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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER: 0-28734
ADVANCED FIBRE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 68-0277743
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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ONE WILLOW BROOK COURT
PETALUMA, CALIFORNIA 94954
(707) 794-7700
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 1999, 76,624,882 shares of Advanced Fibre Communications,
Inc. Common Stock, $0.01 par value, were outstanding, and the aggregate market
price of the shares held by non-affiliates was $577,597,854. (Solely for the
purposes of calculating the preceding amount, all directors and officers of the
registrant are deemed to be affiliates.)
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Annual Report to Stockholders for the
year ended December 31, 1998 and the Company's definitive Proxy Statement issued
in connection with the 1999 Annual Meeting of Stockholders to be held on May 25,
1999, are incorporated by reference in Parts II and III of this report.
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ADVANCED FIBRE COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I.
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 17
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Consolidated Financial Data........................ 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. 21
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure.................................................. 22
PART III.
Item 10. Directors, Executive Officers and Key Employees of the
Registrant.................................................. 23
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 26
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PART I.
Except for the historical financial information contained herein, the
following discussion may contain "forward-looking statements" that have been
made pursuant to the provisions of the Private Securities Litigation Reform Act
of 1995. Such statements include declarations regarding the intent, belief or
current expectations of the Company and its management. Any such forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties. Actual results could differ materially from those
indicated by such forward-looking statements. Among the important factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements are those set forth beginning on page 8 in "Certain
Factors That Might Affect Future Operating Results," as well as those noted in
the documents incorporated herein by reference. Unless required by law, the
Company undertakes no obligations to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, readers should carefully review the risk factors set forth in other
reports or documents the Company files from time to time with the Securities and
Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any
current reports on Form 8-K.
ITEM 1. BUSINESS
OVERVIEW
Advanced Fibre Communications, Inc. ("the Company" or "AFC") designs,
develops, manufactures, markets and supports the Universal Modular Carrier
1000(TM) ("UMC 1000"), a cost-effective, multi-service digital loop carrier
system developed to serve small to mid line size markets. The UMC 1000 is
designed to enable telecommunications companies and other service providers to
connect subscribers to the central office switch for voice and data
communications. The UMC 1000 meets the service needs of domestic and
international subscribers, including analog services such as plain old telephone
service ("POTS"), high speed digital data service, and Integrated Services
Digital Network compatibility.
The UMC 1000 can provide narrowband and broadband services in a single
platform, from POTS to all types of digital subscriber lines ("xDSL") over
copper wire, fiber optic cable or wireless transport media. The 6.2 Gbps
backplane architecture allows the UMC 1000 to transition between time division
multiplexing ("TDM"), Frame Relay, and Asynchronous Transfer Mode ("ATM")
networks. Designed with distributed common control, the system is economically
scalable from two to 2,000 lines, and can transition from a narrowband to
broadband access system. The UMC 1000 can be installed in a variety of network
configurations to support the varying geographic distribution of subscriber
bases. Thus, the UMC 1000 offers a cost-effective solution to the small to mid
line size market with a wide variety of features and advanced services.
There are more than 12,000 UMC 1000 systems installed in 23 countries
serving approximately 2.5 million access lines. In the U.S., Sprint, WinStar,
and Pac Bell, among others, deploy the UMC 1000 system. The UMC 1000 system has
been deployed in South Africa, France, Canada, Mexico, Puerto Rico, Venezuela,
Brazil, Panama, China, Hong Kong, Japan, and the Philippines, among others. The
UMC 1000 is distributed and serviced worldwide through a direct sales force in
the United States and through direct sales, distributors and sales
representatives in international markets.
AFC was incorporated in California in May 1992 and reincorporated in
Delaware in September 1995. The Company completed an initial public offering on
October 4, 1996 and a secondary offering on February 12, 1997. Principal
executive offices are located at One Willow Brook Court, Petaluma, California
94954, and the telephone number at that address is (707) 794-7700.
AFC operates on a 13-week fiscal quarter, comprised of four, four and five
week months ending on the last Saturday of the last week of the five-week month.
For presentation purposes only, the first three fiscal quarters are shown as
ending on March 31, June 30, and September 30, and the fourth fiscal quarter and
fiscal year are shown as ending on December 31. As used in this report, 1998,
1997, and 1996 refer to the fiscal years ending December 31, 1998, 1997 and
1996, respectively, unless the context otherwise indicates.
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INDUSTRY BACKGROUND
Over the past twenty years, the telecommunications industry has experienced
significant advances technologically and architecturally. These changes have
been prompted by the demand for new and expanded services, increased competition
among telecom providers, and the need to leverage existing networks and reduce
operating costs.
The Telecommunications Act of 1996 opened up the telecom markets to new
entrants and created an environment in which telecom providers began offering
expanded crossover services. Growth in the Internet, electronic commerce, and
telecommuting increased pressure on telecom providers to supply a broader range
of voice and data services over faster networks. Today, over 7,500 registered
Internet Service Providers in the U.S. have helped drive the demand for faster
transmission and higher broadband capacity. Subscriber demand has created a need
by telecom providers for flexible, cost efficient local loop system upgrades
from current voice-optimized networks to networks optimized for packet data, or
statistical multiplexing. Packet data provides a more efficient method of
sending data and is rapidly replacing traditional TDM. However, in general, the
broadband capacity of the access network has not kept pace with these
developments, particularly in the local loop portion between the central office
and the subscriber. For the most part, standard analog modems have reached the
data-carrying capacity of the existing local loop network and telecom providers
have sought solutions to ease the congestion in this portion of the network.
BRIDGING THE VOICE AND DATA EVOLUTION
The UMC 1000 provides cost-effective, multi-service local loop systems for
the small to mid line size market, incorporating a modular architecture
supporting copper, fiber, and wireless and the evolution from one transmission
media to another. The system was developed to expand local loop capacity by
using more of the available frequency spectrum of copper lines to provide
symmetric or asymmetric data service. AFC delivers a platform that supports
narrowband and wideband services. The addition of high speed SONET/SDH
capabilities, and ATM, the leading protocol capable of managing a wide diversity
of services in the access network are in development. The UMC 1000 is easily
scalable from two to 2,000 lines through the addition of modular components and
plug-in cards.
Utilizing a single platform and a variety of line cards supporting specific
services, the UMC 1000 system is capable of providing a range of voice and data
services. The system's ability to provide xDSL technology from any slot in any
shelf, without the loss of POTS density, allows telecom providers to deploy high
speed data services more quickly and cost effectively.
The UMC 1000 was designed to require a minimum number of common control
units to support transmission over a variety of media and the delivery of more
advanced services and features by telecom providers. In addition, the system can
be installed in a variety of network configurations to support the varying
geographic distribution of subscriber bases. With the UMC 1000, the Company is a
leading provider of cost effective and flexible solutions for the local access
market.
RECENT DEVELOPMENTS
In 1998, AFC released a new 24 lowline size product, Element Management
System, and the V6.1 software and hardware package for the UMC 1000 adding
Asymmetric Digital Subscriber Line ("ADSL") capabilities, 24 line fiber to the
curb, and expanding the system to serve up to 2,000 lines. In early 1999, the
Company released an ADSL card that fully integrates ADSL and POTS on a single
card, making high speed Internet access available to subscribers served over
digital loop carriers.
AFC has introduced the UMC 1000 Third Generation Digital Loop Carrier(TM)
("3GDLC"). This enhanced version of the UMC 1000 is designed to accommodate the
bandwidth and connectivity requirements of current and future local loop
applications. The 3GDLC has the capability to connect simultaneously to TDM,
cell (ATM and Frame Relay), and high speed SONET/SDH network architectures. It
delivers voice or data access from 64 Kbps to 155 Mbps to any subscriber from a
single channel bank assembly. The 3GDLC was designed to support 6.2 Gbps
bandwidth, making it capable of delivering broadband and narrowband
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technology and services anywhere in the local loop from a single platform. The
GR-303 interface capability has been added to the 3GDLC and allows a remote DLC
terminal to connect directly to a telecommunications company switch.
The Company seeks to enhance its products and technology by forming
strategic alliances with other technology leaders whose products leverage and
integrate with the UMC 1000 system. AFC has product and technology alliances
with ADTRAN, Inc. and Pairgain Technologies, Inc. to collaborate on high speed
digital subscriber line solutions. A joint marketing agreement with VINA
Technologies combines VINA's Multiservice T1 Integrator(R) and the UMC 1000 with
a GR-303 interface, integrating voice and data traffic into a single T1 line.
The Company has entered into alliances with 3Com Corporation, Aware, Inc.,
Cayman Systems, Centillium Technology Corporation, Efficient Networks, Inc., and
Redback Networks, Inc. concentrating on ADSL technology.
In the latter portion of 1998, AFC joined a strategic alliance with
Sourcenet Corporation, Efficient Networks, Inc., Minerva Systems, Newbridge
Networks, nCUBE, and Stellar One Corporation to develop and produce a complete
end to end advanced telecommunications services solution called On Demand
Network(TM) ("ODN"). ODN uses ATM packet switching over DSL to provide high
speed "always on" Internet access, data transport, true video on demand,
multichannel broadcast video, pay per view, and voice service over a single
copper pair connection to the home. ODN is compatible with existing telephones,
televisions and personal computers, and the service is affordable from a total
cost of ownership perspective.
AFC is a member of the Universal ADSL Work Group ("UAWG"), a group of
leading telecommunications, networking industry, and personal computer companies
working to create a universal ADSL standard and facilitate interoperability of
devices. The stated goal of UAWG is to propose an open, interoperable
International Telecommunications Union Standard of ADSL which will deliver high
speed communications up to 25 times the speed of current high speed analog modem
technology.
MARKETS AND CUSTOMERS
The largest portion of the Company's customer base consists of the
independent telecommunications companies serving the U.S. rural and suburban
markets. The UMC 1000 system is deployed by National Local Exchange Carriers
("NLECs"), Competitive Local Exchange Carriers ("CLECs"), Independent Local
Exchange Carriers ("ILECs"), Regional Bell Operating Companies ("RBOCs") and
international telecommunications service providers.
Domestic Small to Mid Line Size Markets. The domestic small to mid line
size markets for telecommunications services are generally located in rural and
suburban areas and are served by approximately 1,200 independent
telecommunications companies and the five RBOCs. The independent
telecommunications companies range from rural companies with as few as 125
subscribers to NLECs such as Sprint with approximately 7.7 million subscribers.
The Company has divided the domestic telecommunications company market into the
following markets:
- small independents using consultant/engineering firms to provide network
design for service expansion and modernization
- medium size independents performing network design internally
- CLECs requiring cost-effective platforms with a wide range of
copper-based services
- NLECs whose requirements include testing and equipment modifications to
meet specific network requirements
- RBOCs requiring cost-effective solutions to their small to mid line size
requirements.
During 1998, AFC extended supply contracts with among others, TDS Telecom,
and distribution agreements with Sprint North Supply, and ALLTEL Supply, among
others. The Company also entered into a five year contract with the U.S.
Government's General Services Administration. Under the terms of this
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contract, the UMC 1000 was added to the government's supply catalog, providing a
designated purchasing path for government agencies, contractors and other
authorized organizations to purchase the system.
In 1998, AFC expanded its sales force to specifically pursue orders from
CLECs, focusing on approximately 130 potential customers in 1999. During the
third and fourth quarters of 1998, AFC shipped the largest single purchase order
in the Company's history to a leading CLEC.
International Markets. The international telecommunications market can be
divided into two general categories of service need requirements. Basic
services, such as POTS, fulfill the immediate service needs of developing
countries with little or no telecommunications infrastructure. Developed
countries generally require more advanced telecommunication services, often
coupled with unique standards or network specifications. In many of these
international markets, deregulation and privatization of the incumbent
telecommunications companies are prompting service providers to optimize
existing facilities, typically consisting of copper, for a growing subscriber
base. Simultaneously, these companies are installing technology offering the
opportunity in the future for advanced services. The UMC 1000 can be used to
cost-effectively deliver basic service over existing copper or to develop a
fiber or wireless network where no facilities exist. As service demand grows,
the telecommunications companies can incrementally add more sophisticated high
bandwidth services within the UMC 1000 configuration. The Company is pursuing
selected opportunities to develop these international markets primarily through
its direct sales force, local distributors and strategic relationships.
In 1998, AFC's international revenues grew 15.7%. During the year, the
Company extended existing contracts with Integrators of System Technology (Pty)
to sell to South Africa's main telephony provider (Telkom South Africa), France
Telecom, and Hongkong Telecommunications. The Company continued to supply
product under contracts to customers in Canada, Venezuela, Brazil, and Panama.
SALES, MARKETING AND CUSTOMER SUPPORT
The UMC 1000 is marketed worldwide directly to telecommunications companies
and indirectly through original equipment manufacturers, distributors, and sales
representatives. AFC's sales force consists of two groups, one of which focuses
on U.S. and Canadian telecommunications companies, and the second focusing on
international markets.
The North American sales force focuses on developing relationships,
understanding network deployment strategies, and cost requirements of ILECs,
NLECs, CLECs, and RBOCs in the U.S. and telecommunications companies in Canada.
As of December 31, 1998, the North American sales organization consisted of 33
direct salespeople and one domestic sales vice president.
AFC's sales personnel are dedicated to specific customer accounts. In
addition to direct calls on telecommunications companies, sales to customers
often involve marketing through consulting engineers who are retained by small
independent telecommunications companies for engineering, specifications and
installation services.
In international markets, a direct sales force is employed consisting of
thirteen salespersons and one vice president. The primary tasks of the
International sales force include marketing the UMC 1000 directly to
international telecommunications companies and selecting, training and managing
local distributors. Sales to international customers are primarily fulfilled
through the Company's distributors and sales representatives. AFC has
international sales or representative offices in Hong Kong, Shanghai, Singapore,
New Delhi, London, Warsaw, and Coral Gables, Florida. The organizational
infrastructure has dedicated international business development, product
management, customer support personnel, and distribution channel management in
all major international regions.
The North American and International sales organizations receive support
from AFC's marketing department for, among other things, product marketing,
advertising and marketing communications. The marketing department works closely
with telecommunications companies' planning and engineering departments on
specific network configurations in order to provide product proposals that are
optimal in terms of both performance and cost.
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AFC's customer support organization is responsible for servicing products
and assisting sales personnel. In addition to its own field technical service
engineers, AFC also relies on various third party support organizations to
provide post sales support to domestic customers. International customer support
is provided directly or through authorized distributors. Training curriculums
and materials are made available to customers either through student training or
train-the-trainer programs. The UMC 1000 generally has a 24-month warranty
period.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts have been focused on
developing local loop products with advanced features for small line size and
mid line size markets. The UMC 1000 was designed with a modular software and
hardware platform that can be configured and adapted to particular customer
requirements. Development efforts include extensive attention to ease of
installation and use by the customer as evidenced in the menu driven software
approach as well as the compact and efficient hardware design demonstrated in
its printed circuit board assemblies. Research and development personnel work
closely with sales and marketing personnel to ensure development efforts are
targeted to customer needs. Recent development efforts have focused on
developing enhancements to the UMC 1000 system, such as a new fiber to the curb
capability, single-pair digital subscriber line service, the first production
version of an ADSL card, wireless local loop, video/PSTN connections, survivable
span, ATM broadband capabilities, a 24 line cabinet, and larger line size
products. In international markets, efforts have been focused on the V5.2 switch
interface, element management system, and numerous country-specific
customizations.
The industry in which the Company operates is characterized by rapidly
changing technological and market conditions which may shorten product life
cycles. AFC's future competitive position will depend not only upon successful
production and sales of the UMC 1000, but also upon its ability to develop and
produce, on a timely basis, new features and services to meet existing and
anticipated industry demands. The Company is currently engaged in the
development of several new features for the UMC 1000. During the product
development process, a substantial amount of resources is invested in products
that often require extensive field testing and evaluation prior to introduction
to the market.
Research and development costs charged to expense were $41.0 million in
1998, $25.7 million in 1997, and $14.4 million in 1996. As a percentage of total
revenues, research and development costs represented 13.1% in 1998, 9.6% in
1997, and 11.1% in 1996. AFC considers its research and development efforts
vital to its future success and plans to continue to support the development of
new products, features and product cost reductions. As of December 31, 1998, the
research and development staff had grown to 288 employees from 176 employees at
the end of 1997.
MANUFACTURING
Manufacturing, system integration and certain testing operations are
performed at AFC's headquarters in Petaluma, California. The Company's
manufacturing operations consist primarily of the final assembly and testing of
product, primarily printed circuit boards purchased from third parties, and
cabinet assembly. Quality is monitored at each stage of the production and
supply process, including the selection of component suppliers, warehouse
procedures, the assembly of finished goods and final testing, packaging and
shipping. Functional, environmental and systems testing and other quality
assurance related activities are performed on the subassemblies incorporated
into the UMC 1000. In February 1998, the domestic manufacturing and distribution
operations were moved into a new facility, doubling capacity. See Part I, Item 1
- -- "Certain Factors That Might Affect Future Operating Results" as it pertains
to these matters on pages 12 and 13 of this Annual Report on Form 10-K.
AFC relies on a limited number of independent contractors to manufacture
the subassemblies to strict specifications for use in the Company's products. In
particular, AFC relies on:
- Flextronics International Ltd. and Solectron International USA, Inc. to
manufacture printed circuit board assemblies ("PCBA")
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- Siemens Microelectronics, Inc. for PCBA components
- Paragon Electronic Systems, Inc., and Tyco Printed Circuit Group Inc. to
manufacture backplanes and channel bank assemblies
- Celestica, Inc. for channel bank assemblies and protector panel
subassemblies
- General Cable Corporation for protector panel subassemblies
- CMOR Manufacturing and Wilco Wire Technology, Inc. for cable and wire
harnesses and various turnkey assemblies
- American Microsystems, Inc. for application specific integrated circuits
- Hendry Telephone Products for fuse panels and racks
- Powersafe Standby Batteries Inc. for battery systems
- LeeMah Electronics Inc. for fully integrated cabinets
- Pairgain Technologies Inc. for custom enclosures and boards
- Sonoma Metal Products, Inc., Cowden Metal San Jose, Inc., Mayville Metal
Products, and EMAR Inc. to manufacture the external housing cabinets
- Advanced Digital Graphics, Inc. for system documentation
Certain components used in the UMC 1000 are only available from a single
source or limited number of suppliers. Some of AFC's sole source suppliers are
companies which from time to time allocate parts to telecommunications equipment
manufacturers due to market demand for components and equipment. Many of AFC's
competitors are much larger and may be able to obtain priority allocations from
these shared suppliers, resulting in limited or unreliable sources of supply for
these components. See Part I, Item 1 -- "Certain Factors That Might Affect
Future Operating Results" as it pertains to these matters on page 13 of this
Annual Report on Form 10-K.
COMPETITION
AFC's competitors range from small companies, both domestic and
international, to large multinational corporations. The Company's principal
competitors include: ADC Telecommunications, Inc., Alcatel
Alsthom Compagnie, Ericsson Inc., Fujitsu America, Inc., Hitron Technology,
Inc., Huawei Technologies Co. Ltd., Lucent Technologies, Inc., NEC America,
Inc., Nokia Telecommunications, Northern Telecom Ltd., Opnet Technologies Co.
Ltd., RELTEC Corporation, Shenzhen Zhongxing Telecom Corporation, Ltd., UT
Starcom, Inc. and Vidar-SMS Co. Ltd.
Many of these competitors have more extensive financial, marketing and
technical resources than AFC and enjoy superior name recognition in the market.
In addition, pursuant to the Settlement Agreement and related agreements entered
into with the Industrial Technology Research Institute ("ITRI"), certain of its
member companies have been granted certain rights to manufacture and sell the
European Telecommunications Standards Institute ("ETSI") version of the UMC 1000
outside of North America. These companies currently compete with AFC in
international markets, primarily in China. Upon termination of certain
restrictions set forth in such agreements, in January 2005, such companies will
have a worldwide, non-exclusive, royalty-free, irrevocable license to use
certain UMC 1000 technology and will be able to compete with the Company
worldwide at such time. See Part I, Item 3 -- "Legal Proceedings" as it pertains
to this matter on page 17 of this Annual Report on Form 10-K.
The Company believes rapid technological change, continuing regulatory
change and industry consolidation will continue to cause rapid evolution in the
competitive environment of the telecommunications equipment market, the full
scope and nature of which is difficult to predict. Moreover, AFC believes that
technological and regulatory change will continue to attract new entrants to the
market in which the Company competes.
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COMPLIANCE WITH REGULATORY AND INDUSTRY STANDARDS
The UMC 1000 is required to comply with a large number of voice and data
regulations and standards, which vary between domestic and international
markets, and may vary by specific international markets. Standards setting and
compliance verification in the U.S. are determined by the Federal Communications
Commission ("FCC"), Underwriters Laboratories, Quality Management Institute,
Telcordia Technologies, Inc. ("Telcordia") formerly known as "Bellcore", other
independent third party testing organizations, and by independent
telecommunications companies. In international markets, the Company's products
must comply with recommendations issued by Industry Canada, the Consultative
Committee on International Telegraph and Telephony, and individual regional
carriers' network operating system requirements and specifications. In addition,
the Company's products must comply with standards issued by ETSI and implemented
and enforced by the Telecommunications Regulatory Authority of each European
nation. Standards for new services continue to evolve, and AFC will be required
to modify the UMC 1000 or develop and support new versions to meet these
standards.
Telcordia testing on the UMC 1000 is often required to ensure
interoperability with various standards of operations, administration,
maintenance and provisioning systems. Telcordia testing requires significant
investments in time and money to achieve compliance. Some UMC 1000 features must
pass Telcordia testing prior to field release. See Part I, Item 1 -- "Certain
Factors That Might Affect Future Operating Results" as it pertains to these
matters beginning on page 16 of this Annual Report on Form 10-K.
AFC has successfully completed the Telcordia Operations Systems
Modifications for the Integration of Network Elements process on LFACS, TIRKS,
SWITCH, and NMA interoperability. LFACS and TIRKS are operational support
systems ("OSS") which allow RBOCs' operations systems to identify the UMC 1000's
bandwidth and equipment type and capabilities. SWITCH is an OSS designed to
inventory and assign telecommunications equipment. NMA adds the ability to
retrieve UMC 1000 alarms through the RBOCs' operating systems and generate
trouble tickets online. Switch compliance testing has been completed on GR-303
with Lucent Technologies on the Lucent 5ESS switch, and with Northern Telecom on
the DMS-100 switch. GR-303 compliance testing with Telcordia is currently in
process. The UMC 1000 is currently undergoing testing with Telcordia for
integration with OPS/INE allowing provisioning through Telcordia operating
systems.
In 1998, both the FCC and Industry Canada approved the use, deployment, and
commercial sale of the UMC 1000 Spread Spectrum Radio System ("SSR") in the U.S.
and Canada. SSR is a point to point digital microwave radio transport using
spread spectrum technology for license-free digital communication links and
offers up to 30 DSO channels per dish over 2.4 Gigahertz and up to 60 DSO over
5.7 Gigahertz transport frequencies with full voice and data capacity.
In October 1997, Underwriters Laboratories officially registered the
Company as ANSI/ISO/ASQC Q9001-1994 ("ISO") compliant which assures quality in
design, development, production, installation and servicing. The ISO standard
consists of all elements defining a quality system aimed primarily at achieving
customer satisfaction by preventing nonconformity at all stages from design
through servicing. In November 1998, Quality Management Institute completed an
annual audit and certified the Company's ongoing ISO standard compliance.
During 1998, France Telecom completed validation of the UMC 1000 and
officially endorsed the technology for deployment throughout France. France
Telecom continues to evaluate newly introduced UMC 1000 features for use in
France; however, validation must be completed prior to deployment.
In 1996, the U.S. Congress passed regulations that affect
telecommunications services, including changes to pricing, access by competitive
suppliers and many other broad changes to the data and telecommunications
networks and services. These changes will have a major impact on the pricing of
existing services, and may affect the deployment of future services. These risks
are discussed in Part I, Item 1 -- "Certain Factors That Might Affect Future
Operating Results" beginning on page 16 of this Annual Report on Form 10-K.
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ENVIRONMENTAL MATTERS
The Company's operations and manufacturing processes are subject to certain
federal, state, local and foreign environmental protection laws and regulations.
These laws and regulations relate to the use, handling, storage, discharge and
disposal of certain hazardous materials and wastes, the pre-treatment and
discharge of process waste waters and the control of process air pollutants. AFC
believes that it is in compliance in all material respects with applicable
environmental regulations.
If those laws and regulations become more stringent over time, the Company
may not be able to comply in a timely manner, or comply at all. Compliance with
new laws and regulations could create significant compliance expenses, result in
production suspension and delay, restrictions on expansion at present locations,
and require the acquisition of costly equipment. Non-compliance with laws and
regulations could result in penalties and suspension of operations.
PROPRIETARY RIGHTS AND LICENSES
AFC attempts to protect its technology through a combination of copyrights,
trade secret laws, contractual obligations and patents. No patents are currently
held for existing UMC 1000 product, but two patent applications are pending.
There can be no assurance that AFC's intellectual property protection measures
will be sufficient to prevent misappropriation of the Company's technology. See
Part I, Item 1 -- "Certain Factors That Might Affect Future Operating Results"
as it pertains to this matter on page 14 of this Annual Report on Form 10-K. The
laws of many foreign countries do not protect AFC's intellectual property rights
to the same extent as the laws of the U.S. See Part I, Item 3 -- "Legal
Proceedings" as it pertains to this matter on page 17 of this Annual Report on
Form 10-K.
Frequent litigation, based on allegations of patent and other intellectual
property infringement, has resulted from the telecommunications industry's
dependence on proprietary technology. In 1996, AFC settled litigation with DSC
Communications Corporation ("DSC") under which DSC had claimed proprietary
rights in the UMC 1000 technology. In addition, DSC filed a lawsuit in January
1998 that includes allegations of patent infringement by AFC. This pending
litigation with DSC is discussed in Part I, Item 3 -- "Legal Proceedings"
beginning on page 17 of this Annual Report on Form 10-K.
In March 1998, AFC settled litigation with ITRI, ITRI's sub-licensee Member
Companies, and others, including Acer Netxus, Inc. ("Acer") involving breach of
a prior agreement, trade secret misappropriation, unfair competition and related
claims. In September 1998, AFC settled litigation with Acer enjoining them from
the development, manufacture, and selling of any device utilizing or deriving
from AFC's UMC 1000 technology. See Part I, Item 1 -- "Certain Factors That
Might Affect Future Operating Results" as it pertains to both of these cases
beginning on page 11 and Part I, Item 3 -- "Legal Proceedings" on page 17 of
this Annual Report on Form 10-K.
EMPLOYEES
As of December 31, 1998, 815 people were employed at AFC. None of the
employees are covered by collective bargaining agreements, and AFC has never
experienced a work stoppage, strike or labor dispute. The Company believes
relations with its employees are good.
CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
In addition to the other information in this Annual Report on Form 10-K,
the following are important factors that should be considered in evaluating the
Company and its business.
Potential Fluctuations in Future Operating Results and Seasonality. AFC's
operating results have been, and will continue to be, affected by a wide variety
of factors, some of which are outside of its control, that
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could have a material adverse effect on revenues and results of operations
during any particular period. These factors include:
- Domestic and International sales mix
- Customer mix
- Product mix
- Timing and size of orders which are received and can be shipped in a
quarter
- Availability of adequate supplies of key components and assemblies
- Ability to introduce new products and technologies on a timely basis
- Timing of new product introductions or announcements by the Company or
its competitors
- Price competition
- Unit volume
- Royalty revenue levels
- Excess or obsolete inventory
- Adequacy of manufacturing capacity
- Customers' ability to pay when due
- Expanded warranty coverage
The UMC 1000 is sold primarily to telecommunications companies installing
the UMC 1000 as part of their access networks. Additions to those networks
represent complex engineering projects, requiring lengthy periods from project
conceptualization to completion. The UMC 1000 typically represents only a
portion of a given project and, therefore, the timing of product shipment and
revenue recognition is often difficult to forecast. The Company's customers
normally install a portion of the UMC 1000 in outdoor locations. Shipments of
the system are subject to the effects of seasonality, with fewer installation
projects scheduled for the winter months. The majority of the Company's sales
are to telecommunications companies in the North American region, and
accordingly, the Company believes that over time this seasonality will cause
revenues in the quarter ended March 31 to be lower than revenues in the
preceding quarter ended December 31. In particular, AFC believes that revenues
for the quarter ended March 31, 1999 will be lower than the revenues in the
quarter ended December 31, 1998. In developing countries, delays and reductions
in the planned project deployment can be caused by additional factors, including
currency fluctuations, reductions in capital availability due to declines in the
local economy, priority changes in the governments' budgets, political
environment and delays in receiving government approval for deployment of the
UMC 1000 system in the local loop.
AFC's expenditures for research and development, marketing and sales, and
general and administrative functions are based in part on future growth
projections and in the near term are relatively fixed. The Company may be unable
to adjust spending in a timely manner in response to any unanticipated failure
to meet these growth projections. Accordingly, any significant decline in demand
for the UMC 1000 relative to planned levels could have a material adverse effect
on the Company's business, financial condition and results of operations in that
quarter or subsequent quarters.
All of the above factors are difficult to forecast, and these or other
factors could have a material adverse effect on the Company's business,
financial condition and results of operations. As a result, AFC believes that
period to period comparisons are not necessarily meaningful and should not be
relied upon as indications of future performance. There can be no assurance that
the Company will sustain or increase its profitability in the future.
Fluctuations in AFC's operating results may cause volatility in the price
of its Common Stock. It is likely that in some future quarter, revenues or
operating results will be below the expectations of public market
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analysts and investors. In such event, the market price of AFC's Common Stock
would likely be materially adversely affected. AFC attempts, through timely
press releases and announcements, to disclose significant factors impacting, or
expected to impact, the business, financial condition and results of operations.
However, due to factors outside the Company's control, there may be little or no
meaningful relationship between the resulting market price of AFC's Common Stock
and results of operations. Factors outside of the Company's control, such as
market analysts' published expectations and short traders' activities can cause
a material fluctuation in the stock price. Recent periods of volatility in the
market price of AFC's Common Stock resulted in stockholder litigation against
the Company and various officers and directors. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on the operating results and financial
condition of the Company. See Part I, Item 3 -- "Legal Proceedings" as it
pertains to this matter on page 18 of this Annual Report on Form 10-K.
Customer Concentration. For the year ended December 31, 1998, approximately
11.2% of total revenues were derived from sales to WinStar Communications, Inc.,
and 10.4% to Integrators of System Technology (Pty) Ltd. in South Africa. For
the year ended December 31, 1997, GTE accounted for 19.2% of total revenues. No
other single customer accounted for 10% or more of total revenues in either
period. The Company's five largest customers accounted for 41.9% of revenues in
the year ended 1998, and 38.2% of revenues in the year ended 1997. Although
AFC's largest customers have varied from period to period, the Company
anticipates that its results of operations in any given period will continue to
depend to a significant extent upon sales to a small number of customers. None
of AFC's customers have entered into agreements requiring them to purchase a
minimum amount of product from the Company. There can be no assurance that
principal customers will continue to purchase product at current levels, if at
all. In the event that a significant existing customer merged with another
telecommunications company, there can be no assurance that such customer will
continue to purchase AFC's products. The loss of one or more major customers
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Risks Associated with International Markets. International sales
constituted 26.2% of total revenues in the year ended December 31, 1998 and
26.5% in the year ended December 31, 1997. International sales have fluctuated
in absolute dollars and as a percentage of revenues, and are expected to
continue to fluctuate in future periods. The Company relies on a number of third
party distributors and sales representatives to market and sell the UMC 1000
outside of North America. There can be no assurance that such distributors or
sales representatives will provide the support and effort necessary to service
international markets effectively. AFC is entering new international markets,
which demand significant management attention and financial commitment. The
Company's management has limited experience in international operations, and
there can be no assurance that the Company will successfully expand its
international operations. Successful expansion of international operations and
sales in certain markets may depend on AFC's ability to establish and maintain
productive strategic relationships. There can be no assurance that the Company
will be able to identify suitable parties for joint ventures or strategic
relationships or, even if such parties are identified, that successful joint
ventures or strategic relationships will result. There can be no assurance that
AFC will be able to increase international sales of the UMC 1000 through
strategic relationships or joint ventures. The failure to do so could
significantly limit the ability to expand international operations and could
adversely affect AFC's business, financial condition and results of operations.
International telecommunications companies are in many cases owned or
strictly regulated by local authorities. Access to such markets is often
difficult to obtain due to trade barriers and established relationships between
a government owned or controlled telecommunications company and its traditional
indigenous equipment suppliers. Many of these companies require extended payment
terms and financing options which increase the risk of nonpayment and may have a
material adverse effect on the Company's cash flows. In addition, customers in
certain international markets require AFC to post bid and performance bonds. The
Company could incur contract penalties should it fail to meet production and
delivery time schedules on large orders. Failure to meet these schedules could
also result in the loss of collateral posted for the bonds or financial
penalties, which could adversely affect the Company's business, financial
condition and results of operations.
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International sales are currently primarily U.S. dollar denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make AFC's products less competitive in international markets.
Failure to meet revenue projections in the international market could adversely
affect the Company's business, financial condition and results of operations.
See Part II, Item 7A -- "Quantitative and Qualitative Disclosures About Market
Risk" as it pertains to this matter on page 21 of this Annual Report on Form
10-K.
Operating in international markets subjects AFC to certain additional
risks, including:
- Changes in regulatory requirements
- Political and economic conditions
- Tariffs or other barriers
- Staffing and managing international operations
- Exchange rate fluctuations
- Exchange and repatriation controls on foreign earnings
- Negative tax consequences
- Longer sales and payment cycles
- Collection of accounts receivable
The economies in some of the Asia Pacific and Central and Latin America
regions have deteriorated resulting in the devaluation of currencies in certain
of the countries of these regions. There can be no assurance that adverse
economic conditions in foreign countries or foreign currency exchange rates will
not have a material adverse effect on AFC's business, financial condition or
results of operations.
Compliance with various country-specific regulations and standards must be
attained to compete in international markets. Any inability to obtain local
regulatory approval could delay or prevent entrance into international markets,
which could materially impact the Company's business, financial condition and
results of operations.
Competition. Many of AFC's competitors have more extensive financial,
marketing and technical resources than the Company and enjoy superior name
recognition in the market. Primary competitors include: ADC Telecommunications,
Inc., Alcatel Alsthom Compagnie, Ericsson Inc., Fujitsu America, Inc., Hitron
Technology, Inc., Huawei Technologies Co. Ltd., Lucent Technologies, Inc., NEC
America, Inc., Nokia Telecommunications, Northern Telecom Ltd., Opnet
Technologies Co. Ltd., RELTEC Corporation, Shenzhen Zhongxing Telecom
Corporation, Ltd., UT Starcom, Inc. and Vidar-SMS Co. Ltd.
As a result of the Settlement Agreement and related agreements entered into
with ITRI, certain of its Member Companies have been granted certain rights to
manufacture and sell the ETSI version of the UMC 1000 outside of North America.
Such entities currently compete with AFC in international markets, primarily in
China. Upon termination of certain restrictions set forth in such agreements, in
January 2005, such Member Companies will have a worldwide, non-exclusive,
royalty-free, irrevocable license to use certain UMC 1000 technology and,
consequently, such Member Companies will be able to compete with the Company
worldwide at such time. The Company has successfully settled its litigation
against Acer Netxus, Inc. Among other things, the Settlement Agreement and a
related Federal Court judgment permanently enjoin Acer Netxus, Inc. from
developing, manufacturing, or selling any product that uses or derives from the
UMC 1000(TM) technology. See Part I, Item 3 -- "Legal Proceedings" as it
pertains to this matter on page 17 of this Annual report on Form 10-K.
The Company believes rapid technological change, continuing regulatory
change and industry consolidation will continue to cause rapid evolution in the
competitive environment of the telecommunications equipment market, the full
scope and nature of which is difficult to predict.
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Moreover, the Company believes that technological and regulatory change
will continue to attract new entrants to the market in which the Company
competes. There can be no assurance that AFC will be able to compete
successfully in the future.
Risk of Failure to Manage Expanding Operations. A period of rapid company
growth has occurred, which has placed and could continue to place, a significant
strain on AFC's management, operational, financial and other resources. The
members of the management team have limited experience in managing rapidly
growing companies. AFC needs to continue to recruit, train, assimilate, motivate
and retain qualified managers and employees to effectively manage the growth and
any future growth. The Company's results of operations could be adversely
affected if revenues do not increase sufficiently to compensate for the increase
in operating expenses and facility obligations resulting from any expansion. Any
business disruption or other system transition difficulties could have a
material adverse effect on the Company's business, financial condition and
results of operations. The failure of the Company to effectively manage its
domestic and international operations or any current or future growth could have
a material adverse effect on the Company's business, financial condition and
results of operations.
In February 1998, AFC moved its domestic manufacturing and distribution
operations into a new facility which doubled capacity. Although the operational
capacity was expanded, there can be no assurance that the Company will not have
excess capacity or that the transition and further utilization of the new
facility will continue without interruption, or that any such interruption will
not have a material adverse effect on the Company's business, manufacturing and
distribution functions.
The Company's facility obligations and commitments are based in part on
anticipated growth projections, and in the near term are relatively fixed. Based
on existing commitments for additional office space, AFC will have excess office
space in the future. AFC's results of operations could be adversely affected if
it is unable, in a timely manner, to sublease the excess facility space at rents
comparable to the Company's obligations.
Concentrated Product Line, New Products and Rapid Technological
Change. Substantially all of AFC's revenues are derived from the UMC 1000 and
the Company expects this concentration will continue in the foreseeable future.
Any decrease in the overall level of sales of, or the prices for the UMC 1000
could have a material adverse effect on the Company's business, financial
condition and results of operations. Factors include price competition,
introductions or announcements by competitors, a decline in the demand for the
UMC 1000, or product obsolescence, among others.
The telecommunications equipment market is characterized by rapidly
changing technology, evolving industry standards, changes in end-user
requirements, and frequent new product introductions and enhancements. The
introduction of products embodying new technologies or the emergence of new
industry standards can render existing products obsolete or unmarketable. AFC's
success will depend upon its ability to enhance the UMC 1000 technology and to
develop and introduce, on a timely basis, new products and feature enhancements.
International sales in 1998 in the Asia Pacific region were affected in part by
the delay in certain technological developments designed for international
markets. New feature enhancements must keep pace with technological developments
and emerging industry standards, and address changing customer requirements in a
cost-effective manner. There can be no assurance that AFC will be successful in
identifying, developing, manufacturing, and marketing new products or product
enhancements that respond to technological change or evolving industry
standards. There can be no assurance that the Company will overcome difficulties
that could delay or prevent the successful development, introduction and
marketing of these products and enhancements, or that its new products or
enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance. Substantial costs may be incurred to modify the UMC
1000 and build AFC's infrastructure to accommodate these changes. From time to
time, the Company may announce new products or enhancements, services or
technologies that have the potential to replace or shorten the life cycle of the
UMC 1000 and that may cause customers to defer purchasing the UMC 1000. The
introduction of new industry switch interfaces, such as GR-303, reduces the
amount of equipment required to support each access line or port. There can be
no assurance that technological advances in the telecommunications industry will
not reduce sales of the UMC 1000, diminish market acceptance of the
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system or render the system obsolete and, thereby, materially adversely affect
the Company's business, financial condition and results of operations.
AFC has experienced delays in completing development and introduction of
new products, product variations and feature enhancements, and there can be no
assurance that such delays will not continue or recur in the future. The UMC
1000 contains a significant amount of complex hardware and software that may
contain undetected or unresolved errors that may become apparent as products are
introduced, or as new versions are released. Technical difficulties have been
discovered in certain system installations. There can be no assurance that
despite significant testing, hardware or software errors will not be found in
the UMC 1000 after commencement of shipments, resulting in delays in, or
cancellation of, customer orders or in the loss of market acceptance, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Telecommunications Industry and Small to Mid Line Size
Market. AFC's customers are concentrated in the public carrier
telecommunications industry and, in the U.S. market include CLECs, NLECs, ILECs,
and the RBOCs. Accordingly, AFC's future success depends upon the capital
spending patterns of such customers and the continued demand by such customers
for the UMC 1000. The target markets for the systems are the U.S. and
international small to mid line size markets. Historically, these markets have
had little access to the advanced services that can be made available through
the UMC 1000 and there can be no assurance that potential customers will
consider the near term value of these advanced services to be sufficient to
influence their purchase decisions. The system may not be met with widespread
acceptance among the telecommunications companies and other potential customers
in small to mid line size markets. Existing customers and potential customers
may adopt alternative architectures or technologies that are incompatible with
the UMC 1000 technology which could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that telecommunications companies, foreign governments or other
customers will pursue infrastructure upgrades that will necessitate the
implementation of advanced products such as the UMC 1000. Infrastructure
improvements requiring the Company's technology may be delayed or prevented by a
variety of factors, including cost, regulatory obstacles, the lack of consumer
demand for advanced telecommunications services and alternative approaches to
service delivery.
Dependence on Sole Source and Limited Number of Third Party Manufacturers
and Support Organizations. Certain components used in the Company's products,
including the Company's proprietary application specific integrated circuits
("ASICs"), codec components, certain surface mount technology components and
other components, are only available from a single source or limited number of
suppliers. A limited number of independent contractors manufacture the
subassemblies to AFC's specifications for use in the Company's products. Some of
the sole source suppliers are companies who, from time to time, allocate parts
to telecommunications equipment manufacturers due to market demand for
components and equipment. Many of the Company's competitors are much larger and
may be able to obtain priority allocations from these shared suppliers, thereby
limiting or making unreliable the sources of supply for these components. There
can be no assurance that shortages of components will not occur in the future or
will not result in the Company having to pay a higher price for components. If
sufficient quantities of these or any other components cannot be obtained,
delays or reductions in manufacturing or product shipments could occur which
could have a material adverse effect on AFC's business, financial condition and
results of operations. In particular, the Company relies upon:
- Flextronics International Ltd. and Solectron International USA, Inc. to
manufacture printed circuit board assemblies ("PCBA")
- Siemens Microelectronics, Inc. for PCBA components
- Paragon Electronic Systems, Inc., and Tyco Printed Circuit Group Inc. to
manufacture backplanes and channel bank assemblies
- Celestica, Inc. for channel bank assemblies and protector panel
subassemblies
- General Cable Corporation for protector panel subassemblies
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- CMOR Manufacturing and Wilco Wire Technology, Inc. for cable and wire
harnesses and various turnkey assemblies
- American Microsystems, Inc. for ASICs
- Hendry Telephone Products for fuse panels and racks
- Powersafe Standby Batteries Inc. for battery systems
- LeeMah Electronics Inc. for fully integrated cabinets
- Pairgain Technologies Inc. for custom enclosures and boards
- Sonoma Metal Products, Inc., Cowden Metal San Jose, Inc., Mayville Metal
Products, and EMAR Inc. to manufacture the external housing cabinets
- Advanced Digital Graphics, Inc. for system documentation
The Company's business, financial condition and results of operations could
be adversely affected if its subcontractors were to experience financial,
operational, production, or quality assurance difficulties that resulted in a
reduction or interruption in supply to the Company or otherwise failed to meet
the Company's manufacturing requirements. The Company may not be able to
establish sufficient manufacturing supply from alternative sources. Current or
alternative manufacturers may not be able to meet the Company's future
requirements and such manufacturing services may not continue to be made
available to the Company at favorable prices, or at all.
Various third party support organizations provide post sales support to
AFC's domestic sales customers. There can be no assurance that these
organizations will be able to provide the level of customer support demanded by
existing or potential customers.
Risks Associated with Pending Litigation. AFC is a party to certain legal
proceedings as described in Part I, Item 3 -- "Legal Proceedings" beginning on
page 17 of this Annual Report on Form 10-K. The Company is unable to predict the
ultimate outcome of these proceedings or determine the total expense or possible
loss, if any, that may ultimately be incurred in the resolution of these
proceedings. Regardless of the ultimate outcome, these proceedings could result
in significant diversion of management's time.
Limited Protection of Proprietary Technology; Risk of Third Party Claims of
Infringement. AFC attempts to protect its technology through a combination of
copyrights, trade secret laws, contractual obligations, and patents. AFC does
not presently hold any patents for the UMC 1000 product, but two patent
applications are pending. These intellectual property protection measures may
not be sufficient to prevent misappropriation of AFC's technology nor will they
prevent competitors from independently developing technologies that are
substantially equivalent or superior to AFC's technology. The laws of many
foreign countries do not protect AFC's intellectual property rights to the same
extent as the laws of the U.S. Failure to protect proprietary information could
have a material adverse effect on AFC's business, financial condition and
results of operations. The Company is currently involved in a dispute with
RELTEC Corporation regarding, among other things, alleged trade secret
misappropriation. See Part I, Item 3 -- "Legal Proceedings" as it pertains to
this matter on page 18 of this Annual Report on Form 10-K.
In June 1996, AFC settled litigation with DSC Communications, Inc. ("DSC")
under which DSC had claimed proprietary rights to the UMC 1000 technology. In
January 1998, DSC filed a lawsuit against the Company alleging, among other
things, that the Company's 3GDLC product infringes a DSC patent. See Part I,
Item 3 -- "Legal Proceedings" beginning on page 18 of this Annual Report on Form
10-K.
In March 1998, AFC settled litigation with ITRI, ITRI's sub-licensee Member
Companies, and others, including Acer Netxus, Inc. ("Acer") involving breach of
a prior agreement, trade secret misappropriation, unfair competition and related
claims. In September 1998, AFC settled litigation with Acer enjoining them from
the development, manufacture, and selling of any device utilizing or deriving
from AFC's UMC 1000 technology. See Part I, Item 3 -- "Legal Proceedings" as it
pertains to both of these cases beginning on page 17 of this Annual Report on
Form 10-K.
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In the future, the Company may be subject to additional litigation to
defend against claimed infringements of the rights of others or to determine the
scope and validity of the proprietary rights of others. Future litigation also
may be necessary to enforce and protect trade secrets and other intellectual
property rights owned by AFC. Any such litigation could be costly and cause
diversion of management's attention, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Adverse determinations in such litigation could result in the loss
of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties, or prevent
the Company from manufacturing or selling its products, any one of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, there can be no assurance that any
necessary licenses will be available on reasonable terms.
Dependence on Key Personnel. AFC's success depends to a significant extent
upon key technical and management employees. The loss of the services of any of
these key employees could have a material adverse effect on AFC's business,
financial condition and results of operations. The Company does not have
employment agreements with, or key person life insurance for, any of its
employees. Competition for highly qualified employees is intense and the process
of locating key technical and management personnel with the required combination
of skills and attributes is often lengthy. There can be no assurance that AFC
will be successful in retaining its existing key personnel or in attracting and
retaining the additional employees it may require.
In June 1998, the Company's President and Chief Executive Officer, Carl
Grivner, resigned and the Company's Chairman and founder, Don Green, assumed the
role of President and Chief Executive Officer on an interim basis. The Company
is currently engaged in a search for a new President and Chief Executive
Officer. There can be no assurance that the Company will be successful in
identifying and hiring a new President and Chief Executive Officer on a timely
basis. There can be no assurance as to the effect that this management
transition may have on AFC's business, financial condition and results of
operations.
Year 2000. AFC has formed a Year 2000 Committee to understand and address
the year 2000 ("Y2K") issue as it affects the Company's infrastructure,
operations, and the UMC 1000 product. Representatives from each functional area
of the Company are responsible for identifying and assessing organizational
readiness, preparing remediation steps, testing, and applying new standards and
contingency plans.
AFC has identified and assessed a majority of the potential Y2K-affected
hardware, software, and facility equipment, and vendors in its organizational
structure. For the most part, AFC's systems and software have been found to be
Y2K compliant, or have been upgraded to compliance through manufacturers'
upgrades.
The Company is currently in the process of surveying and testing its
vendors' Y2K readiness and developing its own contingency plans in case of
vendors' failures. Contingency plans for vendor Y2K failures include
pre-qualifying alternative vendor suppliers, maintaining multiple vendor sources
for critical components and assemblies, and maintaining adequate supplies of key
components on hand. However, there can be no assurance that AFC will be able to
obtain sufficient manufacturing supply from alternative sources. Current or
alternative manufacturers may not be able to meet the Company's supply
requirements and such supplies may not continue to be made available at
favorable prices, or at all.
A survey is currently underway of AFC's leased properties and facilities,
including operational vendors providing power, local and long distance
telecommunications, water, heating and cooling, and various services to
determine the status of embedded technology equipment that could affect AFC's
operations. The Company plans to test and validate its internal operations,
complete the vendor surveys, and finalize and implement contingency plans by
mid-1999. Failure of the Company to adequately address all known and unknown Y2K
compliance issues could have a material adverse affect on AFC's business,
financial condition and results of operations.
The UMC 1000 was originally designed and developed to be Y2K compliant. AFC
utilizes operating systems and software applications that were designed and
developed to properly reflect the year 2000 and subsequent years' data. Although
AFC believes that its product and operating systems are Y2K compliant, the
Company's manufacturing suppliers may utilize equipment or software that is not
compliant. The failure on
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the part of any vendor to adequately address its own Y2K compliance issues could
lead to delays on the part of the vendor in the delivery of subassemblies for
use in the Company's products, or disruption of services provided by a vendor,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. The remaining Y2K compliance
activities are not expected to result in significant incremental operating
expenses; the Company estimates it will not exceed $200,000 to complete its Y2K
readiness and contingency plans. Expenditures to date in relation to Y2K
readiness have been immaterial.
