<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE SECOND QUARTER ENDED JUNE 30, 1996
COMMISSION FILE NUMBER 0-22202
PAIRGAIN TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0282809
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
14402 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92780-7013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(714) 832-9922
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
----- -----
THERE WERE 31,277,880 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE OF
$.0005 PER SHARE OUTSTANDING ON JUNE 30, 1996.
<PAGE> 2
PAIRGAIN TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for the
quarters and six months ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 15
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE> 3
PART I: ITEM 1
FINANCIAL INFORMATION
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------------- -------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,422 $ 24,576
Short-term investments (Note 3) 28,849 31,149
Accounts receivable 17,372 13,044
Inventories (Note 4) 29,852 22,522
Other current assets and deferred taxes 4,071 4,870
-------------- --------------
Total current assets 132,566 96,161
Property and equipment, net (Note 5) 8,233 6,402
Note receivable (Note 6) 2,708 2,708
Long-term investments (Note 7) 3,273 --
Other assets 74 55
-------------- --------------
Total assets $ 146,854 $ 105,326
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 29,628 $ 11,395
Bank line of credit (Note 8) -- --
-------------- --------------
Total current liabilities 29,628 11,395
Stockholders' equity (Notes 1 and 12):
Preferred stock, $.001 par value:
Authorized shares - 2,000,000; Issued and outstanding
shares - None -- --
Common stock, $.0005 par value:
Authorized shares - 60,000,000; Issued and outstanding
shares - 31,277,880 and 30,354,534 at June 30, 1996
and December 31, 1995, respectively 16 15
Additional paid-in capital 96,603 87,175
Deferred compensation (38) (82)
Unrealized gain on marketable securities 69 67
Retained earnings 20,576 6,756
-------------- --------------
Total stockholders' equity 117,226 93,931
-------------- --------------
Total liabilities and stockholders' equity $ 146,854 $ 105,326
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 47,239 $ 23,919 $ 87,750 $ 42,997
Cost of revenues 24,574 12,471 46,046 22,124
------------ ------------ ------------ ------------
Gross profit 22,665 11,448 41,704 20,873
------------ ------------ ------------ ------------
Operating expenses:
Research and development 4,475 2,869 8,096 4,761
Sales and marketing 4,358 2,223 8,082 4,091
General and administrative 2,417 1,637 4,751 3,088
------------ ------------ ------------ ------------
Total operating expenses 11,250 6,729 20,929 11,940
------------ ------------ ------------ ------------
Income from operations 11,415 4,719 20,775 8,933
Interest and other income, net 894 488 1,659 1,075
Gain on investments -- 258 -- 358
Unusual loss due to unauthorized trading
of investments by third parties (Note 9) -- (26,774) -- (26,774)
------------ ------------ ------------ ------------
Income (loss) before income taxes 12,309 (21,309) 22,434 (16,408)
Provision for income taxes (Note 10) 4,739 1,447 8,614 3,206
------------ ------------ ------------ ------------
Net income (loss) $ 7,570 $ (22,756) $ 13,820 $ (19,614)
============ ============ ============ ============
PER SHARE DATA (Note 1):
Earnings (loss) per share $ 0.21 $ (0.76) $ 0.39 $ (0.70)
============ ============ ============ ============
Weighted average number of common and common
equivalent shares 36,021 29,843 35,656 28,079
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
PAIRGAIN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,820 $ (19,614)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 2,022 1,317
Gain on investments -- (358)
Unusual loss due to unauthorized trading of investments by third
parties -- 26,774
Change in operating assets and liabilities:
Accounts receivable (4,328) 1,990
Inventories (7,330) (7,336)
Other current assets 795 329
Other assets (19) (39)
Accounts payable and other current liabilities 17,538 (654)
Federal income tax refund (Note 10) 6,900 --
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,398 2,409
---------------- ----------------
Cash flows from investing activities:
Net proceeds from (purchases of) short-term investments 1,877 (11,433)
Purchases of long-term investments (3,273) --
Purchases of property and equipment (3,381) (3,871)
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (4,777) (15,304)
---------------- ----------------
Cash flows from financing activities:
Payments on bank line of credit -- (1,000)
Proceeds from issuance of common stock 3,225 14,249
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,225 13,249
---------------- ----------------
Increase in cash and cash equivalents 27,846 354
Cash and cash equivalents at beginning of period 24,576 711
---------------- ----------------
Cash and cash equivalents at end of period $ 52,422 $ 1,065
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ -- $ 18
================ ================
Income tax paid $ -- $ 4,053
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
PairGain Technologies, Inc., (the "Company") designs, manufactures,
markets and supports a comprehensive line of digital telecommunications products
that enable telecommunication exchange carriers and private networks to more
efficiently provide high speed digital service to end users over the large
infrastructure of unconditioned copper wires.
INTERIM PERIOD ACCOUNTING POLICIES
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position as of June 30,
1996, and consolidated results of operations for the three and six months ended
June 30, 1996, and June 30, 1995, and cash flows for the six months ended June
30, 1996, and June 30, 1995. Results of operations for the three and six months
ended June 30, 1996, are not necessarily indicative of results to be expected
for the full year ending December 31, 1996.
Although the Company believes that the disclosures in the accompanying
financial statements are adequate to make the information presented not
misleading, certain information and footnote information normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, and these financial statements should
be read in conjunction with the Company's audited consolidated financial
statements included in the Company's Form 10-K for the year ended December 31,
1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: PairGain Services Group, Inc., which
provides support services for the Company's customers throughout the United
States; PairGain Canada Inc., a sales company focused on the Canadian market;
and PairGain International Sales Corporation, a foreign sales corporation
("FSC"). All significant intercompany transactions have been eliminated in
consolidation.
6
<PAGE> 7
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
TRANSLATION OF FOREIGN CURRENCIES
Foreign subsidiary financial statements are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translations". The functional currency of the Company's
Canadian subsidiary is the U.S. dollar, therefore, translation gains and
losses are included in results of operations. Transaction and translation
gains and losses were not significant in 1996 or 1995.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities at
the date of purchase of less than three months to be cash equivalents.
SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The adoption did not have a
significant impact on the Company's consolidated financial statements.
Management determines the appropriate classification of such securities at the
time of purchase and reevaluates such classification as of each balance sheet
date. Based on its intent, the Company's investments are classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of tax, reported as a separate component of stockholders' equity.
The investments are adjusted for amortization of premiums and discounts to
maturity and such amortization is included in interest income. Realized gains
and losses and declines in value judged to be other than temporary are
determined based on the specific identification method and are reported in the
consolidated statements of income.
INVENTORIES
Inventories are stated at lower of cost (determined on a first-in,
first-out basis) or market. The Company maintains allowances for estimated
obsolete and excess inventories based upon projected sales levels.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The Company provides for
depreciation and amortization using the straight-line method. The estimated
useful life of equipment is three years. Leasehold improvements are amortized
over the lesser of five years or the life of the lease.
7
<PAGE> 8
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment.
Provision is made currently for estimated product returns. Revenue for
technology and licensing fees and royalty income is recognized when earned.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
PER SHARE INFORMATION
Net income per share is computed using the weighted average number of
common shares and common share equivalents outstanding during the periods
presented. Common share equivalents result from outstanding options and warrants
to purchase common stock and are calculated using the treasury stock method.
STOCK SPLIT
All share and per share amounts have been adjusted to reflect the June
12, 1996, two-for-one stock split for all periods presented (See Note 12).
STATEMENT OF CASH FLOWS
During the six months ended June 30, 1996, the Company recorded noncash
tax benefits from exercises of common stock options aggregating $6.2 million.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement No. 123"), which became effective for the Company
beginning January 1, 1996. Statement No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to employees.
8
<PAGE> 9
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
2. CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS AND PRODUCTS
The Company markets its products principally to telephone companies in
the United States and Canada. Credit is extended based on an evaluation of the
customer's financial condition and collateral is not required. Credit losses are
provided for in the financial statements and consistently have been minimal.
A decision by a significant customer to substantially decrease or delay
purchases from the Company or the Company's inability to collect receivables
from these customers could have a material adverse effect on the Company's
financial condition and results of operations.
Revenues from HiGain products represented approximately 82% and 75% of
the Company's total revenues for the six months ended June 30, 1996 and 1995,
respectively. A decline in demand for HiGain products, whether as a result of
competition, deployment of fiber cable, technological change or otherwise, could
have a material adverse effect on the Company's operating results.
3. SHORT-TERM INVESTMENTS
Short-term investments as of June 30, 1996 and December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
JUNE 30, 1996
Municipal bonds $ 28,738 $ 111 $ -- $ 28,849
DECEMBER 31, 1995
Municipal bonds $ 31,042 $ 107 $ -- $ 31,149
</TABLE>
There were no net realized gains for the three and six months ended
June 30, 1996, compared to net realized gains of $258,000 and $358,000,
respectively, for the corresponding 1995 periods. During the second quarter of
1995, the Company also realized a $26.8 million loss due to unauthorized trading
of investments by third parties (See Note 9). Unrealized gains on short-term
investments, net of tax, included as a separate component of stockholders'
equity were $69,000 at June 30, 1996 and $67,000 at December 31, 1995.
9
<PAGE> 10
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
The amortized cost and estimated fair value of investments at June 30,
1996 by contractual maturity are shown below. Actual maturities may differ from
contractual maturities because the issuer of the securities may have the right
to repurchase such securities.
<TABLE>
<CAPTION>
COST FAIR VALUE
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 16,935 $ 17,024
Due after one year through three years 11,803 11,825
============= =============
$ 28,738 $ 28,849
============= =============
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 10,637 $ 4,987
Work in process 5,648 9,693
Finished goods 13,567 7,842
------------- -------------
$ 29,852 $ 22,522
============= =============
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures $ 149 $ 50
Machinery and equipment 12,789 9,722
Leasehold improvements 1,326 1,111
-------------- -------------
14,264 10,883
Less accumulated depreciation and amortization 6,031 4,481
============= =============
$ 8,233 $ 6,402
============= =============
</TABLE>
10
<PAGE> 11
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
6. NOTE RECEIVABLE
In July 1995, the Company entered into certain agreements with
Sourcecom Corporation of Valencia, California ("Sourcecom"). Sourcecom designs,
manufactures and markets remote networking devices which enable the integration
of Ethernet local area networks with wide area networking over copper wire. The
agreements provide for the incorporation of Sourcecom's networking technology
into the Company's current and future transmission products. Under the terms of
the agreements, the Company loaned Sourcecom $2.7 million and has rights to
purchase a minority ownership position. The note bears interest at the prime
rate less one percent (7.25% at June 30, 1996), payable monthly, with the
principal balance due July 1999.
7. LONG-TERM INVESTMENTS
In April 1996, the Company purchased approximately 75,000 shares of
Sourcecom's Series A Preferred Stock for an aggregate of $273,000.
In June 1996, the Company made a minority investment in E/O Networks of
Hayward, California ("E/O"). E/O supplies low-density fiber optic access
equipment to public carriers both domestically and internationally. The Company
purchased approximately 545,000 shares of E/O's Series D Preferred Stock for an
aggregate of $3.0 million. Both investments are accounted for using the cost
method.
8. BANK LINE OF CREDIT
The Company maintains an unsecured line of credit with a bank. The line
allows maximum borrowings of $5,000,000, including the issuance of letters of
credit and foreign exchange contracts. The line bears interest at prime (8.25%
at June 30, 1996). At June 30, 1996, the Company had no outstanding borrowings
under this line of credit. The debt agreement specifies certain financial and
other covenants. The Company was in compliance with the financial and other
covenants at June 30, 1996. The agreement expires May 1, 1997.
9. UNUSUAL LOSS DUE TO UNAUTHORIZED TRADING OF INVESTMENTS BY THIRD PARTIES
In 1993 and 1994, the Company invested a portion of its excess cash
with Capital Insight, Inc. ("Capital Insight"), a financial advisor and broker
based in Beverly Hills, California. The Company had no funds invested with
Capital Insight at either December 31, 1993 or December 31, 1994, as all such
invested funds were returned to the Company prior to the end of each of those
years.
11
<PAGE> 12
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
In early 1995, the Company again invested a portion of its excess cash
with Capital Insight, with instructions that the funds be invested solely in
U.S. Treasury securities with maturities of one year or less. These instructions
were consistent with the investment guidelines which had been approved by the
Company's Board of Directors in October 1994. However, these instructions were
violated and the funds were used to engage in unauthorized trading in options
and futures. In November 1995, the Company confirmed that it had incurred
non-recurring losses of $15.8 million resulting from these inappropriate and
unauthorized trading activities.
The Company's outside directors retained independent legal counsel and
forensic accountants to determine the facts and circumstances surrounding this
matter. This investigation revealed no improper involvement by any Company
director, officer or employee in the unauthorized trading. Additionally, the
investigation found that the Company was provided with fictitious statements by
Capital Insight, and the Company had actually incurred substantial losses in the
second quarter of 1995. During the third and fourth quarters of 1995, the
unauthorized trading generated significant gains resulting in net trading losses
of $15.8 million for the year. Furthermore, it was determined that the 1994
statements provided by this advisor and relied upon by the Company for its
quarterly reporting were also incorrect. Although total financial results for
1994 were not impacted by these false statements, previously reported 1994
quarterly financial statements did not reflect the proper periods in which the
trading gains and losses occurred. Based on the results of the investigation,
the Company has amended its quarterly reports for both 1994 and 1995 to reflect
the proper reporting of the trading gains and losses.
10. INCOME TAXES
Income taxes are provided at the rate expected to be in effect for the
entire year.
During the quarter ended March 31, 1996, the Company received a $6.9
million refund of its Federal income taxes paid for the year ended December 31,
1995. This refund arises out of certain deductions the Company claimed in its
tax return for the year ended December 31, 1995. Until the Internal Revenue
Service audits the Company's 1995 income tax return, the treatment of these
deductions is uncertain. The Company believes the ultimate resolution of these
uncertainties will not have a material adverse effect on the Company's financial
statements.
11. CONTINGENCIES
In January 1996, the Company received a copy of a complaint, filed
derivatively by a Company stockholder on behalf of the Company, naming as
defendants the Company's directors and certain officers, as well as Mr. S. Jay
Goldinger and Capital Insight, Inc., a third party investment advisor. This suit
arises out of losses incurred by the Company in 1995 of approximately $15.8
million in connection with the losses through unauthorized trading of
investments made by Mr. Goldinger and Capital Insight on the Company's behalf
(see Note 9, above, for a description of such losses). The derivative complaint
alleges causes of action for breach of fiduciary duty, abuse of control,
constructive fraud, gross mismanagement and waste of corporate assets. The
complaint seeks in excess
12
<PAGE> 13
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
of $15.8 million in damages and legal fees and expenses in connection with the
loss by the Company of the funds it provided to Mr. Goldinger and Capital
Insight. The suit was filed in Superior Court of the State of California, County
of Orange. Additionally, the same stockholder filed a separate, related
complaint, brought derivatively on behalf of the Company, in the Orange County
Superior Court, against a brokerage firm involved in the Capital Insight matter.
That suit, filed during the second quarter of 1996, has been removed to federal
court, but is to be consolidated with the prior derivative suit for purposes of
the proposed settlement described below.
In August 1996, the Company and other parties to the derivative suits
described above executed agreements-in-principle to settle and dismiss the
derivative suits. Under the proposed settlement, among other things, the
Company will receive $2.5 million from the brokerage firm involved in
processing the investments for Capital Insight and the Company will pay
plaintiff's attorneys $450,000. The settlement is subject to execution of
definitive settlement documents, approval by the Company's Board of Directors
and final approval by the Court in the derivative suits. The impact of these
agreements-in-principle will be recorded in the Company's financial statements
when all the related contingencies have been removed.
