The Company
has made and expects to continue to make changes to its internal systems in
order to accommodate doing business in the Euro. Any delays in the Company's
ability to be Euro-compliant could have an adverse impact on the Company's
results of operations or financial condition.
Certain of the Company's assets, including certain bank accounts and accounts
receivable, exist in nondollar-denominated currencies, which are sensitive to
foreign currency exchange rate fluctuations. The nondollar-denominated
currencies are principally Italian lire, Swedish krona and French francs.
Additionally, certain of the Company's current and long-term liabilities are
denominated principally in Italian lire, German deutschmarks and Swedish krona,
which are also sensitive to foreign currency exchange rate fluctuations.
To date, the Company has not hedged against currency exchange risks. In the
future, the Company may engage in foreign currency denominated sales or pay
material amounts of expenses in foreign currencies and, in such event, may
experience gains and losses due to currency fluctuations. The Company's
operating results could be adversely affected by such fluctuations or as a
result of inflation in particular countries where material expenses are
incurred. Moreover, the Company's operating results could also be adversely
affected by seasonality of international sales, which are typically lower in
Asia in the first calendar quarter and in Europe in the third calendar quarter.
These international factors could have a material adverse effect on future sales
of the Company's products to international end-users and, consequently, the
Company's business, operating results and financial condition.
Slowdown in Industry Growth Rates.
The Company's success is dependent, in part, on the overall growth rate of the
networking industry. In 1997 and 1998, industry growth was below historical
rates according to industry reports. There can be no assurance that the
networking industry will continue to grow or that it will achieve higher growth
rates. The Company's business, operating results or financial condition may be
adversely affected by any further decrease in industry growth rates. In
addition, there can be no assurance that the Company's results in any particular
period will fall within the ranges for growth forecast by market researchers.
Manufacturing and Dependence on Suppliers and Third Party Manufacturers.
The Company uses internally developed Application Specific Integrated Circuits
("ASICs"), which provide the functionality of multiple integrated circuits in
one chip, in the manufacture of its LAN switching products. To develop ASICs
successfully, the Company must transfer a code of instructions to a single mask
from which low cost duplicates can be made. Each iteration of a mask involves a
substantial up-front cost, which costs can adversely affect the Company's result
of operations and financial condition if errors or "bugs" occur following
multiple duplication of the masks. While the Company has not experienced
material expenses to date as a result of errors discovered in ASIC masks,
because of the complexity of the duplication process and the difficulty in
detecting errors, the Company could suffer a material adverse effect to its
operating results and financial condition if errors in developing ASICs were to
occur in the future. Moreover, the Company currently relies on a single,
unaffiliated foundry, Chip Express, to fabricate its ASICs. The Company does not
have a long-term supply contract with Chip Express, any other ASIC vendor or any
other of its limited source vendors, purchasing all of such components on a
purchase order basis under
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standard terms of sale. While the Company believes it would be able to obtain
alternative sources of supply for the ASICs or other key components, a change in
ASIC or other suppliers of key components could require a significant lead time
and, therefore, could result in a delay in product shipments. Although the
Company has not experienced delays in the receipt of ASICs or other key
components, any future difficulty in obtaining any of these key components could
result in delays or reductions in product shipments which, in turn, could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company outsources the board-level assembly, test and quality control of
material, components, subassemblies and systems relating to its networking
products to third party contract manufacturers. Though there are a large number
of contract manufacturers which the Company can use for its outsourcing, it has
elected to use a limited number of vendors for a significant portion of board
assembly requirements in order to foster consistency in quality of the products.
These independent third party manufacturers also provide these services to other
companies. Risks associated with the use of independent manufacturers include
unavailability of or delays in obtaining adequate supplies of products and
reduced control of manufacturing quality and production costs. If the Company's
contract manufacturers fail to deliver products in the future on a timely basis,
or at all, it could be difficult for the Company to obtain adequate supplies of
products from other sources in the near term. There can be no assurance that the
Company's third party manufacturers will provide adequate supplies of quality
products timely or at all. While the Company could outsource with other vendors,
a change in vendors may require significant lead-time and may result in shipment
delays and expenses. MRV's inability to obtain such products timely, its loss of
a vendor or a change in the terms and conditions of its outsourcing arrangements
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company relies almost exclusively on its own production capability for
critical semiconductor lasers and light-emitting diodes ("LEDs") used in its
products. Because the Company manufactures these and other key components of its
products at its own facility and such components are not readily available from
other sources, any interruption of the Company's manufacturing process could
have a material adverse effect on the Company's operations. Furthermore, the
Company has a limited number of employees dedicated to the operation and
maintenance of its wafer fabrication equipment, the loss of any of whom could
result in the Company's inability to effectively operate and service such
equipment. Wafer fabrication is sensitive to many factors, including variations
and impurities in the raw materials, the fabrication process, performance of the
manufacturing equipment, defects in the masks used to print circuits on the
wafer and the level of contaminants in the manufacturing environment. There can
be no assurance that the Company will be able to maintain acceptable production
yields and avoid product shipment delays. In the event adequate production
yields are not achieved, resulting in product shipment delays, the Company's
business, operating results and financial condition could be materially
adversely affected.
Risks Associated with Potential Future Acquisitions.
An important element of management's strategy is to review acquisition prospects
that would complement the Company's existing products, augment its market
coverage and distribution ability or enhance its technological capabilities.
Accordingly, the Company may acquire additional businesses, products or
technologies in the future. Future acquisitions by the Company could result in
charges similar to those incurred in connection with the Xyplex Acquisition,
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, any of which could materially adversely affect the Company's
business, financial condition and results of operations. Acquisitions entail
numerous risks, including the assimilation of the acquired operations,
technologies and products, diversion of management's attention to other business
concerns, risks of entering markets in which the Company has no or limited prior
experience, the potential loss of key employees of acquired organizations and
difficulties in honoring commitments made to customers by management of the
acquired
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entity prior to the acquisition. There can be no assurance as to the ability of
the Company to successfully integrate the products, technologies or personnel of
any business that might be acquired in the future, and the failure of the
Company to do so could have a material adverse effect on the Company's business,
financial condition and results of operations.
Present Lack of Patent Protection; Dependence on Proprietary Technology.
The Company holds no patents and only recently has filed two patent applications
and a provisional patent application in the United States with respect to
certain aspects of its technology. With the Xyplex Acquisition, MRV acquired
five additional provisional patent applications filed by Xyplex on certain
aspects of its technology. The Company currently relies on copyrights, trade
secrets and unpatented proprietary know-how, which may be duplicated by others.
The Company employs various methods, including confidentiality agreements with
employees and suppliers, to protect its proprietary know-how. Such methods may
not afford complete protection, however. For example, others could independently
develop such know-how or obtain access to it or independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In the event that protective measures are not successful, the
Company's business, operating results and financial condition could be
materially and adversely affected. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent, as
do the laws of the United States. There can be no assurance that any patents
will be issued as a result of the pending applications, including the
provisional patent application, or any future patent applications, or, if
issued, will provide the Company with meaningful protection from competition. In
addition, there can be no assurance that any patents issued to the Company will
not be challenged, invalidated or circumvented. The electronics industry has
been characterized by extensive litigation regarding patents and other
intellectual property rights, and companies in the electronics industry have
employed intellectual property litigation to gain a competitive advantage. Since
United States patent applications are presently maintained in secrecy until
patents issue and since the publication of inventions in technical or patent
literature tends to lag behind such patent application filings by several
months, the Company cannot be certain that it was the first inventor of
inventions covered by pending United States patent applications or that the
Company is not infringing on the patents of others. Litigation may be necessary
to enforce any patents that may be issued to the Company or other intellectual
property rights of the Company, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations
regardless of the final outcome of such litigation. In the event that any of the
Company's products are found to infringe on the intellectual property rights of
third parties, the Company would be required to seek a license with respect to
such patented technology, or incur substantial costs to redesign the infringing
products. There can be no assurance that any such license would be available on
terms acceptable to the Company or at all, that any of the Company's products
could be redesigned on an economical basis or at all, or that any such
redesigned products would be competitive with the products of the Company's
competitors.
