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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER: 0-22738
QUICKTURN DESIGN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0159619
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
55 W. Trimble Road, San Jose, CA 95131
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 914-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
27, 1998 on the Nasdaq National Market was approximately $171,682,000. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock as of
February 27, 1998 was 17,772,921.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1997 are incorporated by reference in Parts II
and IV of this Form 10-K to the extent stated herein. Also, certain sections of
the Registrant's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be held on April 17, 1998 are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
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THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT QUICKTURN'S INDUSTRY, MANAGEMENT'S BELIEFS, AND CERTAIN
ASSUMPTIONS MADE BY QUICKTURN'S MANAGEMENT. WORDS SUCH AS "ANTICIPATES,"
"EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF
SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE THOSE SET FORTH HEREIN UNDER "RISK FACTORS" ON PAGES 11 THROUGH 18, AS
WELL AS THOSE NOTED IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. UNLESS
REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS
SET FORTH IN OTHER REPORTS OR DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION, PARTICULARLY THE QUARTERLY REPORTS ON
FORM 10-Q AND ANY CURRENT REPORTS ON FORM 8-K.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Quickturn Design Systems, Inc. (the "Company" or "Quickturn") designs,
manufactures, sells and supports products that verify the design of
integrated circuits ("ICs") and electronic systems. The Company derives
substantially all of its revenue from its design verification products and
related maintenance and consulting services. The Company's principal design
verification products include System Realizer-TM- and CoBALT-TM- (Concurrent
Broadcast Array Logic Technology) emulators, and SpeedSim-TM- cycle-based
simulation software. Emulation systems are sold in modules of various system
capacities measured in "logic gates," which are measurement units that
describe the design elements created and verified by Quickturn's customers.
As system capacity increases, the selling price of these systems increases
correspondingly. Cycle-based simulation revenue is charged on a per-license
basis. Cycle-based simulation products, which complement the Company's
emulation products, can be used by customers to verify digital logic designs
early in the design process, particularly
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when design changes occur several times per day. Later, when designs become
more stabilized, customers may use in-circuit emulation to test the entire
system that contains the design and to help identify system-level bugs, which
typically are more difficult to find at this stage in the design process.
Quickturn's products serve the needs of IC and systems design engineers in a
variety of markets including microprocessors, computers, workstations and
PCs, telecommunications and networking, multimedia, and graphics.
The Company was incorporated in California in July 1987 and
reincorporated in Delaware in December 1993. In January 1997, the Company
commenced shipment of its CoBALT emulation system which was co-developed with
IBM. In February 1997, the Company merged with SpeedSim, Inc. ("SpeedSim"),
a provider of cycle-based simulation software (the "SpeedSim Merger"). See
Note 3 of the Notes to Consolidated Financial Statements in the Company's
1997 Annual Report to Stockholders. In June 1997, the Company purchased from
Synopsys, Inc. ("Synopsys") certain assets relating to Synopsys's emulation
business of Arkos Design, Inc. (the "Arkos Acquisition"). See Note 3 of the
Notes to Consolidated Financial Statements in the Company's 1997 Annual
Report to Stockholders. Also in June 1997, the Company extended its
relationship with IBM to develop the next generation of custom
processor-based emulation systems. In November 1997, Quickturn moved its
corporate headquarters to San Jose, California. Late in 1997, the Company
introduced release 5.1 of its Quest-TM- II emulation software, which is
designed to enable customers to more quickly and easily compile their IC
designs.
The Company's principal executive offices are located at 55 W. Trimble
Road, San Jose, California, 95131, and its telephone number is (408) 914-6000.
The Company's homepage can be located on the Web at http://www.quickturn.com/.
TECHNOLOGY AND PRODUCTS
CYCLE-BASED SIMULATION
The IC design process begins when electronic design engineers create an
initial description of an IC, typically using high level or register transfer
level ("RTL") languages such as VHDL or Verilog. This description is then
debugged using software simulation which creates a software mock-up of the IC's
logic flow based on the RTL description. Test inputs are then fed into the
mock-up to determine if the current design performs as desired.
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Once an IC design is deemed reliable at the RTL level, the designer maps
out a physical layout of the transistors and gates. This is often
accomplished using synthesis software which transforms RTL designs into gate
level architecture. Once at the gate level, the design again must be tested
for critical operating functionality. Both RTL and gate level tests are
typically run on event-driven simulation software, which runs at speeds
substantially below the normal speed of a completed IC. The speed of most
event-driven simulation software is typically in the range of tens or
hundreds of cycles per second, while most complex ICs are designed to run in
the range of tens of millions to hundreds of millions of cycles per second.
Therefore, software simulation testing of a highly complex design with
hundreds of thousands of gates using event-driven simulation could take a
substantial period of time. Since a design may need to undergo dozens of
iterations, given the time-to-market demands in the electronics industry, the
delays associated with full event-driven simulation for complex IC designs
can be unacceptable to IC designers.