Compliance with Regulations and Industry Standards. The UMC 1000 is
required to comply with a large number of voice and data regulations and
standards, which vary between domestic and international markets, and may vary
within specific international markets. Standards for new services continue to
evolve, and the UMC 1000 will need to be modified or new versions developed to
meet these standards. Failure of the system to comply with, or delays in meeting
compliance of evolving standards both in domestic and international markets,
could have a material adverse effect on the Company's business, financial
condition and results of operations. Standards setting and compliance
verification in the U.S. are determined by the Federal Communications
Commission, Underwriters Laboratories, QMI, Telcordia Technologies, Inc.
("Telcordia") formerly known as "Bellcore", other independent third party
testing organizations, and by independent telecommunications companies. In
international markets, the Company's products must comply with recommendations
issued by the Consultative Committee on International Telegraph and Telephony,
Industry Canada, and individual regional carriers' network operating system
requirements and specifications. In addition, AFC's products must comply with
standards issued by the European Telecommunications Standards Institute and
implemented and enforced by the Telecommunications Regulatory Authority of each
European nation.
The Company needs to continue to ensure that the UMC 1000 is easily
integrated with various network management systems. Telcordia testing on the UMC
1000 is often required to ensure interoperability with various standards of
operations, administration, maintenance and provisioning systems. Telcordia
testing requires significant investments in time and money to achieve
compliance. Some UMC 1000 features must pass Telcordia testing prior to field
release. Failure to maintain such compliance or to obtain it on new features
released in the future could have a material adverse effect on the Company's
business, financial condition and results of operations.
In October 1997, Underwriters Laboratories officially registered AFC as
ANSI/ISO/ASQC Q9001-1994 ("ISO") compliant, which assures quality in design,
development, production, installation and servicing. The ISO standard consists
of all elements which define a quality system aimed primarily at achieving
customer satisfaction by preventing nonconformity at all stages from design
through servicing. In November 1998, Quality Management Institute certified the
Company's annual ISO standard. There can be no assurance that AFC will maintain
such certification. The failure to maintain such certification may preclude
selling the UMC 1000 in certain markets and could materially adversely affect
the Company's ability to compete with other suppliers of telecommunications
equipment.
Failure to maintain interoperability with other companies or adopt or
maintain industry standards in the UMC 1000 could have a material adverse effect
on the Company's ability to compete with other telecommunications equipment
suppliers, and could materially adversely affect its business, financial
condition and results of operations.
In 1996, the U.S. Congress passed regulations that affect
telecommunications services, including changes to pricing, access by competitive
suppliers and many other broad changes to the data and telecommunications
networks and services. These changes will have a major impact on the pricing of
existing services, and may affect the deployment of future services. These
changes could cause greater consolidation in the telecommunications industry,
which in turn could disrupt existing customer relationships and have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that any regulatory changes will not have
a material adverse effect on the demand for the UMC 1000. Uncertainty regarding
future policies combined with emerging new competition may also affect the
demand for telecommunications products such as the UMC 1000 system.
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ITEM 2. PROPERTIES
AFC leases five buildings in Petaluma, California where the following
functions reside: administration and principal executive offices, sales,
marketing, product development, manufacturing and distribution. In addition to
its Petaluma headquarters, properties are leased at the following locations:
Fremont, California (research and design), Buffalo Grove, Illinois (research and
design), Overland Park, Kansas (sales), Coral Gables, Florida (sales and
marketing), Miramar, Florida (research and design), Shanghai (sales support),
Hong Kong (sales), Singapore (sales and marketing), New Delhi (sales support).
These buildings are suitable to AFC's operational use and these facilities are
substantially utilized while still allowing room for expansion needs in the next
12 months.
The Company has signed lease agreements commencing in 1999 for two
additional buildings in Petaluma to house anticipated growth in research and
design and headquarters. The Company's facility obligations are based in part on
future growth projections, and in the near term are relatively fixed. Based on
existing commitments for additional office space, the Company will have excess
capacity and may encounter difficulty in fully utilizing these two additional
buildings as a result of any unanticipated failure to meet growth projections.
See Part I, Item 1 "Certain Factors That Might Affect Future Operating Results"
as it pertains to this matter on page 12 of this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
ITRI/Acer Netxus, Inc. In September 1992, AFC entered into agreements (the
"ITRI Agreements") with the Industrial Technology Research Institute ("ITRI"), a
Taiwanese government-sponsored research and development organization, that
granted to ITRI certain license rights to the European Telecommunications
Standards Institute ("ETSI") version of the UMC 1000. In July 1996, the Company
became involved in litigation and arbitration proceedings with ITRI, certain of
ITRI's sub-licensee "Member Companies", and others, including Acer Netxus, Inc.
("Acer"). These legal proceedings involved claims for breach of the ITRI
Agreements, trade secret misappropriation, unfair competition, and related
claims.
In March 1998, the Company, ITRI, the Member Companies and other parties
entered into a definitive Settlement Agreement that resolved all claims among
such parties, except Acer. Under the Settlement Agreement, all claims involved
in the proceedings between such parties were dismissed with prejudice. The
Settlement Agreement provides that the Member Companies will pay an aggregate of
$6.3 million to the Company over a five year period, and will pay the Company
royalties on the purchase of certain ASICs by the Member Companies. Under the
Settlement Agreement, the Company granted a limited license to the Member
Companies to certain of the Company's technology, agreed to sell certain ASICs
to the Member Companies, and agreed to pay $500,000 to ITRI over a three year
period for legal fees incurred by ITRI in the proceedings. The Settlement
Agreement does not grant to the Member Companies any rights to the Company's UMC
1000 Third Generation Digital Loop Carrier(TM) ("3GDLC") technology or products.
This Settlement Agreement did not affect the Company's claims against Acer.
In September 1998, AFC favorably resolved its litigation with Acer.
Pursuant to a settlement agreement dated September 18, 1998, and a Permanent
Injunction And Final Judgment entered by the United States District Court,
Northern District of California, on September 22, 1998, Acer is enjoined from
selling any digital loop carrier system for at least one year, and from
developing, manufacturing, or selling any device that uses or derives from UMC
1000 technology or that is otherwise not the product of strict clean room
development or based on licensed third party technology. In addition, the
injunction requires that Acer destroy all work product and inventory related to
its two systems that competed with the UMC 1000, and subjects Acer to a $500,000
penalty for any and each violation of the injunction.
Alcatel USA/DSC. On December 22, 1997, AFC filed a lawsuit in Sonoma County
Superior Court in California against DSC Communications Corporation ("DSC")
related to its hiring of a former employee of DSC, to become the Company's Vice
President, Product Planning. In September 1998, DSC was acquired by Alcatel
Alsthom Compagnie and is now a part of Alcatel USA, Inc. For purposes of this
footnote, reference is made only to DSC. The Company's complaint responded to
DSC's litigation threats, and sought a declaratory judgment that its hiring of
the former DSC employee was lawful. In April 1998, DSC filed a cross-complaint
17
<PAGE> 20
against AFC that alleged "inevitable" trade secret misappropriation and related
claims, and sought unspecified damages, and injunctive relief relating to the
alleged misappropriation, attorneys' fees and other relief. During September
1998, the Court struck all material misappropriation allegations from DSC's
Cross-Complaint. DSC filed a First Amended Cross-Complaint on October 2, 1998,
alleging "threatened" trade secret misappropriation and related claims. The
Amended Cross-Complaint sought the same relief as the original Cross-Complaint.
On January 19, 1999, the Court sustained the Company's demurrers to all but two
causes of action of the Amended Cross-Complaint, with prejudice. Thereafter, DSC
agreed to dismiss the entire action with prejudice, and in early February 1999,
the Company and DSC filed a joint Request For Dismissal of the entire action
with the Court.
On January 22, 1998, DSC filed a lawsuit against AFC and the former DSC
employee in the United States District Court, Eastern District of Texas,
alleging "inevitable" trade secret misappropriation and related claims. DSC also
asserted a separate claim against the Company for patent infringement alleging
that AFC's 3GDLC product infringes a DSC patent. DSC's complaint sought
unspecified damages and injunctive relief relating to the alleged
misappropriation and patent infringement, attorneys' fees and other relief. On
February 5, 1998, the United States District Court, Eastern District of Texas
granted AFC's motion to dismiss all non-patent claims in this lawsuit. In May
1998, the Company filed a counterclaim against DSC in the Texas patent action
alleging federal antitrust violations, unfair competition, breach of a prior
settlement agreement and other related claims. Between April and August 1998,
certain discovery occurred, and the parties filed various motions, including
cross-motions for summary judgment on the Company's defense that a prior
Settlement Agreement between AFC and DSC barred DSC's patent claims. By a Report
And Recommendation filed October 2, 1998, the United States Magistrate Judge
recommended that the District Court grant summary judgment in the Company's
favor on the patent claim based on the Settlement Agreement. DSC filed an
Objection to this ruling with the District Court on October 16, 1998, and the
matter remains pending.
Based on reviews of the patent claim, the Company believes that AFC's 3GDLC
product does not infringe the DSC patent, and that the Company has meritorious
defenses to such claim. The Company intends to vigorously defend the litigation
against DSC and prosecute its claims against DSC. However, the ultimate outcome
of these lawsuits cannot be predicted. In addition, patent litigation is highly
complex and can extend for a protracted period of time, which can divert the
attention of management and technical personnel and require the Company to incur
substantial costs and expenses. If the patent claim were to be resolved against
AFC, this could have a material adverse effect on the Company's business,
results of operations and financial condition.
RELTEC Corporation. On November 26, 1997, AFC filed a lawsuit in Sonoma
County Superior Court in California against RELTEC Corporation, alleging trade
secret misappropriation, tortious interference with a contract, and related
claims. The case involves RELTEC's alleged acquisition of AFC's technology
through the Company's Taiwan-based licensee, Vidar-SMS Co., Ltd. Discovery is
ongoing, and trial is scheduled to start on April 12, 1999.
Stockholder Litigation. The Company and various of its current and former
officers and directors are parties to a number of related lawsuits which purport
to be class actions, filed on behalf of certain of AFC's stockholders (excluding
the defendants and parties related to them). The lawsuits, which are
substantially identical, allege that the defendants violated certain federal
securities laws. The cases have been consolidated in the United States District
Court, Northern District of California. The plaintiffs filed a consolidated
Amended Complaint on or about January 27, 1999. A hearing on defendants' motion
to dismiss the complaint is scheduled for May 24, 1999. No discovery has
occurred, and only limited discovery is expected to occur pending ruling on the
motion to dismiss.
All of these actions are in the early stages of proceedings and the Company
is currently investigating the allegations. Based on its current information,
the Company believes the suits to be without merit and intends to defend itself
and its officers and directors vigorously. Although it is reasonably possible
the Company may incur a loss upon the conclusion of these claims, an estimate of
any loss or range of loss cannot be made.
18
<PAGE> 21
No provision for any liability that may result upon adjudication has been
made in the Company's consolidated financial statements. In the opinion of
management, resolution of this matter is not expected to have a material adverse
effect on the financial position of AFC. However, depending on the amount and
timing, an unfavorable resolution of this matter could materially affect the
Company's future results of operations or cash flows in a particular period. In
connection with these legal proceedings, the Company expects to incur
substantial legal and other expenses. Stockholder suits of this kind are highly
complex and can extend for a protracted period of time, which can substantially
increase the cost of such litigation and divert the attention of the Company's
management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote of
stockholders through the solicitation of proxies or otherwise.
19
<PAGE> 22
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market using
the symbol "AFCI". The Company's Common Stock prices are listed daily in the
Wall Street Journal and other publications under the Nasdaq National Market
listing with the abbreviation "AdvFibComm".
In September 1997, AFC's stockholders approved an increase in the number of
authorized shares of common stock from 100,000,000 to 200,000,000. On September
22, 1997, the Company effected a two-for-one stock split to stockholders of
record as of August 29, 1997. All share, per share and common stock amounts
herein have been restated to reflect the effect of this split.
The following table lists the high and low closing sales prices for the
Company's Common Stock as reported by the Nasdaq National Market for each full
quarterly period of the two most recent fiscal years:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1998:
First Quarter (through March 28)......................... $40.13 $25.25
Second Quarter (through June 27)......................... 44.50 34.00
Third Quarter (through September 26)..................... 41.06 6.00
Fourth Quarter (through December 26)..................... 11.88 4.44
FISCAL 1997:
First Quarter (through March 29)......................... $27.81 $14.50
Second Quarter (through June 28)......................... 30.44 14.50
Third Quarter (through September 27)..................... 38.00 29.88
Fourth Quarter (through December 27)..................... 42.50 23.88
</TABLE>
On March 15, 1999, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $8.53 per share. As of December 31,
1998, there were approximately 442 stockholders of record holding the Company's
Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to utilize all of its earnings, if any, for use in
its business and does not anticipate the payment of cash dividends in the
foreseeable future. In addition, the Company's line of credit agreement requires
consent from the banks prior to payment of dividends.
ISSUANCE OF UNREGISTERED SECURITIES
None.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
AFC completed its initial public offering in October 1996, in which it
issued and sold 10,350,000 shares of Common Stock for aggregate proceeds to the
Company of $120.3 million. The Registration Statement Commission File No.
333-8921 for the offering was effective for October 1, 1996, and the offering
terminated on October 4, 1996. The managing underwriters for the offering were:
Morgan Stanley & Co. Incorporated, Merrill Lynch & Co., Cowen & Company and
Hambrecht & Quist. Of the aggregate proceeds received in the offering, $2.2
million was used to defray costs and expenses related to the offering, resulting
in net proceeds of approximately $118.1 million. Of the net proceeds, $14.8
million was used to reduce debt. The remainder is invested in cash equivalents
and marketable securities.
20
<PAGE> 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item is set forth on page 18 of AFC's 1998
Annual Report to Stockholders, which is incorporated by reference and filed as
Exhibit 13.1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is set forth on pages 19 - 25 of
AFC's 1998 Annual Report to Stockholders, which is incorporated by reference and
filed as Exhibit 13.2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion and analysis about market risk disclosures may
contain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements include declarations regarding the
intent, belief or current expectations of the Company and its management. AFC's
market risk lies in foreign currency exchange rate fluctuations and changes in
interest rates.
The Company's foreign exchange risk arises from both revenues and expenses
associated with its international sales and operations. AFC has one customer
contract that is payable in French francs. The receivable is hedged using
forward currency exchange contracts. The remainder of international sales are
denominated in U.S. dollars. Changes in foreign exchange rates create risk for
AFC as it attempts to mitigate adverse fluctuations from impacting results of
operations and cash flows. The Company uses foreign exchange contracts to offset
gains and losses on exchange rate fluctuations against gains and losses on
assets, liabilities and transactions hedged. At December 31, 1998, one foreign
exchange contract in the amount of $1,146,000 was outstanding with a maturity
date of January 14, 1999. Expenses primarily consist of operating expenses
incurred in the local currencies of the Company's China, Hong Kong, Singapore,
India, Poland and U.K.-based sales and representative offices. Operating
expenses generally consist of compensation-related costs, and general office
expenses which are paid in a timely manner. Operating expenses for these offices
have historically been immaterial to the Company on a consolidated basis, and
fluctuations in the exchange rates are not considered material. The introduction
in 1999 of the "Euro" currency may cause increased competition among European
companies which in turn may cause the value of the Euro to materially fluctuate
relative to the U.S. dollar. As use of the Euro increases and becomes mandatory
in 2002, the Company may have to change its billing practices in the future.
Adoption of the Euro is not expected to have a material impact on AFC's
business, results of operations or financial condition.
Changes in domestic interest rates create risk for AFC and may cause
adverse fluctuations of its marketable securities portfolio, results of
operations and cash flows. The Company may be affected by changes in the
short-term U.S. Prime Rate and the resulting interest rate on amounts borrowed
under its line of credit. AFC's marketable securities portfolio consists of
domestic municipal debt and domestic corporate debt, of which approximately 62%
mature in one year or less. At December 31, 1998, the weighted average yield on
the Company's marketable securities was 3.71%, and the weighted average yield on
cash equivalents was 4.56%. Changes in short-term U.S. interest rates affect the
market value of those marketable securities. Because of the short-term nature of
its investment portfolio, the Company believes its exposure to these market
fluctuations is immaterial. If, at December 31, 1998, interest rates had
increased immediately by two full percentage points, the Company believes its
marketable securities portfolio would not have declined by a material amount.
The marketable securities portfolio is treated as available-for-sale under
Financial Accounting Standards Board No. 115.
21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages 26 - 42 of
AFC's 1998 Annual Report to Stockholders, which is incorporated by reference and
filed as Exhibit 13.3.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE> 25
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
Executive officers are selected annually and serve at the discretion of the
Board of Directors. No family relationships exist between any of the executive
officers or directors of AFC. The following table sets forth certain information
with respect to each person who is an executive officer, key employee or
director of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS
President, Chief Executive Officer, Chairman of the
Donald Green(3) 67 Board
Gregory S. Steele 37 Vice President, Chief Operating Officer
Vice President, Chief Financial Officer, Treasurer and
Peter A. Darbee 46 Secretary
Vice President, Corporate Controller and Assistant
Karen L. Godfrey 44 Secretary
James T. Hoeck 37 Vice President, Chief Technical Officer
Catherine Millet 46 Vice President, Development Engineering
Gregory A. Peters 37 Vice President, International Operations
Richard L. Stanfield 42 Vice President, Domestic Sales
John W. Webley 40 Vice President, Marketing
KEY EMPLOYEES
Richard J. Johnston 37 Vice President, Customer Service
Dennis Omanoff 43 Vice President, Quality Assurance
Pete S. Patel 47 Vice President, Operations
Amy M. Paul 30 Vice President, General Counsel
OUTSIDE DIRECTORS
Herbert M. Dwight, Jr.(2)(4) 68 Director
Ruann F. Ernst(1)(3)(4) 51 Director
Clifford H. Higgerson(2) 59 Director
Dan Rasdal(1)(3) 65 Director
Alex Sozonoff(1)(2) 60 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating Committee
(4) Member of the Governance Committee
DONALD GREEN is a co-founder of AFC and has served as the Company's
Chairman of the Board since May 1992. Mr. Green has served as Chief Executive
Officer since June 1998, a position he held previously from May 1992 to June
1997. Mr. Green is also a director of TCSI Corporation, Larscom, Inc., two
private organizations, and a private non-profit foundation.
GREGORY S. STEELE was named Chief Operating Officer in December 1998. From
June through December of 1998, Mr. Steele served as Vice President, Marketing,
and from April 1995 through May 1998, he held the position of Vice President,
Operations. Mr. Steele joined AFC in November 1994 and served as the Director of
Operations until his promotion in March 1995. Prior to joining the Company, from
1990 to 1994, Mr. Steele held various positions at DSC Communications
Corporation, including Director of Account Marketing and Senior Manager of
Manufacturing.
PETER A. DARBEE has served as Vice President, Chief Financial Officer,
Treasurer and Secretary since joining the Company in June 1997. Prior to joining
AFC, Mr. Darbee was the Vice President, Chief Financial Officer and Controller
of Pacific Bell, an RBOC, from 1994 through June 1997. From 1989 through 1994,
23
<PAGE> 26
Mr. Darbee was Vice President and co-head of Goldman Sachs' Global Energy and
Telecommunications Group.
KAREN L. GODFREY has been Corporate Controller since joining the Company in
May 1994 and Assistant Secretary since February 1995. Ms. Godfrey was made a
Vice President in May 1997. From 1992 to 1994, Ms. Godfrey was self-employed as
a financial management consultant.
JAMES T. HOECK is a co-founder of AFC and currently serves as Chief
Technical Officer. Mr. Hoeck served as Vice President and Corporate
Technologist, Advanced Research & Development from November 1997 until his
promotion in February 1999. From February 1995 through November 1997, Mr. Hoeck
served as Vice President, Advanced Development. From the inception of the
Company in May 1992 and continuing through January 1995, Mr. Hoeck served as
Vice President, Engineering.
CATHERINE MILLET has served as Vice President, Development Engineering
since June 1998. Ms. Millet joined the Company in December 1997 and served as
Vice President, Product Planning through May 1998. Prior to joining AFC, Ms.
Millet was Vice President, Advanced Planning and Senior Director, Systems
Engineering with DSC Communications Corporation from September 1994 to December
1997. From 1993 through August 1994, Ms. Millet was the Senior Director,
Engineering with Alcatel Network Systems.
GREGORY A. PETERS served as Vice President, International Operations from
June 1997 through February 1999 when Mr. Peters left the Company to pursue other
opportunities. Prior to joining the Company, Mr. Peters was the Vice President,
International Operations of ADTRAN Inc., from 1996 to June 1997. From 1993 to
1996, Mr. Peters served as Executive Vice President of Connell Communications
Company.
RICHARD L. STANFIELD has served as Vice President, Domestic Sales since
joining AFC in December 1994. Prior to joining AFC, from 1986 through December
1994, Mr. Stanfield held various management positions with Stratus Computer,
Inc., including Western Region Director of Sales.
JOHN W. WEBLEY is a co-founder of the Company and currently serves as Vice
President, Marketing. Previously, Mr. Webley served as Vice President and
Corporate Technologist, Advanced Research & Development from November 1997
through his promotion in February 1999. From February 1995 through November
1997, Mr. Webley served as Vice President, Advanced Development. From the
inception of AFC in May 1992 and continuing through January 1995, Mr. Webley
served as Vice President, Engineering.
RICHARD J. JOHNSTON was named Vice President, Customer Service in November
1998. Mr. Johnston joined AFC in April 1993 and served as Director, Customer
Service until his promotion in 1998. Prior to joining AFC, from 1988 to 1993,
Mr. Johnston served as Manager of the Technical Service Engineering department
at Optilink Corporation, which was later purchased by DSC.
DENNIS OMANOFF was hired as Vice President, Quality in April 1998. Previous
to joining AFC, Mr. Omanoff served as Senior Director of Quality, Reliability
and Engineering Services at Fore Systems from 1996 to 1998. From 1995 to 1996,
Mr. Omanoff was Chief Quality Officer at StrataCom Communications, and from 1990
to 1995, he served as Director, Quality at SynOptics.
PETE S. PATEL was named Vice President, Operations in May 1998. Previously,
Mr. Patel served as Director of Operations from June 1997 to May 1998 and as
Director of Design Verification and Test Engineering from May 1996 through June
1997. Mr. Patel joined AFC in August 1995 and served in the capacity of Senior
Test Engineering Manager until his promotion in 1997. Prior to joining AFC, from
1988 to 1995, Mr. Patel held various senior manager positions at Optilink, which
was later purchased by DSC.
AMY M. PAUL was promoted to Vice President and General Counsel in February
1999. Previously, Ms. Paul served as Director, Contracts and Legal Affairs, from
December 1995 until her promotion in 1999. Prior to joining AFC, Ms. Paul served
as an associate in the Business and Technology Group at Brobeck Phleger &
Harrison LLP from 1993 to December 1995.
HERBERT M. DWIGHT, JR. has served as a Director since May 1998. Mr. Dwight
has served as Chairman of the Board of Optical Coating Laboratory, Inc.
("OCLI"), an optical coating and specialty ink
24
<PAGE> 27
manufacturer, since 1991. From 1991 to April 1998, Mr. Dwight also served as
Chief Executive Officer of OCLI and from 1991 to 1997, he served as President of
OCLI. Mr. Dwight is also a director of Applied Magnetics, Inc. and Applied
Materials, Inc.
RUANN F. ERNST has served as a Director since May 1998. Ms. Ernst has
served as President and Chief Executive Officer of Digital Island, Inc., a
telecom service provider, since June 1998. From 1994 to 1998 she served as
General Manager, Financial Services Business Unit for Hewlett-Packard Company,
an electronics equipment and computer company, and from 1993 to 1994 she was
Worldwide Financial Services Marketing Manager for Hewlett-Packard. Ms. Ernst is
also a director of Phoenix International Corporation and two private
organizations.
CLIFFORD H. HIGGERSON has served as a Director since January 1993. Mr.
Higgerson has served as a General Partner of Communications Ventures, a venture
capital firm, since 1987 and a General Partner of Vanguard Venture Partners, a
venture capital firm and a stockholder of the Company, since July 1991. Mr.
Higgerson is also a Director of Digital Microwave Corporation, Ciena Corporation
and eleven private companies.
DAN RASDAL has served as a Director since February 1993. Mr. Rasdal has
served as a director of Symmetricom, Inc. ("Symmetricom"), a telecommunications
company, since 1985. From 1988 to July 1998, Mr. Rasdal was Chairman of the
Board and Chief Executive Officer of Symmetricom. From 1985 to July 1998, he
served as President and Chief Executive Officer of Symmetricomm. Mr. Rasdal is
also a director of Celeritek, Inc.
ALEX SOZONOFF has been a Director since October 1997. Mr. Sozonoff has
served as Vice President of Customer Advocacy for Hewlett-Packard Company, an
electronics equipment and computer company, since 1998. From 1994 to 1998, he
was Vice President of Marketing for Hewlett-Packard.
Messrs. Green and Rasdal were elected as a result of the terms of the
Company's certificate of incorporation and a voting agreement among certain
stockholders of the Company. The stockholders owning the Company's Series A and
Series B Preferred Stock had the right to elect three directors and agreed to
vote for directors designated in accordance with a voting agreement. Upon
closing of the initial public offering in October 1996, all Preferred Stock was
converted into shares of Common Stock and the Preferred Stock arrangements
ended.
The certificate of incorporation calls for a Board of Directors composed of
seven directors. The terms of the office of the Board of Directors are divided
into three classes:
- Clifford H. Higgerson and Alex Sozonoff are Class I Directors, and their
terms will expire at the annual meeting of the stockholders to be held
in 2000.
- Herbert M. Dwight, Jr. and Ruann F. Ernst are Class II Directors, and
their terms will expire at the annual meeting of the stockholders to be
held in 2001.
- Donald Green and Dan Rasdal are Class III Directors, and their terms
will expire at the annual meeting of the stockholders to be held in
1999.
At each annual meeting of stockholders, the newly elected directors' terms
begin on the date of election and qualification and continue for three years
through the third annual meeting following election. Terms may differ in the
case where a director resigns, is removed from office, or until the time when a
successor director is elected and qualified.
If the need arises to increase the number of directors, additional
directorships will be distributed equally among the three classes so that, as
nearly as possible, each class is equally weighted and represented.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
AFC's directors and executive officers and individuals owning more than ten
percent of the Company's Common Stock are required to file initial reports of
ownership and changes in ownership with the Securities and Exchange Commission
under Section 16(a) of the Securities Exchange Act of 1934, as amended. The
25
<PAGE> 28
Securities and Exchange Commission regulations also require those persons to
provide copies of all filed Section 16(a) reports to the Company. AFC has
reviewed the report copies filed in 1998, and based also on written
representations from those persons, the Company believes that there was
compliance with Section 16(a) filing requirements for 1998, except that Mr.
Green inadvertently filed one Form 4 late reporting three transactions.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in AFC's definitive 1999
Proxy Statement to be filed within 120 days from the Company's fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in AFC's definitive 1999
Proxy Statement to be filed within 120 days from the Company's fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in AFC's definitive 1999
Proxy Statement to be filed within 120 days from the Company's fiscal year end.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following is a list of the consolidated financial statements and the
financial statement schedules which are included in this Form 10-K or which are
incorporated herein by reference:
1. FINANCIAL STATEMENTS:
As of December 31, 1998 and 1997:
-- Consolidated Balance Sheets
For the Years Ended December 31, 1998, 1997, and 1996:
-- Consolidated Statements of Operations
-- Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit)
-- Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
Quarterly Results of Operations (Unaudited)
2. FINANCIAL STATEMENT SCHEDULE:
-- Schedule II -- Valuation Accounts
All other financial statements and financial statement schedules have been
omitted because they are not applicable, or the required information is included
in the consolidated financial statements or notes thereto.
26
<PAGE> 29
3(A). EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<S> <C>
3.3.1 Fifth Amended and Restated Certificate of Incorporation of
the Registrant.(3)
3.3.2 Certificate of Designation of Series A Junior Participating
Preferred Stock.(5)
3.5 Amended and Restated Bylaws of the Registrant.(2)
4.1 Specimen Certificate of Common Stock.(1)
4.2 Series E Preferred Stock Purchase Agreement, dated September
29, 1995, between the Registrant and certain purchasers of
the Registrant's Series E Preferred Stock.(1)
4.3 Certificate of Incorporation of the Registrant (included in
Exhibit 3.3.1).
4.4 Rights Agreement dated as of May 13, 1998, between the
Registrant and BankBoston, N.A.(5)
4.5 Amendment to Rights Agreement dated as of October 19, 1998,
between the Registrant and BankBoston, N.A.(7)
10.3 Form of Warrant Issued in Connection with the Sale of the
Registrant's Series C Preferred Stock on March 16, 1994.(1)
10.4 Form of Performance Warrant Issued in Connection with the
Sale of the Registrant's Series C Preferred Stock on March
16, 1994 and May 4, 1994.(1)
10.4.1 Form of Amendment to Warrants and Performance Warrants.(1)
10.5 Warrant Issued in Connection with the Sale of the
Registrant's Series E Preferred Stock on September 29,
1995.(1)
10.6 Restricted Stock Issuance Agreement, dated May 19, 1995,
between the Registrant, Donald Green and Maureen Green.(1)
10.7 Compensation Agreement, dated May 19, 1995, between the
Registrant and Donald Green.(1)
10.8 Promissory Note Secured by Pledge Agreement, dated May 31,
1995, by Donald Green in favor of the Registrant.(1)
10.9 Stock Pledge Agreement, dated June 16, 1995, between the
Registrant and Donald Green.(1)
10.11 Hangzhou Aftek Communication Registrant Ltd. Contract, dated
June 18, 1994, between Advanced Fibre Technology
Communication (Hong Kong) Limited and Hangzhou Communication
Equipment Factory of the MPT., HuaTong Branch.(1)+
10.12 1445 & 1455 McDowell Boulevard North Net Lease, dated
February 1, 1993, between the Registrant and G & W/Redwood
Associates Joint Venture, for the premises located at 1445
McDowell Boulevard North.(1)
10.14 Redwood Business Park Net Lease, dated July 10, 1995,
between the Registrant and G & W/Redwood Associates Joint
Venture, for the premises located at 1440 McDowell Boulevard
North.(1)
10.15 Redwood Business Park Net Lease, dated June 3, 1996, between
the Registrant and G & W/Redwood Associates Joint Venture,
for the premises located at Buildings 1 & 9 of Willow Brook
Court.(1)
10.17 Form of Indemnification Agreement for Executive Officers and
Directors of the Registrant.(1)
10.18 The Registrant's 1993 Stock Option/Stock Issuance Plan, as
amended (the "1993 Plan").(1)
10.19 Form of Stock Option Agreement pertaining to the 1993
Plan.(1)
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<S> <C>
10.20 Form of Notice of Grant of Stock Option pertaining to the
1993 Plan.(1)
10.21 Form of Stock Purchase Agreement pertaining to the 1993
Plan.(1)
10.22 The Registrant's 1996 Stock Incentive Plan (the "1996
Plan").(1)
10.23 Form of Stock Option Agreement pertaining to the 1996
Plan.(1)
10.23.1 Form of Automatic Stock Option Agreement pertaining to the
1996 Plan.(1)
10.24 Form of Notice of Grant of Stock Option pertaining to the
1996 Plan.(1)
10.24.1 Form of Notice of Grant of Non-Employee Director Automatic
Stock Option pertaining to the 1996 Plan.(1)
10.25 Form of Stock Issuance Agreement pertaining to the 1996
Plan.(1)
10.26 The Registrant's Employee Stock Purchase Plan.(1)
10.27 Stock Issuance Agreement, dated June 30, 1997, between the
Registrant and Peter A. Darbee.(2)
10.28 Note secured by Stock Pledge Agreement, dated June 30, 1997,
by Peter A. Darbee in favor of the Registrant.(2)
10.29 Stock Pledge Agreement, dated June 30, 1997, between the
Registrant and Peter A. Darbee.(2)
10.30 Consulting Agreement, dated May 19, 1997, between the
Registrant and Peter A. Darbee.(2)
10.31 Cypress Center Net Lease, dated October 9, 1997, between the
Registrant and RNM Lakeville L.P., for the premises located
at 2210 South McDowell Boulevard.(4)
10.32 Redwood Business Park Net Lease, dated August 4, 1997,
between the Registrant and G & W/Copley Redwood Business
Park, L.P., for the premises located at 1435 McDowell
Boulevard North.
10.33 Redwood Business Park Net Lease, dated October 23, 1997,
between the Registrant and G & W/Copley Redwood Business
Park, L.P., for the premises located at 1465 McDowell
Boulevard North.
10.34 Revolving Credit Agreement, dated July 30, 1998, between the
Registrant and Banque Nationale De Paris and Bank of America
National Trust and Savings Association.(6)
10.35 Redwood Business Park Net Lease, dated July 10, 1998,
between the Registrant and G & W/Copley Redwood Business
Park, L.P., for the premises located at 1347 Redwood Way.
13.1 Selected Consolidated Financial Data from the 1998 Annual
Report to Stockholders.
13.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations from the 1998 Annual Report to
Stockholders.
13.3 Financial Statements and Supplementary Data from the 1998
Annual Report to Stockholders.
21.1 Subsidiaries of the Registrant.(1)
23.1 Report on Schedule and Consent of KPMG LLP.
27.1 Financial data schedule.
27.1296 Financial data schedule (restated) for the year ended
December 31, 1996.
27.1297 Financial data schedule (restated) for the year ended
December 31, 1997.
</TABLE>
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (no. 333-8921) filed with the Securities and Exchange Commission on
July 26, 1996, as amended, and declared effective September 30, 1996.
28
<PAGE> 31
(2) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, filed with the Securities and
Exchange Commission on August 8, 1997.
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed with the Securities and
Exchange Commission on November 7, 1997.
(4) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Securities and Exchange
Commission on March 23, 1998.
(5) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 19, 1998.
(6) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, filed with the Securities and
Exchange Commission on August 10, 1998.
(7) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 29, 1998.
+ Portions of this Exhibit have been granted Confidential Treatment.
3(B). REPORTS ON FORM 8-K
The Company filed one report on Form 8-K during the fourth quarter ended
December 31, 1998. The report was filed on October 29, 1998, reporting an
amendment to the Company's Stockholder Rights Plan.
29
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ADVANCED FIBRE COMMUNICATIONS, INC.
(Registrant)
March 24, 1999 By: /s/ DONALD GREEN
------------------------------------
Donald Green
President, Chief Executive Officer
and
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD GREEN President, Chief Executive March 24, 1999
- ----------------------------------------------------- Officer and Chairman of the
Donald Green Board
/s/ HERBERT M. DWIGHT, JR. Director March 24, 1999
- -----------------------------------------------------
Herbert M. Dwight, Jr.
/s/ RUANN F. ERNST Director March 24, 1999
- -----------------------------------------------------
Ruann F. Ernst
/s/ CLIFFORD H. HIGGERSON Director March 24, 1999
- -----------------------------------------------------
Clifford H. Higgerson
/s/ DAN RASDAL Director March 24, 1999
- -----------------------------------------------------
Dan Rasdal
/s/ ALEX SOZONOFF Director March 24, 1999
- -----------------------------------------------------
Alex Sozonoff
/s/ PETER A. DARBEE Vice President, Chief Financial March 24, 1999
- ----------------------------------------------------- Officer, Treasurer and
Peter A. Darbee Secretary (Duly Authorized
Signatory and Principal
Financial Officer)
/s/ KAREN L. GODFREY Vice President, Corporate March 24, 1999
- ----------------------------------------------------- Controller and Assistant
Karen L. Godfrey Secretary (Duly Authorized
Signatory and Principal
Accounting Officer)
</TABLE>
30
<PAGE> 1
EXHIBIT 10.32
REDWOOD BUSINESS PARKNET LEASE BASIC LEASE INFORMATION
1. DATE August 4, 1997
2. LANDLORD G & W/Copley Redwood Business Park, L.P.
3. TENANT Advanced Fibre Communications, Inc., a Delaware corporation
4. Premises REFERENCE
a. Project Redwood Business Park Paragraph 1
b. Building 1435 McDowell Boulevard North
c. Address 1435 McDowell Boulevard North
d. Assessor's Parcel 047-550-015
e. Suite
f Usable Sq. Ft. 68,400
g. Rentable Sq. Ft. 68,400
5. TERM Paragraph 2
a. Estimated Commencement Date April 1, 1998
b. Length of Term Twelve years
6. BASE RENT Paragraph 3
a. Monthly Base Rent See Addendum
b. Advanced Base Rent
(Paid Upon Lease Execution)
c. Adjustment Date of Monthly Base Rent Year 2
7. PROPERTY TAXES AND OPERATING EXPENSES Paragraph 4
a. Initial Monthly Allocation per rentable Sq.Ft. $0.23
b. Premises v. Building Sq.Ft. Ratio 68400/68400 = 100%
c. Premises v. Project Sq.Ft. Ratio 68400/68400 = 100%
8. SECURITY DEPOSIT * as per separate agreement Paragraph 16
9. TENANT IMPROVEMENTS Turn key up to $24.00/sf
10. USE General Office Paragraph 6
11. TENANT'S ADDRESS FOR NOTICES Paragraph 201 Willowbrook Court
Petaluma, CA 94975
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<PAGE> 2
12. LANDLORD'S ADDRESS FOR NOTICES Paragraph 20
G & W/Copley Redwood Business Park, L.P. c/o G&W Management Co.
1318 Redwood Way, Suite 140 Petaluma, CA 94954
With a Copy to:
13. REAL ESTATE BROKERS Paragraph 23
EXHIBITS AND ADDENDUM
Exhibit A: Diagram of Premises
Exhibit A-1: Diagram of the Project
Exhibit B: Work Letter Agreement Exhibit B-1: Preliminary Space Plan
Exhibit C: Rules and Regulations
Exhibit D: Hazardous Materials List
2
<PAGE> 3
REDWOOD BUSINESS PARK NET LEASE
THIS LEASE, dated _________199____, is made and entered into by and between
G&W/Copley Redwood Business Park, L.P. ("Landlord"), and Advanced Fibre
Communications, Inc., a Delaware corporation ("Tenant").
1. Premises.
Landlord leases to Tenant, and Tenant hereby leases from Landlord for the term
of this Lease ("Term") and at the rent and upon the conditions set forth below,
the Premises described in the Basic Lease Information and identified on the
floor plan attached hereto as Exhibit A. The Premises are located within the
Building described in the Basic Lease Information, and constitute part of the
Project described in the Basic Lease Information and as shown in Exhibit A-I
attached hereto, at the Redwood Business Park, located in Petaluma, California.
All areas and facilities outside the Buildings and within the exterior
boundaries of the Project that are provided and designated by Landlord from time
to time for the general nonexclusive use and convenience of the tenants of the
Project shall be known as "Common Areas".
2. Term.
(a) The Term shall commence upon the date ("Commencement Date") which is the
earlier of, (i) substantial completion of the Premises, as the term "substantial
completion" is defined in the Work Letter Agreement, attached hereto as Exhibit
B; or (ii) the date substantial completion would have occurred but for Tenant
Delays (as the term is defined in the Work Letter Agreement). The Estimated
Commencement Date is set forth in the Basic Lease Information, which date may be
postponed due to a delay in delivering the Premises as provided in Paragraph
2(b) below. A "Lease Year" is a period of twelve (12) consecutive calendar
months. A "Lease Month" is a calendar month. The initial Term of this Lease
shall be determined as follows:
(1) If the Commencement Date of this Lease occurs on the first calendar day of a
calendar month, the Term shall be for a period of Lease Years and Months as
specified in the Basic Lease Information, unless terminated sooner as provided
in this Lease.
(2) If the Commencement Date of this Lease occurs on other than the first
calendar day of a calendar month, the Term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, plus the number of days
remaining in the calendar month in which the Commencement Date occurs, unless
terminated sooner as provided in this Lease.
(b) Subject to the provisions of Paragraph 22 below, in the event the Premises
are not substantially completed (in accordance with the Work Letter Agreement)
on or within six (6) months after the Estimated Commencement Date, then Tenant
may, at Tenants option, by notice in writing to Landlord within ten (10) days
thereafter, cancel this Lease, in which event, (i) this Lease shall be deemed
null and void and have no further force or effect, (ii) all security or other
deposits made herewith shall be promptly returned to Tenant, and (iii) the
parties shall have no further obligation to each other; provided further,
however, that if such written notice of Tenant is not received by Landlord
within said 10-day period, Tenant's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3. Rent.
(a) For purposes of this Lease, the term "Rent" shall mean the Base Rent,
Advanced Base Rent, all additional rent, and all of the other monetary
obligations of Tenant under this Lease. Upon execution of this Lease, Tenant
shall pay to Landlord the Advanced Base Rent set forth in the Basic Lease
Information. Tenant shall pay to Landlord the Base Rent specified in the Basic
Lease Information, payable on or before the first day of each and every
successive calendar month following the Commencement Date. If the Term commences
on other than the first day of a calendar month, the first payment of Base Rent
shall be appropriately prorated, on the basis of a 30-day month. Tenant's
payment of any Advanced Base Rent (excluding that portion attributable to last
month's rent, if any) shall be credited against Tenants obligation to pay Base
Rent beginning as of the Commencement Date.
(b) Tenant shall pay, as additional rent, all amounts of money required to be
paid to Landlord by Tenant under this Lease in addition to monthly Base Rent,
whether or not the same be designated "additional rent." If such amounts are not
paid at the time provided in this Lease, they shall nevertheless be collectable
as additional rent with the next installment of
1
<PAGE> 4
monthly Base Rent thereafter falling due, but nothing herein contained shall be
deemed to suspend or delay the payment of any amount of money at the time the
same becomes due and payable hereunder, or limit any other remedy of Landlord.
(c) Tenant acknowledges that late payment by Tenant to Landlord of Rent after
the expiration of any applicable grace period will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by the
terms of any trust deed covering the Premises. Accordingly, if any installment
of Rent or any other sums due from Tenant shall not be received by Landlord when
due, Tenant shall pay to Landlord a late charge equal to two percent (2%) of
such overdue amount. The parties agree that such late charge represents a fair
and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount, nor
prevent Landlord from exercising any of the other rights and remedies granted
hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear interest from
the date due until paid at the rate of ten percent (10%) per annum. Payment of
interest shall not excuse or cure any default hereunder by Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made to Landlord
without deduction or offset, in lawful money of the United States of America at
Landlord's address for notices hereunder, or to such other person or at such
other place as Landlord may from time to time designate in writing to Tenant.
4. Taxes and Operating Expenses.
(a) In addition to the Base Rent, Tenant shall pay (i) Tenant's Percentage Share
of Property Taxes (according to the percentage set forth in the Basic Lease
Information) relating to those Property Taxes (as the term is defined under
Paragraph 4(a)(1) below) which are assessed during the Term, and (ii) Tenant's
Percentage Share of Operating Expenses (according to the percentage set forth in
the Basic Lease Information) relating to those Operating Expenses (as the term
is defined under Paragraph 4(a)(2) below) which are paid or incurred by Landlord
during the Term.
(1) "Property Taxes" shall mean all real property taxes, bonds and assessments
and governmentally imposed fees or charges (and any tax levied wholly or partly
in lieu thereof) levied, assessed, confirmed, imposed or which have become a
lien against the Building (which for the purposes of defining "Property Taxes"
shall include the tax parcel of which the Building is a part) and Common Areas.
(2) "Operating Expenses" shall mean the following: (A) all reasonable costs of
management, operation, maintenance and repair of the Building and Common Areas,
including, without limitation, property management expenses, maintenance and
repair materials, supplies and equipment; (B) all reasonable costs of water,
power, electricity, refuse collection, parking lot sweeping, landscaping, and
other services relating to the Common Areas; (C) all reasonable costs of
alterations or improvements to the Building or Common Areas made to achieve
compliance with federal, state and local law including, without limitation, the
Americans with Disabilities Act (42 U.S.C. Section 121 01 et seq.), which costs
will be amortized over the useful life of each alteration or improvement; (D)
all reasonable costs of public liability and casualty insurance maintained by
Landlord with respect to the Building and Common Areas; (E) all reasonable costs
incurred by Landlord for making any capital improvements, structural repairs or
modifications to the Building or Common Areas or making any improvements or
modifications to reduce the operating expenses, which costs will be amortized
over the useful life of each capital improvement, structural repair or
modification; (F) all reasonable costs of maintaining machinery, equipment and
directional signage or other markers; and (G) the share allocable to the
Building of dues and assessments payable under any reciprocal easement or common
area maintenance agreements or declarations or by any owners' associations
affecting the Building. That portion of the Operating Expenses relating to the
property management expenses for the Building and Common Areas which shall be
charged to Tenant shall be four percent (4%) of both Tenant's annual Base Rent
and the subtotal of Tenant's share of Operating Expenses of the Building. In the
event that Landlord calculates the Operating Expenses based upon the Project
instead of the Building, as indicated on the Basic Lease Information, then the
term "Project" shall be substituted in the place of all references to the term
"Building" in this paragraph.
(b) The Property Taxes to be paid by Tenant shall be determined by multiplying
the total amount of the Property Taxes by Tenant's Percentage Share of Property
Taxes (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the
2
<PAGE> 5
rentable area of the Premises and the denominator of which is the total rentable
area of all improvements located within the tax parcel of which the Premises are
a part). Landlord may cause the Common Areas of the Project to be separately
assessed from other areas and buildings of the Project. In such case, Tenant's
Percentage Share of Property Taxes attributable to the Common Areas shall be
determined by the ratio that the total rentable square feet in the Premises
bears to the total number of square feet of rentable area which is included in
the property subject to the assessment.
(c) Operating Expenses for each calendar year shall be adjusted to equal
Landlord's reasonable estimate of Operating Expenses as though ninety-five
percent (95%) of the total rentable area of the Building had been occupied. When
the Building is one hundred percent(100%) occupied, the Operating Expenses shall
be adjusted to reflect a 100% occupied building. The Operating Expenses to be
paid by Tenant shall be determined by multiplying the total amount of the
Operating Expenses as adjusted above by Tenant's Percentage Share of Operating
Expenses (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the rentable area of the Premises and the denominator of
which is the total rentable area located within the Building, if the Operating
Expenses are calculated for the Building, or within the Project, if the
Operating Expenses are calculated for the Project).
(d) Tenant shall pay to Landlord each month at the same time and in the same
manner as monthly Base Rent one-twelfth (1/12th) of Landlord's estimate of the
amount of Property Taxes and one-twelfth (1/12th) of Landlord's estimate of
Operating Expenses payable by Tenant for the then-current calendar year. The
initial monthly amount shall be as set forth in the Basic Lease Information.
Within one hundred twenty (120) days after the close of each calendar year, or
as soon after such 120-day period as practicable, Landlord shall deliver to
Tenant a statement in reasonable detail of the actual amount of Property Taxes
and Operating Expenses payable by Tenant in accordance with this Paragraph 4 for
such calendar year. Tenant may request further information if desired.
Landlord's failure to provide such statement to Tenant within the 120-day period
shall not act as a waiver and shall not excuse Tenant or Landlord from making
the adjustments to reflect actual costs as provided herein. If on the basis of
such statement Tenant owes an amount that is less than the estimated payments
for such calendar year previously made by Tenant, Landlord shall credit such
excess to Tenant against future additional rent due under this Paragraph 4. If
on the basis of such statement Tenant owes an amount that is more than the
estimated payments for such calendar year previously made by Tenant, Tenant
shall pay the deficiency to Landlord within fifteen (15) days after delivery of
the statement. The obligations of Landlord and Tenant under this Paragraph 4(d)
with respect to the reconciliation between the estimated and actual amounts of
Property Taxes and Operating Expenses payable by Tenant for the last year of the
Term shall survive the termination of the Lease. When the final determination is
made of the actual amounts of Property Taxes and Operating Expenses payable by
Tenant for the year in which this Lease terminates, Tenant shall immediately pay
any increase due over the estimated payments and, conversely, any overpayment
made by Tenant shall be immediately reimbursed to Tenant by Landlord.
5. Other Taxes.
In addition to Tenant's obligations under Paragraph 4 above, Tenant shall pay or
reimburse Landlord for (i) any taxes upon, measured by or reasonably
attributable to the cost or value of Tenant's equipment, furniture, fixtures,
and other personal property located in the Premises or leasehold improvements
made in or to the Premises at Tenant's expense, (ii) for taxes, if any, measured
by or reasonably attributable to tenant improvements paid for by Tenant, and
(iii) for any taxes, assessments, fees, or charges imposed by any public
authority or private community maintenance association upon or by reason of the
development, possession, use or occupancy of the Premises or the parking
facilities used by Tenant in connection with the Premises. On request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment of
Tenants business personal property taxes and deliver copies of such business
personal property tax bills to Landlord.
6. Use.
6.1 Prohibited Uses.
(a) The Premises shall be used and occupied by Tenant solely for the use set
forth in the Basic Lease Information. Tenant shall, at Tenants expense, comply
promptly with all applicable federal, state and local laws, regulations,
ordinances, rules, orders, and requirements in effect during the Term relating
to the condition, use or occupancy of the Premises. Tenant shall not use or
permit the use of the Premises in any manner that will tend to create waste or a
nuisance, or that unreasonably disturbs other tenants of the Building or
Project, nor shall Tenant place or maintain any signs, antennas, awnings,
fighting or plumbing fixtures, loudspeakers, exterior decoration or similar
devises on or visible from the exterior of the Premises, without Landlord's
prior written consent, which may be withheld in Landlord's sole discretion.
Tenant shall not use any corridors, sidewalks, stairs, elevators, or other areas
outside
3
<PAGE> 6
of the Premises for storage or any purpose other than access to the Premises.
Tenant shall not use, keep, or permit to be used or kept on the Premises any
foul or noxious gas or substance, nor shall Tenant do or permit to be done
anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located, or the Rules (as the term is
defined under Paragraph 6.3(b) below).