Risks From Year 2000 Issues.
Many existing computer programs, including some programs used by the Company,
use only two digits to identify a year in the date field. These programs were
designed without considering the impact of the upcoming change in the century.
If not corrected, these computer applications and systems could fail or create
erroneous results by, at, or after the year 2000. Based on the Company's
investigation to date, management believes that Year 2000 readiness compliance
will occur before January 1, 2000 and does not anticipate that the Company will
incur material operating expenses or be required to incur material costs to be
year 2000 compliant. See Year 2000 Issues above. The dates on which the Company
believes the Year 2000 Compliance Program ("Y2K Program") will be completed are
based on management's
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estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no assurance that
all Year 2000 issues have been identified and would be addressed by the Y2K
Program, that the estimates of the Y2K Program will be achieved, or that there
will not be a delay in, or increased costs associated with, the implementation
of the Y2K Program. Specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third-parties
and suppliers of their Year 2000 issues and similar uncertainties. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-parties and the
interconnection of global businesses, the Company cannot ensure its ability to
timely and cost-effectively resolve problems associated with the Year 2000 issue
that may affect its operations and business, or expose it to third-party
liability.
Year 2000 compliance is an issue for virtually all businesses whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their information systems' spending to fund such
upgrades and modifications and divert spending away from networking or fiber
optic solutions. Such changes in customers' spending patterns could have a
material adverse impact on the Company's sales, operating results or financial
condition.
Dependence on Key Personnel.
The Company is substantially dependent upon a number of key employees, including
Dr. Shlomo Margalit, its Chairman of the Board of Directors and Chief Technical
Officer, Dr. Zeev Rav-Noy, its Chief Operating Officer, and Noam Lotan, its
President and Chief Executive Officer. The loss of the services of any one or
more of these officers could have a material adverse effect on the Company. The
Company has entered into employment agreements with each officer and owns and is
the beneficiary of key man life insurance policies in the amounts of $1,000,000
each on the lives of Drs. Margalit and Rav-Noy and Mr. Lotan. There can be no
assurance that the proceeds from these policies will be sufficient to compensate
the Company in the event of the death of any of these individuals, and the
policies do not cover the Company in the event that any of them becomes disabled
or is otherwise unable to render services to the Company.
Attraction and Retention of Qualified Personnel.
The Company's ability to develop, manufacture and market its products and its
ability to compete with its current and future competitors depends, and will
depend, in large part, on its ability to attract and retain qualified personnel.
Competition for qualified personnel in the networking and fiber optics
industries is intense, and the Company will be required to compete for such
personnel with companies having substantially greater financial and other
resources than the Company. If the Company should be unable to attract and
retain qualified personnel, the business of the Company could be materially
adversely affected. There can be no assurance that the Company will be able to
attract and retain qualified personnel.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K.
(a) The following exhibits are filed as part of this Report:
Exhibit No. Exhibit
- ----------- -------
10.1 Standard Industrial Lease dated as of July 13, 1999 between
Nordhoff Industrial Complex and MRV Communications, Inc.
related to the real property located at 20550 Nordhoff
Street, Chatsworth, CA
10.2 Indemnity Agreement dated July __ ,1999 between NetCom
Systems, Inc. and MRV Communications, Inc.
10.3 Letter Agreement dated July 13, 1999 of NetCom Systems, Inc.
in favor of MRV Communications, Inc. transferring to MRV
Communications, Inc. certain equipment and services.
27 Financial Data Schedule
(b) No Reports on Form 8-K was filed during the quarter for which
this report was filed.
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on August 13, 1999.
MRV COMMUNICATIONS, INC.
By: /s/ EDMUND GLAZER
--------------------------
Edmund Glazer
Vice President of Finance
and Administration and
Chief Financial Officer
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EXHIBIT 10.1
[LOGO] STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
July 13, 1999, is made by and between Nordhoff Industrial Complex, a California
general partnership ("Lessor") and MRV Communications, Inc., a Delaware
corporation("Lessee"), (collectively the "Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 20550 Nordhoff Street, Chatsworth, located in the County of Los
Angeles, State of California, and generally described as (describe briefly the
nature of the property and, if applicable, the "Project", if the property is
located within a Project) an approximately 49,920 square foot concrete tilit-up
building situated on approximately 169,884 square feet of land ("Premises").
(See also Paragraph 2)
1.3 Term: five (5) years and 0 months ("Original Term") commencing July
14, 1999 ("Commencement Date") and ending July 13, 2004 ("Expiration Date").
(See also Paragraph 3)
1.4 Early Possession: N/A ("Early Possession Date"). (See also
Paragraphs 3.2 and 3.3)
1.5 Base Rent: $37,939.20 per month ("Base Rent"), payable on the first
(1st) day of each month. (See also Paragraph 4 and paragraphs 1 and 16 of
Addendum)
[X] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $37,939.20 as Base Rent for the
period October 1, 1999 through October 31, 1999.
1.7 Security Deposit: $37,939.20 ("Security Deposit"). (See also
Paragraph 5)
1.8 Agreed Use: engineering, manufacture and distribution of electrical
products and associated office uses (See also Paragraph 6)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise
stated herein. (See also Paragraph 8)
1.10 Real Estate Brokers: (See also Paragraph 15)
(a) Representation: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction (check applicable boxes):
[ ] represents Lessor exclusively ("Lessor's Broker");
[ ] represents Lessee exclusively ("Lessee's Broker"); or
[X] Delphi Business Properties represents both Lessor and Lessee ("Dual
Agency").
(b) Payment to Brokers: Upon execution and delivery of this Lease
by both Parties, Lessor shall pay to the Broker the fee agreed to in their
separate written agreement. Lessee shall have no responsibility for payment of
any commission to Broker, which shall be Lessor's sole obligation and
responsibility.
1.11 Guarantor. Certain of the obligations of the Lessee under this
Lease are to be guaranteed by NETCOM SYSTEMS, INC., pursuant to a guaranty which
shall be in form and substance satisfactory to Lessor ("Guarantor").
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Addendum to Standard Industrial/Commercial Single - Tenant Lease -
Net (the "Addendum"), all of which constitute a part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 Compliance. All applicable laws; covenants or restrictions of
record, building codes, regulations and ordinances in effect on the Start Date
(as hereafter defined) are referred to as the "Applicable Requirements." The
"Start Date" shall mean the Commencement Date.
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2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use; (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises; and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises; and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including, but not limited to, the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 Delay In Possession. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee by the Start Date and Lessee
does not terminate this Lease, as aforesaid, any period of rent abatement that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts
or omissions of Lessee. If possession of the Premises is not delivered within
four (4) months after the Commencement Date, this Lease shall terminate unless
other agreements are reached between Lessor and Lessee, in writing.
3.4 Lessee Compliance. Lessor shall not be required to tender possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.
4. Rent.
4.1. Rent Defined. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
Rent for any period during the term hereof which is for less than one (1) full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
6.2 Hazardous Substances. (SEE ADDENDUM)
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(d) Investigations and Remediations. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities.