The Company's SpeedSim high performance simulation software uses
cycle-based simulation ("CBS") technology, which is an alternative to
traditional event-driven simulation. CBS is specifically designed to improve
on the verification speed limitations of event-driven simulation, and it may
also contribute to lower IC design costs by reducing the need for expensive
hardware simulation accelerators.
The Company's SpeedSim cycle-based simulator employs a proprietary
technology called Boolean Dataflow Engine ("BDE") to enhance verification
performance by having the cycle-based simulator examine results only at the
end of every clock cycle, therefore eliminating unnecessary calculations.
These unnecessary calculations are inherent to traditional event-driven
simulation, which examines every active signal that propagates through every
device during a clock cycle. Therefore, the Company believes that its CBS
approach may be five to ten times faster than event-driven simulation because
CBS focuses only on the primary task at hand, which is functional
verification of chip design logic. BDE further enhances performance by
employing fewer logic states, typically two (1s and 0s), while full
event-driven-simulation addresses from four to nine logic states.
Other enhancements related to BDE technology include:
* Minimal Memory Usage: The SpeedSim product enhances performance by
utilizing less memory than event-driven simulation. Using BDE, engineers
can fit a one million gate design into a 10MB image. Without BDE, the
computer memory requirements for the same image may be typically five to 50
times
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larger. For very large chip designs, the reduced memory requirements made
possible by BDE are further enhanced by allowing a design team to speed up
verification by running different tests on all of their desktop workstations
in their network at once, instead of on just one large server.
* Simultaneous Test: This SpeedSim option allows for up to 32 different
tests to be run simultaneously on one image of a design model, using a single
workstation, which can result in a five-fold to ten-fold gain in performance
throughput.
* Symmetric MultiProcessing ("SMP"): This feature allows chip designers to
take a single design of one million gates or more and divide it into segments.
Each segment is then simulated on different CPUs within the SMP box, thereby
creating software simulation that is four to eight times faster across multiple
CPUs compared to having to simulate on a single CPU.
* Fast Design Iterations: After a design bug is located and fixed, this
feature provides for fast recompilation, typically within minutes for very large
designs, instead of hours using some event-driven simulation.
The platforms supported by the SpeedSim product include UNIX workstations
on SUN, HP, DEC, and IBM platforms and Intel-compatible PCs running LINUX or
Windows/NT.
EMULATION
Quickturn's System Realizer emulation system and CoBALT emulation system
are used by electronic design engineers to generate reprogrammable physical
prototypes, or "virtual silicon"-TM- representations, of their electronic
circuit designs. This enables designers to achieve concurrent verification
of the entire target system, including system software and applications, and
to perform iterative design changes prior to actual silicon fabrication.
System Realizer offers a versatile solution for synchronous and asynchronous
designs in the range of 150,000 to six million logic gates. CoBALT provides
verification capabilities for complex, synchronous designs of up to 8 million
logic gates. Both systems share the same software environment, which allows
designers to select the optimum emulation solution for any design style.
The emulation process begins with the Company's emulation products
automatically accepting logic designs created in the most widely used,
commercially available electronic design automation ("EDA") systems, as well as
those created in the proprietary design environments of selected large
customers.
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These designs are then processed by the Company's proprietary software on a
commercial workstation. Using information provided by engineers as well as
by built-in proprietary algorithms, the software is used to partition designs
into different blocks of logic which are then automatically mapped into a
virtual silicon implementation. The user's gate or RTL description is mapped
into the programmable hardware of CoBALT or System Realizer. Optimization is
done during the mapping process to best utilize the programmable hardware.
Once the designs are partitioned, the software defines the interconnection
and logic routing of the various blocks of logic.
The designs are then downloaded from the commercial workstation to the
emulation system, thereby creating a virtual silicon implementation of the
designs. The virtual silicon is then cabled into the target system where the
fabricated silicon will ultimately reside. At this time, the target system can
be run just as it would if fabricated silicon were available. The target
system is then tested by running embedded software, operating systems and
application software. The verification of the target system will typically run
at speeds in the millions of cycles per second range, several orders of
magnitude faster than gate-level simulation, but typically slower than real
operating speeds.
The emulation system includes an integrated logic analyzer and software
debugging tools which enable the engineer to observe the details of the design
behavior at any location within a design. When design problems are discovered,
changes are made and then transferred by the emulation software to the virtual
silicon. The impact of the changes can be determined quickly in the target
system while the design can still be easily modified.
The Company's emulation products range in emulation capacities from
150,000 logic gates to 8 million logic gates and are priced at between $0.75
to $1.00 per logic gate.
Quickturn's products are based on the Company's patented technologies and
proprietary software algorithms that have produced the following core
technologies:
* LOGIC COMPILATION INCLUDING PARTITIONING: the complex software that
segments a large IC design into smaller units which are programmed into the
field programmable gate arrays ("FPGAs") for System Realizer or processor chips
for CoBALT, and programmable memories that constitute the core reprogrammable
components of Quickturn's emulation systems.
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* INTERCONNECT ARCHITECTURE: in System Realizer, the patented
system-level schema for connecting reprogrammable components, which is
implemented with Quickturn's proprietary interconnect ICs and placement and
routing software.
