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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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 (I.R.S. Employer
incorporation or organization) Identification No.)
14402 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92780
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 832-9922
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.0005 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant : (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Based on the closing sale price of Nasdaq National Market on January
31, 1997, the aggregated market value of the voting stock held by non affiliates
of the registrant was $2,594,697,000. The number of shares outstanding of the
registrant's common stock, $.0005 par value, was 64,527,013 on January 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders currently expected to be held on June 11, 1997, as filed with the
Commission pursuant to Regulation 14A, are incorporated by reference in Part III
of this Report.
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PART I
ITEM 1. BUSINESS.
PairGain Technologies, Inc. ("PairGain" or the "Company") is a leading
provider of telecommunications products based on high-speed Digital Subscriber
Line ("xDSL") technology. The Company designs, manufactures, markets and
supports products that allow telecommunications carriers and private network
owners to more efficiently provide high-speed digital services to end users over
the large existing infrastructure of unconditioned copper wires. These services
enable high-speed data transmission for applications such as T1/E1, high-speed
Internet access, telecommuting, wide area networking and video conferencing.
RISK FACTORS
Except for the historical information contained herein, the matters
discussed in this Annual Report 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.
Acquisition-Related Risks
The Company recently completed its first significant acquisition of
another company. This acquisition will present the Company with numerous
challenges, including difficulties in the assimilation of the operations,
technologies and products of the acquired company and managing separate
geographic operations. The Company may make future acquisitions where it
believes that it can acquire new products and channels of distribution or
otherwise rapidly enter new or emerging markets. Mergers and acquisitions of
high technology companies are inherently risky and no assurance can be given
that the recent acquisition or any future acquisitions will be successful and
will not adversely affect the Company's financial condition or results of
operations.
Average Sales Price Reductions
Commencing in mid-1993, the Company began reducing the average sales
prices of its HiGain(TM) products in an effort to increase market demand for its
products and in anticipation of expected price competition. These reductions
have been significant, representing a reduction of as much as 14% in 1996, 23%
in 1995 and 40% in 1994. The Company expects to continue to reduce the average
sales prices of its products, including its HiGain products, in future periods.
Accordingly, the Company's ability to maintain or increase revenues will depend
in part upon its ability to increase unit sales volumes of HiGain products and
to introduce and sell new products at rates sufficient to compensate for the
reduced revenue effect of such continuing reductions in the average sales prices
of the Company's HiGain products. Declining average sales prices may also
adversely affect gross margins on the Company's HiGain products if the Company
is unable to fully offset such reductions in average sales prices by reductions
in the Company's per unit costs. There can be no assurance that the Company will
be able to increase the unit sales volumes of its HiGain products, introduce and
sell new products, reduce its per unit costs or maintain or increase revenues or
margins attributable to such products. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business--Products" and
"--Competition."
Product Concentration
Revenues from HiGain products represented approximately 76% of the
Company's total revenues in each of the years 1996, 1995 and 1994. The Company
expects that revenues from HiGain products will continue to account for a
majority of the Company's revenues for the foreseeable future, although there
can be no assurance that the Company will be able to sustain recent levels of
HiGain product sales. A decline in demand for HiGain products, whether as a
result of competition, deployment of fiber cable, technological change or
otherwise, could
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have a material adverse effect on the Company's operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Products."
Future Operating Results Subject to Fluctuation
The Company's operating results may fluctuate in the future as a result
of a number of factors, including the timing of orders from, and shipments to,
major customers, the timing of new product announcements by the Company or its
competitors, variations in the Company's sales channels or the mix of products
it sells, changes in pricing policies by the Company's suppliers, the
availability and cost of key components, the timing of personnel hirings, the
market acceptance of new and enhanced versions of the Company's products and the
timing of final product approvals from any of the Regional Bell Operating
Companies ("RBOC's"). Further, the Company's expense levels are based in part on
expectations of future revenues, and the Company has been significantly
increasing and intends to continue to significantly increase operating
expenditures and to increase inventories as it expands its levels of operations.
The Company anticipates that the rate of new orders may vary significantly from
month to month. Consequently, if anticipated sales and shipments in any quarter
do not occur when expected, operating expenses and inventory levels could be
disproportionately high, and the Company's operating results for that quarter,
and potentially future quarters, would be adversely affected.
Competition
Competition in the Company's markets is intense, and the Company
expects that competition will increase. Many of the Company's potential
competitors have substantially greater name recognition and technical, financial
and marketing resources than the Company. There can be no assurance that the
Company will have the financial resources, technical expertise or marketing,
distribution and support capabilities to compete successfully in the future.
Competitive pressures could reduce demand for the Company's products, cause the
Company to further reduce prices on its existing products, increase expenses or
cause delays or cancellations of customer orders, any one of which could
adversely affect the Company's business and results of operations.
The Company's most significant domestic competitors are ADTRAN, Inc.
("ADTRAN") and ADC Telecommunications, which offer High-bit-rate Digital
Subscriber Line ("HDSL") systems and have often competed with the Company on the
basis of price. The Company may also face competition from the licensees of its
own HDSL technology. Specifically, the Company and Alcatel Network Systems, Inc.
("Alcatel") have granted each other royalty-free cross licenses of current
PairGain HDSL technology and Alcatel's current Network Management Software.
Many companies have introduced or announced xDSL-based products,
including both T1 and E1 products, including HDSL chips currently offered by
Brooktree Corporation ("Brooktree"), the former supplier of the Company's SPAROW
I chip, Level One Communications ("Level One") and Metalink. Other companies
that offer xDSL-based products include Ascend, ADTRAN, Westel, Amati and Cisco.
The Company also faces significant competition from providers of other
technologies used by private network users to transmit information, including
fiber and conventional repeatered T1 lines. The Company expects that additional
companies will introduce competitive products in the future, and there can be no
assurance that the Company will continue to compete successfully in the future.
See "Business--Sales and Marketing and Customer Support" and "--Competition."
All manufacturers of products based on HDSL technology face competition
from fiber optic and conventional repeatered systems as alternate solutions for
the delivery of T1, E1 and other high-bandwidth services to end users. As
telephone companies continue to install fiber cable and conventional repeatered
T1 systems to provide high-bandwidth service in local subscriber loops, the
demand for HDSL products may decline. Further, the deployment of fiber to
replace existing HDSL installations will result in the availability of those
existing HDSL systems for installation elsewhere and may adversely affect future
demand for HDSL products. See "Business--Industry Background" and
"--Competition."
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Dependence on Suppliers and Subcontractors
Certain components used in the Company's HDSL products are currently
purchased from a single source (including the Company's SPAROW II chip) and
others are available from a limited number of sources. In the past, the Company
has experienced delays in the receipt of certain of its key components, which
have resulted in delays in product deliveries. There can be no assurance that
delays in key component and product deliveries will not occur in the future. The
inability to obtain sufficient key components as required, or to develop
alternative sources if and as required in the future, could result in delays or
reductions in product shipments to the Company's customers. Any such delays or
reductions could have a material adverse effect on the Company's reputation and
customer relationships which could, in turn, have a material adverse effect on
the Company's business and results of operations. In addition, the Company uses
third-party subcontractors for the manufacture of its products. This reliance on
third-party subcontractors involves several risks, including the potential
absence of adequate capacity, the unavailability of or interruptions in access
to certain process technologies and reduced control over product quality,
delivery schedules, manufacturing yields and costs.
Shortage of raw materials or production capacity constraints at the
Company's subcontractors could negatively affect the Company's ability to meet
its production obligations and result in increased prices for affected parts.
Any such reduction may result in delays in shipments of the Company's products
or increases in the price of components, either of which could have a material
adverse impact on the Company. See "Business--Manufacturing."
Customer Concentrations
Aggregate sales to local telephone companies affiliated with Bell
Atlantic, BellSouth, NYNEX, Pacific Telesis, and SBC Communications (formerly
Southwestern Bell) accounted for approximately 59%, 63% and 66% of the Company's
total revenues for 1996, 1995 and 1994, respectively. As a result of the
Company's dependence on its largest customers, the Company's future success will
significantly depend upon the timeliness and size of future purchase orders, if
any, from its largest customers, the product requirements of such customers, the
financial and operational success of such customers, and in particular, the
success of such customers' services deployed using the Company's products. The
Company's sales to its largest customers have in the past fluctuated and may in
the future fluctuate significantly from quarter-to-quarter and year-to-year. The
loss of any such customer or the occurrence of any such sales fluctuations could
have a material adverse effect on the Company's business and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business--Customers."
Dependence on New Markets and Technologies
The Company is evaluating new applications of high-speed copper
transmission technologies, is investing significant corporate resources in the
development of Asymmetric Digital Subscriber Line ("ADSL") technology, and
expects to devote significant additional resources to the development of other
new technologies in the future. In addition, the Company does not expect to
generate significant revenues from ADSL products in 1997, and there can be no
assurance that the Company will ever generate significant revenues from ADSL
products. There can be no assurance that such technologies will be viable or
that markets for such technologies will develop. Any failure in the development
of new markets and technologies could have a material adverse effect on the
Company's business. "Business--Company Strategy" and "--Product Development."
Rapid Technological Change and Dependence on New Products
The market for the Company's products is characterized by rapid
technological advances, evolving industry standards, changes in end user
requirements and frequent new product introductions and enhancements. The
introduction of xDSL products involving superior technologies or the emergence
of alternative technologies or new industry standards could render the Company's
existing products, as well as products currently under development, obsolete and
unmarketable. The Company believes its future success will depend in part upon
its
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ability to continue, on a cost-effective and timely basis, to enhance its xDSL
products, develop and introduce new products for the xDSL market and other
markets, meet changing customer needs and achieve broad market acceptance for
its products. There can be no assurance that the Company will be able to respond
effectively to technological changes or new product announcements, that the
Company will be able to successfully develop and market new products or product
enhancements or that such products or enhancement will achieve market
acceptance. Any failure by the Company to anticipate or respond on a cost
effective and timely basis to technological developments, changes in industry
standards or end user requirements, or any significant delays in product
development or introduction, could have a material adverse effect on the
Company's business. Further, there are physical limits to the speed at which
transmissions can travel over copper wire, and the Company's copper-based xDSL
products will not be a viable solution for customers requiring service at
performance levels beyond the limits of copper wire. See "Business--Company
Strategy" and "--Product Development."
Need to Generate International Sales
To date, sales of the Company's products outside of the United States
and Canada have been limited. The Company's ability to meet its objectives will
require it to generate significant international sales in 1997 and beyond.
International business is subject to risks in addition to those inherent in the
Company's North American business including substantially different regulatory
requirements in different jurisdictions, varying technical standards, tariffs
and trade barriers, political and economic instability, reduced protection for
intellectual property rights in certain countries, difficulties in staffing and
maintaining foreign operations, difficulties in managing distributors,
potentially adverse tax consequences, foreign currency exchange fluctuations,
the burden of complying with a wide variety of complex foreign laws and treaties
and the possibility of difficulties in collecting accounts receivable and
increased days sales outstanding. There can be no assurance that the Company
will be able to generate significant international sales, or establish new
strategic marketing relationships in the future. In addition, in the event the
Company is successful in doing business outside of North America, the Company
may also face economic, political and foreign currency situations that are
substantially more volatile than those commonly experienced in the United States
and other international markets. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's business and
results of operations.
Proprietary Technology
The Company's success and future revenue growth will depend, in part,
on its ability to protect trade secrets, obtain or license patents and operate
without infringing on the rights of others. Although the Company regards its
technology as proprietary, it has limited patents on such technology. The
Company relies on a combination of technical leadership, trade secrets,
copyright and trademark law and nondisclosure agreements to protect its
unpatented proprietary know-how. However, there can be no assurance that such
measures will provide meaningful protection for the Company's trade secrets or
other proprietary information. Moreover, in the absence of patent protection,
the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technology. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. The Company is also subject to
the risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others. From time to time the Company has
received claims of infringement of other parties' proprietary rights, although
the Company is not party to any pending intellectual property litigation. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future or that any such claims will not result in
costly litigation or require the Company to obtain a license to intellectual
property rights of such parties, regardless of the merit of such claims. No
assurance can be given that any necessary licenses will be available or that, if
available, such licenses can be obtained on commercially reasonable terms. See
"Business--Proprietary Rights."
Dependence on Key Personnel
The success of the Company is dependent in large part on two of its
founders, Howard S. Flagg and Benedict A. Itri, on its Chairman and Chief
Executive Officer, Charles S. Strauch, and on other key management and technical
personnel, the loss of one or more of whom could adversely affect the Company's
business. The Company does not have employment contracts with any of its
executive officers. In addition, the Company believes
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that its future success will depend in large part upon its continued ability to
attract, retain and motivate highly skilled employees, who are in great demand.
There can be no assurance that the Company will be able to do so.
Management of Expanding Operations
The Company has experienced a period of significantly expanding
operations and headcount, which has placed, and will continue to place, a
significant strain on the Company's personnel and other resources. The Company's
ability to manage any future increases in the scope of its operations or
headcount, should they occur, will depend on significant expansion of its
manufacturing, research and development, marketing and sales, management and
financial and administrative capabilities. The failure of the Company's
management to effectively manage any expansion in its business could have a
material adverse effect on the Company's business and results of operations.
Reliance on Primary Manufacturing Facilities
The Company historically conducted virtually all final assembly and
final test functions at its manufacturing facility in Tustin, California. In
1996, the Company entered into an agreement to have its PG-2 products
manufactured, on a turnkey basis, by Jabil Circuits at Jabil's St. Petersburg,
Florida facility. Any extended interruption of operations at either of these
facilities could have a material adverse effect on the Company's business and
results of operations.
Capital Requirements
The Company's capital requirements will depend on many factors,
including the levels at which the Company maintains inventory, the continued
market acceptance of the Company's products, growth in unit sales volume of
HiGain products, the extent to which the Company invests in new technology and
improvements to its existing xDSL technology, the marketing expenditures
associated with launching new products and maintaining a competitive position in
the marketplace and the response of competitors to products based on the
Company's technology. 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. No assurance can be given that additional financing will be
available or that, if available, it can be obtained on terms favorable to the
Company and its stockholders.
INDUSTRY BACKGROUND
In recent years, demands on the telephone infrastructure have prompted
telephone companies to improve the reliability and increase the speed of
transmission over telephone networks. Telephone networks have evolved from
systems based entirely on low speed analog communication over copper wires to
fiber optic backbones running throughout the interexchange carrier and local
exchange carrier networks. These fiber optic backbones permit digital
communication of much greater volumes of data with greatly enhanced reliability
and increased speed throughout the interexchange network and among the local
carriers. However, the "last mile," the local subscriber loop through which
telephone services are delivered from local carriers to end users, continues to
be predominantly characterized by low speed analog transmission over copper
wires.
The following diagram depicts the public telephone network
infrastructure:
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[DIAGRAM OF INFRASTRUCTURE]
The quality of telephone service to end users is determined by the
least reliable and slowest link in the network, and the traditional analog
infrastructure was not designed to provide high-speed, high-data capacity
service to end users. However, end users are increasingly demanding higher speed
data transmission for applications such as Internet access, telecommuting,
remote LAN (local area network) access, video conferencing and wide area
networking, which includes communications among computers and telephone systems.
Telephone service carriers are therefore facing increasing pressure to install
digital telecommunications services in the "last mile." Digital transmission has
distinct advantages over analog transmission, including increased speed, higher
reliability and better quality. Installing digital service facilities also
provides telephone companies worldwide with the foundation to offer their
customers high-speed video and multimedia services. In addition, international
carriers, especially those in developing countries where the copper wire
infrastructure is less extensive, are facing a growing demand for digital
service and are deploying it to provide multiple voice circuits (telephone
lines) rather than the high-speed services requested in the United States.
Competitive pressure from alternate carriers has further accelerated
the telephone companies' deployment of digital service in the "last mile."
Unlike public telephone companies, these alternate carriers are not required to
provide universal service and instead may choose to serve only those customers
with high demand for digital services, an important market targeted by the
telephone companies due to the higher rates and increased usage associated with
these services. By installing primarily fiber cable, these alternate carriers
have provided short delivery intervals and high quality service, which has
enabled them to compete effectively with the local telephone companies for these
high demand customers. As a result of this competitive pressure, the telephone
companies face an increased need to provide digital service approaching the
quality of fiber optic cable quickly and efficiently.
The basic building blocks of today's high-speed digital
telecommunications networks in North America are T1 lines, which transmit data
at 1.544 Mbps, the equivalent of 24 voice circuits for simple telephone service.
E1 lines, the international functional equivalent of T1 lines, operate at 2.048
Mbps. Telephone companies are seeking cost effective methods of providing T1
service to meet customer demands for high-speed digital transmission. By
providing T1 service, telephone companies can provide the means for increased
customer usage which, in turn, expands the revenue base for these telephone
companies. One way that telephone companies have installed T1 service has been
to deploy fiber cable. However, deploying fiber cable in the "last mile" is
capital and labor intensive, so it is only cost efficient if a number of T1
lines are requested in the particular subscriber loop. A fiber system may be
capable of transporting from four to over one hundred T1 lines. The equipment
required at a customer's premises alone can cost a few thousand dollars for a T1
fiber optic system with four lines to tens of thousands of dollars for higher
capacity systems. In either case, significant additional costs are involved in
installing fiber cable in existing conduit or burying new cable. Installing
fiber cable in the "last mile" is also time consuming, often taking a carrier
weeks or months to complete, depending on the location to which the fiber is
deployed, the timeliness of the carrier's success in obtaining the necessary
rights of way and the extent to which the existing conduit is obstructed or
damaged.
As an alternative to fiber deployment, telephone companies use
repeatered T1 lines, which require them to "condition" the existing copper wires
to meet T1 or E1 standards. Conditioning copper wires is accomplished through a
time consuming, capital and labor intensive installation process, which involves
the removal of bridged taps and the installation of repeaters. Repeaters are
devices required about every 3,000 to 5,000 feet to regenerate
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the signal as it passes along the line. To condition existing copper wires,
telephone company engineers must (i) identify which copper wires are to be used
(only three to four pairs of wires in a single cable can be used due to
"crosstalk," or interference, from other pairs of wires in the same cable), (ii)
define where repeaters must be installed, (iii) allocate space in repeater
housings and manholes for the necessary equipment and (iv) locate bridged taps
(wire leads from previously disconnected lines) for removal. Technicians,
following the design of the engineers, must then go to each location to remove
the bridged taps, install the repeaters and add new repeater housings when
needed. Next, each repeater span must be measured by the engineers to ensure
that the intent of the design is achieved. The cost of installing a repeatered
T1 line varies widely depending on the amount of conditioning that the copper
wires require, including the number of repeaters that need to be installed.
Generally, the cost of installing a repeatered T1 line on up to 12,000 feet of
unconditioned copper wire can range from approximately $2,500 to $8,000. While
often deployed as an alternative to fiber, the transmission error rates on
repeatered T1 lines are significantly higher than fiber, which is particularly
detrimental for certain data and video transmissions.
In the late 1980s, Bellcore, the research and development entity
jointly created and funded by the seven RBOCs for the development of new
technologies, developed the parameters for HDSL technology as a high quality,
but lower cost and more efficient method for installing T1 lines in the "last
mile" on copper. HDSL utilizes high-speed digital signal processing technology
to create a mathematical model of copper wire that allows the receiver to
precisely compensate for the predictable distortion that the wire imparts on the
digital signal sent from the distant end.
The following diagram depicts a comparison of a conventional repeatered
T1 line with an HDSL circuit:
[COMPARISON DIAGRAM OF T1 LINE WITH HDSL CIRCUIT]
The Company believes that HDSL technology offers a significant
opportunity to meet end user demand for high-speed digital telecommunications
services in the local subscriber loop. HDSL technology has a number of
advantages over both fiber cable and conventional repeatered T1 systems,
including lower installation costs and faster deployment time. There are,
however, certain situations in which HDSL technology is disadvantaged relative
to these alternative solutions. For example, if a number of T1 lines are
requested at a single location, fiber cable provides the highest quality digital
transmission and may be more cost effective to deploy. However, because HDSL
technology utilizes the existing copper wire infrastructure, it can be deployed
in one or two days instead of weeks or months. HDSL systems operate over copper
wire without the removal of bridged taps and can tolerate crosstalk, resulting
in reduced engineering design time and lower costs. HDSL systems also eliminate
the need for repeaters, thereby reducing a carrier's initial capital
expenditures and its subsequent maintenance costs for trouble shooting. HDSL
provides higher quality digital transmission than repeatered copper and
approaches the low error rate of fiber optic cable.
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PAIRGAIN STRATEGY
The Company pioneered the development of a very large scale integration
("VLSI") implementation of HDSL technology and is currently a leading provider
of telecommunications products based on xDSL technology. The Company's strategy
for expanding the market for its products consists of three primary elements:
- Maintain Technology Leadership. The Company believes that it is a leader
in xDSL technology and systems. The Company's engineering organization
includes a core development team focused on applying digital signal
processing ("DSP") techniques to telecommunications products. The Company
leverages this core DSP expertise with an in-house VLSI design group that
designs advanced VLSI components. The Company's in-house VLSI design
group was the first to deliver an HDSL transceiver on a single chip (the
SPAROW I chip). The Company believes that the close coordination between
its VLSI design and product development teams enables it to reduce its
time to market for new products. The engineering organization places the
highest priority on maintaining the cost and feature competitiveness of
the Company's HDSL product line through aggressive cost reduction and
introduction of new additions to the HiGain product family. As an
example, the Company's SPAROW II chip provides lower power consumption
and lowers the individual device cost. The Company is also putting
significant effort into Asymmetric Digital Subscriber Line ("ADSL"), a
technology for higher speed transmission over copper wire. The Company
believes that maintaining its leadership in technology for high-speed
digital transmission over copper wire is critical to its ability to build
and maintain strong relationships with the RBOCs and other customers and
to achieve leadership in new markets.
- Leverage Core Technologies Into New Applications. The Company has
developed its Campus product line based upon the same core HDSL
technology utilized in the Company's HiGain products, which it markets to
private network users such as universities, hospitals, military bases,
corporate complexes and other campus environments. In addition, potential
demand for the delivery of advanced communication services to residential
and business customers, including high-speed Internet access, advanced
video services such as pay-per-view movies, interactive video games,
educational video and many other on-demand services, may present a
significant new market opportunity for products incorporating the
Company's DSP and copper transmission expertise. See "-- Products" and
"-- Product Development."
- Develop OEM Opportunities. The Company intends to pursue opportunities to
provide products and chipsets to manufacturers of telecommunications and
data communications equipment. The Company believes that it can provide
added value to third-party products through higher levels of integration
with other elements of wide area networking infrastructures, such as
bridges, routers and multiplexers. The Company also believes an
opportunity exists to utilize its xDSL technology to connect local
wireless communication systems to local subscriber loops.
PRODUCTS
Core Technology
The core technology for the Company's HiGain and Campus product lines
is based on HDSL and was developed from the Company's dual core competencies in
digital signal processing and microelectronics. HDSL allows the transmission and
receipt of digital data at high speed (768 kbps) on a single twisted pair of
copper wires to attain an aggregate bidirectional bit rate of 1.544 Mbps, the
standard T1 rate, over two twisted pairs of copper wires. HDSL permits the
delivery of an outbound signal on the same pair of wires on which the return
signal is received. The transmitted signal is canceled by the receiver by
precisely predicting the amount of signal "echo" and subtracting it from the
overall input signal. HDSL-based products tolerate crosstalk and operate not
only on continuous unobstructed pairs of wires, but also on cables with mixed
wire gauges and bridged taps.
The Company's unique implementation of HDSL technology stems from its
development of a special purpose digital signal processing integrated circuit.
This VLSI device, the SPAROW (Signal Processing Adaptive Receiver On Wire) chip,
operates at a speed of 250 million instructions per second, enabling it to
perform the extremely heavy numerical calculations required for the transmission
of signals at HDSL rates. The SPAROW chip
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has enabled the Company to significantly reduce the physical size of its
HDSL-based products. Two SPAROW chips are used in each of the Company's
HDSL-based products, one for each twisted pair of copper wires entering the
unit. The SPAROW I chip was replaced by the Company's SPAROW II chip which
provides all of the features of the original SPAROW I chip, costs less to
produce and consumes less power.
The Company's microelectronics team has design and development
capabilities that include silicon compilers which allow the Company to develop
chips that are at performance and complexity levels beyond what is achievable on
standard ASIC design systems. The Company has also leveraged its
microelectronics product capabilities into the HiGain and Campus product lines.
The Company is currently focusing its resources on further cost and performance
improvements in HDSL and also is putting significant effort into the new ADSL
technology, for which a highly integrated digital signal processor with over 1.2
million transistors (SPAROW II has 240,000 transistors) is being developed to
perform the Bellcore sanctioned discrete multi-tone transmission algorithms.
By utilizing its HDSL technology in different forms, the Company offers
products for different markets and varied applications.
HiGain Systems
The Company's HiGain systems are used by telephone companies to (i)
provide a T1 or fractional T1 link between the central office and a carrier's
remote hub and (ii) provide T1 or fractional T1 service in the local subscriber
loop between the central office or remote hub and the customer. A HiGain system
consists of two units: a circuit plug-in unit that mounts in a shelf located in
the central office or in a shelf in a remote hub and a unit that mounts at or
near the customer's location. The circuit plug-in unit mounts in standard
telephone company shelves alongside conventional transmission equipment, making
it easily deployable in almost every central office and remote hub.
HiGain systems are capable of providing T1 service over two twisted
pairs of copper wire of up to 12,000 feet in length over 24-gauge copper wire
and up to 9,000 feet over 26-gauge wire without the repeaters or complicated
engineering design required with repeatered T1 systems. According to Bellcore
and the RBOCs, approximately 85% of the business subscriber loops nationwide are
within these distances from the local central office. Each HiGain system
provides a single end user with the service of one T1 line, which is the
equivalent of 24 voice circuits for simple telephone service. An end user
requiring the capacity of multiple T1 lines will require an equivalent number of
HiGain systems.
The Company also provides HiGain systems in different forms to address
variances in customer installation and configuration requirements. The Company's
Doubler product regenerates the HDSL signal at the end of a wire to a HiGain
remote unit located a similar distance further on, allowing telephone companies
to increase the distance range of HDSL from 12,000 feet to 24,000 feet and
satisfy T1 demands by its more isolated customers. In addition, the Company has
also introduced a product which provides a T1 connection over shorter distances
requiring only one pair instead of two pairs of wire.
To ensure flexibility of installation, the Company's HiGain units are
available with a variety of shelf and mounting hardware, weather resistant
housings and connecting hardware. In addition, all HiGain remote units provide
self-diagnostic testing to detect failures and interface with the central office
alarm system. HiGain systems, consisting of two units, have a list price of
$1,445 per unit, although the Company generally sells such systems at a discount
which may exceed 60% to its high volume customers. The Company first shipped
units of its HiGain system to customers in June 1992. As of December 31, 1996,
the Company had shipped approximately 345,000 HiGain units.
ETSI
In order to provide digital E1 solutions to the Company's European
customers, including public carriers and private network operators, the Company
introduced the HiGain International Series. These products apply
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<PAGE> 11
HDSL-based technology in compliance with European Telecommunication Standards
Institute ("ETSI") requirements.
Campus Systems
The Company's Campus systems are xDSL transmission products designed by
the Company to meet the digital communications needs of organizations operating
their own private networks. Campus systems are reconfigured versions of the
HiGain product and provide high-speed digital connectivity over one or two
twisted pairs of copper wires between user premises in campus environments.
Examples of these environments include universities, hospitals, utility plants,
military bases, industrial parks and corporate complexes. The Campus systems
enable the interconnection of LANs, video conferencing, PBX extensions and many
other applications.
A Campus system consists of two base units that operate at T1, E1, 768
kbps or 384 kbps speeds and are compatible with a number of standard data
communications interfaces. These interfaces allow Campus systems to connect
directly to LAN bridges, routers, T1 multiplexers, PBXs, video conferencing
systems and other high-speed networking devices. A Campus system, consisting of
two base units and interfaces, has a list price of approximately $2,500 per base
unit, although certain customers receive significant discounts off of list
price. The Company first shipped Campus systems to customers in June 1993.
The Company enhanced the Campus family of products in late 1994 with
the Campus-Star(TM) access platform. The Campus-Star is a rack mountable module
that incorporates power supplies and SNMP network management capabilities along
with slots for up to 14 Campus unit equivalents. The use of the Campus-Star
platform is driven by the needs of data communications managers to incorporate
network management capabilities into their network components. PairGain has
further enhanced the Campus-Star to provide Ethernet bridging interfaces and
other high bandwidth interfaces. The Campus-Star is being positioned to provide
flexibility in supporting a broad range of access interfaces and is designed to
be a core element of the networking strategy of Campus data communications
managers. The Company continued to enhance the Campus family of products with
the introduction of the Campus-REX(TM) (Remote Ethernet eXpress), a full
bandwidth Ethernet remote bridge, providing transparent connectivity between
LANs without repeaters at a distance of up to five miles. It provides a 10BASE-T
port, one serial port, an embedded SNMP agent and IEEE 802. 1d transparent MAC
level bridging with Spanning Tree protocol support.
PG-2 Products
PG-2 was the Company's first commercial product and was delivered to
customers beginning in 1989. The PG-2 system allows telephone companies to
establish two analog transmission lines over a single twisted pair of copper
wires, where traditional technology only allowed the establishment of one line
over a single twisted pair of copper wires. PG-2 systems are used by telephone
companies to provide emergency service and additional line service to residences
and small businesses. The Company's PG-2 system can also be used to convert a
degraded analog copper pair to high-speed digital transmission. In the
international marketplace, where the copper infrastructure is less extensive,
these digital subscriber systems allow postal, telegraph and telephone companies
("PTTs") to expand telephone service without laying more copper lines.
A PG-2 system consists of a shelf-mounted line unit, located in the
central office, and a remote transceiver mounted near the subscriber premises.
The list price for the Company's PG-2 system is approximately $700 for two
transceivers, one at each end, although many customers receive discounts off of
list price.
The PG-2 system is fully approved by three RBOCs and has been accepted
by many of the independent telephone companies, including six of the large
independents. The Company's PG-2 products compete worldwide with products from a
number of telecommunications equipment manufacturers. The Company considers
itself to be at a competitive disadvantage in the international market for the
two channel digital subscriber carrier business served by its PG-2 system
because it lacks a local manufacturing presence, which results in price
disadvantages caused by import duties.
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<PAGE> 12
PG-Flex(TM) Systems
PG-Flex is a small subscriber carrier product. PG-Flex is a hybrid of
the Company's PG-2 and HDSL technologies and provides a system for delivering up
to 32 standard phone lines on two pairs of wire over an operating range of up to
12,000 feet. The Company markets the PG-Flex product to both international and
domestic telephone companies and expects significant competition in both
markets. The Company began production shipments of PG-Flex systems in 1996.
OEM Products
The Company has formed an OEM sales group to establish relationships
with manufacturers to integrate PairGain's xDSL technologies into their own
products.
Megabit Access Products
The Company's two megabit access products, EtherPhone(TM) and Megabit
Modem(TM), enable telephone companies to deliver high-speed data to the home for
Internet and on-line service access, telecommuting, and work-at-home
applications, including remote LAN access, over ordinary telephone lines. These
products make use of the existing copper wire infrastructure and are intended to
allow carriers and other access providers to compete in the remote office and
residential multimedia access markets. These products provide a higher level of
performance than existing low-speed analog modems and Integrated Services
Digital Network ("ISDN") technology allowing data to be delivered at rates of
704 kbps to 2.5 Mbps over ordinary telephone lines. The Company introduced its
megabit access products in January of 1996 with plans for future announcements
in 1997.
PRODUCTS UNDER DEVELOPMENT
PG-Plus(TM)
In 1997, the Company intends to introduce PG-Plus, a small subscriber
carrier system based on HDSL technology. The PG-Plus system can be configured to
support four or six channels for plain old telephone service ("POTS") or ISDN
over one unconditioned copper telephone line at distances up to 21,000 feet. It
is intended to offer low cost solutions to business and residential users who
require additional voice, fax or data lines, or in emergency situations for
temporary voice communications. The PG-Plus system consists of central office
terminal and remote terminal equipment along with the alarm unit which is the
central point of communication within the PG-Plus system.
ADSL
The Company has a significant engineering development program in
progress to develop a low cost, high performance module to perform ADSL
transmission. ADSL is designed to allow existing telephone lines to deliver
high-speed data and, in the future, video-on-demand services and provides a
high-speed (up to 6 Mbps) channel to the customer from the telephone company's
central office and a medium speed (up to 640 kbps) upstream channel to the
central office from the customer. Although telephone companies have focused on
deploying fiber and hybrid fiber and coaxial cable networks for delivering these
advanced services, the Company believes the high cost and long implementation
periods that will be involved in setting up these networks will provide a window
of opportunity for equipment that can deliver similar capabilities on ordinary
telephone wires.
In the first quarter of 1997, the Company plans to introduce its first
ADSL modem using GlobeSpan Technologies, Inc.'s Carrierless Amplitude Phase
modulation ("CAP") technology. The Megabit Modem C1500 will provide asymmetric
bandwidth and will require almost no configuration by the subscriber.
11
<PAGE> 13
CUSTOMERS
The Company sells its HiGain, PG-2, PG-Flex, megabit access and ADSL
products primarily into the public network market and its Campus products
primarily into the private network market. The Company uses its direct sales
force to market its products to the public network market in the United States
and Canada. The Company markets its domestic Campus products and all
international products through direct sales and distributors.
Public Networks
The public network market consists of the seven RBOCs and their local
telephone company affiliates, as well as independent telephone companies and
international carriers.
RBOCs. Prior to selling products in volume to a local telephone company
affiliated with an RBOC, a vendor must first receive approval of its product
from the RBOC. Although the approval process for a new product varies somewhat
among the seven RBOCs, the process generally consists of the following three
phases:
- Laboratory Evaluation. The product's functions and performance are tested
against all relevant industry standards. This process can take from two
weeks to three months, or longer, depending on a variety of factors.
- Field Trial. A number of actual telephone lines are equipped with the
product for live operation in a field trial lasting from three weeks to
three months, or longer. These field trials are for evaluating
performance, assessing the ease of installation and establishing
troubleshooting procedures. The RBOCs grant conditional approval upon
successful completion of a new product's field trial, enabling field
personnel to order limited quantities of the product under one-time
approvals.
- Final Approval and Contract. Prior to final approval, which may take from
one to four months, or longer, the RBOC develops and implements a variety
of procedures that cover ordering, stocking, installation, maintenance,
returns and all other activities associated with use of the product.
All seven U.S. RBOCs and Bell Canada have approved the Company's HiGain
products. In addition, three RBOC's have approved the Company's PG-2 system.
Sales to local telephone companies affiliated with Bell Atlantic, BellSouth,
NYNEX, Pacific Telesis and SBC Communications (formerly Southwestern Bell) in
each case accounted for more than 9% of the Company's total revenues in 1996 and
sales in the aggregate to local telephone companies affiliated with these five
RBOCs accounted for approximately 59% of the Company's total revenues in 1996.
Independent Telephone Companies. There are approximately 1,500
telephone companies in the United States that are unaffiliated with any of the
RBOCs. The Company has targeted approximately 50 of the largest independent
telephone companies as potential customers for its carrier products. Although
the independent telephone company market does not present as large an
opportunity as the RBOC market, the Company's experience has been that the
independents are often more receptive to new technology. As a result, the
approval process for new technology is often less time consuming. Currently, US
Sprint and GTE, the largest independent telephone companies, and a number of the
smaller independents have approved and deployed the Company's HiGain system.
International Carriers. In most international markets there is one
telephone company per country; there are no alternate carriers and no
independents. Typically these PTTs are highly regulated, government-owned
agencies that have an even more rigorous approval process for new technology
than the RBOCs. While the international carrier network systems are
architecturally similar to the domestic public networks, E1 service is not
deployed as extensively in local subscriber loops internationally as T1 service
is in local loops domestically. The
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<PAGE> 14
demand for E1 service has grown, however, and international carriers are
deploying it primarily to provide multiple voice circuits rather than the
high-speed service requested in the United States.
Private Networks
Customers for the Company's Campus products, first introduced in June
1993, include universities, hospitals, military bases and other government
installations, corporate complexes and other campus-like environments with
private network systems. The Company has shipped over 18,000 units of its Campus
product to such customers. Certain of such customers, none of which individually
accounted for more than 1% of the Company's total revenues in 1996, are
identified below:
Alyeska Pipeline Service Co. Louisiana State University
American Electric Power Military Department of Indiana
Bethlehem Steel Southern Illinois University
Burlington Northern Railroad Stanford University
Elmendorf Air Force Base State of Alaska
Fort Carson - U.S. Army Unisys Corporation
Inland Steel Company United States Army
ITT Federal Services Corp. United States Marine Corps.
Kaiser Foundation Health Plan University of Illinois
Langley Air Force Base Whiteman Air Force Base
SALES, MARKETING AND CUSTOMER SUPPORT
Sales and Marketing
The Company's direct sales force markets its products to the RBOCs and
their local telephone company affiliates and to the larger independent telephone
companies by working closely with the planning, switching and transmission
departments of such customers. The Company sells to other independent carriers
and owners of private networks through direct sales, telesales and distributors.