(b) Tenant shall not attach any signage to or on any part of the outside of the
Premises, the Building or the Project, or in the halls, lobbies, windows or
elevator banks of the Building without Landlord's prior written consent, which
consent may be withheld in Landlord's sole discretion. Any signage so permitted
shall be subject to prior approval of and conformance with the requirements of
the design review committee of the Project and the design review agency of the
city. At Tenant's expense, Tenant shall (i) maintain all permitted signage, and
(ii) upon the expiration or termination of this Lease, remove such signage and
repair any damage caused by their removal. If Tenant fails to do so, Landlord
may maintain, repair or remove such signage without notice to Tenant and at
Tenant's expense, the cost of which shall be payable by Tenant as additional
rent in accordance with Paragraph 14(b)(2) below.
6.2 Suitability. Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty with respect to the Premises or
the Building or with respect to the suitability or fitness of either for the
conduct of Tenant's business or for any other purpose. Nor has Landlord agreed
to undertake any modification, alteration or improvement to the Premises except
as provided in this Lease. Tenant acknowledges that the Premises are located in
a 100-year flood zone and that the finished floor elevations of the Building are
designed to be at least one (1) foot above the federal government's estimate of
the 100-year flood level at the time of initial construction.
6.3 Use of Common Areas.
(a) Landlord gives Tenant and its authorized employees, agents, customers,
representatives, and invitees the nonexclusive right to use the Common Areas,
with others who are entitled to use the Common Areas, subject to Landlord's
rights as set forth in this Paragraph 6.3.
(b) All Common Areas shall be subject to the exclusive control and management of
Landlord and Landlord shall have the right to establish, modify, amend, and
enforce reasonable rules and regulations with respect to the Common Areas.
Tenant acknowledges receipt of a copy of the current rules and regulations,
attached hereto as Exhibit C, and agrees that they may, from time to time, be
modified or amended by Landlord in a commercially reasonable manner (the
"Rules"). Tenant agrees to abide by and conform with such Rules; to cause its
concessionaires and its and their employees and agents to abide by such Rules;
and to use its best efforts to cause its customers, invitees, and licensees to
abide by such Rules.
(c) Landlord shall have the right to close temporarily any portion of the Common
Areas for the purpose of discouraging use by parties who are not tenants or
customers of tenants; to use portions of the Common Areas while engaged in
making additional improvements or repairs or alterations to the Property; to use
or permit the use of the Common Areas by others to whom Landlord may grant or
have granted such rights; and to do and perform such acts in, to, and with
respect to, the Common Areas as in the use of good business judgment Landlord
shall determine to be appropriate for the Project.
(d) Landlord shall have the unqualified right to increase or reduce the Common
Areas, provided the Project meets the parking requirement under Paragraph 6.5
below.
(e) Tenant shall cooperate with Landlord and other tenants in the Project in
recycling waste paper, cardboard, or such other materials identified under any
trash recycling program that may be established in order to reduce trash
collection costs.
6.4 Environmental Matters.
(a) (1) The term "Hazardous Materials" as used herein means any petroleum
products, asbestos, polychlorinated biphenyls, P.C.B.'s, chemicals, compounds,
materials, mixtures or substances that are now or hereafter defined or listed
in, or otherwise classified as a "hazardous substance", "hazardous material",
"hazardous waste", "extremely hazardous waste", "infectious waste", "toxic
substance", "toxic pollutant" or any other formulation intended to define, list
or classify substances by reason of deleterious properties such
4
<PAGE> 7
as ignitability, corrosivity, reactivity, carcinogenicity or toxicity Pursuant
to any federal, state or local environmental law, regulation, ordinance,
resolution, order or decree relating to industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, release,
disposal or transportation of the same ("Hazardous Materials Laws"). (2) Except
for ordinary office supplies and janitorial cleaning materials which in common
business practice are customarily and lawfully used, stored and disposed of in
small quantities, and except for those Hazardous Materials listed on Exhibit D
attached hereto, Tenant shall not use, manufacture, store, release, dispose or
transport any Hazardous Materials in, on, under or about the Premises, the
Building or the Project without giving prior written notice to Landlord and
obtaining Landlord's prior written consent, which consent Landlord may withhold
in its sole discretion. Subject to Landlord's prior written consent, Hazardous
Materials may be added to Exhibit D on an annual review basis; any such
amendments to Exhibit D shall be signed by each party and attached hereto.
Tenant shall at its own expense procure, maintain in effect, and comply with all
conditions of any and all permits, licenses, and other governmental and
regulatory approvals required in connection with Tenant's generation, use,
storage, disposal and transportation of Hazardous Materials. Except as
discharged into the sanitary sewer in strict accordance and conformity with all
applicable Hazardous Materials Laws, Tenant shall cause any and all Hazardous
Materials removed from the Premises to be removed and transported solely by duly
licensed haulers to duly licensed facilities for final disposal of such
materials and wastes. Regardless whether permitted under the Hazardous Materials
Laws, Tenant shall not maintain in, on, under, or about the Premises, the
Building or the Project any above or below ground storage tanks, clarifiers, or
sumps, nor shall any wells for the monitoring of ground water, soils, or
subsoils be allowed.
(3) Tenant shall immediately notify Landlord in writing of. (a) any enforcement,
cleanup, removal or other governmental or regulatory action instituted,
completed or threatened pursuant to any Hazardous Materials Law; (b) any claim
made or threatened by any person or entity against Tenant or the Premises
relating to damage, contribution, cost, recovery, compensation, loss or injury
resulting from or claimed to result from any Hazardous Materials; and (c) any
reports, information, inquiries or demands made, ordered, or received by or on
behalf of Tenant which arise out of or in connection with the existence or
potential existence of any Hazardous Materials in, on, under or about the
Premises, the Building, or the Project, including, without limitation, any
complaints, notices, warnings, asserted violations, or mandatory or voluntary
informational filings with any governmental agency in connection therewith, and
immediately supply Landlord with copies thereof.
(b) Tenant shall indemnify, defend (by counsel reasonably acceptable to
Landlord), protect, and hold Landlord, and each of Landlord's partners,
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, attorneys,
successors and assigns, free and harmless from and against any and all claims,
liabilities, damages, fines, penalties, forfeitures, losses, cleanup and
remediation costs or expenses (including attorneys' fees) or death of or injury
to any person or damage to any property whatsoever, arising from or caused in
whole or in part, directly or indirectly, by (i) Tenant's use, analysis,
generation, manufacture, storage, release, disposal, or transportation of
Hazardous Materials by Tenant, Tenant's agents, employees, contractors,
licensees or invitees to, in, on, under, about or from the Premises, the
Building, or the Project, or(ii) Tenant's failure to comply with any Hazardous
Materials Law. Tenant's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any required or necessary
repair, cleanup, detoxification or decontamination of the Premises, the
Building, or the Project and the preparation and implementation of any closure,
remedial action or other required plans in connection therewith, and shall
survive the expiration or earlier termination of this Lease.
(c) Landlord shall have the right to enter the Premises during regular business
hours upon reasonable prior notice at all times for the purposes of ascertaining
compliance by Tenant with all applicable Hazardous Materials Laws, provided,
however, that in the instance of an emergency Landlord's entry onto the Premises
shall not be restricted to regular business hours nor shall notice be required.
(d) Landlord shall have the option to declare a default of this Lease for the
release or discharge of Hazardous Materials by Tenant, Tenant's employees,
agents, contractors, or invitees on the Premises, Building or Project or in
violation of law or in deviation from prescribed procedures in Tenant's use or
storage of Hazardous Materials. Landlord shall have the option to conduct a
Hazardous Materials investigation if it has a reasonable belief that there has
been a discharge or release, or potential of discharge or release, of Hazardous
Materials b Tenant, Tenant's employees, agents, contractors, or invitees on the
Premises, Building or Project in violation of law or in deviation from
prescribed procedures in Tenant's use or storage of Hazardous Materials. If
Tenant fails to comply with any of the provisions under this Paragraph 6.4,
Landlord shall have the right (but not the obligation) to remove or otherwise
cleanup any Hazardous Materials from the Premises, the Building or the Project.
In such case, the costs of any Hazardous Materials investigation, removal or
other cleanup
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(including, without limitation, transportation, storage, disposal and attorneys'
fees and costs) Will be additional rent due under this Lease, whether or not a
court has ordered the cleanup, and will become due and payable on demand by
Landlord.
6.5 Parking.
Landlord grants to Tenant and Tenant's customers, suppliers, employees and
invitees a nonexclusive license to use unassigned and unreserved parking spaces
in the Common Areas for the use of motor vehicles during the Term subject to
rights reserved to Landlord as specified in this Paragraph 6.5. Landlord
reserves the right to grant similar nonexclusive and unassigned and unreserved
use to other tenants; to promulgate rules and regulations relating to the use of
the Common Areas including parking by tenants and employees of tenants; to make
changes in the parking layout from time to time; and to do and perform any other
acts in and to these areas and improvements as Landlord determines to be
advisable. Tenant agrees not to overburden the parking facilities and to abide
by and conform with the rules and regulations and to cause its employees and
agents to abide by and conform to the rules and regulations. Upon request,
Tenant shall provide Landlord with license plate numbers of all vehicles driven
by its employees and to cause Tenant's employees to park only in spaces
specifically designated for tenant parking. Landlord shall have the unqualified
right to rearrange or reduce the number of parking spaces; provided, however,
the ratio of the number of parking spaces available to Tenant will be no less
than four (4.0) spaces per 1,000 usable square feet of the Premises.
7. Services.
(a) Tenant shall pay for all water, sewer, gas, electricity, heat, cooling,
telephone, refuse collection, and other utility-type services furnished to
Tenant or the Premises, together with all related installation or connection
charges or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and paid for
directly by Tenant. To the extent any of the foregoing services are provided by
Landlord, Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with the provision of such services based on Landlord's reasonable
estimate of the level of Tenant's use or consumption of such services. Landlord
shall bill Tenant on a monthly or other periodic basis for such services and
payment shall be made by Tenant within ten (10) days after submittal of
Landlord's statement.
(b) Landlord shall not be in default hereunder or be liable for any damages or
personal injuries to any person directly or indirectly resulting from, nor shall
there be any Rent abatement by reason of, any interruption or curtailment
whatsoever in utility services.
8. Maintenance, Repairs and Alterations.
(a) Tenant shall, at Tenant's expense, maintain every part of the Premises in
good order, condition and repair, including without limitation, (i) all interior
surfaces, ceilings, walls, door frames, window frames, floors, carpets,
draperies, window coverings and fixtures, (ii) all windows, doors, locks and
closing devices, entrances, plate glass, and signs, (iii) all plumbing and
sewage pipes, fixtures and fittings, (iv) all phone lines, electrical wiring,
equipment, switches, outlets, and light bulbs, (v) any fire detection, fire
sprinkler or extinguisher equipment, (vi) all of Tenant's personal property,
improvements and alterations, and (vii) all other fixtures and special items
installed by or for the benefit of, or at the expense of Tenant. Tenant shall,
at its expense, cause to be maintained in good operating condition and repair,
all heating, ventilating, and air conditioning equipment installed in, or on the
roof of the Premises. Tenant shall keep in force a preventive maintenance
contract with a qualified maintenance company covering all heating, ventilating
and air conditioning equipment and shall annually provide Landlord with a copy
of this contract. Tenant shall not enter onto the roof area of the Building,
except for the purpose of maintaining the heating, ventilating, and air
conditioning equipment and provided that Tenant shall repair any damage to the
roof area caused by its entry. Tenant shall be responsible for its own
janitorial service. Landlord shall incur no expense (nor have any obligation)
of any kind whatsoever in connection with the maintenance of the Premises.
(b) Landlord shall keep in good condition and repair the foundation, roof
structure, exterior walls and other structural parts of the Building, and all
other portions of the Building not the obligation of Tenant or any other tenant
in the Building. Tenant expressly waives the benefits of any statute, including
Civil Code Sections 1941 and 1942, which would afford Tenant the right to make
repairs at Landlord's expense or to terminate this Lease due to Landlord's
failure to keep the Building in good order, condition and repair. Landlord shall
have no liability to Tenant for any damage, inconvenience, or interference with
the use of the Premises by Tenant as the result of Landlord performing any such
maintenance and repair work.
(c) In the event Tenant fails to perform Tenant's obligations under this
Paragraph 8, Landlord may, but shall not be required to, give Tenant notice to
do such acts as are reasonably required to so maintain the Premises. If Tenant
shall fail to commence such work and diligently prosecute it to completion, then
Landlord shall have the right (but not the obligation) to do such
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work. Any amounts so expended by Landlord will be additional rent due under this
Lease, and such amounts will become due and payable on demand by Landlord.
Landlord shall have no liability to Tenant for any such damages, inconvenience,
or interference with the use of the Premises by Tenant as a result of performing
such work.
(d) Upon the expiration or earlier termination of this Lease, Tenant shall
surrender the Premises in good condition and repair, only ordinary wear and tear
excepted. Tenant, at its sole cost and expense, agrees to repair any damages to
the Premises caused by or in connection with the removal of any articles of
personal property, business or trade fixtures, signs, machinery, equipment,
cabinetwork, furniture, moveable partitions, or permanent improvements or
additions, including without limitation thereto, repairing the floor and
patching and painting the walls where required by Landlord, to Landlord's
reasonable satisfaction. Tenant shall indemnify Landlord against any loss or
liability resulting from delay by Tenant in so surrendering the Premises,
including without limitation, any claims made by any succeeding tenant resulting
from such delay.
(e) Tenant shall not make any alterations, improvements, or additions in, on, or
about the Premises without Landlord's prior written consent, except that Tenant
may make alterations, improvements, or additions without Landlord's prior
written consent where (i) the reasonably estimated cost does not exceed $2,500,
and (ii) such alterations, improvements, or additions do not affect or involve
the structural integrity, roof membrane, exterior areas, building systems, or
water-tight nature of the Premises, the Building or the Project. In requesting
Landlord's consent, Tenant shall, at Tenant's sole cost, submit to Landlord
complete drawings and specifications describing such work and the identity of
the proposed contractor at least ten (10) business days prior to the
commencement of any work.
With respect to any alterations, improvements or additions made to the Premises
by Tenant:
(1) Before commencing any work relating to alterations, additions, or
improvements affecting the Premises, Tenant shall notify Landlord of the
expected date of commencement thereof and of the anticipated cost thereof.
Landlord shall then have the right at any time and from time to time to post and
maintain on the Premises such notices as Landlord reasonably deems necessary to
protect the Premises and Landlord from mechanics' liens or any other liens.
(2) Tenant shall pay when due all claims for labor or materials furnished to
Tenant for use in the Premises. Tenant shall not permit any mechanics' liens or
any other liens to be levied against the Premises for any labor or materials
furnished to Tenant in connection with work performed on the Premises by or at
the direction of Tenant. Tenant shall indemnify, hold harmless and defend
Landlord (by counsel reasonably satisfactory to Landlord) from any liens and
encumbrances arising out of any work performed or materials furnished by, or at
the direction of Tenant. In the event that Tenant shall not, within twenty (20)
days following the imposition of any such lien, cause such lien to be released
of record by payment or posting of a proper bond, Landlord shall have, in
addition to all other remedies provided herein by law, the right, but not the
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All such sums
paid by Landlord and all expenses incurred by it in connection therewith,
including attorneys' fees and costs, shall be payable to Landlord by Tenant on
demand with interest at the rate of eight and one-half percent (8.50%) per
annum.
(3) All alterations, improvements or additions in or about the Premises
performed by or on behalf of Tenant shall be done in a first-class, workmanlike
manner, shall not unreasonably lessen the value of leasehold improvements in the
Premises, and shall be completed in compliance with all applicable laws,
ordinances, regulations and orders of any governmental authority having
jurisdiction thereover, as well as the requirements of insurers of the Premises
and the Building.
(4) Upon Landlord's request, Tenant shall remove any contractor, subcontractor
or material supplier from the Premises and the Building if the work or presence
of such person or entity results in labor disputes in or about the Building or
Project or damage to the Premises, Building or Project.
(5) Landlord, at Landlord's sole discretion, may refuse to grant Tenant
permission for alterations, improvements or additions which require, because of
application of Americans with Disabilities Act or other laws, substantial
improvements or alterations to be made to the Common Areas.
(6) Landlord may, up to sixty (60) days prior to the expiration of the Term,
require that Tenant, at Tenant's expense, remove any such alterations,
improvements or additions
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(7) Unless Landlord requires their removal, as set forth above, all alterations,
improvements, or additions made to the Premises shall become the property of
Landlord and remain upon and be surrendered with the Premises upon the
expiration of this Lease; provided, however, that Tenant's machinery, equipment,
and trade fixtures, other than any which may be affixed to the Premises so that
they cannot be removed without material damage to the Premises, shall remain the
property of Tenant and may be removed by Tenant subject to the provisions of
Paragraph 8(d) above.
9. Construction of Tenant Improvements.
Landlord shall be responsible for constructing the tenant improvements ("Tenant
Improvements") in the Premises, as provided in the Work Letter Agreement,
attached hereto as Exhibit B.
10. Insurance and Indemnity.
10.1 Insurance.
(a) Tenant shall obtain and maintain during the Term comprehensive general
liability insurance with a combined single limit for personal injury and
property damage in an amount of not less than $2,000,000 (in a form, with a
deductible amount, and with carriers reasonably acceptable to Landlord) and
employees liability and workers' compensation insurance as required by law. The
insurance carrier shall be authorized to do business in the State of California,
with a policyholders and financial rating of at least A:IX Class status as rated
in the most recent edition of Best's Key-Rating guide. Tenant's comprehensive
general liability insurance policy shall be endorsed to provide that (i) it may
not be canceled or altered in such a manner as to adversely affect the coverage
afforded thereby without thirty (30) days' prior written notice to Landlord,
(ii) Landlord is designated as an additional insured, (iii) the insurer
acknowledges acceptance of the mutual waiver of claims by Landlord and Tenant
pursuant to Paragraph 10.2(b) below, and (iv) such insurance is primary with
respect to Landlord and that any other insurance maintained by Landlord is
excess and noncontributing with such insurance. If, in the reasonable opinion of
Landlord's lender or in the commercially reasonable opinion of Landlord's
insurance adviser, the specified amounts of coverage are no longer adequate,
such coverage shall, within 30 days written notice to Tenant, be appropriately
increased. Prior to the commencement of the Term, Tenant shall deliver to
Landlord a duplicate of such policy or a certificate thereof to Landlord for
retention by it, with endorsements. At least thirty (30) days prior to the
expiration of such policy or any renewal or modification thereof, Tenant shall
deliver to Landlord a replacement or renewal binder, followed by a duplicate
policy or certificate within a reasonable time thereafter. If Tenant fails to
obtain such insurance or to furnish Landlord any such duplicate policy or
certificate as herein required, Landlord may, at its election, without notice to
Tenant and without any obligation to do so, procure and maintain such coverage
and Tenant shall reimburse Landlord on demand as additional rent for any premium
so paid by Landlord.
(b) Landlord waives all claims against Tenant, and Tenant's officers, directors,
partners, employees, agents and representatives for loss or damage to the extent
that such loss or damage is insured against under any valid and collectable
insurance policy insuring Landlord or would have been insured against but for
any deductible amount under any such policy. Tenant waives all claims against
Landlord, and Landlord's officers, directors, partners, employees, affiliates,
joint venturers, members, trustees, owners, shareholders, principals, agents,
representatives, successors and assigns, for loss or damage to the extent such
loss or damage is insured against under any valid and collectable insurance
policy insuring Tenant or required to be maintained by Tenant under this Lease,
or would have been insured against but for any deductible amount under any such
policy. The insuring party shall, upon obtaining the policies of insurance
required under this Lease, give notice to the insurance carrier or carriers that
the foregoing mutual waiver of subrogation is contained in this Lease. Tenant
agrees that in the event of a sale, assignment or transfer of the Premises by
Landlord, this waiver of subrogation shall continue in favor of the original
Landlord and any subsequent Landlord.
(c) Tenant shall at its own cost maintain on all its personal property, Tenant's
improvements, and alterations, in, on, or about the Premises, a policy of
standard fire and extended coverage insurance, with vandalism and malicious
mischief endorsements, to the extent of at least one hundred percent (100%) of
their full replacement value. The proceeds from any such policy shall be used by
Tenant for the replacement of personal property and the restoration of Tenant's
improvements or alterations. Notwithstanding any other provisions of the Lease,
Landlord shall have no liability for damage to or destruction of Tenant's
personal property,
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unless caused by the active negligence or willful misconduct of Landlord, its
agents, employees, or contractors.
(d) During the Term, Landlord shall keep the Building, and improvements within
which the Premises are located, insured against loss or damage by (i) fire, with
extended coverage and vandalism, malicious mischief and special extended perils
(all risk) endorsements or their equivalents, in amounts not less than one
hundred percent (100%) of the replacement cost of the Building and structures
insured, and (ii) flood, in the maximum amount provided for by FEMA under its
flood loss insurance program, with loss payable thereunder to Landlord and to
any authorized encumbrancer of Landlord (with standard mortgagee loss payable
clause) in accordance with their respective interests. Landlord may maintain
rent insurance, for the benefit of Landlord, equal to at least one year's Base
Rent hereunder. If, the Lease is terminated as a result of damage by fire,
casualty or earthquake as set forth in this Paragraph 10, all insurance proceeds
shall be paid to and retained by Landlord, subject to the rights of any
authorized encumbrancer of Landlord.
(e) Tenant acknowledges that Landlord does not, at the time of the signing of
this Lease, insure the Building for earthquake damage. Landlord may, when
Landlord deems the premiums to be reasonable, insure the Building fully or
partially for earthquake damage. At such time, the premium for earthquake
insurance will be added to the Operating Expenses for purposes of determining
additional rent.
10.2 Indemnity.
(a) Tenant waives all claims against Landlord for damage to any property or
injury to or death of any person in, on, or about the Premises, the Building, or
any other portion of the Project arising at any time and from any cause, unless
caused by the active negligence or willful misconduct of Landlord, its agents,
employees, or contractors. Tenant shall indemnify, defend (by counsel reasonably
satisfactory to Landlord) and hold harmless Landlord, and Landlord's officers,
directors, partners, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, principals, agents, representatives, successors and
assigns, from and against all claims, costs, damages, actions, indebtedness and
liabilities (except such as may arise from the active negligence or willful
misconduct of Landlord, and Landlord's officers, directors, partners, employees,
affiliates, joint venturers, members, trustees, owners, shareholders,
principals, agents, representatives, successors and assigns) arising by reason
of any death, bodily injury, personal injury, property damage or any other
injury or damage in connection with (i) any condition or occurrence in or about
or resulting from any condition or occurrence in or about the Premises during
the Term, or (ii) any act or omission of Tenant, or Tenant's agents,
representatives, officers, directors, shareholders, partners, employees,
successors and assigns, wherever it occurs. The foregoing indemnity obligation
of Tenant shall include reasonable attorneys' fees, and all other reasonable
costs and expenses incurred by Landlord from the first notice that any claim or
demand is to be made. The provisions of this Paragraph 10.2 shall survive the
termination or expiration of this Lease with respect to any damage, injury, or
death occurring prior to such expiration or termination.
(b) Neither party shall be liable to the other for any unauthorized or criminal
entry of third parties into the Premises, Building, Project, Common Areas, or
parking facilities, or for any damage to person or property, or loss of property
in and about the Premises, Building, Project, Common Arm, parking facilities and
the approaches, entrances, streets, sidewalks, stairs, elevators, restrooms, or
corridors thereto, by or from any unauthorized or criminal acts of third
parties, regardless of any breakdown, malfunction or insufficiency of any
security measures, practices or equipment provided by Landlord or Tenant. Tenant
shall immediately notify Landlord in writing of any breakdown or malfunction of
any security measures, practices or equipment provided by Landlord as to which
Tenant has knowledge.
(c) Any diminution or interference with light, air or view by any structure
which may be erected on land adjacent to the Building or resulting from any
other cause shall in no way alter this Lease or impose any liability on
Landlord.
(d) Tenant agrees that in no event shall Landlord be liable for consequential
damages, including injury to Tenant's business or any loss of income therefrom.
(e) In the event that Landlord or any successor owner of the Building sells or
conveys the Building, then all liabilities and obligations of Landlord or the
successor owner under this Lease accruing after the sale or conveyance shall
terminate and become binding on the new owner, and Tenant shall release Landlord
from all liability under this Lease (including, without limitation, the Security
Deposit, as defined under Paragraph 16 below), except for acts or omissions of
Landlord occurring prior to such sale or conveyance.
(f) Tenant expressly agrees that so long as Landlord is a corporation,
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limited liability company, trust, partnership, joint venture, unincorporated
association or other form of business entity, (i) the obligations of Landlord
shall not constitute personal obligations of the officers, directors, partners,
employees, affiliates, joint venturers, members, trustees, owners, shareholders,
or other principals, agents or representatives of such business entity ("Member
of Landlord"), and (ii) Tenant shall have recourse only to the interest of such
business entity in the Building of which the Premises are a part for the
satisfaction of such obligations and not against the assets of such Member of
Landlord other than to the extent of their respective interests in the Building.
In this regard, Tenant agrees that in the event of any actual or alleged
failure, breach or default by Landlord of its obligations under this Lease, that
(i) no Member of Landlord shall be sued or named as a party in any suit or
action (except as may be necessary to secure jurisdiction of Landlord), (ii) no
judgment will be taken against any Member of Landlord, and any judgment taken
against any Member of Landlord may be vacated and set aside at any time without
hearing, (iii) no writ of execution will ever be levied against the assets of
any Member of Landlord, and (iv) these agreements by Tenant are enforceable both
by Landlord and by any Member of Landlord.
11. Damage or Destruction
(a) Subject to the provisions of Paragraphs 11 (b) and 11 (c) below, if, during
the Term, the Premises are totally or partially destroyed from any insured
casualty, Landlord shall, within ninety (90) days after the destruction,
commence to restore the Premises to substantially the same condition as they
were in immediately before the destruction and prosecute the same diligently to
completion. Such destruction shall not terminate this Lease. Landlord's
obligation shall not include repair or replacement of Tenant's alterations or
Tenant's equipment, furnishings, fixtures and personal property. If the existing
laws do not permit the Premises to be restored to substantially the same
condition as they were in immediately before destruction, and Landlord is unable
to get a variance to such laws to permit the commencement of restoration of the
Premises within the 90-day period, then either party may terminate this Lease by
giving written notice to the other party within thirty (30) days after
expiration of the 90-day period.
(b) Despite the provisions of Paragraph 11(a) above, Landlord may decide within
ninety (90) days after such destruction to demolish the Building rather than
rebuild it, in which case this Lease will terminate as of the date of the
destruction. Landlord shall give Tenant written notice of its intention within
ninety (90) days after the destruction.
(c) If any destruction occurs to the Premises during the last six (6) months of
the initial Term or during the last six (6) months of any extension period,
regardless of the nature and extent of the destruction, either party can elect
to terminate this Lease within thirty (30) days after the destruction occurs. If
this Lease does not terminate pursuant to this Paragraph 11 (c), the provisions
of Paragraph 11 (a) above shall apply.
(d) If the Premises are damaged from any uninsured casualty to any extent
whatsoever, Landlord may within ninety (90) days following the date of such
damage: (i) commence to restore the Premises to substantially the same condition
as they were in immediately before the destruction and prosecute the same
diligently to completion, in which event this Lease shall continue in full force
and effect; or (ii) within the 90-day period Landlord may elect not to so
restore the Premises, in which event this Lease shall cease and terminate. In
either such event, Landlord shall give Tenant written notice of its intention
within the 90-day period.
(e) In the event of destruction or damage to the Premises which materially
interferes with Tenant's use of the Premises, if this Lease is not terminated as
above provided, there shall be an abatement or reduction of Base Rent between
the date of destruction and the date Landlord substantially completes its
reconstruction obligations, based upon the extent to which the destruction
materially interferes with Tenant's use of the Premises. All other obligations
of Tenant under this Lease shall remain in full force and effect. Except for
abatement of Base Rent, Tenant shall have no claim against Landlord for any loss
suffered by Tenant due to damage or destruction of the Premises or any work of
repair undertaken as herein provided.
(f) The provisions of California Civil Code Sections 1932(2) and 1933(4), and
any successor statutes, are inapplicable with respect to any destruction of the
Premises, such sections providing that a lease terminates upon the destruction
of the Premises unless otherwise agreed between the parties to the contrary.
12. Eminent Domain.
(a) If all or any part of the Premises shall be taken as a result of the
exercise of the power of eminent domain, this Lease shall terminate as to the
part so taken as of the date of taking. In the case of a partial taking of
greater than fifty percent (50%) of the rentable area of the Premises, either
Landlord or Tenant shall have the right to terminate this Lease as to the
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balance of the Premises by notice to the other within thirty (30) days after the
date of the taking. In the event of a partial taking of the Premises which does
not result in a termination of this Lease, the monthly Base Rent thereafter to
be paid shall be equitably reduced on a square footage basis. If the continued
occupancy of Tenant is materially interfered with for any time during the
partial taking, notwithstanding the partial taking does not terminate this Lease
as to the part not so taken, the Base Rent shall proportionately abate so long
as Tenant is not able to continuously occupy the part remaining and not so
taken.
(b) All compensation awarded or paid upon a total or partial taking of the fee
title shall belong to Landlord whether such compensation be awarded or paid as
compensation for diminution in value of the leasehold or of the fee except:
Tenant shall retain and have a claim for the following, to the extent
specifically designated by the condemning authority: (i) the unamortized value
over the Term of Tenant's leasehold improvements (to the extent Landlord has not
contributed to the cost thereof); (ii) that portion (if any) of the award made
to Landlord as a result of removing fixtures, removable by Tenant herein, under
the terms of this Lease but which are required to be taken by the condemn or are
so acquired by the condemn or; and (iii) all relocation assistance, moving and
relocation expenses to the extent (if any) provided by the condemning authority
directly to Tenant.
13. Assignment and Subletting.
(a) Tenant shall not assign, sublet or hypothecate this Lease or any interest
herein or sublet the Premises or any part thereof or permit the use of the
Premises by any party other than Tenant without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Any of the foregoing
acts without Landlord's consent shall be void and shall, at the option of
Landlord, terminate this Lease. In connection with each consent requested by
Tenant, Tenant shall submit to Landlord the terms of the proposed transaction,
the identity of the parties to the transaction, the proposed documentation for
the transaction, current financial statements of any proposed assignee or
sublessee and all other information reasonably requested by Landlord concerning
the proposed transaction and the parties involved therein.
(b) As used in this Paragraph 13, the term "assign" or "assignment" shall
include, without limitation, any sale, transfer, or other disposition of all or
any portion of Tenant's estate under this Lease, whether voluntary or
involuntary, and whether by operation of law or otherwise, including any of the
following:
(1) if Tenant is a corporation or a limited liability company: (A) any
dissolution, merger, consolidation, or other reorganization of Tenant; or (B) a
sale or other transfer of more than fifty percent (50%) of the value of the
assets of Tenant; or (C) if Tenant is a corporation with fewer than 500
shareholders, a sale or other transfer of a controlling percentage of the
capital stock of Tenant; or (D) if Tenant is a limited liability company, a sale
or other transfer of a controlling percentage of the interest in Tenant. The
phrase "controlling percentage" means the ownership of, and the right to vote,
stocks or interests possessing at least fifty percent (50%) of the total
combined voting power of the limited liability company or, in the case of a
corporation, of all classes of Tenant's stock issues, outstanding and permitted
to vote for the election of directors of the corporation;
(2) if Tenant is a trust, the transfer of more than fifty percent (50%) of the
beneficial interest of Tenant, or the dissolution of the trust;
(3) if Tenant is a partnership or joint venture, the withdrawal, or the transfer
of the interest, of any general partner or joint venturer or the dissolution of
the partnership or joint venture; and
(4) if Tenant is composed of tenants-in-common, the transfer of interest of any
cotenants or the partition or dissolution of the cotenancy.
(c) No sublessee shall have a right further to sublet, and any assignment by a
sublessee of its sublease shall be subject to Landlord's prior written consent
in the same manner as if Tenant were entering into a new sublease.
(d) Regardless of Landlord's consent, no subletting or assignment shall release
Tenant of Tenant's obligation, or alter the primary liability of Tenant to pay
the Rent and to perform all other obligations to be performed by Tenant
hereunder. The acceptance of Rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provisions hereof. Consent to one
assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Tenant or
any successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor.
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<PAGE> 14
(e) In the event Tenant shall assign or sublet the Premises or request the
consent of Landlord to any assignment or subletting, then Tenant shall reimburse
Landlord for reasonable costs and attorneys' fees incurred in connection
therewith in an amount not to exceed $1,000.00.
14. Default by Tenant.
(a) The following events shall constitute events of default under this Lease:
(1) a failure by Tenant to pay any Rent or to deliver an estoppel certificate
(as provided in Paragraph 17 below) where such failure continues for five (5)
days after written notice by Landlord to Tenant;
(2) the bankruptcy or insolvency of Tenant, any transfer by Tenant to defraud
creditors, any assignment by Tenant for the benefit of creditors, or the
commencement of any proceedings of any kind by or against Tenant under any
provision of the Federal Bankruptcy Act or under any other insolvency,
bankruptcy or reorganization act unless, in the event any such proceedings are
involuntary, Tenant is discharged from the same within sixty (60) days
thereafter; the appointment of a receiver for a substantial part of the assets
of Tenant; or the levy upon this Lease or any estate of Tenant hereunder by any
attachment or execution;
(3) the abandonment or vacation of the Premises;
(4) the discovery by Landlord that any financial statement given to Landlord by
Tenant, any assignee of Tenant, any subtenant of Tenant, any successor in
interest of Tenant or any guarantor of Tenant's obligation hereunder, and any of
them, was materially false; and
(5) a failure by Tenant to perform any of the terms, covenants, agreements or
conditions of this Lease to be observed or performed by Tenant (excluding any
event of default under Paragraph 14(a)(1) above), where such failure continues
for thirty (30) days after written notice thereof is received by Tenant from
Landlord via certified mail, postage prepaid, by Landlord to Tenant; provided,
however, that if the nature of the default is such that the same cannot
reasonably be cured within the 30-day period, Tenant shall not be deemed to be
in default if Tenant shall within such period commence such cure and thereafter
diligently prosecute the same to completion.
(b) In the event of any material default or breach by Tenant, Landlord may at
anytime thereafter, without limiting Landlord in the exercise of any right or
remedy at law or inequity which Landlord may have by reason of such default or
breach:
(1) Pursue the remedy described in California Civil Code Section 1951.4 whereby
Landlord may continue this Lease in full force and effect after Tenant's breach
and abandonment and recover the Rent and any other monetary charges as they
become due, without terminating Tenant's right to sublet or assign this Lease,
subject only to reasonable limitations as herein provided. During the period
Tenant is in default, Landlord shall have the right to do all acts necessary to
preserve and maintain the Premises as Landlord deems reasonable and necessary,
including removal of all persons and property from the Premises, and Landlord
can enter the Premises and relet them, or any part of them, to third parties for
Tenant's account. Tenant shall be liable immediately to Landlord for all costs
Landlord incurs in reletting the Premises, including, without limitation,
brokers' commissions, expenses of remodeling the Premises required by the
reletting, and like costs. Reletting can be for a period shorter or longer than
the remaining Term.
(2) Pay or perform such obligation due (but shall not be obligated to do so), if
Tenant fails to pay or perform any obligations when due under this Lease within
the time permitted for their payment or performance. In such case, the costs
incurred by Landlord in connection with the performance of any such obligation
will be additional rent due under this Lease and will become due and payable on
demand by Landlord.
(3) Terminate Tenant's rights to possession by any lawful means, in which case
this Lease shall terminate and Tenant shall immediately surrender possession of
the Premises to Landlord. In such event Landlord shall be entitled to recover
from Tenant all damages incurred by Landlord by reason of Tenant's default,
including, without limitation, the following: (A) the worth at the time of award
of any unpaid Rent which had been earned at the time of such termination; plus
(B) the worth at the time of award of the amount by which the unpaid Rent which
would have been earned after termination until the time of award exceeds the
amount of such Rent loss that is proved could have been reasonably avoided; plus
(C) the worth at the time of award of the amount by which the unpaid Rent for
the balance of the Term after the time of award exceeds the amount of such Rent
loss that is proved could be reasonably avoided; plus (D) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or which in the
ordinary
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<PAGE> 15
course of events would be likely to result therefrom; plus (E) at Landlord's
election, such other amounts in addition to or in lieu of the foregoing as may
be permitted from time to time by applicable State law. Upon any such
termination of Tenant's possessory interest in and to the Premises, Tenant (and
at Landlord's sole election, Tenant's sublessees) shall no longer have any
interest in the Premises, and Landlord shall have the right to make any
reasonable repairs, alterations or modifications to the Premises which Landlord
in its sole discretion deems reasonable and necessary. The "worth at the time of
award" of the amounts referred to. In subparagraphs (A) and (B) above is
computed by allowing interest at the maximum rate of eight and one-half percent
(8.50%). The worth at the time of award of the amount referred to in
subparagraph (C) above is computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
(4) Pursue any other legal or equitable remedy available to Landlord. Unpaid
installments of Rent and other unpaid monetary obligations of Tenant under the
terms of this Lease shall bear interest from the date due at the rate of ten
percent (10%) per annum.
(c) In the event Tenant is evicted or Landlord takes possession of the Premises
by reason of any default by Tenant hereunder, Tenant hereby waives any right of
redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the Premises, this
Lease shall continue in effect for so long as Landlord does not terminate
Tenant's right to possession, and Landlord may enforce all its rights and
remedies under this Lease, including the right to recover Rent as it becomes due
under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(e) In the event Tenant is in material default under any provision of this Lease
then, at Landlord's sole election: (i) Tenant shall not have the right to
exercise any available right, option or election under this Lease ("Tenant Vs
Exercise Rights") if at such time Tenant is in default hereunder, (ii) Tenant
shall not have the right to consummate any transaction or event triggered by the
exercise of any of Tenant's Exercise Rights if at such time Tenant is in default
hereunder, and (iii) Landlord shall not be obligated to give Tenant any required
notices or information relating to the exercise of any of Tenant's Exercise
Rights hereunder.
15. Default by Landlord. Notice to Mortgagee.
Landlord shall not be in default unless Landlord, or the holder of any mortgage,
deed of trust or ground lease covering the Premises, fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord certified mail,
postage prepaid, and to the holder of any first mortgage, deed of trust or
ground lease covering the Premises whose name and address shall have been
furnished to Tenant in writing, specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance
then Landlord shall not be in default if Landlord or the holder of any such
mortgage, deed of trust or ground lease commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion. In no event
shall Tenant be entitled to terminate this Lease by reason of Landlord's
default, and Tenant's remedies shall be limited to an action for monetary
damages at law.
16. Security Deposit
On execution of this Lease, Tenant shall deposit with Landlord the sum specified
in the Basic Lease Information (the "Security Deposit"). The Security Deposit
shall be held by Landlord as security for the performance by Tenant of all of
the provisions of this Lease. If Tenant fails to pay Rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Landlord may use, apply, or retain all or any portion of the Security Deposit
for the payment of any Rent or other charge in default, or the payment of any
other sum to which Landlord may become obligated by reason of Tenant's default,
or to compensate Landlord for any loss or damage which Landlord may suffer
thereby. If Landlord so uses or applies all or any portion of the Security
Deposit, then within ten (10) days after demand therefor Tenant shall deposit
cash with Landlord in an amount sufficient to restore the deposit to the full
amount thereof, and Tenant's failure to do so shall be a material breach of this
Lease. Landlord shall not be required to keep the Security Deposit separate from
its general accounts. If Tenant performs all of Tenant's obligations hereunder,
the Security Deposit, or so much thereof as has not theretofore been applied by
Landlord, shall be returned, without payment of interest for its use, to Tenant
(or, at Landlord's option to the last assignee, if any, of Tenant's interest
hereunder) at the expiration of the Term, and after Tenant has vacated the
Premises. No trust relationship is created herein between Landlord and Tenant
with respect to the Security Deposit.
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17. Estoppel Certificate.
(a) Tenant shall within ten (10) days of notice from Landlord execute,
acknowledge and deliver to Landlord a statement certifying (i) that this Lease
is unmodified and in full force and effect (or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in full
force and effect), (ii) the amount of the Security Deposit, (iii) the date to
which the Rent has been paid, (iv) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any are claimed, and (v) such other matters as may reasonably
be requested by Landlord. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Building.
(b) Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant, (i) that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) that there are no
uncured defaults in Landlord's performance, and (iii) that not more than one
month's Base Rent has been paid in advance.
(c) If Landlord desires to finance or refinance the Building, Tenant agrees to
deliver to any lender designated by Landlord such financial statements of Tenant
as may be reasonably required by such lender. All such financial statements
shall be received by Landlord in confidence and shall be used for the purposes
herein set forth.
18. Subordination.
This Lease, at Landlord's sole option, shall be subordinate to any ground lease,
mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the Building and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements, refinancings and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground lease,
whether this Lease is dated prior to or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. If any mortgage
or deed of trust to which this Lease is subordinate is foreclosed or a deed in
lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall
attorn to the purchaser at the foreclosure sale or to the grantee under the deed
in lieu of foreclosure; if any ground lease to which this Lease is subordinate
is terminated, Tenant shall attorn to the ground lessor. Tenant agrees to
execute any documents required to effectuate such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be, or to evidence such attornment. Any such document of attornment
shall also provide that the successor shall not disturb Tenant in its use of the
Premises in accordance with this Lease.
19. Attorneys' Fees.
In the event legal action is initiated by either party, the prevailing party
shall be entitled to recover all costs and expenses incurred in such action,
including, without limitation, reasonable attorneys' fees and costs, including
attorneys' fees incurred at trial and on appeal, if any.
20. Notices.
All notices, consents, demands, and other communications from one party to the
other given pursuant to the terms of this Lease shall be in writing and shall be
deemed to have been fully given when personally delivered, delivered by courier
service, sent via facsimile (confirmation receipt required), or forty-eight (48)
hours after the same is deposited in the United States mail, certified or
registered, postage prepaid, and addressed as follows: To Tenant at the address
specified in the Basic Lease Information or to such other place as Tenant may
from time to time designate in a notice to Landlord; to Landlord at the address
specified in the Basic Lease Information, or to such other place and to such
other parties as Landlord may from time to time designate in a notice to Tenant.
21. General Provisions.
(a) This Lease shall be governed by and construed in accordance with the
internal laws of the State of California, notwithstanding any choice of law
statutes, regulations, provisions or requirements to the contrary.
14
(b) 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.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease Information
contains all agreements and understandings of the parties and supersedes and
cancels any and all prior or contemporaneous written or oral agreements,
instruments, understandings, and communications of the parties with respect to
the subject matter herein. This Lease, including the attached Exhibits, Addenda,
and Basic Lease Information, may be modified only in writing signed by each of
the parties.
(d) No waiver of any provision hereof by either party shall be deemed by the
other party to be a waiver of any other provision, or of any subsequent breach
of the same provision. Landlord's or Tenant's consent to, or approval of, any
act shall not be deemed to render unnecessary the obtaining of Landlord's or
Tenant's consent to, or approval of, any subsequent act by the other party.
(e) If Tenant remains in possession, with the expressed consent of Landlord, of
all or any part of the Premises after the expiration of the Term, such tenancy
shall be from month to month only, and not a renewal hereof or an extension for
any further term, and in such case, Rent shall be payable in the amount of the
last month's Base Rent and all other charges under the Lease and such
month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein.
(f) Subject to the provisions of this Lease restricting assignment or subletting
by Tenant, this Lease shall bind the parties, their personal representatives,
successors, and assigns.
(g) Upon reasonable prior notice to Tenant (which notice shall not be required
in the event of an emergency), Landlord and Landlord's representatives and
agents shall have the right to enter the Premises during regular business hours
for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders, and making such alterations, repairs, improvements, or
additions to the Premises, the Building or the Common Areas as Landlord may deem
necessary or desirable. Landlord may at any time during the last one hundred
twenty (120) days of the Term place on or about the Premises any ordinary "For
Lease" sign. Landlord may at any time place on or about the Premises any
ordinary "For Sale" sign.
(h) The voluntary or other surrender of this Lease by Tenant, the mutual
cancellation thereof or the termination of this Lease by Landlord as a result of
Tenant's default shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to
Landlord of any or all of such subtenancies.
(i) If Tenant is a corporation, limited liability company or partnership, each
individual executing this Lease on behalf of Tenant represents and warrants that
he is duty authorized to execute and deliver this Lease on behalf of the
corporation, company or partnership in accordance with, where applicable, a duly
adopted resolution of the board of directors of the corporation, the vote of the
members of the limited liability company or the vote of the partners within the
partnership, and that this Lease is binding upon the corporation, company or
partnership in accordance with its respective articles of incorporation and
bylaws, operating agreement or partnership agreement.
(j) Time is expressly declared to be of the essence of this Lease and of each
and every covenant, term, condition, and provision hereof, except as to the
conditions relating to the delivery of possession of the Premises to Tenant.
(k) If there is more than one party comprising Tenant, the obligations imposed
on Tenant shall be joint and several.
(l) The language in all parts of this Lease shall be in all cases construed as a
whole according to its fair meaning and not strictly for nor against either
Landlord or Tenant.
(m) As used in this Lease and whenever required by the context thereof, each
number, both singular and plural, shall include all numbers and in each gender
shall include all genders. Landlord and Tenant, as used in this Lease or in any
other instrument referred to in or made a part of this Lease, shall likewise
include both the singular and the plural, a corporation, limited liability
company, partnership, individual or person acting in any fiduciary capacity as
executor, administrator, trustee or in any other representative capacity.
(n) The Exhibits and Addendum, if any, specified in the Basic Lease Information
are attached to this Lease and by this reference made a part hereof.
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22. Force Majeure.
Any delay in construction, repairs, or rebuilding any building, improvement or
other structure herein shall be excused and the time limit extended to the
extent that the delay is occasioned by reason of acts of God, labor troubles,
laws or regulations of general applicability, acts of Tenant or Tenant Delays
(as the term is defined in the Work Letter Agreement attached hereto as Exhibit
B), or other occurrences beyond the reasonable control of Landlord. Accordingly,
Landlord's obligation to perform shall be excused for the period of the delay
and the period for performance shall be extended for a period equal to the
period of such delay.
23. Broker's Fee.
Each party represents that it has not had dealings with any real estate broker,
finder, or other person, with respect to this Lease in any manner, except the
brokerage firm(s) specified in the Basic Lease Information. Each party shall
hold harmless the other party from all damages resulting from any claim that may
be asserted against the other party by any broker, finder, or other person with
whom the other party has or purportedly has dealt. Landlord shall pay any
commissions or fees that are payable to the broker or finder specified in the
Basic Lease Information, with respect to this Lease in accordance with the
provisions of a separate commission contract.
24. Financial Statement.
It is acknowledged by all parties hereto that the attached financial declaration
of Tenant is incorporated as a part of this Lease as Exhibit E, that the
information contained therein is true and correct in all material respects, and
that the accuracy of the information is a significant fact upon which Landlord
has relied in the granting of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease on the date first
mentioned above.
TENANT: LANDLORD:
Advanced Fibre Communications, Inc. G & W/Copley Redwood Business Park,
a Delaware corporation L.P. a limited partnership
By: G & W Management Co.
Its: Manager
By: /s/ Peter A. Darbee
Peter A. Darbee
Its: Vice President, CFO BY: /s/ William C. White
William C. White, President
G & W Management Co.
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ADDENDUM NO. 1
BASE RENT:
LEASE YEAR MONTHLY BASE RENT
1 $64,980
2 $78,660
3 - 5 $82,080
6 - 12 CPI Adjustment (see below)
At the start of the sixth lease year and every other year of the term thereafter
there will be a rental adjustment based on the percentage increase in the
Consumer Price Index For All Urban Consumers, San Francisco-Oakland-San Jose,
All Items (1982-1984=100), as published by the U.S. Bureau of Labor Statistics
("Index"). The "Beginning index" shall be the Index published most immediately
preceding the start of the fifth lease year. The "Adjustment Index" shall be the
Index published one month prior to the Adjustment Date. The monthly Base Rent
until the next Base Rent adjustment shall be determined by multiplying the
monthly Base Rent for the month preceding the Adjustment Date by a fraction, the
numerator of which is the Adjustment Index and the denominator of which is the
Beginning Index. However, in no event will the monthly Base Rent be increased by
an amount less than 3% per year or more than 5% per year. If the 1982-1984 base
of the Index is changed, the new base shall be converted to the 1982-1984 base
in accordance with the U.S. Department of Labor's conversion factor, and the
base as so converted shall be used. If the U.S. Department of Labor ceases to
publish the Index, then the successor index designated by the U.S. Department of
Labor or, if no successor index is so designated, the most nearly comparable
index shall be used.
FIRST AMENDMENT TO REDWOOD BUSINESS PARK NET LEASE
THIS FIRST AMENDMENT TO REDWOOD BUSINESS PARK NET LEASE ("Amendment") is made
and entered into as of October 23, 1997, by and between G & W/Copley Redwood
Business Park, L.P., a California limited partnership, and successor to G & W
Redwood Associates Joint Venture, a California general partnership ("Landlord"),
and Advanced Fibre Communications, Inc., a Delaware corporation ("Tenant"). All
capitalized terms not defined herein shall incorporate the meanings of such
terms as set forth in the 1435 Lease" (as defined in Recital A).