* LOGIC MAPPING: the software which optimizes the mapping of the design to
be emulated into the basic cells of the FPGAs in the emulation system.
* MEMORY ARCHITECTURE MAPPING: the software which optimizes the use of
programmable memories in the emulation system to represent the memory
architecture of the IC to be emulated.
* INSTRUMENTATION: the fully integrated software and logic analyzer
technology which allows users of Quickturn's emulation systems to observe the
gate level behavior of the virtual silicon, allowing for the assessment of a
design's correctness at this level.
These core technologies maximize the cost effectiveness of the products by
optimizing emulation system capacity and performance and minimizing both the
user's time to emulation and the costs required to verify and debug designs.
See "---Risk Factors: Developing Market; Acceptance of the Company's
Products."
CUSTOMERS
The Company markets its products to customers who design complex ICs and
electronic systems. Early adopters represent the IC and system companies with
the largest design verification problems. As the technology has matured, a
broader range of customers has adopted the technology. Today, the Company's
customers include microprocessor, computer, workstation and PC,
telecommunications and networking, multimedia, and graphics companies. The
Company's customers are in industries characterized by rapid advances in
technology, competitive pressures to quickly develop and introduce new products
and the need for extensive system-level design verification and debugging prior
to design implementation.
Microprocessors and microcontrollers with complexity levels of hundreds of
thousands and even millions of logic gates are applications for which emulation
is considered a critical technology because of the requirement to verify design
compatibility with new and existing software. Typical new users of Quickturn's
design verification products are designers of custom ICs or
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Application Specific Integrated Circuits ("ASICs") with 30,000 to 100,000 or
more logic gates.
See "---Risk Factors: Customer Concentration."
CUSTOMER SERVICE AND SUPPORT
The Company provides customers with technical support, training and design
consulting services. The Company believes that a high level of customer service
and support is critical to the adoption of the Company's design verification
technology by new users. During the early stages of a customer's first project,
the Company works closely with the customer's project team to ensure a smooth
integration of its design verification products into the design process.
Quickturn maintains a rapid response program which is designed to meet customer
support issues. For customers using the Company's design verification products
on mission-critical projects, the Company offers expert-user design consulting
services through its Time-to-Market-Engineering Services ("TtME") to provide
such expert assistance to customers. Additionally, substantially all of the
Company's customers currently have maintenance agreements with the Company. The
Company generally warrants its products to be free from defects and to
substantially conform to material specifications for a period of 90 days.
SALES AND MARKETING
The Company markets its products and services primarily through its direct
sales and service force. The Company employs a highly skilled sales force and
an application engineering team capable of serving the sophisticated needs of
prospective customers' engineering and management staffs. The sales process is
supported by a broad range of marketing programs which includes trade shows,
direct marketing, public relations and customer seminars. From time to time the
Company may enter into joint marketing agreements with EDA companies and other
technology partners to increase market acceptance of the Company's design
verification products. See "---Risk Factors: Potential Fluctuations in
Quarterly Results" and "---Risk Factors: Lengthy Sales Cycles."
As of February 28, 1998, the Company's direct sales and service force
consisted of 155 technical, administrative and management employees. The
Company has 14 sales and support offices throughout the United States located in
Arizona, California (Garden Grove, San Diego, San Jose), Colorado, Illinois,
Massachusetts (Marlborough and North Chelmsford), Minnesota, New Jersey, North
Carolina, Oregon and Texas (Austin and Dallas). Internationally, the
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Company has six sales and support offices, one each in London, Munich, Osaka,
Paris, Stockholm and Yokohama. The Company plans to lease a sales office in
Tel Aviv by the second quarter of 1998.
In Japan, the Company serves its customers through its direct sales and
service offices in Osaka and Yokohama. Additionally in Japan, the Company has
a hardware maintenance agreement with D Scan Service Co., Ltd. The Company
utilizes manufacturer's representatives and other selected distributors in
Israel, Korea, Singapore and Taiwan.
International sales (sales outside of North America) accounted for
approximately 34%, 36% and 31% of the Company's revenue in 1997, 1996 and 1995,
respectively. See "---Risk Factors: International Sales."
RESEARCH AND DEVELOPMENT
To support its current leadership position in the design verification
market, the Company presently invests and will continue to invest in continued
innovation in the key technology areas of new products and existing products.
As of February 28, 1998, the Company's research and development group
consisted of 135 full-time employees. Within the research and development
organization, approximately 74% was involved in software development, with the
balance in hardware design. During 1997, 1996 and 1995, research and
development expenses were $23.5 million, $19.7 million and $15.4 million,
respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future.
See "---Risk Factors: New Products and Technological Change."
MANUFACTURING
The Company performs final assembly and test of its emulation products in
its San Jose, California facility. The Company utilizes subcontractors for all
major subassembly manufacturing, including all individual printed circuit boards
and custom integrated circuits. The Company has a testing and qualification
program to ensure that all subassemblies meet the Company's specifications
before going into final assembly and test.