In January 1996, the Company filed suit, in Los Angeles federal court,
against Mr. S. Jay Goldinger and Capital Insight, Inc. charging unauthorized
trading, fraudulent misrepresentation, violation of federal securities laws and
breach of fiduciary duties. The suit seeks $15.8 million in damages by reason of
the losses incurred by the Company, as well as punitive damages and legal fees.
As has been reported in the public media, various government and
regulatory agencies are, or have been, investigating the activities of Capital
Insight and Mr. Goldinger. The Company is cooperating in such a formal
fact-finding investigation by the Securities and Exchange Commission including,
as part of a broader investigation concerning Mr. Goldinger and Capital
Insight, inquiries and requests for information pertaining to the Company's
investments and dealings with Mr. Goldinger and Capital Insight, and the
Company's accounting therefor.
The Company does not maintain Directors and Officers liability
insurance. However, under the terms of its articles of incorporation, the
Company indemnifies its directors and officers for damages and legal fees
arising from litigation matters.
13
<PAGE> 14
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
12. STOCKHOLDERS' EQUITY
In March 1995, the Company completed a secondary public offering and
sold 1,000,000 shares of its common stock at a price of $11.8125 per share. The
net proceeds raised by the Company were approximately $10,970,000. In connection
with the offering, certain outstanding warrants were exercised to purchase
2,875,310 shares of common stock at an aggregate exercise price of $2,717,000.
In June 1996, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation (the "Amendment") to increase the
authorized Common Stock of the Company from 30 million, par value $.001, to 60
million, par value $.0005, and to effect a two-for-one stock split (the "Stock
Split") of all outstanding common stock, options and warrants. The Amendment and
Stock Split were effective June 18, 1996.
Additionally, in June 1996, the Company's stockholders approved the
1996 Non-Employee Directors Stock Option Plan (the "Directors Plan"). Under the
terms of the Directors Plan, 200,000 shares of Common Stock have been reserved
for issuance to non-employee members of the Board. Following the 1996 Annual
Meeting, initial options to purchase 20,000 shares of the Company's Common Stock
were granted to each non-employee director who had not previously received any
stock option grants from the Company. Beginning with the 1997 Annual Meeting, an
option to purchase an additional 10,000 shares of Common Stock will be granted
to each individual who is to continue to serve as a non-employee Board member.
There is no limit to the number of such 10,000-share option grants any one
non-employee Board member may receive over his or her period of continued Board
service. Each option will have an exercise price per share equal to 100% of the
fair market value per share of Common Stock on the option grant date and a
maximum term of ten years measured from the option grant date. Initial option
grants vest over four years and additional option grants vest over one year. The
term of the Directors Plan is ten years.
14
<PAGE> 15
PART I: ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PAIRGAIN TECHNOLOGIES, INC.
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements which involve
risk and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS (quarter and six months ended June 30, 1996, compared to
quarter and six months ended June 30, 1995)
All share and per share amounts have been adjusted to reflect the
two-for-one stock split effective June 18, 1996.
REVENUES
Revenues for the quarter ended June 30, 1996, increased $23.3 million
or 97% as compared with the 1995 quarter. Product revenues increased $23.7
million, offset by a decrease in royalty income of $420,000. The increase in
product revenue was primarily due to a 128% increase in the unit sales volume of
the Company's HiGain product. Increases in the unit sales volume of the
Company's PG-2 and Campus products, 68% and 37%, respectively, also contributed
to the increased product revenue. These increases were partially offset by
declines in the average sales prices of HiGain and Campus products.
Revenues for the six months ended June 30, 1996, increased $44.8
million or 104%, over the six month period in the prior year. This increase in
revenues consisted of increases in product revenues of $45.3 million and
decreases in royalty income of $522,000. The increase in product revenue was
primarily due to a 141% increase in the unit sales volume of the Company's
HiGain product. A less significant portion of the increase was attributed to 71%
and 63% increases in unit sales volume of the Company's PG-2 and Campus
products, respectively. These increases were partially offset by declines in the
average sales prices of HiGain and Campus products.
The decrease in royalty income was due to a reduction in royalty fees
generated by Alcatel for the use of the Company's HDSL technology as a result of
the renegotiation and termination of its agreement with Alcatel in the fourth
quarter of 1995. As part of terminating the agreement, the Company granted
royalty-free licenses of current company technology to Alcatel and Alcatel
granted a royalty-free license of its network management software to the
Company. The agreement also reduced the royalty rate for standalone T1 products
which incorporate the Company's HDSL technology being sold by Alcatel.
Consequently, technology licensing fees and royalty income will continue to
decline in the future.
15
<PAGE> 16
GROSS PROFIT
Gross profit represents total revenues for a period, including
technology fees and royalty income, less the cost of revenues for such period.
Cost of revenues represents primarily product costs, together with associated
overhead expenditures. Gross profit increased $11.2 million or 98% and $20.8
million or 100% for the quarter and six months ended June 30, 1996, as compared
with the prior year periods. This growth in gross profit was principally
attributed to the increase in the Company's revenues.
As a percentage of revenues, gross profit was 48% for the quarter and
six month period ended June 30, 1996 compared to 48% and 49% for the quarter and
six month period, respectively, in 1995. Gross profit has remained consistently
strong despite reductions in the average selling prices of the Company's
products primarily because of the Company's emphasis on cost reduction through
engineering design changes, reduced prices for components, increased
manufacturing efficiencies and increases in production volume.
The Company expects that increased competition will continue to place
downward pressure on the average selling prices of its existing products.
Declining average selling prices may adversely affect gross product margins on
the Company's existing products if the Company is unable to fully offset such
price reductions by reductions in the Company's per unit cost. The Company's
ability to mitigate future declines in its gross product margin will depend in
part upon its ability to introduce and sell new products with higher gross
product margins and further reduce its per unit costs.
OPERATING EXPENSES
In order to support the growth of its business, the Company
significantly expanded its levels of operations in all areas. Accordingly,
operating expenses increased $4.5 million, or 67%, for the three months ended
June 30, 1996 as compared with the same period in the prior year. For the six
month period, operating expenses increased $9.0 million or 75%. Costs relating
to the addition of personnel represented approximately 42% and 46% of these
increases. However, as a percentage of revenues, operating expenses decreased to
24% in the 1996 periods from 28% in 1995.
Research and development expense increased $1.6 million or 56% and $3.3
million or 70%, respectively, for the quarter and six months ended June 30,
1996, as compared with the same periods in the prior year. These increases were
primarily due to the addition of personnel, depreciation on additions of capital
equipment, and prototype expenditures associated with new products. In addition,
the 1996 periods include expenses related to the Company's Raleigh, North
Carolina design center, which was established in the fourth quarter of 1995.
Research and development expense as a percentage of revenues was 10% and 9% in
the 1996 quarter and six month period, respectively, compared to 12% and 11% in
1995. The Company plans to continue to expend at least 9% of its revenues on new
product development, product enhancements and continuing efforts toward product
cost reductions.
Selling and marketing expense increased $2.1 million or 96% and $4.0
million or 98%, respectively, for the quarter and six months ended June 30,
1996, as compared with the same periods in the prior year. Additional sales and
marketing support personnel, commissions, advertising, trade show and travel
costs primarily accounted for the increase in expenditures. Selling and
marketing
16
<PAGE> 17
expense as a percentage of revenues was 9% in the 1996 quarter and six month
period compared to 9% and 10% in the corresponding 1995 periods.
General and administrative expense increased $780,000 or 48% and $1.7
million or 54%, respectively, for the quarter and six months ended June 30,
1996, as compared with the same periods in the prior year. These increases were
primarily due to increases in personnel associated costs, increased legal fees,
consulting fees related to upgrading the Company's information system
capabilities and an overall increase in the level of purchasing associated with
general supplies and non-capitalized equipment.
INCOME FROM OPERATIONS
As a result of the above, income from operations for the quarter ended
June 30, 1996 increased 142% to $11.4 million, compared to $4.7 million for the
1995 quarter. Income from operations for the six months ended June 30, 1996
increased 133% to $20.8 million, compared to $8.9 million for the first half of
1996. As a percentage of revenues, income from operations was 24% for the
quarter and six month period in 1996, compared to 20% and 21% in the respective
1995 periods.
INTEREST AND OTHER INCOME, NET
Net interest income increased to $406,000 and $1.7 million for the
three and six months ended June 30, 1996, respectively, from $488,000 and $1.0
million in the corresponding 1995 periods. These increases resulted primarily
from higher average cash levels available for investment, aided by the Company's
March 20, 1995 secondary stock offering. There was no interest expense during
the first half of 1996 or 1995.
GAIN ON INVESTMENTS
During the quarter and six months ended June 30, 1995, gains from the
sale of investments were $258,000 and $358,000 respectively. There were no
corresponding investment sales during 1996.
LOSS ON INVESTMENTS AND UNUSUAL LOSS DUE TO UNAUTHORIZED TRADING BY THIRD
PARTIES
In 1993 and 1994, the Company invested a portion of its excess cash
with Capital Insight, Inc. ("Capital Insight"), a financial advisor and broker
based in Beverly Hills, California. The Company had no funds invested with
Capital Insight at either December 31, 1993 or December 31, 1994, as all such
invested funds were returned to the Company prior to the end of each of those
years.
In early 1995, the Company again invested a portion of its excess cash
with Capital Insight, with instructions that the funds be invested solely in
U.S. Treasury securities with maturities of one year or less. These instructions
were consistent with the investment guidelines which had been approved by the
Company's Board of Directors in October 1994. However, these instructions were
violated and the funds were used to engage in unauthorized trading in options
and futures. In November 1995, the Company confirmed that it had incurred
non-recurring losses of $15.8 million resulting from these inappropriate and
unauthorized trading activities.
17
<PAGE> 18
The Company's outside directors retained independent legal counsel and
forensic accountants to determine the facts and circumstances surrounding this
matter. This investigation revealed no improper involvement by any Company
director, officer or employee in the unauthorized trading. Additionally, the
investigation found that the Company was provided with fictitious statements by
Capital Insight, and the Company had actually incurred substantial losses in the
second quarter of 1995. During the third and fourth quarters of 1995, the
unauthorized trading generated significant gains resulting in net trading losses
of $15.8 million for the year. Furthermore, it was determined that the 1994
statements provided by this advisor and relied upon by the Company for its
quarterly reporting were also incorrect. Although total financial results for
1994 were not impacted by these false statements, previously reported 1994
quarterly financial statements did not reflect the proper periods in which the
trading gains and losses occurred. Based on the results of the investigation,
the Company has amended its quarterly reports for both 1994 and 1995 to reflect
the proper reporting of the trading gains and losses.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three and six months ended June
30, 1996, was $4.7 million and $8.6 million, respectively, compared to $1.4
million and $3.2 million for the three and six months ended June 30, 1995. The
Company did not record any tax benefit from its unusual trading losses in 1995.
The Company's effective rate increased to 38% in 1996 from 34% and 35% in the
1995 quarter and six month period, respectively, as tax credits and tax-free
interest income represented a smaller proportion of total pre-tax income as a
result of the earnings growth. The Company expects to maintain its tax rate at
38% for the remainder of 1996.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
As a result of the above, net income for the three months ended June
30, 1996 was $7.6 million, compared to net loss of $22.8 million in 1995.
Without the unusual trading loss, net income for the second quarter of 1995
would have been $3.6 million. Net income for the first six months of 1996 was
$13.8 million, compared a loss of $19.6 million in the first half of 1995.
Without the unusual trading loss, net income for the first half of 1995 would
have been $6.7 million.
Earnings per share for the three and six months ended June 30, 1996
were $0.21 and $0.39, respectively, compared to losses of $0.76 and $0.70 for
the quarter and first half of 1995. Without the unusual trading loss, net income
for the second quarter and first half of 1995 would have been $0.11 and $0.21,
respectively.
The weighted average number of common and common equivalent shares
outstanding was 36.0 million and 29.8 million for the three months ended June
30, 1996 and 1995, respectively. The weighted average number of common and
common equivalent shares outstanding was 35.7 million and 28.1 million for the
first half of 1996 and 1995, respectively. The increase in common and common
equivalent shares was primarily attributable to the issuance of 1,000,000 shares
in the Company's secondary offering in March 1995 which were outstanding for the
entire 1996 quarter, the granting of options to key employees of the Company,
and the reduction in the number of shares assumed to be repurchased upon the
exercise of options and warrants, using the treasury stock method, as a result
of the Company's higher stock price in 1996 over 1995.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had $81.3 million in cash, cash
equivalents and short-term investments and $102.9 million in working capital.
These figures represent an increase of $25.5 million in cash, cash equivalents
and short-term investments and $18.2 million in working capital over the year
ending December 31, 1995. These increases were primarily attributable to cash
generated from operations of $18.7 million (net of capital expenditures of
approximately $3.4 million), the receipt of a Federal income tax refund of $6.9
million and $3.2 million from the exercise of stock options, offset by $3.3
million used for the purchase of long-term investments. The increase in the
Company's accounts receivable to $17.3 million at June 30, 1996, compared to
$13.0 million at December 31, 1995, was primarily reflective of higher revenue
levels. Accounts receivable days outstanding were 34 at June 30, 1996 and
December 31, 1995. The increase in inventory to $29.9 million at June 30, 1996,
compared to $22.5 million at December 31, 1995, was due to increased stocking
and production levels to support future shipments. The Company has historically
maintained relatively high levels of inventory. However, annualized inventory
turnover increased to 3.1 times for the six month period ended June 30, 1996,
compared to 1.9 times for the first half of 1995.
Capital expenditures decreased by $490,000 in the six month period
ended June 30, 1996 compared to the 1995 period. The higher levels in 1995 were
primarily due to tenant improvements at the Company's Tustin facility and the
purchase of software and equipment to upgrade its information system
capabilities.
The Company maintains an unsecured line of credit with a bank. The line
allows maximum borrowings of $5,000,000, including the issuance of letters of
credit and foreign exchange contracts. The line bears interest at prime (8.25%
at June 30, 1996). At June 30, 1996, the Company had no outstanding borrowings
under this line of credit. The debt agreement specifies certain financial and
other covenants. The Company was in compliance with the financial and other
covenants at June 30, 1996. The agreement expires May 1, 1997.
During the second quarter of 1996, the Company made investments in
Sourcecom Corporation ("Sourcecom") and E/O Networks ("E/O") of $273,000 and
$3.0 million, respectively. Sourcecom, of Valencia, California, designs,
manufactures and markets remote networking devices which enable the integration
of Ethernet local area networks with wide area networking over copper wire.
Hayward, California-based E/O supplies low-density fiber optic access equipment
to public carriers worldwide. Both investments were made with internally
generated funds.
The Company has no material near-term commitments for its funds. The
Company believes that the current cash, cash equivalents and short-term
investment balances and internally generated cash flow will be sufficient to
meet its working capital and capital expenditure requirements through 1996. To
the extent that the Company's existing resources, together with future earnings,
are insufficient to fund the Company's future activities, the Company may need
to raise additional funds through public or private financings.
19
<PAGE> 20
PART II. OTHER INFORMATION
PAIRGAIN TECHNOLOGIES, INC.
Item 1. Legal Proceedings
As previously reported in the Company's Form 10-K for the year ended
December 31, 1995, as filed with the Securities and Exchange Commission
on March 28, 1996, in January 1996, the Company received a copy of a
complaint, filed derivatively by a Company stockholder on behalf of the
Company, naming as defendants the Company's directors and certain
officers, as well as Mr. S. Jay Goldinger and Capital Insight, Inc., a
third party investment advisor. This suit arises out of losses incurred
by the Company in 1995 of approximately $15.8 million in connection
with the losses through unauthorized trading of investments made by Mr.