RECITALS
A. Landlord and Tenant entered into that certain Redwood Business Park Net
Lease, and Addendum No. I thereto, dated August 4, 1997, (collectively, 1435
Lease") pursuant to which Tenant will lease the entire approximately 68,400
rentable square feet of office space within that certain building that will be
constructed at 1435 North McDowell Boulevard, Petaluma, California ("Premises").
B. Landlord and Tenant desire to enter into a separate lease agreement for the
entire approximately 140,448 rentable square feet of office space within that
certain building that will be constructed at 1465 North McDowell Boulevard,
Petaluma, California (1465 Lease").
C. In light of Landlord and Tenant recently entering into the 1465 Lease, the
parties would like to amend the 1435 Lease to reflect a new Estimated
Commencement Date, to extend the Term of the 1435 Lease, and to modify the Base
Rent obligations of Tenant with respect to the Premises, subject to the terms
and conditions of this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties agree as follows:
1. Estimated Commencement Date. The Estimated Commencement Date of the 1435
Lease, as set forth in Paragraph 5.a. of the Basic Lease Information, shall be
amended and restated to be as follows: "September 1, 1999".
2. Term. The Term of the 1435 Lease, as set forth in Paragraph 5.b. of the
Basic Lease Information, shall be amended and restated to be as follows: "Twelve
(12) years and seven (7) months".
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3. Base Rent. Paragraph I of Addendum No. I to the 1435 Lease shall be amended
and restated in its entirety as follows:
Lease Year Base Rent per Sq. Ft.
1(mos. 1 - 3) - 0 -
1(mos. 4 - 7) $0.61
1(mos. 8 - 12) $0.98
2 $1.19
3- 5 $1.24
6- 12 (plus, mos. 145 - 151) CPI Adjustment (see below)
At the start of the Sixth (6th) Lease Year and every other Lease Year of the
Term thereafter ("Adjustment Date(s)") there shall be a rental adjustment based
on the percentage increase in the Consumer Price Index For All Urban Consumers,
San Francisco-Oakland-San Jose, All Items (1982-1984 = 100), as published by the
U.S. Bureau of Labor Statistics ("Index"). The "Beginning index" shall be the
Index published one month prior to the start of the Fifth (5th) Lease Year. The
"Adjustment Index" shall be the Index published one month prior to the
applicable Adjustment Date. The monthly Base Rent until the next Adjustment Date
shall be determined by multiplying the monthly Base Rent for the month preceding
the Adjustment Date by a fraction, the numerator of which is the Adjustment
Index and the denominator of which is the Beginning Index. However, in no event
shall the monthly Base Rent be increased by an amount less than Three Percent
(3%) per year or greater than Five Percent (5%) per year. If the 1982-1984 base
of the Index is changed, the new index shall be converted to the 1982-1984 base
in accordance with the U.S. Department of Labor's conversion factor, and the
index as so converted shall be used. If the U.S. Department of Labor ceases to
publish the Index, then the successor index designated by the U.S. Department of
Labor shall be used or, if no successor index is so designated, the most nearly
comparable index shall be used.
4. Effective Date. The effectiveness of this Amendment shall be conditional upon
the execution of the 1465 Lease by Landlord and Tenant. In the event that the
1465 Lease is not executed within thirty (30) days following the execution date
of this Amendment, then this Amendment shall immediately become null and void
and of no force or effect.
5. Remainder Unchanged. Except as provided in this Amendment, the 1435 Lease
(including all exhibits, addenda and amendments thereto, if any) shall remain in
full force and effect and unamended. Except with respect to the 1435 Lease, this
Amendment shall supersede and cancel all prior and contemporaneous written and
oral agreements, correspondence and communications between the parties regarding
the subject matter hereof.
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This Amendment is executed on the date first mentioned above in Petaluma,
California.
LANDLORD TENANT:
G & W/COPLEY REDWOOD BUSINESS PARK, L.P., ADVANCED FIBRE COMMUNICATIONS, INC.,
a California limited partnership a Delaware corporation
By: G & W Management Co., By: /s/ Peter A. Darbee
a California corporation
Its: Managing Agent Its:
By: /s/ William C. White
William C. White
Its: President
<PAGE> 20
EXHIBIT B
WORK LETTER AGREEMENT
THIS WORK LETTER AGREEMENT supplements that certain Lease dated
______19____("Lease"), executed by G & W/Copley Redwood Business Park, L.P., a
limited partnership, as Landlord, and Advanced Fibre Communications, Inc., a
Delaware corporation as Tenant. All capitalized terms not otherwise defined
herein shall have the same meaning as those capitalized terms contained in the
Lease.
1. Landlord shall be responsible for constructing within the Premises
the tenant improvements ("Tenant Improvements") described in the preliminary
space plan attached hereto as Exhibit B-I ("Preliminary Space Plan"). The
Tenant Improvements for the Premises will be more particularly described in the
plans and construction drawings ("Construction Drawings") as approved below. Any
additional work ("Tenant Extra Improvements") required under the approved
Construction Drawings shall be at Tenant's expense.
2. Landlord and Tenant shall diligently finalize the Preliminary Space
Plan for construction of the Tenant Improvements and Tenant Extra Improvements
so that, within thirty (30) days after execution of the Lease, Landlord can
provide Tenant with the Construction Drawings. The Construction Drawings shall
indicate the specific requirements of Tenant's lease space, outlining in detail
interior partitions, floor coverings, a reflected ceiling plan, plumbing
fixtures, and electrical plans (setting forth the electrical requirements of
Tenant), all in conformity with the Preliminary Space Plan. The Construction
Drawings shall include full energy calculations as required by the State of
California and the city agencies.
3. Within three (3) days after receipt of the Construction Drawings,
Tenant shall approve the drawings and/or request changes or modifications
thereto. Any such request for changes or modifications shall be subject to
Landlord's approval and, thereafter, the Construction Drawings shall be
resubmitted for Tenant's approval in accordance with the preceding sentence.
Tenant acknowledges that the Construction Drawings are subject to the approval
of the appropriate government authorities. It shall be Tenant's responsibility
to ensure that the design and function of the Tenant Improvements and Tenant
Extra Improvements are suitable for Tenant's business and needs. The
improvements shall be constructed in accordance with current building standards,
laws, regulations, ordinances and codes. Landlord shall not be required to
install any Tenant Improvements or Tenant Extra Improvements which do not
conform to the Construction Drawings.
4. Landlord shall furnish and install the units and quantities of Tenant
Improvements as set forth on Exhibit B-1. The Tenant Improvements to be paid by
Landlord shall not exceed One Million Six Hundred Forty-one Thousand Six Hundred
Dollars ($1,641,600) ($24.00 per usable square foot) of lease space within the
Premises and shall include:
(a) The costs of the Preliminary Space Plan (including one
revision thereto) and final Construction Drawings and engineering costs
associated with completion of the State of California energy utilization
calculations under Title 24 legislation; and
(b) The costs of obtaining building permits and other necessary
authorizations from the city, county and the State of California.
Any additional units, quantities or costs of the Tenant Improvements
required in accordance with the approved Construction Drawings shall be deemed
Tenant Extra Improvements and shall be paid for by Tenant at the unit cost set
forth in a summary of unit costs to be provided by Landlord.
5. In no event shall the Tenant Improvements payable by Landlord include
(i) the costs of procuring or installing any trade fixtures, equipment,
furniture, furnishings, telephone or computer equipment or wiring or other
personal property ("Personal Property"), or (ii) any Change Orders (as the term
is defined in Paragraph 6 below). Such items shall be paid by Tenant.
<PAGE> 21
6. Following Tenant's, approval of the Construction Drawings, Tenant may
request changes or modifications thereto ("Change Order"), however, the cost of
any Change Order(s) shall be borne by Tenant. If Tenant shall request any Change
Order, then Landlord shall promptly give Tenant a written estimate of (a) the
cost of engineering and design services to prepare the Change Order, (b) the
cost of work to be performed pursuant to the Change Order, and (c) the time
delay expected because of such requested Change Order. Within three (3) days
after Tenant's receipt of the written estimate, Tenant shall notify Landlord in
writing whether it approves the written estimate. If Tenant approves the written
estimate, then Tenant shall accompany its approval with a check made payable to
Landlord in the amount of the estimated cost of the Change Order. Upon
Landlord's completion of the Change Order and submission of the final cost
thereof to Tenant, Tenant shall promptly pay to Landlord any additional amounts
incurred in excess of the written estimate. If such written authorization and
check are not received by Landlord, then Landlord shall not be obligated to
commence work on the Premises and Tenant shall be chargeable for any delay in
the completion of the Premises in accordance with Paragraph 7 below.
7. If the Commencement Date of the Lease has not occurred on or before
the Estimated Commencement Date, and if the cause of the delay in the occurrence
of the Commencement Date is attributable to Tenant, then the Lease shall begin
on the date the Commencement Date otherwise would have occurred but for the
Tenant delays. Delays attributable to Tenant ("Tenant Delays") shall include,
without limitation, those caused by (a) delays by Tenant in approving the
Construction Drawings and costs, (b) Tenant's request for special materials not
available when needed for construction in accordance with the construction
schedule, (c) Change Orders, and (d) interference with Landlord's work caused by
Tenant or Tenant's agents. All costs and expenses occasioned by a Tenant Delay,
including, without limitation, increases in labor or materials, shall be borne
by Tenant.
8. Tenant may, with Landlord's written consent, enter the Premises prior
to the Commencement Date solely for the purpose of installing its Personal
Property as long as such entry will not interfere with the orderly construction
and completion of the Premises ("Tenant's Work"). Tenant shall notify Landlord
of its desired time(s) of entry and shall submit for Landlord's written approval
the scope of the Tenant's Work to be performed and the name(s) of the
contractor(s) who will perform such work. Tenant agrees to indemnify, defend and
hold harmless Landlord, any mortgagee, ground lessor or beneficiary of a deed of
trust encumbering, secured by or affecting the Premises or the Building, from
and against any and all claims, actions, losses, liabilities, damages, costs or
expenses (including, without limitation, reasonable attorneys' fees and claims
for worker's compensation) of any nature whatsoever, arising out of or in
connection with the Tenant's Work (including, without limitation, claims for
breach of warranty, personal injury or property damage).
9. During the course of construction, at Tenant's expense, Tenant shall
obtain or maintain public liability and worker's compensation insurance, in
amounts acceptable to Landlord, and which name Landlord and Tenant as parties
insured from and against any and all liability for death of or injury to person
or damage to property caused in or about or by reason of the construction of the
Tenant's Work.
10. Upon substantial completion of the Premises in accordance with the
Construction Drawings, Tenant agrees to accept the Premises in the condition
which it may then be and waives any right or claim against Landlord for any
cause directly or indirectly arising out of the condition of the Premises,
appurtenances thereto, improvements thereon, and equipment therein. Tenant shall
hold harmless Landlord from and against any liability or damage as provided
under Paragraph 10.2 of the Lease. Landlord shall not be liable for any latent
or patent defects therein, except that Landlord warrants the Premises against
latent defects for a period of one (1) year from the date of substantial
completion.
<PAGE> 22
11. Tenant releases Landlord from any claim whatsoever for damages
against Landlord for any delay in the date on which the Premises shall be ready
for occupancy by Tenant.
12. The Premises shall be deemed "substantially completed" as of the
date that all of the following conditions are satisfied:
(a) The Tenant Improvements have been substantially completed in
accordance with the approved Construction Drawings (except for those punch list
items referenced in Paragraph 12 below), such that Tenant can reasonably conduct
business within the Premises; and
(b) A certificate of occupancy and/or finalized building permit
has been issued for the Premises.
(c) All base building facilities shall be in good operating order
and shall comply and conform with the design specifications furnished by Tenant;
the base building includes the following items: restrooms, a first floor lobby
and elevator cabs, HVAC units on the roof which are distributed to each floor,
sprinkler systems which are distributed around each floor (but with no drop
heads), electrical equipment in the first floor electrical room and electrical
panels on each floor, and a card-key security system for access to all Building
common area exterior doors.
13. Tenant shall immediately prior to occupancy inspect the Premises and
compile and finish Landlord with an initial punch list of any missing or
deficient Tenant Improvements. Within the first thirty (30) days after delivery
of the Premises, Tenant shall make a final punch list and submit this list to
Landlord. Landlord shall use its best efforts to complete the corrective work in
a prompt, good and workman-like manner. Punch list corrections shall not delay
the Commencement Date, nor shall a delay in making corrections be grounds for a
delay or reduction in any rent payments due Landlord.
14. All floor area calculations are from the center line of the
partitions and the outside line of the exterior and hall walls. No deduction is
allowed for the columns, sprinkler risers, roof drains, or air conditioning
units serving Tenant and located within the Premises.
15. Landlord shall select the manufacturer and vendor of all building
materials and equipment with respect to the Tenant Improvements and Tenant Extra
Improvements to be constructed hereunder.
TENANT:
Advanced Fibre Communications, Inc., LANDLORD:
a Delaware corporation
G & W/Copley Redwood Business Park, L.P.
By: /s/Peter A. Darbee a limited partnership
Peter A. Darbee
Its: Vice President, CFO
By: G & W Management Co.
Its Manager
By: /s/ William C. White,
William C. White
President
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<PAGE> 23
TO BE AGREED UPON BETWEEN LANDLORD AND TENANT
EXHIBIT B-1
PRELIMINARY SPACE PLAN
<PAGE> 24
EXHIBIT C
RULES AND REGULATIONS
It is further agreed that the Following Rules and Regulations shall be and are
hereby made a part of this Lease, and Tenant agrees that Tenant's employees and
agents, or any others permitted by Tenant to occupy or enter the Premises, will
at all times abide by said Rules and Regulations, unless otherwise specified or
provided for in the Lease, to wit:
1. The driveways, entrances and exits to the Property, sidewalks,
passages, building entries, lobbies, corridors, stairways, and elevators of the
Building shall not be obstructed by Tenant, or Tenant's agents or employees, or
used for any purpose other than ingress and egress to and from the Premises.
Tenant or Tenant's agents or employees shall not loiter on the lawn areas or
other common areas of the Property.
(a) Furniture, freight equipment and supplies will be moved in or
out of the Building only through the rear service entrances or other entrances
designated by Landlord and then only during such hours and in such manner as may
be reasonably prescribed by Landlord. Tenant shall cause its movers to use only
the loading facilities, and entrances designated by Landlord. In the event
Tenant's movers damage any part of the Building or Property, Tenant shall
forthwith pay to Landlord the amount required to repair said damage.
(b) No safe or article, the weight of which may in the opinion of
Landlord constitute a hazard to or damage to the Building or the Building's
equipment, shall be moved into the Premises without Landlord's prior written
approval, but such consent or approval shall not be unreasonably withheld,
conditioned or delayed. Landlord and Tenant shall mutually agree to the location
of such articles in the Premises. All damage done to the Property, Building or
Premises by putting in, taking out or maintaining extra heavy equipment shall be
repaired at the expense of Tenant.
(c) Landlord reserves the right to close and keep locked any and
all entrances and exits of the Building and Property and gates or doors closing
the parking areas thereof during such hours as Landlord may deem advisable for
the adequate protection of the Property and all tenants therein.
2. Except as otherwise provided for in the Lease, no sign, advertisement
or notice shall be inscribed, painted or affixed on any part of the inside or
outside of the Building unless of such color, size and style and in such place
upon or in the Building as shall be first approved in writing by Landlord. No
furniture or other materials shall be placed in front of the Building or in any
lobby or corridor, without the prior written consent of Landlord. Landlord shall
have the right to remove all non-permitted signs and furniture, without notice
to Tenant.
<PAGE> 25
3. Tenant shall not employ any person or persons other than the janitor
or cleaning contractor of Landlord for the purpose of cleaning or taking care of
the Premises without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
the Lease, Landlord shall in no way be responsible to Tenant for any loss of
property from the Premises, however occurring. The janitor of the Building may
at all times keep a pass key, and other agents of Landlord shall at all times be
allowed admittance to the Premises in accordance with the provisions set forth
in the Lease.
4. Water closets and other water fixtures shall not be used for any
purpose other than that for which the same are intended, and any damage
resulting to the same from misuse on the part of Tenant or Tenant's agents or
employees, shall be paid for by Tenant. No person shall waste water by tying
back or wedging the faucets or in any other manner.
5. No animals except seeing-eye dogs or other animals necessary to the
functioning of handicapped personnel shall be allowed on the lawns or sidewalks
or in the offices, halls, and corridors of the Building.
6. No persons shall disturb the occupants of this or adjoining buildings
or premises by the use of any radio, sound equipment or musical instrument or by
the making of loud or improper noises, nor interfere in any way with the other
tenants or those having business with them. Should sound mitigation measures be
required due to sounds originating in the Premises, the costs of such measures
shall be paid for by Tenant.
7. Bicycles or other vehicles, other than wheel chairs, shall not be
permitted in the offices, halls, corridors and lobbies in the Building nor shall
any obstruction of sidewalks or entrances of the Building by such be permitted.
2
<PAGE> 26
8. Tenant shall not allow anything to be placed on the outside of the
Building, nor shall anything be thrown by Tenant or Tenant's agents or
employees, out of the windows or doors, or down the corridors, ventilation ducts
or shafts of the Building. Tenant, except in case of fire or other emergency,
shall not open any outside window.
9. No awnings shall be placed over any window or entrance,
10. All garbage, including wet garbage, refuse or trash shall be placed
by Tenant in the receptacles designated by Landlord for that purpose. Tenant
shall not burn any trash or garbage at any time in or about the leased Premises
or any area of the Property. Tenant and Tenant's officers, agents, and employees
shall not throw cigar or cigarette butts or other substances or litter of any
kind in or about the Property.
11. Tenant shall not install or operate any steam or gas engine or
boiler, or other machinery or carry on any mechanical business, other than such
mechanical business which normally is identified with general use in the
Premises. Explosives or other articles of an extra hazardous nature shall not be
brought into the Building complex.
12. Any painting or decorating as may be agreed to be done by and at the
expense of Landlord shall be done during regular weekday working hours. Should
Tenant desire such work on Saturdays, Sundays, holidays or outside of regular
working hours, Tenant shall pay for the extra cost thereof, if any.
13. Tenant and Tenant's agents and employees shall park their vehicles
in areas designated from time-to-time for employee parking.
14. Tenant shall not mark, drive nails, screw, bore, or drill into,
paint or in any way deface the common area walls, exterior walls, roof,
foundations, bearing walls, or pillars without the prior written consent of
Landlord. The expense of repairing any breakages, stoppage or damage resulting
from a violation of this rule shall be borne by Tenant.
15. No waiver of any rule or regulation by Landlord shall be effective
unless expressed in writing and signed by Landlord or his authorized agent.
16. Tenant shall be responsible for cleaning up any trash blowing around
their facility that may have been left by their customers or employees.
17. In the event of any conflict between these rules and regulations or
any further or modified rules and regulations from time to time issued by
Landlord, and the lease provisions, the lease provisions shall govern and
control.
18. Landlord reserves the right at any time to change or rescind any one
or more of these rules and regulations, or to make such other and further
reasonable rules and regulations as in Landlord's judgment may from time to time
be necessary for the management, safety, care and cleanliness of the Premises,
and for the preservation of good order therein, as well as for the convenience
of other tenants of the Property. Landlord shall not be responsible to Tenant or
to any other person for the non-observance or violation of the rules and
regulations by any other tenant or person. Tenant shall be deemed to have read
these rules and to have agreed to abide by them as a condition to its occupancy
of the space herein leased, and Tenant shall abide by any additional rules and
regulations which are ordered or requested by Landlord or by any governmental
authority.
2
<PAGE> 27
EXHIBIT D
Materials Quantities
Tenant agrees that:
(a) None of the above materials will be used, held or stored on
or about the Premises in quantities of greater than one (1) gallon each, or
twenty (20) pounds each in the case of non-liquid materials; provided, however,
that used or excess materials may be stored together in a fifty-five (55) gallon
drum while awaiting transport off the Premises for disposal.
(b) The materials listed on Page 1 to this Exhibit D shall be
stored in fire-proof lockers on the Premises in accordance with applicable laws,
regulations and ordinances. No storage outside the Premises will be permitted.
(c) No used or excess materials will be disposed of in, on, under
or about the Premises or Redwood Business Park. Instead, such materials shall be
transported off-site, no less often than every one hundred eighty (180) days, by
a duly licensed hazardous materials transporter. While waiting for transport
off-site for disposal, used or excess materials shall be stored in a safe
location on the Premises in secure containers which are appropriately labeled.
(d) No materials listed on Page 1 to this Exhibit D, regardless
of whether they are water-soluable, shall be flushed down any sanitary sewer
drains on or about the Premises or Redwood Business Park.
<PAGE> 1
EXHIBIT 10.33
REDWOOD BUSINESS PARKNET LEASE
BASIC LEASE INFORMATION
1. DATE October 23, 1997
2. LANDLORD G&W/Copley Redwood Business Park, L.P.
3. TENANT Advanced Fibre Communications, Inc., a Delaware corporation.
4. Premises REFERENCE
a. Project Redwood Business Park Paragraph 1
b. Building 1465 McDowell Boulevard North
c. Address 1465 McDowell Boulevard North
d. Assessor's Parcel 047-550-015
e. Suite
f. Usable Sq. Ft. 140,448
g. Rentable Sq. Ft. 140,448
5. TERM Paragraph 2
a. Estimated Commencement Date May 1, 1998
b. Length of Term Twelve years
6. BASE RENT Paragraph 3
a. Monthly Base Rent See Addendum
b. Advanced Base Rent
(Paid Upon Lease Execution)
c. Adjustment Date of Monthly Base Rent Year 2
7. PROPERTY TAXES AND OPERATING EXPENSES Paragraph 4
a. Initial Monthly Allocation per rentable Sq. Ft. $0.21
b. Premises v. Building Sq. Ft. Ratio 68400/68400 100%
c. Premises v. Project Sq. Ft. Ratio 68400/68400 100%
8. SECURITY DEPOSIT Addendum Paragraph 16
9. TENANT IMPROVEMENTS Turn key up to $24.00/sf
10. USE General Office Paragraph 6
11. TENANT'S ADDRESS FOR NOTICES Paragraph 20
1 Willow Brook Court
Petaluma, CA 94954
12. LANDLORD'S ADDRESS FOR NOTICES Paragraph 20
G&W/Copley Redwood Business Park, L.P.
c/o G&W Management Co.
1318 Redwood Way, Suite 140 Petaluma, CA 94954
With a Copy to:
13. REAL ESTATE BROKERS Paragraph 23
G&W Management Co.
Keegan & Coppin, Co., Inc.
EXHIBITS AND ADDENDUM
Exhibit A: Diagram of Premises
Exhibit A-1: Diagram of the Project
Exhibit B: Work Letter Agreement
Exhibit B-1: Preliminary Space Plan
Exhibit C: Rules and Regulations
Exhibit D: Hazardous Materials List
2
<PAGE> 2
REDWOOD BUSINESS PARKNET LEASE
THIS LEASE, dated October 23, 1997, is made and entered into by and between
G&W/Copley Redwood Business Park, L.P. ("Landlord"), and Advanced Fibre
Communications, Inc., a Delaware corporation ("Tenant").
1. Premises.
Landlord leases to Tenant, and Tenant hereby leases from Landlord for the term
of this Lease ("Term") and at the rent and upon the conditions set forth below,
the Premises described in the Basic Lease Information and identified on the
floor plan attached hereto as Exhibit A. The Premises are located within the
Building described in the Basic Lease Information, and constitute part of the
Project described in the Basic Lease Information and as shown in Exhibit A-1
attached hereto, at the Redwood Business Park, located in Petaluma, California.
All areas and facilities outside the Buildings and within the exterior
boundaries of the Project that are provided and designated by Landlord from time
to time for the general nonexclusive use and convenience of the tenants of the
Project shall be known as "Common Areas".
2. Term.
(a) The Tenant shall commence upon the date ("Commencement Date") which is the
earlier of: (i) substantial completion of the Premises, as the term
"substantial completion" is defined in the Work Letter Agreement, attached
hereto as Exhibit B; or (ii) the date substantial completion would have occurred
but for Tenant Delays (as the term is defined in the Work Letter Agreement). The
Estimated Commencement Date is set forth in the Basic Lease Information, which
date may be postponed due to a delay in delivering the Premises as provided in
Paragraph 2(b) below. A "Lease Year" is a period of twelve (12) consecutive
calendar months. A "Lease Month" is a calendar month. The initial Term of this
Lease shall be determined as follows:
(1) If the Commencement Date of this Lease occurs on the first calendar day of a
calendar month, the Term shall be for a period of Lease Years and Months as
specified in the Basic Lease Information, unless terminated sooner as provided
in this Lease.
(2) If the Commencement Date of this Lease occurs on other than the first
calendar day of a calendar month, the Term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, plus the number of days
remaining in the calendar month in which the Commencement Date occurs, unless
terminated sooner as provided in this Lease.
(b) Subject to the provisions of Paragraph 22 below, in the event the Premises
are not substantially completed (in accordance with the Work Letter Agreement)
on or within six (6) months after the Estimated Commencement Date, then Tenant
may, at Tenant's option, by notice in writing to Landlord within ten (10) days
thereafter, cancel this Lease, in which event, (i) this Lease shall be deemed
null and void and have no further force or effect, (ii) all security or other
deposits made herewith shall be promptly returned to Tenant, and (iii) the
parties shall have no further obligation to each other; provided further,
however, that if such written notice of Tenant is not received by Landlord
within said 10-day period, Tenant's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3. Rent.
(a) For purposes of this Lease, the term "Rent" shall mean the Base Rent,
Advanced Base Rent, all additional rent, and all of the other monetary
obligations of Tenant under this Lease. Upon execution of this Lease, Tenant
shall pay to Landlord the Advanced Base Rent set forth in the Basic Lease
Information. Tenant shall pay to Landlord the Base Rent specified in the Basic
Lease Information, payable on or before the first day of each and every
successive calendar month following the Commencement Date. If the Term commences
on other than the first day of a calendar month, the first payment of Base Rent
shall be appropriately prorated, on the basis of a 30-day month. Tenant's
payment of any Advanced Base Rent (excluding that portion attributable to last
months rent, if any) shall be credited against Tenant's obligation to pay Base
Rent beginning as of the Commencement Date.
(b) Tenant shall pay, as additional rent, all amounts of money required to be
paid to Landlord by Tenant under this Lease in addition to monthly Base Rent,
whether or not the same be designated "additional rent." If such amounts are not
paid at the time provided in this Lease, they shall nevertheless be collectable
as additional rent with the next installment of
1
<PAGE> 3
monthly Base Rent thereafter failing due, but nothing herein contained shall be
deemed to suspend or delay the payment of any amount of money at the time the
same becomes due and payable hereunder, or limit any other remedy of Landlord.
(c) Tenant acknowledges that late payment by Tenant to Landlord of Rent after
the expiration of any applicable grace period will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by the
terms of any trust deed covering the Premises. Accordingly, if any installment
of Rent or any other sums due from Tenant shall not be received by Landlord when
due, Tenant shall pay to Landlord a late charge equal to two percent (2%) of
such overdue amount. The parties agree that such late charge represents a fair
and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount, nor
prevent Landlord from exercising any of the other rights and remedies granted
hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear interest from
the date due until paid at the rate of ten percent (10%) per annum. Payment of
interest shall not excuse or cure any default hereunder by Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made to Landlord
without deduction or offset, in lawful money of the United States of America at
Landlord's address for notices hereunder, or to such other person or at such
other place as Landlord may from time to time designate in writing to Tenant.
4. Taxes and Operating Expenses.
(a) In addition to the Base Rent, Tenant shall pay (i) Tenant's Percentage Share
of Property Taxes (according to the percentage set forth in the Basic Lease
Information) relating to those Property Taxes (as the term is defined under
Paragraph 4(a)(1) below) which are assessed during the Term, and (ii) Tenant's
Percentage Share of Operating Expenses (according to the percentage set forth in
the Basic Lease Information) relating to those Operating Expenses (as the term
is defined under Paragraph 4(a)(2) below) which are paid or incurred by Landlord
during the Term.
(1) "Property Taxes" shall mean all real property taxes, bonds and assessments
and governmentally imposed fees or charges (and any tax levied wholly or partly
in lieu thereof) levied, assessed, confirmed, imposed or which have become a
lien against the Building (which for the purposes of defining "Property Taxes"
shall include the tax parcel of which the Building is a part) and Common Areas.
(2) "Operating Expenses" shall mean the following: (A) all reasonable costs of
management, operation, maintenance and repair of the Building and Common Areas,
including, without limitation, property management expenses, maintenance and
repair materials, supplies and equipment; (B) all reasonable costs of water,
power, electricity, refuse collection, parking lot sweeping, landscaping, and
other services relating to the Common Areas; (C) all reasonable costs of
alterations or improvements to the Building or Common Areas made to achieve
compliance with federal, state and local law including, without limitation, the
Americans with Disabilities Act (42 U. S.C. Section 121 01 et seq.), which costs
will be amortized over the useful life of each alteration or improvement; (D)
all reasonable costs of public liability and casualty insurance maintained by
Landlord with respect to the Building and Common Areas; (E) all reasonable costs
incurred by Landlord for making any capital improvements, structural repairs or
modifications to the Building or Common Areas or making any improvements or
modifications to reduce the operating expenses, which costs will be amortized
over the useful life of each capital improvement, structural repair or
modification; (F) all reasonable costs of maintaining machinery, equipment and
directional signage or other markers; and G) the share allocable to the Building
of dues and assessments payable under any reciprocal easement or common area
maintenance agreements or declarations or by any owners' associations affecting
the Building. That portion of the Operating Expenses relating to the property
management expenses for the Building and Common Areas which shall be charged to
Tenant shall be four percent (4%) of both Tenant's annual Base Rent and the
subtotal of Tenant's share of Operating Expenses of the Building. In the event
that Landlord calculates the Operating Expenses based upon the Project instead
of the Building, as indicated on the Basic Lease Information, then the term
"Project" shall be substituted in the place of all references to the term
"Building" in this paragraph.
(b) The Property Taxes to be paid by Tenant shall be determined by multiplying
the total amount of the Property Taxes by Tenant's Percentage Share of Property
Taxes (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the
2
<PAGE> 4
rentable area of the Premises and the denominator of which is the total rentable
area of all improvements located within the tax parcel of which the Premises are
a part). Landlord may cause the Common Areas of the Project to be separately
assessed from other areas and buildings of the Project. In such case, Tenant's
Percentage Share of Property Taxes attributable to the Common Areas shall be
determined by the ratio that the total rentable square feet in the Premises
bears to the total number of square feet of rentable area which is included in
the property subject to the assessment.
(c) Operating Expenses for each calendar year shall be adjusted to equal
Landlord's reasonable estimate of Operating Expenses as though ninety-five
percent (95%) of the total rentable area of the Building had been occupied. When
the Building is one hundred percent(100%) occupied, the Operating Expenses shall
be adjusted to reflect a 100% occupied building. The Operating Expenses to be
paid by Tenant shall be determined by multiplying the total amount of the
Operating Expenses as adjusted above by Tenant's Percentage Share of Operating
Expenses (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the rentable area of the Premises and the denominator of
which is the total rentable area located within the Building, if the Operating
Expenses are calculated for the Building, or within the Project, if the
Operating Expenses are calculated for the Project).
(d) Tenant shall pay to Landlord each month at the same time and in the same
manner as monthly Base Rent one-twelfth (1/12th) of Landlord's estimate of the
amount of Property Taxes and one-twelfth (1/12th) of Landlord's estimate of
Operating Expenses payable by Tenant for the then-current calendar year. The
initial monthly amount shall be as set forth in the Basic Lease Information.
Within one hundred twenty (120) days after the close of each calendar year, or
as soon after such 120-day period as practicable, Landlord shall deliver to
Tenant a statement in reasonable detail of the actual amount of Property Taxes
and Operating Expenses payable by Tenant in accordance with this Paragraph 4 for
such calendar year. Tenant may request further information if desired.
Landlord's failure to provide such statement to Tenant within the 120-day period
shall not act as a waiver and shall not excuse Tenant or Landlord from making
the adjustments to reflect actual costs as provided herein. If on the basis of
such statement Tenant owes an amount that is less than the estimated payments
for such calendar year previously made by Tenant, Landlord shall credit such
excess to Tenant against future additional rent due under this Paragraph 4. If
on the basis of such statement Tenant owes an amount that is more than the
estimated payments for such calendar year previously made by Tenant, Tenant
shall pay the deficiency to Landlord within fifteen (15) days after delivery of
the statement. The obligations of Landlord and Tenant under this Paragraph 4(d)
with respect to the reconciliation between the estimated and actual amounts of
Property Taxes and Operating Expenses payable by Tenant for the last year of the
Term shall survive the termination of the Lease. When the final determination is
made of the actual amounts of Property Taxes and Operating Expenses payable by
Tenant for the year in which this Lease terminates, Tenant shall immediately pay
any increase due over the estimated payments and, conversely, any overpayment
made by Tenant shall be immediately reimbursed to Tenant by Landlord.
5. Other Taxes.
In addition to Tenant's obligations under Paragraph 4 above, Tenant shall pay or
reimburse Landlord for (i) any taxes upon, measured by or reasonably
attributable to the cost or value of Tenant's equipment, furniture, fixtures,
and other personal property located in the Premises or leasehold improvements
made in or to the Premises at Tenant's expense, (ii) for taxes, if any, measured
by or reasonably attributable to tenant improvements paid for by Tenant, and
(iii) for any taxes, assessments, fees, or charges imposed by any public
authority or private community maintenance association upon or by reason of the
development, possession, use or occupancy of the Premises or the parking
facilities used by Tenant in connection with the Premises. On request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment of
Tenant's business personal property taxes and deliver copies of such business
personal property tax bills to Landlord.
6. Use.
6.1 Prohibited Uses.
(a) The Premises shall be used and occupied by Tenant solely for the use set
forth in the Basic Lease Information. Tenant shall, at Tenant's expense, comply
promptly with all applicable federal, state and local laws, regulations,
ordinances, rules, orders, and requirements in effect during the Term relating
to the condition, use or occupancy of the Premises. Tenant shall not use or
permit the use of the Premises in any manner that will tend to create waste or a
nuisance, or that unreasonably disturbs other tenants of the Building or
Project, nor shall Tenant place or maintain any signs, antennas, awnings,
fighting or plumbing fixtures, loud speakers, exterior decoration or similar
devises on or visible from the exterior of the Premises, without Landlord's
prior written consent, which may be withheld in Landlord's sole discretion.
Tenant shall not use any corridors, sidewalks, stairs, elevators, or other areas
outside
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of the Premises for storage or any purpose other than access to the Premises.
Tenant shall not use, keep, or permit to be used or kept on the Premises any
foul or noxious gas or substance, nor shall Tenant do or permit to be done
anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located, or the Rules (as the term is
defined under Paragraph 6.3(b) below).
(b) Tenant shall not attach any signage to or on any part of the outside of the
Premises, the Building or the Project, or in the halls, lobbies, windows or
elevator banks of the Building without Landlord's prior written consent, which
consent may be withheld in Landlord's sole discretion. Any signage so permitted
shall be subject to prior approval of and conformance with the requirements of
the design review committee of the Project and the design review agency of the
city. At Tenant's expense, Tenant shall (i) maintain all permitted signage, and
(ii) upon the expiration or termination of this Lease, remove such signage and
repair any damage caused by their removal. If Tenant fails to do so, Landlord
may maintain, repair or remove such signage without notice to Tenant and at
Tenant's expense, the cost of which shall be payable by Tenant as additional
rent in accordance with Paragraph 14(b)(2) below.
6.2 Suitability. Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty with respect to the Premises or
the Building or with respect to the suitability or fitness of either for the
conduct of Tenant's business or for any other purpose. Nor has Landlord agreed
to undertake any modification, alteration or improvement to the Premises except
as provided in this Lease. Tenant acknowledges that the Premises are located in
a 100-year flood zone and that the finished floor elevations of the Building are
designed to be at least one (1) foot above the federal government's estimate of
the 100-year flood level at the time of initial construction.
6.3 Use of Common Areas.
(a) Landlord gives Tenant and its authorized employees, agents, customers,
representatives, and invitees the nonexclusive right to use the Common Areas,
with others who are entitled to use the Common Areas, subject to Landlord's
rights as set forth in this Paragraph 6.3.
(b) All Common Areas shall be subject to the exclusive control and management of
Landlord and Landlord shall have the right to establish, modify, amend, and
enforce reasonable rules and regulations with respect to the Common Areas.
Tenant acknowledges receipt of a copy of the current rules and regulations,
attached hereto as Exhibit C, and agrees that they may, from time to time, be
modified or amended by Landlord in a commercially reasonable manner (the
"Rules"). Tenant agrees to abide by and conform with such Rules; to cause its
concessionaires and its and their employees and agents to abide by such Rules;
and to use its best efforts to cause its customers, invitees, and licensees to
abide by such Rules.
(c) Landlord shall have the right to close temporarily any portion of the Common
Areas for the purpose of discouraging use by parties who are not tenants or
customers of tenants; to use portions of the Common Areas while engaged in
making additional improvements or repairs or alterations to the Property; to use
or permit the use of the Common Areas by others to whom Landlord may grant or
have granted such rights; and to do and perform such acts in, to, and with
respect to, the Common Areas as in the use of good business judgment Landlord
shall determine to be appropriate for the Project.
(d) Landlord shall have the unqualified right to increase or reduce the Common
Areas, provided the Project meets the parking requirement under Paragraph 6.5
below.
(e) Tenant shall cooperate with Landlord and other tenants in the Project in
recycling waste paper, cardboard, or such other materials identified under any
trash recycling program that may be established in order to reduce trash
collection costs.
6.4 Environmental Matters.
(a) (1) The term "Hazardous Materials" as used herein means any petroleum
products, asbestos, polychlorinated biphenyls, P.C.B.'s, chemicals, compounds,
materials, mixtures or substances that are now or hereafter defined or listed
in, or otherwise classified as a "hazardous substance", "hazardous material",
"hazardous waste", "extremely hazardous waste", "infectious waste", "toxic
substance", "toxic pollutant" or any other formulation intended to define, list
or classify substances by reason of deleterious properties such
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as ignitability, corrosivity, reactivity, carcinogenicity or toxicity pursuant
to any federal, state or local environmental law, regulation, ordinance,
resolution, order or decree relating to industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, release,
disposal or transportation of the same ("Hazardous Materials Laws").
(2) Except for ordinary office supplies and janitorial cleaning materials which
in common business practice are customarily and lawfully used, stored and
disposed of in small quantities, and except for those Hazardous Materials listed
on Exhibit D attached hereto, Tenant shall not use, manufacture, store, release,
dispose or transport any Hazardous Materials in, on, under or about the
Premises, the Building or the Project without giving prior written notice to
Landlord and obtaining Landlord's prior written consent, which consent Landlord
may withhold in its sole discretion. Subject to Landlord's prior written
consent, if Hazardous Materials may be added to Exhibit D on an annual review
basis; any such amendments to Exhibit D shall be signed by each party and
attached hereto. Tenant shall at its own expense procure, maintain in effect,
and comply with all conditions of any and all permits, licenses, and other
governmental and regulatory approvals required in connection with Tenant's
generation, use, storage, disposal and transportation of Hazardous Materials.
Except as discharged into the sanitary sewer in strict accordance and conformity
with all applicable Hazardous Materials Laws, Tenant shall cause any and all
Hazardous Materials removed from the Premises to be removed and transported
solely by duly licensed haulers to duly licensed facilities for final disposal
of such materials and wastes. Regardless whether permitted under the Hazardous
Materials Laws, Tenant shall not maintain in, on, under, or about the Premises,
the Building or the Project any above or below ground storage tanks, clarifiers,
or sumps, nor shall any wells for the monitoring of ground water, soils, or
subsoils be allowed.
(3) Tenant shall immediately notify Landlord in writing of (a) any enforcement,
cleanup, removal or other governmental or regulatory action instituted,
completed or threatened pursuant to any Hazardous Materials Law; (b) any claim
made or threatened by any person or entity against Tenant or the Premises
relating to damage, contribution, cost, recovery, compensation, loss or injury
resulting from or claimed to result from any Hazardous Materials; and (c) any
reports, information, inquiries or demands made, ordered, or received by or on
behalf of Tenant which arise out of or in connection with the existence or
potential existence of any Hazardous Materials in, on, under or about the
Premises, the Building, or the Project, including, without limitation, any
complaints, notices, warnings, asserted violations, or mandatory or voluntary
informational filings with any governmental agency in connection therewith, and
immediately supply Landlord with copies thereof.
(b) Tenant shall indemnify, defend (by counsel reasonably acceptable to
Landlord), protect, and hold Landlord, and each of Landlord's partners,
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, attorneys,
successors and assigns, free and harmless from and against any and all claims,
liabilities, damages, fines, penalties, forfeitures, losses, cleanup and
remediation costs or expenses (including attorneys' fees) or death of or injury
to any person or damage to any property whatsoever, arising from or caused in
whole or in part, directly or indirectly, by (i) Tenant's use, analysis,
generation, manufacture, storage, release, disposal, or transportation of
Hazardous Materials by Tenant, Tenant's agents, employees, contractors,
licensees or invitees to, in, on, under, about or from the Premises, the
Building, or the Project, or(ii) Tenant's failure to comply with any Hazardous
Materials Law. Tenant's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any required or necessary
repair, cleanup, detoxification or decontamination of the Premises, the
Building, or the Project and the preparation and implementation of any closure,
remedial action or other required plans in connection therewith, and shall
survive the expiration or earlier termination of this Lease.
(c) Landlord shall have the right to enter the Premises during regular business
hours upon reasonable prior notice at all times for the purposes of ascertaining
compliance by Tenant with all applicable Hazardous Materials Laws, provided,
however, that in the instance of an emergency Landlord's entry onto the Premises
shall not be restricted to regular business hours nor shall notice be required.
(d) Landlord shall have the option to declare a default of this Lease for the
release or discharge of Hazardous Materials by Tenant, Tenant's employees,
agents, contractors, or invitees on the Premises, Building or Project or in
violation of law or in deviation from prescribed procedures in Tenant's use or
storage of Hazardous Materials. Landlord shall have the option to conduct a
Hazardous Materials investigation if it has a reasonable belief that there has
been a discharge or release, or potential of discharge or release, of Hazardous
Materials by Tenant, Tenant's employees, agents, contractors, or invitees on the
Premises, Building or Project in violation of law or in deviation from
prescribed procedures in Tenant's use or storage of Hazardous Materials. If
Tenant fails to comply with any of the provisions under this Paragraph 6.4,
Landlord shall have the right (but not the obligation) to remove or otherwise
cleanup any Hazardous Materials from the Premises, the Building or the Project.
In such case, the costs of any Hazardous Materials investigation, removal or
other cleanup
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(including, without limitation, transportation, storage, disposal and attorneys'
fees and costs) will be additional rent due under this Lease, whether or not a
court has ordered the cleanup, and will become due and payable on demand by
Landlord.
6.5 Parking. Landlord grants to Tenant and Tenant's customers, suppliers,
employees and invitees a nonexclusive license to use unassigned and unreserved
parking spaces in the Common Areas for the use of motor vehicles during the Term
subject to rights reserved to Landlord as specified in this Paragraph 6.5.
Landlord reserves the right to grant similar nonexclusive and unassigned and
unreserved use to other tenants; to promulgate rules and regulations relating to
the use of the Common Areas including parking by tenants and employees of
tenants; to make changes in the parking layout from time to time; and to do and
perform any other acts in and to these areas and improvements as Landlord
determines to be advisable. Tenant agrees not to overburden the parking
facilities and to abide by and conform with the rules and regulations and to
cause its employees and agents to abide by and conform to the rules and
regulations. Upon request, Tenant shall provide Landlord with license plate
numbers of all vehicles driven by its employees and to cause Tenant's employees
to park only in spaces specifically designated for tenant parking. Landlord
shall have the unqualified right to rearrange or reduce the number of parking
spaces; provided, however, the ratio of the number of parking spaces available
to Tenant will be no less than four (4.0) spaces per 1,000 usable square feet of
the Premises.
7. Services.
(a) Tenant shall pay for all water, sewer, gas, electricity, heat, cooling,
telephone, refuse collection, and other utility-type services furnished to
Tenant or the Premises, together with all related installation or connection
charges or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and paid for
directly by Tenant. To the extent any of the foregoing services are provided by
Landlord, Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with the provision of such services based on Landlord's reasonable
estimate of the level of Tenant's use or consumption of such services. Landlord
shall bill Tenant on a monthly or other periodic basis for such services and
payment shall be made by Tenant within ten (10) days after submittal of
Landlord's statement.
(b) Landlord shall not be in default hereunder or be liable for any damages or
personal injuries to any person directly or indirectly resulting from, nor shall
there be any Rent abatement by reason of, any interruption or curtailment
whatsoever in utility services.
8. Maintenance, Repairs and Alterations.
(a) Tenant shall, at Tenant's expense, maintain every part of the Premises in
good order, condition and repair, including without limitation, (i) all interior
surfaces, ceilings, walls, door frames, window frames, floors, carpets,
draperies, window coverings and fixtures, (ii) all windows, doors, locks and
closing devices, entrances, plate glass, and signs, (iii) all plumbing and
sewage pipes, fixtures and fittings, (iv) all phone lines, electrical wiring,
equipment, switches, outlets, and light bulbs, (v) any fire detection, fire
sprinkler or extinguisher equipment,(vi) all of Tenant's personal property,
improvements and alterations, and (vii) all other fixtures and special items
installed by or for the benefit of, or at the expense of Tenant. Tenant shall,
at its expense, cause to be maintained in good operating condition and repair,
all heating, ventilating, and air conditioning equipment installed in, or on the
roof of the Premises. Tenant shall keep in force a preventive maintenance
contract with a qualified maintenance company covering all heating, ventilating
and air conditioning equipment and shall annually provide Landlord with a copy
of this contract. Tenant shall not enter onto the roof area of the Building,
except for the purpose of maintaining the heating, ventilating, and air
conditioning equipment and provided that Tenant shall repair any damage to the
roof area caused by its entry. Tenant shall be responsible for its own
janitorial service. Landlord shall incur no expense (nor have any obligation) of
any kind whatsoever in connection with the maintenance of the Premises.
(b) Landlord shall keep in good condition and repair the foundation, roof
structure, exterior walls and other structural parts of the Building, and all
other portions of the Building not the obligation of Tenant or any other tenant
in the Building. Tenant expressly waives the benefits of any statute, including
Civil Code Sections 1941 and 1942, which would afford Tenant the right to make
repairs at Landlord's expense or to terminate this Lease due to Landlord's
failure to keep the Building in good order, condition and repair. Landlord shall
have no liability to Tenant for any damage, inconvenience, or interference with
the use of the Premises by Tenant as the result of Landlord performing any such
maintenance and repair work.
(c) In the event Tenant fails to perform Tenant's obligations under this
Paragraph
8. Landlord may, but shall not be required to, give Tenant notice to do such
acts as are reasonably required to so maintain the Premises. If Tenant shall
fail to commence such work and diligently prosecute it to completion, then
Landlord shall have the right (but not the obligation) to do such acts and
expend such funds at the expense of Tenant as are reasonably required to perform
such
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work. Any amounts so expended by Landlord will be additional rent due under this
Lease, and such amounts will become due and payable on demand by Landlord.
Landlord shall have no liability to Tenant for any such damages, inconvenience,
or interference with the use of the Premises by Tenant as a result of performing
such work.
(d) Upon the expiration or earlier termination of this Lease, Tenant shall
surrender the Premises in good condition and repair, only ordinary wear and tear
excepted. Tenant, at its sole cost and expense, agrees to repair any damages to
the Premises caused by or in connection with the removal of any articles of
personal property, business or trade fixtures, signs, machinery, equipment,
cabinetwork, furniture, moveable partitions, or permanent improvements or
additions, including without limitation thereto, repairing the floor and
patching and painting the walls where required by Landlord, to Landlord's
reasonable satisfaction. Tenant shall indemnify Landlord against any loss or
liability resulting from delay by Tenant in so surrendering the Premises,
including without limitation, any claims made by any succeeding tenant resulting
from such delay.
(e) Tenant shall not make any alterations, improvements, or additions in, on, or
about the Premises without Landlord's prior written consent, except that Tenant
may make alterations, improvements, or additions without Landlord's prior
written consent where (i) the reasonably estimated cost does not exceed $2,500,
and (ii) such alterations, improvements, or additions do not affect or involve
the structural integrity, roof membrane, exterior areas, building systems, or
water-tight nature of the Premises, the Building or the Project. In requesting
Landlord's consent, Tenant shall, at Tenant's sole cost, submit to Landlord
complete drawings and specifications describing such work and the identity of
the proposed contractor at least ten (10) business days prior to the
commencement of any work. With respect to any alterations, improvements or
additions made to the Premises by Tenant:
(1) Before commencing any work relating to alterations, additions, or
improvements affecting the Premises, Tenant shall notify Landlord of the
expected date of commencement thereof and of the anticipated cost thereof.
Landlord shall then have the right at any time and from time to time to post and
maintain on the Premises such notices as Landlord reasonably deems necessary to
protect the Premises and Landlord from mechanics' liens or any other liens.
(2) Tenant shall pay when due all claims for labor or materials furnished to
Tenant for use in the Premises. Tenant shall not permit any mechanics' liens or
any other liens to be levied against the Premises for any labor or materials
furnished to Tenant in connection with work performed on the Premises by or at
the direction of Tenant. Tenant shall indemnify, hold harmless and defend
Landlord (by counsel reasonably satisfactory to Landlord) from any liens and
encumbrances arising out of any work performed or materials furnished by, or at
the direction of Tenant. In the event that Tenant shall not, within twenty (20)
days following the imposition of any such lien, cause such lien to be released
of record by payment or posting of a proper bond, Landlord shall have, in
addition to all other remedies provided herein by law, the right, but not the
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All such sums
paid by Landlord and all expenses incurred by it in connection therewith,
including attorneys' fees and costs, shall be payable to Landlord by Tenant on
demand with interest at the rate of eight and one-half percent (8.50%) per
annum.