The Company's North American sales personnel are located in the
following areas: California, Florida, Georgia, Utah, Texas, Washington, New
Hampshire, Illinois, New Jersey, New York, North Carolina, Oregon,
Massachusetts, Maryland, Missouri, Washington, D.C., and, in the provinces of
Alberta and Quebec. The Company sells its products outside of North America
through its own sales force based in the United States, Switzerland, the United
Kingdom, Hong Kong and China, and a network of international data communications
equipment distributors.
In addition to the specific sales efforts directed at its public and
private network customers, the Company's marketing activities include
participation in industry trade shows and conferences, distribution of sales and
product literature, media relations, advertising in trade journals, direct mail
and ongoing communications with its customers and industry analysts.
Customer Support
Service, repair, and technical support of the Company's products are
performed primarily in-house. Additionally, field service personnel are located
in California, New York, Maryland, Georgia, Florida, Illinois and Ontario,
Canada. The Company offers technical support to its customers on a
24-hours-a-day, 7-days-a-week basis via an 800 hotline and through paging
systems for all support personnel. The Company's product warranties range
between three and five years. Current products are sold with a five year
warranty.
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<PAGE> 15
PRODUCT DEVELOPMENT
The Company believes that its future success depends on its ability to
maintain its technological leadership through enhancements of its existing
products and development of new products that meet a wide range of customer
needs. Accordingly, the Company intends to continue to make substantial
investments in product development.
The Company has organized its product development efforts into three
main groups: microelectronics, software development and hardware development.
Within the microelectronics group, a substantial majority of the Company's
efforts are devoted to the development of ADSL, the enhancement of
microelectronics used in the Company's HiGain and Campus product lines and the
development of microelectronics products based on the Company's existing
products. Within the software development group, the Company's efforts are
devoted to the development and enhancement of network management software and
protocol compliance for its products and the development of firmware for
products such as PG-Flex, PG-Plus and ETSI.
The remainder of the Company's research and development is devoted to
the development, improvement and enhancement of new and existing hardware
products and is directed at the following:
- Cost Reduction. The Company continuously reviews the design and
manufacturing process of its products to determine areas of product cost
savings or enhanced product quality. This review includes, among other
things, an examination of the product design to determine if further
improvements can be made in the VLSI components.
- Product Line Extensions. The Company seeks to extend its existing product
lines through product modifications and enhancements in order to meet the
needs of its different customers and their applications. Products
resulting from the Company's product line extension efforts include the
PairGain Management System for management of HiGain products, long range
384 kbps Campus systems, single pair T1 systems, and the HiGain Doubler
product.
- New Technology. The Company explores new transmission technologies to
determine whether they represent an opportunity for products
incorporating the Company's DSP and copper transmission expertise.
During 1996, 1995 and 1994, research and development expenses were
approximately $18.6 million, $10.7 million and $5.8 million, respectively. All
of the Company's research and development expenses were charged to operations as
incurred.
MANUFACTURING
The Company's manufacturing operations consist primarily of quality
control, functional testing, final assembly, burn-in and shipping. The Company
uses domestic independent third-party contract assembly and test companies on
primarily a consignment but also on a turnkey basis for circuit board assembly
and in-circuit testing for all of its products. The Company conducts virtually
all final assembly and final test functions at its facility in Tustin,
California. In addition, the Company performs extensive burn-in, testing and
inspection of all of its products prior to shipping them to customers. Product
quality and reliability are the Company's prime concerns in all phases of the
manufacturing process. Quality control is maintained through incoming inspection
of components and subassemblies, auditing of consignment and turnkey
contractors, in-house final assembly and test functions, plus a final shipping
inspection of all products. During 1996, the Company entered into an agreement
to have its PG-2 products manufactured, on a turnkey basis, by Jabil Circuits at
Jabil's St. Petersburg, Florida facility. Under the terms of this agreement,
Jabil will manufacture, test, package and ship these products directly to the
Company's customers.
In April 1996 the Company achieved ISO 9001 certification for its
manufacturing operations location in Tustin, California. ISO 9000 Quality
Standards were developed by the International Organization for Standardization.
It is a quality system standard for ensuring a total quality management system
in engineering and
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<PAGE> 16
manufacturing and is becoming an accepted prerequisite for international
trade. ISO 9001 is the most comprehensive standard, covering design and
development as well as production, installation and service.
The Company currently procures all of its components from outside
suppliers, either directly or through its consignment and turnkey contractors.
The Company generally purchases and stores the more expensive components at its
location and allows its assembly and test subcontractors to purchase and store
other necessary components. In procuring components, the Company and its
subcontractors rely upon a number of suppliers that are the sole source for
certain of the components. One such sole supplier part is the SPAROW II chip.
Although the Company has utilized its VLSI expertise to design its SPAROW II
chip in a manner that will facilitate transition to multiple sources of supply,
such a transition could result in delays or reductions in product shipments
which, in turn, could have a material adverse effect on the Company's customer
relationships and operating results.
The Company's backlog at December 31, 1996 was approximately $5.0
million. The Company includes in backlog all firm purchase orders for products
regardless of their ship date. Because of the quick turnaround that the
Company's customers expect on their orders, and because of the possibility of
customer changes in delivery schedules or cancellation of orders, the Company's
backlog as of any particular date may not be indicative of actual revenues
expected for any future period.
The Company's products are subject to FCC regulations regarding
emission of electromagnetic energy, which may interfere with other equipment.
All of the Company's currently commercially available products have been tested
and comply with the relevant FCC regulations. The Company's commercially
available products that are sold for use at the end user's premises, such as the
HiGain remote unit and the Campus products, also comply with all required UL
safety specifications.
COMPETITION
Competition in the Company's markets is intense and the Company expects
that competition will increase. Many of the Company's potential competitors have
substantially greater name recognition and technical, financial and marketing
resources than the Company. The Company's most significant domestic competitors
are ADTRAN, Inc. and ADC Telecommunications, which offer HDSL systems and have
often competed with the Company on the basis of price. The Company may also face
competition from the licensees of its own HDSL technology. Specifically, the
Company and Alcatel have granted each other royalty-free cross licenses of
current PairGain HDSL technology and Alcatel's current Network Management
Software.
Several companies have developed competing HDSL technology and
products, including HDSL chips currently offered by Brooktree, the former
supplier of the Company's SPAROW I chip, Level One and Metalink. The Company
also faces more competition from a consortium of telecommunications supply
companies with HDSL products based on the chip designed by Level One. In
addition, Brooktree has the unrestricted right to sell the Company's SPAROW I
chip in component form; however, the Company has developed and is currently
shipping its enhanced SPAROW II chip to which Brooktree does not have access.
The Company expects that additional companies will introduce competitive
products in the future.
Many companies have introduced or announced xDSL-based products,
including both T1 and E1 products. Such companies include ADTRAN, Inc., Nokia,
Ericsson, Orkit, Tadiran, ECI Telecom and a number of lesser known manufacturers
worldwide. The Company also faces significant competition from providers of
other technologies used by private network users to transmit information,
including fiber and conventional repeatered T1 lines. To the extent fiber or
repeatered lines are used, the market for the Company's Campus products may be
reduced.
The market for the Company's PG-2 products (a product that does not
utilize HDSL technology) is also characterized by intense competition.
Competitive products are offered by several telecommunications device
manufacturers, many of which have substantially greater financial, technical,
marketing and sales resources than the Company.
15
<PAGE> 17
End users want high bandwidth services, such as T1/E1, Internet and
corporate Intranet access, telecommuting and remote LAN access now. xDSL
technologies provide solutions to these problems using the existing copper
telephone network, allowing telecommunications carriers and companies with
private networks to rapidly meet this demand without costly, time-consuming
re-wiring and fiber installation. All manufacturers of products based on xDSL
technology face competition from fiber optic, conventional repeatered systems,
ISDN or cable modems as alternate solutions for the delivery of high-speed
services to end users. As telephone companies continue to install fiber cable
and conventional repeatered T1 systems to provide high-speed service in local
subscriber loops, the demand for many xDSL products may decline. Further, the
deployment of fiber to replace existing xDSL installations will result in the
availability of those existing xDSL systems for installation elsewhere and may
adversely affect future demand for xDSL products.
The Company believes that the principal competitive factors in its
markets are conformance to standard transmission formats, size, price,
performance, product features, reliability, technical support and marketing
expertise. In addition, the Company believes that, with respect to its products,
product reputation and the ability for the customer to deploy the Company's
products in the existing copper telephone infrastructure, thereby generating
immediate revenues, and the speed with which the Company can obtain approval
from the RBOCs for its products are important competitive factors. The Company
believes that it competes favorably with respect to all of these factors.
PROPRIETARY RIGHTS
The Company relies on a combination of technical leadership, trade
secret, patent, copyright and trademark law and nondisclosure agreements to
establish and protect its proprietary rights in its products. Currently, the
Company holds two United States patents and has an application pending for one
additional patent. The Company also has certain registered and other trademarks.
The Company believes that, because of the rapid pace of technological change in
the networking industry, patent and copyright protection are less significant to
the Company's competitive position than factors such as the knowledge, ability
and experience of the Company's personnel, new product development, market
recognition and ongoing product maintenance and support.
EMPLOYEES
As of December 31, 1996, the Company employed 486 persons, including
185 in manufacturing, 89 in sales and marketing, seven in customer service, 170
in engineering and 42 in finance and administration. The Company also employs a
number of temporary and contract employees. During the last quarter of fiscal
1996, the Company employed between 70 and 73 temporary employees, mostly in
manufacturing. None of the Company's employees is represented by a labor union
and the Company has experienced no work stoppages. The Company does not have any
employment contracts with any of its executive officers.
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<PAGE> 18
ITEM 2. PROPERTIES.
The Company's principal administrative, engineering, manufacturing,
sales and marketing facility is located in an approximately 75,000 square foot
building in Tustin, California, that is leased through February 29, 2000. In
addition, the Company has several other property leases, as detailed below:
<TABLE>
<CAPTION>
Approx.
Location Use Square Feet Expiration
--------------------------- ------------------------------------- ------------- -------------
<S> <C> <C> <C>
Tustin, California Engineering and marketing offices 15,000 07/31/99
Tustin, California Finance and marketing offices 5,000 06/30/97
Santa Ana, California Warehouse and distribution 20,000 04/14/98
Santa Ana, California Warehouse and distribution 5,000 monthly
Raleigh, North Carolina Research and development facility 20,000 08/31/01
Landover, Maryland Sales office 1,000 10/31/99
Basel, Switzerland Sales office 2,000 monthly
Hong Kong Sales office 1,000 06/15/98
</TABLE>
In January 1997, the Company leased an approximately 66,000 square foot
building adjacent to its principal facility in Tustin, California. The Company
plans to use this facility to consolidate its personnel and warehouse and
distribution presently located in other Tustin and Santa Ana locations and to
allow for its further expansion requirements. The new building is currently
being improved according to Company specifications to meet requirements for
warehouse space and research and development. Occupancy of the building is
anticipated to begin in June 1997. The Company believes that such facilities are
either adequate to satisfy its projected requirements, including its
requirements for production capacity, through 1997, or that suitable additional
space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS.
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
arose out of losses incurred by the Company in 1995 of approximately $15.8
million in connection with unauthorized trading of investments made by Mr.
Goldinger and Capital Insight on the Company's behalf. The derivative complaint
alleged causes of action for breach of fiduciary duty, abuse of control,
constructive fraud, gross mismanagement and waste of corporate assets. The
complaint sought 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. 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.
In September 1996, the Company and other parties to the derivative
suits described above executed definitive settlement agreements to settle and
dismiss the derivative suits. The Court approved the settlement on November 19,
1996. Under the terms of the settlement, the Company received $2.5 million from
a brokerage firm involved in processing the investments for Capital Insight, and
paid plaintiff's attorneys fees of $450,000. The impact of the settlement has
been recorded in the Company's financial statements for the year ended December
31, 1996, included in this Form 10-K beginning on page F-1.
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.
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<PAGE> 19
As has been reported in the public media, various government and
regulatory agencies (including the Securities and Exchange Commission and U.S.
Attorney) are, or have been, investigating the activities of Capital Insight and
Mr. Goldinger, including transactions with the Company, and the Company's
accounting therefor.
The Company does not maintain Directors and Officers liability
insurance. However, under the terms of its certificate of incorporation, the
Company indemnifies its directors and officers for damages and legal fees
arising from litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
A Special Meeting of Stockholders was held at the Company's offices at
14402 Franklin Avenue, Tustin, California 92780, on December 10, 1996 to vote on
the following matter:
To approve a proposal to amend Article IV A. of the Company's
Amended and Restated Certificate of Incorporation to increase the
authorized Common Stock of the Company from sixty million (60,000,000)
shares, par value $.0005 per share, to one hundred seventy-five million
(175,000,000) shares, par value $.0005 per share.
The proposal was approved. Results of the voting are shown below:
<TABLE>
<CAPTION>
For Against Abstain
-------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
15,923,501 479,743 19,043
</TABLE>
Following stockholder approval of the increase in authorized stock, the
Company declared a two-for-one stock split effected in the form of a 100% stock
dividend to stockholders of record on December 11, 1996. The stock split was
effective on December 18, 1996.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market on
the Nasdaq National Market under the symbol PAIR. As of January 31, 1997, there
were 64,527,013 shares of the Company's Common Stock issued and outstanding. The
number of stockholders of record at that date was 233. This number does not
account for Common Stock registered in street name. Accordingly, the actual
number of holders of record of the Company's Common Stock may be significantly
greater than the number indicated above. The following table sets forth, for the
fiscal periods indicated, the high and low sale prices for the Common Stock as
reported on the Nasdaq National Market. The market quotations set forth below
reflect inter-dealer prices, without retail markup, markdown or commissions, and
may not necessarily represent actual transactions. The Company has never paid
cash dividends and has no present intention of declaring a cash dividend for the
foreseeable future.
<TABLE>
<CAPTION>
QUARTERLY QUARTERLY
HIGH* LOW*
------------- -------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
First Quarter $ 6.66 $ 3.31
Second Quarter 6.03 4.41
Third Quarter 8.88 4.69
Fourth Quarter 14.00 6.94
YEAR ENDED DECEMBER 31, 1996
First Quarter $ 17.50 $ 9.75
Second Quarter 31.13 16.41
Third Quarter 41.50 19.50
Fourth Quarter 34.88 28.88
</TABLE>
On January 31, 1997, the last reported sales price for the Company's
stock was $40.94.
* All share prices have been adjusted for the June 18, 1996 and December 18,
1996 two-for-one stock splits.
19
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company as of December
31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 is
derived from audited consolidated financial statements of the Company included
elsewhere in this Annual Report. The selected consolidated financial data of the
Company as of December 31, 1994, 1993 and 1992 and for the years ended December
31, 1993 and 1992 is derived from audited consolidated financial statements of
the Company not included in this Annual Report. The following information should
be read in conjunction with the Consolidated Financial Statements of the Company
and the related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in separate sections of
this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- -------------- -------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 205,409 $ 107,224 $ 59,518 $ 36,307 $ 9,502
Income (loss) from operations 53,242 23,532 10,513 8,614 (2,000)
Unusual loss due to unauthorized trading of
investments by third parties -- (15,827) -- -- --
Settlement income related to unauthorized trading of
investments by third parties 2,500 -- -- -- --
Net income (loss) 36,603 1,056 8,567 7,612 (2,085)
Net income (loss) per share* $ 0.51 $ 0.02 $ 0.14 $ 0.15 $ (0.05)
Number of shares used in per share calculations* 72,058 67,280 61,612 49,940 38,084
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 139,766 $ 84,766 $ 71,368 $ 62,941 $ 5,218
Total assets 193,016 105,326 86,625 68,303 9,693
Long-term debt -- -- -- -- 2,677
Redeemable preferred stock -- -- -- -- 13,528
Common stockholders' equity (deficit) 156,228 93,931 74,846 65,236 (9,859)
</TABLE>
The Company paid no dividends on its Common Stock during any of
the periods presented.
* All share and per share amounts have been adjusted for the June 18, 1996 and
December 18, 1996 two-for-one stock splits.
20
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
PairGain, founded in February 1988, designs, manufactures, markets and
supports products that allow telecommunications carriers and private network
owners to more efficiently provide high-speed digital service to end users over
the large existing infrastructure of unconditioned copper wires. The Company's
first product was PG-2, a two-channel digital subscriber carrier system, which
was initially shipped in late 1989. In 1991, the Company undertook the
development of the HiGain system, which was first shipped in June 1992. The
Company's revenue growth subsequent to 1991 and its profitability beginning in
the fourth quarter of 1992 are attributable to the market acceptance and
increased sales of its HiGain systems. In June 1993, the Company introduced its
Campus line of products, and in 1996, began shipping its PG-Flex product, a
small subscriber carrier system for delivering up to 32 voice channels over two
pair of copper wires. HiGain systems represented 76% the Company's total
revenues in each of the years 1996, 1995 and 1994. Although revenues from sales
of the Company's HiGain products have historically represented a substantial
majority of the Company's total revenues and are expected to continue to account
for a majority of its revenues for the foreseeable future, the Company believes
that revenues from sales of its PG-2, Campus, PG-Flex and other products will
continue to increase in the future.
Commencing in mid-1993, the Company began reducing the average sales
prices of its HiGain products in an effort to increase market demand for its
products and in anticipation of expected price competition. These reductions
have been significant, representing reductions of as much as 14% in 1996, 23% in
1995 and 40% in 1994. Although future effects of price competition and other
competitive pressures inherent in the Company's business are uncertain, the
Company expects to continue to reduce the average sales prices of its HiGain and
other products. Accordingly, the Company's ability to maintain or increase
revenues will depend in part upon its ability to increase unit sales volumes of
existing products and to introduce and sell new products at rates sufficient to
compensate for the reduced revenue effect of such continuing reductions in the
average sales prices of the Company's existing products. Declining average sales
prices may also adversely affect gross margins on the Company's existing
products if the Company is unable to fully offset such reductions in average
sales prices by reductions in the Company's per unit costs. Declining average
sales prices had a significant effect on gross margins in 1994 as they declined
to 44% from 52% in 1993. During 1996 and 1995 the Company's continuing effort
toward cost reduction through engineering design changes, reduced prices for
components, increased manufacturing efficiencies, and increases in volume
resulted in improved gross margins, which climbed to 48% in 1996 and 1995.
However, there can be no assurance that the Company will be able to continue to
increase unit sales volumes, introduce and sell new products or further reduce
its per unit costs in the future.
RESULTS OF OPERATIONS
The results of operations discussed below are comprised of two
sections, the first section compares 1996 to 1995 for all items noted on the
Consolidated Statements of Income contained in a separate section of this Annual
Report on Form 10-K commencing on page F-1. The second section compares 1995 to
1994 for the same items.
All share and per share amounts have been adjusted to reflect the
two-for-one stock splits effective June 18, 1996 and December 18, 1996, for all
periods presented.
The following table sets forth, for the periods indicated, certain
operating data as a percentage of total revenues.
21
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product sales 100% 99% 96%
Technology fees and royalty income 0 1 4
---- ---- ----
Total revenues 100 100 100
Cost of revenues 52 52 56
---- ---- ----
Gross profit 48 48 44
Operating expenses:
Research and development 9 10 10
Selling and marketing 8 9 10
General and administrative 5 6 7
---- ---- ----
Total operating expenses 22 25 27
---- ---- ----
Income from operations 26 23 18
Other income, (loss):
Interest income, net 2 2 2
Gain on sales of investments, net -- -- 2
Unusual loss due to unauthorized trading of
investments by third parties -- (15) --
Settlement income related to unauthorized
trading of investments by third parties 1 -- --
---- ---- ----
Income before income taxes 29 10 22
Provision for income taxes 11 9 8
---- ---- ----
Net income 18% 1% 14%
==== ==== ====
</TABLE>
1996 COMPARED TO 1995
Revenues
Revenues increased 92% to $205.4 million in 1996 compared with $107.2
million in 1995. This increase was primarily due to a 106% increase in unit
sales volume of the Company's HiGain products and, to a lesser extent, a 90% and
64% increase in unit sales volume of the Company's Campus and PG-2 products,
respectively. These increases were somewhat offset by declines in the average
sales prices of the HiGain and Campus products. Revenue per average employee
increased 48% to $405,000 in 1996, compared to $274,000 in 1995.
Aggregate sales to local telephone companies affiliated with five RBOCs
accounted for approximately 59% and 63% of the Company's total revenues for 1996
and 1995, respectively. In addition, included in revenues for 1996 and 1995 were
technology licensing fees and royalty income totaling $97,000 and $1.1 million,
respectively. The technology licensing fees and royalties were paid to the
Company primarily in connection with technology licensing agreements entered
into with Alcatel and ADC Telecommunications, Inc. As a result of the
renegotiated terms of the agreement between the Company and Alcatel, technology
licensing fees and royalty rates will be minimal in future periods.
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. In 1996, the Company's gross profit as a percentage of
total revenues continued at 48% in spite of decreases in average sales prices
and a decline in technology fees and royalty income. The ability to maintain
gross margin was primarily the result of the Company's continuing effort toward
cost reduction through engineering design changes, reduced prices for
components, increased manufacturing efficiencies and increases in volume.
22
<PAGE> 24
Operating Expenses
Research and development expense increased to $18.6 million in 1996
from $10.7 million in 1995. Research and development expense was 9% of total
revenues in 1996 compared to 10% in 1995. The increase in absolute expense
levels was primarily due to the addition of personnel for the development of new
products, specifically, development programs for PG-Flex, PG-Plus, ADSL
technology and Megabit Access products, and sustaining, enhancement and cost
reduction programs for HiGain and Campus products. Costs for prototype
expenditures as new products were tested in the lab and payments to consultants
where specific resources were needed in the development process also increased
in 1996 over the prior year. In addition, the Company's research and development
facility in Raleigh, North Carolina, which was established in the second half of
1995, was expanded significantly during 1996.
Selling and marketing expense increased to $17.2 million in 1996 from
$9.9 million in 1995. This increase in expense levels was primarily due to the
addition of personnel and the associated increase in salaries, commission and
travel expenses, and additional advertising and trade show expenditures. Selling
and marketing expense as a percentage of total revenues was 8% in 1996 compared
to 9% in 1995. This decrease as a percentage of total revenues was primarily
attributable to the slower growth of personnel, salaries and commissions
relative to overall revenue growth from 1995 to 1996.
General and administrative expense increased to $9.9 million in 1996
from $6.8 million in 1995. This increase was primarily due to the addition of
personnel, payments to outside consultants related to the implementation of an
information systems upgrade, legal and accounting fees related to the unusual
trading losses and subsequent settlement and an overall increase in spending
commensurate with the Company's increase in headcount and operating activities.
General and administrative expense as a percentage of total revenues was 5% in
1996 compared to 6% in 1995.
Interest Income, Net
Net interest income was $3.7 million in 1996 and $2.1 million in 1995.
The increase in interest income was the result of increased average cash
balances.
Gain on Sales of Investments, Net
There were no net realized gains on sales of investments in 1996. Net
realized gains on sales of investments were $415,000 in 1995. Net unrealized
gains on short-term investments, net of tax, aggregated $71,000 and $67,000 in
1996 and 1995, respectively, and are included as a separate component of
stockholders' equity.
Unusual Loss and Settlement Income Related to Unauthorized Trading of
Investments by Third Parties
As described in Notes 14 and 15 of Notes to the Consolidated Financial
Statements, the Company incurred a loss of $15.8 million from unauthorized and
inappropriate trading of investments by third parties in 1995.
In January 1996, the Company received copies of complaints filed
derivatively by a Company stockholder on behalf of the Company, naming as
defendants the Company's directors and certain officers, as well as Capital
Insight and Mr. S. Jay Goldinger, its president, and a brokerage firm used in
executing and clearing transactions authorized by Mr. Goldinger. The derivative
complaint stated causes of action for breach of fiduciary duty, abuse of
control, constructive fraud, gross mismanagement and waste of corporate assets.
The suit sought an award in the amount of all damages sustained by the Company
including the losses of $15.8 million and legal fees and expenses.
In September 1996, the Company and other parties to the derivative
suits described above executed definitive settlement agreements to settle and
dismiss the derivative suits. The Court approved the settlement on November 19,
1996. Under the terms of the settlement, the Company received $2.5 million from
a brokerage firm involved in processing the investments for Capital Insight, and
the Company paid plaintiff's attorneys fees of
23
<PAGE> 25
$450,000. The impact of the settlement has been recorded in the Company's
financial statements for the year ended December 31, 1996, included in this Form
10-K.
Provision for Income Taxes
The Company's provision for income taxes increased to $22.8 million in
1996, compared to $9.2 million in 1995. The effective tax rate during 1996 was
38.4%. The effective tax rate during 1995 was 90%, since the Company did not
record any tax benefit on the unusual trading losses in 1995.
Excluding the $15.8 million unusual loss, the Company's effective tax
rate in 1995 was 37%. The increased effective tax rate in 1996 over 1995 was
attributed to tax credits and tax-free interest income representing a smaller
proportion of total pre-tax income as a result of the earnings growth.
Net Income and Earnings Per Share
Net income for the year ended December 31, 1996 was $36.6 million or
$0.51 per share, compared to $1.1 million or $0.02 per share, for the year ended
December 31, 1995. Excluding the impact of the unauthorized trading loss, 1995
net income was $16.5 million or $0.24 per share. The weighted average number of
common and common equivalent shares outstanding were 72.1 million and 67.3
million for the years ended December 31, 1996 and 1995, respectively. This
increase in common and common equivalent shares was primarily attributable to
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.
1995 COMPARED TO 1994
Revenues
Revenues increased 80% to $107.2 million in 1995 compared with $59.5
million in 1994. This increase was primarily due to a 120% increase in unit
sales volume of the Company's HiGain products and, to a lesser extent, a 218%
and 69% increase in unit sales volume of the Company's Campus and PG-2 products,
respectively. These increases were somewhat offset by declines in the average
sales prices of the products.
Aggregate sales to local telephone companies affiliated with five RBOCs
accounted for approximately 63% of the Company's total revenues for 1995
compared to 66% of total revenues in 1994. In addition, included in revenues for
1995 and 1994 were technology licensing fees and royalty income totaling $1.1
million and $2.1 million, respectively. The technology licensing fees and
royalties were paid to the Company primarily in connection with technology
licensing agreements entered into with Alcatel and ADC Telecommunications, Inc.
As a result of the renegotiated terms of the agreement between the Company and
Alcatel, technology licensing fees and royalty rates will continue to decline.
Annual revenue per average employee during 1995 was $274,000 compared
to $228,000 in 1994.
Gross Profit
In 1995, the Company's gross profit as a percentage of total revenues
increased to 48% from 44% in 1994. This increase was primarily the result of the
Company's cost reduction efforts through engineering design changes, reduced
prices for components, increased manufacturing efficiencies and increases in
volume. These reductions were partially offset by reductions in average sales
prices of products and a decrease in technology fees and royalty income.
24
<PAGE> 26
Operating Expenses
Research and development expense increased to $10.7 million in 1995
from $5.8 million in 1994. Research and development expense as a percentage of
revenue was 10% in both 1995 and 1994. The increase in expense levels was
primarily due to the addition of personnel for the development of PG-Flex and
Megabit Access products and the FALCON chip and enhancement of existing
products, in addition to prototype expenditures as these new products were
tested in the lab and payments to consultants where specific resources were
needed in the development process.
Selling and marketing expense increased to $9.9 million in 1995 from
$5.8 million in 1994, although selling and marketing expense as a percentage of
total revenues was 9% in 1995 compared to 10% in 1994. The increase in expense
levels in 1995 was primarily due to the addition of personnel, increases in
salaries and commissions and additional advertising and trade show expenditures.
General and administrative expense increased to $6.8 million in 1995
from $4.3 million in 1994. This increase was primarily due to the addition of
personnel, payments to outside consultants related to the implementation of an
information systems upgrade and an overall increase in spending commensurate
with the Company's increase in headcount and operating activities. General and
administrative expense as a percentage of total revenues was 6% in 1995 compared
to 7% in 1994.
Interest Income, Net
Net interest income was $2.1 million in 1995 compared to $1.5 million
in 1994. The increase in interest income principally consisted of net interest
income earned on the cash received by the Company in its secondary offering
completed in March 1995, as well as increased average cash balances due to
higher revenue levels.
Gain on Sales of Investments, Net
Net realized gains on sales of investments were $415,000 and $1.2
million in 1995 and 1994, respectively. Net unrealized gain (loss) on short-term
investments, net of tax, aggregated $67,000 and ($210,000) in 1995 and 1994,
respectively, and is included as a separate component of stockholders' equity.
Unusual Loss Due to Unauthorized Trading of Investments by Third Parties
As more fully described in Note 14 of Notes to the Consolidated
Financial Statements, the Company incurred a loss of $15.8 million from
unauthorized trading of investments by third parties in 1995.
In January 1996, the Company received copies of complaints filed
derivatively by a Company stockholder on behalf of the Company, naming as
defendants the Company's directors and certain officers, as well as Capital
Insight and Mr. S. Jay Goldinger, its president, and a brokerage firm used in
executing and clearing transactions authorized by Mr. Goldinger. The derivative
complaint stated causes of action for breach of fiduciary duty, abuse of
control, constructive fraud, gross mismanagement and waste of corporate assets.
The suit sought an award in the amount of all damages sustained by the Company
including the losses of $15.8 million and legal fees and expenses.
Provision for Income Taxes
The Company's provision for income taxes increased to $9.2 million in
1995, compared to $4.6 million in 1994. The effective tax rate during 1995 was
90%, since the Company did not record any tax benefit on the unusual trading
losses in excess of 1995 and 1994 gains on sales of investments of $1.6 million.
Excluding the $15.8 million unusual loss, the Company's effective tax
rate in 1995 was 37% compared to 35% in 1994. The principal reason for the
increased effective tax rate was the elimination of the valuation allowance on
deferred tax assets in 1994 as management believes it is more likely than not
that such deferred tax assets will be realized in future periods.
25
<PAGE> 27
Net Income and Earnings Per Share
Net income for the year ended December 31, 1995 was $1.1 million or
$0.02 per share, compared to $8.6 million or $0.14 per share, for the year ended
December 31, 1994. Excluding the impact of the unauthorized trading loss, 1995
net income was $16.5 million or $0.24 per share. The weighted average number of
common and common equivalent shares outstanding were 67.3 million and 61.6
million for the years ended December 31, 1995 and 1994, respectively. This
increase in common and common equivalent shares was primarily attributable to
the issuance of 2,000,000 shares in the Company's secondary offering in March
1995, 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 1995 over 1994.
26
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the Company had cash flow from operations of $61.6 million.
Additionally, $7.4 million in cash was generated from the issuance of stock as a
result of exercises of common stock options and common stock sold under the
Employee Stock Purchase Plan. In 1995, the Company had cash flow from operations
of $12.5 million. In addition, $15.5 million in cash was generated from the
issuance of stock, of which $11.0 million was from the Company's March 1995
secondary offering. These amounts were offset by unusual trading losses of $15.8
million, which resulted from unauthorized trading in options and futures by an
independent financial advisor, as mentioned above. In 1994, the Company
generated cash flow from operations of $4.7 million.
As of December 31, 1996, the Company had $112.6 million in cash, cash
equivalents and short-term investments and $139.6 million in working capital,
compared to $55.7 million in cash, cash equivalents and short-term investments
and $84.8 million in working capital in 1995. The increase in the Company's
accounts receivable to $23.9 million at December 31, 1996, compared to $13.0
million at December 31, 1995, was primarily due to increased sales for the
period. Days sales outstanding was 35 days in 1996 compared to 34 in 1995.
Inventories increased to $26.0 million at December 31, 1996, compared to $22.5
million at December 31, 1995, due to increased stocking levels to support future
shipments. Although, the Company continued to maintain high levels of
inventories in 1996, inventory turns increased from two-and-a-half times in 1995
to four times in 1996.
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, furniture and fixtures and leasehold improvements
were $7.5 million, $5.9 million and $2.0 million for the years ended December
31, 1996, 1995 and 1994, respectively. Included in these amounts were
approximately $450,000 and $750,000 in 1996 and 1995, respectively, of software
and equipment purchased to upgrade the Company's information system
capabilities. Expenditures in 1996 also included $251,000 in leasehold
improvements at the Company's two Tustin facilities and $158,000 in leasehold
improvements at the Company's Raleigh, North Carolina research and development
center. Included in the 1995 additions is $1.0 million in leasehold improvements
at the Company's Tustin, California manufacturing, engineering and
administrative headquarters.
During 1996, the Company made investments in Sourcecom Corporation
("Sourcecom") and E/O Networks ("E/O") of $544,000 and $3.0 million,
respectively. Sourcecom, of Westlake Village, California, develops,
manufactures and markets next generation access networking product. 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 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 December 31, 1996). At December 31, 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 December 31, 1996. The agreement expires May 1, 1997.
The Company has no other material near-term commitments for its funds.
The Company believes that the current cash 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.
27
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and schedule appear in
a separate section of this Annual Report on Form 10-K beginning on page F-1 and
S-1, respectively.
SUPPLEMENTARY FINANCIAL DATA
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(RESTATED) (RESTATED)
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
Revenues $ 19,078 $ 23,919 $ 29,602 $ 34,625
Gross Profit 9,425 11,448 13,768 16,360
Operating income 4,214 4,719 6,459 8,140
Unusual gain (loss) due to unauthorized
trading of investments by third parties -- (26,774) 1,660 9,287
Net income (loss) 3,142 (22,756) 6,165 14,505
Net income (loss) per share * $ 0.05 $ (0.38) $ 0.09 $ 0.21
Weighted average number of common and
common equivalent shares * 64,412 59,687 68,206 69,613
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Revenues $ 40,511 $ 47,239 $ 54,609 $ 63,050
Gross Profit 19,039 22,665 26,140 31,116
Operating income 9,360 11,415 13,858 18,609
Settlement income related to
unauthorized trading of investments
by third parties -- -- -- 2,500
Net income 6,250 7,570 9,069 13,714
Net income per share * $ 0.09 $ 0.11 $ 0.12 $ 0.19
Weighted average number of common and
common equivalent shares * 70,580 72,043 72,736 72,876
</TABLE>
The Company restated its quarterly financial statements for the three
month periods ended June 30, 1995 and September 30, 1995, as described in Note
14 in Notes to Consolidated Financial Statements, which begins on page F-16 of
this Annual Report.
* Net income (loss) per share and weighted average number of common and
common equivalent shares have been adjusted to reflect the June 18, 1996 and
December 18, 1996 two-for-one stock splits.
28
<PAGE> 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 7, 1995, the Company dismissed Ernst & Young LLP as the
principal independent auditor for the audit of the Company's financial
statements. There were no disagreements with Ernst & Young LLP on any matter of
accounting principles or practices. Their accountant's report on the financial
statements of the Company for the year ended December 31, 1994 was unqualified.
Also on July 7, 1995, the Registrant engaged Deloitte & Touche LLP as
principal independent public auditor for the Registrant's financial statements
for the fiscal year ending December 31, 1995.
The decision to dismiss Ernst & Young LLP and appoint Deloitte & Touche
LLP as the Company's principal independent public accountant was approved by the
Company's Board of Directors.
29
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The sections tilted "Directors and Nominees" and "Compliance with
Section 16(a) of the Exchange Act" appearing in the Company's Proxy Statement
for the 1997 Annual Meeting of Stockholders is incorporated herein by reference.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Executive Officers and Directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- ------------------ -----------------------------------------------------
<S> <C> <C>
Charles S. Strauch 61 Chairman of the Board and Chief Executive Officer
Howard S. Flagg 42 President and Director
Benedict A. Itri 43 Chief Technical Officer and Director
Charles W. McBrayer 48 Vice President, Finance and Administration and
Chief Financial Officer
Dennis Young 54 Vice President, Operations
Bruce Kimble 47 Vice President, Engineering
Tom Reynolds 45 Senior Vice President, Sales, Service and Field
Marketing
Robert C. Hawk (1) 57 Director
Robert A. Hoff (1)(2) 44 Director
B. Allen Lay (1)(2) 62 Director
</TABLE>
- -----------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Strauch became a director of the Company in October 1991, Chairman
of the Board of Directors of the Company in November 1991 and Chief Executive
Officer of the Company in April 1992. From May 1989 until December 1991, Mr.
Strauch was self-employed providing management services to technology companies.
From October 1991 to December 1991, in his self-employed role, Mr. Strauch
provided management services to the Company. Also as a part of providing such
management services, from May 1989 to May 1991 he served as Vice Chairman of the
Board of Directors of EECO, Inc., a manufacturer of electronic switches and
computer components. From November 1988 to May 1989, Mr. Strauch served as
President of MSI Data Corporation, a manufacturer of hand-held data collection
devices and then a subsidiary of Symbol Technologies, Inc., having been acquired
by Symbol Technologies in November 1988. Mr. Strauch also served as a member of
the Board of Directors of Symbol Technologies from November 1988 to May 1989.
From August 1984 until November 1988, Mr. Strauch served as Chief Executive
Officer of MSI Data Corporation.