Although the Company's customers often forecast projected requirements
considerably in advance of the proposed shipment date, actual orders are
typically not received until shortly before the desired shipment date. As a
result,
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backlog at the beginning of a period may not represent a significant
percentage of the product sales anticipated for that period. Accordingly,
the Company does not consider backlog to be a significant measure of
anticipated sales for any future period. However, the Company partially
relies on forecasts to determine inventory levels and manufacturing
schedules.
See "---Risk Factors: Dependence Upon Certain Suppliers" and "---Risk
Factors: Manufacturing."
COMPETITION
The EDA industry is highly competitive and rapidly changing. The Company's
products are specifically targeted at the emerging portion of this industry
relating to advanced verification technology, and, to date, substantially all of
the Company's revenue has resulted from sales in this segment. The Company
faces significant competition for emulation-based system-level design
verification and cycle-based simulation, and also competition from traditional
design verification methodologies which rely on the approach of building and
then testing complete system prototypes, as well as from potentially new tools
such as formal verfication. The Company will continue to inform potential
customers of the benefits of emulation and cycle-based simulation in order for
such customers to adopt the Company's advanced design verification systems as a
complement to standard simulation tools. See "---Risk Factors: Competition."
In addition, competitors may resort to litigation as a means of
competition. Such litigation may result in substantial costs to the Company and
significant diversion of management time. In 1995, Mentor Graphics Corporation
("Mentor") filed suit against the Company for declaratory judgment of
noninfringement, invalidity and unenforceability of several of the Company's
patents. Several actions between the Company and Mentor were consolidated in the
U.S. District Court for the District of Oregon, where six of the Company's
patents are now involved in the disputes. The Company has filed counterclaims
against Mentor and Mentor's French subsidiary, Meta Systems ("Meta"), for
infringement and threatened infringement of those six patents. Mentor has also
filed claims against the Company for defamation and tortious interference. In
January 1996, the Company filed a complaint with the International Trade
Commission, seeking to stop unfair importation of hardware logic emulation
systems and components manufactured by Meta on the grounds that such systems
infringe the Company's patents. In November 1996, Aptix Corporation filed a
suit against the Company alleging antitrust violations and unfair competition.
In August 1997, a preliminary injunction sought by Mentor's German subsidiary,
Mentor Graphics (Deutschland) GmbH, was issued by a
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regional court in Munich, enjoining agents of the Company from making certain
statements concerning the U.S. litigation matters between Mentor and the
Company. In October 1997, the Company filed suit in Germany against Mentor's
German subsidiary, Mentor Graphics (Deutschland) GmbH, for infringement of
the Company's German patent. See Note 16 of the Notes to Consolidated
Financial Statements in the Company's 1997 Annual Report to Stockholders.
There can be no assurance as to the outcome of these matters. See "---Item
3. Legal Proceedings." Although patent and intellectual property disputes in
the EDA industry are often settled through licensing, cross-licensing or
similar arrangements, costs associated with such litigation and arrangements
may be substantial.
PROPRIETARY RIGHTS
The Company's success and ability to compete depend in part upon its
proprietary technology. While the Company relies on patent, trademark, trade
secret and copyright law to protect its technology, the Company also believes
that factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technology leadership position.
The Company currently holds 22 U.S. patents, of which one is co-owned,
and has 24 patent applications on file at the U.S. Patent and Trademark
Office. The Company's U.S. patents expire between 2008 and 2014. The Company
also holds five corresponding foreign patents and 43 foreign patent
applications pending. The five foreign patents expire in 2009.
See "---Risk Factors: Proprietary Rights."
EMPLOYEES
As of February 28, 1998, the Company had a total of 388 employees, of
whom 350 were based in the United States and 38 were based overseas. Of the
total, 173 were engaged in sales, marketing and related customer support
services, 135 were in research and development, 55 were in manufacturing and
25 were in finance and administration.
See "---Risk Factors: Dependence Upon Key Personnel."
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RISK FACTORS
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K AND IN
THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, THE FOLLOWING RISK FACTORS
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS
BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE A
SIGNIFICANT IMPACT IN THE COMPANY'S BUSINESS, OPERATING RESULTS OR FINANCIAL
CONDITION.