Goldinger and Capital Insight on the Company's behalf. The derivative
complaint alleges causes of action for breach of fiduciary duty, abuse
of control, constructive fraud, gross mismanagement and waste of
corporate assets. The complaint seeks in excess of $15.8 million in
damages and legal fees and expenses in connection with the loss by the
Company of the funds it provided to Mr. Goldinger and Capital Insight.
The suit was filed in Superior Court of the State of California, County
of Orange.
During the second quarter of 1996, this same stockholder filed
derivatively on behalf of the Company, a separate, related complaint in
Orange County Superior Court, against a brokerage firm involved in the
Capital Insight matter. This suit has been removed to federal court,
but is to be consolidated with the prior derivative suit for purposes
of the proposed settlement described below.
In August 1996, the Company and other parties to the derivative suits
described above executed agreements-in-principle to settle and dismiss
the derivative suits. Under the proposed settlement, among other
things, the Company will receive $2.5 million from a brokerage firm
involved in the Capital Insight matter and the Company will pay
plaintiff's attorneys $450,000. The settlement is subject to execution
of definitive settlement documents, approval by the Company's Board of
Directors and final approval by the Court in the derivative suits.
As has been reported in the public media, various government and
regulatory agencies are, or have been, investigating the activities of
Capital Insight and Mr. S. Jay Goldinger. The Company is cooperating
in such a formal fact-finding investigation by the Securities and
Exchange Commission including, as part of a broader investigation
concerning Mr. Goldinger and Capital Insight, inquiries and requests
for information pertaining to the Company's investments and dealings
with Mr. Goldinger and Capital Insight, and the Company's accounting
therefor.
Item 2. Changes in Securities
At the Annual Meeting of Stockholders held on June 12, 1996, the
stockholders approved a two-for-one stock split that changed each
issued share of Common Stock, par value $.001, into two shares of
Common Stock, par value $.0005, by way of a 100% stock dividend. See
Item 4 below.
20
<PAGE> 21
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on June 12, 1996, the
stockholders:
- elected three directors to serve until the 1999 Annual Meeting;
- approved the 1996 Non-Employee Directors Stock Option Plan;
- approved the proposal to amend the Company's Certificate of
Incorporation to increase the authorized Common Stock of the Company
from thirty million (30,000,000) shares, par value $.001 per share,
to sixty million (60,000,000) shares, par value $.0005 per share, and
to effect a two-for-one stock split; and
- approved the selection of Deloitte & Touche LLP as the Company's
independent auditor for the fiscal year ending December 1996.
Results of the voting are shown below:
TO ELECT THE FOLLOWING DIRECTORS TO SERVE FOR A TERM OF THREE YEARS:
<TABLE>
<CAPTION>
Votes For Votes Withheld
-------------------- -------------------
<S> <C> <C>
Charles S. Strauch 12,486,672 62,865
Robert C. Hawk 12,528,666 20,871
Robert A. Hoff 12,529,341 20,196
</TABLE>
TO APPROVE THE ADOPTION OF THE 1996 NON-EMPLOYEE DIRECTORS STOCK
OPTION PLAN:
<TABLE>
<CAPTION>
For Against Abstain
--------------------- --------------------- ---------------------
<S> <C> <C>
7,620,559 4,803,697 76,041
</TABLE>
TO APPROVE THE PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED COMMON STOCK OF THE COMPANY
FROM THIRTY MILLION (30,000,000) SHARES, PAR VALUE $.001, TO SIXTY
MILLION (60,000,000) SHARES, PAR VALUE $.0005 PER SHARE, AND TO EFFECT
A TWO-FOR-ONE STOCK SPLIT:
<TABLE>
<CAPTION>
For Against Abstain
--------------------- --------------------- ---------------------
<S> <C> <C>
12,399,178 34,197 64,922
</TABLE>
TO APPROVE THE SELECTION OF DELOITTE & TOUCHE LLP AS THE COMPANY'S
INDEPENDENT AUDITOR FOR THE FISCAL YEAR ENDING DECEMBER 1996:
<TABLE>
<CAPTION>
For Against Abstain
--------------------- --------------------- ---------------------
<S> <C> <C>
12,472,684 2,645 74,208
</TABLE>
21
<PAGE> 22
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
10.37 Lease Agreement dated May 30, 1996 between the
Registrant and Parker-Raleigh Development XXIII,
Limited Partnership
*10.38 PairGain Technologies, Inc. 1996 Non-Employee
Directors Stock Option Plan
**10.39 Amendment to Certificate of Incorporation of PairGain
Technologies, Inc.
11.1 Calculation of Per Share Earnings
27.1 Financial Data Schedule
----------------
* Incorporated herein by reference to Exhibit number
99-1 of Form S-8 Registration Statement as filed with
the Commission on July 23, 1996
** Incorporated herein by reference to Appendix A of
Proxy Statement for the Annual Meeting of Stockholders
to be held June 12, 1996 as filed with the Commission
on May 9, 1996
(B) Reports filed on Form 8-K during the period:
None.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
under signed thereunto duly authorized.
PairGain Technologies, Inc.
------------------------------------------
(Registrant)
Date: August 13, 1996 /S/ Charles W. McBrayer
-------------------------- ------------------------------------------
Charles W. McBrayer
Vice President, Finance and Administration
Chief Financial Officer
(Duly Authorized Officer)
Date: August 13, 1996 /S/ Robert R. Price
-------------------------- ------------------------------------------
Robert R. Price
Corporate Controller
(Chief Accounting Officer)
23
<PAGE> 1
Exhibit 10.37
STANDARD LEASE
SUITE 153 & 155 PARKER LINCOLN PAVILION
This Lease, made as of May 30, 1996, by and between the Landlord and
the Tenant named below.
ARTICLE I. - BASIC LEASE TERMS
For purposes of this Lease, the following terms shall have the meanings
set forth below:
1.1 Landlord. Parker-Raleigh Development XXIII, Limited Partnership
1.2 Tenant. PairGain Technologies, Inc.
whose Trade Name, if any is ___________________________________________________
1.3 Manager. Parker Lincoln Developers, Inc.
1.4 Building. The Building (including the Premises) known as 2431
Spring Forest Road, Raleigh, NC 27615 located on that tract of land (the
"Land") described on EXHIBIT A hereto, together with all other buildings,
structures, fixtures and other improvements located thereon from time to time,
being presently as depicted on the drawing (the "Site Plan") attached hereto as
EXHIBIT B. The Building and the Land are collectively referred to herein as
the "Property".
1.5 Premises. The floor space and interior wall and ceiling space
of that portion of the Building outlined in red or highlighted on Exhibit C
attached hereto, resulting in an aggregate of approximately 20,000 square feet
of gross leasable area known as Suite 153 and 155.
1.6 Lease Term. 5 years, 0 months and 0 days beginning on the
Commencement Date.
1.7 Commencement Date. If improvements are to be erected upon the
Premises, as described in Section 6.1, then the "Commencement Date" shall be the
earlier of the date Tenant begins operating its business in the improvements
erected upon the Premises or; ten (10) days after Landlord notifies Tenant that
the Premises are ready for occupancy; and if no improvements are to be erected
upon the Premises, the Commencement Date shall be the earlier of the date Tenant
begins operating its business in the Premises or September 1, 1996. The
Commencement Date shall constitute the commencement of the term of this Lease
for all purposes, whether or not Tenant has actually taken possession. Within
thirty (30) days after the Commencement Date, Landlord and Tenant will execute
an acknowledgement of the Commencement and Expiration Dates in the form attached
hereto as EXHIBIT D. If Tenant is permitted access to the Premises prior to the
Commencement Date, such early entry will be subject to all the terms and
provisions of this Lease as though the Commencement Date had occurred.
1.8 Base Rent. Base Rent is:
<TABLE>
<CAPTION>
Months PSF Annual Monthly
<S> <C> <C> <C> <C>
1 through 12 $7.75 $155,000.00 $12,916.67
13 through 24 $7.98 $159,600.00 $13,300.00
25 through 36 $8.22 $164,400.00 $13,700.00
37 through 48 $8.47 $169,400.00 $14,116.67
49 through 60 $8.72 $174,400.00 $14,533.33
</TABLE>
1.9 Security Deposit. Security deposit is $3,441.76 is being
transferred from lease dated August 22, 1995. The amount of $11,691.57 to be
paid at lease execution. Said total security deposit being a total of
$15,133.33.
1.10 Address.
<TABLE>
<CAPTION>
Landlord's Address: Tenant's Address: Manager's Address:
<S> <C> <C>
Post Office Box 58036 14402 Franklin Avenue Post Office Box 58036
Raleigh, NC 27658 Tustin, CA 92680-7013 Raleigh, NC 27658
</TABLE>
Landlord, Tenant and Manager, by written notice to the others may change from
time to time the foregoing addresses, and Landlord, by written notice to Tenant,
may notify Tenant from time to time of the appointment of a new Manager and such
new Manager's address.
1.11 Permitted Use. research and development
1.12 Common Areas. Such parking areas, streets, driveways, aisles,
sidewalks, curbs, delivery passages, loading areas, lighting facilities, and all
other areas situated on or in the Property which are designated by Landlord,
from time to time, for use by all tenants of the Property in common.
1.13 Proportionate Share. The proportion, expressed as a percentage,
that the gross leasable area in square feet in the Premises, as determined by
Landlord, bears to the total number of constructed gross leasable area in square
feet in the Building, as determined by Landlord, as of the date that the
computation is made. The computation shall be adjusted by Landlord if
additional square footage is added to the Building or to the Premises.
1.14 Estimated Initial Common Area Costs Payment (Includes Common
Area Maintenance, Taxes and Insurance):
PSF $1.33 Annual $26,600.00 Monthly $2,216.66
1.15 Total Rental:
(Estimated for the First Year)
Annual $181,600.00 Monthly $15,133.33
1.16 Guarantor(s). The guarantor(s) of Tenant's obligations under
this Lease is (are)
_______________________________________________________________________________
_______________________________________________________________________________
ARTICLE 2. - GRANTING CLAUSE AND RENT PROVISIONS
2.1 Grant of Premises. In consideration of the obligation of Tenant
to pay the rent and other charges as provided in this Lease and in consideration
of the other terms and provisions of this Lease, Landlord hereby leases the
Premises to Tenant during the Lease Term, subject to the terms and provisions of
this Lease.
2.2 Base Rent. Tenant agrees to pay monthly as Base Rent during the
term of this Lease the sum of money set forth in Section 1.8 of this Lease,
which amount shall be payable to Landlord at the address shown above or at such
other address that Landlord in writing shall notify Tenant. One (1) monthly
installment of Base Rent shall be due and payable on the date of execution of
this Lease by Tenant for the first month's rent and a like monthly installment
shall be due and payable on or before the first day of each calendar month
succeeding the Commencement Date during the term of this Lease, without demand,
offset or deduction; provided, if the Commencement Date should be a date other
than the first day of a calendar month, the monthly rental set forth above shall
be prorated to the end of that calendar month, and all succeeding installments
of rent shall be payable on or before the first
[PLEASE INITIAL STAMP]
- 1 -
<PAGE> 2
day of each succeeding calendar month during the term of this Lease. Tenant
shall pay, as Additional Rent, all other sums due under this Lease, Base Rent
and Additional Rent are sometimes collectively referred to herein as "Rent".
2.3 Common Area Costs. As used in this Lease, the term "Common
Area Costs" shall mean all expenses of Landlord with respect to the
maintenance, servicing, repairing and operation of the Property, including, but
not limited to the following: maintenance, repair, repair and replacement
costs; electricity, fuel, water, sewer, gas and other utility charges;
security, window washing and janitorial services; trash and snow and ice
removal; landscaping and pest control; management fees payable to Landlord,
Landlord's affiliates or third parties; wages and benefits payable to employees
of Landlord whose duties are directly connected with the operation and
maintenance of the Property; all services, supplies, repairs, replacement or
other expenses for maintaining and operating the Property; the cost, including
interest, amortized over its useful life, of any capital improvement made to
the Property by Landlord after the date of this Lease which is required under
any governmental law or regulation that was not applicable to the Property at
the time it was constructed; the cost, including interest, amortized over its
useful life, of installation of any device or other equipment which improves
the operating efficiency of any system within the Premises and thereby reduces
operating expenses; all other expenses which generally would be regarded as
operating and maintenance expenses which would reasonably be amortized over a
period not to exceed five (5) years; all real property taxes and installments of
special assessments, including dues and assessments by means of deed
restrictions and/or owner's association which accrue against the Property during
the term of this Lease; governmental levies or charges of any kind or nature
assessed or imposed on the Property, whether by state, county, city or any
political subdivision thereof; and all insurance premiums Landlord is required
to pay or deems necessary to pay, including public liability insurance, with
respect to the Property. The term operating expenses does not include the
following; expenses for repairs, restoration or other work occasioned by fire,
wind, the elements or other casualty that are covered by insurance; income and
franchise taxes of Landlord; expenses incurred in leasing to or procuring of
tenants, leasing commissions, advertising expenses and expenses for the
renovating of space for new tenants; interest or principal payments or any
mortgage or other indebtedness of Landlord; compensation paid to any employee
of Landlord above the grade of property manager; any depreciation allowance or
expenses; or operating expenses which are the responsibility of Tenant. Prior
to the Commencement Date, and from time to time thereafter, Landlord shall
deliver to Tenant its estimate of the Common Area Costs to be incurred during
the then-current calendar year. Landlord may adjust the estimate from time to
time during the year to which it relates.
2.4 Common Area Costs Payments. Tenant, on the first day of each
month during the Lease Term shall pay to Landlord, as Additional Rent, without
offset or deduction, an amount equal to one-twelfth (1/12) of Tenant's
Proportionate Share of the estimated Common Area Costs as calculated by
Landlord (prorated of any partial month). The Estimated Initial Common Area
Costs Payment due from Tenant shall be the sum set forth in Section 1.14 above.
All sums payable as additional rent under the terms of this Section shall be
subject to adjustment as provided in Section 2.5.
2.5 Adjustments to Common Area Costs. Within one hundred twenty
(120) days following the end of each calendar year, Landlord shall furnish to
Tenant a statement showing the total actual Common Area Costs for the calendar
year just expired, the amount of Tenant's Proportionate Share of the Common
Area Costs, and payments made by Tenant during such calendar year under Section
2.4. If Tenant's Proportionate Share of the actual Common Area Costs for such
calendar year exceeds the aggregate of Tenant's monthly payments made during
the calendar year just expired, Tenant shall pay to Landlord the deficiency
within thirty (30) days after receipt of said statement. If Tenant's payments
exceed Tenant's Proportionate Share of the actual Common Area Costs as shown on
such statement, Tenant shall be entitled to offset the excess against payments
thereafter becoming due as Tenant's Proportionate Share of Common Area Costs.
No portion of the Common Area Costs paid by Tenant under this Article 2 shall
be credited against Base Rent or any other rental obligations hereunder.
2.6 Late Payment. Other remedies for nonpayment of Rent
notwithstanding, if any payment of Base Rent or Additional Rent is not received
by Landlord on or before the fifth (5th) day of the month for which the rent is
due, or if any other payment hereunder due Landlord by Tenant is not received
by Landlord on or before the fifth (5th) day of the month next following the
month in which tenant was invoiced, Tenant shall also pay (a) a late payment
charge of four percent (4%) of such past due amount and (b) interest of
eighteen percent (18%) per annum or the maximum then allowed by applicable law,
whichever is less, on the remaining unpaid balance, retroactive to the date
originally due until paid.
2.7 Increase in Insurance Premiums. If an increase in any
insurance premiums paid by Landlord for the Property is caused by Tenant's use
of the Premises in a manner other than as set forth in Section 1.11, or if
Tenant vacated the Premises and caused an increase in such premiums, then
Tenant shall pay as Additional Rent the amount of such increase to Landlord.