Mr. Flagg, a founder of the Company, has been President and a director
of the Company since November 1991. He served as Chief Executive Officer from
November 1991 to April 1992 and as Vice President, Research and Development from
February 1988 to November 1991. Prior to founding the Company, Mr. Flagg founded
and served as a principal of Advanced Telecommunications, Inc., an aerospace
telecommunications consulting firm.
Mr. Itri, a founder of the Company, was named Chief Technical Officer
in April 1996. Previously, Mr. Itri was Vice President, Engineering of the
Company since its inception in February 1988 and has been a director of the
Company since November 1991. Prior to founding the Company, Mr. Itri founded and
served as a principal of Advanced Telecommunications, Inc.
30
<PAGE> 32
Mr. McBrayer joined the Company in March 1995 as Vice President,
Finance and Administration and Chief Financial Officer. Mr. McBrayer served as
Vice President, Finance and Chief Financial Officer for Triconex Corporation, a
publicly held corporation, from 1986 to March 1995 and as a director of Triconex
Corporation in 1993 and 1994.
Mr. Young joined the Company in September 1993 as Director, European
Operations and assumed the position of Vice President, Operations in December
1994. From 1985 to 1993 Mr. Young served as Managing Director for the U.K.
subsidiary of EECO, Inc. and for Talley (U.K.) Ltd. These companies manufactured
and sold consumer and industrial electronic products throughout the European
market.
Mr. Kimble joined the Company in September 1993 as Project Manager and
later assumed the position of Director of Engineering. He was named Vice
President, Engineering in April 1996. From 1991 to 1993 Mr. Kimble was a Product
Line Manager at Cable and Computer Technology, Inc., a military computer systems
manufacturer. From 1985 to 1991 Mr. Kimble was President and owner of Semaphore
Corporation, a telemetry equipment and DSP consulting firm.
Mr. Reynolds joined the Company in October 1996 as Senior Vice
President, Sales, Customer Service and Field Marketing. Mr. Reynolds was
employed by Motorola Information Systems Group from 1990 to 1996 where he served
in various senior management positions in sales and marketing. From 1983 to 1990
Mr. Reynolds held field sales management positions at Hewlett-Packard and Harris
Corporation, manufacturers of workstation and data communications products.
Mr. Hawk became a director of the Company in November 1992. Mr. Hawk is
President and CEO of U S WEST Multimedia Communications, Inc. Mr. Hawk also
serves as a director of Premisys Communications and Xylan Corporation, as well
as several other private companies. From 1988 until 1996, Mr. Hawk served as
President-Carrier Division of U S WEST Communications, Inc., one of the seven
RBOCs. Prior to that time, Mr. Hawk served as Vice President, Marketing of U S
WEST and as Director, Advanced Services of AT&T.
Mr. Hoff became a director of the Company in February 1989. Mr. Hoff
has been a general partner of Crosspoint Venture Partners, a private venture
capital investment company, since September 1983. Mr. Hoff also serves as a
director of privately-held Com21 Incorporated, Efficient Networks, Accredited
Home Lenders and US Web Corporation and publicly-held Onyx Acceptance
Corporation.
Mr. Lay became a director of the Company in February 1989. Mr. Lay has
been a general partner of Southern California Ventures, a private venture
capital investment partnership, since May 1983. Mr. Lay also serves as Chairman
and CEO of Vestro Natural Foods, Inc. and as a director of privately-held
Physical Optics Corporation, Kofax Imaging Corporation, Waveband, Inc. and
Medclone, Inc., and of publicly-held ViaSat, Inc. and Helisys, Inc.
ITEM 11. EXECUTIVE COMPENSATION.
The section titled "Executive Compensation and Related Information"
appearing in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section titled "Principal Stockholders" appearing in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section titled "Certain Transactions" appearing in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders is incorporated
herein by reference.
31
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS:
The following financial statements are included in a separate section
of this Annual Report on Form 10-K commencing on page F-1:
Independent Auditors' Reports
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE:
The following financial schedule for the years 1996, 1995 and 1994 is
included in a separate section of this Annual Report on Form 10-K commencing on
page S-1:
Schedule II - Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) EXHIBITS:
(a) 3.4 Certificate of Incorporation of Registrant, a Delaware
corporation.
(a) 3.5 Form of Agreement and Plan of Merger of Registrant, a
Delaware corporation, and Registrant, a California
corporation.
(a) 3.6 Bylaws of Registrant, a Delaware corporation.
(a) 10.1 PairGain Technologies, Inc. 1990 Stock Option Plan
(the "1990 Plan").
(a) 10.2 Form of Incentive Stock Option Agreement pertaining to
the 1990 Plan.
(a) 10.3 Form of Supplemental Incentive Stock Option Agreement
pertaining to the 1990 Plan.
(a) 10.4 Form of Nonstatutory Stock Option Agreement pertaining
to the 1990 Plan.
(a) 10.5 PairGain Technologies, Inc. 1993 Option/Stock Issuance
Plan (the "1993 Plan").
(a) 10.6 Form of Stock Option Agreement pertaining to the 1993
Plan.
(a) 10.7 Form of Stock Issuance Agreement pertaining to the
1993 Plan.
(a) 10.8 Contract No. BA07617 dated as of October 27, 1990,
between the Registrant and Bell Atlantic Network
Services, Inc., as amended.
(a) 10.9 Stock Option Agreement dated June 23, 1992 between the
Registrant and Charles S. Strauch.
32
<PAGE> 34
(a) 10.10 Stock Option Agreement dated June 23, 1992 between
the Registrant and Howard S. Flagg.
(a) 10.11 Stock Option Agreement dated June 23, 1992 between
the Registrant and Benedict A. Itri.
(a) 10.12 Agreement dated April 26, 1991 between the Registrant
and Brooktree Corporation.
(a) 10.13 Loan and Security Agreement dated as of July 31,
1991, between the Registrant and Silicon Valley
Bank, as amended.
(a) 10.14 Standard Sublease dated as of October 29, 1991,
between the Registrant and Kirkwood Dynaelectric
Company.
(a) 10.15 Series B Preferred Stock Purchase Agreement dated as
of January 17, 1992, among the Registrant and the
investors listed therein.
(a) 10.16 Industrial Lease dated as of March 17, 1992, between
the Registrant and Alondra Shoemaker Associates.
(a) 10.17 Warrant to Purchase Stock dated June 22, 1992, issued
to Silicon Valley Bank.
(a) 10.18 Development and license Agreement and Remote HDSL OEM
Agreement both dated June 30, 1992, between the
Registrant and ADC Telecommunications, Inc.
(a) 10.19 Agreement No. PR-6727-A dated September 11, 1992,
between the Registrant and Bell South
Telecommunications, Inc., as amended.
(a) 10.20 Series B Preferred Stock Purchase Agreement dated as
of September 30, 1992, among the Registrant and the
investors listed therein.
(a) 10.21 Registration Rights Agreement dated as of September
30, 1992, among the Registrant, Alcatel Network
Systems, Inc., and the investors listed therein.
(a) 10.22 License and Distribution Agreement dated September
30, 1992, between the Registrant and Alcatel Network
Systems, Inc.
(a) 10.23 PairGain Technologies, Inc. Series D Preferred Stock
Purchase Warrant dated September 30, 1992, issued to
Alcatel Network Systems, Inc.
(a) 10.24 Subordinated Demand Promissory Note, principal amount
$3,000,000, dated September 30, 1992, issued to
Alcatel Network Systems, Inc.
(a) 10.25 PairGain Technologies, Inc. Common Stock Purchase
Warrant dated March 25, 1993, issued to Ventana
Leasing, Inc.
(a) 10.26 PairGain Technologies, Inc. Common Stock Purchase
Warrant dated March 25, 1993, issued to
Praktikerfinans A.B.
(a) 10.27 Form of Indemnification Agreement
(b) 10.28 Sublease Agreement dated as of August 1, 1994,
between the Registrant and LH Research.
(b) 10.29 Lease Agreement dated January 30, 1995 between the
Registrant and Mr. Niles Gates.
33
<PAGE> 35
(c) 10.30 Senior Note and Warrant Purchase Agreement dated July
24, 1995 between PairGain Technologies, Inc. and
Sourcecom Corporation
(c) 10.31 Warrant Agreement dated July 24, 1995 between
PairGain Technologies, Inc. Sourcecom Corporation
(c) 10.32 Investor Right Agreement dated July 24, 1995 between
PairGain Technologies, Inc. Sourcecom Corporation
(c) 10.33 Stock Purchase Agreement dated July 24, 1995 between
PairGain Technologies, Inc. Sourcecom Corporation
(d) 10.34 PairGain Technologies, Inc. Common Stock Purchase
Warrant dated May 10, 1995, issued to Brobeck,
Phleger & Harrison
(d) 10.35 PairGain Technologies, Inc. Common Stock Purchase
Warrant dated August 3, 1995, issued to Nexus
Applied Research, Inc.
(d) 10.36 Amendment to Loan and Security Agreement dated May 3,
1995, between the Registrant and Silicon Valley Bank
(e) 10.37 Lease Agreement dated May 30, 1996 between the
Registrant and Parker-Raleigh Development XXIII,
Limited Partnership
(f) 10.38 PairGain Technologies, Inc. 1996 Non-Employee
Directors Stock Option Plan
(g) 10.39 Amendment to Certificate of Incorporation of PairGain
Technologies, Inc.
(i) 10.40 Amendment to Certificate of Incorporation of PairGain
Technologies, Inc.
10.41 Lease Agreement dated December 25, 1996 between the
Registrant and the Cheek Family Trust "D"
10.42 Lease Agreement dated January 7, 1997 between the
Registrant and Catellus Development Corporation
11.1 Statement Regarding Computation of Earnings Per Share
(h) 20.1 Notice to Company Shareholders of Hearing on Proposed
Settlement of derivative Action, Case No. 758117.
(b) 21. Subsidiaries of the Registrant
(b) 23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Deloitte & Touche LLP, Independent Auditors
27 Financial Data Schedule
- ----------------------
(a) Incorporated herein by reference to the same Exhibit number to the
Company's Registration Statement on Form S-1 (Registration No.
33-66680) declared effective by the Commission on September 14, 1993,
as amended.
34
<PAGE> 36
(b) Incorporated herein by reference to the same Exhibit number to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1994, as filed with the Commission on February 22, 1995.
(c) Incorporated herein by reference to the same Exhibit number to the
Company's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1995, as filed with the Commission on August 10, 1995.
(d) Incorporated herein by reference to the same Exhibit number to the
Company's Quarterly Report on Form 10-Q for the third quarter ended
September 30, 1995, as filed with the Commission on November 6, 1995.
(e) Incorporated herein by reference to the same Exhibit number to the
Company's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1996, as filed with the Commission on August 13, 1996.
(f) Incorporated herein by reference to Exhibit number 99-1 of Form S-8
Registration Statement as filed with the Commission on July 23, 1996.
(g) 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.
(h) Incorporated herein by reference to the same Exhibit number to the
Company's Quarterly Report on Form 10-Q for the third quarter ended
September 30, 1996, as filed with the Commission on November 8, 1996.
(i) Incorporated herein by reference to Appendix A of Proxy Statement for
the Special Meeting of Stockholders to be held December 10, 1996 as
filed with the Commission on November 12, 1996.
(b) REPORTS ON FORM 8-K:
A Form 8-K was filed on March 5, 1997 reporting the Company's
acquisition of Avidia Systems, Inc. on February 27, 1997.
35
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
PAIRGAIN TECHNOLOGIES, INC.
Date: March 18, 1997 By: /S/ CHARLES S. STRAUCH
-------------------------------------------------------
Charles S. Strauch
(Registrant)
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 18, 1997 By: /S/ CHARLES W. MCBRAYER
-------------------------------------------------------
Charles W. McBrayer
Vice President, Finance and Administration
Chief Financial Officer
(Principal Financial Officer)
Date: March 18, 1997 By: /S/ ROBERT R. PRICE
-------------------------------------------------------
Robert R. Price
Corporate Controller
(Principal Accounting Officer)
</TABLE>
- --------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K is signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
Signature Title Date
--------- ------ -----
<S> <C> <C>
/S/ CHARLES S. STRAUCH Chairman, Chief Executive March 18, 1997
------------------------------------ Officer and Director
Charles S. Strauch
/S/ HOWARD S. FLAGG President and Director March 18, 1997
------------------------------------
Howard S. Flagg
/S/ BENEDICT A. ITRI Chief Technical Officer March 18, 1997
------------------------------------ and Director
Benedict A. Itri
/S/ ROBERT C. HAWK Director March 18, 1997
------------------------------------
Robert C. Hawk
/S/ ROBERT A. HOFF Director March 18, 1997
------------------------------------
Robert A. Hoff
/S/ B. ALLEN LAY Director March 18, 1997
------------------------------------
B. Allen Lay
</TABLE>
36
<PAGE> 38
PAIRGAIN TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CONTENTS
PAGE
--------
Independent Auditors' Reports F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Income F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
PairGain Technologies, Inc.
Tustin, California
We have audited the accompanying consolidated balance sheets of PairGain
Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. Our audits also included the financial statement
schedule listed in the index at Item 14 (a)(2) for the years ended December 31,
1996 and 1995. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and subsidiaries as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 27, 1997
F-2
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
Board of Directors
PairGain Technologies, Inc.
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of PairGain Technologies, Inc. for the year
ended December 31, 1994. Our audit also included the financial statement
schedule listed in the index at Item 14 (a)(2). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of PairGain Technologies, Inc.
operations and its cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Orange County, California
February 17, 1995
F-3
<PAGE> 41
PAIRGAIN TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-----------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 46,840 $ 24,576
Short-term investments (Note 3) 65,779 31,149
Accounts receivable, less allowance for doubtful accounts of
$900 and $469 at December 31, 1996 and 1995, respectively 23,873 13,044
Inventories (Note 4) 26,010 22,522
Deferred tax assets (Note 9) 11,074 3,353
Other current assets 2,767 1,517
--------- ---------
TOTAL CURRENT ASSETS 176,343 96,161
Property and equipment, net (Note 5) 10,295 6,402
Note receivable and long-term investments (Note 6) 6,252 2,708
Other assets 126 55
--------- ---------
TOTAL ASSETS $ 193,016 $ 105,326
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,960 $ 6,402
Accrued compensation and related expenses 5,702 2,605
Accrued expenses 9,300 2,388
Accrued income taxes (Note 9) 15,826 --
--------- ---------
TOTAL CURRENT LIABILITIES 36,788 11,395
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 10 AND 16)
Stockholders' equity (Note 11):
Preferred stock, $.001 par value:
Authorized shares -- 2,000,000
Issued and outstanding shares -- None -- --
Common stock, $.0005 par value:
Authorized shares -- 175,000,000
Issued and outstanding shares-- 64,042,596 and 60,709,068
at December 31, 1996 and 1995, respectively 32 15
Additional paid-in-capital 112,782 87,175
Deferred compensation -- (82)
Unrealized gain on short-term investments 71 67
Retained earnings 43,343 6,756
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 156,228 93,931
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 193,016 $ 105,326
========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 42
PAIRGAIN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Product sales $ 205,312 $ 106,173 $ 57,417
Technology fees and royalty income (Note 8) 97 1,051 2,101
------------ ------------ ------------
TOTAL REVENUES 205,409 107,224 59,518
Cost of revenues 106,449 56,223 33,141
------------ ------------ ------------
Gross profit 98,960 51,001 26,377
------------ ------------ ------------
Operating expenses:
Research and development 18,593 10,728 5,849
Selling and marketing 17,218 9,944 5,765
General and administrative 9,907 6,797 4,250
------------ ------------ ------------
Total operating expenses 45,718 27,469 15,864
------------ ------------ ------------
INCOME FROM OPERATIONS 53,242 23,532 10,513
Other income (loss):
Interest income, net 3,677 2,118 1,482
Gain on sales of short-term investments, net -- 415 1,185
Unusual loss due to unauthorized trading of investments
by third parties (Note 14) -- (15,827) --
Settlement income related to unauthorized trading of
investments by third parties (Note 15) 2,500 -- --
------------ ------------ ------------
Income before income taxes 59,419 10,238 13,180
Provision for income taxes (Note 9) 22,816 9,182 4,613
------------ ------------ ------------
NET INCOME $ 36,603 $ 1,056 $ 8,567
============ ============ ============
Per Share Data (Note 1):
Earnings per share $ 0.51 $ 0.02 $ 0.14
============ ============ ============
Weighted average number of common and common
equivalent shares 72,058,000 67,280,000 61,612,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 43
PAIRGAIN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN(LOSS) RETAINED TOTAL
------------------------- PAID-IN DEFERRED ON SHORT-TERM EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION INVESTMENTS (DEFICIT) EQUITY
---------- ---------- ---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 49,350,440 $ 12 $ 68,348 $ (257) $ -- $ (2,867) $ 65,236
Exercise of common stock 1,484,104 1 203 -- -- -- 204
options
Tax benefits from exercise of
common stock options -- -- 962 -- -- -- 962
Amortization of deferred
compensation -- -- -- 87 -- -- 87
Unrealized loss on short-term
investments, net of tax
benefit of $141 -- -- -- -- (210) -- (210)
Net income -- -- -- -- -- 8,567 8,567
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1994 50,834,544 13 69,513 (170) (210) 5,700 74,846
Issuance of common stock for
cash, net of offering costs
of $842 2,000,000 1 10,969 -- -- -- 10,970
Exercise of warrants 5,771,124 1 2,726 -- -- -- 2,727
Exercise of common stock 2,024,380 -- 1,440 -- -- -- 1,440
options
Issuance of common stock
sold under Employee Stock
Purchase Plan 79,020 -- 386 -- -- -- 386
Tax benefits from exercise of
common stock options -- -- 2,141 -- -- -- 2,141
Amortization of deferred
compensation -- -- -- 88 -- -- 88
Unrealized gain on short-term
investments, net of tax of ($181) -- -- -- -- 277 -- 277
Net income -- -- -- -- -- 1,056 1,056
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1995 60,709,068 15 87,175 (82) 67 6,756 93,931
Exercise of common stock 3,258,320 1 6,252 -- -- -- 6,253
options
Issuance of common stock
sold under Employee Stock
Purchase Plan 75,208 -- 1,110 -- -- -- 1,110
Tax benefits from exercise of
common stock options -- -- 18,245 -- -- -- 18,245
Amortization of deferred
compensation -- -- -- 82 -- -- 82
Unrealized gain on short-term
investments, net of tax of $1 -- -- -- -- 4 -- 4
Stock split effected as a
stock dividend (Note 11) -- 16 -- -- -- (16) --
Net income -- -- -- -- -- 36,603 36,603
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1996 64,042,596 $ 32 $ 112,782 $ -- $ 71 $ 43,343 $ 156,228
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 44
PAIRGAIN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
-------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 36,603 $ 1,056 $ 8,567
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,683 4,048 1,726
Gains on sales of investments -- (415) (1,185)
Unusual loss due to unauthorized trading of investments by
third parties -- 15,827 --
Provision for deferred tax assets (7,721) (1,400) (2,133)
Change in operating assets and liabilities:
Accounts receivable (10,829) (2,876) (4,718)
Inventories (3,488) (6,048) (5,875)
Other current assets (1,651) (421) (508)
Other assets (71) (8) (17)
Trade accounts payable (442) (268) 4,408
Accrued compensation 3,097 1,259 758
Accrued expenses 6,912 1,634 537
Income taxes (Note 1) 34,472 132 3,112
-------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 61,565 12,520 4,672
-------- -------- ---------
Cash flows from investing activities:
Purchases of short-term investments (68,620) (43,272) (115,610)
Proceeds from sales of short-term investments 33,025 48,711 98,817
Purchase of property and equipment (7,525) (5,909) (2,022)
Issuance of note receivable -- (2,708) --
Purchases of long-term investments (3,544) -- --
-------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES (46,664) (3,178) (18,815)
-------- -------- ---------
Cash flows from financing activities:
Net (payments on) borrowings under bank line of credit -- (1,000) 1,000
Proceeds from issuance of common stock 7,363 15,523 204
-------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,363 14,523 1,204
-------- -------- ---------
Increase (decrease) in cash and cash equivalents 22,264 23,865 (12,939)
Cash and cash equivalents at beginning of year 24,576 711 13,650
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 46,840 $ 24,576 $ 711
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 4,335 $ 10,887 $ 3,625
======== ======== =========
Income tax refunds received $ 8,342 $ -- $ --
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 45
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 worldwide; 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.
TRANSLATION OF FOREIGN CURRENCIES
Foreign subsidiary financial statements are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards ("SFAS")
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, 1995 or 1994.
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.
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 SFAS
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.
F-8
<PAGE> 46
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Equipment is
depreciated over an estimated useful life of three years. Leasehold improvements
are amortized over the lesser of five years or the life of the lease.
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
Earnings 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
two-for-one stock splits, effective June 18, 1996 and December 18, 1996, for all
periods presented. (See Note 11)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". (See Note 12)
STATEMENT OF CASH FLOWS
Significant noncash transactions in 1996, 1995 and 1994 affecting the
Company's accounts consisted of tax benefits from exercises of common stock
options of $18.2 million, $2.1 million and $962,000, respectively.
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
insignificant. Sales to major customers as a percentage of total product revenue
were as follows:
F-9
<PAGE> 47
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Customer A 15% 15% 18%
Customer B 13% 17% 19%
Customer C 12% 12% 13%
Customer D 10% 11% 10%
</TABLE>
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 76% of the
Company's total revenues in each of the years 1996, 1995 and 1994. 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 financial condition and results of operations.
3. SHORT-TERM INVESTMENTS
Short-term investments as of December 31, 1996 and 1995 are summarized
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------- ---------------- -------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
Municipal bonds $ 59,686 $ 41 $ -- $ 59,727
Other short-term investments 5,982 70 -- 6,052
---------------- ---------------- -------------- ----------------
$ 65,668 $ 111 $ -- $ 65,779
================ ================ ============== ================
1995
Municipal bonds $ 31,042 $ 107 $ -- $ 31,149
================ ================ ============== ================
</TABLE>
Unrealized gains on short-term investments, net of tax, included as a
separate component of stockholders' equity were $71,000 and $67,000 in 1996 and
1995, respectively.
The amortized cost and estimated fair value of investments at December
31, 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>
FAIR
COST VALUE
---------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 30,084 $ 30,242
Due after one year through three years 35,584 35,537
---------------- -----------------
$ 65,668 $ 65,779
================ =================
</TABLE>
F-10
<PAGE> 48
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods $10,597 $ 7,842
Work in process 9,745 9,693
Purchased parts 5,668 4,987
------- -------
$26,010 $22,522
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment $ 16,888 $ 9,772
Leasehold improvements 1,520 1,111
-------- --------
18,408 10,883
Less accumulated depreciation and amortization (8,113) (4,481)
-------- --------
$ 10,295 $ 6,402
======== ========
</TABLE>
6. NOTE RECEIVABLE AND LONG-TERM INVESTMENTS
On July 20, 1995, the Company entered into certain agreements with
Sourcecom Corporation of Westlake Village, 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 December 31,
1996), payable monthly, with the principal balance due July 1999.
In April 1996, the Company purchased approximately 150,000 shares of
Sourcecom's Series A Preferred Stock for an aggregate of $273,000. In September
1996, the Company purchased approximately 321,000 shares of Sourcecom's Common
Stock for an aggregate of $271,000. Shares purchased have been adjusted to
reflect Sourcecom's two-for-one stock split, effective September 24, 1996.
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.
These investments are accounted for using the cost method.
F-11
<PAGE> 49
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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 the prime rate
(8.25% at December 31, 1996). At December 31, 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 December 31, 1996. The agreement expires May 1,
1997.
8. LICENSE AND DISTRIBUTION AGREEMENTS
In 1992, the Company granted an exclusive worldwide noncancelable
license to its HDSL technology configured for general use in specified markets
outside the U.S. and a nonexclusive, worldwide, noncancelable license to its
HDSL technology configured for general use in the U.S. to a U.S. subsidiary of
Alcatel, SA, a French telecommunications company. In November 1995, this
agreement was terminated. 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 revised the royalty rate for standalone T1 products
which incorporate the Company's HDSL technology being sold by Alcatel.
9. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $25,179 $ 8,150 $ 5,546
State and foreign 5,358 2,432 1,200
------- ------- -------
Total current 30,537 10,582 6,746
------- ------- -------
Deferred:
Federal (6,600) (1,207) (1,875)
State and foreign (1,121) (193) (258)
------- ------- -------
Total deferred (7,721) (1,400) (2,133)
------- ------- -------
Total provision $22,816 $ 9,182 $ 4,613
======= ======= =======
</TABLE>
The provision for income taxes for the years ended December 31, 1996,
1995, and 1994 differs from the U.S. federal statutory tax expense for the years
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. federal statutory tax expense $20,797 $ 3,583 $ 4,481
Unusual loss due to unauthorized trading of investments by third parties -- 4,980 --
State taxes, net of federal tax benefit 2,104 1,422 792
Decrease in valuation allowance for deferred tax assets -- -- (994)
Other items, net (85) (803) 334
------- ------- -------
Total provision $22,816 $ 9,182 $ 4,613
======= ======= =======
</TABLE>
F-12
<PAGE> 50
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components for the Company's deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Inventory and related reserves $ 6,867 $ 1,915
Warranty reserve 1,538 400
Other reserves and accruals 1,450 457
Other 1,219 581
-------- --------
Total deferred tax assets $ 11,074 $ 3,353
======== ========
</TABLE>
10. COMMITMENTS
The Company has entered into several operating leases for its
facilities with varying terms and escalation clauses. Future annual minimum
lease payments under the noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31, (IN THOUSANDS)
--------------------------------- ----------------
<S> <C>
1997 $ 1,195
1998 1,122
1999 1,002
2000 670
2001 601
Thereafter 1,522
--------
$ 6,112
========
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994
aggregated $717,000, $424,000 and $298,000, respectively.
11. STOCKHOLDERS' EQUITY
STOCK SPLITS
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 shares, par value $.001,
to 60 million shares, par value $.0005, and to effect a two-for-one stock split
(the "Stock Split").
In December 1996, the Company's stockholders approved an amendment to
the Company's Amended and Restated Certificate of Incorporation (the "Second
Amendment") to increase the authorized Common Stock of the Company from 60
million shares, par value $.0005, to 175 million shares, par value $.0005. The
Second Amendment was proposed to facilitate a two-for-one stock split (the
"Second Stock Split") which was effected in the form of a 100% stock dividend.
F-13
<PAGE> 51
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All references in the accompanying consolidated financial statements
related to common stock, common stock options, common stock warrants and
earnings per share have been adjusted to reflect both stock splits.
SECONDARY PUBLIC OFFERING
In March 1995, the Company completed a secondary offering and sold
2,000,000 shares of its common stock at a price of $5.91 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
5,750,620 shares of common stock at an aggregate exercise price of $2,717,000.
WARRANTS
In 1995, the Company granted warrants for the purchase of 40,000 shares
of its common stock at exercise prices of $5.00 to $6.25 per share in exchange
for services. Such warrants were outstanding at December 31, 1996 and expire
beginning in May 1998 through September 1999.
In 1993, the Company granted warrants for the purchase of 57,240 shares
of its common stock at an exercise price of $0.47 per share to a company and its
affiliate in connection with an equipment leasing transaction. Such warrants
were exercised during 1995.
12. STOCK OPTION PLANS
1993 EMPLOYEE STOCK OPTION PLAN
Under the Company's 1993 Stock Option/Stock Issuance Plan ("the Plan"),
which is the successor plan to its 1990 Stock Option Plan ("the 1990 Plan"), a
Committee consisting of non-employee members of its Board of Directors, is
authorized to grant stock options or issue common stock to officers, key
employees, members of the Board of Directors, and certain consultants or other
independent contractors of the Company. In addition, the Plan also provides for
the purchase of the Company's common stock by eligible individuals at a price
per share not less than 85% of the fair market value at the time of issuance. No
shares have been issued under the purchase provisions. Incentive options are
granted at a price equal to 100% of the fair market value at the date of grant
(at least 85% of the fair market value for non-qualified options) and vested
options are exercisable for a period determined by the Committee that is not to
exceed ten years from the date of grant. Options issued under the 1990 Plan are
exercisable immediately upon grant and shares issued related to options
exercised but not vested are subject to repurchase by the Company at the
exercise price of such options. At the discretion of the Committee, the Plan
provides option holders stock appreciation rights which allow the holder to
exercise such options in exchange for the payment of the difference between the
fair market value and option price of the underlying shares in the form of cash
or shares of common stock. Under certain circumstances in the event of a merger,
sale or other significant transaction involving the Company, the options and
stock issued may become fully vested and exercisable.
In January 1995, the Company's Board of Directors approved an increase
in the number of common shares reserved and available for issuance under the
Plan from 14,800,000 shares to 18,800,000 shares.
F-14
<PAGE> 52
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
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, 400,000 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 40,000 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. On an annual basis beginning with the 1997 Annual
Meeting, an option to purchase an additional 20,000 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 annual 20,000-share option
grants any one non-employee Board member may receive over his or her period of
continued Board service during the term of the Directors Plan. 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. Each option will be immediately exercisable
for all the option shares, but any purchased shares will be subject to
repurchase by the Company, at the exercise price paid per share, upon the
optionee's cessation of Board service. Each initial option grant will vest (and
the Company's repurchase rights will lapse) in four successive equal annual
installments over the optionee's period of Board service, with the first such
installment to vest upon the completion of one year of Board service measured
from the option grant date. Additional option grants will vest (and the
Company's repurchase rights will lapse) upon the completion of one year of Board
service measured from the option grant date. The term of the Directors Plan is
ten years.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------------- ----------------
<S> <C> <C>
Outstanding, January 1, 1994 9,630,784 $ 0.35
Granted 3,240,400 $ 2.36
Exercised (1,484,104) $ 0.07
Canceled (705,908) $ 1.52
-----------
Outstanding, December 31, 1994
(4,649,244 exercisable at a weighted average price of $0.34) 10,681,172 $ 0.90
Granted (weighted average fair value of $2.96) 4,956,400 $ 5.14
Exercised (2,024,380) $ 0.71
Canceled (286,700) $ 3.39
-----------
Outstanding, December 31, 1995
(5,692,132 exercisable at a weighted average price of $0.66) 13,326,492 $ 2.48
Granted (weighted average fair value of $12.11) 2,843,000 $20.95
Exercised (3,258,320) $ 1.92
Canceled (228,611) $ 6.87
===========
Outstanding, December 31, 1996 12,682,561 $6.68
===========
</TABLE>
F-15
<PAGE> 53
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The outstanding stock options primarily vest ratably over a four year
period. Stock options outstanding at December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- ----------------------- -------------------- --------------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.04 - $0.07 3,503,410 5.3 $ 0.07 3,494,568 $ 0.07
$0.83 - $3.44 3,364,276 7.4 $ 2.48 1,538,184 $ 2.17
$4.00 - $7.63 3,029,223 8.6 $ 5.86 781,781 $ 5.79
$10.31 - $17.31 1,328,258 9.2 $14.15 91,990 $13.40
$20.50 - $30.00 1,457,394 9.6 $27.19 142,182 $26.39
-------------------- --------------- ---------------- --------------------- ----------------
$0.04 - $30.00 12,682,561 7.5 $ 6.68 6,048,705 $ 2.16
==================== =====================
</TABLE>
At December 31, 1996, 1,039,615 and 320,000 shares were available for
future grants under the Option Plan and Directors' Plan, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan, (the "Purchase
Plan"), eligible employees are permitted to have salary withholdings to purchase
shares of common stock at a price equal to 85% of the lower of the market value
of the stock at the beginning or end of each six-month offer period, subject to
an annual limitation. Stock issued under the Purchase Plan was 75,208 and
79,020 shares in 1996 and 1995 at weighted average prices of $14.77 and $4.89,
respectively. The weighted average fair value, per share, of the 1996 and 1995
awards was $17.38 and $5.75, respectively. At December 31, 1996, 845,772 shares
were reserved for future issuances under the Purchase Plan.
ADDITIONAL STOCK PLAN INFORMATION (SFAS NO. 123)
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations. No compensation expense has been recognized in the financial
statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No.
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values.
F-16
<PAGE> 54
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
six months following vesting; stock volatility, 65% in 1996 and 65% in 1995;
risk free interest rates, 6.26% in 1996 and 6.11% in 1995; and no dividends
during the expected term. The Company's calculations are based on a single
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1996 and 1995 awards had been amortized to expense
over the vesting period of the awards, pro forma net income would have been
$31.3 million, or $0.43 per share, in 1996 and a loss of $258,000, or $0.00 per
share, in 1995. These amounts are based on calculated values for option awards
in 1996 and 1995 of $34.4 million and $14.7 million, respectively. The impact of
stock options granted prior to 1995 has been excluded from the pro forma
calculation; accordingly, the 1996 and 1995 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation may
apply to all applicable stock options.
13. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(K) Savings and
Investment Plan, which was established in 1993, covering substantially all of
the Company's employees subject to certain eligibility requirements. At its
discretion, the Company may make contributions to the plan. In April 1996, the
Board approved a resolution to match employee contributions provided that a
threshold earnings per share level was reached. Employee deferrals from April
28, 1996 through December 31, 1996 were eligible for a matching contribution
equal to fifty percent (50%) of the employee's salary deferral, not to exceed
$500 per employee. Matching contributions vest over a period of four years of
service. The aggregate accrual for this contribution included in the
accompanying consolidated balance sheet as of December 31, 1996 was $145,000. No
contributions were made by the Company in 1995 or 1994.
14. 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.
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 amended its quarterly statements for both 1994 and 1995 to
reflect the proper reporting of the trading gains and losses.
F-17
<PAGE> 55
<PAGE> 56
PAIRGAIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
15. SETTLEMENT INCOME RELATED TO UNAUTHORIZED TRADING OF INVESTMENTS BY
THIRD PARTIES
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 Capital
Insight and Mr. S. Jay Goldinger, its president. The derivative complaint stated
causes of action for breach of fiduciary duty, abuse of control, constructive
fraud, gross mismanagement and waste of corporate assets by reason of unusual
losses incurred by the Company as a result unauthorized trading of investment by
third parties (See Note 14). The suit sought an award in the amount of all
damages sustained by the Company including the losses of $15.8 million and legal
fees and expenses.
In September 1996, the Company and other parties to the derivative
suits described above executed definitive settlement agreements to settle and
dismiss the derivative suits. The Court approved the settlement in November
1996. Under the terms of the settlement, the Company received $2.5 million from
a brokerage firm involved in processing the investments for Capital Insight, and
paid plaintiff's attorneys fees of $450,000. The impact of the settlement has
been recorded in the Company's financial statements for the year ended December
31, 1996.
16. SUBSEQUENT EVENTS
On February 27, 1997, the Company acquired all the outstanding shares
of Avidia Systems, Inc., ("Avidia") pursuant to an Agreement and Plan of
Reorganization (the "Merger Agreement") among Avidia and others, with Avidia
surviving as a wholly-owned subsidiary of the Company (the "Acquisition"). The
Avidia Common Stock, Preferred Stock and outstanding options and warrants to
purchase Avidia Common Stock were converted into the right to receive
approximately 2,366,865 shares of the Company's Common Stock, consisting of
directly issued shares and warrants and options to acquire the Company's Common
Stock. The Company intends to account for the Acquisition as a
pooling-of-interests.
Avidia was formed in December 1995 to address the growing market
requirements for high-speed, low-cost desktop networking products in business
and residential environments. Avidia has entered that market with a family of
standards-compliant ATM ("Asynchronous Transfer Mode") digital desktop products,
including high performance ATM switches for 25 Mbps connectivity for the
corporate, government and education markets. The Company intends to continue to
market Avidia's line of ATM desktop products under the Avidia name.
Following is pro forma revenue, net income and earnings per share
had the acquisition occurred as of January 1, 1996.
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED
----------------------
(IN THOUSANDS, EXCEPT
EARNINGS PER SHARE)
<S> <C>
Revenues $ 205,505
Net income $ 34,908
Earnings per share $ 0.47
</TABLE>
The pro forma information presented is not necessarily indicative of
either the results of operations that would have occurred had the merger been
effected on January 1, 1996 nor of future results of operations.
F-18
<PAGE> 57
PAIRGAIN TECHNOLOGIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
------------ ---------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts
receivable $ 469 $ 428 $ 3 $ -- $ 900
Inventory reserves 4,235 13,877 -- 3,456 14,656
-------- -------- -------- -------- --------
Total $ 4,704 $ 14,305 $ 3 $ 3,456 $ 15,556
======== ======== ======== ======== ========
Year ended December 31, 1995:
Allowance for doubtful accounts
receivable $ 298 $ 159 $ 91 $ 79 $ 469
Inventory reserves 1,882 3,353 -- 1,000 4,235
-------- -------- -------- -------- --------
Total $ 2,180 $ 3,512 $ 91 $ 1,079 $ 4,704
======== ======== ======== ======== ========
Year ended December 31, 1994:
Allowance for doubtful accounts
receivable $ 155 $ 150 $ -- $ 7 $ 298
Inventory reserves 1,183 812 -- 113 1,882
-------- -------- -------- -------- --------
Total $ 1,338 $ 962 $ -- $ 120 $ 2,180
======== ======== ======== ======== ========
</TABLE>
S-1
<PAGE> 1
EXHIBIT 10.41
GROUND LEASE
This Ground Lease is made this 25th day of December, 1996 by and
between Richard D. Cheek, Robert D. Cheek and Daniel S. Cheek, all Trustees
under The Cheek Family Trust "D" utd March 1, 1995 (collectively, "LANDLORD")
and PairGain Technologies, Inc., a Delaware corporation ("TENANT") upon the
following terms and conditions:
BASIC LEASE PROVISIONS
A. PREMISES: Lot No. 37, Tract No. 8590, a vacant parcel
containing approximately 1.249 acres (54,406 sf) of land commonly known as
14381 Franklin Avenue, Tustin, California.
B. USE OF PREMISES: Parking lot to accommodate approximately 150
cars.