DEVELOPING MARKET; ACCEPTANCE OF THE COMPANY'S PRODUCTS. Substantially
all of the Company's revenue has been derived from the sale of its design
verification products, and sales of such products are expected to continue to
account for substantially all of the Company's revenue in the foreseeable
future. To date, the Company's products have been sold to a limited number of
customers. See "---Risk Factors: Customer Concentration." Accordingly,
broad market acceptance of design verification products by existing and new
customers is critical to the Company's future success. The adoption of the
Company's design verification products in the design verification process by
IC and system designers, particularly those which have historically relied on
other methodologies, generally requires the designer to adopt an entirely new
method of design verification. While the Company believes that its design
verification products offer considerable advantages in the IC and system
design process, there can be no assurance that market acceptance of those
products will continue to grow. Moreover, there can be no assurance that
emulation products will be adopted beyond the high-end emulation market,
which is characterized by complex ICs of hundreds of thousands or, in some
cases, millions of logic gates. The adoption of the Company's design
verification products for designing ICs and systems will also depend on the
continued increased complexity of ICs designed into electronic systems,
integration of the Company's products with other tools for design and
verification, importance of the time-to-market benefits of the Company's
design verification products and industry acceptance of the need to close the
gap between high level design and silicon production. Because the market for
design verification products is new and evolving, it is difficult to predict
with any assurance whether the market for design verification products will
continue to expand.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly
operating results have in the past and may in the future vary significantly
depending on factors such as the timing of customer development projects and
related orders to purchase the Company's design verification products, new
product announcements and releases by the Company, and economic conditions
generally and in the electronics industry specifically. Other factors which
could
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adversely affect the Company's quarterly operating results in the future
include the efficiencies achieved by the Company in managing inventories and
fixed assets, the timing of expenditures in anticipation of increased sales,
customer product delivery requirements and shortages of product components or
labor. Many of the Company's customers order on an as-needed basis and often
delay delivery of firm purchase orders until their project commencement dates
are determined. As a result, backlog at the beginning of a quarter may not
represent a significant percentage of the product sales anticipated in that
quarter. Quarterly revenue and operating results will therefore depend on
the volume and timing of orders received during the quarter, which are
difficult to forecast. Moreover, a significant portion of the Company's
revenue in each quarter generally results from shipments during the last few
weeks of the quarter. The absence of significant backlog and the
concentration of sales at the end of the quarter limit the Company's ability
to plan operating expenses and production and inventory levels. In addition,
sales of individual systems make up a significant percentage of the Company's
quarterly revenue. Therefore, if anticipated shipments in any quarter do not
occur or are delayed, expenditure levels could be disproportionately high as
a percentage of revenue, and the Company's operating results for that quarter
would be adversely affected.
LENGTHY SALES CYCLES. Sales of the Company's products depend, in
significant part, upon the decision of a prospective customer to commence a
project for the design and development of complex ICs and systems. In view of
the significant amounts of both time and commitment of capital involved in the
design and development of complex ICs and systems, the Company may experience
delays following initial qualification of the Company's design verification
products as a result of delays in commencement of the project by a customer.
For this and other reasons, the Company's design verification products typically
have a lengthy sales cycle during which the Company may expend substantial funds
and management effort. Lengthy sales cycles subject the Company to a number of
significant risks, including inventory obsolescence and fluctuations in
operating results, over which the Company has little or no control.
CUSTOMER CONCENTRATION. A relatively limited number of customers has
historically accounted for a substantial portion of the Company's revenue.
These customers represent early adopters of emulation technology, typically for
the design of complex ICs. The Company expects that sales of its products to a
relatively limited number of customers will continue to account for a high
percentage of revenue in the foreseeable future. The loss of a major customer
or any reduction in orders by such a customer, including reductions due to
market or competitive conditions in the electronics or EDA industry, could have
an
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adverse effect on the Company's financial condition and results of
operations. Moreover, the Company's ability to increase its sales will
depend in part upon its ability to obtain orders from new customers, as well
as the financial condition and success of its customers and the general
economy. There can be no assurance that such an increase will occur.
DEPENDENCE ON ELECTRONICS INDUSTRY. The Company is dependent upon the
state of the electronics industry, and in particular on new system and IC design
projects. The electronics industry is characterized by rapid technological
change, short product life cycles, fluctuations in manufacturing capacity and
pricing and margin pressures, which cause the industry to be volatile. As a
result, the electronics industry has historically experienced sudden and
unexpected downturns during which new system and IC design projects decrease.
Because most of the Company's sales occur upon the commencement of new projects
for system and IC products, the Company is dependent upon the rate of
commencement of new system and IC design projects. Accordingly, negative factors
affecting the electronics industry could have a material adverse effect on the
Company's financial condition or results of operations.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The EDA industry is
characterized by extremely rapid technological change in hardware and
software development, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to enhance its current lines of verification products and to design,
develop and support its next-generation design verification products on a
timely basis that keep pace with technological developments and emerging
industry standards. Next-generation design verification products must address
increasingly sophisticated customer needs, all of which require a high level
of expenditures for research and development by the Company. Although the
Company is not currently aware of any material limitations on its ability to
develop new products which are capable of verifying the next generation of
ICs, there can be no assurance that the Company will successfully develop and
market product enhancements or new products that respond to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable, for technological
or other reasons, to develop and introduce products in a timely manner in
response to changing market conditions or customer requirements, the
Company's business,
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operating results and financial condition will be materially and adversely
affected. Moreover, from time to time, the Company may announce new products
or technologies that have the potential to replace the Company's existing
product offerings. There can be no assurance that the announcement of new
product offerings will not cause customers to defer purchases of existing
Company products, which could adversely affect the Company's results of
operations.