Tenant agrees to pay any amounts due under this Section within ten (10) days
following receipt of the invoice showing the Additional Rent due.
2.8 Security Deposit. The security deposit set forth in Section
1.9(if any) shall be held by Landlord for the performance of tenant's covenants
and obligations under this Lease, it being expressly understood that the
security deposit shall not be considered an advance payment of rental or a
measure of Landlord's damage in case of default hereunder by Tenant, and shall
be held by Landlord without payment of any interest thereon. Upon the occurrence
of any event of default by Tenant under this Lease, Landlord may, from time to
time, without prejudice to any other remedy, use the security deposit to the
extent necessary to make good any arrears of Rent, or to repair any damage or
injury, or pay any expense or liability incurred by Landlord as a result of the
event of default or breach of covenant, and any remaining balance of the
security deposit shall be returned by Landlord to Tenant upon the termination of
this Lease. If any portion of the security deposit is so used or applied, Tenant
shall upon ten (10) days written notice from Landlord, deposit with Landlord by
cash or cashier's check an amount sufficient to restore the security deposit to
its original amount. The Security Deposit may be assigned and transferred by
Landlord to the successor in interest of Landlord and, upon acknowledgement by
such successor of receipt of such security and its assumption of the obligation
to account to Tenant for such security in accordance with the terms of this
Lease, Landlord shall thereby be discharged of any further obligation
relating thereto.
2.9 Notice to Vacate. Tenant shall give written notice to Landlord
one hundred and eighty (180) days prior to the expiration of the Lease Term to
vacate upon expiration of the Lease, to negotiate a renewal or to exercise an
option to renew, if available. Failure to provide such written notice will
indicate that Tenant intends to vacate and Landlord shall have the right to
place signs, for the purpose of marketing in the windows of the Premises and to
begin showing the Premises to potential new tenants. Negotiations of renewal
options must be completed within thirty (30) days from the date Tenant gives
written notice to exercise its option to renew. Notwithstanding the above,
Landlord may decide not to renew Tenant's lease at its sole discretion.
2.10 Holding Over. If Tenant does not vacate the Premises upon the
expiration or earlier termination of this Lease, Tenant shall be a tenant at
sufferance for the holdover period and all of the terms and provisions of this
Lease shall be applicable during that period, except that Tenant shall pay
Landlord (in addition to Additional Rent payable under section 2.3 and any
other sums payable under this Lease) as Base Rent for the period of such
holdover an amount equal to two times the Base Rent which would have been
payable by Tenant had the holdover period been a part of the original term of
this Lease (without waiver of Landlord's right to recover damages as permitted
by law). Upon the expiration or earlier termination of this Lease, Tenant
agrees to vacate and deliver the Premises, and all keys thereto, to Landlord
upon delivery to Tenant of notice from Landlord to vacate. The rental payable
during the holdover period shall be payable to Landlord on demand . No holding
over by Tenant, whether with or without the consent of Landlord shall operate
to extend the term of this Lease. Tenant shall indemnify Landlord against all
claims made by any tenant or prospective tenant against Landlord resulting from
delay by Landlord in delivering possession of the Premises to such other tenant
or prospective tenant.
ARTICLE 3. - OCCUPANCY, USE AND OPERATIONS
3.1 Use and Operation of Tenant's Business. Tenant warrants and
represents to Landlord that the Premises shall be used and occupied only for the
purpose as set forth in Section 1.11. Tenant shall occupy the Premises, conduct
its business and control its agents, employees, and visitors in such a manner as
is lawful, reputable and will not create a nuisance to other tenants in the
Property. Tenant shall continuously throughout the Lease Term occupy the
Premises under the Trade Name. Tenant shall at all times operate its business in
a first class manner. Tenant shall not conduct any auction or fire or bankruptcy
sale in the Premises. Tenant shall not solicit business, distribute handbills or
display merchandise within the Common Areas, or take any action which would
interfere with the rights of other persons to use the Common Areas. Tenant shall
not permit any operation which emits any odor or matter which intrudes into
other portions of the Property, use any apparatus or machine which makes undue
noise or causes vibration in any portion of the Property or otherwise interfere
with, annoy or disturb any other tenant in its normal business operations or
Landlord in its management of the Property. Tenant shall neither permit any
waste on the Premises nor allow the Premises to be used in any way which would,
in the opinion of Landlord, be extra hazardous on account of fire or which would
in any way increase or render void the fire insurance on the Property.
3.2 Signs. Tenant shall be responsible for the installation of a
sign within thirty (30) days of occupancy in accordance with the sign criteria
attached hereto as EXHIBIT G. No other sign of any type or description shall be
erected, placed or painted in or about the Premises or the Property without
Landlord's prior written consent, and Landlord reserves the right to remove, at
Tenant's expense, all signs other than signs approved in writing by Landlord
under this Section 3.2, without notice to Tenant and without liability to Tenant
for any damages sustained by Tenant as a result thereof. Tenant shall be liable
to Landlord for any cost or expense incurred by Landlord in removing such sign
and for any damage caused by the removal of such sign. Landlord reserves the
right, in Landlord's discretion, to permit a sign or signs which deviate from
the Landlord's then-established sign criteria, and such permission by Landlord
to any tenant or tenants shall not give rise to any rights in any other tenants
to object thereto or to require Landlord to permit such other tenant to deviate
from the criteria. Nothing contained herein shall limit Landlord's right to
modify or amend such criteria from time to time.
3.3 Compliance with Laws, Rules and Regulations.
(a) Tenant, at Tenant's sole cost and expense, shall comply
with all laws, ordinances, orders, rules and regulations of state, federal,
municipal or other agencies or bodies having jurisdiction over the use,
condition or occupancy of the Premises. Tenant shall procure at its own expense
all permits and licenses required for the transaction of its business in the
Premises.
(b) The "Americans with Disabilities Act of 1990" (ADA) is a
federal law that prohibits discrimination on the basis of disability. The
requirements of this act vary with the type of business the Tenant is engaged
in and the number of employees the Tenant has both at this, and other
locations. The Landlord is not qualified to determine which provisions of the
ADA apply to Tenant. Therefore the Tenant shall determine if the leased space
complies with the accessibility guidelines under ADA and advise the Landlord if
any physical modifications to this facility are required to meet the Tenants
needs under this law, or any other law, code or regulations. Modifications
requested by Tenant to the leased facility shall be made by the Landlord, and
the Tenant shall pay Landlord the full cost of the modifications requested. The
Tenant shall indemnify and hold harmless the Landlord and its agents
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and employees from and against all claims, damages, losses and expenses,
including but not limited to Attorney's fees, arising out of or resulting from
the Tenants compliance of failure to comply with the ADA or other laws, codes or
regulations.
(c) Tenant will comply with the rules and regulations of the
Property adopted by Landlord attached hereto as EXHIBIT E. If Tenant is not
complying with such rules and regulations, or if Tenant is in any way not
complying with this Article 3, then, notwithstanding anything to the contrary
contained herein, Landlord may, at its election enter the Premises without
liability therefor and fulfill Tenant's obligations. Tenant shall reimburse
Landlord on demand, as Additional Rent, for any expenses which Landlord may
incur in effecting compliance with Tenant's obligations and agrees that Landlord
shall not be liable for any damages resulting to Tenant from such action.
Landlord shall have the right at all times to change and amend the rules and
regulations in any reasonable manner as it may deem advisable for the safety,
care, cleanliness, preservation of good order and operation or use of the
Property or the Premises. All changes and amendments to the rules and
regulations of the Property will be forwarded by Landlord to Tenant in writing
and shall thereafter be carried out and observed by Tenant.
3.4 Warranty of Possession. Landlord and Tenant each warrants that
it has the right and authority to execute this Lease, and Landlord warrants to
Tenant, that upon payment of the required rents by Tenant and subject to the
terms, conditions, covenants and agreements contained in this Lease, Tenant
shall have possession of the Premises during the full term of this Lease, as
well as any extension or renewal thereof, without hindrance from Landlord or any
person or persons lawfully claiming the Premises by, through or under Landlord
(but not otherwise); subject, however, to all mortgages, deeds of trust, leases
and agreements to which this Lease is subordinate and to all laws, ordinances,
orders, rules an regulations of any governmental authority. Landlord shall not
be responsible for the acts or omissions of any other lessee or third party that
may interfere with Tenant's use and enjoyment of the Premises.
3.5 Inspection. Landlord or its authorized agents shall at any and
all reasonable times have the right to enter the Premises to inspect the same,
to supply janitorial service or any other service to be provided by Landlord,
to show the Premises to prospective mortgagees, purchasers or prospective
tenants, and to alter, improve or repair the Premises or any other portion of
the Property. Tenant hereby waives any claim for abatement or reduction of
rent, or for any damages for injury, or inconvenience to, or interference with,
Tenant's business, for any loss or occupancy or use of the Premises, and for any
other loss occasioned thereby. Landlord shall at all times have and retain a
key with which to unlock all of the doors in, upon and about the Premises.
Tenant shall not change Landlord's lock system or in any other manner prohibit
Landlord from entering the Premises. Landlord shall have the right at all
times to enter the Premises by any means in the event of any emergency without
liability therefor.
3.6 Personal Property Taxes. Tenant shall be liable for all taxes
levied against leasehold improvements, merchandise, personal property, trade
fixtures and all other taxable property located in the Premises. If any such
taxes for which Tenant is liable are levied against Landlord or Landlord's
property and if Landlord elects to pay the same or if the assessed value of
Landlord's property is increased by inclusion of personal property and trade
fixtures placed by Tenant in the Premises and Landlord elects to pay the taxes
based on such increase, Tenant shall pay to Landlord, upon demand, that part of
such taxes for which the Tenant is primarily liable pursuant to the terms of
this Section. Tenant shall pay when due any and all taxes related to Tenant's
use and operation of its business in the Premises.
3.7 Garbage. All garbage and refuse shall be kept in an area
designated by Landlord and in the kind of container specified by Landlord and
shall be placed outside of the Premises daily, prepared for collection in the
manner and at the times and places specified by Landlord. If Landlord provides
or designates a service for collection of refuse and garbage, Tenant shall use
it, at Tenant's expense, provided the cost thereof is competitive with any
identical service available to Tenant.
ARTICLE 4. - UTILITIES AND SERVICE
4.1 Utility Services. Landlord shall provide or cause to be
provided the mains, conduits and other facilities necessary to supply water,
gas, electricity, telephone service and sewage service to the Premises. Tenant
shall, however, be responsible, at its expense, to make provisions for
connecting or hooking up to such utilities, directly with the appropriate
utility company furnishing same.
4.2 Tenant Responsible for Charges. Tenant shall promptly pay all
charges and deposits for electricity, water, gas, telephone service and sewage
service and other utilities furnished to the Premises. Landlord may, if it so
elects, furnish one or more utility services to Tenant, and in such event,
Tenant shall purchase the use of such services as are tendered by Landlord, and
shall pay on demand the rates established therefor by Landlord which shall not
exceed the rate which would be charged for the same service if furnished to
Tenant directly by the local public utility furnishing the same to the public
at large. Landlord may at any time discontinue furnishing any such service
without obligation to Tenant other than to connect the Premises to the public
utility, if any, furnishing such service.
4.3 Landlord's Services. Landlord shall provide routine
maintenance, painting and electrical lighting service for all Common Areas and
special service areas of the Property in the manner and to the extent deemed by
Landlord to be standard. Landlord may, in its sole discretion, provide
additional services not enumerated herein.
4.4 No Liability. Landlord shall not be liable for any interruption
whatsoever in utility services not furnished by it, nor for interruption in
utility service furnished by it which are due to fire, accident, strikes, acts
of God, riot, civil commotion, terrorist act, national emergency, shortage or
labor or materials or other causes beyond the control of Landlord or in order
to make alterations, repairs or improvements. Moreover, Landlord shall not be
liable for any interruption of such utility services which continues during any
reasonable period necessary to restore such service upon the occurrence of any
of the foregoing conditions. Failure by Landlord to any extent to provide any
services of Landlord specified herein or any other services not specified, or
any cessation thereof, shall not render Landlord liable in any respect for
damages to either person or property, be construed as an eviction of Tenant,
work an abatement of rent or relieve Tenant from fulfillment of any covenant in
this Lease. If any of the equipment or machinery necessary or useful for
provision of any utility services, and for which Landlord is responsible,
breaks down, or for any cause ceases to function properly, Landlord shall use
reasonable diligence to repair the same promptly, but Tenant shall have no
claim for rebate of rent or damages on account of any interruption in service
occasioned from the repairs.
4.5 Theft or Burglary. Landlord shall not be liable to Tenant for
losses to Tenant's property or personal injury caused by criminal acts or entry
by unauthorized persons into the Premises or the Property.
ARTICLE 5. - REPAIRS AND MAINTENANCE
5.1 Landlord Repairs. Landlord shall not be required to make any
improvements, replacements or repairs of any kind or character to the Premises
during the term of this Lease except as are set forth in this Section.
Landlord shall maintain only the roof, foundation, parking and Common Areas,
the structural soundness of the exterior walls. Landlord's cost of maintaining
and repairing the items set forth in this Section are subject to the additional
rent provisions in Section 2.2. Landlord shall not be liable to Tenant, except
as expressly provided in this Lease, for any damage or inconvenience, and
Tenant shall not be entitled to any damages nor to any abatement or reduction
of rent by reason of any repairs, alterations or additions made by Landlord
under this Lease.
5.2 Tenant Repairs. Tenant, at its own cost and expense, shall
maintain the Premises in a first-class condition (except for those items that
are the responsibility of Landlord under Section 5.1). Without limiting the
generality of the foregoing, Tenant shall maintain and keep in good repair
(including replacement when necessary):
(a) the interior of the Premises, including walls, floors and
ceilings;
(b) all windows and doors, including frames, glass, molding
and hardware;
(c) all wires and plumbing within the Premises which serve the
Premises (as distinguished from those serving the Building generally);
(d) all signs, air conditioning and heating equipment,
mechanical doors and other mechanical equipment situated on or in the Premises
or serving the Premises (as distinguished from those serving the Building
generally); and
(e) those utility facilities that are not Landlord's
responsibility hereunder. Tenant shall further make all other repairs to the
Premises made necessary by Tenant's failure to comply with its obligations under
this Section. All fixtures installed by Tenant shall be new or shall have been
completely and recently reconditioned.
5.3 Request for Repairs. All requests for repairs or maintenance
that are the responsibility of Landlord pursuant to any provision of this Lease
must be made in writing to Landlord at the address in Section 1.10.
5.4 Tenant Damages. Tenant shall not allow any damage to be
committed on any portion of the Premises or Property, and at the termination of
this Lease, by lapse of time or otherwise, Tenant shall deliver the Premises to
Landlord in as good condition as existed at the Commencement Date of this
Lease, ordinary wear and tear expected. The cost and expense of any repairs
necessary to restore the condition of the Premises shall be borne by Tenant.
ARTICLE 6. - ALTERATIONS AND IMPROVEMENTS
6.1 Construction. If any construction of tenant improvements is
necessary for the initial occupancy of the Premises, such construction shall be
accomplished and the cost of such construction shall be borne by Landlord and/or
Tenant in accordance with EXHIBIT F attached hereto. Except as expressly
provided in this Lease, Tenant acknowledges and agrees that Landlord has not
undertaken to perform any modification, alteration or improvements to the
Premises, and Tenant further waives any defects in the Premises and acknowledges
and accepts (1) the Premises as suitable for the purpose for which they are
leased and (2) the Property and every part and appurtenance thereof as being in
good and satisfactory condition. Upon the request of Landlord, Tenant shall
deliver to Landlord a completed acceptance of premises memorandum in Landlord's
prescribed form.