C. LEASE TERM: Eight (8) years with one option to extend the term
for a period of five (5) years ("OPTION TERM").
Commencement Date: January 1, 1997
Expiration Date: December 31, 2004
D. BASIC RENT. Four Thousand Nine Hundred Dollars ($4,900.00)
per month. (Tenant shall be entitled to two (2) months free rent. Basic Rent
shall be payable commencing March 1, 1997 as set forth in Paragraph 3 below).
E. RENTAL ADJUSTMENT: During the Option Term, the rent shall be
determined by applying a factor of nine percent (9%) to then fair market value
for unimproved industrial land in the Tustin/Irvine business area. The
resulting product shall be the annual rent during the Option Term. The monthly
rent shall be one-twelfth (1/12) of the annual rent.
F. SECURITY DEPOSIT: Ten Thousand Dollars ($10,000.00).
G. ADDRESS FOR PAYMENTS AND NOTICES.
If to Landlord: Cheek Family Trust "D"
14341 Franklin Avenue
Tustin, California 92680
Attn.: Richard D. Cheek, Trustee
If to Tenant: PairGain Technologies, Inc.
14402 Franklin Avenue
Tustin, California 92680-7013
Attn.: Rob Price, Controller
GROUND LEASE PROVISIONS.
1. LEASED PREMISES. For and in consideration of the rent to be
paid, covenants and conditions to be kept and performed by Tenant, Landlord
does hereby lease to Tenant, and Tenant hereby hires from Landlord, that
certain real property described in Item A of the Basic Lease Provisions (said
real property and all improvements from time to time constructed thereon being
hereinafter sometimes referred to as the "PREMISES").
2. TERMS.
(a) PRIMARY TERM. The Primary Term of this lease shall
be for eight (8) years, commencing January 1, 1997 and ending on December 31,
2004, subject, however, to earlier termination as provided in Paragraph 18(i)
of this Lease.
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(b) OPTION TERM. Tenant shall have one (1) option to
extend the term of this Lease for an additional period of five (5) years
("OPTION TERM"), such Option Term to commence upon expiration of the Primary
Term of this Lease and, except for the adjustment in the Basic Rent described
in Section 4(b) hereinbelow, the same terms and conditions as herein set forth
shall apply to such Option Term. If Tenant shall elect to exercise the
aforesaid option, it shall do so by giving written notice to Landlord not less
than thirty (30) days prior to expiration of the Primary Term of this Lease.
3. COMMENCEMENT OF RENT AND PAYMENT OF EXPENSES. Tenant's
obligation for the payment as set forth in Paragraph 4 below shall commence on
March 1, 1997. Tenant's obligation for the payment of expenses provided in
Paragraphs 8, 9, 10 and 11 below shall commence on January 1, 1997.
4. BASIC RENT AND ADJUSTMENTS. Tenant hereby agrees to pay as
rent for the use and occupancy of the Premises during the term of this Lease,
without deduction or offset, at the time and in the manner as hereinafter
provided, the following sums:
(a) BASIC RENT. A basic monthly rent in the amount
specified in Item D of the Basic Lease Provisions, subject to adjustment as
hereinafter provided, shall be payable monthly in advance on the Commencement
Date and on the first day of each succeeding month thereafter for the entire
Lease Term.
(b) BASIC RENT DURING OPTION TERM. The Basic Rent during
the Option Term shall be determined by applying a factor to the then fair
market value for unimproved industrial land in the Tustin/Irvine business area.
The resulting product shall be the annual rent. The monthly rent shall be
one-twelfth (1/12/) of the annual rent. The fair market value of the Premises
shall be determined by an appraiser selected by Tenant and Landlord, which
appraiser shall determine the fair market value of the Premises if it were then
made available on the open market for the use set out in Paragraph 5 below but
excluding the value of the Tenant's improvements thereon. However, in no event
shall the Basic Rent as so adjusted be less than the Basic Rent otherwise
payable immediately prior to such adjustment. The appraiser employed to
determine the fair market value of the Premises must be a qualified MIA
Appraiser with at least ten (10) years experience appraising industrial land.
Such appraiser shall be appointed ninety (90) days or more prior to expiration
of the Lease Term. Should Landlord and Tenant fail to appoint such appraiser
prior to ninety (90) days from termination of the Lease Term, then either
Landlord or Tenant shall have the right to apply to the Superior Court of
Orange County, California to appoint such appraiser to establish the fair
market value of the Premises. Such appraiser shall determine the fair market
value of the Premises and render such finding in writing to the Landlord and
Tenant sixty (60) days prior to expiration of the Lease Term. Such
determination shall be final. The cost of such appraiser shall be divided
equally between Landlord and Tenant.
5. USE. Tenant shall use the Premises for the operation of the
facilities described in Item B of the Basic Lease Provisions and for no other
use or purpose without the prior consent of Lessor.
6. CONSTRUCTION.
(a) COMMENCEMENT. Commencing as of the date hereof and
continuing until completion, Lessee shall construct a paved parking lot on the
Premises sufficient to accommodate approximately one hundred fifty (150) cars
in accordance with all applicable governmental laws, ordinances, regulations
and other requirements. The Tenant shall be responsible for all costs
associated with the design, permitting and construction of such improvements.
(b) FORCE MAJEURE. The time limits provided above for the
commencement and completion of construction shall be extended for, and
throughout such period of time as commencement and
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continuation of construction is prevented or delayed due to strikes, lockouts,
acts of government, acts of God, wars, riots, civil insurrection or abnormal
force of elements, provided in no event shall any extension of said period of
time be deemed to have occurred unless Tenant shall have given written notice
to Landlord within such period of time setting forth the facts giving rise to
each such extension.
7. RIGHT OF FIRST REFUSAL. Landlord hereby grants to Tenant an
exclusive right of first refusal to acquire the Premises at any time during the
period commencing on the date of this Lease and ending on the expiration of the
term of this Lease extended by any Option Periods which have been exercised by
Tenant. Landlord shall give Tenant thirty (30) days notice of receipt by
Landlord of a bona fide option to purchase the Premises, which offer is
acceptable to Landlord. During such thirty-day period, Tenant shall have the
right to match such bona fide offer, in which event Tenant shall complete the
purchase under the same terms and conditions as set forth in such bona fide
offer.
8. TAXES. Tenant shall be responsible for, and agrees to pay, no
later than ten (10) days prior to delinquency, any and all taxes, assessments,
levies, fees and other governmental charges of every kind and nature
(hereinafter collectively called "TAXES"), levied or assessed by any municipal,
county, state, federal or other taxing or assessing authority upon, against or
with respect to (i) the Premises, (ii) all personal property of any kind,
placed or installed upon or about the Premises, (iii) all alterations,
additions or improvements by Tenant of every kind and nature, if any, made to
the Premises, and (iv) rent or other charges payable by Tenant to Landlord but
expressly excluding any general net income, franchise, inheritance or ad
valorem taxes levied upon or payable by Landlord. Tenant shall, not later than
the ten (10) day period described above or upon written request by Landlord if
payment is made earlier, furnish to Landlord a copy of the receipted of tax
bill or other proof of said payment. If any such charges are not paid when
due, Landlord may pay the same, and any amount so paid by the Landlord shall
thereupon become due to Landlord from Tenant as additional rent, together with
interest thereon.
9. REPAIRS AND UPKEEP.
(a) NO OBLIGATIONS OF LANDLORD. Landlord shall not be
required or obligated to make any changes, alterations, additions, improvements
or repairs in, on or about the Premises or any part thereof, during the Term of
this Lease.
(b) TENANT OBLIGATIONS. At all times during the term of
this Lease, Tenant shall, at its sole cost and expense, keep and maintain the
Premises and all improvements thereon and all facilities appurtenant thereto in
a first-class condition, order and repair at least equal in quality to that
maintained by other owners of such properties of similar class and condition in
Orange County, California.
10. UTILITY CHARGES. Tenant shall pay all charges for gas, water,
sewer, electricity, telephone and other utility services used for the Premises
during the Lease Term, and shall indemnify Landlord and the Premises from and
against any such charges or liens arising therefrom.
11. INSURANCE.
(a) POLICY FORM AND EVIDENCE OF COVERAGE. All policies of
insurance provided for herein shall be written as primary policies (without
"contribution") with responsible and solvent insurance companies authorized to
do business in California. Prior to the commencement of construction described
in Section 6 above, Tenant shall supply Landlord a true and correct copy of all
such policies or Certificates of Insurance actually reflecting the coverage
required hereby, together with satisfactory evidence showing that all the
premiums thereon have been paid, and thereafter as additional
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premiums become due, Tenant shall supply Landlord with satisfactory evidence
that all such premiums have been paid. Notwithstanding anything to the
contrary contained in this provision, Tenant's obligations to carry insurance
as provided herein may be brought within the coverage of a so-called "blanket"
policy or policies of insurance carried and maintained by Tenant, so long as
such policy or policies segregate the amount of coverage applicable to the
Premises.
(b) TYPES AND LIMITS OF COVERAGE. Tenant, at its sole cost and
expense, shall during the entire term hereof, procure, pay for and keep in full
force and effect comprehensive general liability and property damage insurance
with respect to the Premises and the operations of, or on behalf of Tenant in,
on or about the Premises, including, but not limited to owned and non-owned
automobile (vehicle) liability, personal injury, on or at the Premises for not
less than One Million Dollars ($1,000,000) combined limit per occurrence for
bodily injury, death and property damage liability.
12. DAMAGE AND DESTRUCTION.
(a) TENANT'S OBLIGATIONS. If any improvement erected by
Tenant on the Premises or any part thereof, shall be damaged or destroyed, by
any casualty during the term of this Lease, Tenant shall, at its own cost and
expense, repair or restore the same according to the original plans thereof or
according to such modified plans as shall previously be approved by a writing
by Landlord.
(b) TENANT'S OPTION TO TERMINATE. Notwithstanding
anything to the contrary contained in the preceding paragraph, if during the
last two years of the Term or the Option Term any improvements shall be damaged
by any casualty and the cost of repairing or restoring the same shall exceed
the insurance proceeds payable for such damage, then Tenant shall have the
option to be exercised within thirty (30) days after such event to repair or
restore said improvement or terminate this Lease by written notice thereof to
Landlord. Notwithstanding the above, the option to terminate under this
paragraph may only be exercised if the Easement and Catellus Lease (as those
terms are defined in Paragraph 16(b) below are also terminated).
13. LIENS AND CLAIMS. Tenant shall not suffer or permit to be
enforced against the Premises or any part thereof, or any of the improvements
thereon, any mechanics', materialmens', contractors' or subcontractors' liens
arising from any claim for damage growing out of the work of any construction,
repair, restoration, replacement or improvement, or any other claim or damage
howsoever the same may arise, but Tenant shall pay or cause to be paid all of
such liens, claims or demands before any action is brought to enforce the same
against said Premises. Notwithstanding the foregoing, if Tenant shall in its
good faith contest the validity of any such lien, then Tenant shall, at its
sole cost and expense, defend itself and Landlord against the same and shall
pay and satisfy any adverse expense or cost or any adverse judgment that may be
rendered thereon before the enforcement thereof against Landlord or the
Premises, upon the condition that if Landlord shall require, Tenant shall
furnish to Landlord a surety bond satisfactory to Landlord in an amount at
least equal to such contested lien indemnifying Landlord against liability for
the same, and holding the Premises free from the effect of such lien or if
Landlord shall request, Tenant shall procure and record the bond provided for
in the California Civil Code, or any comparable statute hereinafter enacted
providing for the bond freeing the Premises from the effect of such lien.
14. ASSIGNMENT AND SUBLETTING. Neither the Tenant nor any
trustee, receiver or other successor to Tenant shall, either voluntarily or by
operation of law, assign, sell, encumber, pledge or otherwise transfer all or
any part of Tenant's leasehold estate hereunder, or permit the Premises to be
occupied by anyone other than Tenant or Tenant's employees or sublet the
Premises or any portion thereof without Landlord's prior written consent in
each instance, which consent shall not be unreasonably withheld.
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15. DEFAULTS AND REMEDIES.
(a) DEFAULTS. The occurrence of any one or more of the
following events shall constitute a default by Tenant: (i) abandonment of the
Premises; (ii) failure by Tenant to make any payment of rent or other payment
or charge required to be made by Tenant hereunder as and when due, where such
failure shall continue for a period of ten (10) days after written notice
thereof from Landlord to Tenant; or (iii) failure by Tenant to perform any
other express or implied covenants or provisions herein contained and should
such failure continue for thirty (30) days after written notice thereof from
Landlord to Tenant specifying the particulars of such default, provided,
further, that if the nature of Tenant's default is such that more than thirty
(30) days are reasonably required for its cure, then Tenant shall not be deemed
to be in default if Tenant shall commence such cure within said thirty (30) day
period and thereafter diligently prosecute such cure to completion.
(b) REMEDIES. If any of such events of default shall
occur, in addition to any or all other rights or remedies of the Landlord
hereby or by law provided, Landlord may terminate Tenant's rights to possession
of the Premises by any lawful means, in which case this Lease shall terminate
and Tenant shall immediately surrender possession of the Premises to Landlord.
In such event, Landlord shall be entitled to recover from Tenant damages as set
forth in Section 1951.2 of the California Civil Code.
16. SURRENDER, REMOVAL AND TITLE TO IMPROVEMENTS.
(a) STATUS OF IMPROVEMENTS. Upon expiration or other
termination of this Lease, Landlord may require Tenant, at its expense, to
promptly and diligently remove, demolish and/or clear off from the Premises all
or any designated portion of the improvements and other property of whatsoever
nature placed or owned by Tenant or its successor-in-interest thereon, whether
or not affixed to the Premises or to any improvements thereon, and after such
removal or clearance, Tenant shall restore the surface of the ground to a grade
properly filled, level and in uniform condition, free from all excavations and
debris. Rent, as provided in Paragraph 4 above, shall continue until the
removal and restoration is completed.
(b) TERMINATION OF EASEMENT. Landlord and Tenant hereby
acknowledge that a Grant of Easement for Parking, Use and Maintenance
("EASEMENT") dated of even date herewith has been executed by Landlord and
Catellus Development Corporation, a Delaware corporation, ("CATELLUS") at the
request of Tenant herein. Further, Landlord and Tenant hereby acknowledge that
Tenant has executed that certain lease of even date herewith with Catellus
describing certain real property commonly referred to as 14352 Franklin Avenue,
Tustin, California ("CATELLUS LEASE"). Tenant and Landlord hereby agree that
the Easement shall be terminated concurrently with expiration or earlier
termination of this Ground Lease and the Catellus Lease. Any failure by Tenant
to cause the termination of the Easement in the manner set forth above shall be
deemed a material default under this Ground Lease and Tenant shall be liable
for direct damages caused by such default suffered by Landlord.
17. CONDEMNATION.
(a) TOTAL TAKING. If during the term hereof there shall
be a total taking by a public authority under the power of eminent domain, then
the leasehold estate of Tenant in and to the Premises shall cease and terminate
as of the date of actual and physical possession thereof shall be taken.
(b) PARTIAL TAKING. If during said term there shall be a
partial taking of the Premises, this Lease shall terminate as to the portion of
the Premises taken on the date when actual possession is taken pursuant to said
eminent domain proceedings, but said Lease shall continue in full force and
effect as to the remainder of said
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Premises. The Basic Rent payable by Tenant for the balance of said term shall
be abated in the ratio that the square footage of the ground area of the
Premises taken bears to the total ground area of said Premises at the time of
such taking. In the event of such taking, Tenant may, in its sole and absolute
discretion, terminate this Lease as of the date of such partial taking.
(c) ALLOCATION OF AWARD. All compensation and damages
awarded for the taking of the Premises or any portion thereof shall be
apportioned between Landlord and Tenant in the manner set forth in California
law or as provided by the condemning authority.
18. MISCELLANEOUS PROVISIONS.
(a) NOTICES. Any notice, election, demand or other
communication to be given by either party to the other hereunder may be
delivered in person to an authorized representative of the other party, or may
be deposited in the United States mail, duly registered or certified, with
postage prepaid, return receipt requested and addressed to the party for whom
intended as follows:
If to Landlord: at the address set forth in the Basic
Lease Provisions of this Lease.
If to Tenant: at the address set forth in the Basic
Lease Provisions of this Lease.
Either of the parties hereto may hereafter respectively designate another
address as provided above. Service of any such written notice shall be deemed
complete at the time of such personal delivery or within two (2) days after the
mailing thereof as hereinabove provided.
(b) ENTIRE AGREEMENT. This Lease covers in full each and
every agreement of every kind and nature whatsoever between the parties hereto
concerning the Premises, and all preliminary negotiations and agreements of
whatsoever kind with respect to the Premises, except those contained herein,
are superseded and of no further force or effect.
(c) AMENDMENT TO LEASE. No amendment or other
ratification of this Lease shall be effective unless in a writing signed by
Tenant and Landlord.
(d) CONTROLLING LAW. This Lease shall be governed by and
construed in accordance with the laws of the State of California.
(e) TIME IS OF THE ESSENCE. Time is of the essence of
each provision of this instrument of which time is an element.
(f) SEVERABILITY OF PROVISIONS. If any term, covenant or
condition of this Lease or the application thereof to any entity or
circumstance shall be invalid or unenforceable, the remainder of this Lease
shall not be affected thereby.
(g) ATTORNEYS' FEES. In the event any action is brought
by Landlord or Tenant against the other to enforce the breach of any of the
terms, covenants or conditions contained in this Lease, the prevailing party
shall be entitled to recover reasonable attorneys' fees to be fixed by the
court, together with costs of the suit therein incurred.
(h) SUCCESSORS AND ASSIGNS. This Lease shall inure to
the benefit of and be binding upon Landlord and Tenant and their respective
heirs, executors, legal representatives, successors and assigns.
(i) CONTINGENCY. The enforceability of this Lease
Agreement between Landlord and Tenant is specifically conditioned upon the
following conditions precedent, which shall be deemed satisfied by Tenant in
its sole, absolute and unfettered discretion:
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1. Physical inspection of the property,
including inspection of the soils and environmental condition of the Premises.
2. The issuance by the City of Tustin of a
conditional use permit for use of the Premises as a parking lot and use of that
certain real property located at 14352 Franklin Avenue, Tustin, California by
Tenant which permitted use shall be subject to the prior review and approval by
Tenant in its sole, unfettered and absolute discretion.
3. The successful execution of the Lease for the
property located at 14352 Franklin Avenue, Tustin, California.
4. Approval of this Lease by the Board of
Directors of Tenant.
5. The execution by all necessary parties of
that certain agreement entitled "Limited Secondary Agreement to Remove
Improvements" by and between Landlord and Catellus Development Corporation.
These conditions precedent shall be deemed satisfied upon receipt of written
notice of such satisfaction delivered to Landlord by Tenant. If these
conditions are not satisfied, Tenant may elect to cancel this Lease upon
written notice to Landlord at any time thereafter.
(j) SECURITY DEPOSIT. Upon the mutual execution of this
Lease, Tenant shall deposit with Landlord the Security Deposit (as defined in
the Basic Lease Provisions) and shall make an additional deposit of the first
month's rent ("FIRST MONTH'S RENT"). Such Security Deposit shall act as the
last month's rent under this Lease and shall insure the due, full and complete
performance by Tenant of all of the terms, covenants and conditions contained
in this Lease. The Security Deposit shall be applied to the last month's rent
and therefore Tenant shall not be required to make the last monthly rent
payment under this Lease. The First Month's Rent shall apply to the Basic Rent
for the first month of the Lease Term.
(k) COOPERATION. Tenant shall obtain from the City of
Tustin a conditional use permit to utilize the Premises as a parking lot.
Landlord shall cooperate with Tenant, render all reasonable assistance to
Tenant, and execute any documents reasonably requested by Tenant in order for
Tenant to obtain such conditional use permit.
IN WITNESS WHEREOF, the parties hereto have executed this
Lease as of the date and year first above written.
"LANDLORD"
/s/ RICHARD D. CHEEK, TRUSTEE
----------------------------
Richard D. Cheek, Trustee under
The Cheek Family Trust "D" utd
March 1, 1995
/s/ ROBERT D. CHEEK, TRUSTEE
---------------------------
Robert D. Cheek, Trustee under
The Cheek Family Trust "D" utd
March 1, 1995
/s/ DANIEL S. CHEEK, TRUSTEE
----------------------------
Daniel S. Cheek, Trustee under
The Cheek Family Trust "D" utd
March 1, 1995
"TENANT"
PairGain Technologies, Inc.,
a Delaware corporation
By: /s/ CHARLES W. MCBRAYER
-----------------------
Name: Charles W. McBrayer
Its: Chief Financial Officer
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LIMITED SECONDARY AGREEMENT TO REMOVE IMPROVEMENTS
THIS AGREEMENT is made as of the 31st day of December 1996 ("Effective
Date") by and between CATELLUS DEVELOPMENT CORPORATION, a Delaware corporation
("Catellus") and RICHARD CHEEK, ROBERT D. CHEEK, AND DANIEL S. CHEEK, all
Trustees of THE CHEEK FAMILY TRUST "D" UDT March 1, 1995 (the "Cheek Trust").
RECITALS
A. Catellus is the owner of that certain real property commonly
known 14352 Franklin Ave., Tustin, California, as more particularly described
on Exhibit A attached hereto and made a part hereof by this reference (the
"Catellus Property").
B. The Cheek Trust is the owner of that certain real property
located in the City of Tustin, California, as more particularly described on
attached hereto and made a part hereof by this reference (the "Cheek
Property"), which property is located near the Catellus Property.
C. Catellus has or intends to enter into a lease (the "Building
Lease") with PairGain Technologies, Inc., a Delaware corporation ("PairGain")
whereby PairGain intends to construct certain improvements (the "Tenant
Improvements") to the existing Building on the Catellus Property for use by
PairGain during the term of the Building Lease. As a condition to allowing
such Tenant Improvements to be constructed, the City of Tustin has required
that PairGain obtain additional parking and has required that the parking
rights be evidenced by a Grant of Easement to be recorded on the Cheek
Property. Accordingly, PairGain has entered into a lease (the "Ground Lease")
with the Cheek Trust for use of the Cheek Property as a parking lot.
D. Catellus has required as a part of the Building Lease and
related documentation, that, among other things, PairGain (a) remove the Tenant
Improvements in accordance with the provisions of the Building Lease at the
termination or expiration of the Building Lease, and (b) indemnify and hold
Catellus free and harmless from any and all costs, damages, liabilities, or
consequences, whether monetary or otherwise, resulting from the building of the
Tenant Improvements, the Conditional Use Permit from the City of
Tustin, and the Ground Lease.
E. It is the intent of the parties that the Ground Lease be
terminated upon termination or expiration of the Building Lease.
F. The Cheek Trust desires the assurance of Catellus that in the
event PairGain defaults in its obligation to remove the improvements such that
the Ground Lease can be terminated and any encumbrance relating thereto may be
removed from the title to the Cheeks Property, and Catellus is willing to give
such assurance on the limited terms of this Agreement.
NOW THEREFORE, the parties agree as follows:
1. AGREEMENT TO REMOVE IMPROVEMENTS
Catellus hereby agrees that in the event PairGain fails to remove the
Tenant Improvements and restore the Premises to the termination condition
called for in the Building Lease on or before ninety (90) days from the
expiration or termination of the Building Lease, including any extensions or
options thereof, Catellus will promptly undertake and pursue to completion the
removal of such improvements and restoration to the condition called for in the
Building Lease at its cost and expense; provided however, that such
undertaking on the part of Catellus shall in no way be deemed a waiver of its
rights to indemnity from PairGain nor of the primary responsibility of PairGain
with respect to such removal. Further, notwithstanding the foregoing, Catellus
shall not have any obligation or responsibility with respect to removal of any
portion of the Tenant Improvements nor restoration which is not required as a
condition by the City of Tustin to consenting to and permitting the termination
of the Ground Lease and the removal of the encumbrance related to the grant of
an easement for parking in connection therewith.
2. AGREEMENT FOR SOLE BENEFIT OF THE CHEEK TRUST.
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This Agreement is intended for and strictly limited to the Cheek Trust
and its successors-in-interest to the Cheek Property. Nothing in this
agreement shall be construed as granting any other party, including but not
limited to PairGain and the City of Tustin, any right to enforce or benefit
from this agreement.
3. SECONDARY, NOT PRIMARY OBLIGATION.
The agreement of Catellus shall be deemed secondary to the obligation
of PairGain directly to The Cheek Trust, and Catellus shall not be deemed the
primary obligor for the removal of the Tenant Improvements. The Cheek Trust
shall look first to PairGain for removal and restoration sufficient to result
in the Ground Lease termination and reconveyance of the easement encumbering
the Cheeks Property related thereto.
4. NO REPRESENTATION OR WARRANTY.
No representation or warranty, of any nature or kind, is made by
Catellus except for the limited agreement to remove the Tenant Improvements as
specifically set forth herein.
5. GENERAL PROVISIONS.
This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original Agreement, and all of which shall constitute one
Agreement to be effective as of the Effective Date. In the event any action is
brought to enforce or interpret any of the terms and provisions of this
Agreement, the "prevailing party" in such action shall be entitled to recover,
as an element of costs of suit and not as damages, reasonable costs and
expenses, including but not limited to taxable costs and reasonable attorneys'
fees. Each of the undersigned shall have joint and several liability for each
and every obligation set forth herein. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and assigns. The
parties and their successors and assigns agree to execute any and all documents
reasonably advisable and/or necessary to effectuate the terms and intent of
this Agreement. If any provision of this Agreement as applied to any party or
circumstance shall be adjudged by a court to be void and unenforceable, the
same shall in no way affect any other provision of this Agreement or the
validity and enforceability of the Agreement as a whole. This Agreement shall
be governed by the laws of the State of California.
"Catellus" CATELLUS DEVELOPMENT CORPORATION
a Delaware corporation
By /s/ ANA MARIA PEREZ
------------------------------------------
Its Vice President
---------------------------------------
"The Cheeks Trust" THE CHEEK FAMILY TRUST "D" UDT MARCH 1, 1995
By /s/ RICHARD D. CHEEK, TRUSTEE
------------------------------------------
Richard D. Cheek, Trustee
By /s/ ROBERT D. CHEEK, TRUSTEE
------------------------------------------
Robert D. Cheek, Trustee
By /s/ DANIEL S. CHEEK, TRUSTEE
------------------------------------------
Daniel S. Cheek, Trustee
READ, APPROVED, and AGREED TO:
PAIRGAIN TECHNOLOGIES, INC.,
a Delaware corporation
By /s/ CHARLES W. McBRAYER
-----------------------------
Its CFO
-------------------------
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EXHIBIT 10.42
SINGLE TENANT INDUSTRIAL LEASE
Effective Date: January 7, 1997
(The date set forth below Landlord's signature.)
BASIC LEASE INFORMATION
Landlord: CATELLUS DEVELOPMENT CORPORATION, a Delaware
corporation
Landlord's Address
For Notice: 1065 N. PacifiCenter Drive, Suite 200
Anaheim, CA 92806
Attn: Asset Management
Telephone: (714) 630-8100
Fax: (714) 237-7425
Landlord's Address
For Payment of Rent: File #53694
Los Angeles, CA 90074-3694
Tenant: PAIRGAIN TECHNOLOGIES, INC., a Delaware
corporation
Tenant's Address
For Notice: 14402 Franklin Ave.
Tustin, CA 92680-7013
Attn: Rob Price, Controller
Telephone: 714-730-2916
Fax: 714-832-9924
Project: Franklin Building
Building: Approximately 65,910 rentable square feet as
shown in Exhibit A.
Building Address:
Street: 14352 Franklin Ave.
City and State: Tustin, CA
Lot: The tax parcel on which the Building is located.
Term: Ninety-six (96) months
Commencement Date: January 1, 1997
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Base Rent Per Month: January 1, 1997 - December 31, 1998 Thirty Thousand Three
Hundred Eighteen Dollars
($30,318.00), provided
however that the rent for
months one (1) and two (2)
shall be conditionally abated
as set forth in the
Addendum
January 1, 1999 - December 31, 2000 Thirty Two Thousand Seven
Hundred Fifty Seven Dollars
($32,757.00)
January 1, 2001 - December 31, 2002 Thirty Five Thousand Four
Hundred Fifty Nine Dollars
($35,459.00)
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January 1, 2003 - December 31, 2004 Thirty Eight Thousand Three
Hundred Fifty Nine Dollars
($38,359.00)
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Security Deposit: Seventy Five Thousand Three Hundred Eighteen Dollars
($75,318.00) of which Thirty Thousand Three Hundred
Eighteen Dollars ($30,318.00) shall be in cash, and
of which Forty Five Thousand Dollars shall be in the
form of an irrevocable standby letter of credit
issued from a financially sound financial
institution reasonably satisfactory to Landlord.
(See Addendum for additional provisions concerning
the Letter of Credit.)
Broker: Landlord shall pay a brokerage commission in
connection with this Lease to The Grubb & Ellis
Company (Byron Ward and Kevin Turner for Landlord,
and Gary Allen for Tenant) pursuant to the listing
agreement executed between Grubb & Ellis and
Landlord.
Lease Year: Shall refer to each three hundred sixty-five (365)
day period during the Term commencing on the
Commencement Date and on each anniversary thereof.
Permitted Uses: General office, engineering, assembly and storage
for communication equipment and related uses, and no
other uses shall be permitted without the prior
written consent of Landlord.
EXHIBITS
A - Building/Lot - Premises
B - Work Letter
B-1 - Space Plan
C - Commencement Date Memorandum
D - Insurance Certificate
E - Prohibited Uses
G - Estoppel Certificate
H - Sample Form of Acceptable Subordination, Non-Disturbance, and
Attornment Agreement
I - Drawing of Acceptable Industrial / Office Configuration at Lease
Termination
J - Landlord Requirements for Improvements or Alterations by Tenant
The Basic Lease Information set forth above and the Exhibits attached
hereto are incorporated into and made a part of the following Lease. Each
reference in this Lease to any of the Basic Lease Information shall mean the
respective information above and shall be construed to incorporate all of the
terms provided under the particular Lease paragraph pertaining to such
information. In the event of any conflict between the Basic Lease Information
and the provisions of the Lease, the latter shall control.
LANDLORD (________) AND TENANT (_______) AGREE.
initial initial
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Table of Contents
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Page
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1. PREMISES...........................................................1
1.1 Premises.....................................................1
1.2 Reserved Rights..............................................1
2. TERM...............................................................1
2.1 Commencement Date............................................1
2.2 Possession...................................................1
3. RENT...............................................................1
3.1 Rent.........................................................1
3.2 Late Charge and Interest.....................................1
3.3 Security Deposit.............................................2
4. UTILITIES..........................................................2
5. TAXES..............................................................2
5.1 Real Property Taxes..........................................2
5.2 Personal Property Taxes......................................3
6. TRIPLE NET LEASE...................................................3
7. INSURANCE..........................................................3
7.1 Landlord.....................................................3
7.2 Tenant.......................................................3
7.3 General......................................................4
7.4 Indemnity....................................................4
7.5 Exemption of Landlord from Liability.........................4
8. REPAIRS AND MAINTENANCE............................................5
8.1 Landlord.....................................................5
8.2 Tenant.......................................................5
9. ALTERATIONS........................................................5
9.1 Trade Fixtures; Alterations....................................5
9.2 Damage; Removal................................................5
9.3 Liens..........................................................6
10. USE................................................................6
11. ENVIRONMENTAL MATTERS..............................................6
11.1 Hazardous Materials...........................................6
11.2 Indemnification...............................................7
12. DAMAGE AND DESTRUCTION.............................................7
12.1 Casualty......................................................7
12.2 Tenant's Fault................................................8
12.3 Uninsured Casualty............................................8
12.4 Waiver 8
13. EMINENT DOMAIN.....................................................8
13.1 Total Condemnation............................................8
13.2 Partial Condemnation..........................................8
13.3 Award.........................................................8
13.4 Temporary Condemnation........................................9
14. DEFAULT............................................................9
14.1 Events of Defaults............................................9
14.2 Remedies......................................................9
14.3 Cumulative...................................................10
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15. ASSIGNMENT AND SUBLETTING.........................................10
15.1 No Assignment or Subletting Without Landlord's Consent.......10
15.2 Exception for Related Entity Assignment......................11
16. ESTOPPEL, ATTORNMENT AND SUBORDINATION............................11
16.1 Estoppel.....................................................11
16.2 Subordination................................................11
16.3 Attornment...................................................11
17. MISCELLANEOUS.....................................................11
17.1 General....................................................11
17.2 Signs......................................................12
17.3 Waiver.....................................................12
17.4 Financial Statements.......................................12
17.5 Limitation of Liability....................................12
17.6 Notices....................................................13
17.7 Brokerage Commission.......................................13
17.8 Authorization..............................................13
17.9 Holding Over; Surrender....................................13
17.10 Joint and Several..........................................13
17.11 Covenants and Conditions...................................13
17.12 Addenda....................................................13
</TABLE>
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1. PREMISES.
1.1 Premises. Landlord hereby leases to Tenant the Building and that
portion of the Lot (or all thereof if the Building constitutes the material
improvement thereon) upon which the same is situated (hereinafter collectively
referred to as the "Premises")as shown on Exhibit A attached hereto.
1.2 Reserved Rights. Landlord reserves the right to enter the Premises
upon reasonable notice to Tenant (except in case of an emergency) and/or to
undertake the following: inspect the Premises and/or the performance by Tenant
of the terms and conditions hereof; grant easements on the Project, dedicate for
public use portions thereof and record covenants, conditions and restrictions
("CC&R's") affecting the Project and/or amendments to existing CC&R's which do
not unreasonably interfere with Tenant's use of the Premises; change the name of
the Project; and, during the last FIVE (5) months of the INITIAL
Term, show the Premises to prospective tenants. IN THE EVENT TENANT EXERCISES
ITS OPTION TO EXTEND AS PROVIDED IN THE ADDENDUM, LANDLORD RESERVES THE RIGHT
DURING THE LAST NINE (9) MONTHS OF THE EXTENSION TERM TO ENTER THE PREMISES UPON
REASONABLE NOTICE TO
2. TERM. ON THE COMMENCEMENT DATE SET FORTH
IN THE BASIC LEASE INFORMATION
2.1 Commencement Date. The Term of the Lease shall commence ("Commencement
Date") and the Lease shall continue in full force and effect for the period of
time specified as the Term or until this Lease is terminated as otherwise
provided herein. Tenant shall, upon demand after delivery of the Premises to
Tenant, execute and deliver to Landlord a Commencement Date Memorandum in the
form attached hereto as Exhibit C acknowledging (i) the Commencement Date, and
(ii) Tenant's acceptance of the Premises.
3. RENT.
3.1 Rent. Tenant shall pay to Landlord, at Landlord's Address for Payment
of Rent designated in the Basic Lease Information, or at such other address as
Landlord may from time to time designate in writing to Tenant for the payment of
Rent, the Base Rent, without notice, demand, offset or deduction, in advance, on
the first day of each calendar month. Upon the execution of this Lease, Tenant
shall pay to Landlord the first month's Base Rent. If the Term commences (or
ends) on a date other than the first (or last) day of a month, Base Rent shall
be prorated on a per diem basis with respect to the portion of the first month
and/or last month within the Term. All sums other than Base Rent which Tenant is
obligated to pay under this Lease shall be deemed to be additional rent due
hereunder, whether or not such sums are designated "additional rent." The term
"Rent" means the Base Rent and all additional rent payable hereunder.
3.2 Late Charge and Interest. The late payment of any Rent will cause
Landlord to incur additional costs, including administration and collection
costs and processing and accounting expenses and increased debt service
("Delinquency Costs"). If Landlord has not received any installment of Rent
within five (5) days after such amount is due, Tenant shall pay a late charge of
SIX PERCENT (6%) of the delinquent amount, which is agreed to represent a
reasonable estimate of the Delinquency Costs incurred by Landlord. In addition,
IF AND ONLY IF LANDLORD COMMENCES A LEGAL PROCEEDING TO ENFORCE THIS LEASE, all
such delinquent amounts shall bear interest from the date such amount was due
until paid in full at a rate per annum ("Applicable Interest Rate") equal to the
lesser of (a) the maximum interest rate permitted by law or (b) five percent
(5%) above the rate publicly announced by Bank of America, N.A. (or if Bank of
America, N.A. ceases to exist, the largest bank then headquartered in the State
of California ("Bank") as its "Reference Rate." If the use of the announced
Reference Rate is discontinued by the Bank, then the term Reference Rate shall
mean the announced rate charged by the Bank which is, from time
1.