COMPETITION. Because of the demand for a design verification methodology
which reduces the number of costly design iterations and improves product
quality, the Company expects competition in the market for system-level design
verification and cycle-based simulation to increase as other companies attempt
to introduce emulation and cycle-based simulation products and product
enhancements, and as major new EDA technologies may emerge. Moreover, the
Company competes with established EDA companies that have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and larger installed customer bases than the Company.
In addition, many of these competitors have established relationships with
current and potential customers of the Company. Increased competition could
result in price reductions, reduced margins and loss of market share, all of
which could materially adversely affect the Company. Further, the Company
competes with the design engineers of its existing and potential customers, who
sometimes develop customized prototyping solutions for their particular needs.
The Company believes that the principal competitive factors in the EDA market
are quality of results, the mission-critical nature of the technology, technical
support, product performance, reputation, price and support of industry
standards. The Company believes that it currently competes favorably with
respect to these factors. However, there can be no assurance that the Company
will be able to compete successfully against current and future competitors or
that competitive pressures faced by the Company will not materially adversely
affect its business, operating results and financial condition.
INTERNATIONAL SALES. Revenue from most international customers is
denominated in U.S. dollars. However, receivables from certain other
international customers are denominated in local currencies. Such
receivables are hedged, where practicable, by forward exchange contracts to
minimize the impact of foreign exchange rate movements on the Company's
operating results. The Company plans to continue to expand its international
sales and distribution channels. However, there can be no assurance that the
Company's products will achieve widespread commercial acceptance in
international markets in the future. The Company is uncertain whether the
recent weakness experienced in the Asia-Pacific markets will continue in the
foreseeable future due to extreme
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currency devaluation and liquidity problems in this region. Additionally,
EDA spending budgets of major Japanese electronics firms may be decreased;
consequently, sales of the Company's design verification products in Japan
may be flat or down. The Company's future international sales may be subject
to additional risks associated with international operations, including
currency exchange fluctuations, tariff regulations and requirements for
export, which licenses may on occasion be delayed or difficult to obtain.
DEPENDENCE UPON CERTAIN SUPPLIERS. Certain key components used in the
Company's emulation products are presently available from sole or limited
sources. The inability to develop alternate sources for these sole or limited
source components or to obtain sufficient quantities of these components could
result in delays or reductions in product shipments which could adversely affect
the Company's operating results. In particular, the Company currently relies on
Xilinx, Inc. ("Xilinx") for its supply of field programmable gate arrays
("FPGAs"). The Company does not have a long-term supply agreement with Xilinx.
If for any reason there were to be a reduction or interruption of supply of
these FPGAs to the Company, the Company's results of operations would be
materially adversely affected. Although the Company believes that it can obtain
FPGAs from alternate sources in the event of a reduction or interruption of
supply from Xilinx, a significant amount of time would be required to redesign
the Company's emulation systems and software to accommodate an alternate FPGA
supplier. In such event, the Company's operating results could be materially
adversely affected. The Company currently mitigates this risk by maintaining a
supply of FPGAs in inventory in excess of its forecasted requirements; however,
there can be no assurance that this measure will be adequate to alleviate any
future supply problems.
The Company's design verification products also use a proprietary IC
that is currently manufactured solely by National Semiconductor Corporation.
The Company generally purchases this component pursuant to purchase orders
placed from time to time in the ordinary course of business and has no
guaranteed supply arrangements with this source supplier. Moreover, the
manufacture of this component is extremely complex, and the Company's
reliance on the supplier of this component exposes the Company to production
difficulties and quality variations that may be experienced by this supplier.
Therefore, the Company's reliance on this sole and limited source supplier
involves several risks, including a potential inability to obtain an adequate
supply of required components, reduced control over pricing, and timely
delivery and quality of acceptable components. While the timeliness and
quality of deliveries to date from this supplier have been acceptable, there
can be no assurance that problems will not occur in the future. Any
prolonged inability to obtain adequate
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deliveries, or any other circumstances that would require the Company to seek
alternative sources of supply, could have a material adverse effect on the
Company's operating results and could damage the Company's relationships with
its customers.
DEPENDENCE UPON KEY PERSONNEL. The Company's performance is substantially
dependent on the performance of its executive officers, some of whom have worked
together for only a short period of time. Furthermore, the loss of the services
of any of its executive officers or other key employees could have a material
adverse effect on the Company. The Company does not maintain key person life
insurance policies on the lives of its key officers or key personnel, all of
whom are important to the Company's future success. The Company's future success
also depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to retain its key
managerial and technical employees or that it will be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. The inability of the Company to attract and retain the necessary
technical personnel in the future could impair the development of new products
and have a material adverse effect upon the Company's business, operating
results and financial condition. None of the Company's employees is represented
by a labor union. The Company has not experienced any work stoppages and
considers its relations with its employees to be good.
MANUFACTURING. The Company's emulation systems are complex and are used by
the Company's customers in critical development projects which demand a high
level of quality and reliability. The Company invests substantial resources to
ensure the quality and reliability of its emulation systems and is required to
provide a high level of service to its customers to minimize downtime in the
event of a malfunction. There can be no assurance that the Company will be able
to meet customer requirements for quality and reliability in the future.