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6.2 Tenant Improvements. Tenant shall not make or allow to be made
any alterations, physical additions or improvements in or to the Premises
without first obtaining the written consent of Landlord, which consent may in
the sole and absolute discretion of Landlord be denied. Any alterations,
physical additions or improvements to the Premises made by or installed by
either party hereto shall remain upon and be surrendered with the Premises and
become the property of Landlord upon the expiration or earlier termination of
this Lease without credit to Tenant; provided, however, Landlord, at its option,
may require Tenant to remove any physical improvements or additions and/or
repair any alterations in order to restore the Premises to the condition
existing at the time Tenant took possession, all costs of removal and/or
alterations to be borne by Tenant. This clause shall not apply to moveable
equipment, furniture or moveable trade fixtures owned by Tenant, which may be
removed by Tenant at the end of the term of this Lease if Tenant is not then in
default and if such equipment and furniture are not then subject to any other
rights, liens and interests of Landlord. Tenant shall have no authority or
power, express or implied, to create or cause any mechanic's or materialmen's
lien, charge or encumbrance of any kind against the Premises, the Property or
any portion thereof. Tenant shall promptly cause any such liens that have
arisen by reason of any work claimed to have been undertaken by or through
Tenant to be released by payment, bonding or otherwise within thirty (30) days
after request by Landlord, and shall indemnify Landlord against losses arising
out of any such claim (including, without limitation, legal fees and court
costs).
6.3 Common and Service Area Alterations. Landlord shall have the
right to decorate and to make repairs, alterations, additions, changes or
improvements, whether structural or otherwise, in, about or on the exterior of
the Property, or any part thereof exclusive of the Premises, and to change,
alter, relocate, remove or replace service areas and/or Common Areas, and to
otherwise alter or modify the Property exclusive of the Premises, and for such
purposes, to take such measures for safety or for the expediting of such work
as may be required, in Landlord's judgment, all without affecting any of
Tenant's obligations hereunder.
ARTICLE 7. - CASUALTY AND INSURANCE
7.1 Substantial Destruction. If in the determination of Landlord
the Premises should be totally destroyed by fire or other casualty, or if in
the determination of Landlord the Premises should be damaged so that rebuilding
cannot reasonably be completed substantially within one hundred and eighty
(180) working days after Landlord's receipt of written notification by tenant
of the destruction, or if the Premises are damaged or destroyed by casualty not
covered by the standard broad form of fire and extended coverage insurance then
in common use in the State of North Carolina, then, at Landlord's sole option,
this Lease shall terminate and, in such case, the rent shall be abated for the
unexpired portion of the Lease, effective as of the date of the written
notification.
7.2 Partial Destruction. If following damage or destruction to the
Premises by fire or other casualty, this Lease is not terminated pursuant to
Section 7.1 hereof, this Lease shall not terminate, and Landlord shall proceed,
to the extent of insurance proceeds actually received by Landlord after the
exercise by any mortgage of the Property of an option to apply proceeds against
Landlord's debt to such mortgagee, with reasonable diligence to rebuild or
repair the Building or other improvements to substantially the same conditions
in which they existed prior to the damage. If the Premises are to be rebuilt
or repaired and are untenantable in whole or in part following the damage, and
the damage or destruction was not caused or contributed to by act or negligence
of Tenant, its agents, employees, invitees or those for whom Tenant is
responsible, the Base Rent payable under this Lease during the period for which
the Premises are untenantable shall be reduced to amount determined by
multiplying the Base Rent that would otherwise be payable but for this
provision by the ratio that the portion of the Premises not rendered
untenantable bears to the total net rentable area of the Premises prior to the
casualty. Landlord's obligation to rebuild or restore under this Section shall
be limited to restoring the Premises to substantially the condition in which
the same existed prior to the casualty, exclusive of improvements for which
Tenant is responsible under Section 6.1 and Exhibit F, and Tenant shall,
promptly after the completion of such work by Landlord, proceed with reasonable
diligence and at Tenant's sole cost and expense to restore those improvements
for which Tenant is responsible to substantially the condition in which the
same existed prior to the casualty and to otherwise make the Premises suitable
for Tenant's use. If Landlord fails to substantially complete the necessary
repairs or rebuilding within one hundred and eighty (180) working days from the
date of Landlord's receipt of written notification by Tenant of the
destruction, Tenant may at its own option terminate this Lease by delivering
written notice of termination to landlord, whereupon all rights and obligations
under this Lease shall cease to exist.
7.3 Property Insurance. Landlord shall at all times during the
term of this Lease insure the Property against all risk of direct physical loss
in an amount and with such deductibles as Landlord considers appropriate,
provided, Landlord shall not be obligated in any way or manner to insure any
personal property (including, but not limited to, any furniture, machinery,
goods or supplies) of Tenant upon or within the Premises, any fixtures
installed or paid for by Tenant upon or within the Premises, or any
improvements which Tenant may construct on the Premises. Tenant shall have no
right in or claim to the proceeds of any policy of insurance maintained by
Landlord even if the cost of such insurance is borne by Tenant as set forth in
Article 2. Landlord shall have the right to self-insure against the
above-described risk. Tenant at all times during the term of this Lease shall,
at its own expense, keep in full force and effect insurance against fire and
such other risks as are from time to time included in standard all-risk
insurance policy (including coverage against vandalism and malicious mischief)
for the full replacement cost of Tenant's trade fixtures, furniture, supplies
and all items of personal property of Tenant located on or within the
Premises. Tenant's policy shall also include business interruption/extra
expense coverage in sufficient amounts. Landlord shall be a named insured on
said policy.
7.4 Waiver of Subrogation. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant hereby waive and release each other of and
from any and all right of recovery, claim, action or cause of action, against
each other, their agents, officers and employees, for any loss or damage that
may occur to the Premises, improvements to the Property, or personal property
within the Property, by reason of fire or the elements, regardless of cause or
origin, including negligence of Landlord or Tenant and their agents, officers
and employees. Landlord and Tenant agree immediately to give their respective
insurance companies which have issued policies of insurance covering all risk
of direct physical loss, written notice of the terms of the mutual waivers
contained in this Section, and to have the insurance policies properly
endorsed, if necessary, to prevent the invalidation of the insurance coverages
by reason of the mutual waivers.
7.5 Hold Harmless. Landlord shall not be liable to Tenant or to
Tenant's customers, employees, agents, guests or invitees, or to any other
person whomever, for any injury to persons or damage to property on or about
the Premises, including but not limited to, consequential damage, (1) caused by
any act or omission of Tenant, its employees, subtenants, licensees and
concessionaires or of any other person entering the Property or the Premises by
express or implied invitation of Tenant, or (2) arising out of the use of the
Premises or the Property by Tenant, its employees, subtenants, licensees,
concessionaires or invitees, or (3) arising out of any breach or default by
Tenant in the performance of its obligations hereunder, or (4) caused by the
improvements located in the Premises becoming out of repair or by defect in or
failure of equipment, pipes, or wiring, or by broken glass, or by the backing
up of drains, or by gas, water, steam, electricity or oil leaking, escaping or
flowing into the Premises or Property, or (5) arising out of the failure or
cessation of any service provided by Landlord (including security service and
devices), and Tenant hereby agrees to indemnify Landlord and hold Landlord
harmless from any liability, loss, expense or claim (including, but not limited
to reasonable attorneys' fees) arising out of such damage or injury. Nor shall
Landlord be liable to Tenant for any loss or damage that may be occasioned by
or through the acts or omissions of other tenants of the Property or of any
other persons whomsoever, excepting only duly authorized employees and agents
of Landlord acting within the scope of their authority. Further, Tenant
specifically agrees to be responsible for and indemnify and hold Landlord
harmless from any and all damages or expenses of whatever kind arising out of
or caused by a burglary, theft, vandalism, malicious mischief or other illegal
acts performed in, at or from the Premises.
7.6 Liability Insurance.
(a) Tenant at all times during the Lease shall, at its own
expense, keep in full force and effect commercial general liability insurance
with "personal injury" coverage and contractual liability coverage, with
minimum combined bodily injury and property damage limit of $1,000,000 per
occurrence/$2,000,000 aggregate per location subject to no deductible.
Landlord shall be an additional insured on said policy. Definition of
additional insured shall include all partners, officers, directors, employees,
agents and representatives of the named entities including its managing agent.
Further, coverage for additional insured shall apply on a primary basis
irrespective of any other insurance, whether collectible or not. All insurance
policies or duly executed certificates for the same required to be carried by
Tenant under this Lease, together with satisfactory evidence of the payment of
the premium thereof, shall be deposited with Landlord on the date Tenant first
occupies the Premises and upon renewals of such policies not less than fifteen
(15) days prior to the expiration of the term of such coverage. All insurance
required to be carried by Tenant under this Lease shall be in form and content,
and written by insurers acceptable to Landlord, in its sole discretion. If
Tenant shall fail to comply with any of the requirements contained relating to
insurance, Landlord may obtain such insurance and Tenant shall pay to Landlord,
on demand as additional rent hereunder, the premium cost thereof.
(b) Affording coverage under the Workers Compensation laws of
the State of North Carolina and Employers Liability coverage subject to a limit
of no less than $100,000 each employee, $100,000 each accident, $500,000 policy
limit.
(c) Tenant shall maintain umbrella liability insurance at not
less than a $3,000,000 limit providing excess coverage over all limits and
coverages noted in 7.6.a and 7.6.b above. This policy shall be written on an
occurrence basis. All policies noted above shall be written with insurance
companies licensed to do business in the State of North Carolina and rated no
lower than A:10 in the most current edition of A.M. Best's Casualty Key Rating
Guide. All policies shall be endorsed to provide that in the event of
cancellation, non-renewal or material modification, Landlord shall receive
thirty (30) days written notice thereof.
7.7 Boiler Insurance. At all times when a "boiler," as that term
is defined for the purposes of boiler insurance, is located within the
Premises, Tenant shall carry, at its expense, boiler insurance with policy
limits of not less than One Hundred Thousand Dollars ($100,000.00) insuring
both Landlord and Tenant against loss or liability caused by the operation or
malfunction of such boiler.
7.8 Hazardous Material. Throughout the term of this Lease, Tenant
shall prevent the presence, use, generation, release, discharge, storage,
disposal, or transportation of any Hazardous Materials (as hereinafter defined)
on, under, in, above, to, or from the Premises other than in strict compliance
with all applicable federal, state, and local laws, rules, regulations and
orders. For purposes of this provision, the term "Hazardous Materials" shall
mean and refer to any wastes, materials, or other substances of any kind or
character that are or become regulated as hazardous or toxic waste or
substances, or which require special handling or treatment, under any
applicable local, state or federal law, rule, regulation or order. Tenant
shall indemnify, defend, and hold harmless from and against
(a) any loss, cost, expense, claim, or liability arising out
of any investigation, monitoring, clean-up, containment, removal, storage, or
restoration work (herein referred to as "Remedial Work") required by, or
incurred by Landlord or any other person or party in a reasonable belief that
such Remedial Work is required by any applicable federal, state or local law,
rule, regulation or order, or by any governmental agency, authority, or
political subdivision having jurisdiction over the Premises, and
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(b) any claims of third parties for loss, injury, expense, or
damage arising out of the presence, release, or discharge of any Hazardous
Materials on, under, in, above, to, or from the Premises. In the event any
Remedial Work is so required under any applicable federal, state, or local law,
rule, regulation or order, Tenant shall promptly perform or cause to be
performed such Remedial Work in compliance with such law, rule, regulation, or
order. In the event Tenant shall fail to commence the Remedial Work in a
timely fashion, or shall fail to prosecute diligently the Remedial Work to
completion, such failure shall constitute an event of default on the part of
Tenant under the terms of this Lease, and Landlord, in addition to any other
rights or remedies afforded it hereunder, may, but shall not be obligated to,
cause the Remedial Work to be performed, and Tenant shall promptly reimburse
Landlord for the cost and expense thereof upon demand.
ARTICLE 8. - CONDEMNATION
8.1 Substantial Taking. If in the determination of Landlord all or
a substantial part of the Premises are taken for any public or quasi-public use
under any governmental law, ordinance or regulation, or by right of eminent
domain or by purchase in lieu thereof, and in the determination of Landlord the
taking would prevent or materially interfere with the portion of this Lease
effective on the date physical possession is taken by the condemning authority.
8.2 Partial Taking. If in the determination of Landlord a portion
of the Premises shall be taken for any public or quais-public use under any
governmental law, ordinance or regulation, or by right of eminent domain or by
purchase in lieu thereof, and this Lease is not terminated as provided in
Section 8.1 above, Landlord shall restore and reconstruct, to the extent of
condemnation proceeds (excluding any proceeds for land) actually received after
the exercise by any mortgagee of the Property of an option to apply such
proceeds against Landlord's debt to such mortgagee, the Property and other
improvements on the Premises to the extent necessary to make it reasonably
tenantable. The Base Rent payable under this Lease during the unexpired portion
of the term shall be reduced to an amount determined by multiplying the Base
Rent that would otherwise be payable but for this provision by the ratio that
the portion of the Premises not rendered untenantable bears to the total net
rentable area of the Premises prior to the casualty. If Landlord fails to
substantially complete such restoration and reconstruction within one hundred
and eighty (180) working days of the date of the physical possession by the
condemning authority, Tenant may at its option terminate this Lease by
delivering written notice of termination to Landlord, whereupon all rights and
obligations of this Lease shall cease to exist.
8.3 Condemnation Proceeds. All compensation awarded for any taking
(or the proceeds of private sale in lieu thereof), whether for the whole or a
part of the Premises, shall be the property of Landlord (whether such award is
compensation for damages to Landlord's or Tenant's interest in the Premises)
and Tenant hereby assigns all of its interest in any such award to Landlord;
provided, however, Landlord shall have no interest in any award made to Tenant
for loss of business or for taking of Tenant's fixtures and other property
within the Premises if a separate award for such items is made to Tenant.
ARTICLE 9. - ASSIGNMENT OR SUBLEASE
9.1 Tenant Assignment. Tenant shall not assign, in whole or in
part, this Lease, or allow it to be assigned, in whole or in part, by operation
of law or otherwise (including without limitation by merger, dissolution or
transfer of a controlling interest in any partnership or corporate Tenant,
which merger, dissolution or transfer shall be deemed an assignment) or mortgage
or pledge the same, or sublet the Premises, in whole or in part, without the
prior written consent of Landlord, and in no event shall any such assignment or
sublease ever release Tenant or any guarantor from any obligation or liability
hereunder. No assignee or sublessee of the Premises or any portion thereof may
assign or sublet the Premises or any portion thereof.