(e) Lessor Termination Option. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater, give written notice to Lessee, within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days following
the date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 Lessee's Compliance with Applicable Requirements. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into Premises
at any time, in the case of an emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall be
paid by Lessor, unless a violation of Applicable Requirements, or a release of
Hazardous Substances is found to exist or be imminent, or the inspection is
requested or ordered by a governmental authority. In such case, Lessee shall
upon request reimburse Lessor for the cost of such inspections, so long as such
inspection is reasonably related to the violation or release.
7. Maintenance; Repairs, Utility Installations; Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) In General. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall, during the term of this
Lease, keep the exterior appearance of the Building in a first-class condition.
(b) Service Contracts. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility
feed to the perimeter of the Building, and (ix) any other equipment, if
reasonably required by Lessor.
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7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee. It is
the intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises, and
they expressly waive the benefit of any statute now or hereafter in effect to
the extent it is inconsistent with the terms of this Lease.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing
in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the Premises.
The term "Alterations" shall mean any modification of the improvements, other
than Utility Installations or Trade Fixtures, whether by addition or deletion.
"Lessee Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) Indemnification. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one and one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's attorneys' fees and costs.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.
(b) Removal. By delivery to Lessee of written notice from Lessor
not earlier than ninety (90) and not later than thirty (30) days prior to the
end of the term of this Lease, Lessor may require that any or all Lessee Owned
Alterations or Utility Installations be removed by the expiration or termination
of this Lease. Lessor may require the removal at any time of all or any part of
any Lessee Owned Alterations or Utility Installations made without the required
consent.
(c) Surrender/Restoration. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Lessee shall repair
any damage occasioned by the installation, maintenance or removal of Trade
Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings,
and equipment as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
groundwater contaminated by Lessee. Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of Paragraph
26 below.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per
occurrence. Premiums for policy periods commencing prior to or extending beyond
the Lease term shall be prorated to correspond to the Lease term. Payment shall
be made by Lessee to Lessor within ten (10) days following receipt of an
invoice.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises
Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an 'insured contract' for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) Carried by Lessor. Lessor shall maintain liability insurance
as described in Paragraph 8.2(a), in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. Such policy or policies may insure against all risks of direct physical
loss or damage (including the perils of flood and/or earthquake), including
coverage for debris removal and the enforcement of any Applicable Requirements
requiring the upgrading, demolition, reconstruction or replacement of any
portion of the Premises as the result of a covered loss. Said policy or policies
shall also contain an agreed valuation provision in lieu of any coinsurance
clause, waiver of subrogation, and inflation guard protection causing an
increase in the annual property insurance coverage amount by a factor of not
less than the adjusted U.S. Department of Labor Consumer Price Index for All
Urban Consumers for the city nearest to where the Premises are located. If such
insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss. SEE PARAGRAPHS 3 AND 17 OF ADDENDUM.
(b) Rental Value. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor and
any Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
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8.4 Lessee's Property/Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) Business Interruption. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence or willful misconduct,
Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys' and consultants' fees, expenses and/or liabilities arising
out of, involving, or in connection with, the use and/or occupancy of the
Premises by Lessee. If any action or proceeding is brought against Lessor by
reason of any of the foregoing matters, Lessee shall upon notice defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be defended or indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in nine (9) months or
less from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(b) "Premises Total Destruction" SEE ADDENDUM
(c) "Insured Loss" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. In the event Lessor elects to
terminate this Lease, Lessee shall have the right within ten (10) days after
receipt of the termination notice to give written notice to Lessor of Lessee's
commitment to pay for the repair of such damage without reimbursement from
Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance
thereof within thirty (30) days after making such commitment. In such event this
Lease shall continue in full force and effect, and Lessor shall proceed to make
such repairs as soon as reasonably possible after the required funds are
available. If Lessee does not make the required commitment, this Lease shall
terminate as of the date specified in the termination notice. SEE ADDENDUM
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5 Damage Near End of Term. Notwithstanding the foregoing, if Lessee at
that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b)
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providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs on or before the earlier of (i) the date
which is ten days after Lessee's receipt of Lessor's written notice purporting
to terminate this Lease, or (ii) the day prior to the date upon which such
option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished. SEE ADDENDUM
9.6 Abatement of Rent; Lessee's Remedies.
(a) Abatement. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.
(b) Remedies. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee gives
such notice and such repair or restoration is not commenced within thirty (30)
days thereafter, this Lease shall terminate as of the date specified in said
notice. If the repair or restoration is commenced within said thirty (30) days,
this Lease shall continue in full force and effect. "Commence" shall mean either
the unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 Termination - Advance Payments. Upon termination of this Lease
pursuant to Paragraph 6.2(e) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated with reference to the Building address and where
the proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises. Notwithstanding anything to the contrary contained herein,
Real Property Taxes shall not include any gross receipts tax based upon the
rental revenue received by Lessor.
10.2
(a) Payment of Taxes. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.
(b) Advance Payment. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at least
twenty (20) days prior to the applicable delinquency date, or (ii) monthly in
advance with the payment of the Base Rent. If Lessor elects to require payment
monthly in advance, the monthly payment shall be an amount equal to the amount
of the estimated installment of taxes divided by the number of months remaining
before the month in which said installment becomes delinquent. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payments shall be adjusted as required to provide the funds needed to
pay the applicable taxes. If the amount collected by Lessor is insufficient to
pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand,
such additional sums as are necessary to pay such obligations. All monies paid
to Lessor under this Paragraph may be intermingled with other monies of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of its obligations under this Lease, then any balance of funds paid
to Lessor under the provisions of this Paragraph may, at the option of Lessor,
be treated as an additional Security Deposit.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent, which consent shall not be unreasonably
withheld. Lessor shall grant or withhold its consent within thirty (30) days
after Lessor's receipt of the information and fee required by paragraph 12.2(e)
hereof.
(b) SEE ADDENDUM
(c) Except as provided in Paragraph 12.1(b), an assignment or
subletting without consent shall, at Lessor's option, be a Default curable after
notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of
any notice and grace period. If Lessor elects to treat such unapproved
assignment or subletting as a noncurable Breach, Lessor may either: (i)
terminate this Lease, or (ii) upon thirty (30) days written notice, increase the
monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in
effect. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to one hundred ten percent (110%) of the price
previously in effect, and (ii) all fixed and non-fixed rental adjustments
scheduled during the remainder of the Lease term shall be increased to One
Hundred Ten Percent (110%) of the scheduled adjusted rent.
(d) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease; (ii)
release Lessee of any obligations hereunder; or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
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assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a fee of
$1,000, as consideration for Lessor's considering and processing said request.
Lessee agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor all Rent due and to become due under the
sublease. Sublessee shall rely upon any such notice from Lessor and shall pay
all Rents to Lessor without any obligation or right to inquire as to whether
such Breach exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a failure by the Lessee
to comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "Breach" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, within five (5) days when due, to provide reasonable evidence
of insurance or surety bond, or to fulfill any obligation under this Lease which
endangers or threatens life or property, where such failure continues for a
period of five (5) days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
of any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph 13.1 (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
13.2 Remedies. If Lessee fails to perform any of its affirmative duties
or obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. In the event of a
Breach, Lessor may, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful
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detainer and a Breach of this Lease entitling Lessor to the remedies provided
for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred to as "Inducement
Provisions," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of Rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to five percent (5%) of each such overdue
amount. The Parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Interest. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, within thirty (30) days following the date
on which it was due, shall bear interest from the date when due, as to scheduled
payments, or the thirty-first (31st) day after it was due as to non-scheduled
payments. The interest ("Interest") charged shall be equal to the prime rate
reported in the Wall Street Journal as published closest prior to the date when
due plus four percent (4%), but shall not exceed the maximum rate allowed by
law. Interest is payable in addition to the potential late charge provided for
in Paragraph 13.4.