PROPRIETARY RIGHTS. There can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology, duplicate
the Company's technology or design around the patents owned by the Company. The
source code for the Company's proprietary software is protected both as a trade
secret and as an unpublished copyrighted work. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. The
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Company generally enters into confidentiality or license agreements with its
employees, distributors and customers, and limits access to and distribution
of its software, documentation and other proprietary information.
Nevertheless, there can be no assurance that the steps taken by the Company
will prevent misappropriation of its technology. In addition, litigation has
been necessary in the past to enforce the Company's patents and may be
necessary in the future to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. See "---Competition,"
"---Risk Factors: Competition" and "Item 3 ---Legal Proceedings." Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that any
patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future
patent applications, whether or not being currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by the Company, if at all.
From time to time the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. Although
the Company does not believe that its products infringe upon the proprietary
rights of any third parties, there can be no assurance that infringement or
invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted against the Company or that any such assertions
will not materially adversely affect the Company's business, financial condition
or results of operations. Irrespective of the validity or the successful
assertion of such claims, the Company could incur significant costs with respect
to the defense thereof, which costs could have a material adverse effect on the
Company's business, financial condition or results of operations. If any claims
or actions are asserted against the Company, the Company may seek to obtain a
license under a third party's intellectual property rights. There can be no
assurance, however, that under such circumstances, a license would be available
under reasonable terms or at all.
The Company also relies on certain software which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's verification products to perform key
functions. There can be no assurance that these third party software licenses
will continue to be available to the Company on commercially reasonable terms.
The
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loss of or inability to maintain any of these software licenses could result
in delays or reductions in product shipments until equivalent software were
identified, licensed and integrated, which would adversely affect the Company's
operating results.
VOLATILITY OF STOCK PRICE. The market for Quickturn's Common Stock is
highly volatile, and could be subject to wide fluctuations in response to
quarterly variations in operating and financial results, announcements of
technological innovations or new products by Quickturn or its competitors,
changes in prices of Quickturn's or its competitors' products and services,
changes in product mix, changes in revenue and revenue growth rates for
Quickturn as a whole or for individual geographic areas, product units,
products or product categories, as well as other events or factors.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the market in which
Quickturn does business or relating to Quickturn specifically have resulted,
and could in the future result, in an immediate and adverse effect on the
market price of Quickturn's Common Stock. Statements by financial or industry
analysts regarding the extent of the dilution in Quickturn's net income per
share resulting from the SpeedSim Merger and the extent to which such
analysts expect potential business synergies to offset such dilution can be
expected to contribute to volatility in the market price of Quickturn's
Common Stock. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations which have particularly
affected the market price for the securities of many high-technology
companies and which often have been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the
market price of Quickturn's Common Stock.
ANTI-TAKEOVER PROVISIONS. The Company has adopted a number of provisions
that could have antitakeover effects. In January 1996, the Company's Board of
Directors adopted a Preferred Shares Rights Agreement, commonly referred to as a
"poison pill." In addition, the Company's Board of Directors has the authority
to issue up to 2,000,000 shares of Preferred Stock and to fix the rights,
preferences, privileges and restrictions, including voting rights, of these
shares without any further vote or action by the stockholders. Furthermore,
Quickturn is subject to the provisions of Section 203 of the General Corporation
Law of Delaware, which has the effect of restricting changes of control of a
company.
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<PAGE>
ITEM 2. PROPERTIES.
The Company's principal administrative, sales, marketing, manufacturing and
research and development facility is located in two buildings totaling 145,815
square feet in San Jose, California, which are subject to a lease that expires
in August 2004. The Company leases thirteen other domestic sales and service
offices throughout the United States. The Company also leases international
sales and service offices in London, Munich, Osaka, Paris, Stockholm and
Yokohama, and plans to lease a sales office in Tel Aviv by the second quarter of
1998. The Company expects that it will be able to renew its leases on
satisfactory terms. The Company believes that its existing facilities are
adequate for its current needs and that additional space will be available as
needed.
ITEM 3. LEGAL PROCEEDINGS.