<PAGE> 6
to time, substituted for the Reference Rate. Landlord and Tenant recognize that
the damage which Landlord shall suffer as a result of Tenant's failure to pay
such amounts is difficult to ascertain and said late charge and interest are the
best estimate of the damage which Landlord shall suffer in the event of late
payment. If a late charge becomes payable for any three (3) installments of Rent
within any twelve (12) month period, then the Rent shall automatically become
due and payable quarterly in advance.
3.3 Security Deposit. Upon the execution of this Lease, Tenant shall pay
to Landlord the Security Deposit. The Security Deposit shall secure the full and
faithful performance of each provision of this Lease to be performed by Tenant.
Landlord shall not be required to pay interest on the Security Deposit or to
keep the Security Deposit separate from Landlord's own funds. If Tenant fails to
perform fully and timely all or any of Tenant's covenants and obligations
hereunder, Landlord may, but without obligation, apply all or any portion of the
Security Deposit toward fulfillment of Tenant's unperformed covenants and/or
obligations. If Landlord does so apply any portion of the Security Deposit,
Tenant shall immediately pay Landlord sufficient cash to restore the Security
Deposit to the SUM OF (i) THE amount of the then current Base Rent per month,
PLUS (ii) THE FORTY FIVE THOUSAND DOLLARS ($45,000) LETTER OF CREDIT REFERRED TO
IN THE BASIC LEASE INFORMATION AND AS FURTHER SPECIFIED IN THE ADDENDUM ATTACHED
HERETO. Upon any increase in Base Rent, Landlord may require the Security
Deposit to be increased by the amount of the increase in Base Rent per month.
After Tenant vacates the Premises, upon the expiration or sooner termination of
this Lease, if Tenant is not then in default, Landlord shall return to Tenant
any unapplied balance of the Security Deposit.
4. UTILITIES. Tenant shall make all arrangements for and shall pay all charges
for heat, water, gas, electricity, telephone and any other utilities used on or
provided to the Premises including, without limitation, paying any deposits and
"hook up charges." Landlord shall not be liable to Tenant for interruption in or
curtailment of any utility service, nor shall any such interruption or
curtailment constitute constructive eviction or grounds for rental abatement.
5. TAXES.
5.1 Real Property Taxes. Landlord shall pay to the proper taxing
authorities as the same become due all Real Property Taxes applicable to the
Premises, subject to reimbursement by Tenant as provided below. The term "Real
Property Taxes" shall be the sum of the following: all real property taxes,
possessory-interest taxes, business or license taxes or fees, service payments
in lieu of such taxes or fees, annual or periodic license or use fees, excises,
transit and traffic charges, housing fund assessments, open space charges, child
care fees, school, sewer and parking fees or any other assessments, levies,
fees, exactions or charges, general and special, ordinary and extraordinary,
unforeseen as well as foreseen (including fees "in-lieu" of any such tax or
assessment) which are assessed, levied, charged, conferred or imposed by any
public authority upon the Premises (or any real property comprising any portion
thereof) or its operations, together with all taxes, assessments or other fees
imposed by any public authority upon or measured by any Rent or other charges
payable hereunder, including any gross receipts tax or excise tax levied by any
governmental authority with respect to receipt of rental income, or upon, with
respect to or by reason of the development, possession, leasing, operation,
management, maintenance, alteration, repair, use or occupancy by Tenant of the
Premises or any portion thereof, or documentary transfer taxes upon this
transaction or any document to which Tenant is a party creating or transferring
an interest in the Premises, together with any tax imposed in substitution,
partially or totally, of any tax previously included within the aforesaid
definition or any additional tax the nature of which was previously included
within the aforesaid definition, together with the costs and expenses (including
attorneys and expert witness fees and costs) of challenging any of the foregoing
or seeking the reduction in or abatement, redemption or return of any of the
foregoing, but only to the extent of any such reduction, abatement, redemption
or return. Nothing contained in this Lease shall require Tenant to pay any
franchise, corporate, estate or inheritance tax of Landlord, or any income,
profits or revenue tax or charge upon the net income of Landlord.
5.1.1 Reimbursement By Tenant. Tenant shall pay to Landlord an amount
equal to the Real Property Taxes then due within fifteen (15) days after
delivery to Tenant by Landlord of an invoice for the same. Landlord may, at
Landlord's option, deliver statements from different taxing authorities at
different times or deliver all such statements at one time. In addition,
Landlord may elect to collect such Real Property Taxes from Tenant in advance,
on a monthly or quarterly basis, based upon Landlord's reasonable estimate of
such Real Property Taxes. If the amount of monthly or quarterly payments for
estimated Real Property Taxes received by Landlord from Tenant is more or less
than the actual Real Property Taxes due, an appropriate adjustment shall be made
by Landlord and Tenant. NOTWITHSTANDING THE FOREGOING, PROVIDED (i) TENANT IS
NOT IN DEFAULT UNDER THE TERMS OF THIS LEASE, (ii) TENANT IS OCCUPYING AT LEAST
NINETY PERCENT (90%) OF THE PREMISES, AND (iii) LANDLORD HAS NOT GIVEN MORE THAN
ONE (1) NOTICE OF DEFAULT IN ANY TWELVE (12) MONTH PERIOD FOR NONPAYMENT OF
MONETARY OBLIGATIONS, PAYMENT OF REAL PROPERTY TAXES SHALL NOT BE REQUIRED OF
TENANT SOONER THAN 30 DAYS PRIOR TO THE DATE THE APPLICABLE REAL PROPERTY TAX IS
DUE. IN NO EVENT SHALL REAL PROPERTY TAXES REIMBURSABLE BY TENANT INCLUDE
PENALTIES OR LATE CHARGES IMPOSED BY THE TAXING AUTHORITY BY REASON OF THE
FAILURE OF LANDLORD TO PAY TAXES ON TIME UNLESS SUCH DELINQUENCY OR FAILURE TO
PAY WAS DIRECTLY OR INDIRECTLY CONTRIBUTED TO BY TENANT, INCLUDING BUT NOT
LIMITED TO THE FAILURE OF TENANT TO PROMPTLY REIMBURSE LANDLORD AS REQUIRED
HEREUNDER.
5.1.2 Partial Years. Real Property Taxes for partial tax fiscal years,
if any, failing within the Term, shall be prorated. Tenant's obligations for
Real Property Taxes for the last full or partial year of the Term shall survive
the expiration or earlier termination of this lease.
2.
<PAGE> 7
5.1.3 RIGHT TO CONTEST TAX ASSESSMENTS. TENANT SHALL HAVE THE RIGHT TO
EXAMINE TAX STATEMENTS RECEIVED FROM ANY TAXING AUTHORITY AND OTHER RELEVANT
INFORMATION UPON REASONABLE REQUEST TO LANDLORD, TO REQUEST A PROPOSITION 8
REASSESSMENT, OR TO OTHERWISE CONTEST THE AMOUNT OF REAL PROPERTY TAXES WITH THE
APPROPRIATE TAXING AUTHORITY, PROVIDED HOWEVER, THAT IN THE EVENT OF ANY SUCH
REQUEST FOR REASSESSMENT OR IN THE EVENT TENANT CONTESTS THE AMOUNT OR LEGALITY
OF SUCH TAXES (i) TENANT SHALL BEAR THE ENTIRE COST OF SUCH REQUEST OR CONTEST,
(ii) TENANT AGREES TO INDEMNIFY AND HOLD LANDLORD FREE AND HARMLESS FROM ALL
COSTS, LIABILITY, OR EXPENSE, INCLUDING WITHOUT LIMITATION ATTORNEYS' FEES, IN
CONNECTION THEREWITH, (iii) TENANT SHALL PROVIDE LANDLORD WITH NOT LESS THAN
THIRTY (30) DAYS ADVANCE WRITTEN NOTICE OF SUCH INTENT TO SEEK A REASSESSMENT OR
TO CONTEST THE AMOUNT, (iv) LANDLORD SHALL HAVE THE RIGHT, IN LANDLORD'S SOLE
DISCRETION, TO JOIN IN SUCH OR RELATED PROCEEDINGS, MOTIONS, AND PETITIONS, AND
(v) LANDLORD MAY REQUIRE THAT TENANT PAY SUCH TAXES AS THEY BECOME DUE
REGARDLESS OF THE STATUS OF SUCH CONTEST OR REQUEST.
5.2 Personal Property Taxes. Prior to delinquency, Tenant shall pay all
taxes and assessments levied upon trade fixtures, alterations. additions,
improvements, inventories and other personal property located and/or installed
an the Premises by Tenant; and Tenant shall provide Landlord copies of receipts
for payment of all such taxes and assessments. To the extent any such taxes are
not separately assessed or billed to Tenant, Tenant shall pay the amount thereof
as invoiced by Landlord.
6. TRIPLE NET LEASE. It is intended that this Lease be a "triple net lease,"
and that the Rent to be paid hereunder by Tenant will be received by Landlord
without any deduction or offset whatsoever by Tenant, foreseeable or
unforeseeable. Except as expressly provided to the contrary in this Lease,
Landlord shall not be required to make any expenditure, incur any obligation, or
incur any liability of any kind whatsoever in connection with this Lease or the
ownership, construction, maintenance, operation or repair of the Premises,
EXCEPT AS SPECIFICALLY SET FORTH IN THE ADDENDUM.
7. INSURANCE.
7.1 Landlord. Landlord shall maintain insurance insuring the Building
against fire and extended coverage (including, if Landlord elects, "all risk"
coverage, earthquake/volcanic action, flood and/or surface water insurance) for
the full replacement cost of the Building, with deductibles and the form and
endorsements of such coverage as selected by Landlord, together with rental
abatement insurance against loss of Rent in an amount equal to the amount of
Rent for a period of at least twelve (12) months commencing on the date of loss.
Landlord may also carry such other insurance as Landlord may deem prudent or
advisable, including, without limitation, liability insurance in such amounts
and on such terms as Landlord shall determine. Tenant shall pay to Landlord an
amount equal to the premiums then due within fifteen (15) days after delivery to
Tenant by Landlord of an invoice for any such premiums. Landlord may, at
Landlord's option, elect to collect such premiums from Tenant in advance, on a
monthly or quarterly basis, based upon Landlord's reasonable estimate of such
premiums. If the amount of monthly or quarterly payments for estimated premiums
received by Landlord from Tenant are more or less than the actual premiums due,
an appropriate adjustment shall be made by Landlord and Tenant.
7.2 Tenant. Tenant shall, at Tenant's expense, obtain and keep in force at
all times the following insurance:
7.2.1 Commercial General Liability Insurance (Occurrence Form). A
policy of commercial general liability insurance (occurrence form) having a
combined single limit of not less than Two Million Dollars ($2,000,000) per
occurrence and Two Million Dollars ($2,000,000) aggregate per location if Tenant
has multiple locations, providing coverage for, among other things, blanket
contractual liability, premises, products/completed operations and personal and
advertising injury coverage, with deletion of (a) the exclusion for operations
within fifty (50) feet of a railroad track (railroad protective liability), if
applicable, and (b) the exclusion for explosion, collapse or underground hazard,
if applicable, and, if necessary, Tenant shall provide for restoration of the
aggregate limit;
7.2.2 Automobile Liability Insurance. Comprehensive automobile
liability insurance having a combined single limit of not less than Two Million
Dollars ($2,000,000) per occurrence and insuring Tenant against liability for
claims arising out of ownership, maintenance, or use of any owned, hired or
non-owned automobiles;
7.2.3 Workers' Compensation and Employer's Liability Insurance.
Workers' compensation insurance having limits not less than those required by
state statute and federal statute, if applicable, and covering all persons
employed by Tenant in the conduct of its operations on the Premises (including
the all states endorsement and, if applicable, the volunteers endorsement),
together with employer's liability insurance coverage in the amount of at least
One Million Dollars ($1,000,000); and
7.2.4 Property Insurance. "All risk" property insurance including
boiler and machinery comprehensive form, if applicable, covering damage to or
loss of any of Tenant's personal property, fixtures, equipment and alterations,
including electronic data processing equipment (collectively "Tenant's
Property") (and coverage for the full replacement cost thereof including
business interruption of Tenant), together with, if the property of Tenant's
invitee's is to be kept in the Premises,
3.
<PAGE> 8
warehouser's legal liability or bailee customers insurance for the full
replacement cost of the property belonging to invitee's and located in the
Premises.
7.3 General.
7.3.1 Insurance Companies. Insurance required to be maintained by
Tenant shall be written by companies licensed to do business in the state in
which the Premises are located and having a "General Policyholders Rating" of at
least A 8 (or such higher rating as may be required by a lender having a lien on
the Premises) as set forth in the most current issue of "Best's Insurance
Guide."
7.3.2 Certificates of Insurance. Tenant shall deliver to Landlord
certificates of insurance for all insurance required to be maintained by Tenant
in the form of Exhibit D, attached hereto, no later than seven (7) days prior to
the date of possession of the Premises. Tenant shall, at least ten (10) days
prior to expiration of the policy, furnish Landlord with certificates of renewal
or "binders" thereof. Each certificate shall expressly provide that such
policies shall not be cancelable or otherwise subject to modification except
after sixty (60) days prior written notice to the parties named as additional
insured in this Lease (except in the case of cancellation for nonpayment of
premium in which case cancellation shall not take effect until at least (10)
days' notice has been given to Landlord). If Tenant fails to maintain any
insurance required in this Lease, Tenant shall be liable for all losses and cost
resulting from said failure.
7.3.3 Additional Insured. Landlord and any property management company
of Landlord for the Premises shall be named as additional insured under all of
the policies required by Section 7.2.1. The policies required under Section
7.2.1 shall provide for severability of interest.
7.3.4 Primary Coverage. All insurance to be maintained by Tenant
shall, except for workers' compensation and employer's liability insurance, be
primary, without right of contribution from insurance of Landlord. Any umbrella
liability policy or excess liability policy (which shall be in "following form")
shall provide that if the underlying aggregate is exhausted, the excess coverage
will drop down as primary insurance. The limits of insurance maintained by
Tenant shall not limit Tenant's liability under this Lease.
7.3.5 Mutual Waiver of Subrogation. Tenant waives any right to recover
against Landlord for claims for damages to Tenant's Property whether or not
covered by insurance. LANDLORD WAIVES ANY RIGHT TO RECOVER AGAINST TENANT FOR
DAMAGES TO LANDLORD'S PROPERTY TO THE EXTENT COVERED BY INSURANCE. This
provision is intended to waive fully, and for the benefit of Landlord AND
TENANT, any rights and/or claims which might give rise to a right of subrogation
in favor of any insurance carrier. The coverage obtained by LANDLORD AND Tenant
pursuant to this Lease shall include, without limitation, a waiver of
subrogation endorsement attached to the certificate of insurance.
7.3.6 Notification of Incidents. Tenant shall notify Landlord within
twenty-four (24) hours after the occurrence of any accidents or incidents in the
Premises which could give rise to a claim under any of the insurance policies
required under this Section 7.
7.4 Indemnity. Tenant shall indemnify, protect, defend (by counsel
acceptable to Landlord) and hold harmless Landlord and its partners, directors,
officers, employees, shareholders, lenders, agents, contractors and each of
their successors and assigns from and against any and all claims, judgments,
causes of action, damages, penalties, costs, liabilities, and expenses,
including all costs, attorneys' fees, expenses and liabilities incurred in the
defense of any such claim or any action or proceeding brought thereon, arising
at any time during or after the Term as a result (directly or indirectly) of or
in connection with (i) any default in the performance of any obligation on
Tenant's part to be performed under the terms of this Lease, or (ii) Tenant's
use of the Premises, the conduct of Tenant's business or any activity, work or
things done, permitted or suffered by Tenant in or about the Premises or other
portions of the Project, except to the extent caused by Landlord's [gross]
negligence or wilful misconduct. TENANT SHALL IN ANY EVENT UNDERTAKE AND PAY FOR
THE COST OF DEFENSE FOR LANDLORD (WITH COUNSEL REASONABLY ACCEPTABLE TO
LANDLORD), AND IN THE EVENT THAT IT IS DETERMINED BY A COURT OF COMPETENT
JURISDICTION THAT THE PLAINTIFF(S) IN SUCH ACTION(S) IS ENTITLED TO AN AWARD
BASED UPON THE COMPARATIVE NEGLIGENCE OF LANDLORD, ANY AWARD AND THE COST OF
DEFENDING SUCH SUIT SHALL BE ALLOCATED BETWEEN TENANT AND LANDLORD IN THE
PROPORTION OF THE COMPARATIVE NEGLIGENCE SO DETERMINED. The obligations of
Tenant under this Section 7.4 shall survive the termination of this Lease with
respect to any claims or liability arising prior to such termination.
7.5 Exemption of Landlord from Liability. Tenant, as a material part of
the consideration to Landlord, hereby assumes all risk of damage to property
including, but not limited to, Tenant's fixtures, equipment, furniture and
alterations or injury to persons in, upon or about the Premises or other
portions of the Project arising from any cause, and Tenant hereby waives all
claims in respect thereof against Landlord, except to the extent such claims are
caused by Landlord's gross negligence or wilful misconduct. Tenant hereby agrees
that Landlord shall not be liable for injury to Tenant's business or any loss of
income therefrom or for damage to the property of Tenant, or injury to or death
of Tenant, Tenant's employees, invitee's, customers, agents or contractors or
any other person in or about the Premises or the Project, whether such damage or
injury is caused by fire, steam, electricity, gas, water or rain, or from the
breakage, leakage or other defects of sprinklers, wires, appliances, plumbing,
air
4.
<PAGE> 9
conditioning or lighting fixtures, or from any other cause, whether said damage
lighting or injury results from conditions arising upon the Premises, or from
other sources or places, and regardless of whether the cause of such damage or
injury or the means of repairing the same is inaccessible to Tenant, except to
the extent caused by Landlord's gross negligence or wilful misconduct.
8. REPAIRS AND MAINTENANCE.
8.1 Landlord. Landlord shall, AT ITS COST AND subject to the following
sentence, maintain the structural portions of the roof, foundation, and
load-bearing portions of walls (excluding wall coverings, painting, glass and
doors) of the Premises. Landlord shall not be required to make any repair
resulting from (i) any alteration or modification to the Premises or to
mechanical equipment within the Premises performed by, for or because of Tenant
or to special equipment or systems installed by, for or because of Tenant, (ii)
the installation, use or operation of Tenant's property, fixtures and equipment,
(iii) the moving of Tenant's property in or out of the Premises, (iv) Tenant's
use or occupancy of the Premises in violation of Section 10 of this Lease or in
the manner not contemplated by the parties at the time of the execution of this
Lease, (v) the acts or omissions of Tenant and Tenant's employees, agents,
invitees, subtenants, licensees or contractors, (vi) fire and other casualty,
except as provided by Section 12 of this Lease or (vii) condensation, except as
provided in Section 13 of this Lease. Landlord shall have no obligation to make
repairs under this Section 8.1 until a reasonable time after receipt of written
notice from Tenant of the need for such repairs. Tenant waives any right to
repair the Premises at the expense of Landlord under any applicable governmental
laws, ordinances, statutes, orders or regulations now or hereafter in effect
which might otherwise apply. IN THE CASE OF AN EMERGENCY WHERE LANDLORD'S
RESPONSE IS NOT (OR CANNOT REASONABLY BE EXPECTED TO OCCUR) WITH SUFFICIENT
PROMPTNESS TO PREVENT FURTHER MATERIAL DAMAGE TO THE PREMISES OR TENANT'S
EQUIPMENT AND PROPERTY, TENANT SHALL HAVE A LIMITED RIGHT TO RIGHT TO REPAIR AT
THE EXPENSE OF LANDLORD TO PREVENT FURTHER DAMAGE TO THE PREMISES AND TENANT'S
EQUIPMENT AND PROPERTY; PROVIDED HOWEVER, THAT TENANT DOES HEREBY WAIVE, AND IN
NO EVENT SHALL TENANT HAVE, A RIGHT TO OFFSET SUCH EXPENSE AGAINST ANY RENT DUE
HEREUNDER AND TENANT HEREBY WAIVES ANY RIGHTS IT MAY OTHERWISE HAVE TO ANY AND
ALL RIGHTS OF OFFSET PURSUANT TO ANY APPLICABLE GOVERNMENTAL LAWS, ORDINANCES,
STATUTES, ORDERS, OR REGULATIONS NOW OR HEREAFTER IN EFFECT. IN SUCH EVENT,
LANDLORD SHALL REIMBURSE TENANT FOR SUCH REASONABLE COSTS WITHIN THIRTY (30)
DAYS FROM THE DATE TENANT DELIVERS AN INVOICE TO LANDLORD.
8.2 Tenant. Except for the portions of the Premises expressly required to
be maintained by Landlord under Section 8.1, Tenant, at Tenant's expense, shall
maintain the Premises in good order, condition and repair, including, without
limitation, THE ROOF MEMBRANE, subfloors and floor coverings, walls and wall
coverings, mechanical, electrical, and plumbing systems, doors, windows, parking
lots and truck aprons, gutters and downspouts, landscaping and any signage.
Tenant shall enter into regularly scheduled preventive maintenance/service
contracts with maintenance contractors reasonably acceptable to Landlord for
servicing all hot water and heating and air conditioning systems and equipment
in the Premises. In the event Tenant fails, in the reasonable judgment of
Landlord, to maintain the Premises in good order, condition and repair, Landlord
shall have the right to perform such maintenance, repairs or refurbishing at
Tenant's expense.
9. ALTERATIONS.
9.1 Trade Fixtures; Alterations. Tenant may install necessary trade
fixtures, equipment and furniture in the Premises, provided that such items are
installed and are removable without structural or material damage to the
Premises or the Project. Tenant shall not construct, nor allow to be
constructed, any alterations or physical additions in, about or to the Premises
without obtaining the prior written consent of Landlord, which consent shall be
conditioned upon Tenant's compliance with Landlord's reasonable requirements
regarding construction of improvements and alterations but such consent
otherwise shall not be unreasonably withheld. Tenant shall submit plans and
specifications to Landlord with Tenant's request for approval and shall
reimburse Landlord for all costs which Landlord may incur in connection with
granting approval to Tenant for any such alterations and additions, including
any costs or expenses which Landlord may incur in electing to have outside
architects and engineers review said matters. Tenant shall file a notice of
completion after completion of such work and provide Landlord with a copy
thereof. Tenant shall provide Landlord with a set of "as-built" drawings for any
such work; PROVIDED HOWEVER THAT "AS-BUILT" DRAWINGS SHALL NOT BE REQUIRED FOR
NON-STRUCTURAL ALTERATIONS. FURTHER, NOTWITHSTANDING THE FOREGOING, THE CONSENT
OF LANDLORD SHALL NOT BE REQUIRED FOR NON-STRUCTURAL IMPROVEMENTS, THE COST OF
WHICH DO NOT EXCEED FIFTY THOUSAND DOLLARS ($50,000) PER PROJECT. IN ALL EVENTS,
REGARDLESS OF THE COST AND THE REQUIREMENT (OR LACK THEREOF) OF LANDLORD'S
CONSENT, TENANT SHALL GIVE LANDLORD REASONABLE ADVANCE NOTICE OF ALL
ALTERATIONS, IMPROVEMENTS, OR WORK TO BE PERFORMED.
9.2 Damage, Removal. Tenant shall repair all damage to the Premises caused
by the installation or removal of Tenant's fixtures, equipment, furniture and
alterations. Upon the termination of this Lease, Tenant shall remove any or all
alterations, additions, improvements and partitions made or installed by Tenant
and restore the Premises to its condition existing prior to the construction of
any such items; provided, however, Landlord may permit, upon written notice to
Tenant, any such items designated by Landlord to remain on the Premises, in
which event they shall be and become the property of Landlord upon the
termination of this Lease. All such removals and restoration shall be
accomplished in a good and workmanlike manner and so as not to cause any damage
to the Premises or the Project whatsoever. SEE ADDENDUM.
9.3 Liens. Tenant shall promptly pay and discharge all claims for labor
performed, supplies furnished and services rendered at the request of Tenant and
shall keep the Premises free of all mechanics' and materialmen's liens in
connection therewith. Tenant shall provide at least ten (10) days prior written
notice to Landlord before any labor is performed, supplies
5.
<PAGE> 10
furnished or services rendered on or at the Premises and Landlord shall have the
right to post on the Premises notices of non-responsibility. If any lien is
filed, Tenant shall cause such lien to be released and removed within [ten (10)]
THIRTY (30) days after the date of filing, and if Tenant fails to do so,
Landlord may take such action as may be necessary to remove such lien and Tenant
shall pay Landlord such amounts expended by Landlord together with interest
thereon at the Applicable Interest Rate from the date of expenditure. AS AN
ALTERNATIVE TO PROMPT RELEASE AND REMOVAL OF A LIEN, IF LANDLORD AND TENANT
MUTUALLY AGREE, TENANT MAY BOND AROUND SUCH LIEN UPON SUCH TERMS AND CONDITIONS,
INCLUDING THE AMOUNT OF THE BOND, AS LANDLORD AND TENANT MAY MUTUALLY AGREE AND
DETERMINE ON A CASE BY CASE BASIS.
10. USE. The Premises shall be used only for the Permitted Uses set forth in
the Basic Lease Information and for no other uses. Tenant's use of the Premises
shall be in compliance with and subject to all applicable governmental laws,
ordinances, statutes, orders and regulations and any CC&R's or any supplement
thereto recorded in any official or public records with respect to the Project
or any portion thereof. In no event shall the Premises be used for any of the
Prohibited Uses set forth on Exhibit E attached hereto. Tenant shall comply with
the rules and regulations attached hereto as Exhibit F, together with such
additional rules and regulations as Landlord may from time to time prescribe.
Tenant shall not commit waste, overload the floors or structure of the Premises,
subject the Premises or the Project to any use which would damage the same or
increase the risk of loss or violate any insurance coverage, permit any
unreasonable odors, smoke, dust, gas, substances, noise or vibrations to emanate
from the Premises, take any action which would constitute a nuisance or would
disturb, obstruct or endanger any other tenants of the Project, take any action
which would abrogate any warranties, or use or allow the Premises to be used for
any unlawful purpose. Tenant shall have the right to use for its employees and
invitees, the parking areas on the Premises. Landlord shall not be responsible
for noncompliance by any other tenant or occupant of the Project with, or
Landlord's failure to enforce, any of the rules or regulations or any other
terms or provisions of such tenant's or occupant's lease. Tenant shall promptly
comply with the reasonable requirements of any board of fire insurance
underwriters or other similar body now or hereafter constituted. Tenant shall
not do any act which shall in any way encumber the title of Landlord in and to
the Premises or the Project.
11. ENVIRONMENTAL MATTERS.
11.1 Hazardous Materials. Tenant shall not cause nor permit, nor allow any
of Tenant's employees, agents, customers, visitors, invitee's, licensees,
contractors, assignees or subtenants (collectively, "Tenant's Parties") to cause
or permit, any Hazardous Materials to be brought upon, stored, manufactured,
generated, blended, handled, recycled, treated, disposed or used on, under or
about the Premises or the Project, except for routine office and janitorial
supplies in usual and customary quantities stored, used and disposed of in
accordance with all applicable Environmental Laws. As used herein, "Hazardous
Materials" means any chemical, substance, material, controlled substance,
object, condition, waste, living organism or combination thereof which is or may
be hazardous to human health or safety or to the environment due to its
radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity,
carcinogenicity, mutagenicity, phytotoxicity, infectiousness or other harmful or
potentially harmful properties or effects, including, without limitation,
petroleum and petroleum products, asbestos, radon, polychlorinated biphenyls
(PCBs) and a of those chemicals, substances, materials, controlled substances,
objects, conditions, wastes, living organisms or combinations thereof which are
now or become in the future listed, defined or regulated in any manner by any
Environmental Law based upon, directly or indirectly, such properties or
effects. As used herein, "Environmental Laws" means any and all federal, state
or local environmental, health and/or safety-related laws, regulations,
standards, decisions of courts, ordinances, rules, codes, orders, decrees,
directives, guidelines, permits or permit conditions, currently existing and as
amended, enacted, issued or adopted in the future which are or become applicable
to Tenant, the Premises, the Building or the Project. Tenant and Tenant's
Parties shall comply with all Environmental Laws and promptly notify Landlord of
the violation of any Environmental Law or presence of any Hazardous Materials,
other than office and janitorial supplies as permitted above, on the Premises.
Landlord shall have the right to enter upon and inspect the Premises and to
conduct tests, monitoring and investigations. If such tests indicate the
presence of any environmental condition which occurred during the Term of this
Lease, Tenant shall reimburse Landlord for the cost of conducting such tests
UNLESS IT IS ULTIMATELY DETERMINED THAT THE CAUSE OR SOURCE OF SUCH
ENVIRONMENTAL CONDITIONS WAS NOT RELATED EITHER DIRECTLY OR INDIRECTLY, WHETHER
THROUGH USE OR OCCUPANCY OR OTHERWISE, TO TENANT OR TENANT'S PARTIES. The phrase
"environmental condition" shall mean any adverse condition relating to any
Hazardous Materials or the environment, including surface water, groundwater,
drinking water supply, land, surface or subsurface strata or the ambient air and
includes air, land and water pollutants, noise, vibration, light and odors. In
the event of any such environmental condition CAUSED BY TENANT OR TENANT'S
PARTIES, Tenant shall promptly take any and all steps necessary to rectify the
same to Landlord's reasonable satisfaction or shall, at Landlord's election,
reimburse Landlord, upon demand, for the cost to Landlord of performing
rectifying work. The reimbursement shall be paid to Landlord in advance of
Landlord's performing such work, based upon Landlord's reasonable estimate of
the cost thereof; and upon completion of such work by Landlord, Tenant shall pay
to Landlord any shortfall within thirty (30) days after Landlord bills Tenant
therefore or Landlord shall within thirty (30) days refund to Tenant any excess
deposit, as the case may be.
11.2 Indemnification. Tenant shall indemnify, protect, defend (by counsel
acceptable to Landlord) and hold harmless Landlord and its partners, directors,
officers, employees, shareholders, lenders, agents, contractors and each of
their respective successors and assigns (individually and collectively,
"Indemnitees") from and against any and all claims, judgments, causes of action,
damages, penalties, fines, taxes, costs, liabilities, losses and expenses
arising at any time during or after the Term as a result (directly or
indirectly) of or in connection with (a) Tenant and/or Tenant's Parties' breach
of any prohibition or provision
6.
<PAGE> 11
of the preceding section, or (b) the presence of Hazardous Materials on, under
or about the Premises or other property as a result (directly or indirectly) of
Tenant's and/or Tenant's Parties' activities, or failure to act, in connection
with the Premises. This indemnity shall include the cost of any required or
necessary repair, cleanup or detoxification, and the preparation and
implementation of any closure, monitoring or other required plans, whether such
action is required or necessary prior to or following the termination of this
Lease. Neither the written consent by Landlord to the presence of Hazardous
Materials on, under or about the Premises, nor the strict compliance by Tenant
with all Environmental Laws, shall excuse Tenant from Tenant's obligation of
indemnification pursuant hereto. Tenant's obligations pursuant to the foregoing
indemnity shall survive the termination of this Lease.
11.3 PRE-EXISTING CONDITIONS.
11.3.1 LANDLORD HEREBY REPRESENTS TO TENANT THAT, TO THE BEST OF ITS
CURRENT ACTUAL KNOWLEDGE (BUT WITHOUT ANY INVESTIGATION OR INQUIRY), NO
ENVIRONMENTAL CONDITION (AS DEFINED IN SECTION 11.1) PRESENTLY EXISTS AS OF THE
EFFECTIVE DATE ON, UNDER, OR WITHIN THE PREMISES (A "PRE-EXISTING CONDITION")
EXCEPT AS DISCLOSED IN THE PHASE I ENVIRONMENTAL SITE ASSESSMENT AS PREPARED BY
ANNE M. BROWN, R.E.A., ENVIRONMENTAL MANAGEMENT CONSULTING, DATED OCTOBER 25,
1996, WHICH WAS PREPARED FOR TENANT AND WHICH TENANT ACKNOWLEDGES IT HAS
RECEIVED, REVIEWED, AND APPROVED. SEE ADDENDUM.
12. DAMAGE AND DESTRUCTION.
12.1 Casualty. If the Premises should be damaged or destroyed by fire or
other casualty, Tenant shall give immediate written notice to Landlord. Within
thirty (30) days after receipt thereof, Landlord shall notify Tenant whether the
necessary repairs can reasonably be made: (a) within TWO HUNDRED SEVENTY (270)
DAYS; or (b) in more than TWO HUNDRED SEVENTY (270) DAYS from the date of such
notice.
12.1.1 Less Than 270 Days. If the Premises should be damaged only to
such extent that rebuilding or repairs can reasonably be completed within TWO
HUNDRED SEVENTY (270) DAYS, this Lease shall not terminate and, provided that
insurance proceeds are available to fully repair the damage, Landlord shall
repair the Premises, except that Landlord shall not be required to rebuild,
repair or replace any alterations, partitions, fixtures, additions and other
improvements (collectively, "Improvements") which may have been placed in, on or
about the Premises by or for the benefit of Tenant. If Tenant is required to
vacate all or a portion of the Premises during Landlord's repair thereof, the
Base Rent payable hereunder shall be abated proportionately from the date Tenant
vacates all or a portion of the Premises only to the extent rental abatement
insurance proceeds are received by Landlord and only during the period the
Premises are unfit for occupancy.
12.1.3 Greater Than 270 Days. If the Premises should be so damaged
that rebuilding or repairs cannot be completed within TWO HUNDRED SEVENTY (270)
DAYS, either Landlord or Tenant may terminate this Lease by giving written
notice within ten (10) days after notice from Landlord specifying such time
period of repair; and this Lease shall terminate and the Rent shall be abated
from the date Tenant vacates the Premises. In the event that neither party
elects to terminate this Lease, Landlord shall promptly commence and diligently
prosecute to completion the repairs to the Premises, provided insurance proceeds
are available to repair the damage (except that Landlord shall not be required
to rebuild, repair or replace any Improvements which may have been placed in, on
or about the Premises by or for the benefit of Tenant). If Tenant is required to
vacate all or a portion of the Premises during Landlord's repair thereof, the
Base Rent payable hereunder shall be abated proportionately from the date Tenant
vacates all or a portion of the Premises only to the extent rental abatement
insurance proceeds are received by Landlord and only during the period that the
Premises are unfit for occupancy. THE TWO HUNDRED SEVENTY (270) DAYS (AND THE
CORRESPONDING RIGHT TO TERMINATE) SHALL BE EXTENDED BY ANY FORCE MAJEURE DELAYS
ENCOUNTERED BY LANDLORD, INCLUDING WITHOUT LIMITATION, ANY DELAYS BEYOND THE
REASONABLE CONTROL OF LANDLORD IN OBTAINING THE NECESSARY PERMITS FROM
APPROPRIATE GOVERNMENTAL BODIES AND AGENCIES.
7.
<PAGE> 12
12.1.4 DAMAGE DURING LAST TWELVE MONTHS OF TERM. NOTWITHSTANDING THE
FOREGOING, IN THE EVENT SUCH DAMAGE OCCURS WITHIN THE LAST TWELVE MONTHS OF THE
LEASE TERM, AND NOTWITHSTANDING ANY OPTION TO EXTEND WHICH TENANT MAY HAVE,
EITHER LANDLORD OR TENANT SHALL HAVE THE OPTION TO TERMINATE THIS LEASE
REGARDLESS OF THE AMOUNT OF TIME ESTIMATED TO REBUILD OR REPAIR THE DAMAGE OR
DESTRUCTION.
12.2 Tenant's Fault. If the Premises or any portion of the Premises is
damaged resulting from the negligence or breach of this Lease by Tenant or any
of Tenant's Parties, Rent shall not be reduced (EXCEPT TO THE EXTENT LANDLORD IS
ENTITLED TO AND RECEIVES RENTAL ABATEMENT INSURANCE PROCEEDS) during the repair
of such damage and Tenant shall be liable to Landlord for the cost of the repair
caused thereby to the extent such cost AND SUCH RENT is not covered by insurance
proceeds FROM POLICIES LANDLORD IS OBLIGATED TO CARRY HEREUNDER.
12.3 Uninsured Casualty. In the event that the Premises or any portion of
the Premises is damaged to the extent Tenant is unable to use the Premises and
such damage is not covered by insurance proceeds received by Landlord (UNLESS
THE FAILURE TO HAVE INSURANCE COVERAGE WAS A RESULT OF A BREACH BY LANDLORD OF
ITS OBLIGATIONS TO PURCHASE A SPECIFIC TYPE AND AMOUNT OF INSURANCE AS SET FORTH
IN THIS LEASE) or in the event that the holder of any indebtedness secured by
the Premises requires that the insurance proceeds be applied to such
indebtedness, then Landlord shall have the right at Landlord's option either (i)
to repair such damage as soon as reasonably possible at Landlord's expense, or
(ii) to give written notice to Tenant within thirty (30) days after the date of
the occurrence of such damage of Landlord's intention to terminate this Lease as
of the date of the occurrence of such damage. In the event Landlord elects to
terminate this Lease. Tenant shall have the right within ten (10) days after
receipt of such notice to give written notice to Landlord of Tenant's intention
to pay the cost of repair of such damage, in which event this Lease shall
continue in full force and effect, Landlord shall make such repairs as soon as
reasonably possible and Tenant shall reimburse Landlord for such repairs within
fifteen (15) days after receipt of an invoice from Landlord. If Tenant does not
give such notice within the ten (10) day period, this Lease shall terminate
automatically as of the date of the occurrence of the damage.