13.6 Breach by Lessor.
(a) Notice of Breach. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
Premises, or more than twenty-five percent (25%) of the land area portion of the
Premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. Brokers' Fee.
15.1
15.2 Assumption of Obligations.
15.3 Representations and Indemnities of Broker Relationships. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, and/or attorneys' fees reasonably incurred with respect thereto.
16. Estoppel Certificates.
(a) Each Party (as "Responding Party") shall within ten (10) days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Estoppel Certificate" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's Rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements as
may be reasonably required by such lender or purchaser, including, but not
limited to, Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Definition of Lessor. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to
Page 8 of 11
REVISED
<PAGE> 9
the transferee or assignee (in cash or by credit) any unused Security Deposit
held by Lessor. Except as provided in Paragraph 15, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. Days. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. Limitation on Liability. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. Time of Essence. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by courier)
or may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given seventy-two (72) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. The acceptance of
Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any
payment by Lessee may be accepted by Lessor on account of monies or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions; Construction of Agreement. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the Parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
Parties, but rather according to its fair meaning as a whole, as if both Parties
had prepared it.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership; (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor; or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"Prevailing Party" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs.
Page 9 of 11
REVISED
<PAGE> 10
SEE ADDENDUM
33. Auctions. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.
34. Signs. SEE ADDENDUM
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. Consents. Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including, but not limited to, architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including, but not limited to, consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt
of an invoice and supporting documentation therefor. Lessor's consent to any
act, assignment or subletting shall not constitute an acknowledgment that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
The failure to specify herein any particular condition to Lessor's consent shall
not preclude the imposition by Lessor at the time of consent of such further or
other conditions as are then reasonable with reference to the particular matter
for which consent is being given. In the event that either Party disagrees with
any determination made by the other hereunder and reasonably requests the
reasons for such determination, the determining party shall furnish its reasons
in writing and in reasonable detail within ten (10) business days following such
request.
37. Guarantor.
37.1 Execution. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 Default. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. Options.
39.1 Definition. "Option" shall mean: (a) the right to extend the term
of or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2
39.3 Multiple Options. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and continuing
until said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), or (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease, which is not timely cured.
40. Multiple Buildings. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay.
44. Authority. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each Party
shall, within thirty (30) days after request, deliver to the other Party
satisfactory evidence of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. Offer. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. Multiple Parties. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF
Page 10 of 11
REVISED
<PAGE> 11
LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.
- --------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION
OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
- --------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Los Angeles, CA Executed at:
-------------------------- ---------------------------
on: July 13, 1999 on:
----------------------------------- ------------------------------------
By LESSOR: By LESSEE:
By: Nordhoff Industrial Complex, a MRV Communications, Inc., a Delaware
----------------------------------- ------------------------------------
California general partnership corporation
----------------------------------- ------------------------------------
By: /s/ GERALD L. KATELL By: /s/ DR. SHLOMO MARGALIT
----------------------------------- ------------------------------------
Name Printed: Gerald L. Katell Name Printed: Dr. Shlomo Margalit
------------------------- --------------------------
Title: Manager, Katell Family Company, Title: Chairman of the Board
-------------------------------- ---------------------------------
LLC
--------------------------------
General Partner
By: By: /s/ DR. ZEEV RAV-NOY
----------------------------------- ------------------------------------
Name Printed: Name Printed: Dr. Zev Rav-Noy
------------------------- --------------------------
Title: Title: Chief Operating Officer
-------------------------------- ---------------------------------
Address: 11999 San Vicente Boulevard, Address: 20550 Nordhoff Street
Ste. 200
------------------------------ -------------------------------
Los Angeles, California 90049 Chatsworth, California 91311
- -------------------------------------- ---------------------------------------
Telephone: (310)459-7200 Telephone: (818)773-0088
--------------------------- ----------------------------
Facsimile: (310)472-8315 Facsimile: (818)407-8183
--------------------------- ----------------------------
Federal ID No. Federal ID No.
------------------------ -------------------------
NOTE: These forms are often modified to meet the changing requirements of law
and industry needs. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
So. Flower Street, Suite 600, Los Angeles, California 90017. (213)
687-8777. Fax No. (213) 687-8616.
Page 11 of 11
REVISED
<PAGE> 12
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL
SINGLE-TENANT LEASE-NET (THE "LEASE")
DATED THE 13TH DAY OF JULY, 1999 BETWEEN
NORDHOFF INDUSTRIAL COMPLEX ("LESSOR") AND
MRV COMMUNICATIONS, INC. ("LESSEE")
It is hereby agreed by Lessor and Lessee that the provisions of this
Addendum are a part of the Lease. If there is a conflict between the terms and
conditions of this Addendum and the terms and conditions of the Lease, the terms
and conditions of this Addendum shall control. Capitalized terms in this
Addendum shall have the same meaning as capitalized terms in the Lease.
1. Base Rent.
(a) From the Commencement Date through the end of the eighteenth
(18th) full calendar month of the term of the Lease, the monthly Base Rent shall
be Thirty-seven Thousand Nine Hundred Thirty-nine and 20/100 Dollars
($37,939.20).
(b) The Base Rent shall be adjusted on the first day of the
nineteenth (19th), thirty-seventh (37th) and fifty-fifth (55th) full calendar
month of the initial term of the Lease (the "CPI DATES") as provided in (c)
below based on the increase in the Consumer Price Index of the Bureau of Labor
Statistics for the Department of Labor for all Urban Consumers (1982-1984 = 100)
"all items" for the Los Angeles, Anaheim, Riverside metropolitan area and herein
referred to as the "CPI-U"; provided, however, in no event shall the Base Rent
be increased by less than 6.173% nor more than 9.393% on each CPI Date.
(C) The increased monthly Base Rent payable on each CPI Date
shall be calculated as follows: the Monthly Base Rent due immediately preceding
the applicable CPI Date shall be multiplied by a fraction, the numerator of
which shall be the CPI-U for the calendar month that is three (3) months prior
to the applicable CPI Date, and the denominator of which shall be the CPI-U for
the calendar month which is twenty-one (21) months prior to the applicable CPI
Date
(d) If the 1982-1984 base period for the CPI-U is changed, the
conversion tables issued by the Bureau of Labor Statistics shall be used. In the
event the compilation and/or publication of the CPI-U shall be transferred to
any other governmental department or agency or shall be discontinued, then the
index most nearly the same as the CPI-U shall be used to make such calculations.
ARBITRATION OF DISPUTES
(e) IN THE EVENT THE LESSOR AND LESSEE CANNOT AGREE ON AN
ALTERNATIVE INDEX AS PROVIDED IN (d) ABOVE, THEN THE MANNER SHALL BE SUBMITTED
FOR DECISION TO THE AMERICAN ARBITRATION ASSOCIATION IN ORANGE COUNTY, IN
ACCORDANCE WITH THE THEN RULES OF SAID ASSOCIATION AND THE DECISION OF THE
ARBITRATOR SHALL BE BINDING UPON THE PARTIES, NOTWITHSTANDING ONE PARTY FAILING
TO APPEAR AFTER DUE NOTICE OF THE PROCEEDING. THE COST OF THE ARBITRATORS SHALL
BE PAID EQUALLY BY LESSOR AND LESSEE.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE
ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES"
PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU
ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A
COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR
JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY
INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO
ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE
UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO
THIS ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT
DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES"
PROVISION TO NEUTRAL ARBITRATION.