(3) All alterations, improvements or additions in or about the Premises
performed by or on behalf of Tenant shall be done in a first-class, workmanlike
manner, shall not unreasonably lessen the value of leasehold improvements in the
Premises, and shall be completed in compliance with all applicable laws,
ordinances, regulations and orders of any governmental authority having
jurisdiction thereover, as well as the requirements of insurers of the Premises
and the Building.
(4) Upon Landlord's request, Tenant shall remove any contractor, subcontractor
or material supplier from the Premises and the Building if the work or presence
of such person or entity results in labor disputes in or about the Building or
Project or damage to the Premises, Building or Project.
(5) Landlord, at Landlord's sole discretion, may refuse to grant Tenant
permission for alterations, improvements or additions which require, because of
application of Americans with Disabilities Act or other laws, substantial
improvements or alterations to be made to the Common Areas.
(6) Landlord may, up to sixty (60) days prior to the expiration of the Term,
require that Tenant, at Tenant's expense, remove any such alterations,
improvements or additions
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prior to or upon the expiration of this Lease, and restore the Premises to their
condition prior to such alterations, improvements or additions.
(7) Unless Landlord requires their removal, as set forth above, all alterations,
improvements, or additions made to the Premises shall become the property of
Landlord and remain upon and be surrendered with the Premises upon the
expiration of this Lease; provided, however, that Tenant's machinery, equipment,
and trade fixtures, other than any which may be affixed to the Premises so that
they cannot be removed without material damage to the Premises, shall remain the
property of Tenant and may be removed by Tenant subject to the provisions of
Paragraph 8(d) above.
9. Construction of Tenant Improvements.
Landlord shall be responsible for constructing the tenant improvements ("Tenant
Improvements") in the Premises, as provided in the Work Letter Agreement,
attached hereto as Exhibit B.
10. Insurance and Indemnity.
10.1 Insurance.
(a) Tenant shall obtain and maintain during the Term comprehensive general
liability insurance with a combined single limit for personal injury and
property damage in an amount of not less than $2,000,000 (in a form, with a
deductible amount, and with carriers reasonably acceptable to Landlord) and
employer's liability and workers' compensation insurance as required by law. The
insurance carrier shall be authorized to do business in the State of California,
with a policyholders and financial rating of at least A:IX Class status as rated
in the most recent edition of Best's Key-Rating guide. Tenant's comprehensive
general liability insurance policy shall be endorsed to provide that (i) it may
not be canceled or altered in such a manner as to adversely affect the coverage
afforded thereby without thirty (30) days' prior written notice to Landlord,
(ii) Landlord is designated as an additional insured, (iii) the insurer
acknowledges acceptance of the mutual waiver of claims by Landlord and Tenant
pursuant to Paragraph 10.2(b) below, and (iv) such insurance is primary with
respect to Landlord and that any other insurance maintained by Landlord is
excess and noncontributing with such insurance. If, in the reasonable opinion of
Landlord's lender or in the commercially reasonable opinion of Landlord's
insurance adviser, the specified amounts of coverage are no longer adequate,
such coverage shall, within 30 days written notice to Tenant, be appropriately
increased. Prior to the commencement of the Term, Tenant shall deliver to
Landlord a duplicate of such policy or a certificate thereof to Landlord for
retention by it, with endorsements. At least thirty (30) days prior to the
expiration of such policy or any renewal or modification thereof, Tenant shall
deliver to Landlord a replacement or renewal binder, followed by a duplicate
policy or certificate within a reasonable time thereafter. If Tenant fails to
obtain such insurance or to furnish Landlord any such duplicate policy or
certificate as herein required, Landlord may, at its election, without notice to
Tenant and without any obligation to do so, procure and maintain such coverage
and Tenant shall reimburse Landlord on demand as additional rent for any premium
so paid by Landlord.
(b) Landlord waives all claims against Tenant, and Tenant's officers, directors,
partners, employees, agents and representatives for loss or damage to the extent
that such loss or damage is insured against under any valid and collectable
insurance policy insuring Landlord or would have been insured against but for
any deductible amount under any such policy. Tenant waives all claims against
Landlord, and Landlord's officers, directors, partners, employees, affiliates,
joint ventures, members, trustees, owners, shareholders, principals, agents,
representatives, successors and assigns, for loss or damage to the extent such
loss or damage is insured against under any valid and collectable insurance
policy insuring Tenant or required to be maintained by Tenant under this Lease,
or would have been insured against but for any deductible amount under any such
policy. The insuring party shall, upon obtaining the policies of insurance
required under this Lease, give notice to the insurance carrier or carriers that
the foregoing mutual waiver of subrogation is contained in this Lease. Tenant
agrees that in the event of a sale, assignment or transfer of the Premises by
Landlord, this waiver of subrogation shall continue in favor of the original
Landlord and any subsequent Landlord.
(c) Tenant shall at its own cost maintain on all its personal property, Tenant's
improvements, and alterations, in, on, or about the Premises, a policy of
standard fire and extended coverage insurance, with vandalism and malicious
mischief endorsements, to the extent of at least one hundred percent (100%) of
their full replacement value. The proceeds from any such policy shall be used by
Tenant for the replacement of personal property and the restoration of Tenant's
improvements or alterations. Notwithstanding any other provisions of the Lease,
Landlord shall have no liability for damage to or destruction of Tenant's
personal property,
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unless caused by the active negligence or willful misconduct of Landlord, its
agents, employees, or contractors.
(d) During the Term, Landlord shall keep the Building, and improvements within
which the Premises are located, insured against loss or damage by (i) fire, with
extended coverage and vandalism, malicious mischief and special extended perils
(all risk) endorsements or their equivalents, in amounts not less than one
hundred percent (100%) of the replacement cost of the Building and structures
insured, and (ii) flood, in the maximum amount provided for by FEMA under its
flood loss insurance program, with loss payable thereunder to Landlord and to
any authorized encumbrancer of Landlord (with standard mortgagee loss payable
clause) in accordance with their respective interests. Landlord may maintain
rent insurance, for the benefit of Landlord, equal to at least one year's Base
Rent hereunder. If the Lease is terminated as a result of damage by fire,
casualty or earthquake as set forth in this Paragraph 10, all insurance proceeds
shall be paid to and retained by Landlord, subject to the rights of any
authorized encumbrancer of Landlord.
(e) Tenant acknowledges that Landlord does not, at the time of the signing of
this Lease, insure the Building for earthquake damage. Landlord may, when
Landlord deems the premiums to be reasonable, insure the Building fully or
partially for earthquake damage. At such time, the premium for earthquake
insurance will be added to the Operating Expenses for purposes of determining
additional rent.
10.2 Indemnity.
(a) Tenant waives all claims against Landlord for damage to any property or
injury to or death of any person in, on, or about the Premises, the Building, or
any other portion of the Project arising at any time and from any cause, unless
caused by the active negligence or willful misconduct of Landlord, its agents,
employees, or contractors. Tenant shall indemnify, defend (by counsel reasonably
satisfactory to Landlord) and hold harmless Landlord, and Landlord's officers,
directors, partners, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, principals, agents, representatives, successors and
assigns, from and against all claims, costs, damages, actions, indebtedness and
liabilities (except such as may arise from the active negligence or willful
misconduct of Landlord, and Landlord's officers, directors, partners, employees,
affiliates, joint venturers, members, trustees, owners, shareholders,
principals, agents, representatives, successors and assigns) arising by reason
of any death, bodily injury, personal injury, property damage or any other
injury or damage in connection with (i) any condition or occurrence in or about
or resulting from any condition or occurrence in or about the Premises during
the Term, or (ii) any act or omission of Tenant, or Tenant's agents,
representatives, officers, directors, shareholders, partners, employees,
successors and assigns, wherever it occurs. The foregoing indemnity obligation
of Tenant shall include reasonable attorneys' fees, and all other reasonable
costs and expenses incurred by Landlord from the first notice that any claim or
demand is to be made. The provisions of this Paragraph 10.2 shall survive the
termination or expiration of this Lease with respect to any damage, injury, or
death occurring prior to such expiration or termination.
(b) Neither party shall be liable to the other for any unauthorized or criminal
entry of third parties into the Premises, Building, Project, Common Areas, or
parking facilities, or for any damage to person or property, or loss of property
in and about the Premises, Building, Project, Common Areas, parking facilities
and the approaches, entrances, streets, sidewalks, stairs, elevators, restrooms,
or corridors thereto, by or from any unauthorized or criminal acts of third
parties, regardless of any breakdown, malfunction or insufficiency of any
security measures, practices or equipment provided by Landlord or Tenant. Tenant
shall immediately notify Landlord in writing of any breakdown or malfunction of
any security measures, practices or equipment provided by Landlord as to which
Tenant has knowledge.
(c) Any diminution or interference with light, air or view by any structure
which may be erected on land adjacent to the Building or resulting from any
other cause shall in no way alter this Lease or impose any liability on
Landlord.
(d) Tenant agrees that in no event shall Landlord be liable for consequential
damages, including injury to Tenant's business or any loss of income therefrom.
(e) In the event that Landlord or any successor owner of the Building sells or
conveys the Building, then all liabilities and obligations of Landlord or the
successor owner under this Lease accruing after the sale or conveyance shall
terminate and become binding on the new owner, and Tenant shall release Landlord
from all liability under this Lease (including, without limitation, the Security
Deposit, as defined under Paragraph 16 below), except for acts or omissions of
Landlord occurring prior to such sale or conveyance.
(f) Tenant expressly agrees that so long as Landlord is a corporation,
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limited liability company, trust, partnership, joint venture, unincorporated
association or other form of business entity, (i) the obligations of Landlord
shall not constitute personal obligations of the officers, directors, partners,
employees, affiliates, joint venturers, members, trustees, owners, shareholders,
or other principals, agents or representatives of such business entity ("Member
of Landlord"), and (ii) Tenant shall have recourse only to the interest of such
business entity in the Building of which the Premises are a part for the
satisfaction of such obligations and not against the assets of such Member of
Landlord other than to the extent of their respective interests in the Building.
In this regard, Tenant agrees that in the event of any actual or alleged
failure, breach or default by Landlord of its obligations under this Lease, that
(i) no Member of Landlord shall be sued or named as a party in any suit or
action (except as may be necessary to secure jurisdiction of Landlord), (ii) no
judgment will be taken against any Member of Landlord, and any judgment taken
against any Member of Landlord may be vacated and set aside at any time without
hearing,(iii) no writ of execution will ever be levied against the assets of any
Member of Landlord, and(iv) these agreements by Tenant are enforceable both by
Landlord and by any Member of Landlord.
11. Damage or Destruction.
(a) Subject to the provisions of Paragraphs 11 (b) and 11 (e) below, if, during
the Term, the Premises are totally or partially destroyed from any insured
casualty, Landlord shall, within ninety (90) days after the destruction,
commence to restore the Premises to substantially the same condition as they
were in immediately before the destruction and prosecute the same diligently to
completion. Such destruction shall not terminate this Lease. Landlord's
obligation shall not include repair or replacement of Tenant's alterations or
Tenant's equipment, furnishings, fixtures and personal property. If the existing
laws do not permit the Premises to be restored to substantially the same
condition as they were in immediately before destruction, and Landlord is unable
to get a variance to such laws to permit the commencement of restoration of the
Premises within the 90-day period, then either party may terminate this Lease by
giving written notice to the other party within thirty (30) days after
expiration of the 90-day period.
(b) Despite the provisions of Paragraph 11 (a) above, Landlord may decide within
ninety (90) days after such destruction to demolish the Building rather than
rebuild it, in which case this Lease will terminate as of the date of the
destruction. Landlord shall give Tenant written notice of its intention within
ninety (90) days after the destruction.
(c) If any destruction occurs to the Premises during the last six (6) months of
the initial Term or during the last six (6) months of any extension period,
regardless of the nature extent of the destruction, either party can elect to
terminate this Lease within thirty (30) days after the destruction occurs. If
this Lease does not terminate pursuant to this Paragraph 11 (c), the provisions
of Paragraph 11 (a) above shall apply.
(d) If the Premises are damaged from any uninsured casualty to any extent
whatsoever, Landlord may within ninety (90) days following the date of such
damage: (i)commence to restore the Premises to substantially the same condition
as they were in immediately before the destruction and prosecute the same
diligently to completion, in which event this Lease shall continue in full force
and effect; or (ii) within the 90-day period Landlord may elect not to so
restore the Premises, in which event this Lease shall cease and terminate. In
either such event, Landlord shall give Tenant written notice of its intention
within the 90-day period.
(e) In the event of destruction or damage to the Premises which materially
interferes with Tenant's use of the Premises, if this Lease is not terminated as
above provided, there shall be an abatement or reduction of Base Rent between
the date of destruction and the date Landlord substantially completes its
reconstruction obligations, based upon the extent to which the destruction
materially interferes with Tenant's use of the Premises. All other obligations
of Tenant under this Lease shall remain in full force and effect. Except for
abatement of Base Rent, Tenant shall have no claim against Landlord for any loss
suffered by Tenant due to damage or destruction of the Premises or any work of
repair undertaken as herein provided.
(f) The provisions of California Civil Code Sections 1932(2) and 1933(4), and
any successor statutes, are inapplicable with respect to any destruction of the
Premises, such sections providing that a lease terminates upon the destruction
of the Premises unless otherwise agreed between the parties to the contrary.
12. Eminent Domain.
(a) If all or any part of the Premises shall be taken as a result of the
exercise of the power of eminent domain, this Lease shall terminate as to the
part so taken as of the date of taking. In the case of a partial taking of
greater than fifty percent (50%) of the rentable area of the Premises, either
Landlord or Tenant shall have the right to terminate this Lease as to the
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<PAGE> 12
balance of the Premises by notice to the other within thirty (30) days after the
date of the taking. In the event of a partial taking of the Premises which does
not result in a termination of this Lease, the monthly Base Rent thereafter to
be paid shall be equitably reduced on a square footage basis. If the continued
occupancy of Tenant is materially interfered with for any time during the
partial taking, notwithstanding the partial taking does not terminate this Lease
as to the part not so taken, the Base Rent shall proportionately abate so long
as Tenant is not able to continuously occupy the part remaining and not so
taken.
(b) All compensation awarded or paid upon a total or partial taking of the fee
title shall belong to Landlord whether such compensation be awarded or paid as
compensation for diminution in value of the leasehold or of the fee except:
Tenant shall retain and have a claim for the following, to the extent
specifically designated by the condemning authority: (i) the unamortized value
over the Term of Tenant's leasehold improvements (to the extent Landlord has not
contributed to the cost thereof); (ii) that portion (if any) of the award made
to Landlord as a result of removing fixtures, removable by Tenant herein, under
the terms of this Lease but which are required to be taken by the condemn or are
so acquired by the condemn or; and (iii) all relocation assistance, moving and
relocation expenses to the extent (if any) provided by the condemning authority
directly to Tenant.
13. Assignment and Subletting.
(a) Tenant shall not assign, sublet or hypothecate this Lease or any interest
herein or sublet the Premises or any part thereof or permit the use of the
Premises by any party other than Tenant without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Any of the foregoing
acts without Landlord's consent shall be void and shall, at the option of
Landlord, terminate this Lease. In connection with each consent requested by
Tenant, Tenant shall submit to Landlord the terms of the proposed transaction,
the identity of the parties to the transaction, the proposed documentation for
the transaction, current financial statements of any proposed assignee or
sublessee and all other information reasonably requested by Landlord concerning
the proposed transaction and the parties involved therein.
(b) As used in this Paragraph 13, the term "assign" or "assignment" shall
include, without limitation, any sale, transfer, or other disposition of all or
any portion of Tenant's estate under this Lease, whether voluntary or
involuntary, and whether by operation of law or otherwise, including any of the
following:
(1) if Tenant is a corporation or a limited liability company: (A) any
dissolution, merger, consolidation, or other reorganization of Tenant; or (B) a
sale or other transfer of more than fifty percent (50%) of the value of the
assets of Tenant; or (C) if Tenant is a corporation with fewer than 500
shareholders, a sale or other transfer of a controlling percentage of the
capital stock of Tenant; or (D) if Tenant is a limited liability company, a sale
or other transfer of a controlling percentage of the interest in Tenant. The
phrase "controlling percentage" means the ownership of, and the right to vote,
stocks or interests possessing at least fifty percent(50%) of the total combined
voting power of the limited liability company or, in the case of a corporation,
of all classes of Tenant's stock issues, outstanding and permitted to vote for
the election of directors of the corporation;
(2) if Tenant is a trust, the transfer of more than fifty percent (50%) of the
beneficial interest of Tenant, or the dissolution of the trust;
(3) if Tenant is a partnership or joint venture, the withdrawal, or the transfer
of the interest, of any general partner or joint venturer or the dissolution of
the partnership or joint venture; and
(4) if Tenant is composed of tenants-in-common, the transfer of interest of any
cotenants or the partition or dissolution of the cotenancy.
(e) No sublessee shall have a right further to sublet, and any assignment by a
sublessee of its sublease shall be subject to Landlord's prior written consent
in the same manner as if Tenant were entering into a new sublease.
(d) Regardless of Landlord's consent, no subletting or assignment shall release
Tenant of Tenant's obligation, or alter the primary liability of Tenant to pay
the Rent and to perform all other obligations to be performed by Tenant
hereunder. The acceptance of Rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provisions hereof. Consent to one
assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Tenant or
any successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor.
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(e) In the event Tenant shall assign or sublet the Premises or request the
consent of Landlord to any assignment or subletting, then Tenant shall reimburse
Landlord for reasonable costs and attorneys' fees incurred in connection
therewith in an amount not to exceed $ 1,000.00.
14. Default by Tenant.
(a) The following events shall constitute events of default under this Lease:
(1) a failure by Tenant to pay any Rent or to deliver an estoppel certificate
(as provided in Paragraph 17 below) where such failure continues for five (5)
days after written notice by Landlord to Tenant;
(2) the bankruptcy or insolvency of Tenant, any transfer by Tenant to defraud
creditors, any assignment by Tenant for the benefit of creditors, or the
commencement of any proceedings of any kind by or against Tenant under any
provision of the Federal Bankruptcy Act or under any other insolvency,
bankruptcy or reorganization act unless, in the event any such proceedings are
involuntary, Tenant is discharged from the same within sixty (60) days
thereafter; the appointment of a receiver for a substantial part of the assets
of Tenant; or the levy upon this Lease or any estate of Tenant hereunder by any
attachment or execution;
(3) the abandonment or vacation of the Premises;
(4) the discovery by Landlord that any financial statement given to Landlord by
Tenant, any assignee of Tenant, any subtenant of Tenant, any successor in
interest of Tenant or any guarantor of Tenant's obligation hereunder, and any of
them, was materially false; and
(5) a failure by Tenant to perform any of the terms, covenants, agreements or
conditions of this Lease to be observed or performed by Tenant (excluding any
event of default under Paragraph 14(a)(1) above), where such failure continues
for thirty (30) days after written notice thereof is received by Tenant from
Landlord via certified mail, postage prepaid, by Landlord to Tenant; provided,
however, that if the nature of the default is such that the same cannot
reasonably be cured within the 30-day period, Tenant shall not be deemed to be
in default if Tenant shall within such period commence such cure and thereafter
diligently prosecute the same to completion.
(b) In the event of any material default or breach by Tenant, Landlord may at
anytime thereafter, without limiting Landlord in the exercise of any right or
remedy at law or inequity which Landlord may have by reason of such default or
breach:
(1) Pursue the remedy described in California Civil Code Section 1951.4 whereby
Landlord may continue this Lease in full force and effect after Tenant's breach
and abandonment and recover the Rent and any other monetary charges as they
become due, without terminating Tenant's right to sublet or assign this Lease,
subject only to reasonable limitations as herein provided. During the period
Tenant is in default, Landlord shall have the right to do all acts necessary to
preserve and maintain the Premises as Landlord deems reasonable and necessary,
including removal of all persons and property from the Premises, and Landlord
can enter the Premises and relet them, or any part of them, to third parties for
Tenant's account. Tenant shall be liable immediately to Landlord for all costs
Landlord incurs in reletting the Premises, including, without limitation,
brokers' commissions, expenses of remodeling the Premises required by the
reletting, and like costs. Reletting can be for a period shorter or longer than
the remaining Term.
(2) Pay or perform such obligation due (but shall not be obligated to do so),if
Tenant fails to pay or perform any obligations when due under this Lease within
the time permitted for their payment or performance. In such case, the costs
incurred by Landlord in connection with the performance of any such obligation
will be additional rent due under this Lease and will become due and payable on
demand by Landlord.
(3) Terminate Tenant's rights to possession by any lawful means, in which case
this Lease shall terminate and Tenant shall immediately surrender possession of
the Premises to Landlord. In such event Landlord shall be entitled to recover
from Tenant all damages incurred by Landlord by reason of Tenant's default,
including, without limitation, the following: (A) the worth at the time of award
of any unpaid Rent which had been earned at the time of such termination; plus
(B) the worth at the time of award of the amount by which the unpaid Rent which
would have been earned after termination until the time of award exceeds the
amount of such Rent loss that is proved could have been reasonably avoided; plus
(C) the worth at the time of award of the amount by which the unpaid Rent for
the balance of the Term after the time of award exceeds the amount of such Rent
loss that is proved could be reasonably avoided; plus (D) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or which in the
ordinary
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course of events would be likely to result therefrom; plus (E) at Landlord's
election, such other amounts in addition to or in lieu of the foregoing as may
be permitted from time to time by applicable State law. Upon any such
termination of Tenant's possessory interest in and to the Premises, Tenant (and
at Landlord's sole election, Tenant's sublessees) shall no longer have any
interest in the Premises, and Landlord shall have the right to make any
reasonable repairs, alterations or modifications to the Premises which Landlord
in its sole discretion deems reasonable and necessary. The "worth at the time of
award" of the amounts referred to in subparagraphs (A) and (B) above is computed
by allowing interest at the maximum rate of eight and one-half percent (8.50%).
The worth at the time of award of the amount referred to in subparagraph (C)
above is computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%).
(4) Pursue any other legal or equitable remedy available to Landlord. Unpaid
installments of Rent and other unpaid monetary obligations of Tenant under the
terms of this Lease shall bear interest from the date due at the rate of ten
percent (10%) per annum.
(c) In the event Tenant is evicted or Landlord takes possession of the Premises
by reason of any default by Tenant hereunder, Tenant hereby waives any right of
redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the Premises, this
Lease shall continue in effect for so long as Landlord does not terminate
Tenant's right to possession, and Landlord may enforce all its rights and
remedies under this Lease, including the right to recover Rent as it becomes due
under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(e) In the event Tenant is in material default under any provision of this Lease
then, at Landlord's sole election: (i) Tenant shall not have the right to
exercise any available right, option or election under this Lease ("Tenant's
Exercise Rights") if at such time Tenant is in default hereunder, (ii) Tenant
shall not have the right to consummate any transaction or event triggered by the
exercise of any of Tenant's Exercise Rights if at such time Tenant is in default
hereunder, and (iii) Landlord shall not be obligated to give Tenant any required
notices or information relating to the exercise of any of Tenant's Exercise
Rights hereunder.
15. Default by Landlord, Notice to Mortgagee.
Landlord shall not be in default unless Landlord, or the holder of any mortgage,
deed of trust or ground lease covering the Premises, fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord certified mail,
postage prepaid, and to the holder of any first mortgage, deed of trust or
ground lease covering the Premises whose name and address shall have been
furnished to Tenant in writing, specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance
then Landlord shall not be in default if Landlord or the holder of any such
mortgage, deed of trust or ground lease commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion. In no event
shall Tenant be entitled to terminate this Lease by reason of Landlord's
default, and Tenant's remedies shall be limited to an action for monetary
damages at law.
16. Security Deposit.
On execution of this Lease, Tenant shall deposit with Landlord the sum specified
in the Basic Lease Information (the "Security Deposit"). The Security Deposit
shall be held by Landlord as security for the performance by Tenant of all of
the provisions of this Lease. If Tenant fails to pay Rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Landlord may use, apply, or retain all or any portion of the Security Deposit
for the payment of any Rent or other charge in default, or the payment of any
other sum to which Landlord may become obligated by reason of Tenant's default,
or to compensate Landlord for any loss or damage which Landlord may suffer
thereby. If Landlord so uses or applies all or any portion of the Security
Deposit, then within ten (10) days after demand there for Tenant shall deposit
cash with Landlord in an amount sufficient to restore the deposit to the full
amount thereof, and Tenant's failure to do so shall be a material breach of this
Lease. Landlord shall not be required to keep the Security Deposit separate from
its general accounts. If Tenant performs all of Tenant's obligations hereunder,
the Security Deposit, or so much thereof as has not theretofore been applied by
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Landlord, shall be returned, without payment of interest for its use, to Tenant
(or, at Landlord's option to the last assignee, if any, of Tenant's interest
hereunder)at the expiration of the Term, and after Tenant has vacated the
Premises. No trust relationship is created herein between Landlord and Tenant
with respect to the Security Deposit.
17. Estoppel Certificate.
(a) Tenant shall within ten (10) days of notice from Landlord execute,
acknowledge and deliver to Landlord a statement certifying (i) that this Lease
is unmodified and in full force and effect (or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in full
force and effect), (ii) the amount of the Security Deposit, (iii)the date to
which the Rent has been paid, (iv) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any are claimed, and (v) such other matters as may reasonably
be requested by Landlord. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Building.
(b) Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant, (i) that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) that there are no
uncured defaults in Landlord's performance, and(iii) that not more than one
month's Base Rent has been paid in advance.
(c) If Landlord desires to finance or refinance the Building, Tenant agrees to
deliver to any lender designated by Landlord such financial statements of Tenant
as may be reasonably required by such lender. All such financial statements
shall be received by Landlord in confidence and shall be used for the purposes
herein set forth.
18. Subordination.
This Lease, at Landlord's sole option, shall be subordinate to any ground lease,
mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the Building and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements, refinancings and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground lease,
whether this Lease is dated prior to or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. If any mortgage
or deed of trust to which this Lease is subordinate is foreclosed or a deed in
lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall
attorn to the purchaser at the foreclosure sale or to the grantee under the deed
in lieu of foreclosure; if any ground lease to which this Lease is subordinate
is terminated, Tenant shall attorn to the ground lessor. Tenant agrees to
execute any documents required to effectuate such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be, or to evidence such attornment. Any such document of attornment
shall also provide that the successor shall not disturb Tenant in its use of the
Premises in accordance with this Lease.
19. Attorneys' Fees.
In the event legal action is initiated by either party, the prevailing party
shall be entitled to recover all costs and expenses incurred in such action,
including, without limitation, reasonable attorneys' fees and costs, including
attorneys' fees incurred at trial and on appeal, if any.
20. Notices.
All notices, consents, demands, and other communications from one party to the
other given pursuant to the terms of this Lease shall be in writing and shall be
deemed to have been fully given when personally delivered, delivered by courier
service, sent via facsimile (confirmation receipt required), or forty-eight (48)
hours after the same is deposited in the United States mail, certified or
registered, postage prepaid, and addressed as follows: To Tenant at the address
specified in the Basic Lease Information or to such other place as Tenant may
from time to time designate in a notice to Landlord; to Landlord at the address
specified in the Basic Lease Information, or to such other place and to such
other parties as Landlord may from time to time designate in a notice to Tenant.
21. General Provisions.
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(a) This Lease shall be governed by and construed in accordance with the
internal laws of the State of California, notwithstanding any choice of law
statutes, regulations, provisions or requirements to the contrary.
(b) 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.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease Information
contains all agreements and understandings of the parties and supersedes and
cancels any and all prior or contemporaneous written or oral agreements,
instruments, understandings, and communications of the parties with respect to
the subject matter herein. This Lease, including the attached Exhibits, Addenda,
and Basic Lease Information, may be modified only in a writing signed by each of
the parties.
(d) No waiver of any provision hereof by either party shall be deemed by the
other party to be a waiver of any other provision, or of any subsequent breach
of the same provision. Landlord's or Tenant's consent to, or approval of, any
act shall not be deemed to render unnecessary the obtaining of Landlord's or
Tenant's consent to, or approval of, any subsequent act by the other party.
(e) If Tenant remains in possession, with the expressed consent of Landlord, of
all or any part of the Premises after the expiration of the Term, such tenancy
shall be from month to month only, and not a renewal hereof or an extension for
any further term, and in such case, Rent shall be payable in the amount of the
last month's Base Rent and all other charges under the Lease and such
month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein.
(f) Subject to the provisions of this Lease restricting assignment or subletting
by Tenant, this Lease shall bind the parties, their personal representatives,
successors, and assigns.
(g) Upon reasonable prior notice to Tenant (which notice shall not be required
in the event of an emergency), Landlord and Landlord's representatives and
agents shall have the right to enter the Premises during regular business hours
for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders, and making such alterations, repairs, improvements, or
additions to the Premises, the Building or the Common Areas as Landlord may deem
necessary or desirable. Landlord may at any time during the last one hundred
twenty (120)days of the Term place on or about the Premises any ordinary "For
Lease" sign. Landlord may at any time place on or about the Premises any
ordinary "For Sale" sign.
(h) The voluntary or other surrender of this Lease by Tenant, the mutual
cancellation thereof or the termination of this Lease by Landlord as a result of
Tenant's default shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to
Landlord of any or all of such subtenancies.
(i) If Tenant is a corporation, limited liability company or partnership, each
individual executing this Lease on behalf of Tenant represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of the
corporation, company or partnership in accordance with, where applicable, a duly
adopted resolution of the board of directors of the corporation, the vote of the
members of the limited liability company or the vote of the partners within the
partnership, and that this Lease is binding upon the corporation, company or
partnership in accordance with its respective articles of incorporation and
bylaws, operating agreement or partnership agreement.
(j) Time is expressly declared to be of the essence of this Lease and of each
and every covenant, term, condition, and provision hereof, except as to the
conditions relating to the delivery of possession of the Premises to Tenant.
(k) If there is more than one party comprising Tenant, the obligations imposed
on Tenant shall be joint and several.
(1) The language in all parts of this Lease shall be in all cases construed as a
whole according to its fair meaning and not strictly for nor against either
Landlord or Tenant.
(m) As used in this Lease and whenever required by the context thereof, each
number, both singular and plural, shall include all numbers and in each gender
shall include all genders. Landlord and Tenant, as used in this Lease or in any
other instrument referred to in or made a part of this Lease, shall likewise
include both the singular and the plural, a corporation, limited liability
company, partnership, individual or person acting in any fiduciary capacity as
executor, administrator, trustee or in any other representative capacity.
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(n) The Exhibits and Addendum, if any, specified in the Basic Lease Information
are attached to this Lease and by this reference made a part hereof.
22. Force Majeure.
Any delay in construction, repairs, or rebuilding any building, improvement or
other structure herein shall be excused and the time limit extended to the
extent that the delay is occasioned by reason of acts of God, labor troubles,
laws or regulations of general applicability, acts of Tenant or Tenant Delays
(as the term is defined in the Work Letter Agreement attached hereto as Exhibit
B), or other occurrences beyond the reasonable control of Landlord. Accordingly,
Landlord's obligation to perform shall be excused for the period of the delay
and the period for performance shall be extended for a period equal to the
period of such delay.
23. Broker's Fee.
Each party represents that it has not had dealings with any real estate broker,
finder, or other person, with respect to this Lease in any manner, except the
brokerage firm(s) specified in the Basic Lease Information. Each party shall
hold harmless the other party from all damages resulting from any claim that may
be asserted against the other party by any broker, finder, or other person with
whom the other party has or purportedly has dealt. Landlord shall pay any
commissions or fees that are payable to the broker or finder specified in the
Basic Lease Information, with respect to this Lease in accordance with the
provisions of a separate commission contract.
24. Financial Statement.
It is acknowledged by all parties hereto that the attached financial declaration
of Tenant is incorporated as a part of this Lease as Exhibit E, that the
information contained therein is true and correct in all material respects, and
that the accuracy of the information is a significant fact upon which Landlord
has relied in the granting of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease on the date first
mentioned above.
TENANT: LANDLORD:
Advanced Fibre Communications, Inc. G & W/Copley Redwood Business Park, L.P.
a Delaware corporation a limited partnership
By: /s/ PETER A. DARBEE
------------------------------
Peter A. Darbee By: G & W Management Co.
Its: Vice President, CFO -----------------------------------
Its: Manager
By: /s/ WILLIAM C. WHITE
----------------------------------
William C. White, President
G & W Management Co.
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ADDENDUM NO. 1
BASE: RENT:
The NNN Base Rent for the Initial Space shall be as follows:
LEASE YEAR BASE RENT PER SO. FT.
97,920
1 Mo. 1 Free
mos. 2 - 12 $0.85
2 $1.10
3 - 4 $1.15
5 - 6 $1.20
7 - 12 CPI Increase minimum 3% - maximum 5%
The NNN Base Rent for the Secondary Space shall be as follows:
LEASE YEAR BASE RENT PER SO. FT.
42,528
1 (3 mos.) $0.00
(9 mos.) $0.25
2 (3 mos.) $0.25
(3 mos.) $0.00 (construction period)
(6 mos.) $0.90
3 - 4 $1.15
5 - 6 $1.20
7 - 12 CPI Increase minimum 3% - maximum 5%
At the start of the seventh lease year and every other year of the term
thereafter there will be a rental adjustment based on the percentage increase in
the Consumer Price Index For All Urban Consumers, San Francisco-Oakland-San
Jose, All Items (1982-1984=100), as published by the U.S. Bureau of Labor
Statistics ("Index"). The "Beginning Index" shall be the Index published most
immediately preceding the last Base Rent adjustment. The "Adjustment Index"
shall be the Index published most immediately preceding the Adjustment Date. The
monthly Base Rent until the next Base Rent adjustment shall be determined by
multiplying the initial monthly Base Rent by a traction, the numerator of which
is the Adjustment Index and the denominator of which is the Beginning Index.
However, in no event will the monthly Base Rent be increased by an amount less
than 3% per year or more than 5% per year. If the 1982-1984 base of the Index is
changed, the new base shall be converted to the 1982-1984 base in accordance
with the U.S. Department of Labor's conversion factor, and the base as so
converted shall be used. If the U.S. Department of Labor ceases to publish the
Index, then the successor index designated by the U.S. Department of Labor or,
if no successor index is so designated, the most nearly comparable index shall
be used.
<PAGE> 19
EXHIBIT B
WORK LETTER AGREEMENT
THIS WORK LETTER AGREEMENT supplements that certain Lease dated October 23, 1997
("Lease"), executed by G & W/Copley Redwood Business Park L.P., a limited
partnership, as Landlord, and Advanced Fibre Communications, Inc., a Delaware
corporation as Tenant. All capitalized terms not otherwise defined herein shall
have the same meaning as those capitalized terms contained in the Lease.
1. Landlord shall be responsible for constructing within the Premises the tenant
improvements ("Tenant Improvements") described in the preliminary space plan
attached here to as Exhibit B-1 ("Preliminary Space Plan"). The Tenant
Improvements for the Premises will be more particularly described in the plans
and construction drawings ("Construction Drawings") as approved below. Any
additional work ("Tenant Extra Improvements") required under the approved
Construction Drawings shall be at Tenant's expense.
2. Landlord and Tenant shall diligently finalize the Preliminary Space Plan for
construction of the Tenant Improvements and Tenant Extra Improvements so that,
within thirty(30) days after execution of the Lease, Landlord can provide Tenant
with the Construction Drawings. The Construction Drawings shall indicate the
specific requirements of Tenant's lease space, outlining in detail interior
partitions, floor coverings, a reflected ceiling plan, plumbing fixtures, and
electrical plans (setting forth the electrical requirements of Tenant), all in
conformity with the Preliminary Space Plan. The Construction Drawings shall
include full energy calculations as. required by the State of California and the
city agencies.
3. Within three (3) days after receipt of the Construction Drawings, Tenant
shall approve the drawings and/or request changes or modifications thereto. Any
such request for changes or modifications shall be subject to Landlord's
approval and, thereafter, the Construction Drawings shall be resubmitted for
Tenant's approval in accordance with the preceding sentence. Tenant acknowledges
that the Construction Drawings are subject to the approval of the appropriate
government authorities. It shall be Tenant's responsibility to ensure that the
design and function of the Tenant Improvements and Tenant Extra Improvements are
suitable for Tenant's business and needs. The improvements shall be constructed
in accordance with current building standards, laws, regulations, ordinances and
codes. Landlord shall not be required to install any Tenant Improvements or
Tenant Extra Improvements which do not conform to the Construction Drawings.
4. Landlord shall furnish and install the units and quantities of Tenant
Improvements as set forth on Exhibit B-1. The Tenant Improvements to be paid by
Landlord shall not exceed Three Million Three Hundred Seventy Thousand Seven
Fifty-two Hundred Dollars ($3,370,752)($24.00 per usable square foot) of lease
space within the Premises and shall include:
(a) The costs of the Preliminary Space Plan (including one revision thereto) and
final Construction Drawings and engineering costs associated with completion of
the State of California energy utilization calculations under Title 24
legislation; and
(b) The costs of obtaining building permits and other necessary authorizations
from the city, county and the State of California.
Any additional units, quantities or costs of the Tenant Improvements required in
accordance with the approved Construction Drawings shall be deemed Tenant Extra
Improvements and shall be paid for by Tenant at the unit cost set forth in a
summary of unit costs to be provided by Landlord.
5. In no event shall the Tenant Improvements payable by Landlord include (i) the
costs of procuring or installing any trade fixtures, equipment, furniture,
furnishings, telephone or
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computer equipment or wiring or other personal property ("Personal Property"),
or (ii) any Change Orders (as the term is defined in Paragraph 6 below). Such
items shall be paid by Tenant.
6. Following Tenant's approval of the Construction Drawings, Tenant may request
changes or modifications thereto ("Change Order"), however, the cost of any
Change Order(s) shall be borne by Tenant. If Tenant shall request any Change
Order, then Landlord shall promptly give Tenant a written estimate of (a) the
cost of engineering and design services to prepare the Change Order, (b) the
cost of work to be performed pursuant to the Change Order, and (c) the time
delay expected because of such requested Change Order. Within three (3) days
after Tenant's receipt of the written estimate, Tenant shall notify Landlord in
writing whether it approves the written estimate. If Tenant approves the written
estimate, then Tenant shall accompany its approval with a check made payable to
Landlord in the amount of the estimated cost of the Change Order. Upon
Landlord's completion of the Change Order and submission of the final cost
thereof to Tenant, Tenant shall promptly pay to Landlord any additional amounts
incurred in excess of the written estimate. If such written authorization and
check are not received by Landlord, then Landlord shall not be obligated to
commence work on the Premises and Tenant shall be chargeable for any delay in
the completion of the Premises in accordance with Paragraph 7 below.
7. If the Commencement Date of the Lease has not occurred on or before the
Estimated Commencement Date, and if the cause of the delay in the occurrence of
the Commencement Date is attributable to Tenant, then the Lease shall begin on
the date the Commencement Date otherwise would have occurred but for the Tenant
delays. Delays attributable to Tenant ("Tenant Delays") shall include, without
limitation, those caused by (a)delays by Tenant in approving the Construction
Drawings and costs, (b) Tenant's request for special materials not available
when needed for construction in accordance with the construction schedule, (e)
Change Orders, and (d) interference with Landlord's work caused by Tenant or
Tenant's agents. All costs and expenses occasioned by a Tenant Delay, including,
without limitation, increases in labor or materials, shall be borne by Tenant.
8. Tenant may, with Landlord's written consent, enter the Premises prior to the
Commencement Date solely for the purpose of installing its Personal Property as
long as such entry will not interfere with the orderly construction and
completion of the Premises ("Tenant's Work"). Tenant shall notify Landlord of
its desired time(s) of entry and shall submit for Landlord's written approval
the scope of the Tenant's Work to be performed and the name(s) of the
contractor(s) who will perform such work. Tenant agrees to indemnify, defend and
hold harmless Landlord, any mortgagee, ground lessor or beneficiary of a deed of
trust encumbering, secured by or affecting the Premises or the Building, from
and against any and all claims, actions, losses, liabilities, damages, costs or
expenses (including, without limitation, reasonable attorneys' fees and claims
for worker's compensation) of any nature whatsoever, arising out of or in
connection with the Tenant's Work (including, without limitation, claims for
breach of warranty, personal injury or property damage).
9. During the course of construction, at Tenant's expense, Tenant shall obtain
or maintain public liability and worker's compensation insurance, in amounts
acceptable to Landlord, and which name Landlord and Tenant as parties insured
from and against any and all liability for death of or injury to person or
damage to property caused in or about or by reason of the construction of the
Tenant's Work.
10. Upon substantial completion of the Premises in accordance with the
Construction Drawings, Tenant agrees to accept the Premises in the condition
which it may then be and waives any right or claim against Landlord for any
cause directly or indirectly arising out of the condition of the Premises,
appurtenances thereto, improvements thereon, and equipment therein. Tenant shall
hold harmless Landlord from and against any liability or damage as provided
under Paragraph 10.2 of the Lease. Landlord shall not be liable for any latent
or patent defects therein, except that Landlord warrants the Premises against
latent defects for a period of one (1) year from the date of substantial
completion.
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11. Tenant releases Landlord from any claim whatsoever for damages against
Landlord for any delay in the date on which the Premises shall be ready for
occupancy by Tenant.
12. The Premises shall be deemed "substantially completed" as of the date that
all of the following conditions are satisfied:
(a) The Tenant Improvements have been substantially completed in accordance with
the approved Construction Drawings (except for those punch list items referenced
in Paragraph 12 below), such that Tenant can reasonably conduct business within
the Premises; and
(b) A certificate of occupancy and/or finalized building permit has been issued
for the Premises.
(c) All base building facilities shall be in good operating order and shall
comply and conform with the design specifications furnished by Tenant; the base
building includes the following items: restrooms, a first floor lobby and
elevator cabs, HVAC units on the roof which are distributed to each floor,
sprinkler systems which are distributed around each floor (but with no drop
heads), electrical equipment in the first floor electrical room and electrical
panels on each floor, and a card key security system for access to all Building
common area exterior doors.
13. Tenant shall immediately prior to occupancy inspect the Premises and compile
and furnish Landlord with an initial punch list of any missing or deficient
Tenant Improvements. Within the first thirty (30) days after delivery of the
Premises, Tenant shall make a final punch list and submit this list to Landlord.
Landlord shall use its best efforts to complete the corrective work in a prompt,
good and workman-like manner. Punch list corrections shall not delay the
Commencement Date, nor shall a delay in making corrections be grounds for a
delay or reduction in any rent payments due Landlord.
14. All floor area calculations are from the center line of the partitions and
the outside line of the exterior and hall walls. No deduction is allowed for the
columns, sprinkler risers, roof drains, or air conditioning units serving Tenant
and located within the Premises.
15. Landlord shall select the manufacturer and vendor of all building materials
and equipment with respect to the Tenant Improvements and Tenant Extra
Improvements to be constructed hereunder.
TENANT: LANDLORD:
Advanced Fibre Communications, Inc., G & W/Copley Redwood Business Park, L.P.
a Delaware corporation a limited partnership
By: G & W Management Co.
Its: Manager
By: /s/ Peter A. Darbee
Peter A. Darbee
Its: Vice President, CFO BY: /s/ William C. White
William C. White, President
G & W Management Co.
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<PAGE> 22
EXHIBIT B-1
(PRELIMINARY SPACE PLAN) TO BE MUTUALLY AGREED UPON BETWEEN LANDLORD AND TENANT
<PAGE> 23
EXHIBIT C
RULES AND REGULATIONS
It is further agreed that the following Rules and Regulations shall be and are
hereby made a part of this Lease, and Tenant agrees that Tenant's employees and
agents, or any others permitted by Tenant to occupy or enter the Premises, will
at all times abide by said Rules and Regulations, unless otherwise specified or
provided for in the Lease, to wit:
1. The driveways, entrances and exits to the Property, sidewalks, passages,
building entries, lobbies, corridors, stairways, and elevators of the Building
shall not be obstructed by Tenant, or Tenant's agents or employees, or used for
any purpose other than ingress and egress to and from the Premises. Tenant or
Tenant's agents or employees shall not loiter on the lawn areas or other common
areas of the Property.
(a) Furniture, freight equipment and supplies will be moved in or out of the
Building only through the rear service entrances or other entrances designated
by Landlord and then only during such hours and in such manner as may be
reasonably prescribed by Landlord. Tenant shall cause its movers to use only the
loading facilities, and entrances designated by Landlord. In the event Tenant's
movers damage any part of the Building or Property, Tenant shall forthwith pay
to Landlord the amount required to repair said damage.
(b) No safe or article, the weight of which may in the opinion of Landlord
constitute a hazard to or damage to the Building or the Building's equipment,
shall be moved into the Premises without Landlord's prior written approval, but
such consent or approval shall not be unreasonably withheld, conditioned or
delayed. Landlord and Tenant shall mutually agree to the location of such
articles in the Premises. All damage done to the Property, Building or Premises
by putting in, taking out or maintaining extra heavy equipment shall be repaired
at the expense, of Tenant.
(c) Landlord reserves the right to close and keep locked any and all entrances
and exits of the Building and Property and gates or doors closing the parking
areas thereof during such hours as Landlord may deem advisable for the adequate
protection of the Property and all tenants therein.
2. Except as otherwise provided for in the Lease, no sign, advertisement or
notice shall be inscribed, painted or affixed on any part of the inside or
outside of the Building unless of such color, size and style and in such place
upon or in the Building as shall be first approved in writing by Landlord. No
furniture or other materials shall be placed in front of the Building or in any
lobby or corridor, without the prior written consent of Landlord. Landlord shall
have the right to remove all non permitted signs and furniture, without notice
to Tenant.
3. Tenant shall not employ any person or persons other than the janitor or
cleaning contractor of Landlord for the purpose of cleaning or taking care of
the Premises without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
the Lease, Landlord shall in no way be responsible to Tenant for any loss of
property from the Premises, however occurring. The janitor of the Building may
at all times keep a pass key, and other agents of Landlord shall at all times be
allowed admittance to the Premises in accordance with the provisions set forth
in the Lease.
4. Water closets and other water fixtures shall not be used for any purpose
other than that for which the same are intended, and any damage resulting to the
same from misuse on the part of Tenant or Tenant's agents or employees, shall be
paid for by Tenant. No person shall waste water by tying back or wedging the
faucets or in any other manner.
5. No animals except seeing-eye dogs or other animals necessary to the
functioning of handicapped personnel shall be allowed on the lawns or sidewalks
or in the offices, halls, and corridors of the Building.
6. No persons shall disturb the occupants of this or adjoining buildings or
premises by the use of any radio, sound equipment or musical instrument or by
the making of loud or improper noises, nor interfere in any way with the other
tenants or those having business with them. Should
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sound mitigation measures be required due to sounds originating in the Premises,
the costs of such measures shall be paid for by Tenant.
7. Bicycles or other vehicles, other than wheel chairs, shall not be permitted
in the offices, halls, corridors and lobbies in the Building nor shall any
obstruction of sidewalks or entrances of the Building by such be permitted.
8. Tenant shall not allow anything to be placed on the outside of the Building,
nor shall anything be thrown by Tenant or Tenant's agents or employees, out of
the windows or doors, or down the corridors, ventilation ducts or shafts of the
Building. Tenant, except in case of fire or other emergency, shall not open any
outside window.
9. No awnings shall be place over any window or entrance.
10. All garbage, including wet garbage, refuse or trash shall be placed by
Tenant in the receptacles designated by Landlord for that purpose. Tenant shall
not bum any trash or garbage at any time in or about the leased Premises or any
area of the Property. Tenant and Tenant's officers ,agents, and employees shall
not throw cigar or cigarette butts or other substances or litter of any kind in
or about the Property.
11. Tenant shall not install or operate any steam or gas engine or boiler, or
other machinery or carry on any mechanical business, other than such mechanical
business which normally is identified with general use in the Premises.
Explosives or other articles of an extra hazardous nature shall not be brought
into the Building complex.
12. Any painting or decorating as may be agreed to be done by and at the expense
of Landlord shall be done during regular weekday working hours. Should Tenant
desire such work on Saturdays, Sundays, holidays or outside of regular working
hours, Tenant shall pay for the extra cost thereof, if any.
13. Tenant and Tenant's agents and employees shall park their vehicles in areas
designated from time-to-time for employee parking.
14. Tenant shall not mark, drive nails, screw, bore, or drill into, paint or in
any way deface the common area walls, exterior walls, roof, foundations, bearing
walls, or pillars without the prior written consent of Landlord. The expense of
repairing any breakage, stoppage or damage resulting from a violation of this
rule shall be borne by Tenant.
15. No waiver of any rule or regulation by Landlord shall be effective unless
expressed in writing and signed by Landlord or his authorized agent.
16. Tenant shall be responsible for cleaning up any trash blowing around their
facility that may have been left by their customers or employees.
17. In the event of any conflict between these rules and regulations or any
further or modified rules and regulations from time to time issued by Landlord,
and the lease provisions, the lease provisions shall govern and control.
18. Landlord reserves the right at any time to change or rescind any one or more
of these rules and regulations, or to make such other and further reasonable
rules and regulations as in Landlord's judgment may from time to time be
necessary for the management, safety, care and cleanliness of the Premises, and
for the preservation of good order therein, as well as for the convenience of
other tenants of the Property. Landlord shall not be responsible to Tenant or to
any other person for the non-observance or violation of the rules and
regulations by any other tenant or person. Tenant shall be deemed to have read
these rules and to have agreed to abide by them as a condition to its occupancy
of the space herein leased, and Tenant shall abide by any additional rules and
regulations which are ordered or requested by Landlord or by any governmental
authority.