9.2 Conditions of Tenant Assignment. If Tenant desires to assign or
sublet all or any part of the Premises, it shall so notify Landlord in writing
at least thirty (30) days in advance of the date on which Tenant desires to make
such assignment or sublease. Tenant shall provide Landlord with a copy of the
proposed assignment or sublease and such information as Landlord might request
concerning the proposed sublessee or assignee to allow Landlord to make informed
judgments as to the financial condition, reputation, operations and general
desirability of the proposed sublessee or assignee. Within fifteen (15) days
after Landlord's receipt of Tenant's proposed assignment or sublease and all
required information concerning the proposed sublessee or assignee, Landlord
shall have the following options:
(1) cancel this Lease as to the Premises or portion thereof
proposed to be assigned or sublet:
(2) consent to the proposed assignment or sublease, and, if
the rent due and payable by any assignee or sublessee under any such permitted
assignment or sublease (or a combination of the rent payable under such
assignment or sublease plus any bonus or any other consideration or any payment
incident thereto) exceeds the rent payable under this Lease for such space,
Tenant shall pay to Landlord all such excess rent and other excess
consideration within ten (10) days following receipt thereof by Tenant; or
(3) refuse, in its sole and absolute discretion and judgment,
to consent to the proposed assignment or sublease, which refusal shall be
deemed to have been exercised unless Landlord gives Tenant written notice
stating otherwise. Upon the occurrence of an event of default by Tenant under
this Lease, if all or any part of the Premises are then assigned or sublet,
Landlord, in addition to any other remedies provided by this Lease or provided
by law, may, at its option, collect directly from the assignee or sublessee all
rents becoming due to Tenant by reason of the assignment or sublease, and
Landlord shall have a security interest in all properties belonging to Tenant
on the Premises to secure payment of such sums. No collection directly by
Landlord from the assignee or sublessee shall be construed to constitute a
novation or a release of Tenant or any guarantor from the further performance
of its obligations under this Lease. All legal fees and expenses incurred by
Landlord in connection with the review by Landlord of Tenant's requested
assignment or sublease pursuant to this Section, together with any legal fees
and disbursements incurred in the preparation and/or review of any
documentation, shall be the responsibility of Tenant and shall be paid by
Tenant within five (5) days of demand for payment thereof, as rental
hereunder. If the rent due and payable by any assignee or sublessee under any
such permitted assignment or sublease (or a combination of the rent payable
under such assignment or sublease plus any bonus or any other consideration or
any payment incident thereto) exceeds the Rent payable under this Lease for
such space, Tenant shall pay to Landlord all such excess rent and other excess
consideration within ten (10) days following receipt thereof by Tenant.
9.3 Landlord Assignment. Landlord shall have the right to sell,
transfer or assign, in whole or in part, its rights and obligations under this
Lease and in the Property. Any such sale, transfer or assignment shall operate
to release Landlord from any and all liabilities under this Lease arising after
the date of such sale, assignment or transfer.
9.4 Rights of Mortgagee. Tenant accepts this Lease subject and
subordinate to any recorded lease, mortgage or deed of trust lien presently
existing, if any, or hereafter encumbering the Property and to all existing
ordinances and recorded restrictions, covenants, easements, and agreements with
respect to the Property. Landlord hereby is irrevocably vested with full power
and authority to subordinate Tenant's interest under this Lease to any mortgage
or deed of trust lien hereafter placed on the Property. Upon any foreclosure,
judicially or non-judicially, of any such mortgage, or the sale of the
Property in lieu of foreclosure, or any other transfer of Landlord's interest
in the Property, whether or not in connection with a mortgage, Tenant hereby
does, and hereafter agrees to attorn to the purchaser at such foreclosure sale
or the grantee under any deed in lieu of foreclosure or to any other transferee
of Landlord's interest, and shall recognize such purchaser, grantee, or other
transferee as Landlord under this Lease, and no further attornment or other
agreement shall be required to effect or evidence Tenant's attornment to and
recognition of such purchaser or grantee as Landlord hereunder. Such agreement
of Tenant shall survive any such foreclosure sale, trustee's sale, conveyance
in lieu thereof, or any other transfer of Landlord's interest in the Property.
Tenant, upon demand, at any time, before or after any such foreclosure sale,
trustee's sale, conveyance in lieu thereof, or other transfer shall execute,
acknowledge, and deliver to the prospective transferee and/or mortgage a Lease
Subordination, Non-Disturbance and Attornment Agreement and any additional
written instruments and certificates evidencing such attornment as the mortgagee
or other prospective transferee may reasonably require, and Tenant hereby
irrevocably appoints Landlord as Tenant's agent and attorney-in-fact for the
purpose of executing, acknowledging, and delivering any such instruments and
certificates. Notwithstanding anything to the contrary implied in this
Section, any mortgagee under any mortgage shall have the right at any time to
subordinate any such mortgage to this Lease on such terms and subject to such
conditions as the mortgagee in its discretion may consider appropriate.
9.5 Estoppel Certificates. Tenant agrees to furnish, from time to
time, within ten (10) days after receipt of a request from Landlord or
Landlord's mortgagee, a statement certifying, if applicable, all or some of the
following: Tenant is in possession of the Premises; the Lease is in full force
and effect; the Lease is unmodified (except as disclosed in such statement);
Tenant claims no present charge, lien, or claim of offset against Rent; the
Rent is paid for the current month, but it is not prepaid for more than one (1)
month and will not be prepaid for more than one (1) month in advance; there is
no existing default by reason of some act or omission by Landlord; that
Landlord has performed all inducements required of Landlord in connection with
this Lease, including construction obligations, and Tenant accepts the Premises
as constructed; an acknowledgement of the assignment of rentals and other sums
due hereunder to the mortgagee and agreement to be bound thereby; and agreement
requiring Tenant to advise the mortgagee of damage to or destruction of the
Premises by fire or other casualty requiring reconstruction; an agreement by
Tenant to give the mortgagee written notice of Landlord's default hereunder and
to permit the mortgagee to cure such default within a reasonable time after
such notice before exercising any remedy Tenant might possess as a result of
such default; and such other matters as may be reasonably required by Landlord's
mortgagee. Tenant's failure to deliver such statement, in addition to being a
default under this Lease, shall be deemed to establish conclusively that this
Lease is in full force and effect except as declared by Landlord, that Landlord
is not in default of any of its obligations under this Lease, and that Landlord
has not received more than one (1) month's Rent in advance.
ARTICLE 10. - LIENS
10.1 Landlord's Lien. As security for payment of Rent, damages and
other payments required to be made by this Lease, and in addition to any
statutory lien or security interest, Tenant hereby grants to Landlord a lien
upon and security interest in all property of Tenant now or subsequently
located upon the Premises. If Tenant is in default of any provision of this
Lease, Landlord may enter upon the Premises, by picking or changing locks if
necessary, without being liable for any claim for damages, and take possession
of all or any part of such property, and may sell all or any part of such
property at a public or private sale, in one or successive sales, with or
without notice, to the highest bidder for cash, and, on behalf of Tenant, sell
and convey all or part of such property to the highest bidder, delivering to
the highest bidder all of Tenant's title and interest in the property sold. The
proceeds of the sale of such property shall be applied by landlord toward the
reasonable costs and expenses of the sale, including attorney's fees, and then
toward the payment of all sums then due by Tenant to Landlord under the terms of
this Lease. Any excess remaining shall be paid to Tenant or any other person
entitled thereto by law.
10.2 Uniform Commercial Code. This Lease is intended as and
constitutes a security agreement within the meaning of the Uniform Commercial
Code of the state in which the Premises are situated. Landlord, in addition to
the rights prescribed in this Lease, shall have all of the rights, titles,
liens and interest in and to Tenant's property; now or hereafter
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located upon the Premises, which may be granted a secured party, (as that term
is defined under such Uniform Commercial Code), under this Lease. Tenant will
on request execute and deliver to Landlord a financing statement (or
continuation statement) for the purpose of perfecting Landlord's security
interest under this Lease.
ARTICLE 11. - DEFAULT AND REMEDIES
11.1 Default by Tenant. The following shall be deemed to be events
of default by Tenant under this Lease:
(1) Tenant shall fail to pay when due any installment of Rent
or any other payment required pursuant to this Lease;
(2) Tenant shall abandon any substantial portion of the
Premises;
(3) Tenant or any guarantor of Tenant's obligations hereunder
shall file a petition or be adjudged bankrupt or insolvent under any
applicable federal or state bankruptcy or insolvency law or admit that
it cannot meet its financial obligations as they become due, or a
receiver or trustee shall be appointed for all or substantially all of
the assets of Tenant or any guarantor of Tenant's obligations hereunder;
(4) Tenant or any guarantor of Tenant's obligations hereunder
shall make a transfer in fraud of creditors or shall make an assignment
for the benefit of creditors;
(5) Tenant shall do or permit to be done any act which results
in a lien being filed against the Premises or the Property;
(6) the liquidation, termination, dissolution or (if the Tenant
is a natural person) the death of Tenant or any guarantor of Tenant's
obligations hereunder;
(7) Tenant vacates or abandons the Premises for a period of
fifteen (15) consecutive business days;
(8) Tenant shall be in default of any other term, provision or
covenant of this Lease, and such default is not cured within ten (10)
days after written notice thereof to Tenant.
11.2 Remedies for Tenant's Default. Upon the occurrence of any
event of default set forth in this Lease, Landlord shall have the option to
pursue any one or more of the remedies set forth in this Section 11.2 without
any additional notice or demand:
(1) Without declaring the Lease terminated, Landlord may
enter upon and take possession of the Premises, by picking or changing
locks if necessary, and lock out, expel or remove Tenant and any other
person who may be occupying all or any part of the Premises without
being liable for any claim for damages, and relet the Premises on behalf
of Tenant and receive the rent directly by reason of the reletting.
Tenant agrees to pay Landlord on demand any deficiency that may arise by
reason of any reletting of the Premises; further, Tenant agrees to
reimburse Landlord for any reasonable expenditure made by it in order to
relet the Premises, including, but not limited to, remodeling and repair
costs, brokerage commissions and attorneys' fees.
(2) Without declaring the Lease terminated, Landlord may
enter upon the Premises, by picking or changing locks if necessary,
without being liable for any claim for damages, and do whatever Tenant
is obligated to do under the terms of this Lease. Tenant agrees to
reimburse Landlord on demand for any reasonable expenses which Landlord
may incur in effecting compliance with Tenant's obligations under this
Lease; further, Tenant agrees that Landlord shall not be liable for any
damages resulting to Tenant from effecting compliance with Tenant's
obligations under this Lease caused by the negligence of Landlord or
otherwise.
(3) Landlord may terminate this Lease, in which event Tenant
shall immediately surrender the Premises to Landlord, and if Tenant
fails to surrender the Premises, Landlord may, without prejudice to any
other remedy which it may have for possession or arrearages in rent,
enter upon and take possession of the Premises, by picking or changing
locks if necessary, and lock out, expel or remove Tenant and any other
person who may be occupying all or any part of the Premises without
being liable for any claim for damages. Tenant agrees to pay on demand
the amount of all loss and damage which Landlord may suffer for any
reason due to the termination of this Lease under this Section 11.2,
including (without limitation) loss and damage due to the failure of
Tenant to maintain and/or repair the Premises as required hereunder
and/or due to the inability of Landlord to relet the Premises on
satisfactory terms or otherwise.
Landlord's exercise, following a default by Tenant under this Lease, of any
right granted hereunder or under any applicable law to lock out or change the
locks securing the Premises shall not impose upon Landlord any duty to notify
Tenant of the name and address or telephone number of the individual or company
from whom a new key may be obtained, nor shall Landlord have any duty to
provide Tenant with a new key or any other means of access to the Premises. To
the maximum extent permitted by law, Landlord and Tenant agree that the parties
hereto intend that all rights and remedies of Landlord under this Lease shall
supersede any conflicting provisions of the General Statutes of North Carolina,
and any amendments, modifications, recodification or other changes thereto.
Notwithstanding any other remedy set forth in this Lease, if Landlord
has made rent concessions of any type or character, or waived any Base Rent,
and Tenant fails to take possession of the Premises on the Commencement Date or
otherwise defaults at any time during the term of this Lease, the rent
concessions, including any waived Base Rent, shall be cancelled and the amount
of the Base Rent or other rent concessions shall be due and payable immediately
as if no rent concessions or waiver of any Base Rent had ever been granted. A
rent concession or waiver of the Base Rent shall not relieve Tenant of any
obligation to pay any other charge due and payable under this Lease.
Notwithstanding anything contained in this Lease to the contrary, this Lease
may be terminated by Landlord only by written notice of such termination to
Tenant given in accordance with Section 13.7 below, and no other act or
omission of Landlord shall be construed as a termination of this Lease.
11.3 Remedies Cumulative. All rights and remedies of Landlord
herein or existing at law or in equity are cumulative and the exercise of one
or more rights or remedies shall not be taken to exclude or waive the rights to
the exercise of any other.
ARTICLE 12. - DEFINITIONS
12.1 Abandon. "Abandon" means the vacating of all or a substantial
portion of the Premises by Tenant, whether or not Tenant is in default of the
rental or other payments due under this Lease.
12.2 Act of God or Force Majeure. An "act of God" or "force
majeure" is defined for purposes of this Lease as strikes, lockouts, sitdowns,
material or labor restrictions by any governmental authority, unusual
transportation delays, riots, floods, washouts, explosions, earthquakes, fire
storms, weather (including wet grounds or inclement weather which prevents
construction), acts of the public enemy, wars, insurrections, and/or any other
cause not reasonably within the control of Landlord or which by the exercise of
due diligence Landlord is unable wholly or in part, to prevent or overcome.
ARTICLE 13. - MISCELLANEOUS
13.1 Waiver. Failure of Landlord to declare an event of default
immediately upon its occurrence, or delay in taking any action in connection
with an event of default, shall not constitute a waiver of the default, but
Landlord shall have the right to declare the default ay any time and take such
action as is lawful or authorized under this Lease. Pursuit of any one or more
of the remedies set forth in Article 11 above shall not preclude pursuit or any
one or more of the other remedies provided elsewhere in this Lease or provided
by law, nor shall pursuit of any remedy hereunder or at law constitute
forfeiture or waiver of any rent or damages accruing to Landlord by reason of
the violation of any of the terms, provisions or covenants of this Lease.
Failure by Landlord to enforce one or more of the remedies provided hereunder
or at law upon any event of default shall not be deemed or construed to
constitute a waiver of the default or of any other violation or breach of any
of the terms provisions and covenants contained in this Lease. Waiver by
Landlord of any default by Tenant hereunder shall in no event be deemed or
construed to be a waiver of identical or similar future defaults. Landlord may
collect and receive rent due from Tenant without waiving or affecting any
rights or remedies that Landlord may have at law or in equity or by virtue of
this Lease at the time of such payment. To the maximum extent allowable
pursuant to applicable law, institution or a summary ejectment action to
re-enter the Premises shall not be construed to be an election by Landlord to
terminate this Lease.
13.2 Act of God. Landlord shall not be required to perform any
covenant or obligation in this Lease, or be liable in damages to Tenant, so
long as the performance or non-performance of the covenant or obligation is
delayed, caused or prevented by an act of God, force majeure or by Tenant.
13.3 Attorney's Fees. If Tenant defaults in the performance of any
of the terms, covenants agreements or conditions contained in this Lease and
Landlord places in the hands of any attorney the enforcement of all or any part
of this Lease, the collection of any rent or other sums due or to become due or
recovery of the possession of the Premises, Tenant agrees to pay Landlord's
cost of collection, including reasonable attorneys' fees, whether suit is
actually filed or not.
13.4 Successors. This Lease shall be binding upon and inure to the
benefit of Landlord and Tenant and their respective heirs, personal
representations, successors and assigns.
13.5 Rent Tax. If applicable in the jurisdiction where the Premises
are situated, Tenant shall pay and be liable for all rental, sales and use
taxes or other similar taxes, if any, levied or imposed by any city, state,
county or other governmental body having authority, such payments to be in
addition to all other payments required to be paid to Landlord by Tenant under
the terms of this Lease. Any such payment shall be paid concurrently with the
payment of the Base Rent, Additional Rent, Common Area Costs, or other charge
upon which the tax is based as set forth above.
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13.6 Interpretation. The captions appearing in this Lease are
convenience only and in no way define, limit, construe or describe the scope or
intent of any Section. Grammatical changes required to make the provisions of
this Lease apply (1) in the plural sense where there is more than one tenant
and (2) to either corporations, associations, partnerships or individuals,
males or females, shall in all instances be assumed as though in each case
fully expressed. The laws of the State of North Carolina shall govern the
validity, performance and enforcement of this Lease. This Lease shall not be
construed more or less favorably with respect to either party as a consequence
of the Lease or various provisions hereof having been drafted by one of the
parties hereto.