----------------- ----------------
(Lessor initials) (Lessee initials)
(f) Lessee shall continue to pay the Base Rent at the rate
previously in effect until the increase in the Base Rent is determined. Within
ten (10) days following the date on which the increase is determined, Lessee
shall make such payment to Lessor as will bring the increased Base Rent current,
commencing with the effective date of such increase to the date of such
determination. Thereafter, the Base Rent shall be paid at the increased rate. No
delay by Lessor in making a CPI-U adjustment shall constitute the waiver by
Lessor of its right to make said adjustment.
2. Option to Extend. Lessor hereby grants to Lessee the option to extend
the term of the Lease for one (1) five (5)-year period (the "Extension Option")
commencing when the initial term of the Lease expires upon each and all of the
following terms and conditions:
(a) Lessee shall give to Lessor on a date which is prior to the
date that the option period would commence (if exercised) by at least one
hundred eighty (180) days, a written notice of the exercise of the option to
extend the Lease for said additional term, time being of the essence. Such
notice shall be given in accordance with the provisions of Paragraph 23 of the
Lease. If said notification of the exercise of said option is not so given and
received, this option shall automatically expire.
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(b) The terms and conditions of Paragraphs 39.3 and 39.4 of the
Lease shall apply to this Extension Option.
(c) All of the terms and conditions of the Lease except where
specifically modified by this Addendum section shall apply.
(d) The Base Rent shall be adjusted on the first day of the
thirteenth (13th), thirty-first (31st) and forty-ninth (49th) months of the term
of the Extension Option (the "Option Period CPI Dates") as provided in (e) below
based on the increase in the CPI-U; provided, however, in no event shall the
Base Rent be increased by less than 6.173% nor more than 9.393% on each Option
Period CPI Date.
(e) The increased monthly Base Rent payable on each Option Period
CPI Date shall be calculated as follows: the monthly Base Rent due immediately
preceding the applicable Option Period CPI Date shall be multiplied by a
fraction, the numerator of which shall be the CPI-U for the calendar month that
is three (3) months prior to the applicable Option Period CPI Date, and the
denominator of which shall be the CPI-U for the calendar month which is one (1)
year and three (3) months prior to the applicable Option Period CPI Date.
3. Insurance Installments. Notwithstanding anything to the contrary
contained in the Lease, Lessor shall have the right to require Lessee to pay
monthly installments to reimburse Lessor for insurance in amounts reasonably
estimated by Lessor to enable Lessor to pay the insurance premiums when the
insurance premiums are due. Lessor shall have the right to increase the monthly
insurance installments from time to time based upon Lessor's estimate of such
insurance premiums. The monthly insurance installments shall be due and payable
on the first day of each calendar month at the same time Base Rent is due and
shall be considered additional rent for the Premises. If the amount of monthly
payments for estimated insurance premiums received by Lessor from Lessee is more
or less than the actual insurance premiums due, an appropriate adjustment shall
be made by Lessor on an annual basis. If Lessee fails to pay an insurance
installment on the date it is due, time being of the essence, such failure shall
be a default under Paragraph 13.1(b) of the Lease.
4. Netcom Lease. The Premises is presently leased to Netcom Systems,
Inc. ("Existing Tenant"). Lessor's obligations under this Lease are conditioned
and contingent upon (a) Existing Tenant executing and delivering to Lessor an
agreement terminating Existing Tenant's lease of the Premises on terms and
conditions satisfactory to Lessor, in Lessor's sole discretion and (b) Existing
Tenant executing and delivering to Lessor a guaranty of Lessee's obligations
under the Lease which is satisfactory to Lessor, in Lessor's sole discretion.
5. Condition. Lessee acknowledges and agrees that it is accepting the
Premises without any representation or warranty by Lessor concerning (a) whether
Lessee's use of the Premises is a permitted use or will comply with any
applicable law or regulation and (b) whether the improvements on the Premises
comply with covenants or restrictions of record, applicable building codes,
zoning or other land use ordinances or the Americans with Disabilities Act.
6. Title. Lessee is entering into this Lease subject to (but only to the
extent the same affects the Premises, if at all) that certain instrument
entitled Declaration of Covenants, Conditions and Restrictions for Nordhoff
Industrial Complex, recorded as Instrument No. 2466, on October 7, 1976, and
amended pursuant to instrument record on September 19, 1979 as Instrument No.
79-1041181, Official Records of Los Angeles County, California.
7. Lessor Liability. Notwithstanding any other provision of this Lease,
in no event shall Lessor be liable to Lessee for any consequential damages or
any damages to Lessee's business or lost profits. Furthermore, all liability of
Lessor under the Lease shall be limited to Lessor's interest in the Premises.
Lessor's interest in the Premises shall be deemed to include any proceeds of any
insurance policy held by Lessor relating to the Premises. No recourse shall be
had by Lessee for any reason to any assets of Lessor, or Lessor's partners,
other than Lessor's interest in the Premises.
8. Financial Information. At Lessor's request, from time to time, during
the term of this Lease (i) Lessee shall provide Lessor with financial statements
and information concerning Lessee prepared in accordance with generally accepted
accounting principals and (ii) Lessee authorizes Lessor to obtain any and all
information concerning the financial condition and credit of Lessee, including
credit reports, that Lessor may deem necessary or appropriate in connection with
this Lease. Lessor shall not be entitled to receive the foregoing information
more often than once in any twelve (12) month period; provided, however, Lessor
shall be entitled to receive such information at any time such information is
requested by a lender or purchaser of the Premises. Lessee consents to having
Lessor disclose this Lease to any person as may be necessary to obtain credit
information concerning Lessee.
9. Premises Total Destruction. The following language replaces the
language contained in Paragraph 9.1(b) of the Lease:
(b) "Premises Total Destruction" shall mean damage or
destruction to improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations and Trade Fixtures, which cannot
reasonably be repaired within nine (9) months or less from the date of
the damage or destruction. Within thirty (30) days following the date of
the damage or destruction, Lessor shall select a general contractor,
which is reasonably acceptable to Lessee ("Lessor's Contractor") who
shall, by written notice to Lessor and Lessee (a "Determination
Notice"), determine whether or not the repair of such damage or
destruction can be completed within twelve (12) months from, the date of
the damage or destruction.
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10. Partial Damage - Uninsured Loss. The following language replaces the
first two sentences of Paragraph 9.3 of the Lease:
If a Premises Partial Damage occurs that is not an Insured Loss,
(i) if the total cost of repairing such damage is reasonably determined
by Lessor to be equal to or less than $100,000, then Lessor shall repair
such damage at Lessor's expense (but not Lessee's Trade Fixtures or
Lessee Owned Alterations and/or Utility Installations), and (ii) if the
total cost of repairing such damage is reasonably determined by Lessor
to be greater than $100,000, then Lessor may either (A) repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations
and/or Utility Installations) as soon as is reasonably possible at
Lessor's expense, in which event the Lease shall remain in full force
and effect, or (B) terminate the Lease by giving written notice to
Lessee (a "Termination Notice") within thirty (30) days after the date
that Lessor becomes aware of the occurrence of such damage, such
termination to be effective one hundred twenty (120) days after the
date of such notice; provided, however, that the Lease shall not so
terminate if Lessee, by written notice to Lessor within thirty (30) days
after receipt of such Termination Notice, elects to repair such damage
at Lessee's sole expense.