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<PAGE> 25
EXHIBIT D
Materials Quantities
Tenant agrees that:
(a) None of the above materials will be used, held or stored on or about the
Premises in quantities of greater than one (1) gallon each, or twenty (20)
pounds each in the case of non-liquid materials; provided, however, that used or
excess materials may be stored together in a fifty-five (55) gallon drum while
awaiting transport off the Premises for disposal.
(b) The materials listed on Page 1 to this Exhibit D shall be stored in
fire-proof lockers on the Premises in accordance with applicable laws,
regulations and ordinances. No storage outside the Premises will be permitted.
(c) No used or excess materials will be disposed of in, on, under or about the
Premises or Redwood Business Park. Instead, such materials shall be transported
off-site, no less often than every one hundred eighty (180) days, by a duty
licensed hazardous materials transporter. While waiting for transport off-site
for disposal, used or excess materials shall be stored in a safe location on the
Premises in secure containers which are appropriately labeled.
(d) No materials listed on Page I to this Exhibit D, regardless of whether they
are water-soluable, shall be flushed down any sanitary sewer drains on or about
the Premises or Redwood Business Park.
<PAGE> 1
EXHIBIT 10.35
REDWOOD BUSINESS PARK
NET LEASE
BASIC LEASE INFORMATION
1. DATE July 10, 1998
2. LANDLORD G & W/Copley Redwood Business Park, LP
3. TENANT Advanced Fibre Communications, a Delaware corporation
4. PREMISES REFERENCE
a. Project Sequoia Court Paragraph 1
b. Building 1347 Redwood Way
c. Address 1347 Redwood Way
d. Assessor's Parcel 137-160-001-010
e. Suite N/A
f. Usable Sq. Ft. 9,939
g. Rentable Sq. Ft. 9,939
5. TERM Paragraph 2
a. Estimated Commencement Date August 1, 1998
b. Length of Term 18 mos.
6. BASE RENT Paragraph 3
a. Monthly Base Rent $8,449
b. Advanced Base Rent $8,449
(Paid Upon Lease Execution)
c. Adjustment Date of Monthly Base Rent N/A
7. PROPERTY TAXES AND OPERATING EXPENSES Paragraph 4
a. Initial Monthly Allocation per rentable Sq.Ft. $0.21
b. Premises v. Building Sq.Ft. Ratio 9939/57,382=17%
c. Premises v. Project Sq.Ft. Ratio 9939/87,497=11%
8. SECURITY DEPOSIT N/A Paragraph 16
9. TENANT IMPROVEMENTS Turn-key up to $7.00 per sq. ft. Exhibit B
10. USE General office/Assembly Paragraph 6
11. TENANT'S ADDRESS FOR NOTICES Paragraph 20
1 Willowbrook Court
Petaluma, CA 94954
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12. LANDLORD'S ADDRESS FOR NOTICES Paragraph 20
G & W/Copley Redwood Business Park, L.P.
c/o G&W Management Co.
P.O. Box 808030
Petaluma, CA 94975-8030
1318 Redwood Way, Suite 140
Petaluma, CA 94954
With a Copy to:
13. REAL ESTATE BROKERS Paragraph 23
G & W Management Co.
Keegan & Coppin
EXHIBITS AND ADDENDUM
Exhibit A: Diagram of Premises
Exhibit A-1: Diagram of the Project
Exhibit B: Work Letter Agreement
Exhibit B- 1: Space Plan
Exhibit C: Rules and Regulations
Exhibit D: Hazardous Materials List
Exhibit E: Tenant's Financial Statement
2
<PAGE> 3
REDWOOD BUSINESS PARK
NET LEASE
THIS LEASE, dated July 10, 1998, is made and entered into by and between
G & W/Copley Redwood Business Park, L.P. ("Landlord"), and Advanced Fibre
Communications, Inc., a Delaware corporation ("Tenant").
1. Premises.
Landlord leases to Tenant, and Tenant hereby leases from Landlord for
the term of this Lease ("Term") and at the rent and upon the conditions set
forth below, the Premises described in the Basic Lease Information and
identified on the floor plan attached hereto as Exhibit A. The Premises are
located within the Building described in the Basic Lease Information, and
constitute part of the Project described in the Basic Lease Information and as
shown in Exhibit A-1 attached hereto, at the Redwood Business Park, located in
Petaluma, California. All areas and facilities outside the Buildings and within
the exterior boundaries of the Project that are provided and designated by
Landlord from time to time for the general nonexclusive use and convenience of
the tenants of the Project shall be known as "Common Areas".
2. Term.
(a) The Term shall commence upon the date ("Commencement Date") which is
the earlier of: (i) substantial completion of the Premises, as the term
"substantial completion" is defined in the Work Letter Agreement, attached
hereto as Exhibit B; or (ii) the date substantial completion would have occurred
but for Tenant Delays (as the term is defined in the Work Letter Agreement). The
Estimated Commencement Date is set forth in the Basic Lease Information, which
date may be postponed due to a delay in delivering the Premises as provided in
Paragraph 2(b) below. A "Lease Year" is a period of twelve (12) consecutive
calendar months. A "Lease Month" is a calendar month. The initial Term of this
Lease shall be determined as follows:
(1) If the Commencement Date of this Lease occurs on the first calendar day of a
calendar month, the Term shall be for a period of Lease Years and Months as
specified in the Basic Lease Information, unless terminated sooner as provided
in this Lease.
(2) If the Commencement Date of this Lease occurs on other than the first
calendar day of a calendar month, the Term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, plus the number of days
remaining in the calendar month in which the Commencement Date occurs, unless
terminated sooner as provided in this Lease.
(b) Subject to the provisions of Paragraph 22 below, in the event the Premises
are not substantially completed (in accordance with the Work Letter Agreement)
on or within six (6)months after the Estimated Commencement Date, then Tenant
may, at Tenant's option, by notice in writing to Landlord within ten (10) days
thereafter, cancel this Lease, in which event, (i) this Lease shall be deemed
null and void and have no further force or effect, (ii) all security or other
deposits made herewith shall be promptly returned to Tenant, and (iii) the
parties shall have no further obligation to each other; provided further,
however, that if such written notice of Tenant is not received by Landlord
within said 10-day period, Tenant's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3. Rent.
(a) For purposes of this Lease, the term "Rent" shall mean the Base Rent,
Advanced Base Rent, all additional rent and all of the other monetary
obligations of Tenant under this Lease. Upon execution of this Lease, Tenant
shall pay to Landlord the Advanced Base Rent set forth in the Basic Lease
Information. Tenant shall pay to Landlord the Base Rent specified in the Basic
Lease Information, payable on or before the first day of each and every
successive calendar month following the Commencement Date. If the Term commences
on other than the first day of a calendar month, the first payment of Base Rent
shall be appropriately prorated, on the basis of a 30-day month. Tenant's
payment of any Advanced Base Rent(excluding that portion attributable to last
month's rent, if any) shall be credited against Tenant's obligation to pay Base
Rent beginning as of the Commencement Date.
(b) Tenant shall pay, as additional rent, all amounts of money required to be
paid to Landlord by Tenant under this Lease in addition to monthly Base Rent,
whether or not the same be designated "additional rent." If such amounts are not
paid at the time provided in this Lease, they shall nevertheless be collectable
as additional rent with the next installment of
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<PAGE> 4
monthly Base Rent thereafter falling due, but nothing herein contained shall be
deemed to suspend or delay the payment of any amount of money at the time the
same becomes due and payable hereunder, or limit any other remedy of Landlord.
(c) Tenant acknowledges that late payment by Tenant to Landlord of Rent after
the expiration of any applicable grace period will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by the
terms of any trust deed covering the Premises. Accordingly, if any installment
of Rent or any other sums due from Tenant shall not be received by Landlord when
due, Tenant shall pay to Landlord a late charge equal to two percent (2%) of
such overdue amount. The parties agree that such late charge represents a fair
and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount, nor
prevent Landlord from exercising any of the other rights and remedies granted
hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear interest from
the date due until paid at the rate of per annum. Payment of interest shall not
excuse or cure any default hereunder by Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made to Landlord
without deduction or offset, in lawful money of the United States of America at
Landlord's address for notices hereunder, or to such other person or at such
other place as Landlord may from time to time designate in writing to Tenant.
4. Taxes and Operating Expenses
(a) In addition to the Base Rent, Tenant shall pay (i) Tenant's Percentage Share
of Property Taxes (according to the percentage set forth in the Basic Lease
Information) relating to those Property Taxes (as the term is defined under
Paragraph 4(a)(1) below) which are assessed during the Term, and (ii) Tenant's
Percentage Share of Operating Expenses (according to the percentage set forth in
the Basic Lease Information) relating to those Operating Expenses (as the term
is defined under Paragraph 4(a)(2) below) which are paid or incurred by Landlord
during the Term.
(1) "Property Taxes" shall mean all real property taxes, bonds and assessments
and governmentally imposed fees or charges (and any tax levied wholly or partly
in lieu thereof) levied, assessed, confirmed, imposed or which have become a
lien against the Building (which for the purposes of defining "Property Taxes"
shall include the tax parcel of which the Building is a part) and Common Areas.
(2) "Operating Expenses" shall mean the following: (A) all reasonable costs of
management, operation, maintenance and repair of the Building and Common Areas,
including, without limitation, property management expenses, maintenance and
repair materials, supplies and equipment; (B) all reasonable costs of water,
power, electricity, refuse collection, parking lot sweeping, landscaping, and
other services relating to the Common Areas; (C) all reasonable costs of
alterations or improvements to the Building or Common Areas made to achieve
compliance with federal, state and local law including, without limitation, the
Americans with Disabilities Act (42 U.S.C. Section 12101 et seq.), which costs
will be amortized over the useful life of each alteration or improvement; (D)
all reasonable costs of public liability and casualty insurance maintained by
Landlord with respect to the Building and Common Areas; (E) all reasonable costs
incurred by Landlord for making any capital improvements, structural repairs or
modifications to the Building or Common Areas or making any improvements or
modifications to reduce the operating expenses, which costs will be amortized
over the useful life of each capital improvement, structural repair or
modification; (F) all reasonable costs of maintaining machinery, equipment and
directional signage or other markers; and G) the share allocable to the Building
of dues and assessments payable under any reciprocal easement or common area
maintenance agreements or declarations or by any owners' associations affecting
the Building. That portion of the Operating Expenses relating to the property
management expenses for the Building and Common Areas which shall be charged to
Tenant shall be four percent (4%) of both Tenant's annual Base Rent and the
subtotal of Tenant's share of Operating Expenses of the Building. In the event
that Landlord calculates the Operating Expenses based upon the Project instead
of the Building, as indicated on the Basic Lease Information, then the term
"Project" shall be substituted in the place of all references to the term
"Building" in this paragraph.
(b) The Property Taxes to be paid by Tenant shall be determined by multiplying
the total amount of the Property Taxes by Tenant's Percentage Share of Property
Taxes (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the
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rentable area of the Premises and the denominator of which is the total rentable
area of all improvements located within the tax parcel of which the Premises are
a part). Landlord may cause the Common Areas of the Project to be separately
assessed from other areas and buildings of the Project. In such case, Tenant's
Percentage Share of Property Taxes attributable to the Common Areas shall be
determined by the ratio that the total rentable square feet in the Premises
bears to the total number of square feet of rentable area which is included in
the property subject to the assessment.
(c) Operating Expenses for each calendar year shall be adjusted to equal
Landlord's reasonable estimate of Operating Expenses as though ninety-five
percent (95%) of the total rentable area of the Building had been occupied. When
the Building is one hundred percent (100%) occupied, the Operating Expenses
shall be adjusted to reflect a 100% occupied building. The Operating Expenses to
be paid by Tenant shall be determined by multiplying the total amount of the
Operating Expenses as adjusted above by Tenant's Percentage Share of Operating
Expenses (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the rentable area of the Premises and the denominator of
which is the total rentable area located within the Building, if the Operating
Expenses are calculated for the Building, or within the Project, if the
Operating Expenses are calculated for the Project).
(d) Tenant shall pay to Landlord each month at the same time and in the same
manner as monthly Base Rent one-twelfth (1/12th) of Landlord's estimate of the
amount of Property Taxes and one-twelfth (1/12th) of Landlord's estimate of
Operating Expenses payable by Tenant for the then-current calendar year. The
initial monthly amount shall be as set forth in the Basic Lease Information.
Within one hundred twenty (120) days after the close of each calendar year, or
as soon after such 120-day period as practicable, Landlord shall deliver to
Tenant a statement in reasonable detail of the actual amount of Property Taxes
and Operating Expenses payable by Tenant in accordance with this Paragraph 4 for
such calendar year. Tenant may request further information if desired.
Landlord's failure to provide such statement to Tenant within the 120-day period
shall not act as a waiver and shall not excuse Tenant or Landlord from making
the adjustments to reflect actual costs as provided herein. If on the basis of
such statement Tenant owes an amount that is less than the estimated payments
for such calendar year previously made by Tenant, Landlord shall credit such
excess to Tenant against future additional rent due under this Paragraph 4. If
on the basis of such statement Tenant owes an amount that is more than the
estimated payments for such calendar year previously made by Tenant, Tenant
shall pay the deficiency to Landlord within fifteen (15) days after delivery of
the statement. The obligations of Landlord and Tenant under this Paragraph 4(d)
with respect to the reconciliation between the estimated and actual amounts of
Property Taxes and Operating Expenses payable by Tenant for the last year of the
Term shall survive the termination of the Lease. When the final determination is
made of the actual amounts of Property Taxes and Operating Expenses payable by
Tenant for the year in which this Lease terminates, Tenant shall immediately pay
any increase due over the estimated payments and, conversely, any overpayment
made by Tenant shall be immediately reimbursed to Tenant by Landlord.
5. Other Taxes.
In addition to Tenant's obligations under Paragraph 4 above, Tenant shall pay or
reimburse Landlord for (i) any taxes upon, measured by or reasonably
attributable to the cost or value of Tenant's equipment, furniture, fixtures,
and other personal property located in the Premises or leasehold improvements
made in or to the Premises at Tenant's expense, (ii) for taxes, if any, measured
by or reasonably attributable to tenant improvements paid for by Tenant, and
(iii) for any taxes, assessments, fees, or charges imposed by any public
authority or private community maintenance association upon or by reason of the
development, possession, use or occupancy of the Premises or the parking
facilities used by Tenant in connection with the Premises. On request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment of
Tenant's business personal property taxes and deliver copies of such business
personal property tax bills to Landlord.
6. Use.
6.1 Prohibited Uses.
(a) The Premises shall be used and occupied by Tenant solely for the use set
forth in the Basic Lease Information. Tenant shall, at Tenant's expense, comply
promptly with all applicable federal, state and local laws, regulations,
ordinances, rules, orders, and requirements in effect during the Term relating
to the condition, use or occupancy of the Premises. Tenant shall not use or
permit the use of the Premises in any manner that will tend to create waste or a
nuisance, or that unreasonably disturbs other tenants of the Building or
Project, nor shall Tenant place or maintain any signs, antennas, awnings,
lighting or plumbing fixtures, loud speakers, exterior decoration or similar
devises on or visible from the exterior of the Premises, without Landlord's
prior written consent, which may be withheld in Landlord's sole discretion.
Tenant shall not use any corridors, sidewalks, stairs, elevators, or other areas
outside
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of the Premises for storage or any purpose other than access to the Premises.
Tenant shall not use, keep, or permit to be used or kept on the Premises any
foul or noxious gas or substance, nor shall Tenant do or permit to be done
anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located, or the Rules (as the term is
defined under Paragraph 6.3(b) below).
(b) Tenant shall not attach any signage to or on any part of the outside of the
Premises, the Building or the Project, or in the halls, lobbies, windows or
elevator banks of the Building without Landlord's prior written consent, which
consent may be withheld in Landlord's sole discretion. Any signage so permitted
shall be subject to prior approval of and conformance with the requirements of
the design review committee of the Project and the design review agency of the
city. At Tenant's expense, Tenant shall (i) maintain all permitted signage, and
(ii) upon the expiration or termination of this Lease, remove such signage and
repair any damage caused by their removal. If Tenant fails to do so, Landlord
may maintain, repair or remove such signage without notice to Tenant and at
Tenant's expense, the cost of which shall be payable by Tenant as additional
rent in accordance with Paragraph 14(b)(2) below.
6.2 Suitability. Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty with respect to the Premises or
the Building or with respect to the suitability or fitness of either for the
conduct of Tenant's business or for any other purpose. Nor has Landlord agreed
to undertake any modification, alteration or improvement to the Premises except
as provided in this Lease. Tenant acknowledges that the Premises are located in
a 100-year flood zone and that the finished floor elevations of the Building are
designed to be at least one (1) foot above the federal government's estimate of
the 100-year flood level at the time of initial construction.
6.3 Use of Common Areas.
(a) Landlord gives Tenant and its authorized employees, agents, customers,
representatives, and invitees the nonexclusive right to use the Common Areas,
with others who are entitled to use the Common Areas, subject to Landlord's
rights as set forth in this Paragraph 6.3.
(b) All Common Areas shall be subject to the exclusive control and management of
Landlord and Landlord shall have the right to establish, modify, amend, and
enforce reasonable rules and regulations with respect to the Common Areas.
Tenant acknowledges receipt of a copy of the current rules and regulations,
attached hereto as Exhibit C, and agrees that they may, from time to time, be
modified or amended by Landlord in a commercially reasonable manner (the
"Rules"). Tenant agrees to abide by and conform with such Rules; to cause its
concessionaires and its and their employees and agents to abide by such Rules;
and to use its best efforts to cause its customers, invitees, and licensees to
abide by such Rules.
(c) Landlord shall have the right to close temporarily any portion of the Common
Areas for the purpose of discouraging use by parties who are not tenants or
customers of tenants; to use portions of the Common Areas while engaged in
making additional improvements or repairs or alterations to the Property; to use
or permit the use of the Common Areas by others to whom Landlord may grant or
have granted such rights; and to do and perform such acts in, to, and with
respect to, the Common Areas as in the use of good business judgment Landlord
shall determine to be appropriate for the Project.
(d) Landlord shall have the unqualified right to increase or reduce the Common
Areas, provided the Project meets the parking requirement under Paragraph 6.5
below.
(e) Tenant shall cooperate with Landlord and other tenants in the Project in
recycling waste paper, cardboard, or such other materials identified under any
trash recycling program that may be established in order to reduce trash
collection costs.
6.4 Environmental Matters.
(a) (1) The term "Hazardous Materials" as used herein means any petroleum
products, asbestos, polychlorinated biphenyls, P.C.B.'s, chemicals, compounds,
materials, mixtures or substances that are now or hereafter defined or listed
in, or otherwise classified as a "hazardous substance", "hazardous material",
"hazardous waste", "extremely hazardous waste", "infectious waste", "toxic
substance", "toxic pollutant" or any other formulation intended to define, list
or classify substances by reason of deleterious properties such
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as ignitability, corrosivity, reactivity, carcinogenicity or toxicity pursuant
to any federal, state or local environmental law, regulation, ordinance,
resolution, order or decree relating to industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, release,
disposal or transportation of the same ("Hazardous Materials Laws").
(2) Except for ordinary office supplies and janitorial cleaning materials which
in common business practice are customarily and lawfully used, stored and
disposed of in small quantities, and except for those Hazardous Materials listed
on Exhibit D attached hereto, Tenant shall not use, manufacture, store, release,
dispose or transport any Hazardous Materials in, on, under or about the
Premises, the Building or the Project without giving prior written notice to
Landlord and obtaining Landlord's prior written consent, which consent Landlord
may withhold in its sole discretion. Subject to Landlord's prior written
consent, Hazardous Materials may be added to Exhibit D on an annual review
basis; any such amendments to Exhibit D shall be signed by each party and
attached hereto. Tenant shall at its own expense procure, maintain in effect,
and comply with all conditions of any and all permits, licenses, and other
governmental and regulatory approvals required in connection with Tenant's
generation, use, storage, disposal and transportation of Hazardous Materials.
Except as discharged into the sanitary sewer in strict accordance and conformity
with all applicable Hazardous Materials Laws, Tenant shall cause any and all
Hazardous Materials removed from the Premises to be removed and transported
solely by duly licensed haulers to duly licensed facilities for final disposal
of such materials and wastes. Regardless whether permitted under the Hazardous
Materials Laws, Tenant shall not maintain in, on, under, or about the Premises,
the Building or the Project any above or below ground storage tanks, clarifiers,
or sumps, nor shall any wells for the monitoring of ground water, soils, or
subsoils be allowed.
(3) Tenant shall immediately notify Landlord in writing of: (a) any enforcement,
cleanup, removal or other governmental or regulatory action instituted,
completed or threatened pursuant to any Hazardous Materials Law; (b) any claim
made or threatened by any person or entity against Tenant or the Premises
relating to damage, contribution, cost, recovery, compensation, loss or injury
resulting from or claimed to result from any Hazardous Materials; and (c) any
reports, information, inquiries or demands made, ordered, or received by or on
behalf of Tenant which arise out of or in connection with the existence or
potential existence of any Hazardous Materials in, on, under or about the
Premises, the Building, or the Project, including, without limitation, any
complaints, notices, warnings, asserted violations, or mandatory or voluntary
informational filings with any governmental agency in connection therewith, and
immediately supply Landlord with copies thereof.
(b) Tenant shall indemnify, defend (by counsel reasonably acceptable to
Landlord), protect, and hold Landlord, and each of Landlord's partners,
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, attorneys,
successors and assigns, free and harmless from and against any and all claims,
liabilities, damages, fines, penalties, forfeitures, losses, cleanup and
remediation costs or expenses (including attorneys' fees) or death of or injury
to any person or damage to any property whatsoever, arising from or caused in
whole or in part, directly or indirectly, by (i) Tenant's use, analysis,
generation, manufacture, storage, release, disposal, or transportation of
Hazardous Materials by Tenant, Tenant's agents, employees, contractors,
licensees or invitees to, in, on, under, about or from the Premises, the
Building, or the Project, or(ii) Tenant's failure to comply with any Hazardous
Materials Law. Tenant's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any required or necessary
repair, cleanup, detoxification or decontamination of the Premises, the
Building, or the Project and the preparation and implementation of any closure,
remedial action or other required plans in connection therewith, and shall
survive the expiration or earlier termination of this Lease.
(c) Landlord shall have the right to enter the Premises during regular business
hours upon reasonable prior notice at all times for the purposes of ascertaining
compliance by Tenant with all applicable Hazardous Materials Laws, provided,
however, that in the instance of an emergency Landlord's entry onto the
Premises shall not be restricted to regular business hours nor shall notice be
required.
(d) Landlord shall have the option to declare a default of this Lease for there
lease or discharge of Hazardous Materials by Tenant, Tenant's employees, agents,
contractors, or invitees on the Premises, Building or Project or in violation of
law or in deviation from prescribed procedures in Tenant's use or storage of
Hazardous Materials. Landlord shall have the option to conduct a Hazardous
Materials investigation if it has a reasonable belief that there has been a
discharge or release, or potential of discharge or release, of Hazardous
Materials by Tenant, Tenant's employees, agents, contractors, or invitees on the
Premises, Building or Project in violation of law or in deviation from
prescribed procedures in Tenant's use or storage of hazardous Materials. If
Tenant fails to comply with any of the provisions under this Paragraph 6.4,
Landlord shall have the right (but not the obligation) to remove or otherwise
cleanup any Hazardous Materials from the Premises, the Building or the Project.
In such case, the costs of any Hazardous Materials investigation, removal or
other cleanup
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(including, without limitation, transportation, storage, disposal and attorneys'
fees and costs) will be additional rent due under this Lease, whether or not a
court has ordered the cleanup, and will become due and payable on demand by
Landlord.
6.5 Parking. Landlord grants to Tenant and Tenant's customers, suppliers,
employees and invitees a nonexclusive license to use unassigned and unreserved
parking spaces in the Common Areas for the use of motor vehicles during the Term
subject to rights reserved to Landlord as specified in this Paragraph 6.5.
Landlord reserves the right to grant similar nonexclusive and unassigned and
unreserved use to other tenants; to promulgate rules and regulations relating to
the use of the Common Areas including parking by tenants and employees of
tenants to make changes in the parking layout from time to time; and to do and
perform any other acts in and to these areas and improvements as Landlord
determines to be advisable. Tenant agrees not to overburden the parking
facilities and to abide by and conform with the rules and regulations and to
cause its employees and agents to abide by and conform to the rules and
regulations. Upon request, Tenant shall provide Landlord with license plate
numbers of all vehicles driven by its employees and to cause Tenant's employees
to park only in spaces specifically designated for tenant parking. Landlord
shall have the unqualified right to rearrange or reduce the number of parking
spaces; provided, however, the ratio of the number of parking spaces available
to Tenant will be no less than four (4.0) spaces per 1,000 usable square feet of
the Premises.
7. Services.
(a) Tenant shall pay for all water, sewer, gas, electricity, heat, cooling,
telephone, refuse collection, and other utility-type services furnished to
Tenant or the Premises, together with all related installation or connection
charges or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and paid for
directly by Tenant. To the extent any of the foregoing services are provided by
Landlord, Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with the provision of such services based on Landlord's reasonable
estimate of the level of Tenant's use or consumption of such services. Landlord
shall bill Tenant on a monthly -or other periodic basis for such services and
payment shall be made by Tenant within ten (10) days after submittal of
Landlord's statement.
(b) Landlord shall not be in default hereunder or be liable for any damages or
personal injuries to any person directly or indirectly resulting from, nor shall
there be any Rent abatement by reason of, any interruption or curtailment
whatsoever in utility services.
8. Maintenance, Repairs and Alterations.
(a) Tenant shall, at Tenant's expense, maintain every part of the Premises in
good order, condition and repair, including without limitation, (i) all interior
surfaces, ceilings, walls, door frames, window frames, floors, carpets,
draperies, window coverings and fixtures, (ii) all windows, doors, locks and
closing devices, entrances, plate glass, and signs, (iii) all plumbing and
sewage pipes, fixtures and fittings, (iv) all phone lines, electrical wiring,
equipment, switches, outlets, and light bulbs, (v) any fire detection, fire
sprinkler or extinguisher equipment,(vi) all of Tenant's personal property,
improvements and alterations, and (vii) all other fixtures and special items
installed by or for the benefit of, or at the expense of Tenant. Tenant shall,
at its expense, cause to be maintained in good operating condition and repair,
all heating, ventilating, and air conditioning equipment installed in, or on the
roof of the Premises. Tenant shall keep in force a preventive maintenance
contract with a qualified maintenance company covering all heating, ventilating
and air conditioning equipment and shall annually provide Landlord with a copy
of this contract. Tenant shall not enter onto the roof area of the Building,
except for the purpose of maintaining the heating, ventilating, and air
conditioning equipment and provided that Tenant shall repair any damage to the
roof area caused by its entry. Tenant shall be responsible for its own
janitorial service. Landlord shall incur no expense (nor have any obligation) of
any kind whatsoever in connection with the maintenance of the Premises.
(b) Landlord shall keep in good condition and repair the foundation, roof
structure, exterior walls and other structural parts of the Building, and all
other portions of the Building not the obligation of Tenant or any other tenant
in the Building. Tenant expressly waives the benefits of any statute, including
Civil Code Sections 1941 and 1942, which would afford Tenant the right to make
repairs at Landlord's expense or to terminate this Lease due to Landlord's
failure to keep the Building in good order, condition and repair. Landlord shall
have no liability to Tenant for any damage, inconvenience, or interference with
the use of the Premises by Tenant as the result of Landlord performing any such
maintenance and repair work.
(c) In the event Tenant fails to perform Tenant's obligations under this
Paragraph 8, Landlord may, but shall not be required to, give Tenant notice to
do such acts as are reasonably required to so maintain the Premises. If Tenant
shall fail to commence such work and diligently prosecute it to completion, then
Landlord shall have the right (but not the obligation) to do such acts and
expend such funds at the expense of Tenant as are reasonably required to perform
such
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work. Any amounts so expended by Landlord will be additional rent due under this
Lease, and such amounts will become due and payable on demand by Landlord.
Landlord shall have no liability to Tenant for any such damages, inconvenience,
or interference with the use of the Premises by Tenant as a result of performing
such work.
(d) Upon the expiration or earlier termination of this Lease, Tenant shall
surrender the Premises in good condition and repair, only ordinary wear and tear
excepted. Tenant, at its sole cost and expense, agrees to repair any damages to
the Premises caused by or in connection with the removal of any articles of
personal property, business or trade fixtures, signs, machinery, equipment,
cabinetwork, furniture, moveable partitions, or permanent improvements or
additions, including without limitation thereto, repairing the floor and
patching and painting the walls where required by Landlord, to Landlord's
reasonable satisfaction. Tenant shall indemnify Landlord against any loss or
liability resulting from delay by Tenant in so surrendering the Premises,
including without limitation, any claims made by any succeeding tenant resulting
from such delay.
(e) Tenant shall not make any alterations, improvements, or additions in, on, or
about the Premises without Landlord's prior written consent, except that Tenant
may make alterations, improvements, or additions without Landlord's prior
written consent where (i) the reasonably estimated cost does not exceed $2,500,
and (ii) such alterations, improvements, or additions do not affect or involve
the structural integrity, roof membrane, exterior areas, building systems, or
water-tight nature of the Premises, the Building or the Project. In requesting
Landlord's consent, Tenant shall, at Tenant's sole cost, submit to Landlord
complete drawings and specifications describing such work and the identity of
the proposed contractor at least ten (10) business days prior to the
commencement of any work. With respect to any alterations, improvements or
additions made to the Premises by Tenant:
(1) Before commencing any work relating to alterations, additions, or
improvements affecting the Premises, Tenant shall notify Landlord of the
expected date of commencement thereof and of the anticipated cost thereof.
Landlord shall then have the right at any time and from time to time to post and
maintain on the Premises such notices as Landlord reasonably deems necessary to
protect the Premises and Landlord from mechanics' liens or any other liens.
(2) Tenant shall pay when due all claims for labor or materials furnished to
Tenant for use in the Premises. Tenant shall not permit any mechanics' liens or
any other liens to be levied against the Premises for any labor or materials
furnished to Tenant in connection with work performed on the Premises by or at
the direction of Tenant. Tenant shall indemnify, hold harmless and defend
Landlord (by counsel reasonably satisfactory to Landlord) from any liens and
encumbrances arising out of any work performed or materials furnished by, or at
the direction of Tenant. In the event that Tenant shall not, within twenty (20)
days following the imposition of any such lien, cause such lien to be released
of record by payment or posting of a proper bond, Landlord shall have, in
addition to all other remedies provided herein by law, the right, but not the
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All such sums
paid by Landlord and all expenses incurred by it in connection therewith,
including attorneys' fees and costs, shall be payable to Landlord by Tenant on
demand with interest at the rate of eight and one-half percent (8.5%) per annum.
(3) All alterations, improvements or additions in or about the Premises
performed by or on behalf of Tenant shall be done in a first-class, workmanlike
manner, shall not unreasonably lessen the value of leasehold improvements in the
Premises, and shall be completed in compliance with all applicable laws,
ordinances, regulations and orders of any governmental authority having
jurisdiction thereover, as well as the requirements of insurers of the Premises
and the Building.
(4) Upon Landlord's request, Tenant shall remove any contractor, subcontractor
or material supplier from the Premises and the Building if the work or presence
of such person or entity results in labor disputes in or about the Building or
Project or damage to the Premises, Building or Project.
(5) Landlord, at Landlord's sole discretion, may refuse to grant Tenant
permission for alterations, improvements or additions which require, because of
application of Americans with Disabilities Act or other laws, substantial
improvements or alterations to be made to the Common Areas.
(6) Landlord may, up to sixty (60) days prior to the expiration of the Term,
require that Tenant, at Tenant's expense, remove any such alterations,
improvements or additions
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prior to or upon the expiration of this Lease, and restore the Premises to their
condition prior to such alterations, improvements or additions.
(7) Unless Landlord requires their removal, as set forth above, all alterations,
improvements, or additions made to the Premises shall become the property of
Landlord and remain upon and be surrendered with the Premises upon the
expiration of this Lease; provided, however, that Tenant's machinery, equipment,
and trade fixtures, other than any which may be affixed to the Premises so that
they cannot be removed without material damage to the Premises, shall remain the
property of Tenant and may be removed by Tenant subject to the provisions of
Paragraph 8(d) above.
9. Construction of Tenant Improvements.
Landlord shall be responsible for constructing the tenant improvements ("Tenant
Improvements") in the Premises, as provided in the Work Letter Agreement,
attached hereto as Exhibit B.
10. Insurance and Indemnity.
10.1 Insurance.
(a) Tenant shall obtain and maintain during the Term comprehensive general
liability insurance with a combined single limit for personal injury and
property damage in an amount of not less than $2,000,000 (in a form, with a
deductible amount, and with carriers reasonably acceptable to Landlord) and
employer's liability and workers' compensation insurance as required by law. The
insurance carrier shall be authorized to do business in the State of California,
with a policyholders and financial rating of at least A:IX Class status as rated
in the most recent edition of Best's Key-Rating guide. Tenant's comprehensive
general liability insurance policy shall be endorsed to provide that (i) it may
not be canceled or altered in such a manner as to adversely affect the coverage
afforded thereby without thirty (30) days' prior written notice to Landlord,
(ii) Landlord is designated as an additional insured, (iii) the insurer
acknowledges acceptance of the mutual waiver of claims by Landlord and Tenant
pursuant to Paragraph 10.2(b) below, and (iv) such insurance is primary with
respect to Landlord and that any other insurance maintained by Landlord is
excess and noncontributing with such insurance. If, in the reasonable opinion of
Landlord's lender or in the commercially reasonable opinion of Landlord's
insurance adviser, the specified amounts of coverage are no longer adequate,
such coverage shall, within 30 days written notice to Tenant, be appropriately
increased. Prior to the commencement of the Term, Tenant shall deliver to
Landlord a duplicate of such policy or a certificate thereof to Landlord for
retention by it, with endorsements. At least thirty (30) days prior to the
expiration of such policy or any renewal or modification thereof, Tenant shall
deliver to Landlord a replacement or renewal binder, followed by a duplicate
policy or certificate within a reasonable time thereafter. If Tenant fails to
obtain such insurance or to furnish Landlord any such duplicate policy or
certificate as herein required, Landlord may, at its election, without notice to
Tenant and without any obligation to do so, procure and maintain such coverage
and Tenant shall reimburse Landlord on demand as additional rent for any premium
so paid by Landlord.
(b) Landlord waives all claims against Tenant, and Tenant's officers, directors,
partners, employees, agents and representatives for loss or damage to the extent
that such loss or damage is insured against under any valid and collectable
insurance policy insuring Landlord or would have been insured against but for
any deductible amount under any such policy. Tenant waives all claims against
Landlord, and Landlord's officers, directors, partners, employees, affiliates,
joint venturers, members, trustees, owners, shareholders, principals, agents,
representatives, successors and assigns, for loss or damage to the extent such
loss or damage is insured against under any valid and collectable insurance
policy insuring Tenant or required to be maintained by Tenant under this Lease,
or would have been insured against but for any deductible amount under any such
policy. The insuring party shall, upon obtaining the policies of insurance
required under this Lease, give notice to the insurance carrier or carriers that
the foregoing mutual waiver of subrogation is contained in this Lease. Tenant
agrees that in the event of a sale, assignment or transfer of the Premises by
Landlord, this waiver of subrogation shall continue in favor of the original
Landlord and any subsequent Landlord.
(c) Tenant shall at its own cost maintain on all its personal property, Tenant's
improvements, and alterations, in, on, or about the Premises, a policy of
standard fire and extended coverage insurance, with vandalism and malicious
mischief endorsements, to the extent of at least one hundred percent (100%) of
their full replacement value. The proceeds from any such policy shall be used by
Tenant for the replacement of personal property and the restoration of Tenant's
improvements or alterations. Notwithstanding any other provisions of the Lease,
Landlord shall have no liability for damage to or destruction of Tenant's
personal property,
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unless caused by the active negligence or willful misconduct of Landlord, its
agents, employees, or contractors.
(d) During the Term, Landlord shall keep the Building, and improvements within
which the Premises are located, insured against loss or damage by (i) fire, with
extended coverage and vandalism, malicious mischief and special extended perils
(all risk) endorsements or their equivalents, in amounts not less than one
hundred percent (100%) of the replacement cost of the Building and structures
insured, and (ii) flood, in the maximum amount provided for by FEMA under its
flood loss insurance program, with loss payable thereunder to Landlord and to
any authorized encumbrancer of Landlord (with standard mortgagee loss payable
clause) in accordance with their respective interests. Landlord may maintain
rent insurance, for the benefit of Landlord, equal to at least one year's Base
Rent hereunder. If the Lease is terminated as a result of damage by fire,
casualty or earthquake as set forth in this Paragraph 10, all insurance proceeds
shall be paid to and retained by Landlord, subject to the rights of any
authorized encumbrancer of Landlord.
(e) Tenant acknowledges that Landlord does not, at the time of the signing of
this Lease, insure the Building for earthquake damage. Landlord may, when
Landlord deems the premiums to be reasonable, insure the Building fully or
partially for earthquake damage. At such time, the premium for earthquake
insurance will be added to the Operating Expenses for purposes of determining
additional rent.
10.2 Indemnity.
(a) Tenant waives all claims against Landlord for damage to any property or
injury to or death of any person in, on, or about the Premises, the Building, or
any other portion of the Project arising at any time and from any cause, unless
caused by the active negligence or willful misconduct of Landlord, its agents,
employees, or contractors. Tenant shall indemnify, defend (by counsel reasonably
satisfactory to Landlord) and hold harmless Landlord, and Landlord's officers,
directors, partners, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, principals, agents, representatives, successors and
assigns, from and against all claims, costs, damages, actions, indebtedness and
liabilities (except such as may arise from the active negligence or willful
misconduct of Landlord, and Landlord's officers, directors, partners, employees,
affiliates, joint venturers, members, trustees, owners, shareholders,
principals, agents, representatives, successors and assigns) arising by reason
of any death, bodily injury, personal injury, property damage or any other
injury or damage in connection with (i) any condition or occurrence in or about
or resulting from any condition or occurrence in or about the Premises during
the Term, or (ii) any act or omission of Tenant, or Tenant's agents,
representatives, officers, directors, shareholders, partners, employees,
successors and assigns, wherever it occurs. The foregoing indemnity obligation
of Tenant shall include reasonable attorneys' fees, and all other reasonable
costs and expenses incurred by Landlord from the first notice that any claim or
demand is to be made. The provisions of this Paragraph 10.2 shall survive the
termination or expiration of this Lease with respect to any damage, injury, or
death occurring prior to such expiration or termination.
(b) Neither party shall be liable to the other for any unauthorized or criminal
entry of third parties into the Premises, Building, Project, Common Areas, or
parking facilities, or for any damage to person or property, or loss of property
in and about the Premises, Building, Project, Common Areas, parking facilities
and the approaches, entrances, streets, sidewalks, stairs, elevators, restrooms,
or corridors thereto, by or from any unauthorized or criminal acts of third
parties, regardless of any breakdown, malfunction or insufficiency of any
security measures, practices or equipment provided by Landlord or Tenant. Tenant
shall immediately notify Landlord in writing of any breakdown or malfunction of
any security measures, practices or equipment provided by Landlord as to which
Tenant has knowledge.
(c) Any diminution or interference with light, air or view by any structure
which may be erected on land adjacent to the Building or resulting from any
other cause shall in no way alter this Lease or impose any liability on
Landlord.
(d) Tenant agrees that in no event shall Landlord be liable for consequential
damages, including injury to Tenant's business or any loss of income therefrom.
(e) In the event that Landlord or any successor owner of the Building sells or
conveys the Building, then all liabilities and obligations of Landlord or the
successor owner under this Lease accruing after the sale or conveyance shall
terminate and become binding on the new owner, and Tenant shall release Landlord
from all liability under this Lease (including, without limitation, the Security
Deposit, as defined under Paragraph 16 below), except for acts or omissions of
Landlord occurring prior to such sale or conveyance.
(f) Tenant expressly agrees that so long as Landlord is a corporation,
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<PAGE> 12
limited liability company, trust, partnership, joint venture, unincorporated
association or other form of business entity, (i) the obligations of Landlord
shall not constitute personal obligations of the officers, directors, partners,
employees, affiliates, joint venturers, members, trustees, owners, shareholders,
or other principals, agents or representatives of such business entity ("Member
of Landlord"), and (ii) Tenant shall have recourse only to the interest of such
business entity in the Building of which the Premises are a part for the
satisfaction of such obligations and not against the assets of such Member of
Landlord other than to the extent of their respective interests in the Building.
In this regard, Tenant agrees that in the event of any actual or alleged
failure, breach or default by Landlord of its obligations under this Lease, that
(i) no Member of Landlord shall be sued or named as a party in any suit or
action (except as may be necessary to secure jurisdiction of Landlord), (ii) no
judgment will be taken against any Member of Landlord, and any judgment taken
against any Member of Landlord may be vacated and set aside at any time without
hearing,(iii) no writ of execution will ever be levied against the assets of any
Member of Landlord, and(iv) these agreements by Tenant are enforceable both by
Landlord and by any Member of Landlord.
11. Damage or Destruction.
(a) Subject to the provisions of Paragraphs 11 (b) and 11 (c) below, if, during
the Term, the Premises are totally or partially destroyed from any insured
casualty, Landlord shall, within ninety (90) days after the destruction,
commence to restore the Premises to substantially the same condition as they
were in immediately before the destruction and prosecute the same diligently to
completion. Such destruction shall not terminate this Lease. Landlord's
obligation shall not include repair or replacement of Tenant's alterations or
Tenant's equipment, furnishings, fixtures and personal property. If the
existing laws do not permit the Premises to be restored to substantially the
same condition as they were in immediately before destruction, and Landlord is
unable to get a variance to such laws to permit the commencement of restoration
of the Premises within the 90-day period, then either party may terminate this
Lease by giving written notice to the other party within thirty (30) days after
expiration of the 90-day period.
(b) Despite the provisions of Paragraph 11 (a) above, Landlord may decide within
ninety (90) days after such destruction to demolish the Building rather than
rebuild it, in which case this Lease will terminate as of the date of the
destruction. Landlord shall give Tenant written notice of its intention within
ninety (90) days after the destruction.
(c) If any destruction occurs to the Premises during the last six (6) months of
the initial Term or during the last six (6) months of any extension period,
regardless of the nature and extent of the destruction, either party can elect
to terminate this Lease within thirty (30) days after the destruction occurs. If
this Lease does not terminate pursuant to this Paragraph 11 (c), the provisions
of Paragraph 11 (a) above shall apply.
(d) If the Premises are damaged from any uninsured casualty to any extent
whatsoever, Landlord may within ninety (90) days following the date of such
damage: (i)commence to restore the Premises to substantially the same condition
as they were in immediately before the destruction and prosecute the same
diligently to completion, in which event this Lease shall continue in full force
and effect; or (ii) within the 90-day period Landlord may elect not to so
restore the Premises, in which event this Lease shall cease and terminate. In
either such event, Landlord shall give Tenant written notice of its intention
within the 90-day period.
(e) In the event of destruction or damage to the Premises which materially
interferes with Tenant's use of the Premises, if this Lease is not terminated as
above provided, there shall be an abatement or reduction of Base Rent between
the date of destruction and the date Landlord substantially completes its
reconstruction obligations, based upon the extent to which the destruction
materially interferes with Tenant's use of the Premises. All other obligations
of Tenant under this Lease shall remain in full force and effect. Except for
abatement of Base Rent, Tenant shall have no claim against Landlord for any loss
suffered by Tenant due to damage or destruction of the Premises or any work of
repair undertaken as herein provided.
(f) The provisions of California Civil Code Sections 1932(2) and 1933(4), and
any successor statutes, are inapplicable with respect to any destruction of the
Premises, such sections providing that a lease terminates upon the destruction
of the Premises unless otherwise agreed between the parties to the contrary.
12. Eminent Domain.
(a) If all or any part of the Premises shall be taken as a result of the
exercise of the power of eminent domain, this Lease shall terminate as to the
part so taken as of the date of taking. In the case of a partial taking of
greater than fifty percent (50%) of the rentable area of the Premises, either
Landlord or Tenant shall have the right to terminate this Lease as to the
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balance of the Premises by notice to the other within thirty (30) days after the
date of the taking. In the event of a partial taking of the Premises which does
not result in a termination of this Lease, the monthly Base Rent thereafter to
be paid shall be equitably reduced on a square footage basis. If the continued
occupancy of Tenant is materially interfered with for any time during the
partial taking, notwithstanding the partial taking does not terminate this Lease
as to the part not so taken, the Base Rent shall proportionately abate so long
as Tenant is not able to continuously occupy the part remaining and not so
taken.
(b) All compensation awarded or paid upon a total or partial taking of the fee
title shall belong to Landlord whether such compensation be awarded or paid as
compensation for diminution in value of the leasehold or of the fee except:
Tenant shall retain and have a claim for the following, to the extent
specifically designated by the condemning authority: (i) the unamortized value
over the Term of Tenant's leasehold improvements (to the extent Landlord has not
contributed to the cost thereof); (ii) that portion (if any) of the award made
to Landlord as a result of removing fixtures, removable by Tenant herein, under
the terms of this Lease but which are required to be taken by the condemn or are
so acquired by the condemn or; and (iii) all relocation assistance, moving and
relocation expenses to the extent (if any) provided by the condemning authority
directly to Tenant.
13. Assignment and Subletting.
(a) Tenant shall not assign, sublet or hypothecate this Lease or any interest
herein or sublet the Premises or any part thereof or permit the use of the
Premises by any party other than Tenant without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Any of the foregoing
acts without Landlord's consent shall be void and shall, at the option of
Landlord, terminate this Lease. In connection with each consent requested by
Tenant, Tenant shall submit to Landlord the terms of the proposed transaction,
the identity of the parties to the transaction, the proposed documentation for
the transaction, current financial statements of any proposed assignee or
sublessee and all other information reasonably requested by Landlord concerning
the proposed transaction and the parties involved therein.
(b) As used in this Paragraph 13, the term "assign" or "assignment" shall
include, without limitation, any sale, transfer, or other disposition of all or
any portion of Tenant's estate under this Lease, whether voluntary or
involuntary, and whether by operation of law or otherwise, including any of the
following:
(1) if Tenant is a corporation or a limited liability company: (A) any
dissolution, merger, consolidation, or other reorganization of Tenant; or (B) a
sale or other transfer of more than fifty percent (50%) of the value of the
assets of Tenants or (C) if Tenant is a corporation with fewer than 500
shareholders, a sale or other transfer of a controlling percentage of the
capital stock of Tenant; or (D) if Tenant is a limited liability company, a sale
or other transfer of a controlling percentage of the interest in Tenant. The
phrase "controlling percentage" means the ownership of, and the right to vote,
stocks or interests possessing at least fifty percent (50%) of the total
combined voting power of the limited liability company or, in the case of a
corporation, of all classes of Tenant's stock issues, outstanding and permitted
to vote for the election of directors of the corporation;
(2) if Tenant is a trust, the transfer of more than fifty percent (50%) of the
beneficial interest of Tenant, or the dissolution of the trust;
(3) if Tenant is a partnership or joint venture, the withdrawal, or the transfer
of the interest, of any general partner or joint venturer or the dissolution of
the partnership or joint venture; and
(4) if Tenant is composed of tenants-in-common, the. transfer of interest of any
cotenants or the partition or dissolution of the cotenancy.
(c) No sublessee shall have a right further to sublet, and any assignment by a
sublessee of its sublease shall be subject to Landlord's prior written consent
in the same manner as if Tenant were entering into a new sublease.
(d) Regardless of Landlord's consent, no subletting or assignment shall release
Tenant of Tenant's obligation, or alter the primary liability of Tenant to pay
the Rent and to perform all other obligations to be performed by Tenant
hereunder. The acceptance of Rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provisions hereof. Consent to one
assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Tenant or
any successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor.
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(e) In the event Tenant shall assign or sublet the Premises or request the
consent of Landlord to any assignment or subletting, then Tenant shall reimburse
Landlord for reasonable costs and attorneys' fees incurred in connection
therewith in an amount not to exceed $ 1,000.00.
14. Default by Tenant.
(a) The following events shall constitute events of default under this Lease:
(1) a failure by Tenant to pay any Rent or to deliver an estoppel certificate(as
provided in Paragraph 17 below) where such failure continues for five (5) days
after written notice by Landlord to Tenant;
(2) the bankruptcy or insolvency of Tenant, any transfer by Tenant to defraud
creditors, any assignment by Tenant for the benefit of creditors, or the
commencement of any proceedings of any kind by or against Tenant under any
provision of the Federal Bankruptcy Act or under any other insolvency,
bankruptcy or reorganization act unless, in the event any such proceedings are
involuntary, Tenant is discharged from the same within sixty (60) days
thereafter; the appointment of a receiver for a substantial part of the assets
of Tenant; or the levy upon this Lease or any estate of Tenant hereunder by any
attachment or execution;
(3) the abandonment or vacation of the Premises;
(4) the discovery by Landlord that any financial statement given to Landlord by
Tenant, any assignee of Tenant, any subtenant of Tenant, any successor in
interest of Tenant or any guarantor of Tenant's obligation hereunder, and any of
them, was materially false; and
(5) a failure by Tenant to perform any of the terms, covenants, agreements or
conditions of this Lease to be observed or performed by Tenant (excluding any
event of default under Paragraph 14(a)(1) above), where such failure continues
for thirty (30) days after written notice thereof is received by Tenant from
Landlord via certified mail postage prepaid, provided, however, that if the
nature of the default is such that the same cannot reasonably be cured within
the 30-day period, Tenant shall not be deemed to be in default if Tenant shall
within such period commence such cure and thereafter diligently prosecute the
same to completion.