13.7 Notices. All rent and other payments required to be made by
Tenant shall be payable to Landlord, in care of Manager, at Manager's address
set forth on page 1 (or if no address be set forth for Manager, to Landlord at
Landlord's address set forth on page 1). All payments required to be made by
Landlord to Tenant shall be payable to Tenant at Tenant's address set forth on
page 1. Any notice or document (other than rent) required or permitted to be
delivered by the terms of this Lease shall be deemed to be delivered (whether or
not actually received) when deposited in the United States Mail, postage
prepaid, certified mail, return receipt required, addressed to the parties at
the respective addresses set forth on page 1 (or, in the case of Tenant, at the
Premises), or to such other addresses as the parties may have designated by
written notice to each other, with copies of notices to Landlord being sent to
Landlord's address as shown on page 1. Manager shall be a co-addressee with
Landlord on all notices sent to Landlord by Tenant hereunder, and any notice
sent to Landlord and not to Manager, also, in accordance with this section shall
be deemed ineffective.
13.8 Submission of Lease. SUBMISSION OF THIS LEASE TO TENANT FOR
SIGNATURE DOES NOT CONSTITUTE A RESERVATION OF SPACE OR AN OPTION TO LEASE.
THIS LEASE IS NOT EFFECTIVE UNTIL EXECUTION BY AND DELIVERY TO BOTH LANDLORD
AND TENANT.
13.9 Corporate Authority. If Tenant executes this Lease as a
corporation or a partnership (general or limited), each person executing this
Lease on behalf of Tenant personally represents and warrants that: Tenant is a
duly authorized and existing corporation or partnership (general or limited),
Tenant is qualified to do business in the state in which the Premises are
located, the corporation or partnership (general or limited) has full right and
authority to enter into this Lease, each person signing on behalf of the
corporation or partnership (general or limited) is authorized to do so, and the
execution and delivery of the Lease by Tenant will not result in any breach of,
or constitute a default under any mortgage, deed of trust, lease, loan, credit
agreement, partnership agreement, or other contract or instrument to which
Tenant is a party or by which Tenant may be bound. If any representation or
warranty contained in this Section is false, each person who executes this
Lease shall be liable, individually, as Tenant hereunder.
13.10 Multiple Tenants. If this Lease is executed by more than one
person or entity as "Tenant," each such person or entity shall be jointly and
severally liable hereunder. It is expressly understood that any one of the
named Tenants shall be empowered to execute any modification, amendment,
exhibit, floor plan, or other document herein referred to and bind all of the
named Tenants thereto; and Landlord shall be entitled to rely on same to the
extent as if all of the named Tenants had executed same.
13.11 Tenant's Financial Statements. Tenant represents and warrants
to Landlord that, as of the date of execution of this Lease by Tenant, the
financial statements, if any, of Tenant provided to Landlord prior to or
simultaneously with the execution of this Lease accurately represent the
financial condition of Tenant as of the dates and for the periods indicated
therein, such financial statements are true and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements included therein not misleading and there has been
no material adverse change in the financial condition or business prospects of
Tenant since the respective dates of such financial statements. If there is a
material adverse change in Tenant's financial condition, Tenant will give
immediate notice of such material adverse change to Landlord. If Tenant fails
to give such immediate notice to Landlord, such failure shall be deemed an
event of default under this Lease.
13.12 Severability. If any provision of this Lease or the
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Lease and the application of
such provisions to other persons or circumstances shall not be affected thereby
and shall be enforced to the greatest extent permitted by law. Each covenant
and agreement contained in this Lease shall be construed to be a separate and
independent covenant and agreement, and the breach of any such covenant or
agreement by Landlord shall not discharge or relieve Tenant from Tenant's
obligation to perform each and every covenant and agreement of this Lease to be
performed by Tenant.
13.13 Landlord's Liability. If Landlord shall be in default under
this Lease and, if as a consequence of such default, Tenant shall recover a
money judgment against Landlord, such judgment shall be satisfied only out of
the right, title and interest of Landlord in the Property as the same may then
be encumbered and neither Landlord nor any other person or entity comprising
Landlord shall be liable for any deficiency. In no event shall Tenant have the
right to levy execution against any property of Landlord other than the
Property, nor any person or entity comprising Landlord other than its interest
in the Property as herein expressly provided.
13.14 Sale of Property. Upon any conveyance, sale or exchange of the
Premises or assignment of this Lease, Landlord shall be and is hereby entirely
free and relieved of all liability under any and all of its covenants and
obligations contained in or derived from this Lease arising out of any act,
occurrence, or omission relating to the Premises or this Lease occurring after
the consummation of such sale or exchange and assignment.
13.15 Time is of the Essence. The time of the performance of all of
the covenants, conditions and agreements of this Lease is of the essence.
13.16 Subtenancies. At Landlord's option, the voluntary or other
surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not
work a merger of estates and shall operate as an assignment of any or all
permitted subleases or subtenancies.
13.17 Common Areas. Landlord reserves the right to change, from time
to time, the dimensions and location, identity and type of any buildings
comprising the Building, and to construct additional buildings or additional
stories on existing buildings or other improvements on the Property, provided
that such changes and additional construction do not materially or adversely
affect parking and signage for the Premises. Landlord reserves the right to
change, from time to time, the dimensions and location of the Common Area and
to allow the Common Area to be put to such uses as Landlord shall, from time to
time, deem desirable. Tenant and its employees and customers shall have the
nonexclusive right to use the Common Area in common with Landlord, other
tenants of the Property and other persons designated by Landlord, subject to
reasonable rules and regulations governing use that Landlord from time to time
prescribes. Tenant shall not solicit business, distribute handbills or display
merchandise within the Common Area, or take any action which would interfere
with the rights of other persons to use the Common Area. Landlord may
temporarily close any part of the Common Area to make repairs or alterations.
Tenant acknowledges that Landlord may be required to grant to major tenants of
the Property the right to display and sell merchandise and services on portions
of the Common Area, and the rights herein granted to Tenant shall be inferior
to any such rights granted to major tenants. The Common Area shall be under
Landlord's sole operation and control. Tenant shall be responsible for and
shall indemnify and hold Landlord harmless from any liability, loss or damage
arising out of or caused by Tenant, its employees, subtenants, licensees,
concessionaires, agents, suppliers, vendors, or service contractors, to any
part of the Common Area, or to the Property whether such damages be structural
or nonstructural.
13.18 Employee Parking. Landlord may, from time to time, designate
specific areas in which vehicles owned by Tenant and its employees shall be
parked, and Tenant shall use best efforts to see that such vehicles are parked
in such areas. Upon request, Tenant shall furnish to Landlord a complete list
of the license numbers of all vehicles operated by Tenant and its employees.
ARTICLE 14. - AMENDMENT AND LIMITATION OF WARRANTIES
14.1 Entire Agreement. IT IS EXPRESSLY AGREED BY TENANT, AS A
MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH
THE SPECIFIC REFERENCES TO EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE
PARTIES; THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THE SUBJECT
MATTER OF THIS LEASE OR OF ANY EXPRESSLY MENTIONED EXTRINSIC DOCUMENTS THAT ARE
NOT INCORPORATED IN WRITING IN THIS LEASE OR IN SUCH DOCUMENTS.
14.2 Amendment. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR
EXTENDED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT.
14.3 Limitations of Warranties. LANDLORD AND TENANT EXPRESSLY AGREE
THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY,
HABITABILITY, SUITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER
KIND ARISING OUT OF THIS LEASE, AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND
THOSE EXPRESSLY SET FORTH IN THIS LEASE. WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, TENANT EXPRESSLY ACKNOWLEDGES THAT LANDLORD HAS MADE NO
WARRANTIES OR REPRESENTATIONS CONCERNING ANY HAZARDOUS SUBSTANCES OR OTHER
ENVIRONMENTAL MATTERS AFFECTING ANY PART OF THE PROPERTY, AND LANDLORD HEREBY
EXPRESSLY DISCLAIMS AND TENANT WAIVES ANY EXPRESS OR IMPLIED WARRANTIES WITH
RESPECT TO ANY SUCH MATTERS.
14.4 Waiver and Releases. TENANT SHALL NOT HAVE THE RIGHT TO
WITHHOLD OR TO OFFSET RENT OR TO TERMINATE THIS LEASE EXCEPT AS EXPRESSLY
PROVIDED HEREIN. TENANT WAIVES AND RELEASES ANY AND ALL STATUTORY LIENS AND
OFFSET RIGHTS.
14.5 Non-Disclosure of Lease Terms. NOTWITHSTANDING ANYTHING
CONTAINED WITHIN THIS LEASE TO THE CONTRARY, IF TENANT DISCLOSES ANY OF THE
MATERIAL TERMS AND/OR PROVISIONS OF THIS LEASE, INCLUDING BUT NOT LIMITED TO
THE BASE RENT, TENANT'S COMMON AREA COSTS OR ANY CAPS ON SUCH COSTS, THE TENANT
FINISH OUT ALLOWANCE, TENANT'S PROPORTIONATE SHARE OF GENERAL TAXES OR ANY CAP
ON SUCH EXPENSE, TENANT'S PROPORTIONATE SHARE OF INSURANCE PREMIUMS OR ANY CAP
ON SUCH EXPENSE, OR THE LEASE TERM TO ANY PERSON OR ENTITY NOT A PARTY TO THIS
LEASE, EXCEPT TENANT'S ATTORNEY, THEN TENANT SHALL BE LIABLE FOR ALL DAMAGE OR
INJURY TO LANDLORD RESULTING FROM TENANT'S FAILURE TO KEEP ALL SUCH INFORMATION
CONFIDENTIAL AND TENANT SHALL INDEMNIFY AND HOLD LANDLORD HARMLESS FROM ANY
DAMAGE, LOSS OR INJURY OCCASIONED THEREBY. IN THE ALTERNATIVE, AND AT
LANDLORD'S SOLE OPTION, IF
-7-
<PAGE> 8
DAMAGES ARE DIFFICULT TO CALCULATE, TENANT SHALL PAY LIQUIDATED DAMAGES EQUAL
TO ONE (1) MONTH'S BASE RENT AS DEFINED IN ARTICLE 1 HEREOF. See Addendum.
EXECUTED by Tenant on June 4, 1996, and by Landlord on _____________,
199___, to be effective as of the first day written herein.
LANDLORD:
Please Initial Parker-Raleigh Development XXIII, Limited Partnership
______________ _____________________________________________________
______________ By:__________________________________________________
ATTEST: _____________________________________________________
______________________ By:__________________________________________________
________ Secretary Name:________________________________________________
(SEAL) Title:_______________________________________________
TENANT: (if an individual)
_______________________ _______________________________________________(SEAL)
WITNESS Name:________________________________________________
_______________________ _______________________________________________(SEAL)
WITNESS Name:________________________________________________
TENANT: (if a corporation)
PairGain Technologies, Inc.__________________________
ATTEST: _____________________________________________________
_________[SIG]_________ By:_________________[SIG]____________________________
[SIG]__ Secretary Name:_______________[SIG]____________________________
(SEAL) Title:_______Chief Financial Officer_________________
TENANT: (if a partnership)
_____________________________________________________
_______________________________________________(SEAL)
_______________________ _____________________________________________________
WITNESS Name:_______________________________, general partner
_______________________ _____________________________________________________
WITNESS Name:_______________________________, general partner
_______________________ _____________________________________________________
WITNESS Name:_______________________________, general partner
_______________________ _____________________________________________________
WITNESS Name:_______________________________, general partner
- 8 -
<PAGE> 9
ADDENDUM
This Addendum is attached to the Lease dated May 30, 1996 by and
between PARKER-RALEIGH DEVELOPMENT XXIII, LIMITED PARTNERSHIP ("Landlord") and
PAIRGAIN TECHNOLOGIES, INC. ("Tenant") ("the Lease"). In the event of a
conflict between the terms and conditions of this Addendum and the general
provisions of the Lease, this Addendum shall govern and control.
The following shall constitute additional provisions or conditions to
the Lease:
1. Landlord, at its sole expense, shall make the following
improvements as per attached Exhibit F:
a. Add bathrooms.
b. Build break area with sink, cabinets, garbage
disposal, and dishwasher.
c. Build out office area.
d. Add electrical outlets.
e. Replace all ceiling tiles.
f. Install new 30 ounce carpet.
g. Install new VCT.
h. Paint all walls.
i. Roof and HVAC to be in good working condition.
j. Landlord shall warrant HVAC for one (1) year.
k. Landlord to provide 1,000 amp electrical service.
2. The Lease dated August 22, 1995, between Parker Lincoln
Developers, Inc. and/or Assigns and PairGain Technologies, Inc. located at
5440 Atlantic Springs Road, Suite 113 through 117, Raleigh, North Carolina,
27604, will be terminated upon turnover of space located at 2431 Spring Forest
Road, Suite 153 and 155, Raleigh, North Carolina, 27615, as evidenced by the
turnover letter and on condition that Tenant has fully complied with all the
terms and conditions of this Lease and not then be in default under any of the
terms hereof.
3. Landlord shall allow Tenant to install wiring, partitions, and
cabling thirty (30) days prior to commencement.
4. Tenant assumes all responsibility for ensuring that his
employees (and students) park only within the designated area as shown on
Exhibit B. Tenant shall submit to Landlord and keep current, a list of all
employees (and students) and the tag numbers for any vehicles they may drive to
this location.
5. Tenant may cancel lease after 36 months by giving Landlord six
months advance written notice and paying $47,740.00 towards unamortized tenant
improvement costs.
6. Landlord will use best efforts to provide future expansion
space to tenant. Consummation of a new lease that expands tenant into a larger
space owned by Parker Lincoln Developers, Inc. will cause this lease to cancel
at no cost to Tenant and be superseded by new lease with Parker Lincoln.
[SIGNATURE PAGE ATTACHED]
<PAGE> 10
Except as modified herein, all provisions of the Lease shall be in
full force and effect.
LANDLORD:
PARKER-RALEIGH DEVELOPMENT XXIII,
LIMITED PARTNERSHIP
By: Parker-Raleigh Development I, Inc.,
Sole General Partner
ATTEST: BY:
--------------------------------------
President
------------------
- ---------------------------------
Secretary
- ------------
(CORPORATE SEAL)
TENANT:
PAIRGAIN TECHNOLOGIES, INC.
ATTEST: BY: /s/
-----------------------------------
Vice President
------------------
/s/
- ---------------------------------
Assistant Secretary
- ------------
(CORPORATE SEAL)
<PAGE> 11
EXHIBIT A
LEGAL DESCRIPTION
PARKER LINCOLN PAVILION
2431 SPRING FOREST ROAD
BEING all of Lot 6, of the Pavilion Shopping Center, containing 9.257
acres, a shown on the plat of survey entitled "Rerecording of Lot 6, Pavilion
Shopping Center", dated September 7, 1989, prepared by Robert T. Newcomb, III,
R.L.S. and recorded in Book of Maps 1989, Page 1018, in the Office of the
Register of Deeds, Wake County, North Carolina.
<PAGE> 12
Exhibit B
PAVILION ON SPRING FOREST
[MAP]
SITE PLAN
<PAGE> 13
Exhibit C
[LOTS MAP]
<PAGE> 14
EXHIBIT D
COMMENCEMENT EXHIBIT
TO BE FORTHCOMING
<PAGE> 15
Exhibit E
RULES & REGULATIONS
The following rules and regulations will remain in full force and effect until
Tenant is notified in writing by Landlord of any changes.
1. Access to the Building. Access to the Demised Premises shall be
gained by use of a key to the outside doors of the Demised Premises.
Landlord may, from time to time, establish security controls for the
purpose of regulating access to the building. Tenant shall abide by
all such security regulations to be established.
2. Protecting Demised Premises. Before leaving the Demised Premises
unattended, Tenant shall close and securely lock all doors or other
means of entry to the Demised Premises and shut off all utilities in
the Demised Premises.