11. Damage Near End of Term. The following language replaces the
language contained in the first sentence of Paragraph 9.5 of the Lease:
If at any time during the last six (6) months of the Original
Term (as the same may be extended by any Extension Option) there is
damage for which the cost of repairs is reasonably estimated by an
impartial general contractor selected by Lessor and reasonably
acceptable to Lessee to exceed $100,000, whether or not an Insured Loss,
Lessor or Lessee may, by written notice to the other party within thirty
(30) days after the date of occurrence of such damage, terminate this
Lease effective sixty (60) days following the date of occurrence of such
damage.
12. Assignment and Subletting - Lessor's Consent Required. The following
language is added as a new Paragraph 12.1 (b) of the Lease:
(b) Lessee shall have the right, without Lessor's consent, to
assign the Lease to an entity (an "Affiliate" controlling, under common
control with, or controlled by Lessee, including an entity resulting
from a merger or consolidation by Lessee, provided that the Affiliate
assumes in writing Lessee's obligations under this Lease.
13. Lessor's Access; Showing Premises Repairs; The following language
replaces the language contained in Paragraph 32 of the Lease:
Lessor and Lessor's agents shall have the right to enter the
Premises at any time, in the case of an emergency, and otherwise, upon
24 hours' prior notice to Lessee, for the purpose of showing same to
prospective purchasers, lenders, or lessees, and making alterations,
repairs, improvements and additions to the Premises as Lessor may deem
necessary. All such activities shall be without abatement of rent or
liability to Lessor. Lessor may at any time place one commercially
standard, free-standing "For Sale" sign at a location to be selected by
mutual agreement of Lessor and Lessee near the perimeter of the
Premises. Lessor may at any time during the last six (6) months of the
Original Term (as the same may be extended by an Extension Option) place
one commercially standard, free-standing "For Lease" sign at a location
to be selected by Lessor near the perimeter of the Premises. Lessee may
at any time place one commercially standard, free-standing "For
Sublease" sign at a location to be selected by Lessee near the perimeter
of the Premises, and all aspects of such sign shall be reasonably
acceptable to Lessor.
14. Signs. The following language replaces the language contained in
Paragraph 34 of the Lease:
Lessee shall not place or permit to be placed any signs upon the
Premises except for (i) any signs installed on the Premises prior to the
Commencement Date, (ii) one "For Sublease" sign in accordance with
Paragraph 32 of the Lease, (iii) signs which comply with all Applicable
Requirements and which are otherwise acceptable to Lessor, in Lessor's
sole discretion.
15. Hazardous Substances. Paragraph 6.2(a), (b), (c), (d) and (e) of the
Lease is hereby deleted in its entirety, and the following is substituted
therefor:
6.2 Hazardous Substances.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance,
chemical, material or waste whose presence, nature, quantity and/or
intensity of existence, use, manufacture, disposal, transportation,
spill, release or effect, either by itself or in combination with other
materials expected to be on the Premises, is either: (i) potentially
injurious to the public health, safety or welfare, the environment or
the Premises, (ii) regulated or monitored by any governmental authority,
or (iii) a basis for liability of Lessor to any governmental agency or
third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof.
Lessee shall not engage in any activity in, on or about the Premises
which constitutes a Reportable Use (as hereinafter defined) of Hazardous
Substances without the express prior written consent of Lessor and
compliance in a timely manner (at
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Lessee's sole cost and expense) with all Applicable Requirements.
"Reportable Use" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration
or business plan is required to be filed with, any governmental
authority. Reportable Use shall also include Lessee's being responsible
for the presence in, on or about the Premises of a Hazardous Substance
with respect to which any Applicable Requirements require that a notice
be given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may, without Lessor's
prior consent, but in compliance with all Applicable Requirements, use
any ordinary and customary materials reasonably required to be used by
Lessee in the normal course of Lessee's business permitted on the
Premises, so long as such use is riot a Reportable Use and does not
expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In
addition, Lessor may (but without any obligation to do so) condition its
consent to the use or presence of any Hazardous Substance, activity or
storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to
protect itself, the public, the Premises and the environment against
damage, contamination or injury and/or liability therefrom or therefor,
including, but not limited to, the installation (and removal on or
before Lease expiration or earlier termination) of reasonably necessary
protective modifications to the Premises (such as concrete encasements)
and/or the deposit of an additional Security Deposit under Paragraph 5
hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition involving
or resulting from same, has come to be located in, on, under or about
the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor. Lessee
shall also immediately give Lessor a copy of any statement, report,
notice, registration, application, permit business plan, license, claim,
action or proceeding given to, or received from, any governmental
authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of or
exposure to any Hazardous Substance or contamination in, on or about the
Premises, including but not limited to all such documents as may be
involved in any Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any,
and the Premises, harmless from and against any and all loss of rents
and/or damages, liabilities, judgments, costs, claims, liens, expenses,
penalties, permits and attorney's and consultant's fees arising out of
or involving any Hazardous Substance or storage tank brought onto the
Premises by or for Lessee or under Lessee's control. Lessee's
obligations under this Paragraph 6 shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the expiration or
earlier termination of this Lease. No termination, cancellation or
release agreement entered into by Lessor and Lessee shall release Lessee
from its obligations under this Lease with respect to Hazardous
Substances or storage tanks, unless specifically so agreed by Lessor In
writing at the time of such agreement.
16. Waiver of Rent. Lessor hereby agrees to waive the Base Rent due from
July 14, 1999 through September 13, 1999. No amounts due to Lessor under the
Lease other than the Base Rent referred to above shall be waived. On or before
September 1, 1999, Lessee shall pay Twenty-one Thousand Four Hundred
Ninety-eight and 88/100 Dollars ($21,498.88) to Lessor which is the Base Rent
due for the period September 14, 1999 through September 30, 1999.
17 Earthquake Insurance Increases. Lessee shall reimburse Lessor for the
cost of purchasing earthquake insurance for the Premises during the first year
of the term of the Lease. Notwithstanding anything to the contrary contained in
the Lease, commencing with the second full year of the term of the Lease, if the
cost of earthquake insurance exceeds the Base Premium (as defined below), Lessee
shall not be obligated to pay to Lessor the cost of the earthquake insurance
during such year which is excess of the Base Premium. For purposes of this
Addendum section, the Base Premium shall mean the cost of purchasing earthquake
insurance during the first year of the term of the Lease increased by six
percent (6%) per year on a compounded basis. For example, if the Base Premium
was $100 during the first year of the term of the Lease, the Base Premium would
be $106 as of the first day of the second year of the term of the Lease and the
Base Premium would be $112.36 as of the first day of the third year of the term
of the Lease. This Addendum section shall not apply during any option term, and
there shall be no limitation on the payment by Lessee of earthquake insurance
costs during any option term.
18. Work Letter Agreement. Attached hereto as Exhibit I is a Work Letter
Agreement. Lessor shall complete the construction of certain improvements in the
Premises in accordance with the terms of the Work Letter Agreement (the
"Improvements"). Except for improvements made to the Premises in accordance with
the terms of the Work Letter Agreement, Lessee hereby accepts the Premises in
its "as is" condition and Lessor shall have no obligation to modify, improve or
repair the Premises. Lessee acknowledges and agrees that the term of the Lease
shall commence on the Commencement Date set forth in the Lease notwithstanding
that the Improvements have not been completed on the Commencement Date. In
addition, Lessee acknowledges and agrees that the construction of the
Improvements will interfere with Lessee's use of the Premises and that Lessor
shall not
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be liable for such interference and Lessee shall not be entitled to an abatement
of rent due to such interference. Lessee shall be solely responsible, at its
sole expense, for moving its personal property and equipment from time to time
in order to accommodate the completion of the Improvements. Lessee hereby
authorizes Lessor's contractor to enter the Premises for purposes of completing
the Improvements.