(b) In the event of any material default or breach by Tenant, Landlord may at
anytime thereafter, without limiting Landlord in the exercise of any right or
remedy at law or inequity which Landlord may have by reason of such default or
breach:
(1) Pursue the remedy described in California Civil Code Section 1951.4 whereby
Landlord may continue this Lease in full force and effect after Tenant's breach
and abandonment and recover the Rent and any other monetary charges as they
become due, without terminating Tenant's right to sublet or assign this Lease,
subject only to reasonable limitations as herein provided. During the period
Tenant is in default, Landlord shall have the right to do all acts necessary to
preserve and maintain the Premises as Landlord deems reasonable and necessary,
including removal of all persons and property from the Premises, and Landlord
can enter the Premises and relet them, or any part of them, to third parties for
Tenant's account. Tenant shall be liable immediately to Landlord for all costs
Landlord incurs in reletting the Premises, including, without limitation,
brokers' commissions, expenses of remodeling the Premises required by the
reletting, and like costs. Reletting can be for a period shorter or longer than
the remaining Term.
(2) Pay or perform such obligation due (but shall not be obligated to do so),if
Tenant fails to pay or perform any obligations when due under this Lease within
the time permitted for their payment or performance. In such case, the costs
incurred by Landlord in connection with the performance of any such obligation
will be additional rent due under this Lease and will become due and payable on
demand by Landlord.
(3) Terminate Tenant's rights to possession by any lawful means, in which case
this Lease shall terminate and Tenant shall immediately surrender possession of
the Premises to Landlord. In such event Landlord shall be entitled to recover
from Tenant all damages incurred by Landlord by reason of Tenant's default,
including, without limitation, the following: (A) the worth at the time of award
of any unpaid Rent which had been earned at the time of such termination; plus
(B) the worth at the time of award of the amount by which the unpaid Rent which
would have been earned after termination until the time of award exceeds the
amount of such Rent loss that is proved could have been reasonably avoided; plus
(C) the worth at the time of award of the amount by which the unpaid Rent for
the balance of the Term after the time of award exceeds the amount of such Rent
loss that is proved could be reasonably avoided; plus (D) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or which in the
ordinary
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course of events would be likely to result therefrom; plus (E) at Landlord's
election, such other amounts in addition to or in lieu of the foregoing as may
be permitted from time to time by applicable State law. Upon any such
termination of Tenant's possessory interest in and to the Premises, Tenant (and
at Landlord's sole election, Tenant's sublessees) shall no longer have any
interest in the Premises, and Landlord shall have the right to make any
reasonable repairs, alterations or modifications to the Premises which Landlord
in its sole discretion deems reasonable and necessary. The "worth at the time of
award" of the amounts referred to in subparagraphs (A) and (B) above is computed
by allowing interest at the maximum rate of eight and one-half (percent (8.5%).
The worth at the time of award of the amount referred to in subparagraph (C)
above is computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%).
(4) Pursue any other legal or equitable remedy available to Landlord. Unpaid
installments of Rent and other unpaid monetary obligations of Tenant under the
terms of this Lease shall bear interest from the date due at the rate of ten
percent (10%) per annum.
(c) In the event Tenant is evicted or Landlord takes possession of the Premises
by reason of any default by Tenant hereunder, Tenant hereby waives any right of
redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the Premises, this
Lease shall continue in effect for so long as Landlord does not terminate
Tenant's right to possession, and Landlord may enforce all its rights and
remedies under this Lease, including the right to recover Rent as it becomes due
under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(e) In the event Tenant is in material default under any provision of this Lease
then, at Landlord's sole election: (i) Tenant shall not have the right to
exercise any available right, option or election under this Lease ("Tenant's
Exercise Rights") if at such time Tenant is in default hereunder, (ii) Tenant
shall not have the right to consummate any transaction or event triggered by the
exercise of any of Tenant's Exercise Rights if at such time Tenant is in default
hereunder, and (iii) Landlord shall not be obligated to give Tenant any required
notices or information relating to the exercise of any of Tenant's Exercise
Rights hereunder.
15. Default by Landlord, Notice to Mortgagee.
Landlord shall not be in default unless Landlord, or the holder of any mortgage,
deed of trust or ground lease covering the Premises, fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord certified mail,
postage prepaid, and to the holder of any first mortgage, deed of trust or
ground lease covering the Premises whose name and address shall have been
furnished to Tenant in writing, specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance.
then Landlord shall not be in default if Landlord or the holder of any such
mortgage, deed of trust or ground lease commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion. In no event
shall Tenant be entitled to terminate this Lease by reason of Landlord's
default, and Tenant's remedies shall be limited to an action for monetary
damages at law.
16. Security Deposit.
On execution of this Lease, Tenant shall deposit with Landlord the sum specified
in the Basic Lease Information (the "Security Deposit"). The Security Deposit
shall be held by Landlord as security for the performance by Tenant of all of
the provisions of this Lease. If Tenant fails to pay Rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Landlord may use, apply, or retain all or any portion of the Security Deposit
for the payment of any Rent or other charge in default, or the payment of any
other sum to which Landlord may become obligated by reason of Tenant's default,
or to compensate Landlord for any loss or damage which Landlord may suffer
thereby. If Landlord so uses or applies all or any portion of the Security
Deposit, then within ten (10) days after demand therefor Tenant shall deposit
cash with Landlord in an amount sufficient to restore the deposit to the full
amount thereof, and Tenant's failure to do so shall be a material breach of this
Lease. Landlord shall not be required to keep the Security Deposit separate from
its general accounts. If Tenant performs all of Tenant's obligations hereunder,
the Security Deposit, or so much thereof as has not theretofore been applied by
Landlord, shall be returned, without payment of interest for its use, to Tenant
(or, at Landlord's option to the last assignee, if any, of Tenant's interest
hereunder)at the expiration of the Term, and after Tenant has vacated the
Premises. No trust relationship is created herein between Landlord and Tenant
with respect to the Security Deposit.
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17. Estoppel Certificate.
(a) Tenant shall within ten (10) days of notice from Landlord execute,
acknowledge and deliver to Landlord a statement certifying (i) that this Lease
is unmodified and in full force and effect (or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in full
force and effect), (ii) the amount of the Security Deposit, (iii) the date to
which the Rent has been paid, (iv) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any are claimed, and (v) such other matters as may reasonably
be requested by Landlord. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Building.
(b) Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant, (i) that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) that there are no
uncured defaults in Landlord's performance, and (iii) that not more than one
month's Base Rent has been paid in advance. (e) If Landlord desires to finance
or refinance the Building, Tenant agrees to deliver to any lender designated by
Landlord such financial statements of Tenant as may be reasonably required by
such lender. All such financial statements shall be received by Landlord in
confidence and shall be used for the purposes herein set forth.
18. Subordination.
This Lease, at Landlord's sole option, shall be subordinate to any ground lease,
mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the Building and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements, refinancings and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground lease,
whether this Lease is dated prior to or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. If any mortgage
or deed of trust to which this Lease is subordinate is foreclosed or a deed in
lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall
attorn to the purchaser at the foreclosure sale or to the grantee under the deed
in lieu of foreclosure; if any ground lease to which this Lease is subordinate
is terminated, Tenant shall attorn to the ground lessor. Tenant agrees to
execute any documents required to effectuate such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be, or to evidence such attornment. Any such document of attornment
shall also provide that the successor shall not disturb Tenant in its use of the
Premises in accordance with this Lease.
19. Attorneys' Fees.
In the event legal action is initiated by either party, the prevailing party
shall be entitled to recover all costs and expenses incurred in such action,
including, without limitation, reasonable attorneys' fees and costs, including
attorneys' fees incurred at trial and on appeal, if any.
20. Notices.
All notices, consents, demands, and other communications from one party to the
other given pursuant to the terms of this Lease shall be in writing and shall be
deemed to have been fully given when personally delivered, delivered by courier
service, sent via facsimile (confirmation receipt required), or forty-eight (48)
hours after the same is deposited in the United States mail, certified or
registered, postage prepaid, and addressed as follows: To Tenant at the address
specified in the Basic Lease Information or to such other place as Tenant may
from time to time designate in a notice to Landlord; to Landlord at the address
specified in the Basic Lease Information, or to such other place and to such
other parties as Landlord may from time to time designate in a notice to Tenant.
21. General Provisions.
(a) This Lease shall be governed by and construed in accordance with the
internal laws of the State of California, notwithstanding any choice of law
statutes, regulations, provisions or requirements to the contrary.
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(b) 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.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease Information
contains all agreements and understandings of the parties and supersedes and
cancels any and all prior or contemporaneous written or oral agreements,
instruments, understandings, and communications of the parties with respect to
the subject matter herein. This Lease, including the attached Exhibits, Addenda,
and Basic Lease Information, may be modified only in a writing signed by each of
the parties.
(d) No waiver of any provision hereof by either party shall be deemed by the
other party to be a waiver of any other provision, or of any subsequent breach
of the same provision. Landlord's or Tenant's consent to, or approval of, any
act shall not be deemed to render unnecessary the obtaining of Landlord's or
Tenant's consent to, or approval of, any subsequent act by the other party.
(e) If Tenant remains in possession, with the expressed consent of Landlord, of
all or any part of the Premises after the expiration of the Term, such tenancy
shall be from month to month only, and not a renewal hereof or an extension for
any further term, and in such case, Rent shall be payable in the amount of the
last month's Base Rent and all other charges under the Lease and such
month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein.
(f) Subject to the provisions of this Lease restricting assignment or subletting
by Tenant, this Lease shall bind the parties, their personal representatives,
successors, and assigns.
(g) Upon reasonable prior notice to Tenant (which notice shall not be required
in the event of an emergency), Landlord and Landlord's representatives and
agents shall have the right to enter the Premises during regular business hours
for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders, and making such alterations, repairs, improvements, or
additions to the Premises, the Building or the Common Areas as Landlord may deem
necessary or desirable. Landlord may at any time during the last one hundred
twenty (120)days of the Term place on or about the Premises any ordinary "For
Lease" sign. Landlord may at any time place on or about the Premises any
ordinary "For Sale" sign.
(h) The voluntary or other surrender of this Lease by Tenant, the mutual
cancellation thereof or the termination of this Lease by Landlord as a result of
Tenant's default shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to
Landlord of any or all of such subtenancies.
(i) If Tenant is a corporation, limited liability company or partnership, each
individual executing this Lease on behalf of Tenant represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of the
corporation, company or partnership in accordance with, where applicable, a duly
adopted resolution of the board of directors of the corporation, the vote of the
members of the limited liability company or the vote of the partners within the
partnership, and that this Lease is binding upon the corporation, company or
partnership in accordance with its respective articles of incorporation and
bylaws, operating agreement or partnership agreement.
(j) Time is expressly declared to be of the essence of this Lease and of each
and every covenant, term, condition, and provision hereof, except as to the
conditions relating to the delivery of possession of the Premises to Tenant.
(k) If there is more than one party comprising Tenant, the obligations imposed
on Tenant shall be joint and several.
(1) The language in all parts of this Lease shall be in all cases construed as a
whole according to its fair meaning and not strictly for nor against either
Landlord or Tenant.
(m) As used in this Lease and whenever required by the context thereof, each
number, both singular and plural, shall include all numbers and in each gender
shall include all genders. Landlord and Tenant, as used in this Lease or in any
other instrument referred to in or made apart of this Lease, shall likewise
include both the singular and the plural, a corporation, limited liability
company, partnership, individual or person acting in any fiduciary capacity as
executor, administrator, trustee or in any other representative capacity.
(n) The Exhibits and Addendum, if any, specified in the Basic Lease Information
are attached to this Lease and by this reference made a part hereof.
15
<PAGE> 18
22. Force Majeure.
Any delay in construction, repairs, or rebuilding any building, improvement or
other structure herein shall be excused and the time limit extended to the
extent that the delay is occasioned by reason of acts of God, labor troubles,
laws or regulations of general applicability, acts of Tenant or Tenant Delays
(as the term is defined in the Work Letter Agreement attached hereto as Exhibit
B), or other occurrences beyond the reasonable control of Landlord. Accordingly,
Landlord's obligation to perform shall be excused for the period of the delay
and the period for performance shall be extended for a period equal to the
period of such delay.
23. Broker's Fee.
Each party represents that it has not had dealings with any real estate broker,
finder, or other person, with respect to this Lease in any manner, except the
brokerage firm(s) specified in the Basic Lease Information. Each party shall
hold harmless the other party from all damages resulting from any claim that may
be asserted against the other party by any broker, finder, or other person with
whom the other party has or purportedly has dealt. Landlord shall pay any
commissions or fees that are payable to the broker or finder specified in the
Basic Lease Information, with respect to this Lease in accordance with the
provisions of a separate commission contract.
24. Financial Statement.
It is acknowledged by all parties hereto that the attached financial declaration
of Tenant is incorporated as a part of this Lease as Exhibit E, that the
information contained therein is true and correct in all material respects, and
that the accuracy of the information is a significant fact upon which Landlord
has relied in the granting of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease on the date first
mentioned above.
TENANT LANDLORD:
Advanced Fibre Communications, Inc. G & W Copley Redwood Business Park, L.P.
a Delaware corporation a limited partnership
By: G & W Management Co.
Its: Manager
By: /s/ Buck Hudkins
Buck Hudkins
Its: Director, facilities BY: /s/ William C. White
William C. White, President
G & W Management Co.
16
<PAGE> 19
EXHIBIT B
WORK LETTER AGREEMENT (Turn Key - Single Story)
THIS WORK LETTER AGREEMENT supplements that certain Net Lease dated, July 10,
1998 ("Lease"), executed by G & W/Copley Redwood Business Park, L.P., a limited
partnership, as Landlord, and Advanced Fibre Communications, a Delaware
corporation as Tenant. All capitalized terms not otherwise defined herein shall
have the same meaning as those capitalized terms contained in the Lease.
1. Landlord shall be responsible for constructing within the Premises the tenant
improvements ("Tenant Improvements") described in the preliminary space plan
attached hereto as Exhibit B-1 ("Preliminary Space Plan"). The Tenant
Improvements for the Premises will be more particularly described in the plans
and construction drawings ("Construction Drawings") as approved below. Any
additional work ("Tenant Extra Improvements") required under the approved
Construction Drawings shall be at Tenant's expense.
2. Landlord and Tenant shall diligently finalize the Preliminary Space Plan for
construction of the Tenant Improvements and Tenant Extra Improvements so that,
within thirty (30) days after execution of the Lease, Landlord can provide
Tenant with the Construction Drawings. The Construction Drawings shall indicate
the specific requirements of Tenant's lease space, outlining in detail interior
partitions, floor coverings, a reflected ceiling plan, plumbing fixtures, and
electrical plans (setting forth the electrical requirements of Tenant), all in
conformity with the Preliminary Space Plan. The Construction Drawings shall
include full energy calculations as required by the State of California and the
city agencies.
3. Within three (3) days after receipt of the Construction Drawings, Tenant
shall approve the drawings and/or request changes or modifications thereto. Any
such request for changes or modifications shall be subject to Landlord's
approval and, thereafter, the Construction Drawings shall be resubmitted for
Tenant's approval in accordance with the preceding sentence. Tenant acknowledges
that the Construction Drawings are subject to the approval of the appropriate
government authorities. It shall be Tenant's responsibility to ensure that the
design and function of the Tenant Improvements and Tenant Extra Improvements are
suitable for Tenant's business and needs. The improvements shall be constructed
in accordance with current building standards, laws, regulations, ordinances and
codes. Landlord shall not be required to install any Tenant Improvements or
Tenant Extra Improvements which do not conform to the Construction Drawings.
4. Landlord shall furnish and install the units and quantities of Tenant
Improvements as set forth on Exhibit B-1, The Tenant Improvements to be paid by
Landlord shall not exceed Sixty-nine Thousand Five Hundred Seventy-three Dollars
($69,573) ($7.00 per usable square foot) and shall include:
(a) The costs of the Preliminary Space Plan (including one revision thereto) and
final Construction Drawings and engineering costs associated with completion of
the State of California energy utilization calculations under Title 24
legislation, and
(b) The costs of obtaining building permits and other necessary authorizations
from the city, county and the State of California.
Any additional units, quantities or costs of the Tenant Improvements required in
accordance with the approved Construction Drawings shall be deemed Tenant Extra
Improvements and shall be paid for by Tenant at the unit cost set forth in a
summary of unit costs to be provided by Landlord.
5. In no event shall the Tenant Improvements payable by Landlord include (i) the
costs of procuring or installing any trade fixtures, equipment, furniture,
furnishings, telephone or computer equipment or wiring or other personal
property ("Personal Property"), or (ii) any Change Orders (as the term is
defined in Paragraph 6 below). Such items shall be paid by Tenant.
6. Following Tenant's approval of the Construction Drawings, Tenant may request
changes or modifications thereto ("Change Order"), however, the cost of any
Change Order(s) shall be borne by Tenant. If Tenant shall request any Change
Order, then Landlord shall
1
<PAGE> 20
promptly give Tenant a written estimate of (a) the cost of engineering and
design services to prepare the Change Order, (b) the cost of work to be
performed pursuant to the Change Order, and (c) the time delay expected because
of such requested Change Order. Within three (3) days after Tenant's receipt of
the written estimate, Tenant shall notify Landlord in writing whether it
approves the written estimate. If Tenant approves the written estimate, then
Tenant shall accompany its approval with a check made payable to Landlord in the
amount of the estimated cost of the Change Order. Upon Landlord's completion of
the Change Order and submission of the final cost thereof to Tenant, Tenant
shall promptly pay to Landlord any additional amounts incurred in excess of the
written estimate. If such written authorization and check are not received by
Landlord, then Landlord shall not be obligated to commence work on the Premises
and Tenant shall be chargeable for any delay in the completion of the Premises
in accordance with Paragraph 7 below.
7. If the Commencement Date of the Lease has not occurred on or before the
Estimated Commencement Date, and if the cause of the delay in the occurrence of
the Commencement Date is attributable to Tenant, then the Lease shall begin on
the date the Commencement Date otherwise would have occurred but for the Tenant
delays. Delays attributable to Tenant ("Tenant Delays") shall include, without
limitation, those caused by (a) delays by Tenant in approving the, Construction
Drawings and costs, (b) Tenant's request for special materials not available
when needed for construction in accordance with the construction schedule, (c)
Change Orders, and (d) interference with Landlord's work caused by Tenant or
Tenant's agents. All costs and expenses occasioned by a Tenant Delay, including,
without limitation, increases in labor or materials, shall be borne by Tenant.
8. Tenant may, with Landlord's written consent, enter the Premises prior to the
Commencement Date solely for the purpose of installing its Personal Property as
long as such entry will not interfere with the orderly construction and
completion of the Premises ("Tenant's Work"). Tenant shall notify Landlord of
its desired time(s) of entry and shall submit for Landlord's written approval
the scope of the Tenant's Work to be performed and the name(s) of the
contractors) who will perform such work. Tenant agrees to indemnify, defend and
hold harmless Landlord, any mortgagee, ground lessor or beneficiary of a deed of
trust encumbering, secured by or affecting the Premises or the Building, from
and against any and all claims, actions, losses, liabilities, damages, costs or
expenses (including, without limitation, reasonable attorneys' fees and claims
for worker's compensation) of any nature whatsoever, arising out of or in
connection with the Tenant's Work (including, without limitation, claims for
breach of warranty, personal injury or property damage).
9. During the course of construction, at Tenant's expense, Tenant shall obtain
or maintain public liability and worker's compensation insurance, in amounts
acceptable to Landlord, and which name Landlord and Tenant as parties insured
from and against any and all liability for death of or injury to person or
damage to property caused in or about or by reason of the construction of the
Tenant's Work.
10. Upon substantial completion of the Premises in accordance with the
Construction Drawings, Tenant agrees to accept the Premises in the condition
which it may then be and waives any right or claim against Landlord for any
cause directly or indirectly arising out of the condition of the Premises,
appurtenances thereto, improvements thereon, and equipment therein. Tenant shall
hold harmless Landlord from and against any liability or damage as provided
under Paragraph 10.2 of the Lease. Landlord shall not be liable for any latent
or patent defects therein, except that Landlord warrants the Building against
latent defects for a period of one (1) year from the date of substantial
completion.
11. Tenant releases Landlord from any claim whatsoever for damages against
Landlord for any delay in the date on which the Premises shall be ready for
occupancy by Tenant.
12. The Premises shall be deemed "substantially completed" as of the date that
all of the following conditions are satisfied:
(a) The Tenant Improvements have been substantially completed in accordance with
the approved Construction Drawings (except for those punch list items referenced
in Paragraph 13 below), such that Tenant can reasonably conduct business within
the Premises; and
(b) A certificate of occupancy and/or finalized building permit has been issued
for the Premises.
13. Tenant shall immediately prior to occupancy inspect the Premises and compile
and furnish Landlord with an initial punch list of any missing or deficient
Tenant Improvements. Within the first thirty (30) days after delivery of the
Premises, Tenant shall make a final punch list and submit this list to Landlord.
Landlord shall use its best efforts to complete the corrective
2
<PAGE> 21
work in a prompt, good and workman-like manner. Punch list corrections shall not
delay the Commencement Date, nor shall a delay in making corrections be grounds
for a delay or reduction in any rent payments due Landlord.
14. All floor area calculations are from the center line of the partitions and
the outside line of the exterior and hall walls. No deduction is allowed for the
columns, sprinkler risers, roof drains, or air conditioning units serving Tenant
and located within the Premises.
15. Landlord shall select the manufacturer and vendor of all building materials
and equipment with respect to the Tenant Improvements and Tenant Extra
Improvements to be constructed hereunder.
TENANT LANDLORD
Advanced Fibre Communication G & W Copley Redwood Business Park, L.P.
a Delaware corporation a limited partnership
By: G & W Management Co.
Its: Manager
By: /s/ Peter A. Darbee
Its: Vice President & CFO By: /s/ William C. White
William C. White, President
G & W Management Co.
3
<PAGE> 22
EXHIBIT C
RULES AND REGULATIONS
It is further agreed that the following Rules and Regulations shall be and are
hereby made a part of this Lease, and Tenant agrees that Tenant's employees and
agents, or any others permitted by Tenant to occupy or enter the Premises, will
at all times abide by said Rules and Regulations, unless otherwise specified or
provided for in the Lease, to wit:
1. The driveways, entrances and exits to the Property, sidewalks, passages,
building entries, lobbies, corridors, stairways, and elevators of the Building
shall not be obstructed by Tenant, or Tenant's agents or employees, or used for
any purpose other than ingress and egress to and from the Premises. Tenant or
Tenant's agents or employees shall not loiter on the lawn areas or other common
areas of the Property.
(a) Furniture, freight equipment and supplies will be moved in or out of the
Building only through the rear service entrances or other entrances designated
by Landlord and then only during such hours and in such manner as may be
reasonably prescribed by Landlord. Tenant shall cause its movers to use only the
loading facilities, and entrances designated by Landlord. In the event Tenant's
movers damage any part of the Building or Property, Tenant shall forthwith pay
to Landlord the amount required to repair said damage.
(b) No safe or article, the weight of which may in the opinion of Landlord
constitute a hazard to or damage to the Building or the Building's equipment,
shall be moved into the Premises without Landlord's prior written approval, but
such consent or approval shall not be unreasonably withheld, conditioned or
delayed. Landlord and Tenant shall mutually agree to the location of such
articles in the Premises. All damage done to the Property, Building or Premises
by putting in, taking out or maintaining extra heavy equipment shall be repaired
at the expense of Tenant.
(e) Landlord reserves the right to close and keep locked any and all entrances
and exits of the Building and Property and gates or doors closing the parking
areas thereof during such hours as Landlord may deem advisable for the adequate
protection of the Property and all tenants therein.
2. Except as otherwise provided for in the Lease, no sign, advertisement or
notice shall be inscribed, painted or affixed on any part of the inside or
outside of the Building unless of such color, size and style and in such place
upon or in the Building as shall be first approved in writing by Landlord. No
furniture or other materials shall be placed in front of the Building or in any
lobby or corridor, without the prior written consent of Landlord. Landlord shall
have the right to remove all non-permitted signs and furniture, without notice
to Tenant.
3. Tenant shall not employ any person or persons other than the janitor or
cleaning contractor of Landlord for the purpose of cleaning or taking care of
the Premises without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
the Lease, Landlord shall in no way be responsible to Tenant for any loss of
property from the Premises, however occurring. The janitor of the Building may
at all times keep a pass key, and other agents of Landlord shall at all times be
allowed admittance to the Premises in accordance with the provisions set forth
in the Lease.
4. Water closets and other water fixtures shall not be used for any purpose
other than that for which the same are intended, and any damage resulting to the
same from misuse on the part of Tenant or Tenant's agents or employees, shall be
paid for by Tenant. No person shall waste water by tying back or wedging the
faucets or in any other manner.
5. No animals except seeing-eye dogs or other animals necessary to the
functioning of handicapped personnel shall be allowed on the lawns or sidewalks
or in the offices, halls, and corridors of the Building.
6. No persons shall disturb the occupants of this or adjoining buildings or
premises by the use of any radio, sound equipment or musical instrument or by
the making of loud or improper noises, nor interfere in any way with the other
tenants or those having business with them. Should
1
<PAGE> 23
sound mitigation measures be required due to sounds originating in the Premises,
the costs of such measures shall be paid for by Tenant.
7. Bicycles or other vehicles, other than wheel chairs, shall not be permitted
in the offices, halls, corridors and lobbies in the Building nor shall any
obstruction of sidewalks or entrances of the Building by such be permitted.
8. Tenant shall not allow anything to be placed on the outside of the Building,
nor shall anything be thrown by Tenant or Tenant's agents or employees, out of
the windows or doors, or down the corridors, ventilation ducts or shafts of the
Building. Tenant, except in case of fire or other emergency, shall not open any
outside window.
9. No awnings shall be placed over any window or entrance.
10. All garbage, including wet garbage, refuse or trash shall be placed by
Tenant in the receptacles designated by Landlord for that purpose. Tenant shall
not burn any trash or garbage at any time in or about the leased Premises or any
area of the Property. Tenant and Tenant's officers, agents, and employees shall
not throw cigar or cigarette butts or other substances or litter of any kind in
or about the Property.
11. Tenant shall not install or operate any steam or gas engine or boiler, or
other machinery or carry on any mechanical business, other than such mechanical
business which normally is identified with general use in the Premises.
Explosives or other articles of an extra hazardous nature shall not be brought
into the Building complex.
12. Any painting or decorating as may be agreed to be done by and at the expense
of Landlord shall be done during regular weekday working hours. Should Tenant
desire such work on Saturdays, Sundays, holidays or outside of regular working
hours, Tenant shall pay for the extra cost thereof, if any.
13. Tenant and Tenant's agents and employees shall park their vehicles in areas
designated from time-to-time for employee parking.
14. Tenant shall not mark, drive nails, screw, bore, or drill into, paint or in
any way deface the common area walls, exterior walls, roof, foundations, bearing
walls, or pillars without the prior written consent of Landlord. The expense of
repairing any breakage, stoppage or damage resulting from a violation of this
rule shall be borne by Tenant.
15. No waiver of any rule or regulation by Landlord shall be effective unless
expressed in writing and signed by Landlord or his authorized agent.
16. Tenant shall be responsible for cleaning up any trash blowing around their
facility that may have been left by their customers or employees.
17. In the event of any conflict between these rules and regulations or any
further or modified rules and regulations from time to time issued by Landlord,
and the lease provisions, the lease provisions shall govern and control.
18. Landlord reserves the right at any time to change or rescind any one or more
of these rules and regulations, or to make such other and further reasonable
rules and regulations as in Landlord's judgment may from time to time be
necessary for the management, safety, care and cleanliness of the Premises, and
for the preservation of good order therein, as well as for the convenience of
other tenants of the Property. Landlord shall not be responsible to Tenant or to
any other person for the non-observance or violation of the rules and
regulations by any other tenant or person. Tenant shall be deemed to have read
these rules and to have agreed to abide by them as a condition to its occupancy
of the space herein leased, and Tenant shall abide by any additional rules and
regulations which are ordered or requested by Landlord or by any governmental
authority.
2
<PAGE> 24
EXHIBIT D
Materials Quantities
Tenant agrees that:
(a) None of the above materials will be used, held or stored on or about the
Premises in quantities of greater than one (1) gallon each, or twenty (20)
pounds each in the case of non-liquid materials; provided, however, that used or
excess materials may be stored together in a fifty-five (55) gallon drum while
awaiting transport off the Premises for disposal.
(b) The materials listed on Page 1 to this Exhibit D shall be stored in
fire-proof lockers on the Premises in accordance with applicable laws,
regulations and ordinances. No storage outside the Premises will be permitted.
(c) No used or excess materials will be disposed of in, on, under or about the
Premises or Redwood Business Park. Instead, such materials shall be transported
off-site, no less often than every one hundred eighty (180) days, by a duly
licensed hazardous materials transporter. While waiting for transport off-site
for disposal, used or excess materials shall be stored in a safe location on the
Premises in secure containers which are appropriately labeled.
(d) No materials listed on Page 1 to this Exhibit D, regardless of whether they
are water-soluable, shall be flushed down any sanitary sewer drains on or about
the Premises or Redwood Business Park.
<PAGE> 1
EXHIBIT 13.1
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996(1) 1995 1994
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues $ 312,745 $ 267,858 $ 130,193 $ 54,287 $ 18,802
Cost of revenues 168,654 145,933 73,950 33,469 14,124
--------- --------- --------- --------- ---------
Gross profit 144,091 121,925 56,243 20,818 4,678
--------- --------- --------- --------- ---------
Operating expenses:
Research and development 40,963 25,726 14,413 5,730 2,867
Selling, general and administrative 65,328 42,653 21,188 9,660 5,051
DSC litigation costs -- -- 18,947 1,623 4,551
--------- --------- --------- --------- ---------
Total operating expenses 106,291 68,379 54,548 17,013 12,469
--------- --------- --------- --------- ---------
Operating income (loss) 37,800 53,546 1,695 3,805 (7,791)
Other income, net 4,055 4,866 2,388 (1,367) 26
--------- --------- --------- --------- ---------
Income (loss) before income taxes 41,855 58,412 4,083 2,438 (7,765)
Income taxes (benefit) 14,648 21,612 (3,154) 97 --
--------- --------- --------- --------- ---------
Net income (loss) $ 27,207 $ 36,800 $ 7,237 $ 2,341 $ (7,765)
========= ========= ========= ========= =========
Basic net income (loss) per share (2) $ 0.36 $ 0.52 $ 0.30 $ 0.27 $ (1.27)
========= ========= ========= ========= =========
Shares used in basic per share computations 74,788 70,131 24,146 8,746 6,093
========= ========= ========= ========= =========
Diluted net income (loss) per share(2) $ 0.34 $ 0.48 $ 0.11 $ 0.05 $ (1.27)
========= ========= ========= ========= =========
Shares used in diluted per share computations 79,511 77,469 68,048 50,684 6,093
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash, cash equivalents and marketable securities $110,753 $105,196 $108,430 $ 11,118 $ 3,858
Working capital 209,324 193,640 145,338 18,770 6,809
Total assets 307,883 273,293 175,679 36,680 14,884
Redeemable convertible preferred stock -- -- -- 37,777 23,546
Stockholders' equity (deficit) 268,300 223,720 158,023 (15,765) (15,706)
</TABLE>
(1) Includes a charge of $15.8 million to reflect a cash payment of $10.1
million and the issuance of 1,451,574 shares of Common Stock to DSC in
settlement of outstanding litigation. Without this charge, operating
income for the year ended December 31, 1996 would have been $17.5
million.
(2) See "Note 1 of Notes to Consolidated Financial Statements" for an
explanation of the determination of the number of shares used in
computing basic and diluted net income per share.
<PAGE> 1
EXHIBIT 13.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Except for the historical financial information contained herein, the following
discussion and analysis may contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements include
declarations regarding the intent, belief or current expectations of the
Company and its management. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties; actual results could differ materially
from those indicated by such forward-looking statements.
Among the important factors that could cause actual results to differ
materially from those indicated by such forward-looking statements, as set
forth in Part II. Item 7 - "Certain Factors That Might Affect Future Operating
Results" of this Annual Report on Form 10-K are:
o Potential Fluctuations in Future Operating Results and Seasonality
o Customer Concentration
o Risks Associated with International Markets
o Competition
o Risk of Failure to Manage Expanding Operations
o Concentrated Product Line, New Products and Rapid Technological Change
o Dependence on Telecommunications Industry and Small Line Size Market
o Dependence on Sole Source and Limited Number of Third Party Manufacturers
and Support Organizations
o Risks Associated with Pending Litigation
o Limited Protection of Proprietary Technology; Risk of Third Party Claims of
Infringement
o Dependence on Key Personnel
o Year 2000
o Compliance with Regulations and Industry Standards
o Other risks identified from time to time in the Company's Reports and
Registration Statements filed with the Securities and Exchange Commission
OVERVIEW
AFC designs, develops, manufacturers, markets and supports the Universal
Modular Carrier 1000(TM) ("UMC 1000" system), a cost-effective multi-service
digital loop carrier system developed to serve small to mid line size markets.
The UMC 1000 is designed to enable telecommunications companies and other
service providers to connect subscribers to the central office switch for voice
and data communications over copper, fiber and analog radio networks. The
Company began shipping the UMC 1000 in January 1994.
During 1998, revenues increased 16.7% over 1997; however, operating income
declined as a percentage of revenues from 20.0% in 1997 to 12.1% in 1998.
Revenues fell short of internal expectations, primarily due to lower
international sales in the Asia Pacific region. International sales in the Asia
Pacific region were affected by the adverse economic conditions experienced in
this region and the delay in certain technological developments designed for the
international markets. Revenue growth during 1998 was also adversely affected by
lower than anticipated sales to the Regional Bell Operating Companies and the
substantial reduction in sales to GTE from 1997. As a result of the slower
growth in revenues, operating income was lower than the prior year as certain of
the Company's expenses were based on anticipated revenues and were relatively
fixed in the short-term. Operating income were also impacted by the Company's
decision to significantly increase its investment in research and development
activities. Operating income decreased from $53.5 million in the year ended 1997
to $37.8 million in 1998.
<PAGE> 2
Although AFC has achieved profitability every year beginning in 1995, there can
be no assurance that profitability will be sustained or increased in the
future. Substantially all of AFC's revenues are derived from the UMC 1000 and
this concentration is expected to continue in the foreseeable future. Any
decrease in the overall level of sales of, or the prices for, the UMC 1000
could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse factors include introductions or
announcements by competitors, price competition, a decline in the demand for
the UMC 1000, product obsolescence, system configurations, loss of customers,
and penetration of certain markets, among other reasons.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenues represented by certain items reflected in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996(1)
----- ----- -------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 53.9 54.5 56.8
----- ----- -----
Gross profit 46.1 45.5 43.2
----- ----- -----
Operating expenses:
Research and development 13.1 9.6 11.1
Selling, general and administrative 20.9 15.9 16.3
DSC litigation costs -- -- 14.5
----- ----- -----
Total operating expenses 34.0 25.5 41.9
----- ----- -----
Operating income 12.1 20.0 1.3
Other income, net 1.3 1.8 1.8
----- ----- -----
Income before income taxes 13.4 21.8 3.1
Income taxes (benefit) 4.7 8.1 (2.4)
----- ----- -----
Net income 8.7% 13.7% 5.5%
===== ===== =====
</TABLE>
(1) Includes a charge of $15.8 million to reflect a cash payment of $10.1
million and the issuance of 1,451,574 shares of Common Stock to DSC in
settlement of outstanding litigation. Without this charge, operating income
as a percentage of revenues for the year ended December 31, 1996 would have
been 13.4%.
1998 COMPARED WITH 1997
REVENUES. For the year ended December 31, 1998, revenues totaled $312.7
million, an increase of $44.8 million, or 16.7%, over the $267.9 million
reported in 1997. The largest increase in revenues was in the domestic market
which increased $33.8 million or 17.1% over the prior year. International
revenues increased $11.1 million, or 15.7%, year-over-year and represented
26.2% of revenues in 1998 and 26.5% of revenues in 1997.
The increase in domestic revenues for 1998 was primarily the result of sales
growth in the Competitive Local Exchange Carrier ("CLEC") market and continued
sales penetration of the Independent Local Exchange Carrier market. The growth
in revenues was partially offset by the substantial reduction in sales to GTE
from 1997. The growth in international sales was primarily due to higher sales
to our customer in South Africa, partially offset by lower sales in the Asia
Pacific region. The Company anticipates the effect of the economic conditions
in the Asia Pacific region will have a continuing adverse affect on the
Company's business, financial condition and results of operations. For the year
ended December 31, 1998, WinStar Communications, Inc. (a CLEC customer)
accounted for 11.2% of total revenues and Integrators of System Technology
(Pty) Ltd. of South Africa accounted for 10.4%. For the year
<PAGE> 3
ended December 31, 1997, GTE accounted for 19.2% of total revenues. No other
customer accounted for 10% or more of total revenues in either period. Although
the Company's largest customers have varied from period to period, the Company
anticipates that its results of operations in any given period will continue to
depend to a significant extent upon sales to a small number of customers. There
can be no assurance that the Company's principal customers will continue to
purchase the UMC 1000 at current levels, if at all. The loss of one or more
major customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
GROSS PROFIT. For the year ended December 31, 1998, gross profit was $144.1
million compared with $121.9 million for 1997, and represented gross margins as
a percentage of revenues of 46.1% in 1998 and 45.5% in 1997. The increase in
gross profit percentage from 1997 to 1998 was due to cost savings from
engineering design changes, the customer mix, vendor discounts, and higher
royalty revenue. In the future, gross profits may fluctuate due to a wide
variety of factors, including: the mix between domestic and international
sales, the customer mix, the product mix, the timing and size of orders which
are received and can be shipped in a quarter, the availability of adequate
supplies of key components and assemblies, the Company's ability to introduce
new products and technologies on a timely basis, the timing of new product
introductions or announcements by the Company or its competitors, price
competition, unit volume, royalty revenues, and changes in warranty coverage.
RESEARCH AND DEVELOPMENT. For the year ended December 31, 1998, research and
development expenses increased $15.3 million, or 59.5%, to $41.0 million
compared with $25.7 million in 1997. Research and development expenses
represented 13.1% of total revenues in 1998 and 9.6% in 1997.
The increase in research and development expenses from 1997 to 1998 was
primarily due to the addition of engineering personnel and the related
increases in salaries, benefits, hiring and relocation, facility costs, and use
of outside consultants and services. Additional expense increases were a result
of material costs and depreciation on test equipment used to develop and test
new products and features. As of December 31, 1998, the number of employees in
research and development was 288 compared with 176 at the end of 1997, an
increase of 63.6%. The Company plans to continue to support the development of
new products, features and product cost reductions. All research and
development costs to date have been expensed as incurred.
SELLING, GENERAL AND ADMINISTRATIVE. For the year ended December 31, 1998,
selling, general and administrative expenses increased $22.6 million, or 52.9%,
to $65.3 million compared with $42.7 million in 1997. Selling, general and
administrative expenses represented 20.9% of total revenues in 1998 and 15.9%
in 1997.
The increase in general and administrative expenses for the year ended December
31, 1998 as compared with 1997 was primarily due to compensation and benefits,
litigation costs, facility costs, and depreciation on capital equipment
purchases. The increases in sales and marketing expenses for the year ending
December 31, 1998 as compared with 1997 was attributable primarily to additional
sales and marketing personnel and the associated salaries and benefits, the
effect of higher revenue levels on commissions earned by the sales force and
international distributors, and increased spending on travel and outside
services. Selling, general and administrative headcount increased 27.0% to 329
as of December 31, 1998, from 259 as of the end of 1997.
INCOME TAXES. For 1998 and 1997, income taxes were recorded at an effective
rate that approximated the combined federal and state statutory rates. The
effective tax rate declined from 37.0% in 1997 to 35.0% in 1998 primarily due
to tax exempt interest income, utilization of research and development credits,
and benefits from the Company's Foreign Sales Corporation.
<PAGE> 4
1997 COMPARED WITH 1996
REVENUES. Revenues for the year ended December 31, 1997 were $267.9 million
compared with $130.2 million for 1996, an increase of $137.7 million or 105.8%.
International revenues were $70.9 million for 1997 compared with $27.1 million
for 1996, an increase of $43.8 million or 161.6%. The increase in revenues for
1997 was primarily due to continued growth in the independent telephone market,
an increase in international revenues arising from expanded marketing and
targeting efforts, the introduction of the 3GDLC and other new features of the
UMC 1000, and the expansion of the Company's customer base. For the year ended
December 31, 1997, GTE accounted for 19.2% of total revenues. No other single
customer accounted for 10% or more of total revenues in 1997. For the year
ended December 31, 1996, no single customer accounted for 10% or more of total
revenues.
GROSS PROFIT. For the year ended December 31, 1997, gross profit was $121.9
million or 45.5% of revenues compared with $56.2 million or 43.2% of revenues
for 1996, an increase of $65.7 million or 116.9%. The improvement in gross
profit, as a percentage of revenues, from 1996 to 1997 resulted from greater
efficiencies achieved in the purchasing and manufacturing activities associated
with higher unit volume, engineering design improvements, and the lower cost of
inventory manufactured in China.
RESEARCH AND DEVELOPMENT. For the year ended December 31, 1997, research and
development expenses were $25.7 million compared with $14.4 million for 1996,
an increase of $11.3 million or 78.5%. Research and development expenses were
9.6% of revenues for 1997 and 11.1% for 1996.
The increase in research and development expenses from 1996 to 1997 was
primarily due to the addition of personnel hired to develop technology, the use
of outside services for certain development and testing efforts, and the higher
costs for material and test equipment used to develop and test new products and
features. As of December 31, 1997, the number of employees in research and
development was 176 compared with 124 in 1996, an increase of 41.9%.
SELLING, GENERAL AND ADMINISTRATIVE. For the year ended December 31, 1997,
selling, general and administrative expenses were $42.7 million compared with
$21.2 million for 1996, an increase of $21.5 million or 101.4%. Selling,
general and administrative expenses were 15.9% of revenues for 1997 and 16.3%
in 1996.
The increase in sales and marketing expenses from 1996 to 1997 was attributed
primarily to the effect of higher revenue levels on commissions earned by the
Company's sales force and by international distributors, additional sales and
marketing personnel including the growth of the Company's infrastructure for
international operations, increased advertising and trade show participation,
and increased travel and entertainment expenses. Additional employees, expenses
related to the conversion of management and accounting systems, higher facility
costs, and legal costs associated with the ITRI litigation predominately
accounted for the increase in general and administrative expenses from 1996 to
1997. Selling, general and administrative headcount increased 82.4% to 259 as
of December 31, 1997, from 142 as of the end of the prior year.
DSC LITIGATION. From July 1993 until June 1996 the Company was involved in
litigation with DSC Communications Corporation ("DSC"). DSC alleged, among
other things, that the Company's UMC 1000 technology contained or was derived
from trade secrets and other proprietary technology of DSC. The parties entered
into a Settlement Agreement and Mutual Releases dated as of June 24, 1996 (the
"Settlement Agreement") pursuant to which the litigation was terminated. Under
the terms of the Settlement Agreement, the Company paid DSC $3.0 million in
June 1996 and $7.1 million in July 1996, and issued 1,451,574 shares of Common
Stock to DSC. The full settlement amount was recorded during the second quarter
of 1996 as a charge of $15.8 million. Under the terms of the Settlement
Agreement, the Company maintains all rights to the UMC 1000 technology free and
clear of any claim by DSC.
OTHER INCOME, NET. For the year ended December 31, 1997, net other income was
$4.9 million compared with $2.4 million in 1996 (including a $1.5 million gain
on dissolution of joint venture), an increase of $2.5 million or 104.2%.
<PAGE> 5
The increase in 1997 was primarily due to investment income from the investment
of a portion of the proceeds of the Company's IPO in October 1996.
INCOME TAXES (BENEFIT). For the year ended December 31, 1997, the Company
recorded income taxes at an effective rate that approximated the combined
federal and state statutory rates. For the year ended December 31, 1996, an
income tax benefit of $3.2 million was recorded to reflect the benefit of the
DSC litigation settlement and the decrease in the valuation allowance recorded
against the Company's deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The components of the Company's capital resources and liquidity as of December
31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 20,669 $ 9,053
Marketable securities 90,084 96,143
Working capital, excluding cash and cash equivalents
and marketable securities 98,571 88,444
</TABLE>
As of December 31, 1998, cash, cash equivalents and marketable securities
amounted to $110.8 million compared with $105.2 million as of December 31, 1997.
In February 1997, AFC completed a secondary offering of 4,000,000 shares of
Common Stock, 3,600,000 of which were sold by certain stockholders and 400,000
of which were sold by the Company, generating approximately $7.8 million of net
proceeds to the Company.
Operating activities in 1998 generated net cash of $33.3 million. This was
primarily the result of operating earnings, including adjustments for non-cash
activities such as tax benefit generated from the exercise and sale of stock
options, depreciation resulting from a higher asset base, and a decrease in
accounts receivable. Offsetting these sources of cash were increases in other
assets, and a reduction in accounts payable and accrued liabilities. Days sales
outstanding were 90 days at the end of 1998 compared with 78 days at the end of
1997, mainly as a result of longer payment terms provided on international
sales. Net cash of $28.1 million was used in investing activities in 1998,
primarily as a result of purchasing fixed asset equipment to support employee
and facility growth, and research and development and manufacturing activities.
Included in the fixed asset equipment purchases were approximately $4.1 million
in assets acquired as a result of buying out certain operating leases.
AFC has a $50.0 million unsecured bank line through two banks with an interest
rate of prime, or LIBOR, plus 0.75%. The line of credit expires in July 1999.
Under the bank line, the banks may issue letters of credit up to $10.0 million
on behalf of the Company. The bank line requires the Company to comply with
certain debt and financial covenants. As of December 31, 1998, $597,000 in
letters of credit and no borrowings were outstanding under the bank line, and
the Company was in compliance with the covenants contained in the agreement.
The Company also has lease lines totaling $5.1 million that were used for
equipment and furniture purchases.
The Company also maintains bank facilities with two banks under which the
Company may open foreign exchange contracts up to $40.0 million. There are no
borrowing provisions associated with these facilities and there are no
financial covenants associated with the facilities. At December 31, 1998, a
foreign exchange contract of $1,146,000 was outstanding, with a maturity date of
January 14, 1999.
<PAGE> 6
The Company's facility obligations and commitments are based in part on
anticipated growth projections, and in the near term, are relatively fixed.
Based on existing commitments for additional office space, the company will have
excess office space in the near future. The Company's results of operations
could be adversely affected if it is unable to, in a timely manner, sublease the
excess facility space at rents comparable to the Company's obligations.
Existing cash and short-term investments, available credit facilities, and cash
flows from operating and financing activities are believed to be adequate to
support the Company's financial resource needs, including working capital
requirements, capital expenditures and operating lease obligations for the next
twelve months.
FOREIGN CURRENCY AND INTEREST RATE RISK
The UMC 1000 is sold worldwide, primarily through a direct sales force in the
domestic market, and through a direct sales force, distributors and sales
representatives in international markets. AFC's wholly owned, Hong Kong-based
subsidiary, markets the UMC 1000 throughout the Asia Pacific region. The Asia
Pacific region's economy has deteriorated resulting in the devaluation of
currencies in certain countries of that region. The Company sells the UMC 1000
in this region, primarily in China, under U.S. dollar denominated contracts. The
UMC 1000 is also marketed in Central and Latin American countries, including
Brazil. The Brazilian economy has deteriorated recently resulting in the
significant devaluation of the Brazilian real. The impact of the Brazilian
downturn on other countries in this region has yet to be determined. Sales of
the UMC 1000 in this region are made under U.S. dollar denominated contracts.
The Company is exposed to market risk as a result of foreign exchange rate
fluctuations. The Company has one customer contract that is payable in French
francs. The receivable is hedged using forward currency exchange contracts. The
remainder of international sales are denominated in U.S. dollars. The
introduction in 1999 of the "Euro" currency may cause increased competition
among European companies which in turn may cause the value of the Euro to
materially fluctuate relative to the U.S. dollar. Adoption of the Euro is not
expected to have a material impact on AFC's business, results of operations or
financial condition.
The Company has sales and representative offices in China, Hong Kong, Singapore,
India, Poland and the U.K. Operating expenses for these offices have
historically been short-term in nature and are immaterial to the Company on a
consolidated basis.
Changes in domestic interest rates create risk for AFC and may cause adverse
fluctuations of its marketable securities portfolio and cash flows. The Company
may be affected by changes in the short-term U.S. Prime Rate and the resulting
interest rate on amounts borrowed under its line of credit. AFC's marketable
securities portfolio consists of domestic municipal debt and domestic corporate
debt, of which approximately 62% mature in one year or less. At December 31,
1998, the weighted average yield on the Company's marketable securities was
3.71%, and the weighted average yield on cash equivalents was 4.56%. Changes in
short-term U.S. interest rates affect the market value of those marketable
securities. Because of the short-term nature of its investment portfolio, the
Company believes its exposure to these market fluctuations is not significant.
If, at December 31, 1998, interest rates had increased immediately by two full
percentage points, the Company believes its marketable securities portfolio
would not have declined by a material amount. The marketable securities
portfolio is treated as available-for-sale under Financial Accounting Standards
Board No. 115.