12.4 Waiver. With respect to any damage or destruction which Landlord is
obligated to repair or may elect to repair, Tenant waives all rights to
terminate this Lease pursuant to rights otherwise presently or hereafter
accorded by law.
13. EMINENT DOMAIN
13.1 Total Condemnation. If all of the Premises is condemned by eminent
domain, inversely condemned or sold under threat of condemnation for any public
or quasi-public use or purpose ("Condemned"), this Lease shall terminate as of
the earlier of the date the condemning authority takes title to or possession of
the Premises, and Rent shall be adjusted to the date of termination.
13.2 Partial Condemnation. If any portion of the Premises is Condemned and
such partial condemnation materially impairs Tenant's ability to use the
Premises for Tenant's business EITHER LANDLORD OR TENANT shall have the option
of terminating this Lease as of the earlier of the date title vests in the
condemning authority or as of the date an order of immediate possession is
issued and Rent shall be adjusted to the date of termination. If such partial
condemnation does not materially impair Tenant's ability to use the Premises for
the business of Tenant, Landlord shall promptly restore the Premises to the
extent of any condemnation proceeds recovered by Landlord, excluding the portion
thereof lost in such condemnation, and this Lease shall continue in full force
and effect except that after the date of such title vesting Rent shall be
adjusted as reasonably determined by Landlord.
13.3 Award. If the Premises are wholly or partially Condemned, Landlord
shall be entitled to the entire award paid for such condemnation, and Tenant
waives any claim to any part of the award from Landlord or the condemning
authority; provided, however, Tenant shall have the right to recover from the
condemning authority such compensation as may be separately awarded to Tenant in
connection with costs in removing Tenant's merchandise, furniture, fixtures,
leasehold improvements and equipment to a new location. No condemnation of any
kind shall be construed to constitute an actual or constructive eviction of
Tenant or a breach of any express or implied covenant of quiet enjoyment.
13.4 Temporary Condemnation. In the event of a temporary condemnation not
extending beyond the Term, this Lease shall remain in effect, Tenant shall
continue to pay Rent and Tenant shall receive any award made for such
condemnation except damages to any of Landlord's property. If a temporary
condemnation is for a period which extends beyond the Term, this Lease shall
terminate as of the date of initial occupancy by the condemning authority and
any such award shall be distributed in accordance with the preceding section.
If a temporary condemnation remains in effect at the expiration or earlier
termination of this Lease, Tenant shall pay Landlord the reasonable cost of
performing any obligations required of Tenant with respect to the surrender of
the Premises.
14. DEFAULT
14.1 Events of Defaults. The occurrence of any of the following events
shall, at Landlord's option, constitute an "Event of Default":
8.
<PAGE> 13
14.1.2 Failure to pay Rent on the date when due and the failure
continuing for a period of three (3) days after written notice from Landlord
that such payment is due and has not been received;
14.1.3 Failure to perform Tenant's covenants and obligations hereunder
(except default in the payment of Rent) where such failure continues for a
period of thirty (30) days after written notice from Landlord; provided,
however, if the nature of the default is such that more than thirty (30) days
are reasonably required for its cure, Tenant shall not be deemed to be in
default if Tenant commences the cure within the thirty (30) day period and
diligently prosecutes such cure to completion;
14.1.4 The making of a general assignment by Tenant for the benefit of
creditors; the filing of a voluntary petition by Tenant or the filing of an
involuntary petition by any of Tenant's creditors seeking the rehabilitation,
liquidation or reorganization of Tenant under any law relating to bankruptcy,
insolvency or other relief of debtors and, in the case of an involuntary action,
the failure to remove or discharge the same within sixty (60) days of such
filing; the appointment of a receiver or other custodian to take possession of
substantially all of Tenant's assets or this leasehold; Tenant's insolvency or
inability to pay Tenant's debts or failure generally to pay Tenant's debts when
due; any court entering a decree or order directing the winding up or
liquidation of Tenant or of substantially all of Tenant's assets; Tenant taking
any action toward the dissolution or winding up of Tenant's affairs; the
cessation or suspension of Tenant's use of the Premises, or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets or
this leasehold;
14.1.5 The making of any material misrepresentation or omission by
Tenant or any successor in interest of Tenant coupled with the failure to
promptly cure, if possible, the misrepresentation or omission in a timely way
and manner such that the misrepresentation or omission by Tenant has no
financial, legal or other appreciable impact on Landlord or Landlord's lender,
in any materials delivered by or on behalf of Tenant to Landlord or Landlord's
lender pursuant to this Lease; or)
14.2 Remedies.
14.2.1 Termination. In the event of the occurrence of any Event of
Default, Landlord shall have the right to give a written termination notice to
Tenant and, on the date specified in such notice, this Lease shall terminate
unless on or before such date all arrears of Rent and all other sums payable by
Tenant under this Lease and all costs and expenses incurred by or on behalf of
Landlord hereunder shall have been paid by Tenant and all other Events of
Default at the time existing shall have been fully remedied to the satisfaction
of Landlord.
14.2.1.1 Repossession. Following termination, without prejudice
to other remedies Landlord may have, Landlord may (i) peaceably re-enter the
Premises upon voluntary surrender by Tenant or remove Tenant therefrom and any
other persons occupying the Premises, using such legal proceedings as may be
available: (ii) repossess the Premises or relet the Premises or any part thereof
for such term (which may be for a term extending beyond the Term), at such
rental and upon such other terms and conditions as Landlord in Landlord's sole
discretion shall determine, with the right to make reasonable alterations and
repairs to the Premises; and (iii) remove all personal property therefrom.
14.2.1.2 Unpaid Rent. Landlord shall have all the rights and
remedies of a landlord provided by applicable law, including the right to
recover from Tenant: (a) the worth, at the time of award, of the unpaid Rent
that had been earned at the time of termination, (b) the worth, at the time of
award, of the amount by which the unpaid Rent that would have been earned after
the date of termination until the time of award exceeds the amount of loss of
rent that Tenant proves could have been reasonably avoided, (c) the worth, at
the time of award, of the amount by which the unpaid Rent for the balance of the
Term after the time of award exceeds the amount of the loss of rent that Tenant
proves could have been reasonably avoided, and (d) any other amount, and court
costs, necessary to compensate Landlord for all detriment proximately caused by
Tenant's default. The phrase ???? worth, at the time of award," as used in (a)
and (b) above. shall be computed at the Applicable Interest Rate, and as used in
(c) above, shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
14.2.2 Continuation. Even though an Event of Default may have
occurred, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession; and Landlord may enforce all of
Landlord's rights and remedies under this Lease, including the right to recover
Rent as it becomes due. Landlord, without terminating this Lease, may, during
the period Tenant is in default, enter the Premises and relet the same, or any
portion thereof, to third parties for Tenant's account and Tenant shall be
liable to Landlord for all costs Landlord incurs in reletting the Premises,
including, without limitation, brokers' commissions, expenses of remodeling the
Premises and Like costs. Reletting may be for a period shorter or longer than
the remaining Term. Tenant shall continue to pay the Rent on the date the same
is due. No act by Landlord hereunder, including acts of maintenance,
preservation or efforts to lease the Premises or the appointment of a receiver
upon application of Landlord
9.
<PAGE> 14
to protect Landlord's interest under this Lease, shall terminate this Lease
unless Landlord notifies Tenant that Landlord elects to terminate this Lease. In
the event that Landlord elects to relet the Premises, the rent that Landlord
receives from reletting shall be applied to the payment of, first, any
indebtedness from Tenant to Landlord other than Base Rent and Real Property
Taxes; second, all costs, including maintenance, incurred by Landlord in
reletting; and, third, Base Rent and Real Property Taxes under this Lease. After
deducting the payments referred to above, any sum remaining from the rental
Landlord receives from reletting shall be held by Landlord and applied in
payment of future Rent as Rent becomes due under this Lease. In no event, and
notwithstanding anything in Section 15 to the contrary, shall Tenant be entitled
to any excess rent received by Landlord. If, on the date Rent is due under this
Lease, the rent received from the reletting is less than the Rent due on that
date, Tenant shall pay to Landlord, in addition to the remaining Rent due, all
costs, including maintenance, which Landlord incurred in reletting the Premises
that remain after applying the rent received from reletting as provided
hereinabove. So long as this Lease is not terminated, Landlord shall have the
right to remedy any default of Tenant, to maintain or improve the Premises, to
cause a receiver to be appointed to administer the Premises and new or existing
subleases and to add to the Rent payable hereunder all of Landlord's reasonable
costs in so doing, with interest at the Applicable Interest Rate from the date
of such expenditure.
14.3 Cumulative. Each right and remedy of Landlord provided for herein or
now or hereafter existing at law, in equity, by statute or otherwise shall be
cumulative and shall not preclude Landlord from exercising any other rights or
remedies provided for in this Lease or now or hereafter existing at law or in
equity, by statute or otherwise. No payment by Tenant of a lesser amount than
the Rent nor any endorsement on any check or letter accompanying any check or
payment as Rent shall be deemed an accord and satisfaction of full payment of
Rent; and Landlord may accept such payment without prejudice to Landlord's right
to recover the balance of such Rent or to pursue other remedies.
15. ASSIGNMENT AND SUBLETTING.
15.1 NO ASSIGNMENT OR SUBLETTING WITHOUT LANDLORD'S CONSENT. Tenant shall
not assign, sublet or otherwise transfer, whether voluntarily or involuntarily
or by operation of law, the Premises or any part thereof without Landlord's
prior written approval, which shall not be unreasonably withheld. The merger of
Tenant with any other entity or the transfer of any controlling or managing
ownership or beneficial interest in Tenant, or the assignment of a substantial
portion of the assets of Tenant, whether or not located at the Premises, shall
constitute an assignment hereunder. If Tenant desires to assign this Lease or
sublet any or all of the Premises, Tenant shall give Landlord written notice
thereof with copies of all related documents and agreements associated with the
assignment or sublease, including without limitation, the financial statements
of any proposed assignee or subtenant, forty-five (45) days prior to the
anticipated effective date of the assignment or sublease. Tenant shall pay
Landlord's reasonable attorneys' fees incurred in the review of such
documentation plus an administrative fee of Three Hundred Fifty Dollars
($350.00) for each proposed transfer. Landlord shall have a period of thirty
(30) days following receipt of such notice and all related documents and
agreements to notify Tenant in writing of Landlord's approval or disapproval of
the proposed assignment or sublease. If Landlord fails to notify Tenant in
writing of such election, Landlord shall be deemed to have disapproved such
assignment or subletting. This Lease may not be assigned by operation of law.
Any purported assignment or subletting contrary to the provisions hereof shall
be void and shall constitute an Event of Default hereunder. Landlord may, wthout
waiving any rights or remedies, collect rent from the assignee, subtenant or
occupant and apply the net amount collected to the Rent herein reserved. Tenant
shall continue to be liable as a principal and not as a guarantor or surety to
the same extent as though no assignment or subletting had been made. Landlord
may consent to subsequent assignments or subletting of this Lease or amendments
or modifications to the Lease by assignees of Tenant without notifying Tenant or
any successor of Tenant and without obtaining their consent. No permitted
transfer shall be effective until there has been delivered to Landlord a
counterpart of the transfer instrument in which the transferee agrees to be and
remain jointly and severally liable with Tenant for the payment of Rent
pertaining to the Premises and for the performance of all the terms and
provisions of this Lease relating thereto arising on or after the date of the
transfer.
15.2 EXCEPTION FOR RELATED ENTITY ASSIGNMENT. NOTWITHSTANDING THE
FOREGOING, TENANT MAY ASSIGN THIS LEASE OR SUBLET THE PREMISES OR ANY PORTION
THEREOF, WITHOUT LANDLORD'S CONSENT, TO ANY PARTNERSHIP, CORPORATION OR OTHER
ENTITY (COLLECTIVELY "RELATED ENTITY") WHICH CONTROLS, IS CONTROLLED BY, OR IS
UNDER COMMON CONTROL WITH TENANT (CONTROL BEING DEEMED FOR SUCH PURPOSES AS THE
POWER TO DIRECT THE MANAGEMENT OF THE RELATED ENTITY); PROVIDED, THAT (A)
LANDLORD RECEIVES THIRTY (30) DAYS PRIOR WRITTEN NOTICE OF SUCH ASSIGNMENT OR
SUBLETTING, (B) THE CREDITWORTHINESS OF TENANT IS NOT IMPAIRED, AND (C)
LANDLORD RECEIVES A FULLY EXECUTED COPY OF SUCH LEASE ASSIGNMENT. IN NO EVENT
SHALL SUCH ASSIGNMENT RELEASE TENANT FROM ITS OBLIGATIONS AND DUTIES HEREUNDER.
FURTHER, TENANT MAY ASSIGN THIS LEASE IN THE EVENT OF A MERGER OF TENANT WITH
ANY OTHER ENTITY, OR MAY TRANSFER ANY CONTROLLING OR MANAGING OWNERSHIP INTEREST
IN TENANT, PROVIDED THAT (I) LANDLORD RECEIVES THIRTY (30) DAYS ADVANCE NOTICE
OF SUCH ASSIGNMENT (OR TRANSFER) TOGETHER WITH REASONABLE FINANCIAL INFORMATION
CONCERNING THE CREDITWORTHINESS OF THE NEW ENTITY WITH WHICH TENANT MERGED (OR
IN THE CASE OF A CHANGE IN THE CONTROLLING OR IN OWNERSHIP OF TENANT, THE
CONTROLLING OR MANAGING PARTIES), (II) THE CREDITWORTHINESS OF TENANT IS NOT
IMPAIRED, (III) THE NET WORTH OF THE MERGED ENTITY IS SUFFICIENT TO UNDERTAKE
AND FULFILL TENANT'S OBLIGATIONS UNDER THIS LEASE, ALL AS REASONABLY DETERMINED
BY LANDLORD, AND, IF A MERGER (IV) THE NEW ENTITY WITH WHICH TENANT MERGED
ASSUMES IN WRITING ALL OF TENANT'S
10.
<PAGE> 15
OBLIGATIONS UNDER THIS LEASE. NOTWITHSTANDING ANYTHING TO THE CONTRARY, LANDLORD
RECOGNIZES THAT TENANT IS A PUBLICLY TRADED COMPANY AND THAT IT HAS NO CONTROL
OVER THE SALES OF PUBLICLY TRADED SHARES. ACCORDINGLY NO SALE OR TRANSFER OF
PUBLICLY TRADED SHARES SHALL BE DEEMED AN ASSIGNMENT FOR PURPOSES OF THIS
SECTION 15.
16. ESTOPPEL, ATTORNMENT AND SUBORDINATION.
16.1 Estoppel. Within ten (10) days after request by Landlord, Tenant shall
deliver an estoppel certificate duly executed (and acknowledged if required by
any lender), in the form attached hereto as Exhibit G, or in such other form as
may be acceptable to the lender, which form may include some or all of the
provisions contained in Exhibit G, to any proposed mortgagee, purchaser or
Landlord. Tenant's failure to deliver said statement in such time period shall
be an Event of Default hereunder and shall be conclusive upon Tenant that (a)
this Lease is in full force and effect, without modification except as may be
represented by Landlord, (b) there are no uncured defaults in Landlord's
performance and Tenant has no right of offset, counterclaim or deduction against
Rent hereunder; and (c) no more than one month's Base Rent has been paid in
advance. If any financier should require that this Lease be amended (other than
in the description of the Premises, the Term, the Permitted Use, the Rent or as
will substantially, materially and adversely affect the rights of Tenant),
Landlord shall give written notice thereof to Tenant, which notice shall be
accompanied by a Lease supplement embodying such amendments. Tenant shall,
within ten (10) days after the receipt of Landlord's notice, execute and deliver
to Landlord the tendered Lease supplement.
16.2 Subordination. This Lease shall be subject and subordinate to all
ground leases and the lien of all mortgages and deeds of trust which now or
hereafter affect the Premises or the Project or Landlord's interest therein, and
all amendments thereto, all without the necessity of Tenant's executing further
instruments to effect such subordination. If requested, Tenant shall execute and
deliver to Landlord within ten (10) days after Landlord's request whatever
documentation that may reasonably be required to further effect the provisions
of this paragraph, PROVIDED HOWEVER THAT AS A CONDITION TO EXECUTING SUCH
SUBORDINATION DOCUMENTATION, TENANT MAY REQUIRE AN AGREEMENT FROM SUCH LENDER OR
HOLDER OF THE GROUND LEASE THAT IN CONNECTION WITH SUCH SUBORDINATION TENANT'S
RIGHT TO QUIET POSSESSION OF THE PREMISES SHALL NOT BE DISTURBED IF TENANT IS
NOT IN DEFAULT UNDER THE LEASE AND SO LONG AS TENANT SHALL PAY ALL RENT DUE
HEREUNDER AND OTHERWISE OBSERVE AND PERFORM ALL OF THE PROVISIONS OF THIS LEASE
UNLESS THIS LEASE IS OTHERWISE TERMINATED PURSUANT TO ITS TERMS. A SAMPLE FORM
OF A SUBORDINATION AGREEMENT WITH NON-DISTURBANCE LANGUAGE, ALL OF WHICH HAS
BEEN APPROVED AND IS ACCEPTABLE TO TENANT, IS ATTACHED HERETO AS EXHIBIT H.
16.3 Attornment. In the event of a foreclosure proceeding, the exercise of
the power of sale under any mortgage or deed of trust or the termination of a
ground lease, Tenant shall, if requested, attorn to the purchaser thereupon and
recognize such purchaser as Landlord under this Lease; provided, however,
Tenant's obligation to attorn to such purchaser shall be conditioned upon
Tenant's receipt of a non-disturbance agreement.
17. MISCELLANEOUS.
17.1 General.
17.1.1 Entire Agreement. This Lease sets forth all the agreements
between Landlord and Tenant concerning the Premises; and there are no agreements
either oral or written other than as set forth herein.
17.1.2 Time of Essence. Time is of the essence of this Lease.
17.1.3 Attorneys' Fees. In any action or proceeding which either party
brings against the other to enforce its rights hereunder, the unsuccessful party
shall pay all costs incurred by the prevailing party, including reasonable
attorneys' fees, which amounts shall be a part of the judgment in said action or
proceeding.
17.1.4 Severability. If any provision of this Lease or the application
of any such provision shall be held by a court of competent jurisdiction to be
invalid, void or unenforceable to any extent, the remaining provisions of this
Lease and the application thereof shall remain in full force and effect and
shall not be affected, impaired or invalidated.
17.1.5 Law. This Lease shall be construed and enforced in accordance
with the laws of the state in which the Premises are located.
17.1.6 No Option. Submission of this Lease to Tenant for examination
or negotiation does not constitute an option to lease, offer to lease or a
reservation of, or option for the Premises, and this document shall become
effective and binding only upon the execution and delivery hereof by Landlord
and Tenant.
17.1.7 Successors and Assigns. This Lease shall be binding upon and
inure to the benefit of the successors and assigns of Landlord and, subject to
compliance with the terms of Section 15, Tenant.
17.1.8 Third Party Beneficiaries. Nothing herein is intended to create
any third party benefit.
11.
<PAGE> 16
17.1.9 Memorandum of Lease. Tenant shall not record this Lease or a
short form memorandum hereof without Landlord's prior written consent.
17.1.10 Agency, Partnership or Joint Venture. Nothing contained herein
nor any acts of the parties hereto shall be deemed or construed by the parties
hereto, nor by any third party, as creating the relationship of principal and
agent or of partnership or of joint venture by the parties hereto or any
relationship other than the relationship of landlord and tenant.
17.1.11 Merger. The voluntary or other surrender of this Lease by
Tenant or a mutual cancellation thereof or a termination by Landlord shall not
work a merger and shall, at the option of Landlord, terminate all or any
existing subtenancies or may, at the option of Landlord, operate as an
assignment to Landlord of any or all of such subtenancies.
17.1.12 Headings. Section headings have been inserted solely as a
matter of convenience and are not intended to define or limit the scope of any
of the provisions contained therein.
17.2 Signs. All signs and graphics of every kind visible in or from public
view or the exterior of the Premises shall be subject to Landlord's prior
written approval and shall be subject to any applicable governmental laws,
ordinances, and regulations and in compliance with Landlord's signage program.
Tenant shall remove all such signs and graphics prior to the termination of this
Lease. Such installations and removals shall be made in such manner as to avoid
injury or defacement of the Premises; and Tenant shall repair any injury or
defacement, including without limitation, discoloration caused by such
installation or removal.
17.3 Waiver. No waiver of any default or breach hereunder shall be implied
from any omission to take action on account thereof, notwithstanding any custom
and practice or course of dealing. No waiver by either party of any provision
under this Lease shall be effective unless in writing and signed by such party.
No waiver shall affect any default other than the default specified in the
waiver and then such waiver shall be operative only for the time and to the
extent therein stated. Waivers of any covenant shall not be construed as a
waiver of any subsequent breach of the same.
17.4 Financial Statements. Tenant shall provide to any lender, purchaser or
Landlord, within ten (10) days after request, a current, accurate, certified
financial statement for Tenant and Tenant's business prepared under generally
accepted accounting principles consistently applied and such other certified
financial information or tax returns as may be reasonably required by Landlord,
purchaser or any lender of either. NOTWITHSTANDING THE FOREGOING, THE PARTIES
RECOGNIZE THAT TENANT IS A PUBLICLY TRADED COMPANY AND ACCORDINGLY, TENANT MAY
SATISFY THE REQUIREMENTS OF THIS SECTION BY PROVIDING UPON REQUEST THE QUARTERLY
10-Q REPORTS AND/OR THE ANNUAL FINANCIAL REPORTS OF THE COMPANY.
17.5 Limitation of Liability. The obligations of Landlord under this Lease
are not personal obligations of the individual partners, directors, officers,
shareholders, agents or employees of Landlord; and Tenant shall look solely to
the Premises for satisfaction of any liability of Landlord and shall not look to
other assets of Landlord nor seek recourse against the assets of the individual
partners, directors, officers, shareholders, agents or employees of Landlord.
Whenever Landlord transfers its interest, Landlord shall be automatically
released from further performance under this Lease and from all further
liabilities and expenses hereunder and the transferee of Landlord's interest
shall assume all liabilities and obligations of Landlord hereunder from the date
of such transfer.
17.6 Notices. All notices to be given hereunder shall be in writing and
mailed postage prepaid by certified or registered mail, return receipt
requested, or delivered by personal or courier delivery, or sent by facsimile
(immediately followed by one of the preceding methods), to Landlord's Address
and Tenant's Address, or to such other place as Landlord or Tenant may designate
in a written notice given to the other party. Notices shall be deemed served
upon the earlier of receipt or three (3) days after the date of mailing.
17.7 Brokerage Commission. Landlord shall pay a brokerage commission to
Broker in accordance with a separate agreement between Landlord and Broker.
Tenant warrants to Landlord that Tenant's sole contact with Landlord or with the
Premises in connection with this transaction has been directly with Landlord and
Broker, and that no other broker or finder can properly claim a right to a
commission or a finder's fee based upon contacts between the claimant and
Tenant. Tenant agrees to indemnify and hold Landlord harmless from any claim or
liability, including reasonable attorneys' fees, in connection with a claim by
any person for a real estate broker's commission, finder's fee or other
compensation based upon any statement, representation or agreement of Tenant,
and Landlord agrees to indemnify and hold Tenant harmless from any such claims
or liability, including reasonable attorneys' fees, based upon any statement,
representation or agreement of Landlord.
17.8 Authorization. Each individual executing this Lease on behalf of
Tenant represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of Tenant and that such execution is binding upon
Tenant.
17.9 Holding Over; Surrender.
17.9.1 Holding Over. If Tenant holds over the Premises or any part
thereof after expiration of the Term, such holding over shall constitute a
month-to-month tenancy, at a rent equal to one hundred twenty five
12.
<PAGE> 17
percent (125%) of the Base Rent in effect immediately prior to such holding over
and shall otherwise be on all the other terms and conditions of this Lease. This
paragraph shall not be construed as Landlord's permission for Tenant to hold
over. Acceptance of Rent by Landlord following expiration or termination shall
not constitute a renewal of this Lease or extension of the Term except as
specifically set forth above. If Tenant fails to surrender the Premises upon
expiration or earlier termination of this Lease, Tenant shall indemnify and hold
Landlord harmless from and against all loss or liability resulting from or
arising out of Tenant's failure to surrender the Premises, including, but not
limited to, any amounts required to be paid to any tenant or prospective tenant
who was to have occupied the Premises after the expiration or earlier
termination of this Lease and any related attorneys' fees and brokerage
commissions,
17.9.2 Surrender. Upon the termination of this Lease or Tenant's right
to possession of the Premises, Tenant will surrender the Premises, together with
all keys, in good condition and repair, reasonable wear and tear excepted.
Conditions existing because of Tenant's failure to perform maintenance, repairs
or replacements shall not be deemed "reasonable wear and tear."
17.10 Joint and Several. If Tenant consists of more than one person, the
obligation of all such persons shall be joint and several.
17.11 Covenants and Conditions. Each provision to be performed by Tenant
hereunder shall be deemed to be both a covenant and a condition.
17.12 Addenda. The Addenda attached hereto, if any, and identified with
this Lease are incorporated herein by this reference as if fully set forth
herein.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date set
forth above.
"Landlord" "Tenant"
CATELLUS DEVELOPMENT CORPORATION, PAIRGAIN TECHNOLOGIES, INC.
a Delaware corporation a Delaware corporation
By: /s/ Ana Maria Perez By: /s/ Charles W. McBrayer
----------------------------- -----------------------------
Its: Vice President Chief Financial Officer
--------------------------- -----------------------------
Date: 1/7/97 1/2/97
--------------------------- -----------------------------
13.
<PAGE> 18
ADDENDUM TO LEASE
THIS ADDENDUM TO LEASE ("Addendum") is attached to and constitutes an
integral part of the Lease between CATELLUS DEVELOPMENT CORPORATION, as
Landlord, and PAIRGAIN TECHNOLOGIES, INC. as Tenant. The terms of this Addendum
shall be incorporated in the Lease for all purposes. In the event of a conflict
between the provisions of the Lease and the provisions of this Addendum, this
Addendum shall control.
THE FOLLOWING NEW SECTIONS ARE HEREBY ADDED TO THE LEASE WHICH STATE IN THEIR
ENTIRETY AS FOLLOWS:
18. Force Majeure Event. For purposes of this Lease, the term "Force Majeure
Event" shall mean and include the following: any delay caused by any action,
inaction, order, ruling, moratorium, regulation, statute, condition or other
decision of any governmental agency having jurisdiction over any portion of the
Project, over the construction anticipated to occur thereon or over any uses
thereof, or by fire, flood, inclement weather, strikes, lockouts or other labor
or industrial disturbance (whether or not on the part of agents or employees of
either party hereto engaged in the construction of the Premises), civil
disturbance, order of any government, court or regulatory body claiming
jurisdiction or otherwise, act of public enemy, war, riot, sabotage, blockade,
embargo, failure or inability to secure materials, supplies or labor through
ordinary sources by reason of shortages or priority, discovery of hazardous or
toxic materials, earthquake, or other natural disaster, or any cause whatsoever
beyond the reasonable control (excluding financial inability) of the party whose
performance is required, or any of its contractors or other representatives,
whether or not similar to any of the causes hereinabove stated.
19. Option to Extend.
19.1 Terms of Option. Provided (i) Tenant is not in default under the terms
of this Lease at the time the renewal option is exercised nor at the
commencement of the Extension Term (as hereinafter defined), (ii) Tenant is
occupying at least ninety percent (90%) of the Premises, and (iii) Landlord has
not given more than two (2) notices of default in any twelve (12) month period
for nonpayment of monetary obligations, Tenant shall have one (1) option to
renew this Lease for an additional period of sixty (60) months (the "Extension
Term"). The Extension Term shall be on all the terms and conditions of this
Lease, and Landlord shall have no additional obligation for free rent, leasehold
improvements or for any other tenant inducements for the Extension Term. Base
Rent shall be increased (but not decreased) as set forth below and the Security
Deposit will be increased to reflect any increase in Base Rent payable under the
Lease. There shall be no additional extension terms beyond the Extension Term
set forth herein. Tenant must exercise its option to extend this Lease by giving
Landlord written notice of its election to do so not less than one hundred fifty
(150) days prior to the end of the initial Term. Any notice not given in a
timely manner shall be void, and Tenant shall be deemed to have waived its
extension rights. The extension option set forth herein is personal to Tenant
and shall not be included in any assignment of this Lease.
19.2 Base Rent During the Extension Term. The monthly Base Rent for the
Extension Term shall be the then fair Market Rent for comparable industrial
facilities, determined as follows:
19.2.1 Agreement on Base Rent. Landlord and Tenant shall have thirty
(30) days after Landlord receives the exercise notice in which to agree on the
Base Rent during the Extension Term. Notwithstanding anything in this Section
19.2 to the contrary, in no event shall the Base Rent for the Extension Term be
less than the Base Rent in effect immediately prior to the Extension Term.
19.2.2 Appraisal by Brokers. If Landlord and Tenant are unable to
agree upon the Base Rent for the Extension Term within such thirty (30) day
period, then within fifteen (15) days after the expiration of the thirty (30)
day period, each party, by giving notice to the other party, shall appoint a
real estate BROKER WHO IS LICENSED IN THE STATE OF CALIFORNIA AND WHO IS ACTIVE
IN THE ORANGE COUNTY AREA HAVING at least five (5) years of experience
appraising OR ACTIVELY ENGAGED IN THE LEASING (WHETHER REPRESENTING LANDLORDS OR
TENANTS) OF building space comparable to the Premises in the city and county
where the Premises is located to determine the Market Rent. Market Rent shall
mean the monthly amount per rentable square foot in the Premises that a willing,
non-equity new tenant would pay and a willing landlord would accept at arm's
length for space in a comparable building or buildings, with comparable tenant
improvements, in a comparable location, giving appropriate consideration to
monthly rental rates per rentable square foot, the presence or absence of rent
escalation clauses such as operating expense and tax pass-throughs, length of
lease term, size and location of premises being leased and other generally
applicable terms and conditions of tenancy for a similar building or buildings.
If the two (2) brokers are unable to agree on the Market Rent for the Extension
Term within twenty (20) days, they shall select a third broker meeting the
qualifications stated in this Section within five (5) days after the last day
the two (2) brokers are given to set the Market Rent for the Extension Term. The
third broker, however selected, shall be a person who has not previously acted
in any capacity for either party. Within twenty (20) days after the selection of
the third broker, a majority of the brokers shall set the Market Rent for the
Extension Term. If a majority of the brokers is unable to set the Market Rent
within the twenty (20) day period, the two (2) closest appraisals shall be added
together and their total divided by two (2). The resulting quotient shall be the
Market Rent for the Extension Term. Each party shall be responsible for the
costs, charges and fees of the broker appointed by that party plus one-half of
the cost of the third broker. IN NO EVENT SHALL LANDLORD BE RESPONSIBLE FOR, OR
SHALL THE USE OF BROKERS IN THE APPRAISAL PROCESS, IN ANY WAY ENTITLE ANY BROKER
TO A COMMISSION FOR TENANT'S
14.
<PAGE> 19
OCCUPANCY DURING THE EXTENSION TERM. AS OF THE DATE OF THE EXECUTION OF THIS
LEASE, THE PARTIES REPRESENT TO EACH OTHER THAN NO BROKER, REAL ESTATE AGENT, OR
OTHER PARTY IS ENTITLED TO ANY COMMISSION OR COMPENSATION RELATING TO THE
EXERCISE OF TENANT'S OPTION TO EXTEND. HOWEVER, SHOULD ANY BROKER BECOME
ENTITLED TO A COMMISSION OR OTHER COMPENSATION RELATING TO TENANT'S OCCUPANCY
DURING THE EXTENSION TERM, SAID BROKER (AND ANY RELATED, AFFILIATED, ASSOCIATED,
OR OTHER BROKER WORKING FOR THAT COMPANY) SHALL BE DISQUALIFIED FROM ACTING AS
AN APPRAISING BROKER HEREUNDER.
19.2.3 Consideration of Improvements Made By Tenant. In no event shall
the Market Rent determined in accordance with this Section 19.2 reflect or
include an increase in the rental value, if any, of the Premises due to
improvements made to the Premises by Tenant at Tenant's expense. Rather, in
determining the Market Rent, the parties, whether Landlord and Tenant or the
BROKERS AS PROVIDED FOR ABOVE, shall determine Market Rent based on the original
configuration of the Premises as of the date of execution of this Lease.
19.2.3 Amendment of Lease. Immediately after the Base Rent is
determined pursuant to this Section 19.2, Landlord and Tenant shall execute
an amendment to this Lease stating the new Base Rent in effect.
20. Improvements to Be Made By Tenant.
20.1 Tenant's Work. Landlord shall grant Tenant, subject to the limitations
set forth hereinafter, the right to make certain Tenant improvements as more
fully described in Exhibit "B" attached to this Lease ("Tenant's Work"). Tenant
will use qualified licensed contractors to perform Tenant's Work. The
Commencement Date of this Lease shall not be delayed by Tenant's failure to
complete Tenant's Work. Tenant shall guarantee to Landlord's reasonable
satisfaction that no mechanics liens are filed in connection with Tenant's work
and, if reasonably requested or required to do so by Landlord or Landlord's
lender, shall indemnify Landlord's lender and/or title insurance company against
mechanic's liens relating to Tenants contractors and subcontractors. In no event
shall Tenant commence Tenant's Work prior to coming to a resolution, which is
satisfactory to Landlord with the City of Tustin for termination of the CUP in
accordance with the provisions of Section 22.2 hereof.
20.2 Tenant Responsible for Tenant Improvements. Tenant shall be
responsible to construct the Tenant Improvements comprising the Tenant's Work at
Tenant's sole cost and expense and according to current building codes and in
compliance with the American Disabilities Act ("ADA"). Additionally, Tenant
shall, at Tenant's sole cost and expense, comply with all conditions outlined in
the Conditional Use Permit ("CUP") obtained from the City of Tustin. Tenant
shall also be responsible for obtaining any other approvals required or
necessary relating to Tenant's Work.
20.3 Removal. Tenant shall remove, at Tenant's sole cost and expense, all
improvements made by Tenant, including the mezzanine and office areas, and shall
restore the Premises to an industrial office configuration in accordance with
the configuration attached to this Lease as Exhibit "I". All such removals and
restoration shall be accomplished in a good and workmanlike manner and so as not
to cause any damage to the Premises or to the Project whatsoever.
20.4 Free Rent Period. Tenant's obligation to pay Base Rent shall be
conditionally abated during months one (1) and two (2) of the Term ("Free Rent
Period"). Such abatement shall apply to Base Rent only and shall not apply to
any other sums payable under this Lease. The abatement of Base Rent described
above is expressly conditioned on Tenant's performance of its obligations under
the Lease throughout the Term; and the amount of the abated Base Rent is based
in part on the amount of Base Rent due under the Lease for the full Term. If
Tenant defaults under the Lease and such default results in a termination of the
Lease prior to the expiration of the Term, then Tenant shall pay to Landlord on
the date of such termination, in addition to all other amounts and damages to
which Landlord is entitled, the amount of Base Rent which would otherwise have
been due and payable during the Free Rent Period.
21. Limited Agreement of Landlord Regarding Certain Improvements.
21.1 Improvements Existing as of Date of Delivery. Landlord shall deliver
the Premises to Tenant in good operating condition including the roof structure
and roof membrane in a leak free condition, plumbing, electrical, fire sprinkler
system, lighting, air conditioning and heating systems, and loading doors.
21.2 Deferred Maintenance / Current Repairs to be Completed by Landlord.
Landlord shall, at Landlord's expense, repair slab fractures existing as of the
date of execution of this Lease where cracks are greater than 1/8 inch wide.
21.3 Code Compliance. Tenant has had and has availed itself of the
opportunity to have an inspection of the Premises to discover any code
violations and items of repair or maintenance it deemed necessary for Landlord
to complete. No code violations of existing improvements were noted by said
inspections. However, in the event that existing code violations as of Effective
Date are discovered in the future which relate to improvements existing prior to
the work to be done by Tenant, Landlord shall be responsible for correction, at
Landlord's cost, of such code related matters up to a maximum of Ten Thousand
Dollars ($10,000.00). The parties further understand that because of the extent
and the nature of the modifications to be made by Tenant, that in the process of
obtaining the necessary permits a condition to said permits may be that other
modifications be made to bring the Premises or portions thereof up to current
building codes. In no event shall Landlord be responsible for any code upgrading
15.
<PAGE> 20
required by reason of Tenant's modifications and applications. Accordingly, in
the event repairs (other than those set forth in section 21.2 above), upgrades,
code compliance corrections (in excess of the $10,000.00 limited contribution of
Landlord for existing violations, if any), or code improvements and/or upgrades
are necessary, Tenant shall bear the cost at its sole expense without limitation
on the amount of such costs and without right of termination of this Lease or
offset.