IN WITNESS WHEREOF, the parties hereto have respectively executed this
Addendum.
"LESSOR"
Nordhoff Industrial Complex, a California
general partnership
By: /s/ GERALD L. KATELL
-------------------------------
Gerald L. Katell, Manager
Katell Family Company, LLC
General Partner
"LESSEE"
MRV Communications, Inc., a Delaware
corporation
By: /s/ SHLOMO MARGALIT
-------------------------------
Dr. Shlomo Margalit
Chairman of the Board
By: /s/ ZEEV RAV-NOY
-------------------------------
Dr. Zev Rav-Noy
Chief Operating Officer
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<PAGE> 17
EXHIBIT 1
WORK LETTER AGREEMENT
(Improvement Allowance)
This Work Letter Agreement ("Agreement")is entered into by and between
Nordhoff Industrial Complex ("Lessor") and MRV Communications, Inc. ("Lessee").
Concurrently with the execution of this Agreement, Lessor and Lessee have
entered into a Standard Industrial/Commercial Single-Tenant Lease-Net of even
date herewith (the "Lease") covering certain premises (the "Premises") more
particularly described in the Lease. In consideration of the mutual covenants
hereinafter contained, Lessor and Lessee hereby agree as follows:
1. Tenant Improvement Coordinator. Within three (3) days after this
Agreement is executed by Lessor and Lessee, Lessor and Lessee shall each
designate in writing the name of one person who shall be that party's tenant
improvement representative. All communication concerning the tenant improvements
shall be directed to the appropriate party's tenant improvement representative.
Lessee shall hot have the right or authority to instruct Lessor's contractor to
take any action. Any action Lessee desires Lessor's contractor to take shall be
communicated by Lessee to Lessor's tenant improvement representative, and
Lessor's tenant improvement representative shall give the necessary instructions
to the contractor.
2. Plans and Specifications.
2.1 Space Plan. Within twenty (20) days after the execution of the
Lease, Lessee shall submit to Lessor for approval a detailed space plan ("Space
Plan") for the Premises which shall include without limitation, the location of
doors, partitions, electrical and telephone outlets, plumbing fixtures, heavy
floor loads and other special requirements. Lessor reserves the right to require
Lessee to use Lessor's architect and/or space planner. If Lessee uses its own
architect or space planner, Lessor shall have the right to employ Lessor's
architect to review the Space Plan, and the cost of such review shall be paid
from the Improvement Allowance. Lessor agrees to cooperate with Lessee and its
design representatives in connection with the preparation of the Space Plan.
Within ten (10) days after receipt by Lessor of the Space Plan, Lessor (i) shall
give its written approval with respect thereto, or (ii) shall notify Lessee in
writing of its disapproval and state with specificity the grounds for such
disapproval and the revisions or modifications necessary in order for Lessor to
give its approval. Within ten (10) days following Lessee's receipt of Lessor's
disapproval, Lessee shall submit to Lessor for approval the requested revisions
or modifications. Within ten (10) days after receipt by Lessor of such revisions
or modifications, Lessor shall give its written approval with respect thereto or
shall request other revisions or modifications therein (but relating only to the
extent Lessee has failed to comply with Lessor's earlier requests). The
preceding sentence shall be implemented repeatedly until Lessor gives its
approval to Lessee's Space Plan.
2.2 Plans. Based on the approved Space Plan, Lessee shall cause to be
prepared and to be submitted to Lessor for approval detailed plans,
specifications and working drawings ("Plans") for the construction of Lessee's
leasehold improvements to the Premises ("Improvements"). Lessor reserves the
right require Lessee to use Lessor's space planner, architect and/or engineer.
If Lessee uses its own architect, space planner or engineer, Lessor shall have
the right to employ Lessor's architect and/or engineer to review the Plans, and
the cost of such review shall be paid from the Improvement Allowance. As used
herein, the term "Improvements" shall include all work to be done in the
Premises pursuant to the Plans, including, but not limited to: demolition work,
partitioning, doors, ceiling, floor coverings, wall finishes (including paint
and wallcoverings), window coverings, electrical (including lighting, switching,
telephones, outlets, computer and special electrical equipment, etc.), plumbing,
heating, ventilating and air conditioning, fire protection, cabinets and other
millwork. Lessee shall submit the Plans to Lessor for approval within ten (10)
days following Lessor's approval of the Space Plan. Within ten (10) days after
receipt by Lessor of the Plans, Lessor (i) shall give its written approval with
respect thereto, or (ii) shall notify Lessee in writing of its disapproval and
state with specificity the grounds for such disapproval and the revisions or
modifications necessary in order for Lessor to give its approval. Within ten
(10) days following Lessee's receipt of Lessor's disapproval, Lessee shall
submit to Lessor for approval the requested revisions or modifications. Within
ten (10) days following receipt by Lessor of such revisions or modifications,
Lessor shall give its written approval with respect thereto or shall request
other revisions or modifications therein (but relating only to the extent Lessee
has failed to comply with Lessor's earlier requests). The preceding sentence
shall be implemented repeatedly until Lessor gives its approval to Lessee's
Plans. After approval of the Plans by Lessor, no further changes to the Plans
shall be made without the prior written approval of Lessor. Lessee acknowledges
that Lessor's review and approval of the Plans is not conducted for the purpose
of determining the accuracy and completeness of the Plans, their compliance with
applicable codes and governmental regulations or their sufficiency for purposes
of obtaining a building permit, all of which shall remain the responsibility of
Lessee and Lessee's architect.
3. Improvement Cost and Allowance.
3.1 Cost Breakdown. Within a reasonable period following approval of the
Plans, Lessor shall provide Lessee with a breakdown of the estimated total cost
of the Improvements ("Cost Breakdown'), including, without limitation:
construction cost of the Improvements; architectural and engineering fees
relating to the preparation and review of the Space Plan and the Plans
(inclusive of all design work); governmental agency plan check, permit and other
fees; sales and use taxes; testing and inspection costs; and construction fees
(including general contractor's overhead and supervision fees and the
construction supervisory fee referred to in section 4.3 hereof). Within ten (10)
days after receipt by Lessee of the Cost Breakdown, Lessee shall either approve
the same in writing or shall provide Lessor with a detailed list of revisions to
the approved Plans.
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3.2 Improvement Allowance. Lessor hereby grants to Lessee an
"Improvement Allowance" of One Hundred Forty Thousand Dollars ($140,000.00),
which Improvement Allowance shall be used only for the items specified in the
Cost Breakdown. In the event that the Cost Breakdown exceeds the Improvement
Allowance, Lessee shall pay to Lessor the sum in excess of the Improvement
Allowance by cashier's check, which payment shall be made within five (5) days
of Lessor's notice to Lessee that Lessor is prepared to commence construction.
3.3 Cost Increases. In the event that the cost of the Improvements
increases subsequent to Lessee's approval of the Cost Breakdown due to the
requirements of any governmental agency imposed with respect to the construction
of the Improvements or due to any other unforeseeable circumstances, Lessee
shall pay to Lessor the amount of such increase within five (5) days of Lessor's
written notice; provided, however, that Lessor shall first apply toward such
increase any remaining balance in the Improvement Allowance.