SEASONALITY
AFC's customers normally install a portion of the UMC 1000 in outdoor
locations. Shipments of the UMC 1000 are subject to the effects of seasonality,
with fewer installation projects scheduled for the winter months. The majority
of the Company's sales are to companies in North America, and accordingly, the
Company believes that over time the effect of seasonality will cause its
revenues in the quarter ended March 31 to be lower than revenues in the
preceding quarter
<PAGE> 7
ended December 31. In particular, AFC currently believes that revenues in the
quarter ended March 31, 1999 will be lower than revenues in the quarter ended
December 31, 1998. See "Quarterly Results of Operations".
YEAR 2000 COMPLIANCE
AFC has formed a Year 2000 Committee to understand and address the year 2000
("Y2K") issue as it affects the Company's infrastructure, operations, and the
UMC 1000 product. Representatives from each functional area of the Company are
responsible for identifying and assessing organizational readiness, preparing
remediation steps, testing, and applying new standards and contingency plans.
AFC has identified and assessed a majority of the potential Y2K-affected
hardware, software, and facility equipment, and vendors. For the most part,
AFC's systems and software have been found to be Y2K compliant, or have been
upgraded to compliance through manufacturers' upgrades.
The Company is currently in the process of surveying and testing its vendors'
Y2K readiness and developing its own contingency plans in case of vendors'
failures. Contingency plans for vendor Y2K failures include pre-qualifying
alternative vendor suppliers, maintaining multiple vendor sources for critical
components and assemblies, and maintaining adequate supplies of key components
on hand. However, there can be no assurance that AFC will be able to obtain
sufficient materials from alternative sources. Current or alternative
manufacturers may not be able to meet the Company's supply requirements and such
supplies may not continue to be made available at favorable prices, or at all. A
survey is currently underway of AFC's leased properties and facilities,
including operational vendors providing power, local and long distance
telecommunications, water, heating and cooling, and various services to
determine the status of embedded technology equipment that could affect AFC's
operations. The Company plans to test and validate its internal operations,
complete the vendor surveys, and finalize and implement contingency plans by
mid-1999. Failure of the Company to adequately address all known and unknown Y2K
compliance issues could have a material adverse affect on AFC's business,
financial condition and results of operations.
The UMC 1000 was originally designed and developed to be Y2K compliant. AFC
utilizes operating systems and software applications that were designed and
developed to properly reflect the year 2000 and subsequent years' data.
Although the Company believes that its product and operating systems are Y2K
compliant, the Company's manufacturing suppliers may utilize equipment or
software that is not compliant. The failure on the part of any vendor to
adequately address its own Y2K compliance issues could lead to delays on the
part of the vendor in the delivery of subassemblies for use in the Company's
products, or disruption of services provided by a vendor, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. The remaining Y2K compliance activities are not
expected to result in significant incremental operating expenses; the Company
estimates the cost to complete its Y2K readiness and contingency plans are not
expected to exceed $200,000. Expenditures to date in relation to Y2K readiness
have been immaterial.
CERTAIN ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. The SFAS disclosure
is described more fully in Note 1 of "Notes to Consolidated Financial
Statements".
During the fourth quarter of 1998, the Company adopted the provisions of SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information.
The SFAS disclosure is described more fully in Notes 1 and 11 of "Notes to
Consolidated Financial Statements".
<PAGE> 8
SFAS No. 133, Accounting for Derivative and Hedging Activities, is effective
for the Company beginning in the first quarter of 2000. Refer to Note 1 of
"Notes to Consolidated Financial Statements" for a discussion of the accounting
treatment of derivative instruments as required by this Statement.
<PAGE> 1
EXHIBIT 13.3
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,669 $ 9,053
Marketable securities 90,084 96,143
Accounts receivable, less allowances of $5,326 and $2,729
in 1998 and 1997, respectively 74,967 79,098
Inventories 53,060 52,073
Other current assets 8,257 6,090
--------- ---------
Total current assets 247,037 242,457
Property and equipment, net 49,315 24,506
Other assets 11,531 6,330
--------- ---------
Total assets $ 307,883 $ 273,293
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,573 $ 18,475
Accrued liabilities 25,140 30,342
--------- ---------
Total current liabilities 37,713 48,817
Long-term liabilities 1,870 756
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.01 par value; 200,000,000 shares authorized
in 1998 and 1997; 75,716,153 and 72,626,370 shares issued
and outstanding in 1998 and 1997, respectively 757 726
Additional paid-in capital 210,420 193,183
Notes receivable from stockholders (730) (835)
Retained earnings 57,853 30,646
--------- ---------
Total stockholders' equity 268,300 223,720
--------- ---------
Total liabilities and stockholders' equity $ 307,883 $ 273,293
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 2
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 312,745 $ 267,858 $ 130,193
Cost of revenues 168,654 145,933 73,950
--------- --------- ---------
Gross profit 144,091 121,925 56,243
--------- --------- ---------
Operating expenses:
Research and development 40,963 25,726 14,413
Selling, general and administrative 65,328 42,653 21,188
DSC litigation costs -- -- 18,947
--------- --------- ---------
Total operating expenses 106,291 68,379 54,548
Operating income 37,800 53,546 1,695
Other income, net 4,055 4,866 2,388
--------- --------- ---------
Income before income taxes 41,855 58,412 4,083
Income taxes (benefit) 14,648 21,612 (3,154)
--------- --------- ---------
Net income $ 27,207 $ 36,800 $ 7,237
========= ========= =========
Basic net income per share $ 0.36 $ 0.52 $ 0.30
--------- --------- ---------
Shares used in basic per share computations 74,788 70,131 24,146
--------- --------- ---------
Diluted net income per share $ 0.34 $ 0.48 $ 0.11
--------- --------- ---------
Shares used in diluted per share computations 79,511 77,469 68,048
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1998, 1997, and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------------- ---------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances as of
December 31, 1995 34,022,408 $ 37,777 10,030,336 $ 100 $ (2,298)
Issuance of preferred stock 440,000 1,540 -- -- --
Issuance of common stock
in settlement of litigation -- -- 1,451,574 15 8,978
Exercise of common stock
options and warrants -- -- 6,032,378 60 82
Initial public offering of
common stock -- -- 10,350,000 104 117,970
Conversion of preferred
stock to common stock (34,462,408) (39,317) 37,434,926 374 38,943
Payment of notes receivable
from stockholder -- -- -- -- --
Net income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances as of
December 31, 1996 -- -- 65,299,214 653 163,675
Exercise of common stock
options and warrants -- -- 6,940,978 69 2,446
Secondary public offering of
common stock -- -- 400,000 4 7,839
Sale of common stock for
notes receivable -- -- 25,378 3 684
Repurchase of common stock -- -- (39,200) (3) (10)
Tax benefit from
option exercises -- -- -- -- 18,549
Net income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances as of
December 31, 1997 -- -- 72,626,370 726 193,183
Exercise of common stock
options and warrants -- -- 3,096,149 31 6,295
Payment of notes receivable
from stockholder -- -- -- -- --
Repurchase of common stock -- -- (6,366) -- (4)
Tax benefit from
option exercises -- -- -- -- 10,946
Net income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances as of
December 31, 1998 -- $ -- 75,716,153 $ 757 $ 210,420
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NOTES TOTAL
RECEIVABLE STOCK
FROM RETAINED HOLDERS'
STOCK- EARNINGS EQUITY
HOLDERS (DEFICIT) (DEFICIT)
----------- ----------- -----------
<S> <C> <C> <C>
Balances as of
December 31, 1995 $ (176) $ (13,391) $ (15,765)
Issuance of preferred stock -- -- --
Issuance of common stock
in settlement of litigation -- -- 8,993
Exercise of common stock
options and warrants -- -- 142
Initial public offering of
common stock -- -- 118,074
Conversion of preferred
stock to common stock -- -- 39,317
Payment of notes receivable
from stockholder 25 -- 25
Net income -- 7,237 7,237
----------- ----------- -----------
Balances as of
December 31, 1996 (151) (6,154) 158,023
Exercise of common stock
options and warrants -- -- 2,515
Secondary public offering of
common stock -- -- 7,843
Sale of common stock for
notes receivable (684) -- 3
Repurchase of common stock -- -- (13)
Tax benefit from
option exercises -- -- 18,549
Net income -- 36,800 36,800
----------- ----------- -----------
Balances as of
December 31, 1997 (835) 30,646 223,720
Exercise of common stock
options and warrants -- -- 6,326
Payment of notes receivable
from stockholder 105 -- 105
Repurchase of common stock -- -- (4)
Tax benefit from
option exercises -- -- 10,946
Net income -- 27,207 27,207
----------- ----------- -----------
Balances as of
December 31, 1998 $ (730) $ 57,853 $ 268,300
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
ADVANCED FIBRE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,207 $ 36,800 $ 7,237
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Tax benefit from option exercises 10,946 18,549 --
Deferred income taxes (2,451) (826) (3,679)
Depreciation and amortization 8,026 2,850 956
Allowances for uncollectible accounts and returns 2,597 2,729 --
Non cash portion of litigation settlement -- -- 12,807
Gain on dissolution of joint venture, net -- -- (1,149)
Changes in operating assets and liabilities:
Accounts receivable 1,534 (49,036) (21,403)
Inventories (987) (34,724) (5,714)
Other current assets 519 (1,175) (588)
Other assets (4,110) 101 --
Accounts payable (5,902) 9,676 1,602
Accrued liabilities (5,202) 22,289 3,442
Other liabilities 1,114 (57) 258
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 33,291 7,176 (6,231)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of marketable securities 6,059 (12,655) (83,488)
Investment in development-stage company (2,018) (3,000) --
Purchase of property and equipment (32,143) (17,767) (8,367)
Reimbursement of loans to joint venture -- -- 1,516
Business acquisition, net of cash acquired -- -- (783)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (28,102) (33,422) (91,122)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options
and warrants, net 6,427 2,514 167
Proceeds from secondary offering of common stock -- 7,843 --
Proceeds from initial public offering of common stock -- -- 118,074
Proceeds from bank borrowings -- -- 16,806
Repayment of bank borrowings -- -- (16,806)
Repayment of long-term portion of litigation settlement -- -- (7,064)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,427 10,357 111,177
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,616 (15,889) 13,824
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,053 24,942 11,118
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 20,669 $ 9,053 $ 24,942
========= ========= =========
NONCASH FINANCING AND INVESTING ACTIVITIES:
Issuance of common stock for notes receivable $ -- $ 684 $ --
Issuance of preferred stock for business acquisition -- -- 1,540
CASH PAID:
Interest -- -- 398
Income taxes 7,190 442 265
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Advanced Fibre Communications, Inc. (the "Company" or "AFC") operates in the
access market and designs, develops, manufactures, markets, and supports the
Universal Modular Carrier 1000(TM) (the "UMC 1000"), a cost-effective,
multi-service digital loop carrier system developed to serve small to mid line
size markets. The Company's UMC 1000 is designed to enable telecommunications
companies and other service providers to connect subscribers to the central
office switch for voice and data communications over copper wire, fiber optic
cable, and analog radio networks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated. AFC's investments in 50% or less owned joint ventures are
accounted for under the equity method. An investment in a development-stage
company, which is less than 20% ownership, is accounted for under the cost
method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash and cash equivalents are
generally invested in money market funds, are classified as available-for-sale
securities and their cost approximates their market value.
MARKETABLE SECURITIES
All marketable securities are classified as available-for-sale and are stated at
fair value, which approximates cost. Unrealized gains and losses and realized
gains and losses were immaterial for all years presented.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133 in June 1998, Accounting for Derivative
and Hedging Activities, effective for fiscal years beginning after June 15,
1999. This standard requires that an entity recognizes all derivatives as either
assets or liabilities in the balance sheet and measures those instruments at
fair value. The treatment of gains or losses resulting from changes in the
derivative will be determined depending on the type and use of the derivative
and whether it qualifies for hedge accounting. The Company believes the adoption
of SFAS No. 133 will not have a material effect on the consolidated results of
operations, financial position or cash flows. The statement will be effective
for the Company beginning in the first quarter of 2000.
INVENTORIES
Inventories are valued at the lower of first-in, first-out cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives, generally five years for
office and engineering equipment, and seven years for furniture and fixtures.
LONG-LIVED ASSETS
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of carrying values or fair values, less costs of disposal.
<PAGE> 6
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION, ALLOWANCES AND PRODUCT WARRANTY
Revenue is generally recognized when products are shipped. An allowance for
estimated returns and allowance for uncollectible accounts is based on
experience. Provision for estimated warranty costs is recorded at the time of
sale and periodically adjusted to reflect actual experience. The Company
generally warrants its product for two years.
INCOME TAXES
AFC accounts for income taxes using the asset and liability method of
accounting. Under this method, deferred tax assets and liabilities are
recognized based on the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for any tax benefits
that are not expected to be realized.
EQUITY-BASED COMPENSATION PLANS
The Company accounts for equity based compensation plans using the intrinsic
value method.
NET INCOME PER SHARE
In December 1997, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. SFAS 128 requires the presentation of basic net income per share and,
for companies with complex capital structures, diluted net income per share.
Basic net income per share is computed using the weighted average number of
shares of common stock outstanding. Diluted net income per share is computed
using the weighted average number of shares of common stock and redeemable
convertible preferred stock outstanding, on an as-if converted basis, and common
equivalent shares from options and warrants to purchase common stock using the
treasury stock method, when dilutive.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 requires classification of items of
other comprehensive income by nature in a financial statement and a breakout of
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid in capital in the equity section of the balance
sheets. Reporting comprehensive income provides a measure of all changes in
equity that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners.
Additional disclosures required by this statement have not been included in the
consolidated financial statements because there are no material differences
between AFC's net income and comprehensive income for all periods presented.
SEGMENT REPORTING
During the fourth quarter of 1998, the Company adopted the provisions of SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information.
SFAS 131 establishes annual and interim reporting standards for operating
segments of a company. This Statement requires disclosures of selected
segment-related financial information and descriptive information about
products, major customers and geographic areas. AFC has one product, the UMC
1000, and is not organized by multiple operating segments for the purpose of
making operating decisions or assessing performance. Accordingly, the Company
operates in one operating segment and reports only certain enterprise-wide
disclosures.
<PAGE> 7
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CONCENTRATION OF CREDIT RISK
Financial instruments potentially exposing AFC to concentrations of credit risk
consist primarily of cash equivalents and trade accounts receivable. The Company
manufactures and sells the UMC 1000 principally to telecommunication companies
in the United States and to telecommunication companies and distributors in
international markets. To reduce credit risk, the Company performs ongoing
credit evaluations of its customers' financial condition. Based on the Company's
evaluation, AFC may require customer prepayment, bank guarantees or letters of
credit.
USE OF ESTIMATES
AFC has made a number of estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
NOTE 2. JOINT VENTURES
AFTEK HONG KONG
On April 11, 1996, the Company acquired all of the outstanding shares of AFTEK
Hong Kong, of which the Company had previously been a 49% stockholder. AFTEK
Hong Kong is a holding company that owned 60% of a joint venture, AFTEK
Hangzhou, that was licensed to manufacture and sell the Company's
telecommunications equipment in China.
Total consideration consisted of the following (in thousands):
<TABLE>
<S> <C>
Issuance of Series F preferred stock $1,540
Cash paid to retire note payable 939
Acquisition costs incurred 79
------
Total consideration $2,558
======
</TABLE>
The acquisition has been accounted for using the purchase method of accounting,
and, accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based upon their fair values at the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired was $932,000 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 5 years.
On August 10, 1996, AFTEK Hong Kong and its joint venture partner agreed to
liquidate AFTEK Hangzhou. The partners appointed a liquidation committee to
facilitate the liquidation procedures and to ensure that the liquidation was
completed in accordance with the relevant stipulations contained in the joint
venture agreement. The Company believes the provisions recorded in 1997 and 1996
of approximately $59,000 and $383,000, respectively, adequately reflect the
reduction in the net realizable value of AFTEK Hong Kong's interest in the joint
venture's net assets to be distributed upon liquidation. The liquidation is
pending governmental approval from the Peoples Republic of China.
<PAGE> 8
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. JOINT VENTURES (continued)
Historical results of AFTEK Hong Kong and pro forma results of operations giving
effect to the acquisitions have not been presented because such information is
immaterial in relation to the Company's results of operations.
ADVANCED ACCESS LABS
During fiscal 1994, the Company entered into a joint venture partnership,
Advanced Access Labs, with a stockholder. The joint venture designed and
developed a product to allow telephone services to be provided over existing
cable TV coaxial systems as well as other transmission media. The Company
contributed the right to use its technology in exchange for a 50% ownership in
the joint venture partnership. During 1996, the Company made loans and other
advances to the joint venture totaling $167,000. The Company has recorded its
proportionate share of the joint venture's losses to the extent of the Company's
loans and advances therein.
On December 23, 1996, the Company and the joint venture partner entered into an
agreement to terminate the partnership. In connection with the dissolution, the
joint venture partner reimbursed the Company $1,683,000 for all loans and
advances made by the Company to date. The reimbursement was recorded as a gain
and is reflected in other income in the accompanying consolidated financial
statements.
NOTE 3. MARKETABLE SECURITIES
Marketable securities are valued at fair value, which approximates cost, and are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Municipal debt securities $89,454 $94,143
Corporate debt securities 630 2,000
------- -------
Total marketable securities $90,084 $96,143
======= =======
</TABLE>
The fair value of securities maturing in one year or less and those maturing
between one year and five years was $55,917,000 and $34,167,000, respectively,
as of December 31, 1998.
NOTE 4. INVENTORIES
The major components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Raw materials $16,135 $17,369
Work-in-progress 566 666
Finished goods 36,359 34,038
------- -------
Total inventories $53,060 $52,073
======= =======
</TABLE>
<PAGE> 9
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Furniture and fixtures $ 7,831 $ 2,572
Computer and office equipment 23,145 11,726
Engineering equipment 29,860 14,395
------- -------
60,836 28,693
Less: accumulated depreciation 11,521 4,187
------- -------
Property and equipment, net $49,315 $24,506
======= =======
</TABLE>
NOTE 6. ACCRUED LIABILITIES
A summary of accrued liabilities follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Outside services $ 3,219 $ 9,522
Income and sales taxes 2,773 5,223
Warranty 6,563 4,929
Salaries and benefits 4,249 4,715
Other 8,336 5,953
------- -------
Total accrued liabilities $25,140 $30,342
======= =======
</TABLE>
<PAGE> 10
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. INCOME TAXES
A summary of the components of income taxes (benefit) follows (in thousands):
<TABLE>
<CAPTION>
CHARGE IN
LIEU OF
INCOME
CURRENT DEFERRED TAXES(1) TOTAL
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Federal $ 4,382 $ (1,455) $ 9,533 $ 12,460
State 1,771 (996) 1,413 2,188
-------- -------- -------- --------
Income taxes (benefit) $ 6,153 $ (2,451) $ 10,946 $ 14,648
======== ======== ======== ========
Year ended December 31, 1997:
Federal $ 3,142 $ (1,052) $ 16,017 $ 18,107
State 747 226 2,532 3,505
-------- -------- -------- --------
Income taxes (benefit) $ 3,889 $ (826) $ 18,549 $ 21,612
======== ======== ======== ========
Year ended December 31, 1996:
Federal $ 523 $ (2,764) $ -- $ (2,241)
State 2 (915) -- (913)
-------- -------- -------- --------
Income taxes (benefit) $ 525 $ (3,679) $ -- $ (3,154)
======== ======== ======== ========
</TABLE>
(1) Charge in lieu of income taxes results from the tax benefit of stock option
exercises
Income taxes (benefit) differs from the amount computed by applying the U.S.
federal statutory rate of 35% in 1998, and 34% in 1997 and 1996, to income
before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income taxes at statutory rate $ 14,649 $ 19,860 $ 1,388
Current losses and temporary differences
for which no benefit was recognized 54 95 476
Foreign sales corporation benefit (164) (179) --
Utilization of credits (735) (304) --
Tax exempt interest (1,225) (407) --
State taxes, net of federal benefit 1,422 2,258 (167)
Change in valuation allowance -- -- (4,687)
Other 647 289 (164)
-------- -------- --------
Income taxes (benefit) $ 14,648 $ 21,612 $ (3,154)
======== ======== ========
</TABLE>
<PAGE> 11
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowances and accruals $ 7,000 $ 4,191
Research tax credit carryforwards 2,597 896
Minimum tax credit carryforwards 744 33
DSC settlement costs 309 784
Other -- 33
-------- --------
10,650 5,937
Deferred tax liability:
Net book value over net tax basis (4,128) (1,866)
-------- --------
6,522 4,071
Less valuation allowance -- --
-------- --------
Net deferred tax asset $ 6,522 $ 4,071
======== ========
</TABLE>
Management believes that a valuation allowance is not required as of December
31, 1998, based upon current and projected profitability of the Company. As of
December 31, 1998, AFC had research credit carryforwards for federal and
California income tax return purposes of approximately $1,871,000 and $726,000,
respectively. The federal and California research tax credit carryforwards are
available to reduce future income subject to income taxes. The federal research
credit carryforwards will expire at various dates through the year 2018 and the
California research credits will carry forward indefinitely until utilized. The
Company has alternative minimum tax credit carryforwards for federal income tax
return purposes of approximately $744,000, which carry forward indefinitely
until utilized.
NOTE 8. BANK BORROWINGS
AFC has a $50.0 million unsecured bank line through two banks with an interest
rate of prime, or LIBOR, plus 0.75%. The line of credit expires in July 1999.
Under the bank line, the banks may issue letters of credit up to $10.0 million
on behalf of the Company. The bank line requires the Company to comply with
certain debt and financial covenants. As of December 31, 1998, $597,000 in
letters of credit and no borrowings were outstanding under the bank line, and
the Company was in compliance with the covenants contained in the agreement.
The Company also maintains bank facilities with two banks under which the
Company may open foreign exchange contracts up to $40.0 million. There are no
borrowing provisions associated with these facilities and there are no financial
covenants or fees associated with the facilities. At December 31, 1998, one
foreign exchange contract of $1,146,000 was outstanding, with a maturity date of
January 14, 1999.
<PAGE> 12
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In October 1996, AFC completed its initial public offering, issuing 10,350,000
shares of common stock which generating net proceeds of approximately $118.1
million. In conjunction with the offering, six series of outstanding redeemable
convertible preferred stock composed of 34,462,408 shares were converted into
37,434,926 shares of common stock.
SECONDARY OFFERING
In February 1997, the Company completed a secondary offering of 4,000,000 shares
of common stock, 3,600,000 of which were sold by certain stockholders and
400,000 of which were sold by the Company, generating approximately $7,843,000
of net proceeds to the Company.
COMMON STOCK SPLIT
In September 1997, the Company effected a two-for-one stock split. All share,
per share, and common stock amounts herein have been restated to reflect the
effect of this split. In September 1997, the stockholders approved an increase
in the Company's authorized shares of common stock from 100,000,000 to
200,000,000.
COMMON STOCK OPTIONS
The Company's 1996 Stock Incentive Plan (the "1996 Plan") is intended to serve
as the successor equity incentive program to the Company's 1993 Stock
Option/Stock Issuance Plan (the "Predecessor Plan"). A total of 19,138,074
shares of common stock were authorized for issuance under the 1996 Plan as of
December 31, 1998, and 16,959,262 as of December 31, 1997. The share reserve
automatically increases on the first trading day of each calendar year by an
amount equal to 3% of the number of shares of common stock outstanding on the
last trading day of the immediately preceding calendar year.
Options issued prior to 1997 generally vest 20% on the first anniversary date
and ratably over the following 48 months. Options issued subsequent to January
1, 1997 generally vest ratably over 48 months for employees with over one year
of service, and 25% on the first anniversary date and ratably over the following
36 months for new employees. The options expire 10 years from the date of grant
and are normally canceled three months after termination of employment.
In August 1998, the Compensation Committee of the Board of Directors authorized
a program to offer to replace option grants made under the 1996 Plan that were
granted at exercise prices exceeding $12.50 per share. The offer was made to all
employees, 99% of whom participated, involving options to purchase 4,190,105
shares of Common Stock and was effected on September 14, 1998. The exercise
price of each option was re-priced at $7.88, based on the closing market price
of the stock on September 14, 1998. The re-pricing is subject to the condition
that the options are not exercised, and employment is not terminated, prior to
March 15, 1999, and September 15, 1999, for employees and officers,
respectively. Vesting of the re-priced options was suspended at September 14,
1998, and will resume on March 15, 1999 for employees, and September 15, 1999
for officers. Any employee voluntarily leaving the Company during the suspended
vesting period will lose the affected options, including previously vested
portions of those options. During the year, the option grants for two Directors
were re-priced. The original exercise prices ranged from $34.00 to $40.00 per
share, and the re-pricing involved options to purchase a total of 80,000 shares
of Common Stock. The exercise price of each re-priced option was $8.63, based on
the closing market price of the stock on October 27, 1998. The re-pricing is
subject to the condition that the options are not exercised, and the
directorships are not terminated, prior to October 27, 1999. Vesting of the
re-priced options was suspended at October 27, 1998, and will resume on October
27, 1999.
<PAGE> 13
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(Continued)
A summary of the Company's stock option plan activity is presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- -------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 8,303,260 $11.92 8,627,088 $ 1.66 7,780,032 $ 0.18
Granted 7,820,811 13.14 3,603,646 27.42 2,166,164 6.17
Exercised (2,289,033) 1.70 (3,050,793) 0.38 (832,852) 0.09
Cancelled (5,781,595) 24.92 (876,681) 14.64 (486,256) 0.61
---------- ------ ---------- ------ ---------- ------
Outstanding at end of year 8,053,443 $ 6.67 8,303,260 $11.92 8,627,088 $ 1.66
Exercisable at end of year 1,417,297 2,611,424 3,411,318
Available for grant 4,770,655 6,807,505 9,519,270
Weighted average fair
value of options
granted during the year $ 5.32 $17.29 $ 2.95
</TABLE>
The following table summarizes information about stock options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTION CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.01-$0.31 889,670 5.6 years $ 0.14 575,646 $ 0.10
0.38-6.00 974,786 7.5 2.26 332,397 1.99
6.25-7.72 521,104 8.0 6.48 386,960 6.28
7.88 4,044,203 9.7 7.88 41,054 7.88
8.13-8.50 1,046,116 10.0 8.50 4,980 8.50
8.63-9.94 385,245 9.8 8.65 30,995 8.63
10.18-17.88 104,584 9.6 13.55 2,181 11.88
20.00-29.81 41,247 6.0 24.84 22,659 25.01
31.00-37.63 46,488 8.4 31.79 20,425 32.65
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the "Purchase Plan") adopted on
July 12, 1996, the Company is authorized to issue up to 3,000,000 shares of
Common Stock to eligible employees of the Company and participating
subsidiaries. The Purchase Plan will be implemented in a series of successive
offering periods, each
<PAGE> 14
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(Continued)
with a maximum duration of 24 months. Under the terms of the Purchase Plan,
eligible employees can enter on the start date of any offering period or on any
subsequent semi-annual entry date. Individuals who become eligible after the
start date may join the Purchase Plan on any subsequent semi-annual entry date
within that offering. Employees may have up to 10 percent of their base salary
withheld through payroll deductions to purchase the Company's Common Stock. The
purchase price of the stock is the lower of 85 percent of 1) the fair market
value of the Common Stock on the participant's entry date into the Purchase Plan
or 2) the fair market value on the semi-annual purchase date. Under the Purchase
Plan, the purchase dates are January 31 and July 31 of each year, or the closest
business day preceding those dates when the purchase date falls on a
non-business day. If at the date of purchase, the Purchase Plan strike price
exceeds the fair market value of the Company's Common Stock, the purchase is
made at the lower price, and the offering is cancelled and reset for a new
two-year offering at the lower strike price. The initial offering commenced on
October 4, 1996 and ended on July 31, 1998. A second offering commenced on
August 3, 1998 and ended after the January 29, 1999 purchase was made. The
second offering was triggered to reset as a result of the original Purchase Plan
strike price exceeding the fair market value of the Company's Common Stock on
the purchase date. A third offering commenced on February 2, 1999 and is
scheduled to continue through January 31, 2001.
Purchases under the Purchase Plan in 1998 totaled 199,905 shares of common
stock. Purchases on January 29, 1999 totaled 125,711 shares of common stock. The
weighted average fair value of stock purchased in 1998 and on January 29, 1999
was $11.37 per share. At December 31, 1998, 2,674,581 shares remained available
for issuance under the Purchase Plan.
COMMON STOCK WARRANTS
Warrants to purchase shares of common stock were issued to investors as part of
the preferred stock agreements. The warrants expire through the year 2000 and
are summarized as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE PER SHARE
----------- ---------------
<S> <C> <C>
Warrants outstanding as of December 31, 1996 5,147,552 $0.01-$3.50
Exercised (3,857,808) 0.01-0.58
----------- -----------
Warrants outstanding as of December 31, 1997 1,289,744 0.01-3.50
Exercised (608,088) 0.01-0.58
----------- -----------
Warrants outstanding as of December 31, 1998 681,656 $0.13-$3.50
=========== ===========
</TABLE>
PRO FORMA FAIR VALUE INFORMATION
AFC applies the intrinsic value method of accounting prescribed by APB Opinion
No. 25 for its stock-based compensation plans. If compensation cost for AFC's
stock-based compensation plans had been determined in accordance with the fair
value approach set forth in SFAS No.123, Accounting for Stock-Based
Compensation, the Company's
<PAGE> 15
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(Continued)
net income and earnings per share would have been reduced to the pro forma
amounts as follows (in thousands except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported $ 27,207 $ 36,800 $ 7,237
Pro forma 5,030 26,404 6,638
Basic net income per share:
As reported $ 0.36 $ 0.52 $ 0.30
Pro forma 0.07 0.38 0.27
Diluted net income per share:
As reported $ 0.34 $ 0.48 $ 0.11
Pro forma 0.06 0.34 0.10
</TABLE>
The fair value of option grants in 1998, 1997, and 1996 were estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
RISK-FREE
DIVIDEND INTEREST
YIELD VOLATILITY RATE EXPECTED LIFE
------- ---------- -------- -------------
<S> <C> <C> <C> <C>
1998 -- 85% 5.54% 5 Years
1998 Re-priced -- 85 4.72 4
1997 -- 71 6.23 5
1996 Post-IPO -- 55 6.32 5
1996 Pre-IPO -- -- 6.24 5
</TABLE>
Pro forma compensation costs related to the Purchase Plan were recognized for
the fair value of the employees' purchase rights, as of the date of purchase
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used:
<TABLE>
<CAPTION>
SEMI-ANNUAL RISK-FREE
PURCHASE DIVIDEND INTEREST
DATE YIELD VOLATILITY RATE EXPECTED LIFE
- ------------ --------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
January 1999 -- 75% 5.8% 14 Months
July 1998 -- 71 5.8 14
January 1998 -- 71 5.8 14
July 1997 -- 71 5.8 14
January 1997 -- 71 5.8 14
</TABLE>
<PAGE> 16
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(Continued)
NET INCOME PER SHARE
The following tables set forth the computations of shares and net income used in
the calculation of basic and diluted net income per share (in thousands, except
share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income $27,207 $36,800 $ 7,237
======= ======= =======
Shares used in basic per share calculations - actual weighted
average common shares outstanding for the period 74,788 70,131 24,146
Weighted average number of shares upon conversion of
redeemable convertible preferred stock -- -- 27,994
Weighted average number of shares upon exercise of
dilutive options and warrants 4,723 7,338 15,908
------- ------- -------
Shares used in diluted per share calculations 79,511 77,469 68,048
======= ======= =======
Basic net income per share $ 0.36 $ 0.52 $ 0.30
======= ======= =======
Diluted net income per share $ 0.34 $ 0.48 $ 0.11
======= ======= =======
</TABLE>
NOTE 10. COMMITMENTS AND CONTINGENCIES
LEASES
Office space and certain equipment are leased under operating leases. Future
minimum payments under operating leases with an initial term of more than one
year as of December 31, 1998 are summarized as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 6,160
2000 7,565
2001 8,308
2002 7,618
2003 7,569
Thereafter 50,738
-------
Total minimum lease payments $87,958
=======
</TABLE>
<PAGE> 17
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (continued)
Total rent expense for all operating leases were $6,112,000, $5,318,000, and
$3,030,000, for the years ended December 31, 1998, 1997, and 1996, respectively.
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan under which employees may contribute a portion of
their compensation on a tax-deferred basis to the plan. The Company may, at its
discretion, contribute to the plan on a matching basis up to a maximum of $5,000
per employee per year. The Company is the plan administrator. During 1998 and
1997, the Company contributed $1,368,000 and $785,000, respectively, to the
plan.
LITIGATION
ITRI/ACER NETXUS, INC. In September 1992, AFC entered into agreements (the "ITRI
Agreements") with the Industrial Technology Research Institute ("ITRI"), a
Taiwanese government-sponsored research and development organization, that
granted to ITRI certain license rights to the European Telecommunications
Standards Institute ("ETSI") version of the UMC 1000. In July 1996, the Company
became involved in litigation and arbitration proceedings with ITRI, certain of
ITRI's sub-licensee "Member Companies", and others, including Acer Netxus, Inc.
("Acer"). These legal proceedings involved claims for breach of the ITRI
Agreements, trade secret misappropriation, unfair competition, and related
claims.
In March 1998, the Company, ITRI, the Member Companies and other parties entered
into a definitive Settlement Agreement that resolved all claims among such
parties, except Acer. Under the Settlement Agreement, all claims involved in the
proceedings between such parties were dismissed with prejudice. The Settlement
Agreement provides that the Member Companies will pay an aggregate of $6.3
million to the Company over a five year period, and will pay the Company
royalties on the purchase of certain ASICs by the Member Companies. Under the
Settlement Agreement, the Company granted a limited license to the Member
Companies to certain of the Company's technology, agreed to sell certain ASICs
to the Member Companies, and agreed to pay $500,000 to ITRI over a three year
period for legal fees incurred by ITRI in the proceedings. The Settlement
Agreement does not grant to the Member Companies any rights to the Company's UMC
1000 Third Generation Digital Loop Carrier(TM) ("3GDLC") technology or products.
This Settlement Agreement did not affect the Company's claims against Acer.
In September 1998, AFC favorably resolved its litigation with Acer. Pursuant to
a settlement agreement dated September 18, 1998, and a Permanent Injunction And
Final Judgment entered by the United States District Court, Northern District of
California, on September 22, 1998, Acer is enjoined from selling any digital
loop carrier system for at least one year, and from developing, manufacturing,
or selling any device that uses or derives from UMC 1000 technology or that is
otherwise not the product of strict clean room development or based on licensed
third party technology. In addition, the injunction requires that Acer destroy
all work product and inventory related to its two systems that competed with the
UMC 1000, and subjects Acer to a $500,000 penalty for any and each violation of
the injunction.
ALCATEL USA/DSC On December 22, 1997, AFC filed a lawsuit in Sonoma County
Superior Court in California against DSC Communications Corporation ("DSC")
related to its hiring of a former employee of DSC, to become the Company's Vice
President, Product Planning. In September 1998, DSC was acquired by Alcatel
Alsthom Compagnie and is now a part of Alcatel USA, Inc. For purposes of this
footnote, reference is made only to DSC. The Company's complaint responded to
DSC's litigation threats, and sought a declaratory judgment that its hiring of
the former DSC employee was lawful. In April, 1998, DSC filed a cross-complaint
against AFC that alleged "inevitable" trade secret misappropriation and related
claims, and sought unspecified damages, and injunctive relief relating to the
alleged
<PAGE> 18
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (continued)
misappropriation, attorneys' fees and other relief. During September 1998, the
Court struck all material misappropriation allegations from DSC's
Cross-Complaint. DSC filed a First Amended Cross-Complaint on October 2, 1998,
alleging "threatened" trade secret misappropriation and related claims. The
Amended Cross-Complaint sought the same relief as the original Cross-Complaint.
On January 19, 1999, the Court sustained the Company's demurrers to all but two
causes of action of the Amended Cross-Complaint, with prejudice. Thereafter, DSC
agreed to dismiss the entire action with prejudice, and in early February 1999,
the Company and DSC filed a joint Request For Dismissal of the entire action
with the Court.
On January 22, 1998, DSC filed a lawsuit against AFC and the former DSC employee
in the United States District Court, Eastern District of Texas, alleging
"inevitable" trade secret misappropriation and related claims. DSC also asserted
a separate claim against the Company for patent infringement alleging that AFC's
3GDLC product infringes a DSC patent. DSC's complaint sought unspecified damages
and injunctive relief relating to the alleged misappropriation and patent
infringement, attorneys' fees and other relief. On February 5, 1998, the United
States District Court, Eastern District of Texas granted AFC's motion to dismiss
all non-patent claims in this lawsuit. In May 1998, the Company filed a
counterclaim against DSC in the Texas patent action alleging federal antitrust
violations, unfair competition, breach of a prior settlement agreement and other
related claims. Between April and August, 1998, certain discovery occurred, and
the parties filed various motions, including cross-motions for summary judgment
on the Company's defense that a prior Settlement Agreement between AFC and DSC
barred DSC's patent claims. By a Report And Recommendation filed October 2,
1998, the United States Magistrate Judge recommended that the District Court
grant summary judgment in the Company's favor on the patent claim based on the
Settlement Agreement. DSC filed an Objection to this ruling with the District
Court on October 16, 1998, and the matter remains pending.
Based on reviews of the patent claim, the Company believes that AFC's 3GDLC
product does not infringe the DSC patent, and that the Company has meritorious
defenses to such claim. The Company intends to vigorously defend the litigation
against DSC and prosecute its claims against DSC. However, the ultimate outcome
of these lawsuits cannot be predicted. In addition, patent litigation is highly
complex and can extend for a protracted period of time, which can divert the
attention of management and technical personnel and require the Company to incur
substantial costs and expenses. If the patent claim were to be resolved against
AFC, this could have a material adverse effect on the Company's business,
results of operations and financial condition.
RELTEC CORPORATION On November 26, 1997, AFC filed a lawsuit in Sonoma County
Superior Court in California against RELTEC Corporation, alleging trade secret
misappropriation, tortious interference with a contract, and related claims. The
case involves RELTEC's acquisition of AFC's technology through the Company's
Taiwan-based licensee, Vidar-SMS Co., Ltd. Discovery is ongoing, and trial is
scheduled to start on April 12, 1999.
STOCKHOLDER LITIGATION The Company and various of its current and former
officers and directors are parties to a number of related lawsuits which purport
to be class actions, filed on behalf of certain of AFC's stockholders (excluding
the defendants and parties related to them). The lawsuits, which are
substantially identical, allege that the defendants violated certain federal
securities laws. The cases have been consolidated in the United States District
Court, Northern District of California. The plaintiffs filed a consolidated
Amended Complaint on or about January 27, 1999. A hearing on defendants' motion
to dismiss the complaint is scheduled for May 24, 1999. No discovery has
occurred, and only limited discovery is expected to occur pending ruling on the
motion to dismiss.
All of these actions are in the early stages of proceedings and the Company is
currently investigating the allegations. Based on its current information, the
Company believes the suits to be without merit and intends to defend itself and
its
<PAGE> 19
ADVANCED FIBRE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (continued)
officers and directors vigorously. Although it is reasonably possible the
Company may incur a loss upon the conclusion of these claims, an estimate of any
loss or range of loss cannot be made.
No provision for any liability that may result upon adjudication has been made
in the Company's consolidated financial statements. In the opinion of
management, resolution of this matter is not expected to have a material adverse
effect on the financial position of AFC. However, depending on the amount and
timing, an unfavorable resolution of this matter could materially affect the
Company's future results of operations or cash flows in a particular period. In
connection with these legal proceedings, the Company expects to incur
substantial legal and other expenses. Stockholder suits of this kind are highly
complex and can extend for a protracted period of time, which can substantially
increase the cost of such litigation and divert the attention of the Company's
management.
NOTE 11. SEGMENT INFORMATION
AFC operates in the access market and derives substantially all of its revenues
from sales of the UMC 1000 product. The Company organizes its operations based
on designing, developing, manufacturing, selling, and supporting the UMC 1000
product. The chief operating decision makers evaluate performance, make
operating decisions, and allocate resources based on consolidated financial
data, including gross profit, operating income, profit or loss from operations
before income taxes, and net income after taxes. Gross profit, operating income,
income from operations, and income taxes are not allocated or specific to
individual departments within the organization. Subsidiaries are not considered
material to the consolidated results of the Company, and for purposes of this
disclosure, are not considered significant to ongoing operations. Accordingly,
the Company has a single reportable segment. As such, the Company is required to
disclose certain information about its product, information about geographic
areas, and information about major customers.
For the year ended December 31, 1998, revenues as a result of sales directly
attributable to the UMC 1000 product were $307,077,000, compared with
$266,386,000 in 1997, and $128,941,000 in 1996. AFC sells the UMC 1000 in over
23 countries worldwide; sales to external customers are categorized
geographically by each customer's country of domicile. For the year ended
December 31, 1998 revenues from sales to U.S. customers were $230,728,000, as
compared with $196,961,000 in 1997, and $103,109,000 in 1996. For the year ended
December 31, 1998, revenues from sales to all foreign countries were
$82,017,000, as compared with $70,897,000 in 1997, and $27,084,000 in 1996.
Material revenues from external customers in South Africa for the year ended
December 31, 1998, were $32,408,000. There were no material revenues from
external customers in foreign countries in the years ended December 31, 1997 or
1996. Long-lived assets located in the U.S. totaled $59,368,000 as of December
31, 1998 and $28,930,000 as of 1997. Long-lived assets located in foreign
countries totaled $1,393,000 as of December 31, 1998, and $1,284,000 as of 1997.
For the year ended December 31, 1998, one customer in the U.S. accounted for
11.2% and one customer in South Africa accounted for 10.4% of total revenues.
For the year ended December 31, 1997, one customer in the U.S. accounted for
19.2% of total revenues. There were no customers in any country accounting for
10% or more of total revenues in the year ended December 31, 1996.
NOTE 12. COMPANY INFORMATION AND CERTAIN CONCENTRATIONS
AFC currently derives substantially all of its revenue from the UMC 1000, and
expects that this concentration will continue for the foreseeable future. As a
result, any factor adversely affecting the demand for, or pricing of, the UMC
1000 could have a material adverse effect on the Company's business and results
of operations.
<PAGE> 20
ADVANCED FIBRE COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
NOTE 12. COMPANY INFORMATION AND CERTAIN CONCENTRATIONS (continued)
Manufacturing operations consist of the final assembly and testing of finished
goods from components and custom made subassemblies purchased from third
parties. Although the Company's product designs employ primarily industry
standard hardware, certain components are only available through limited sources
of supply. The Company's proprietary ASICs, codec components, and some surface
mount technology components and other components are available from limited
sources. Printed circuit board assemblies and channel bank assemblies are
provided by a limited number of turnkey suppliers. If essential components
cannot be obtained as required, the Company may be unable to meet demand for its
products, thereby adversely affecting its operating results. In addition,
scarcity of such components could result in cost increases that adversely affect
the Company's gross profit.
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Advanced Fibre Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced Fibre
Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for each of the years in
the three-year period ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Fibre
Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
San Francisco, California
January 26, 1999
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
Selected quarterly financial data is summarized below (unaudited):
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1998 1998 1998 1998 1997 1997 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 75,143 $ 66,513 $ 85,345 $ 85,744 $ 85,456 $ 76,790 $ 61,207 $ 44,405
Cost of revenues 39,995 36,388 46,696 45,575 45,949 41,472 33,535 24,977
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit 35,148 30,125 38,649 40,169 39,507 35,318 27,672 19,428
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development 10,800 11,422 10,429 8,312 7,231 7,205 6,440 4,850
Selling, general and
administrative 16,202 16,297 18,068 14,761 12,728 12,297 9,830 7,798
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses 27,002 27,719 28,497 23,073 19,959 19,502 16,270 12,648
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income 8,146 2,406 10,152 17,096 19,548 15,816 11,402 6,780
Other income, net 1,034 896 980 1,145 1,172 1,313 1,385 996
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes 9,180 3,302 11,132 18,241 20,720 17,129 12,787 7,776
Income taxes 3,215 1,153 3,896 6,384 7,666 6,338 4,731 2,877
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $ 5,965 $ 2,149 $ 7,236 $ 11,857 $ 13,054 $ 10,791 $ 8,056 $ 4,899
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues 53.2 54.7 54.7 53.2 53.8 54.0 54.8 56.2
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit 46.8 45.3 45.3 46.8 46.2 46.0 45.2 43.8
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development 14.4 17.2 12.2 9.7 8.5 9.4 10.5 10.9
Selling, general and
administrative 21.6 24.5 21.2 17.2 14.9 16.0 16.1 17.6
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses 35.9 41.7 33.4 26.9 23.4 25.4 26.6 28.5
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income 10.8 3.6 11.9 19.9 22.9 20.6 18.6 15.3
Other income, net 1.4 1.3 1.1 1.3 1.4 1.7 2.3 2.2
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes 12.2 4.9 13.0 21.2 24.2 22.3 20.9 17.5
Income taxes 4.3 1.7 4.5 7.4 9.0 8.3 7.7 6.5
--------- --------- --------- --------- --------- --------- --------- ---------
Net income 7.9% 3.2% 8.5% 13.8% 15.3% 14.1% 13.2% 11.0%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 1
EXHIBIT 23.1
REPORT ON SCHEDULE
AND
CONSENT OF KPMG LLP
The audits referred to in our report dated January 26, 1999 included the related
financial statement schedule as of December 31, 1998 and for each of the years
in the three-year period ended December 31, 1998, included in the annual report
on Form 10-K of Advanced Fibre Communications, Inc. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to incorporation by reference in the registration statements (Nos.
333-44645 and 333-15651) on Form S-8 of Advanced Fibre Communications, Inc. of
our reports dated January 26, 1999, relating to the consolidated balance sheets
of Advanced Fibre Communications, Inc. as of December 31, 1998 and 1997, and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for each of the years in
the three-year period ended December 31, 1998, and the related schedule, which
reports appear, or are incorporated by reference, in the December 31, 1998
annual report on Form 10-K of Advanced Fibre Communications, Inc.
KPMG LLP
San Francisco, California
March 24, 1999
<PAGE> 2
ADVANCED FIBRE COMMUNICATIONS, INC.
SCHEDULE II - VALUATION ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND TO OTHER FROM END OF
ALLOWANCE FOR UNCOLLECTIBLES PERIOD EXPENSES ACCOUNTS ALLOWANCE PERIOD
- ----------------------------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ending December 31, 1997 $ -- 2,729 -- -- $2,729
Year ending December 31, 1998 2,729 3,658 -- (1,061) 5,326
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
RESERVE FOR INVENTORY OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
- ----------------------------- ----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ending December 31, 1996 $ 732 434 -- (552) $ 614
Year ending December 31, 1997 614 1,971 -- (1,185) 1,400
Year ending December 31, 1998 1,400 4,949 -- (1,398) 4,951
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED DEDUCTIONS BALANCE AT
BEGINNING COSTS AND TO OTHER FROM END OF
WARRANTY RESERVE OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
- ----------------------------- ----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ending December 31, 1996 $ 852 4,465 -- (2,766) $2,551
Year ending December 31, 1997 2,551 9,171 -- (6,793) 4,929
Year ending December 31, 1998 4,929 11,504 -- (9,870) 6,563
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,699
<SECURITIES> 90,084
<RECEIVABLES> 80,293
<ALLOWANCES> (5,326)
<INVENTORY> 53,060
<CURRENT-ASSETS> 247,037
<PP&E> 60,827
<DEPRECIATION> (11,512)
<TOTAL-ASSETS> 307,883
<CURRENT-LIABILITIES> 37,713
<BONDS> 0
0
0
<COMMON> 757
<OTHER-SE> 267,543
<TOTAL-LIABILITY-AND-EQUITY> 307,883
<SALES> 307,077
<TOTAL-REVENUES> 312,745
<CGS> 157,150
<TOTAL-COSTS> 168,654
<OTHER-EXPENSES> 106,558
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,323)
<INCOME-PRETAX> 41,855
<INCOME-TAX> 14,648
<INCOME-CONTINUING> 27,207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,207
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,942
<SECURITIES> 83,488
<RECEIVABLES> 32,779
<ALLOWANCES> 0
<INVENTORY> 17,349
<CURRENT-ASSETS> 162,189
<PP&E> 11,080
<DEPRECIATION> (1,491)
<TOTAL-ASSETS> 175,679
<CURRENT-LIABILITIES> 16,851
<BONDS> 0
0
0
<COMMON> 653
<OTHER-SE> 157,370
<TOTAL-LIABILITY-AND-EQUITY> 175,679
<SALES> 128,941
<TOTAL-REVENUES> 130,193
<CGS> 69,628
<TOTAL-COSTS> 73,950
<OTHER-EXPENSES> 53,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (855)
<INCOME-PRETAX> 4,083
<INCOME-TAX> (3,154)
<INCOME-CONTINUING> 7,237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,237
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,053
<SECURITIES> 96,143
<RECEIVABLES> 81,827
<ALLOWANCES> (2,729)
<INVENTORY> 52,073
<CURRENT-ASSETS> 242,457
<PP&E> 28,693
<DEPRECIATION> (4,187)
<TOTAL-ASSETS> 273,293
<CURRENT-LIABILITIES> 48,817
<BONDS> 0
0
0
<COMMON> 726
<OTHER-SE> 222,994
<TOTAL-LIABILITY-AND-EQUITY> 273,293
<SALES> 266,386
<TOTAL-REVENUES> 267,858
<CGS> 137,216
<TOTAL-COSTS> 145,933
<OTHER-EXPENSES> 67,906
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,392
<INCOME-PRETAX> 58,412
<INCOME-TAX> 21,612
<INCOME-CONTINUING> 36,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,800
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.48
</TABLE>