21.5 Environmental Clean-up By Dinamation. As a matter of reference only,
without any binding effect on this Lease or on Landlord, the parties acknowledge
that both Landlord and Tenant are aware of that certain Phase I Environmental
Site Assessment prepared by Anne M. Brown, R.E.A., Environmental Management
Consulting, dated October 25, 1996 (the "Phase I Report"), and the contents
thereof. Dinamation has represented that clean-up and remediation of the
Environmental Conditions, as said term is defined in section 11.1 of the Lease,
specified as existing in the Phase I Report, has been completed as of the date
of this Lease. As a part of the Termination Agreement, Dinamation is to provide
Landlord as soon as reasonably practical with a copy of final lab results
verifying completion of the clean-up and remediation, and Landlord will
thereafter provide Tenant with a copy of said final lab results. In no event
shall the foregoing be construed as a waiver or release by Landlord of claims
which Landlord may have against Dinamation relating to Dinamation's obligations
under its lease, including but not limited to environmental matters.
22. Special Provisions Relating to Conditional Use Permit.
22.1 Landlord Cooperation. Landlord agrees to reasonably cooperate with
Tenant regarding the CUP from the City of Tustin, including executing a required
parking agreement, which the parties anticipate will be a Grant of Easement for
Use and Maintenance (the "Parking Agreement") and an Agreement to Conditions
document as required by the CUP, provided that the Parking Agreement and the CUP
agreements are in a form reasonably satisfactory to Landlord. The Parking
Agreement shall contain an express provision that The Cheek Family Trust and any
successors and assigns agree to look solely to Tenant, and not to Landlord, for
satisfaction of all obligations and duties, including but not limited to
financial obligations, imposed either on Landlord or Tenant thereunder.
Landlord's consent to and execution and participation in the CUP and the Parking
Agreements are expressly conditioned upon the indemnity and hold harmless from
Tenant as set forth in Section 22.3 below.
22.2 Amendment of CUP / Termination Clause. Tenant shall, on or before
January 17, 1997 negotiate with the City of Tustin and The Cheek Family Trust
language mutually acceptable to Tenant, Landlord, the City of Tustin, and to the
extent applicable, The Cheek Family Trust, to be included in the Parking
Agreement and the CUP (or a letter or other document amending or clarifying the
CUP) allowing (a) the Parking Agreement to be terminated at such time as this
Lease is terminated for any reason and the improvements installed as the
Tenant's Work are removed as specified in the Lease and this Addendum, and (b)
the CUP to be correspondingly terminated such that it shall be of no further
force or effect and that Landlord may use the Property without the necessity for
the additional parking or other restrictions and requirements imposed by the
CUP. The parties understand that the CUP will run with the Property and that for
an "out" or termination clause to be effective, the conditions of the CUP may
need to be amended to allow for the inclusion of the "out" or termination clause
in the Parking Agreement together with the inclusion in the CUP of a
corresponding provision for revocation or termination of the CUP concurrent with
such termination of the Lease and removal of Tenant's improvements. Tenant shall
be responsible for all costs and expenses, including attorney fees, incurred in
(i) negotiating, drafting, and amendment of the CUP, or negotiation, drafting
and execution of other documentation satisfactory to the City of Tustin and
Landlord, to assure that there is an "out" or termination provision for the CUP,
(ii) negotiating and drafting of the Parking Agreement, and (iii) clearing title
to the Property at the termination of the Lease such that, at Landlord's option,
title is free of any encumbrance relating to the CUP and the Parking Agreement
and any other encumbrance. It is expressly understood and agreed that obtaining
satisfactory documentation relating to such issues on or before said date is a
contingency a condition precedent to Landlord's obligations to lease the
Premises to Tenant. Said contingency is solely for the benefit of Landlord, and
may be exerted only by Landlord and by no other party.
22.3 Indemnity. Tenant shall indemnify, protect, defend (by counsel
acceptable to Landlord) and hold harmless Landlord and its partners, directors,
officers, employees, shareholders, lenders, agents, contractors and each of
their successors and assigns from and against any and all claims, judgments,
causes of action, damages, penalties, costs, liabilities, obligations, and
expenses, including all costs, attorneys' fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding
16.
<PAGE> 21
brought thereon, arising at any time during or after the Term as a result
(directly or indirectly) of or in connection with Tenant's and Landlord's
obligations under the terms of the CUP and the Parking Agreement. The
obligations of Tenant under this Section 22.3 shall survive the termination of
this Lease with respect to any claims or liability arising prior to such
termination.
23. Contingencies.
This Lease is contingent upon the following:
23.1 Concurrent Termination of Dinamation Lease. The parties understand
that the Premises are currently leased by Dinamation International Corp., a
California corporation. Dinamation has indicated that it desires to terminate
its lease, and this Lease is expressly contingent on the successful termination
of the Dinamation lease to be effective as of midnight, December 31, 1996 and
the surrender of the Premises by Dinamation as of that date. This Lease, and the
Lease Termination with Dinamation, are hereby expressly conditioned and
contingent upon each other, and this Lease and the Lease Termination shall be
effective concurrent with each other and in no event shall either agreement be
effective until all contingencies and conditions precedent in both agreements
have been fully satisfied or waived. Notwithstanding the December 31, 1996 date
for termination and surrender by Dinamation, in the event that Dinamation does
not timely terminate and vacate, or that a contingency or condition precedent in
either this Lease or the Termination Agreement has not yet been satisfied, the
date shall automatically be extended by such additional time as is required to
satisfy said contingencies and/or conditions precedent and for Dinamation to
actually vacate and terminate its lease, up to a maximum of six additional
months. In that event, the Commencement Date and Early Access Date shall be
similarly be adjusted and moved forward by an equal number of days such that (i)
the Commencement Date shall be the day after the revised Dinamation termination
and surrender date, and (ii) (iii) this Lease shall become effective as of and
concurrent with the vacation of the Premises by Dinamation in accordance with
its Termination Agreement. This contingency shall be solely in favor and for the
benefit of Landlord, and may be raised and/or exerted only by Landlord and by no
other party.
23.2 Conditional Use Permit and Other Contingencies. This lease is
contingent upon (i) the successful execution of the CUP and the related Parking
Agreement (including amendment of the CUP conditions to provide for an "out" or
termination provision as a way to terminate the Parking Agreement and to revoke
the CUP), and (ii) the approval of the Board of Directors of Tenant. The
contingency set forth as (i) must be satisfied on or before January 17, 1997,
and the contingency set forth as (ii) must be satisfied or waived by Landlord
and Tenant on or before January 17, 1997. In the event of a failure of Tenant to
give Landlord written notice of the failure of the contingency listed as (ii) in
this Section 23.2 on or before the date specified, said contingency shall be
deemed satisfied and/or waived by Tenant.
24. Assignment of Existing Sublease. Silicon Systems currently occupies the
rear 19,900 square feet of the Premises for office and dead storage under a
sublease agreement with Dinamation. Tenant shall enter into appropriate
documentation (whether by way of a new sublease or otherwise, with terms
materially identical to the terms of the existing Silicon Systems sublease) in a
form reasonably satisfactory to Tenant. Alternatively, Tenant may negotiate an
acceptable "buy-out" of the Silicon Systems sublease which expires February 28,
1998. In any event, Tenant will accept the full and complete obligation and
hereby agrees to be responsible for restoring and surrendering the Premises upon
the termination of this Lease with Landlord to the condition called for in
Exhibit 1, regardless of any obligation of Silicon Systems for restoration under
the terms of its sublease. Tenant shall be solely responsible for, and hereby
releases Landlord from any and all liability or involvement with, enforcement of
the restoration provisions of the current sublease against Silicon Systems. The
new sublease or buy-out shall be accomplished on or before January 17, 1997.
25. Non-Disturbance Agreement from Current Lender. Landlord will request that
Landlord's Lender provide a non-disturbance agreement stating that Tenant's
right to quiet possession of the Premises shall not be disturbed if Tenant is
not in default under the Lease and so long as Tenant shall pay all Rent due
hereunder and otherwise observe and perform all of the provisions of this Lease
unless this Lease is otherwise terminated pursuant to its terms; provided
however, that the parties recognize that Landlord's lender is under no
obligation to execute such agreement and that accordingly the obtaining of such
non-disturbance agreement is not and shall not be a condition to the validity of
this Lease. Landlord has provided to Tenant a copy of the standard subordination
for the current Lender normally executes, and has represented to Tenant that its
Lender has in the past commonly executed such subordination agreements upon
request and payment of Lender's processing fee of One Thousand Dollars
($1,000.00). Tenant agrees to pay all processing or other fees charged by
Landlord's Lender in connection with obtaining and providing such subordination.
26. Condition of Premises.
26.1 Tenant has determined that the Premises are acceptable for Tenant's
use and Tenant acknowledges that neither Landlord nor any broker or agent has
made any representations or warranties in connection with the physical condition
of the Premises or their fitness for Tenant's use upon which Tenant has relied
directly or indirectly for any purpose.
26.2. Tenant acknowledges that Tenant has inspected the Premises and that
Tenant accepts the Premises in an "AS-IS" condition, except for the work
Landlord has specifically agreed to do as set forth in this Addendum. Any tenant
improvements which Tenant requires in and to the Premises shall be provided by
Tenant, at Tenant's sole expense; provided, however, all tenant
17.
<PAGE> 22
improvements shall be subject to Landlord's prior written approval and shall
comply with the provisions of Section 9, the Work Letter attached as Exhibit B,
and this Addendum.
27. Additional Security Deposit - Letter of Credit.
27.1 Delivery of Letter of Credit. In addition to the required cash
Security Deposit and as called for in the Basic Lease Information, Tenant shall
deliver to Landlord a clean, irrevocable standby letter of credit (the "LC")
substantially in compliance with the terms, provisions and requirements of this
Section 27, in the amount of Forty Five Thousand Dollars ($45,000.00) and issued
by a financial institution acceptable to Landlord. The LC shall be negotiable as
set forth in this Section 27.
27.2 Term and Renewal of Letter of Credit. The LC shall be for a term of
Twelve (12) months, automatically renewable annually. Tenant shall keep the LC
in effect for the entire Term of this Lease, including any extensions and/or
options exercised by Tenant, plus Ninety (90) days thereafter. Tenant and
Tenant's bank shall be required to give Landlord 60 days notice prior to the LC
expiration if Tenant's bank does not agree to automatically renew such LC. If
for any reason LC is not renewed, Landlord shall be entitled to immediately draw
the entire amount of the LC, and hold such sum as an additional security deposit
for Tenant's faithful performance of the obligations the LC secures in
accordance with the provisions of the Lease and Section 27.3 below.
27.3 Amount of Draw on Letter of Credit. Upon (i) Tenant's failure to
remove (in accordance with the provisions of Section 20.3 hereof) the
improvements made by Tenant as allowed in Section 20.1 and/or elsewhere in the
Lease, (ii) Tenant's failure to promptly and timely follow-through with
completing the termination of the Parking Agreement and the termination of any
restrictions, obligations, and conditions called for by the CUP, all as set
forth herein and in other documents related to such matters, or (iii) promptly
and timely indemnify Landlord for all costs, expense, liability, or damage
relating to the CUP, Parking Agreement, and new Improvements matters as called
for herein and in other related documents, Landlord shall be entitled to obtain
payment under the LC, in such amount as may be required to satisfy Tenant's
outstanding obligations under the Lease and such other related documents and
shall apply such amount to said obligations. Specifically, Landlord shall be
entitled to obtain partial draws pursuant to the LC in the amounts required to
satisfy Tenant's unfulfilled obligations with respect to such matters.
27.4 Manner of Presentment. Landlord is authorized to draw, for the account
of Tenant, the amounts allowable pursuant to this provision by a draft, which
shall be payable at sight, accompanied by a statement of Landlord that (a)
Landlord is entitled to draw on the amount set forth in said draft pursuant to
Section 27.3 of this Lease, or (b) Landlord is entitled to draw on the full
amount of the LC as a result of a failure by Tenant to renew, extend or replace
the LC pursuant to the terms of the Lease. Payment of the draft shall be made by
bank check payable to Landlord, or in such other manner or to such other
accounts as Landlord may designate in the draft.
LANDLORD'S INITIALS TENANT'S INITIALS
------- -------
18.
<PAGE> 23
EXHIBIT A
PREMISES
[FLOORPLAN]
<PAGE> 24
EXHIBIT B
WORK LETTER
Tenant Improvements.
(a) Tenant's Work. Following the execution of this Lease by both parties,
Landlord shall deliver possession of the Premises to Tenant as called for in the
Addendum, and Tenant shall construct or cause to be constructed in and to the
Premises, at Tenant's cost, certain tenant improvements, defined as the
demolition of existing offices and construction of a 15,000 square foot
mezzanine including 30,000 square feet of two-story open plan office space
(15,000 square feet upstairs and 15,000 square feet downstairs which includes
the existing office space) (the "Tenant's Work"), in accordance with Landlord's
building standards and the provisions of Section 9 of the Lease and Section 20
of the Addendum. Tenant's Work, as well as Tenant's installation of furniture,
fixtures and equipment in the Premises shall be performed in a good and
workmanlike manner, and shall comply with all applicable governmental permits,
laws, ordinances and regulations. In addition, Tenant shall comply with
Landlord's requirements for improvements or alterations by Tenant as specified
in Exhibit J attached to this Lease.
(b) Approval of Working Drawings. Preparation of the working drawings shall be
the responsibility of Tenant and Tenant shall submit same to Landlord within
forty-five (45) days after execution of this Lease, for Landlord's approval (to
be evidenced by Landlord's representative's signature thereon). Landlord and
Tenant shall confer regarding any changes reasonably required by Landlord,
Tenant shall cause to be made such changes as are mutually agreed to, and
deliver revised working drawings to Landlord within fifteen (15) business days.
Landlord's approval shall be given within five (5) business days following
receipt thereof. Any significant or material changes to the plans and working
drawings which Tenant desires to make during the course of construction shall
require Landlord's consent, which consent shall not be unreasonably withheld. In
all events, Tenant shall provide Landlord with notice of all changes to the
plans and working drawings. TENANT HAS SUBMITTED TO LANDLORD THE DRAWINGS /
PLANS ATTACHED HERETO AS EXHIBIT B-1, WHICH DRAWINGS / PLANS HAVE BEEN APPROVED
BY LANDLORD.
(c) Cost of Tenant's Work. The cost of Tenant's Work, including without
limitation, the architect's and/or space planner's fees, the construction costs,
and any additional costs due to changes required by the City, or other local,
state or federal governmental agency having jurisdiction, or due to events or
conditions beyond Tenant's control, shall be borne by Tenant and Landlord shall
have no liability therefor.
(d) Indemnity. Tenant shall indemnify, defend and hold Landlord harmless from
and against any and all claims, liabilities, losses, costs, demands, actions, or
causes of action arising out of or relating to Tenant's Work or any part
thereof, unless caused solely by the negligence or willful misconduct of
Landlord or Landlord's agents or employees. The foregoing indemnity shall
include, without limitation, reasonable attorneys' fees incurred by Landlord to
defend itself against any action or proceeding, together with reasonable
attorneys' fees incurred to enforce this indemnity.
(E) CUT TO JOIN DRIVEWAYS AND UTILITY CONDUIT TRENCHING. LANDLORD ACKNOWLEDGES
THAT TENANT HAS DISCLOSED THAT IT PLANS TO (I) CUT A DRIVEWAY TO JOIN THE
PARKING OF THE PREMISES WITH THE ADJACENT BUILDING ALREADY OCCUPIED BY TENANT,
(TOGETHER WITH SUCH OTHER ACCESS MODIFICATIONS AS MAY BE APPROPRIATE WITH
RESPECT TO THE ADDITIONAL PARKING EASEMENT BEING OBTAINED BY TENANT IN
COMPLIANCE WITH THE CUP), AND (II) TRENCH FOR AND INSTALL A CONDUIT FOR
UTILITIES BETWEEN THE PREMISES AND THE ADJACENT BUILDING OCCUPIED BY TENANT.
LANDLORD HAS GIVEN ITS CONSENT IN CONCEPT TO SUCH ITEMS, PROVIDED HOWEVER, THAT
THE FINAL APPROVAL OF LANDLORD IS EXPRESSLY CONDITIONED UPON ACCEPTABLE PLANS
AND SPECIFICATIONS TO BE PROVIDED BY TENANT (WHICH HAVE NOT YET BEEN PREPARED)
AND APPROVED BY LANDLORD, AND THAT SUCH FINAL CONSENT AND APPROVAL IS FURTHER
EXPRESSLY SUBJECT TO AND CONDITIONED UPON THE OBLIGATION OF TENANT TO RESTORE
THE PROPERTY LINE OF THE PREMISES TO ITS ORIGINAL CONDITION UPON TERMINATION OF
THE LEASE.
LANDLORD'S INITIALS TENANT'S INITIALS
------- -------
<PAGE> 25
EXHIBIT B-1
SPACE PLAN
<PAGE> 26
EXHIBIT C
COMMENCEMENT DATE MEMORANDUM
With respect to that certain lease ("Lease") dated , 19 ,
between a ("Tenant"), and Catellus Development Corporation, a
Delaware corporation ("Landlord"), whereby Landlord leased to Tenant and Tenant
leased from Landlord approximately rentable square feet of the building
located at ("Premises"), Tenant
hereby acknowledges and certifies to Landlord as follows:
(1) Landlord delivered possession of the Premises to Tenant in a
Substantially completed condition on ("Possession Date");
(2) The Commencement Date is ; and
(3) Tenant has accepted and is currently in possession of the Premises
and the Premises are acceptable for Tenant's use.
IN WITNESS WHEREOF, this Commencement Date Memorandum is executed this
day of 199 .
"Tenant"
____________________________, a
____________________________
By: ________________________
Its: _________________
By: ________________________
Its: _________________
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ACORD CERTIFICATE OF INSURANCE ISSUE DATE (MM/DD/YY)
- ------------------------------------------------------------------------------------------------------------------------------
PRODUCER THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO
RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND
OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.
- ------------------------------------------------------------------------------------------------------------------------------
COMPANIES AFFORDING COVERAGE
(Must have "Best" Rating of "A8" or better)
- ------------------------------------------------------------------------------------------------------------------------------
COMPANY
LETTER A
- ------------------------------------------------------------------------------------------------------------------------------
INSURED COMPANY
LETTER B
- ------------------------------------------------------------------------------------------------------------------------------
COMPANY
LETTER C
- ------------------------------------------------------------------------------------------------------------------------------
COMPANY
LETTER D
- ------------------------------------------------------------------------------------------------------------------------------
COMPANY
LETTER E
- ------------------------------------------------------------------------------------------------------------------------------
COVERAGES
- ------------------------------------------------------------------------------------------------------------------------------
THIS IS TO CERTIFY THAT POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD
INDICATED. NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS
CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS,
EXCLUSIONS, AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAIMS.
- ------------------------------------------------------------------------------------------------------------------------------
CO POLICY EFFECTIVE POLICY EXPIRATION
LTR TYPE OF INSURANCE POLICY NUMBER DATE (MM/DD/YY) DATE (MM/DD/YY) ALL LIMITS IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------------------------
GENERAL LIABILITY GENERAL AGGREGATE $2,000
[X] COMMERCIAL GENERAL PRODUCTS COMP/OPS $2,000
LIABILITY AGGREGATE
[ ] CLAIMS MADE PERSONAL & ADVERTISING $2,000
[X] OCCURRENCE INJURY
[X] OWNER'S & CONTRACTORS EACH OCCURRENCE $2,000
PROTECTIVE FIRE DAMAGE (ANY ONE FIRE) $ 50
[X] RAILROAD PROT. LIAB. MEDICAL EXPENSE (ANY $ 5
[X] X C U INCLUDED ONE PERIOD)
- ------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE LIABILITY CSL $2,000
[X] ANY AUTO --------------------------
[ ] ALL OWNED AUTOS BODILY INJURY
[ ] SCHEDULED AUTOS (PER PERSON) $
[X] HIRED AUTOS --------------------------
[X] NON-OWNED AUTOS BODILY INJURY $
[ ] GARAGE LIABILITY (PER ACCIDENT)
[ ] ________________ --------------------------
PROPERTY DAMAGE $
- ------------------------------------------------------------------------------------------------------------------------------
EXCESS LIABILITY EACH AGGREGATE
[X] FOLLOWING FORM OCCURRENCE
OTHER THAN UMBRELLA FORM $ $
- ------------------------------------------------------------------------------------------------------------------------------
STATUTORY
WORKERS' COMPENSATION ----------------------------------
$ 1,000 (EACH ACCOUNT)
AND ----------------------------------
$ 1,000 (DISEASE POLICY LIMIT)
EMPLOYERS' LIABILITY ----------------------------------
$ 1,000 (DISEASE EACH EMPLOYEE)
- ------------------------------------------------------------------------------------------------------------------------------
OTHER
- ------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/RESTRICTIONS/SPECIAL ITEMS
Certificate holder is named as additional insured as respects:
____________________________________________________________________________________ (Location)
Refer to Additional Insured endorsement attached. Aggregate limits apply per location.
- ------------------------------------------------------------------------------------------------------------------------------
CERTIFICATE HOLDER CANCELLATION
CATELLUS DEVELOPMENT CORPORATION SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED OR LIMITS
1065 N. PACIFICENTER DRIVE, SUITE 200 REDUCED, BEFORE THE EXPIRATION DATE THEREOF, THE ISSUING COMPANY
ANAHEIM, CA 92806 WILL ENDEAVOR TO MAIL 60 DAYS WRITTEN NOTICE; TO THE CERTIFICATE
ATTN: ASSET MANAGEMENT HOLDER NAMED TO THE LEFT.
FAX (714) 237-7416 ------------------------------------------------------------------
AUTHORIZED REPRESENTATIVE
EXHIBIT D
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
ACORD. EVIDENCE OF PROPERTY INSURANCE DATE(MM/DD/YY)
THIS IS EVIDENCE THAT INSURANCE AS IDENTIFIED BELOW HAS BEEN ISSUED, IS IN
FORCE, AND CONVEYS ALL THE RIGHTS AND PRIVILEGES AFFORDED UNDER THE POLICY.
(Must have "Best" Rating of "A 8" or better.)
<TABLE>
<S> <C> <C> <C> <C>
PRODUCER COMPANY
CODE SUB-CODE
INSURED LOAN NUMBER POLICY NUMBER
EFFECTIVE DATE (MM/DD/YY) EXPIRATION DATE (MM/DD/YY) CONT. UNTIL
TERMINATED
IF CHECKED
THIS REPLACES PRIOR EVIDENCE DATED:
- -----------------------------------------------------------------------------------------------------------------------------------
PROPERTY INFORMATION
LOCATION/DESCRIPTION
(provide address of leased premises)
- -----------------------------------------------------------------------------------------------------------------------------------
COVERAGE INFORMATION
COVERAGE/PERILS/FORMS AMOUNT OF INSURANCE DEDUCTIBLE
Business Personal Property (including Tenants Improvements $ _________________ $ _________
and Betterments, if applicable)
Business Income (100% contribution) $ _________________ $ _________
Boiler & Machinery (if applicable) $ _________________ $ _________
Warehousers legal liability (if applicable) $ _________________ $ _________
Replacement Cost Coverage, special form
- -----------------------------------------------------------------------------------------------------------------------------------
REMARKS (Including Special Conditions)
Waiver of Subrogation provision included (per lease)
- -----------------------------------------------------------------------------------------------------------------------------------
CANCELLATION
THE POLICY IS SUBJECT TO THE PREMIUMS, FORMS, AND RULES IN EFFECT FOR EACH POLICY PERIOD. SHOULD
THE POLICY BE TERMINATED, THE COMPANY WILL GIVE THE ADDITIONAL INTEREST IDENTIFIED BELOW 60 DAYS
WRITTEN NOTICE, AND WILL SEND NOTIFICATION OF ANY CHANGES TO THE POLICY THAT WOULD AFFECT THAT
INTEREST. IN ACCORDANCE WITH THE POLICY PROVISIONS OR AS REQUIRED BY LAW.
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL INTEREST
NAME AND ADDRESS NATURE OF INTEREST
CATELLUS DEVELOPMENT CORPORATION MORTGAGEE ADDITIONAL INSURED
1065 N. PACIFICENTER DRIVE, SUITE 200
ANAHEIM, CA 92806 LOSS PAYEE X (OTHER) Landlord
ATTN: ASSET MANAGEMENT ----------------------------------------------------------------------------------
FAX (714) 237-7416 SIGNATURE OF AUTHORIZED AGENT OF COMPANY
ACORD 27 (2/88) (C) ACORD CORPORATION 1981
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 29
EXHIBIT E
PROHIBITED USES
The following types of operations and activities are expressly prohibited on the
Premises:
1. automobile/truck maintenance, repair or fueling (EXCEPTING NORMAL AND
ROUTINE ACTIVITIES ASSOCIATED WITH TENANT'S PERMITTED USES);
2. battery manufacturing or reclamation;
3. ceramics and jewelry manufacturing or finishing;
4. chemical (organic or inorganic) storage, use or manufacturing
(EXCEPTING NORMAL AND ROUTINE STORAGE, USE OR MANUFACTURING IN NORMAL
QUANTITIES AS REASONABLY ASSOCIATED WITH TENANT'S PERMITTED USES);
5. drum recycling;
6. dry cleaning;
7. electronic components manufacturing (EXCEPTING NORMAL AND ROUTINE
ACTIVITIES ASSOCIATED WITH TENANT'S PERMITTED USES);
8. electroplating and metal finishing;
9. explosives manufacturing, use or storage,
10. hazardous waste treatment, storage, or disposal;
11. leather production, tanning or finishing;
12. machinery and tool manufacturing (EXCEPTING NORMAL AND ROUTINE
ACTIVITIES ASSOCIATED WITH TENANT'S PERMITTED USES);
13. medical equipment manufacturing and hospitals;
14. metal shredding, recycling or reclamation;
15. metal smelting and refining;
16. mining;
17. paint, pigment and coating operations;
18. petroleum refining;
19. plastic and synthetic materials manufacturing;
20. solvent reclamation;
21. tire and rubber manufacturing;
22. above- and/or underground storage tanks; and
23. residential use or occupancy.
<PAGE> 30
EXHIBIT F
RULES AND REGULATIONS
"INTENTIONALLY OMITTED"
<PAGE> 31
EXHIBIT G
TENANT ESTOPPEL CERTIFICATE
To: Bank of America National Trust
and Savings Association ("Bank")
Real Estate Industries Division No.
Attn:
Re: Lease Dated:
Current Landlord:
Current Tenant:
Square Feet: Approximately
Floor(s):
Located at:
("Tenant") hereby certifies that as of 199 :
1. Tenant is the present owner and holder of the tenant's interest under
the lease described above, as it may be amended to date (the "Lease") with
as Landlord (who is called "Borrower" for the purposes of
this Certificate). (USE THE NEXT SENTENCE IF THE LANDLORD OR TENANT NAMED IN
THE LEASE IS A PREDECESSOR TO THE CURRENT LANDLORD OR TENANT.) [The original
landlord under the Lease was , and the original tenant
under the Lease was .] The Lease covers the premises commonly known as
(the "Premises") in the building (the "Building") at the
address set forth above.
(CHOOSE ONE OF THE FOLLOWING SECTION 2(a)s BELOW)
[2. (a) A true, correct and complete copy of the Lease (including all
modifications, amendments, supplements, side letters, addenda and riders of and
to it) is attached to this Certificate as Exhibit A.]
[2 (a) The attached Exhibit A accurately identifies the Lease and all
modifications, amendments, supplements, side letters, addenda and riders of and
to it.]
(b) (IF APPLICABLE) [The Lease provides that in addition to the
Premises, Tenant has the right to use or rent [assigned/unassigned] parking
spaces near the Building or in the garage portion of the building during the
term of the Lease.]
(c) The term of the Lease commenced on 199 , and will expire on
any presently exercised option or renewal term. (CHOOSE ONE OF THE FOLLOWING TWO
SENTENCES.) [Tenant has no option or right to renew, extend or cancel the Lease,
or to lease additional space in the Premises or Building, or to use any parking
(IF APPLICABLE) [other than that specified in Section 2(b) above].] [Except as
specified in Paragraph(s) of the Lease (copy attached), Tenant has no option
or right to renew, extend or cancel the Lease, or to lease additional space in
the Premises or Building, or to use any parking (IF APPLICABLE) [other than that
specified in Section 2(b) above].]
(CHOOSE ONE OF THE FOLLOWING SECTION 2(d)s)
[(d) Tenant has no option or preferential right to purchase all or any
part of the Premises (or the land of which the Premises are a part). Tenant has
no right or interest with respect to the Premises or the Building other than as
Tenant under the Lease.]
<PAGE> 32
[(d) Except as specified in Paragraph(s) ______ of the Lease (copy
attached), Tenant has no option or preferential right to purchase all or any
part of the Premises (or the land of which the Premises are a part). Except for
the foregoing, Tenant has no right or interest with respect to the Premises or
the Building other than as Tenant under the Lease.]
(e) The annual minimum rent currently payable under the Lease is
$_________ and such rent has been paid through ______ 199__. (IF APPLICABLE)
[The annual percentage rent currently payable under the Lease is at the rate of
____ and such rent has been paid through _______ 199__.]
(f) (IF APPLICABLE) [Additional rent is payable under the Lease for
(i) operating, maintenance or repair expenses, (ii) property taxes, (iii)
consumer price index cost of living adjustments, or (iv) percentage of gross
sales adjustments (i.e., adjustments made based on underpayments of percentage
rent). Such additional rent has been paid in accordance with Borrower's rendered
bills through ______ 199_. The base year amounts for additional rental items are
as follows: (1) operating, maintenance or repair expenses $_____ (2) property
taxes $_____________, and (3) consumer price index (please indicate base year
CPI level).]
(g) Tenant has made no agreement with Borrower or any agent,
representative or employee of Borrower concerning free rent, partial rent,
rebate of rental payments or any other similar rent concession (IF APPLICABLE)
[except as expressly set forth in Paragraph(s) _____ of the Lease (copy
attached)].
(h) Borrower currently holds a security deposit in the amount of
$_______ which is to be applied by Borrower or returned to Tenant in accordance
with Paragraph(s) _ of the Lease. Tenant acknowledges and agrees that Bank shall
have no responsibility or liability for any security deposit, except to the
extent that any security deposit shall have been actually received by Bank.
3. (a) The Lease constitutes the entire agreement between Tenant and
Borrower with respect to the Premises, has not been modified changed, altered or
amended and is in full force and effect in the form (CHOOSE ONE) [attached
as/described in] Exhibit A. There are no other agreements, written or oral,
which affect Tenant's occupancy of the Premises.
(b) All insurance required of Tenant under the Lease has been
provided by Tenant and all premiums have been paid.
(c) To the best knowledge of Tenant, no party is in default under the
Lease. To the best knowledge of Tenant, no event has occurred which, with the
giving of notice or passage of time, or both, would constitute such a default.
(d) The interest of Tenant in the Lease has not been assigned or
encumbered. Tenant is not entitled to any credit against any rent or other
charge or rent concession under the Lease except as set forth in the Lease. No
rental payments have been made more than one month in advance.
4. All contributions required to be paid by Borrower to date for
improvements to the Premises have been paid in full and all of Borrower's
obligations with respect to tenant improvements have been fully performed.
Tenant has accepted the Premises, subject to no conditions other than those set
forth in the Lease.
5. Neither Tenant nor any guarantor of Tenant's obligations under the
Lease is the subject of any bankruptcy or other voluntary or involuntary
proceeding, in or out of court, for the adjustment of debtor-creditor
relationships.
6. (a) As used here, "Hazardous Substance" means any substance, material
or waste (including petroleum and petroleum products) which is designated,
classified or regulated as being "toxic" or "hazardous" or a "pollutant" or
which is similarly designated, classified or regulated, under any federal, state
or local law, regulation or ordinance.
(b) Tenant represents and warrants that it has not used, generated,
released, discharged, stored or disposed of any Hazardous Substances on, under,
in or about the Building or the land on which the Building is located (IF
APPLICABLE) [, other than Hazardous Substances used in the ordinary and
commercially reasonable course of Tenant's business in compliance with all
applicable laws]. (IF APPLICABLE) [Except for such commercially reasonable use
by Tenant,) Tenant has no actual knowledge that any Hazardous Substance is
present, or has been used, generated, released, discharged, stored or disposed
of by any party, on, under, in or about such Building or land.
7. Tenant hereby acknowledges that Borrower (CHOOSE ONE) [intends to
encumber/has encumbered] the property containing the Premises with a Deed of
Trust in favor of Bank. Tenant acknowledges the right of Borrower, Bank and any
and
2
<PAGE> 33
all of Borrower's present and future lenders to rely upon the statements and
representations of Tenant contained in this Certificate and further acknowledges
that any loan secured by any such Deed of Trust or further deeds of trust will
be made and entered into in material reliance on this Certificate.
8. Tenant hereby agrees to furnish Bank with such other and further
estoppel as Bank may reasonably request.
----------------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
3
<PAGE> 34
EXHIBIT H
SAMPLE FORM OF ACCEPTABLE SUBORDINATION, NONDISTURBANCE
AND ATTORNMENT AGREEMENT
RECORDING REQUESTED BY, AND
WHEN RECORDED RETURN TO:
SHEPPARD, MULLIN, RICHTER & HAMPTON
333 South Hope Street, 48th Floor
Los Angeles, CA 90071
Attention: Mark L. Nelson, Esq.
SUBORDINATION,
NONDISTURBANCE AND ATTORNMENT AGREEMENT
This agreement ("Agreement"), dated as of , 19 ,
executed by , a corporation ("Tenant"), and CATELLUS
DEVELOPMENT CORPORATION, a Delaware corporation ("Landlord"), in favor of BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
association, as Agent ("Lender"), is entered into with reference to the
following facts:
A. Tenant is presently leasing certain premises (the "Premises")
comprising a portion of the real property (the "Property") described in Exhibit
"A", attached hereto and incorporated herein by this reference, pursuant to a
lease (as modified from time to time, the "Lease") dated 19 , between
Tenant and Landlord.
B. Lender has made or agreed to make a loan or loans to Landlord
(the "Loan") and, in connection therewith, Landlord has executed a deed of trust
(as modified from time to time, the "Deed of Trust") and an assignment of leases
(the "Assignment of Leases"), assigning to Lender Landlord's interest in the
Property, including Landlord's interest as landlord under the Lease.
In consideration of the foregoing, and for other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Tenant and Landlord hereby agree as follows.
1. Certifications by Tenant. Tenant hereby certifies to Lender as
follows:
1.1 Upon full execution, the Lease will be in full force and effect,
Tenant will occupy the Premises pursuant thereto, and Tenant has not transferred
its interests in the Lease or agreed to do so.
1.2 A true and complete copy of the Lease, together with all
amendments, supplements and other modifications thereto (oral or written), has
been delivered to Lender by Landlord prior to the execution of this Agreement.
1.3 No rent or other amount has been prepaid under the Lease, except
as follows (if none, state "None"):
1.4 No deposit of any nature has been made in connection with the
Lease (other than deposits the nature and amount of which are expressly
described in the Lease), except as follows (if none, state "None"):
1.5 Upon the commencement of the Lease term, Tenant will be obligated
to pay [BASE] rent under the Lease in the amount of $ per month [AND
PERCENTAGE RENT IN AN AMOUNT EQUAL TO % OF ITS [GROSS] [NET] INCOME (AS
DEFINED IN THE LEASE) FOR EACH 12-MONTH PERIOD ENDING , 19 ].
[TENANT'S SHARE OF COMMON AREA CHARGES, INSURANCE, REAL ESTATE TAXES AND
ADMINISTRATIVE AND OVERHEAD CHARGES IS ESTIMATED TO BE CHARGED AT THE RATE OF
$ PER MONTH.]
1.6 The Lease is the only agreement between Landlord and Tenant with
respect to the Premises, and Tenant claims no rights with respect to the
Premises or the Property other than those set forth in the Lease, except as
follows (if none, state "None"):
1.7 To the best of Tenant's knowledge, there are no existing defenses
or offsets against amounts due or to become due to Landlord under the Lease, and
there are no existing uncured defaults by Landlord under the Lease, nor has any
event occurred which, with the passage of time or the giving of notice or both,
would constitute such a default, except as follows (if none, state "None"):
1
<PAGE> 35
1.8 Landlord has offered no free rent period, building allowance or
similar concession(s) to induce Tenant to enter into the Lease except as set
forth in the Lease; and Landlord has no other obligations to Tenant in
connection with the Lease, matured or not yet matured, except as set forth in
the Lease.
1.9 To the best of Tenant's knowledge, no circumstance presently
exists, and no event has occurred, that would prevent the Lease from becoming
effective or would entitle Tenant to terminate the Lease.
2. Consent to Assignment. Tenant understands that Landlord has assigned
or will assign the Lease to Lender in connection with the Loan, and Tenant
hereby consents to such assignment. Tenant is not aware of any prior assignment
of the Lease by Landlord, except as follows (if none, state "None"):
3. No Modification of Lease; Lender Consents. Tenant shall not, without
Lender's prior written consent, (a) amend, supplement, terminate (except to the
extent permitted under Section 4, below) or otherwise modify the Lease; or (b)
accept (and/or act in reliance on) the release, relinquishment or waiver by
Landlord of any right with respect to the Lease. Any such termination,
modification, acceptance or other action taken without such prior consent shall,
at Lender's option, be void. Without limiting the generality of the foregoing,
(i) any assignment or subletting by Tenant (or by any assignee or subtenant)
which requires Landlord's consent shall also require Lender's consent, which
consent shall not be unreasonably withheld and shall, at Lender's option, be
void if such consent is not obtained, and (ii) any alteration to the Premises
which requires Landlord's consent shall also require Lender's consent, which
consent shall not be unreasonably withheld. Tenant shall not pay any rent or
other amount due to Landlord under the Lease more than 10 days in advance of the
due date.