3.4 Change in Plans. In the event that Lessee requests a change in the
Plans subsequent to approval of the Cost Breakdown, Lessor shall advise Lessee
as to any increases in the cost of the Improvements. Lessee shall approve or
disapprove such change within five (5) days of written notice. In the event that
Lessee approves such change, Lessee shall accompany its approval with payment in
the amount of the increase; provided, however, that Lessor shall first apply
toward such increase any remaining balance in the Improvement Allowance.
3.5 No Refund. If the actual cost of the Improvements does not exceed
the Improvement Allowance, the unused portion of the Improvement Allowance shall
not be paid or refunded to Lessee or be available to Lessee as a credit against
any obligations of Lessee under the Lease.
4. Construction of Improvements.
4.1 Construction. Within a reasonable period following approval of the
Cost Breakdown by Lessee, and upon payment of any sum required under section 3.2
above, Lessor shall instruct its contractor to secure a building permit and
commence construction.
4.2 Completion. Lessor shall endeavor to cause the contractor to
substantially complete construction of the Improvements in a diligent manner,
but Lessor shall not be liable for any loss or damage as a result of delays in
construction or delivery of possession of the Premises,
4.3 Construction Supervisory Fee. The cost of the Improvements shall
include a construction supervisory fee equal to five percent (5%) of the cost of
constructing the Improvements which shall be payable to Lessor from the
Improvement Allowance.
5. Incorporation. This Agreement is and shall be incorporated by reference
in the Lease, and all of the terms and conditions of the Lease are and shall be
incorporated herein by this reference.
Page 2 of 2
<PAGE> 1
EXHIBIT 10.2
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT (this "AGREEMENT") is made this ___ day of
July, 1999 by and between NetCom System, Inc., a Delaware corporation
("Indemnitee"), and MRV Communications, Inc., a Delaware corporation
("Indemnitor").
RECITALS
This Agreement is made with reference to the following facts and
objectives:
A. Nordhoff Industrial Complex, a California general partnership
("Landlord"), and Indemnitee entered into a written lease dated March 28, 1996,
as amended by that certain First Amendment to Standard Industrial/Commercial
Lease and that certain Second Amendment to Lease dated March 26, 1997 (as
amended, the "Original Lease"), in which Landlord leased to Indemnitee, and
Indemnitee leased from Landlord, those certain Premises described in the
original lease (the "Premises") located at 20500 Nordhoff Street, Chatsworth,
California.
B. Landlord and Indemnitee desire to terminate the Original Lease.
C. Landlord and Indemnitor desire to enter into a new lease (the "New
Lease") whereby Landlord will lease to Indemnitor, and Indemnitor will lease
from Landlord, the Premises.
D. Landlord, in order for it to enter into the New Lease, requires that
Indemnitee provide Landlord with a corporate guaranty (the "Guaranty") covering
Indemnitor's rent obligations under the New Lease.
AGREEMENT
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Indemnity. In order to induce Indemnitee to execute and deliver the
Guaranty to Landlord, Indemnitor shall indemnify, defend, protect and hold
Indemnitee, its shareholders, officers and agents harmless from and against any
and all claims, liabilities, losses, costs (including, without limitation,
reasonable attorneys' fees) and damages arising from or in any manner related to
Indemnitee's obligations under the Guaranty. The provisions of this paragraph
shall survive the expiration or termination of the New Lease and this Agreement.
2. Obligation to Perform. Indemnitor covenants, as a direct obligation
to Indemnitee, that Indemnitor will timely pay and perform all of its
obligations under the New Lease.
3. No Amendments. During the term of the Guaranty, as defined in Section
2 of the Guaranty (the "Guaranty Term"), Indemnitor shall not amend or modify
the New Lease, exercise any expansion or extension rights or do anything that
could increase Indemnitee's obligations or decrease Indemnitee's rights under
the Guarantee without the prior written consent of Indemnitor.
4. Sublease/Assignment. During the Guaranty Term, Indemnitor shall not
sublease any portion of the Premises or assign the New Lease voluntarily, by
operation of law or otherwise, where Landlord's consent to such sublease or
assignment is required under the New Lease, without the prior written consent of
Indemnitee and Landlord. Indemnitee's consent shall not be unreasonably withheld
or
<PAGE> 2
delayed. In the event Indemnitee fails to consent or reasonably deny consent
within thirty (30) days after receiving Indemnitor's written request for such
consent, Indemnitee shall be deemed to have given its consent to such assignment
or sublease.
5. Right to Cure. Indemnitor shall provide Indemnitee with copies of all
notices given by Landlord as and when received by Indemnitor. If Indemnitor
fails to pay any sum of money to Landlord, then Indemnitee may, but shall not be
obligated to, make such payment after giving Indemnitee three (3) days prior
written notice of such payment. All such sums paid shall be paid by Indemnitor
to Indemnitee on demand and all amounts not paid within ten (10) days after
demand by Indemnitee shall accrue interest at ten percent (10%) per annum from
the date of the expenditure until repaid.
6. Insurance. Indemnitor shall include Indemnitee as an additional
insured on all insurance policies it is required to maintain under the New Lease
and shall provide Indemnitee with all required certificates under the New Lease
at the same time and in the same manner such certificates are provided to
Landlord.
7. Miscellaneous. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns. If
either party brings any action or legal proceeding with respect to this
Agreement, the prevailing party in such action shall be entitled to recover its
reasonable attorney's fees and costs. If any one or more of the provisions
contained in this Agreement shall be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby. Captions
are inserted for convenience only and will not affect the construction hereof.
This Agreement may be executed in one or more counterparts, each of which shall
be an original, but all of which, taken together, shall constitute one and the
same Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
dated and effective as of the date first written above.
INDEMNITEE INDEMNITOR
NETCOM SYSTEMS, INC. MRV COMMUNICATIONS, INC.
By: /s/ DWIGHT OLSON By: /s/ DR. SHLOMO MARGALIT
------------------------------- -------------------------------
Name: Dwight Olson Dr. Shlomo Margalit
Its: V.P. Operations Chairman of the Board
By: /s/ GILBERT CABRAL By: /s/ DR. ZEEV RAV-NOY
------------------------------- -------------------------------
Name: Gilbert Cabral Dr. Zev Rav-Noy,
Its: CFO, VP Chief Financial Officer
2
<PAGE> 1
EXHIBIT 10.3
[NETCOM SYSTEMS LETTERHEAD]
July 13, 1999
MRV Communications, Inc.
Dear Sir or Madam:
Upon full execution and all monies paid of a lease, for property at 20550
Nordhoff Street, Chatsworth, California; by and between Nordhoff Industrial
Complex as Lessor and MRV Communications, Inc. as Lessee, Netcom Systems, Inc.
hereby bargains, sells and conveys to MRV the equipment and services, which are
described as follows:
1. Title on the IWATSU ADIX Phone Switch, 216 stations expandable to 416
stations:
o Active Voice Replay Plus voice mail system
o 7 digital cards (56 stations)
o 56 digital telephones (24 button)
o 4 DDS units (50 button)
o 20 analog cards (60 stations)
2. Title on all existing furniture and office fixtures remaining in the
building will pass to MRV.
3. Netcom Systems will warrant all HVAC Systems for a period of one year
from the date of signing. This warranty is conditional upon MRV
performing on-going routine maintenance and service contracts as
required within the Lease contract referenced above, on all units.
Sincerely,
/s/ DWIGHT OLSON
- --------------------------------
Dwight Olson
Vice President, Operations
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<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
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0
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<COMMON> 181,300
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