Tenant must maintain an adequate number of suitable fire extinguishers
on the premises at all times for use in case of fire, including
electrical or chemical fires.
3. Large Articles. Furniture, freight and other large or heavy articles
may be brought into the building only at times and in the manner
designated by Landlord and always at Tenant's sole responsibility.
All damage to the building, its furnishings, fixtures or equipment by
moving or maintaining such furniture, freight or articles shall be
repaired at the expense of Tenant.
4. Signs. Tenant shall not paint, display, inscribe, maintain or affix
any sign, placard, picture, advertisement, name, notice, lettering or
direction on any part of the outside or inside of the building, or on
any part of the inside of the Demised Premises which can be seen from
the outside of the Demised Premises, without the written consent of
the Landlord, and then only such name or names or matter and in such
color, size, style, character and material as shall be first approved
Landlord in writing. Landlord reserves the right to remove, at the
Tenant's expense, all matter other than that above provided for
without notice to Tenant.
5. Compliance with Laws. Tenant shall comply with all applicable laws,
ordinances, governmental orders or regulations and applicable orders
or directions from any public office or body having jurisdiction,
whether now existing or hereinafter enacted with respect to the
Demised Premises and the use or occupancy thereof. Tenant shall not
make or permit any use of the Demised Premises which directly or
indirectly is forbidden by law, ordinance, governmental regulations or
order or direction of applicable public authority, or which may be
dangerous to person or property.
6. Waste Disposal. Tenant must keep, and prepare for collection, all
garbage and refuse in a container approved by Landlord. Landlord must
also approve the location of the container. Tenant will be responsible
for the cost of container and the cost of trash removal. Tenant must
not burn trash or garbage of any kind on or about the leased premises or
the building or park where located.
7. Antenna or satellite dish. Tenant may not erect any aerial, antenna or
satellite dish on the roof or exterior walls of the premises or on the
grounds. Any such installation will be subject to removal without
notice at any time.
8. Obstruction of Public Areas. Tenant may not place or permit any
obstructions, materials or equipment in the outside areas adjoining the
premises without the written consent of the Landlord. All equipment,
merchandise, freight or other materials must be moved inside the
premises at the end of each business day.
Tenant shall not, whether temporarily, accidentally or otherwise, allow
anything to remain in, place or store anything in, or obstruct in any
way, any sidewalk, court, passageway, entrance, or shipping area.
Tenant shall lend its full cooperation to keep such areas free from all
obstruction and in a clean and sightly condition, and move all supplies,
furniture and equipment as soon as received directly to the Demised
Premises,
<PAGE> 16
Rules & Regulations
Page 2
and shall move all such items and waste (other than waste customarily
removed by the building employees) that are any time being taken from
the Demised Premises directly to the areas designated for disposal. All
courts, passageways, entrances, exits, elevators, escalators, stairways,
corridors, halls and roofs are not for the use of the general public and
Landlord shall in all cases retain the right to control and prevent
access thereto by all persons whose presence in the judgement of
landlord shall be prejudicial to the safety, character, reputation and
interest of the building and its tenants provided, however, that nothing
herein contained shall be construed to prevent such access to persons
with whom Tenant deals within the normal course of Tenant's business
unless such persons are engaged in illegal activities.
9. Defacing Demised Premises and Overloading. Tenant shall not place
anything or allow anything to be placed in the Demised Premises near
the glass of any door, partition, wall or window which may be
unsightly from outside the Demised Premises. Tenant shall not place
or permit to be placed any article of any kind on any window ledge or
on the exterior walls; blinds, shades, awnings or other forms of
inside or outside window ventilators or similar devices shall not be
placed in or about the outside windows in the Demised Premises.
Tenant shall not do any painting or decorating in the Demised Premises
or install any floor coverings in the Demised Premises or make,
paint, cut or drill into, or in any way deface any part of the Demised
Premises or building without in each instance obtaining the prior
written consent of Landlord. Tenant shall not overload any floor or
part thereof in the Demised Premises, or any facility in the building
or any public corridors or elevators therein by bringing in or
removing any large or heavy articles mid Landlord may direct and
control the location of safes, files, and all other heavy articles
and, if considered necessary by Landlord, require supplementary
supports at Tenant's expense of such material and dimensions necessary
to properly distribute the weight.
10. Additional Locks. Tenant shall not attach or permit to be attached
additional locks or similar devices to any door or window, change
existing locks or the mechanism thereof, or make or permit to be made
any keys for any door other than those provided by Landlord. Upon
termination of this lease or termination of Tenant's possession,
Tenant shall surrender all keys to the Demised Premises.
11. Communications or Utility Connections. If Tenant desires signal,
alarm or other utility or similar service connections installed or
changed, Tenant shall not install or change the same without the
approval of Landlord, and then only under the direction of Landlord
and at Tenant's expense. Tenant shall not install in the Demised
Premises any equipment which requires a substantial amount of
electrical current without the advance written consent of Landlord.
Tenant shall ascertain from Landlord the maximum amount of load or
demand for or use of electrical current which can safely be permitted
in the Demised Premises, taking into account the capacity of the
electric wiring in the building, and shall not in any event connect a
greater load that which is safe.
Tenant shall not operate any electrical device from which may emanate
electrical waves which may interfere with or impair radio or
television broadcasting or reception from or in the building or
elsewhere and/or cause disturbing noises or vibrations. Tenant shall
not use any illumination or power for the operation of any equipment
or device other than electricity.
12. Parking. Parking is in designated parking areas only. There should not
be any parking in the "no parking" zones or at curbs. Handicapped
spaces are for handicapped persons and the Police Department will ticket
unauthorized, (unidentified) cars in handicapped spaces. Visitor
parking spaces should not be used by Tenant's employees. Storage of
vehicles on the parking lot is prohibited except with the written
consent of the Landlord.
<PAGE> 17
Rules & Regulations
Page 3
13. Pest Control. Tenant must keep the Demised Premises free from pests,
insects and rodents by using a professional pest exterminating
contractor when needed, at Tenant's expense.
14. Restrooms. The restrooms, toilets, urinals, vanities and the other
apparatus shall not be used for any purpose other than that for which
they were constructed and no foreign substance of any kind whatsoever
shall be thrown therein and the expense of any breakage, stoppage, or
damage resulting from the violation of this rule shall be borne by
Tenant who, or whose employees or invitees, shall have caused it.
15. Solicitation. Tenant shall not make any room-to-room canvass to solicit
business from other tenants in the building and shall not exhibit, sell
or offer to sell, use, rent or exchange any products or services in or
from the Demised Premises unless ordinarily embraced within the Tenant's
use of the Demised Premises specified herein and specific authority
granted in the lease agreement. Tenant, his employees, and agents, may
not solicit business in the parking lot or other common areas and may
not distribute handbills or other advertising matter in automobiles
parked in the parking area or other common area.
16. Energy Conservation. Tenant shall not waste electricity, water, heat
or air conditioning and agrees to cooperate fully with Landlord to
assure the most effective operation of the building's heating and air
conditioning, and shall not allow the adjustment (except by Landlord's
authorized building personnel) of any controls.
17. Intoxication. Landlord reserves the right to exclude or expel from the
building any person who, in the judgement of Landlord, is intoxicated or
under the influence of liquor or drugs, or who shall in any manner do
any act in violation of any of the rules and regulations of the
building.
18. Nuisances and Certain Other Prohibited Uses. Tenant shall not:
(a) engage in any mechanical business, utilize any article or thing,
or engage in any service in or about the Demised Premises or building,
except those ordinarily embraced within the permitted use of the Demised
Premises;
(b) use the Demised Premises for housing, lodging, or sleeping
purposes;
(c) create excessive noise, place a musical or sound producing
instrument or device inside or outside the Demised Premises which may be
heard outside the Demised Premises;
(d) bring or permit to be in the building complex any bicycle or
other vehicle, or dog (except in the company of a blind person) or other
animal or bird;
(e) cause or permit any noxious or offensive odors, fumes, gases,
smoke, dust, steam or vapors;
(f) do anything in or about the Demised Premises tending to create
or maintain a nuisance or do any act tending to injure the reputation of
the building.
19. Amendment of Rules & Regulations. Landlord reserves the right to amend
or waive any of the foregoing rules or regulations at any time when, in
its judgement, it is in the property's best interests and the Tenants'
best interests. No such amendment or waiver of any rules and regulation
in favor of one Tenant operates as an alteration or waiver in favor of
any other Tenant. Landlord is not responsible to any Tenant for the
nonobservance or violation by any other Tenant of any these rules and
regulations at any time.
<PAGE> 18
Exhibit F
PAIRGAIN TECHNOLOGIES, INC.
2431 SPRING FOREST ROAD
RALEIGH, NC 27604
PARKER LINCOLN PAVILION
[FLOOR PLAN]
FLOOR PLAN - SCHEME 1
<PAGE> 19
Exhibit G
SIGN CRITERIA SPECIFICATIONS
Parker Lincoln Pavilion
2431 Spring Forest Road
Raleigh, NC 27615
I. SIGN DIVISIONS
A. Major Tenants
B. Outparcels
C. In-Line Tenant's Fascia
D. Tract Identification
II. APPROVAL
All signs shall be reviewed by the Landlord prior to fabrication.
Shop drawings shall be submitted to the Landlord for approval denoting size,
color, material and method of attachment.
III. PERMITS
Sign permits are required by the City of Raleigh for all permanent and
temporary signs and shall be obtained prior to fabrication or installation.
Electrical permits shall be obtained for any electrical signs and shall be
electrically connected by a licensed contractor.
IV. RESTRICTIONS
A. Unless otherwise approved by Landlord, tenant signs shall
consist of the store name only. No listing of service or
merchandise is permitted without Landlord approval unless it
is part of the store name. Nationally and State registered
logos which comply with the requirements of the local
governing authority will be permitted with Landlord approval.
B. The following types of signs are prohibited:
1. Rooftop signs
2. Outrigger signs
3. Moving or flashing signs
4. Indescent signs
C. No sign will be placed in final position without approval from
the Landlord's representative.
D. All signs shall be fabricated and installed in compliance with
all National and local codes.
V. MAJOR TENANT SIGNS
A major tenant is a tenant with a lease area exceeding 17,000 square
feet. The following sign requirements apply to major tenants:
A. Dominant typestyle shall be Helvetica Medium, others with
Landlord approval.
B. Maximum letter height is 6'-0". Minimum letter height is 10".
C. Signs shall consist of individually internally illuminated
channel letters.
D. Letter faces shall be #7328 White acrylic with 1" wide White
jewelite trimcap retainer molding.
E. Internal illumination shall be either two (2) or four (4) row
6500 White neon tubing.
F. Letter channels shall be painted white.
G. Letters shall be installed directly to the building facade.
H. Total major tenant signage shall not exceed 200 square feet.
<PAGE> 20
Parker Lincoln Pavilion
Sign Criteria
Page 2
VI. OUTPARCEL TENANT SIGNS
A. Maximum letter height is 6'-0". Minimum letter height is 4".
B. Outparcel tenants will be allowed internally illuminated
channel letters or cabinet type signs as follows:
1. Individual channel letter signs shall be #7328 White
acrylic faces with 1" wide White jewelite trimcap
retainer molding. Internal illumination to be either
two (2) or four (4) row 6500 White neon tubing.
Letter channels shall be white or Parker Lincoln Teal
#0001.
2. Cabinet type signs shall be fabricated aluminum.
Sign face colors shall be #7328 White and letters
shall be Parker Lincoln Teal #0001. Cabinet sign
channels shall be painted white or Parker Lincoln
Teal #0001.
3. Goodberry's signs will remain Magenta. The use of
the color Magenta is limited to this outparcel and
this pre-existing tenant.
C. Total outparcel signage shall not exceed 200 square feet.
VII. IN-LINE TENANT FASCIA SIGNS
A. Dominant typestyle shall be Helvetica Medium, others with
Landlord approval.
B. Maximum letter size is 24". Minimum letter size is 4".
C. Signs shall consist of individually internally illuminated
channel letters mounted on a raceway.
D. Letter faces shall be #7328 White acrylic with White jewelite
trimcap retainer molding.
E. Internal illumination shall be 6500 White neon tubing.
F. Letter and letter channels shall be white and raceway painted
to match Parker Lincoln Teal #0001.
G. All signs shall be installed within provided signbands located
between storefront columns.
H. Total length of tenant signs shall not exceed 1'-0" less than
the total width of the signband, without Landlord's approval,
for signbands not bordered by columns.
I. Total sign square footage shall not exceed two times the total
width of the lease space.
VIII. TRACT IDENTIFICATIONS SIGNS
The Landlord, at their discretion, may install a maximum of two (2)
tract identification signs denoting the name of the center. The design, color
and location will be determined by the Landlord. Sign colors shall be White
and Parker Lincoln Teal #0001.
IX. MISCELLANEOUS SIGNAGE
A. Directional and public informational signs shall not exceed
six (6) square feet in size and 3'-6" in height. Colors shall
be White and Parker Lincoln Teal #0001.
B. Temporary promotional signs shall require prior approval of
the Landlord.
<PAGE> 1
PAIRGAIN TECHNOLOGIES, INC.
EXHIBIT 11.1--COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
PRIMARY EARNINGS PER SHARE 1996 1995 1996 1995
----------------- ----------------- ------------------ -----------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) $ 7,570 $ (22,756) $ 13,820 $ (19,614)
============ =========== ============ ============
Calculation of weighted average number of common
and common equivalent shares:
Weighted average of common shares outstanding 31,161 29,843 30,952 28,079
Weighted average of common share equivalents:
Weighted average warrants outstanding 20 N/A 20 N/A
Weighted average options outstanding 6,531 N/A 6,517 N/A
Shares assumed to be repurchased using the
treasury stock method (1,020) N/A (1,192) N/A
Shares assumed to be repurchased to reflect
the effects of tax benefits (671) N/A (641) N/A
------------ ----------- ------------ ------------
Weighted average number of common and common
equivalent shares 36,021 29,843 35,656 28,079
============ =========== ============ ============
Earnings (loss) per share $ 0.21 $ (0.76) $ 0.39 $ (0.70)
============ =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
FULLY DILUTIVE EARNINGS PER SHARE 1996 1995 1996 1995
----------------- ----------------- ------------------ -----------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) $ 7,570 $ (22,756) $ 13,820 $ (19,614)
============ ============ ============ ============
Calculation of weighted average number of common
and common equivalent shares:
Weighted average of common shares outstanding 31,161 29,843 30,952 28,079
Weighted average of common share equivalents:
Weighted average warrants outstanding 20 N/A 20 N/A
Weighted average options outstanding 6,531 N/A 6,517 N/A
Shares assumed to be repurchased using the
treasury stock method (825) N/A (990) N/A
Shares assumed to be repurchased to reflect
the effects of tax benefits (695) N/A (663) N/A
------------ ----------- ------------ ------------
Weighted average number of common and common
equivalent shares 36,192 29,843 35,836 28,079
============ =========== ============ ============
Earnings (loss) per share $ 0.21 $ (0.76) $ 0.39 $ (0.70)
============ =========== ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 52,422
<SECURITIES> 28,849
<RECEIVABLES> 17,372
<ALLOWANCES> 0
<INVENTORY> 29,852
<CURRENT-ASSETS> 132,566
<PP&E> 14,264
<DEPRECIATION> 6,031
<TOTAL-ASSETS> 146,854
<CURRENT-LIABILITIES> 29,628
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 117,210
<TOTAL-LIABILITY-AND-EQUITY> 146,854
<SALES> 87,750
<TOTAL-REVENUES> 87,750
<CGS> 46,046
<TOTAL-COSTS> 46,046
<OTHER-EXPENSES> 20,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,659)
<INCOME-PRETAX> 22,434
<INCOME-TAX> 8,614
<INCOME-CONTINUING> 13,820
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,820
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