4. Lender Cure Rights. Tenant shall not exercise any termination remedy
upon a default by Landlord with respect to the Lease unless Tenant has first
given Lender written notice of such default (at the address shown below or any
other address hereafter supplied to Tenant by Lender) and such default is not
cured within 30 days thereafter; provided that, if such default is nonmonetary,
is curable by Lender, and (a) is of such a nature that it cannot reasonably be
cured within 30 days or (b) the cure thereof by Lender requires Lender to have
possession of the Property, then in either such event Tenant shall not exercise
any termination remedy so long as Lender is diligently taking all steps required
for Lender to cure the default (including pursuit of possession of the Property,
to the extent required).
ADDRESS FOR NOTICES TO LENDER:
BANK OF AMERICA NT & SA
50 California St., 11th Floor (#9105)
San Francisco, CA 94111
Attention: Janice Sears, Vice President
5. Payments to Lender. Tenant shall make all payments under the Lease to
Lender upon receiving a direction to pay from Lender, and shall comply with any
such direction to pay without determining whether any default exists with
respect to the Loan.
6. Agreements by Landlord. Landlord hereby agrees as follows:
6.1 Tenant shall have no liability to Landlord for any amount
otherwise owing to Landlord under the Lease in the event that (a) Tenant
receives a written demand from Lender to pay such amount to Lender and (b)
Tenant thereafter pays such amount to Lender.
6.2 Tenant shall be entitled to assume that any such demand by Lender
is valid and shall be under no obligation, and shall have no right, to inquire
as to its validity, nor shall any claim by Landlord that such demand is invalid
affect Tenant's right and obligation to pay all amounts demanded to Lender and
thereupon be discharged of Tenant's obligation to pay such amounts to Landlord.
7. Subordination. All of Tenant's rights and interests with respect to
the Premises and the Property under the Lease and all related documents
(including without limitation any options to purchase and rights of first offer
and first refusal) are and shall remain subject and subordinate to Lender's
rights and interests in the Property under the Deed of Trust, the Assignment of
Leases and all related loan and security documents, and to all amendments,
supplements and other modifications now or hereafter executed with respect
thereto, including without limitation modifications that substantially increase
the obligations to Lender to which Tenant's interests are subordinated. Without
limiting the generality of the foregoing, the provisions of the above-described
loan and security documents shall prevail over any inconsistent provisions of
the Lease relating to the disposition of insurance and condemnation awards.
8. Nondisturbance and Attornment. In the event of any judicial or
nonjudicial foreclosure of the Deed of Trust or transfer by deed in lieu
thereof, the Lease shall not terminate, nor shall Tenant's rights thereunder be
disturbed, except
2
<PAGE> 36
in accordance with the terms of the Lease or any amendment or other applicable
agreement executed by Tenant with respect thereto; provided, however, that the
transferee of Landlord's interests pursuant to such foreclosure or other
transfer shall not be (i) liable for any act or omission of any prior landlord
under the Lease (including without limitation the breach of any representation
or warranty made by any prior landlord unless such breach is caused by such
transferee), (ii) obligated to cure any default of any prior landlord under the
Lease (other than nonmonetary defaults that remain uncured at the time of
foreclosure), (iii) subject to any offsets or defenses which Tenant is entitled
to assert against any prior landlord under the lease, (iv) bound by any payment
of any amount owing under the Lease to any prior landlord which was made more
than 10 days prior to the date due, (v) bound by any amendment or other
modification to the Lease which was made subsequent to the date of this
Agreement without the prior written consent of Lender (which shall not be
unreasonably withheld) and which could adversely affect the landlord's
interests, or (vi) liable for the return to Tenant of any security or other
deposit paid by Tenant to any prior landlord under the Lease except to the
extent that such transferee actually receives such deposit. Tenant shall attorn
to and accept any such transferee as the landlord under the Lease for the
unexpired balance of the Lease term, and shall execute any document reasonably
requested by such transferee to evidence such attornment.
9. Further Assurances. Each party hereto shall execute, acknowledge and
deliver to each other party all documents, and shall take all actions,
reasonably required by such other party from time to time to confirm or effect
the matters set forth herein, or otherwise to carry out the purposes of this
Agreement.
10. Attorneys' Fees. In the event that any litigation shall be commenced
concerning this Agreement, the party prevailing in such litigation shall be
entitled to recover, in addition to such other relief as may be granted, its
reasonable costs and expenses, including without limitation reasonable
attorneys' fees and court costs, whether or not taxable, as awarded by a court
of competent jurisdiction.
11. Reliance by Lender. Tenant understands that Lender will rely upon this
Agreement in making the Loan and/or in entering into certain agreements and/or
granting certain consents in connection therewith. Notice of acceptance of this
Agreement by Lender is waived.
12. Miscellaneous. This Agreement shall bind, and shall inure to the
benefit of, the successors and assigns of the parties. This document may be
executed in counterparts with the same force and effect as if the parties had
executed one instrument, and each such counterpart shall constitute an original
hereof. This Agreement shall be governed by the laws of the State of California.
3
<PAGE> 37
IN WITNESS WHEREOF, Tenant and Landlord have caused this Agreement to be
duly executed as of the date first written above.
"Tenant":
a corporation
By
Its
By
Its
"Landlord":
CATELLUS DEVELOPMENT CORPORATION,
a Delaware corporation
By
Its
4
<PAGE> 38
STATE OF
ss.
COUNTY OF
On , 19__, before me,
personally appeared personally known to me or proved to me on the
basis of satisfactory evidence to be the person(s) whose names(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
STATE OF CALIFORNIA
ss.
COUNTY OF ORANGE
On , 19__, before me,
personally appeared personally known to me or proved
to me on the basis of satisfactory evidence to be the person(s) whose names(s)
is/are subscribed to the within instrument and acknowledged to me that he/she/
they executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
5
<PAGE> 39
CA
---
EXHIBIT "A"
Legal Description of the Property
The real property in the County of , State of California, more
particularly described as follows:
<PAGE> 40
EXHIBIT I
DRAWING OF ACCEPTABLE
INDUSTRIAL/OFFICE
CONFIGURATION AT LEASE
TERMINATION
<PAGE> 41
EXHIBIT J
CATELLUS DEVELOPMENT CORPORATION
REQUIREMENTS FOR IMPROVEMENTS OR ALTERATIONS BY TENANT
If Landlord shall permit Tenant to construct any initial tenant
improvements in the Premises or to have any work performed in the Premises at
any time prior to or during the Lease term by a contractor retained by Tenant
("Tenant's Work"), then Tenant shall comply with the requirements set forth
herein. When the work has been properly authorized, Tenant will receive written
approval and consent for alterations to the Premises. All alterations to the
Premises, excepting movable furniture and trade fixtures, shall, at Landlord's
option, become a part of the realty and belong to Landlord UNLESS OTHERWISE
SPECIFICALLY SET FORTH IN THE LEASE.
1. SUBMITTAL OF PLANS. Prior to commencing any work in the Premises, Tenant
shall submit to Landlord for approval its proposed plans for the work.
Without limiting the foregoing, Tenant shall provide:
(a) A separate scale drawing denoting all proposed construction and/or
demolition.
(b) NOT APPLICABLE.
(c) Specify all dimensions and complete references to all work to be
performed in the affected areas.
(d) If adding extra electrical or mechanical equipment, provide complete
operating and maintenance specifications for each item.
2. CHECKLIST. With respect to each project, Landlord will provide Tenant with
a checklist listing the items required to be furnished to Landlord in
connection with the proposed work. Tenant shall furnish to Landlord prior
to, during, or upon completion of Tenant's Work, as applicable, each of the
items specified in the checklist attached hereto as Attachment 1.
3. CONTRACTORS PROVIDING TENANT IMPROVEMENT SERVICES.
(a) The contractor employed by Tenant and any subcontractors shall be (i)
duly licensed in the state in which the Premises are located, and (ii)
subject to Landlord's prior written approval, which approval shall not
be unreasonably withheld. If more than one trade is employed on a
single job, state law requires the services of a general contractor in
addition to contractors for specialty work being performed.
(b) Each contractor shall provide proof of licensing as a general or
specialty contractor in accordance with State Law. Additionally, each
contractor shall furnish proof of licensing in the city or
municipality wherein the construction related activity is to take
place, if required by law or local ordinance.
(c) N/A (intentionally deleted).
(d) Tenant and Tenant's contractors shall comply with all applicable
local, state and federal codes and regulations pertaining to the
performance of Tenant's Work and the completed improvements and all
applicable safety regulations established by Landlord or the general
contractor.
(e) Prior to commencement of any work in the Premises, Tenant and Tenant's
contractors shall obtain and provide Landlord with certificates
evidencing Workers' Compensation, public liability and property damage
insurance in amounts and forms and with companies satisfactory to
Landlord. Each general contractor employed on the Premises shall
provide Landlord with a current certificate of insurance in effect for
that contractor with a thirty day notice of cancellation or revocation
clause. Insurance requirements are as follows:
(i) Comprehensive General Liability with a $2,000,000 Combined Single
Limit covering the liability of Landlord and contractor for
bodily injury and property damage arising as a result of the
construction of the improvements and the services performed
thereunder. Landlord shall be named as an additional insured.
Page 1 of 5
<PAGE> 42
(ii) Comprehensive Automobile Liability with a $2,000,000 Combined
Single Limit covering Landlord and vehicles used by contractor
(and any subcontractor) in connection with the construction of
the improvements.
(iii) Workers' Compensation and Employer's Liability as required by
law, for employees of the contractor (and any subcontractors)
performing work on the Premises.
(f) The following requirements shall be incorporated as "Special
Conditions" into the contract between Tenant and its contractors and a
copy of the contract shall be furnished to Landlord prior to the
commencement of Tenant's Work:
(i) Prior to start of Tenant's Work, Tenant's contractor shall
provide Landlord with a construction schedule in "bar graph" form
indicating the completion dates of all phases of Tenant's Work.
(ii) Tenant's contractor shall be responsible for the repair,
replacement or clean-up of any damage done by him to other
contractors' work which specifically includes accessways to the
Premises which may be concurrently used by others.
(iii)Tenant's contractor shall accept the Premises prior to starting
any trenching operations. Any rework of sub-base or compaction
required after the contractor's initial acceptance of the
Premises shall be done by Tenant's contractor, which shall
include the removal from the Project of any excess dirt or
debris.
(iv) Tenant's contractor shall contain his storage of materials and
his operations within the Premises and such other space as he may
be assigned by Landlord or Landlord's contractor. Should he be
assigned space outside the Premises, he shall move to such other
space as Landlord or Landlord's contractor shall direct from time
to time to avoid interference or delays with other work.
(v) Tenant's contractor shall clean up the construction area and
surrounding exterior daily. All trash, demolition materials and
surplus construction materials shall be stored within the
Premises and promptly removed from the Premises and the Project
and disposed of in an approved sanitation site.
(vi) Tenant's contractor shall provide temporary utilities, portable
toilet facilities, and potable drinking water as required for his
work within the Premises.
(vii)Tenant's contractor shall notify Landlord or Landlord's project
manager of any planned work to be done on weekends or other than
normal job hours.
(viii)Tenant's contractor or subcontractors shall not post signs on
any part of the Project or on the Premises.
4. COSTS.
(a) Tenant shall promptly pay any and all costs and expenses in connection
with or arising out of the performance of Tenant's Work (including the
costs of permits therefor) and shall furnish to Landlord evidence of
such payment upon request.
(b) NOT APPLICABLE.
5. CONTRACTOR'S BONDS. Prior to the commencement of construction, Tenant shall
obtain or cause its contractor to obtain and deliver evidence thereof to
Landlord payment and performance bonds covering the faithful performance of
the contract for the construction of the Tenant's Work and the payment of
all obligations arising
Page 2 of 5
<PAGE> 43
thereunder. In the alternative, and at Landlord's option. Tenant may
appoint Landlord as its contractor, and in so doing, Tenant shall deposit
with the Landlord a sum of money equal to the entire amount of the
estimated construction cost, as is required for the installation of the
Tenant improvements on the Premises. If Tenant deposits with Landlord
monies for construction costs, it is agreed that Landlord will not be
placed in a fiduciary capacity as a trustee, or any other fiduciary title,
for the sums of monies in Landlord's possession. Tenant agrees to hold
Landlord harmless from any and all claims, for workmanship and installation
of improvements, and for merchantability and quality of goods used for the
installation of Tenant's improvements, as are requested by Tenant. Any
bonds obtained pursuant hereto shall be for the mutual benefit of both
Landlord and Tenant as obligees and beneficiaries. AS A FURTHER ALTERNATIVE
TO DELIVERING PAYMENT OR PERFORMANCE BONDS, TENANT MAY SEEK LANDLORD'S
PRIOR APPROVAL OF THE FINANCIAL STRENGTH OF TENANT'S CONTRACTOR AND A
WAIVER FROM LANDLORD OF BONDING REQUIREMENTS. ANY WAIVER OF BONDING
REQUIREMENTS BY LANDLORD SHALL BE IN LANDLORD'S SOLE BUT REASONABLE
DISCRETION, AND LANDLORD MAY CONSIDER SUCH FACTORS IN MAKING ITS DECISION
AS WHETHER OR NOT ANY MATERIAL RISKS OF EXPOSURE TO LANDLORD OR THE
PROPERTY WILL EXIST IN LIGHT OF ALL OF THE FACTS AND CIRCUMSTANCES,
INCLUDING BUT NOT LIMITED TO THE CONTRACTORS FINANCIAL STRENGTH, IF SUCH
BONDING REQUIREMENTS ARE WAIVED.
6. MECHANIC'S LIENS.
(a) Tenant shall not suffer or permit to be enforced against the Premises
or any part of the Project any mechanic's, materialman's, contractor's
or subcontractor's lien arising out of any work of improvement,
however it may arise.
(b) Tenant shall notify Landlord at least ten (10) days prior to the
commencement of construction of any Tenant's Work and Landlord shall
have the right to post and record a notice of nonresponsibility in
conformity with applicable law. Within ten (10) days following
completion of Tenant's Work, Tenant shall file a Notice of Completion
and deliver to Landlord an unconditional release and waiver of lien
executed by each contractor, subcontractor and materialman involved in
Tenant's Work.
(c) In the event any lien is filed against the Project or any portion
thereof or against Tenant's leasehold interest therein, Tenant shall
obtain the release and/or discharge of said lien, within seven (7)
days after the filing thereof. In the event Tenant fails to do so,
Landlord may obtain the release and/or discharge of said lien and
Tenant shall indemnify Landlord for the costs thereof, including
reasonable attorney's fees, together with interest at the Applicable
Interest Rate from the date of demand. Nothing herein shall prohibit
Tenant from contesting the validity of any such asserted claim,
provided Tenant has furnished to Landlord a lien release bond freeing
the Premises from the effect of the lien claim.
(d) NOTWITHSTANDING ANYTHING TO THE CONTRARY, IN THE EVENT ANY OF THE
REQUIREMENTS AND PROVISIONS OF THIS SECTION 6 CONFLICT WITH OTHER
TERMS OF THE LEASE, THE TERMS OF THE LEASE SHALL CONTROL OVER THE
TERMS OF THIS EXHIBIT.
7. INDEMNITY. Tenant shall indemnify, defend (with counsel satisfactory to
Landlord) and hold Landlord harmless from and against any and all suits,
claims, actions, loss, cost or expense (including claims for workers'
compensation, attorney's fees and costs) based on personal injury or
property damage, or otherwise (including, without limitation, contract and
breach of warranty claims) arising from the performance of Tenant's Work.
Tenant shall repair or replace (or, at Landlord's election, reimburse
Landlord for the cost of repairing or replacing) any portion of the
Building or item of Landlord's equipment or any of Landlord's real or
personal property damaged, lost or destroyed in the performance of Tenant's
Work.
8. NOT APPLICABLE.
9. ROOF PENETRATIONS. If improvements penetrate the roof membrane, the
penetrations will be sealed per Landlord/IRC roofing specifications and
inspected by IRC to maintain roof warranty. The cost of inspection and all
corrective work shall be borne by Tenant. Tenant shall use Landlord's
original roofing contractor.
10. NOT APPLICABLE.
Page 3 of 5
<PAGE> 44
11. NOT APPLICABLE.
12. SCHEDULE OF WORK. Tenant may be required to provide a schedule of all work
to be performed, subject to Landlord approval. All costs to produce such
schedule shall be borne solely by the Tenant.
13. CLEAN UP AND DISPOSAL OF CONSTRUCTION DEBRIS. Building trash containers are
provided for office generated trash only and are not to be used for
disposal of construction-related materials and debris. Unapproved usage
will result in a penalty assessment to the Tenant equal to the cost of an
extra pick-up service as provided under the current rate schedule of
regular trash removal service.
14. INSPECTION BY LANDLORD. Landlord reserves the following rights: (i) the
right of inspection prior to, during and at completion of all construction
and/or demolition, (ii) the right to post and record a notice of
nonresponsibility in conformity with California law, and (iii) the right to
order a total stop to all improvements underway for non-compliance with any
of the above criteria.
15. RIGHT OF ENTRY. Landlord will permit entry of Tenant and/or Tenant's
contractors into the Premises for the purpose of performing work prior to
the commencement of the Term, and while Landlord's contractor is working at
the Premises, only at such time or times as Landlord shall deem feasible
under the circumstances. Such license to enter before commencement of the
Term is expressly conditioned upon the contractor retained by Tenant
working in harmony and not interfering with the workers, mechanics,
suppliers, contractors and subcontractors of Landlord; and if at any time
such entry or work by Tenant's contractors or subcontractors shall cause
any disharmony or interference, such permission to enter may be withdrawn
by Landlord immediately upon written notice to Tenant. Such entry shall be
deemed to be under all the terms, covenants, provisions and conditions of
the Lease, except the covenant to pay Base Rent. Tenant's contractor shall
perform the work in a manner and at times which do not impede or delay
Landlord's contractor in the performance of its work. Any delays in the
completion of the Premises or the commencement of the rental and any damage
to any work caused by Tenant's contractor shall be at the sole cost and
expense of Tenant.
16. GENERAL PROVISIONS.
(a) If Landlord has agreed to provide an allowance toward the cost of
tenant improvements, Landlord shall retain from such funds an amount
determined by Landlord until Tenant has fully complied with the
requirements hereof.
(b) All materials, work, installations and decorations of any nature
whatsoever brought on or installed in the Premises before the
commencement of the Term or throughout the Term shall be at Tenant's
risk, and neither Landlord nor any party acting on Landlord's behalf
shall be responsible for any damage thereto or loss or destruction
thereof due to any reason or cause whatsoever.
(c) Nothing contained herein shall make or constitute Tenant as the agent
of Landlord.
Page 4 of 5
<PAGE> 45
ITEMS TO BE FURNISHED TO LANDLORD FOR EACH WORK OF
IMPROVEMENTS
1. Plan of Alterations for Landlord Approval.
2. Contractor(s), Address, Telephone Number, Contact Person.
3. Copy of Contractor's State and City Business License.
4. Copy of Building Permit.
5. Copy of Final Inspection and Signed Building Permit Cards.
6. Copy of Certificate of Insurance Naming Catellus Development Corporation as
Additional Insured. Insurance to include Comprehensive General Liability,
Comprehensive Auto, Workers' Compensation and Employer's Liability.
7. Signed Unconditional lien waiver in favor of Catellus Development
Corporation.
8. Schedule of Work.
9. Copy of Completion and Payment Bond.
10. Architect's License and Expiration.
11. Tenant and Architect Agreement.
12. Tenant and Contractor Agreement.
13. Copy of Permit Plans.
14. Copy of As-Builts.
15. Copy of Recorded Notice of Completion.
16. Certificate of Occupancy.
17. Evidence of Insurance for All-Risk/Builder's Risk Insurance to the Amount
of Improvements.
Attachment I
Page 5 of 5
<PAGE> 46
[CATELLUS LETTERHEAD]
January 3, 1997
Mr. Herb Espleland
Pairgain Technologies, Inc.
14402 Franklin Avenue
Tustin, CA 92680-7013
Re: Condition of Premises - 14352 Franklin Avenue, Tustin, California
Dear Mr. Espleland,
After discussions with Dinamation, the payment for deferred maintenance items
currently addressed in Paragraph 21.4 of the lease by and between Catellus
Development Corporation and Pairgain Technologies, Inc. shall be paid by
Catellus. The allowance for the deferred maintenance items will be $3,000.00.
This is calculated as $2,000.00 for parking lot repair and $1,000.00 for
building paint. Kevin Turner of Grubb & Ellis has copies of repair bids to
support this allowance. Please strike Paragraph 21.4 of the lease, initial the
change, and execute the leases previously provided.
Catellus Development Corporation, prior to and in conjunction with the
improvements to be made by Pairgain Technologies, Inc., will complete the
following items at its expense:
a) Maintenance to roof. This will include closing the penetration made by
Dinamation for their paint booth.
b) Repair of slab fractures, 1/8" or greater, in concrete flooring.
c) Re-tacking of foil insulation.
From walk through of facility on December 30, 1996 with Dinamation.
d) Remove abandoned conduit drops, manufacturing lighting and suspended
shields.
e) Repair roof drywall penetration in one hour fire wall.
f) Repair roll up door openings.
<PAGE> 47
Pairgain Technologies, Inc.
January 3, 1997
Condition of Premises
Page 2
This letter, once signed by Pairgain Technologies, Inc., will become a binding
commitment from Catellus Development Corporation as to the delivery state of
the facility located at 14352 Franklin Avenue, Tustin, California.
If you have any questions, please call me at (714) 237-7301.
Sincerely,
/s/ CHERYL TODD
Cheryl Todd
Asset Manager
Signed and Accepted.
PAIRGAIN TECHNOLOGIES, INC.
By: /s/ Charles W. McBrayer
----------------------------------
Its: CFO
---------------------------------
cc: Gary Allen
Kevin Turner
Bryan Ward
<PAGE> 48
December 03, 1996
PAINTING PROPOSALS
- --------------------------------------------------------------------------------
COMPANY NAME PHONE NUMBER BID
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Zion Painting Co. (Tony Lee) (714) 736-8993 $2,850.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Lee's Painting Co. (Kenneth Lee) (714) 638-0300 $990.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Private Contractor (John Hinds) (714) 953-8614 $950.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
United Maintenance & Painting Co. (714) 530-0441 $1,450.00
(John Pang)
- --------------------------------------------------------------------------------
<PAGE> 49
Page No. __ of __ Pages
- -------------------------------------PROPOSAL----------------------------------
[LEE'S PAINTING CO. LETTERHEAD]
- -------------------------------------------------------------------------------
PROPOSAL SUBMITTED TO PHONE DATE
Mis. Ruth Dinamation Inc. 665-2915 11/26/96
- -------------------------------------------------------------------------------
STREET JOB NAME
14352 Franklin Av
- -------------------------------------------------------------------------------
CITY, STATE AND ZIP CODE JOB LOCATION
Tustin Same as last
- -------------------------------------------------------------------------------
DATE OF PLANS JOB PHONE
- -------------------------------------------------------------------------------
EXTERIOR INTERIOR
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
[ ] WHOLE OUTSIDE [ ] SHUTTERS [ ] WHOLE INSIDE [ ] CLOSET INSIDE
[x] STUCCO CONCRETE WALL [ ] FENCE [ ] CEILING [ ] DOORS
[ ] EAVES [ ] IRON RAILING [ ] BEDROOM [ ] WINDOWS
[ ] WOOD SIDING FRONTSIDE ONLY [ ] STAIRWAY [ ] BATHROOM [ ] SHUTTERS
[ ] FACIA BOARD [ ] GATE [ ] KITCHEN [ ] RAILING
[ ] TRIM [ ] DORMER [ ] LIVING ROOM [ ] WALLPAPER REMOVE
[ ] DOORS [ ] LATTICE [ ] FAMILY ROOM [ ] VARNISH WORK
[ ] WINDOWS [ ] DECK FLOOR [ ] HALLWAY [ ] TEXTURE COAT
[ ] GARAGE DOORS [ ] STORAGE [ ] DINING ROOM [ ] OTHERS
[ ] PATIO [ ] OTHERS [ ] STAIRWAY
[ ] BALCONY [ ] KITCHEN CABINET
</TABLE>
- -------------------------------------------------------------------------------
(Concrete Wall Repainting)
Front Side Only
A. Water power cleaning
B. Any crack & hole to patching on caulking
C. 100% acrylic flat finish coat Evershield (W201)
Dunn-Edwards Paint Co., materials using (Top Quality Material)
D. Color: same existing color
Light Grey -- Main Wall
L. Dark Blue -- Trim
E. No paint: entry wood area.
- -------------------------------------------------------------------------------
WE PROPOSE hereby to furnish material and labor--complete in accordance with
above specifications, for the sum of:
____________________________________________________________ dollars ($ 990.00)
Payment to be made as follows:
_______________________________________________________________________________
_______________________________________________________________________________
All material is guaranteed to be as specified. All work to be completed in a
workmanlike manner according to standard practices. Any alteration or deviation
from above specifications involving extra costs will be included only upon
written orders, and will become an extra charge over and above the ????, All
agreements upon ???? accidents or delays beyond our control. Owner to carry
fire, tornado and other necessary insurance. Our workers are fully covered by
Workmen's Compensation Insurance.
Authorized
Signature Lee
-----------------------------
Note: This proposal may be withdrawn by us if not accepted within _______ days.
- -------------------------------------------------------------------------------
ACCEPTANCE OF PROPOSAL--The above prices, specifications and conditions are
satisfactory and are hereby accepted. You are authorized to do the work as
specified. Payment will be made as outlined above.
Signature ___________________________
Date of Acceptance: ___________________ Signature ___________________________
- -------------------------------------------------------------------------------
<PAGE> 50
December 03, 1996
PAVING PROPOSALS
- --------------------------------------------------------------------------------
COMPANY NAME PHONE NUMBER BID
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Zion Painting Co. (Tony Lee) (714) 736-8993 $2,150.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Allstar Paving (Robert Haije) (714) 835-9177 $1,985.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
El Camino Paving Co. (Mike) (714) 997-9357 $2,108.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Allied Paving Co. (Chris Barnes) (714) 632-7484 $2,580.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Preferred Paving (Terry Baker) (714) 632-1414 Bid in by 12/06/96
- --------------------------------------------------------------------------------
<PAGE> 51
[ALLSTAR PAVING COMPANY LETTERHEAD]
- -------------------------------------------------------------------------------
PROPOSAL & CONTRACT
- -------------------------------------------------------------------------------
DINAMATION
TO: 14352 Franklin Telephone (714) 665-2910
Tustin, CA 92780
Date November 27, 1996
ATTENTION: Ms. Ruth Johnson
================================================================================
JOB LOCATION: 14352 Franklin, Tustin
================================================================================
SCOPE OF WORK: Furnish all labor, equipment and materials required to complete
the following:
1) Resurface approx. 2,985 sq.ft. of deteriorated pavement with up
to 1" of hot asphalt. Roll and compact.
2) Restripe parking stalls covered by new asphalt patches.
ALL FOR THE SUM OF: $1,985.00
- Not responsible for weed growth.
- Crack filling does not imply crack repair.
- Not responsible for pre-existing engineering with respect to drainage.
- Not responsible for back-fill and compaction or back-fill installed
by others.
- Engineering, testing, inspection and permit fees not included.
- Not responsible for reflective cracking when overlaying or skin
surfacing.
- Scuffing is a natural occurence with new asphalt and seal, normally
correcting itself as it is curing.
ALLSTAR PAVING COMPANY, INC.
TERMS:
This proposal may be withdrawn if not accepted
within N/A days. By: /s/ ROBERT HAIJE
--- ------------------------
100% due upon completion and presentation of ROBERT HAIJE
invoice.
ACCEPTANCE
I/We accept the within proposal and agree to pay the said amount in accordance
with the terms set forth. All of the terms and definitions on the reverse side
are incorporated herein and made a part hereof.
Company____________________________By ___________________ Date ________________
<PAGE> 52
LIMITED SECONDARY AGREEMENT TO REMOVE IMPROVEMENTS
THIS AGREEMENT is made as of the 31st day of December 1996 ("Effective
Date") by and between CATELLUS DEVELOPMENT CORPORATION, a Delaware corporation
("Catellus") and RICHARD CHEEK, ROBERT D. CHEEK, AND DANIEL S. CHEEK, all
Trustees of THE CHEEK FAMILY TRUST "D" UDT March 1, 1995 (the "Cheek Trust").
RECITALS
A. Catellus is the owner of that certain real property commonly
known 14352 Franklin Ave., Tustin, California, as more particularly described
on Exhibit A attached hereto and made a part hereof by this reference (the
"Catellus Property").
B. The Cheek Trust is the owner of that certain real property
located in the City of Tustin, California, as more particularly described on
attached hereto and made a part hereof by this reference (the "Cheek
Property"), which property is located near the Catellus Property.
C. Catellus has or intends to enter into a lease (the "Building
Lease") with PairGain Technologies, Inc., a Delaware corporation ("PairGain")
whereby PairGain intends to construct certain improvements (the "Tenant
Improvements") to the existing Building on the Catellus Property for use by
PairGain during the term of the Building Lease. As a condition to allowing
such Tenant Improvements to be constructed, the City of Tustin has required
that PairGain obtain additional parking and has required that the parking
rights be evidenced by a Grant of Easement to be recorded on the Cheek
Property. Accordingly, PairGain has entered into a lease (the "Ground Lease")
with the Cheek Trust for use of the Cheek Property as a parking lot.
D. Catellus has required as a part of the Building Lease and
related documentation, that, among other things, PairGain (a) remove the Tenant
Improvements in accordance with the provisions of the Building Lease at the
termination or expiration of the Building Lease, and (b) indemnify and hold
Catellus free and harmless from any and all costs, damages, liabilities, or
consequences, whether monetary or otherwise, resulting from the building of the
Tenant Improvements, the Conditional Use Permit from the City of
Tustin, and the Ground Lease.
E. It is the intent of the parties that the Ground Lease be
terminated upon termination or expiration of the Building Lease.
F. The Cheek Trust desires the assurance of Catellus that in the
event PairGain defaults in its obligation to remove the improvements such that
the Ground Lease can be terminated and any encumbrance relating thereto may be
removed from the title to the Cheeks Property, and Catellus is willing to give
such assurance on the limited terms of this Agreement.
NOW THEREFORE, the parties agree as follows:
1. AGREEMENT TO REMOVE IMPROVEMENTS
Catellus hereby agrees that in the event PairGain fails to remove the
Tenant Improvements and restore the Premises to the termination condition
called for in the Building Lease on or before ninety (90) days from the
expiration or termination of the Building Lease, including any extensions or
options thereof, Catellus will promptly undertake and pursue to completion the
removal of such improvements and restoration to the condition called for in the
Building Lease at its cost and expense; provided however, that such
undertaking on the part of Catellus shall in no way be deemed a waiver of its
rights to indemnity from PairGain nor of the primary responsibility of PairGain
with respect to such removal. Further, notwithstanding the foregoing, Catellus
shall not have any obligation or responsibility with respect to removal of any
portion of the Tenant Improvements nor restoration which is not required as a
condition by the City of Tustin to consenting to and permitting the termination
of the Ground Lease and the removal of the encumbrance related to the grant of
an easement for parking in connection therewith.
2. AGREEMENT FOR SOLE BENEFIT OF THE CHEEK TRUST.
<PAGE> 53
This Agreement is intended for and strictly limited to the Cheek Trust
and its successors-in-interest to the Cheek Property. Nothing in this
agreement shall be construed as granting any other party, including but not
limited to PairGain and the City of Tustin, any right to enforce or benefit
from this agreement.
3. SECONDARY, NOT PRIMARY OBLIGATION.
The agreement of Catellus shall be deemed secondary to the obligation
of PairGain directly to The Cheek Trust, and Catellus shall not be deemed the
primary obligor for the removal of the Tenant Improvements. The Cheek Trust
shall look first to PairGain for removal and restoration sufficient to result
in the Ground Lease termination and reconveyance of the easement encumbering
the Cheeks Property related thereto.
4. NO REPRESENTATION OR WARRANTY.
No representation or warranty, of any nature or kind, is made by
Catellus except for the limited agreement to remove the Tenant Improvements as
specifically set forth herein.
5. GENERAL PROVISIONS.
This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original Agreement, and all of which shall constitute one
Agreement to be effective as of the Effective Date. In the event any action is
brought to enforce or interpret any of the terms and provisions of this
Agreement, the "prevailing party" in such action shall be entitled to recover,
as an element of costs of suit and not as damages, reasonable costs and
expenses, including but not limited to taxable costs and reasonable attorneys'
fees. Each of the undersigned shall have joint and several liability for each
and every obligation set forth herein. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and assigns. The
parties and their successors and assigns agree to execute any and all documents
reasonably advisable and/or necessary to effectuate the terms and intent of
this Agreement. If any provision of this Agreement as applied to any party or
circumstance shall be adjudged by a court to be void and unenforceable, the
same shall in no way affect any other provision of this Agreement or the
validity and enforceability of the Agreement as a whole. This Agreement shall
be governed by the laws of the State of California.
"Catellus" CATELLUS DEVELOPMENT CORPORATION
a Delaware corporation
By /s/ Ana Maria Perez
------------------------------------------
Its Vice President
---------------------------------------
"The Cheeks Trust" THE CHEEK FAMILY TRUST "D" UDT MARCH 1, 1995
By /s/ RICHARD D. CHEEK, TRUSTEE
------------------------------------------
Richard D. Cheek, Trustee
By /s/ ROBERT D. CHEEK, TRUSTEE
------------------------------------------
Robert D. Cheek, Trustee
By /s/ DANIEL S. CHEEK, TRUSTEE
------------------------------------------
Daniel S. Cheek, Trustee
READ, APPROVED, and AGREED TO:
PAIRGAIN TECHNOLOGIES, INC.,
a Delaware corporation
By /s/ Charles W. McBrayer
-----------------------------
Its CFO
-------------------------
2
<PAGE> 1
PAIRGAIN TECHNOLOGIES, INC.
EXHIBIT 11.1--COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
PRIMARY EARNINGS PER SHARE 1996 1995 1994
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income $ 36,603 $ 1,056 $ 8,567
======== ======== ========
Calculation of weighted average number of common and
common equivalent shares:
Weighted average of common shares outstanding 62,657 58,225 50,131
Weighted average of common and common shares equivalents:
Weighted average warrants outstanding 40 1,292 5,785
Weighted average options outstanding 13,065 12,069 10,017
Shares assumed to be repurchased using the treasury stock
method (2,380) (3,253) (3,423)
Shares assumed to be repurchased to reflect the effects of
tax benefits (1,324) (1,053) (898)
-------- -------- --------
Weighted average number of common and common
equivalents shares 72,058 67,280 61,612
======== ======== ========
Net income per share $ 0.51 $ 0.02 $ 0.14
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
FULLY DILUTIVE EARNINGS PER SHARE 1996 1995 1994
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income $ 36,603 $ 1,056 $ 8,567
======== ======== ========
Calculation of weighted average number of common and
common equivalent shares:
Weighted average of common shares outstanding 62,657 58,225 50,131
Weighted average of common and common shares equivalents:
Weighted average warrants outstanding 40 1,292 5,785
Weighted average options outstanding 13,065 12,069 10,017
Shares assumed to be repurchased using the treasury stock
method (2,085) (1,700) (2,426)
Shares assumed to be repurchased to reflect the effects of
tax benefits (1,356) (1,178) (923)
-------- -------- --------
Weighted average number of common and common equivalents
shares 72,321 68,708 62,584
======== ======== ========
Net income per share $ 0.51 $ 0.02 $ 0.14
======== ======== ========
</TABLE>
E-1
<PAGE> 1
PAIRGAIN TECHNOLOGIES, INC.
EXHIBIT 23.2--INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
PairGain Technologies, Inc. on Form S-8 Nos. 33-72792 and 33-96080 of our report
dated February 27, 1997, appearing in this Annual Report on Form 10-K of
PairGain Technologies, Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 17, 1997
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 46,840
<SECURITIES> 65,779
<RECEIVABLES> 23,873
<ALLOWANCES> 0
<INVENTORY> 26,010
<CURRENT-ASSETS> 176,343
<PP&E> 18,408
<DEPRECIATION> 8,113
<TOTAL-ASSETS> 193,016
<CURRENT-LIABILITIES> 36,788
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 156,196
<TOTAL-LIABILITY-AND-EQUITY> 193,016
<SALES> 205,312
<TOTAL-REVENUES> 205,409
<CGS> 106,449
<TOTAL-COSTS> 106,449
<OTHER-EXPENSES> 45,718
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,677)
<INCOME-PRETAX> 59,419
<INCOME-TAX> 22,816
<INCOME-CONTINUING> 36,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,603
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