In January 1996, the Company filed a complaint with the International Trade
Commission (the "ITC") in Washington, DC, seeking to stop unfair importation of
logic emulation systems manufactured by Meta Systems ("Meta"), a French
subsidiary of Mentor Graphics Corporation ("Mentor"). In the complaint, the
Company alleges that Mentor's hardware logic emulation systems infringe the
Company's patents. In July 1996, an ITC Administrative Law Judge issued an
Initial Determination granting a Temporary Exclusion Order stopping the
importation of Mentor's emulation systems into the United States, absent the
posting of a bond by Mentor. The ITC Initial Determination included a Cease and
Desist Order against all sales activities regarding unbonded Mentor emulation
products imported into the United States. In August 1996, the ITC ratified the
judge's Initial Determination. Mentor and Meta appealed the Temporary Exclusion
Order to the Federal Circuit Court of Appeals, asking that the ITC's
Interpretation of Quickturn's patent claims be overturned. On August 15, 1997,
the Federal Circuit Court of Appeals affirmed the ITC's decision granting
temporary relief to the Company and adopted the patent claim interpretation of
the ITC as being correct and derived in accordance with the Federal Circuit's
case law. Meanwhile, on August 1, 1997, the ITC Administrative Law Judge issued
an Initial Determination that Mentor's SimExpress emulation systems and
components, including software components, infringe five of the Company's
patents. The Administrative Law Judge recommended that the ITC issue a
Permanent Exclusion Order prohibiting the importation of SimExpress systems and
components. The Administrative Law Judge further recommended that the ITC issue
a Cease and Desist Order prohibiting Mentor from distributing any SimExpress
software of non-U.S. origin in the United States. On October 2, 1997, the ITC
ratified the Administrative Law
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<PAGE>
Judge's Initial Determination. On December 3, 1997, the ITC issued a
Permanent Limited Exclusion Order permanently prohibiting the importation of
hardware logic emulation systems, subassemblies or components (including
software) manufactured by Mentor and/or Meta. At the same time, the ITC
issued a Permanent Cease and Desist Order permanently prohibiting Mentor
from, among other things, selling, offering for sale or advertising the same
hardware logic emulation devices. The period in which President Clinton had
to review the ITC's actions expired on February 2, 1998, and the two orders
became final by operation of law.
The Company is also engaged in a Federal District Court case with Mentor
and Meta involving six of the Company's patents. Mentor and Meta are seeking
a declaratory judgment of noninfringement, invalidity and unenforceability of
the patents in dispute, and the Company has filed counteractions against
Mentor and Meta for infringement and threatened infringement of the six
patents. Mentor has also claimed in this Federal District Court case that
press releases issued by the Company were defamatory and interfered with
Mentor's prospective economic relations. In June 1997, Quickturn filed a
motion for preliminary injunction, asking the District Court to prohibit
Mentor from manufacturing, assembling, marketing, loaning or otherwise
distributing emulation products and components in the United States, which
products and components infringe certain claims in Quickturn's U.S. Patent
No. 5,036,473. On August 1, 1997, the U.S. District Court in Oregon granted
Quickturn's motion for a preliminary injunction against Mentor's domestic
emulation activities. The Oregon action is presently set for trial in August
1998.
In August 1997, a preliminary injunction sought by Mentor's German
subsidiary, Mentor Graphics (Deutschland) GmbH, was issued by a regional court
in Munich, enjoining agents of the Company from making certain statements
concerning U.S. litigation matters between the Company and Mentor. The Company
filed a motion with the regional court in Munich to dismiss this action based on
the failure of Mentor's German subsidiary to advance its case within the 6-month
statutory limitation.
In October 1997, the Company filed a complaint alleging infringement of
the German part of the Company's European Patent No. 0 437 491 B1 against Mentor
Graphics (Deutschland) GmbH, in the District Court of Dusseldorf. The main
court hearing for this matter is set for March 1999.
In November 1996, Aptix Corporation ("Aptix") also filed a suit against the
Company alleging various violations of the antitrust laws and unfair
competition. The discovery phase of this case was recently completed.
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The Company has mounted vigorous defenses against Mentor's defamation and
tortious interference claims and the antitrust and unfair competition claims by
Aptix. The outcome of these actions cannot be predicted with certainty.
In February 1998, Aptix and Meta filed a lawsuit against the Company
alleging infringement of a U.S. patent owned by Aptix and licensed to Meta. The
Company is mounting vigorous defense against this claim. The outcome of this
action cannot be predicted with certainty.
The Company is engaged in certain other legal and administrative
proceedings incidental to its normal business activities. While it is not
possible to determine the ultimate outcome of these actions at this time,
management believes that any liabilities resulting from such proceedings, or
claims which are pending or known to be threatened, will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
Executive Officers and Vice Presidents of the Company
- -----------------------------------------------------
The executive officers and vice presidents of the Company, and their ages
as of February 28, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Keith R. Lobo . . . . . . . . . . 46 President, Chief Executive Officer
and Director
Raymond K. Ostby . . . . . . . . 50 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Donald J. McInnis . . . . . . . . 51 Senior Vice President, Advanced
Simulation Division
Dr. K. C. Chu . . . . . . . . . . 51 Vice President, Software Development
Bernard A. Gilbert . . . . . . . 41 Vice President, Engineering Operations,
Advanced Simulation Division
Jeffrey K. Jordan . . . . . . . . 53 Vice President, North American Sales
Kevin L. Ladd . . . . . . . . . . 35 Vice President and Chief Technologist,
Advanced Simulation Division
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Harlen Ng. . . . . . . . . . . . 57 Vice President, Program Development
Stephen P. Sample . . . . . . . . 46 Vice President, Advanced Development
Dugald H. Stewart . . . . . . . . 45 Vice President, Manufacturing
Christopher J. Tice . . . . . . . 38 Vice President, World-Wide Support
Services
Tung-sun Tung . . . . . . . . . . 49 Vice President, Research and
Development
Dr. Ming Yang Wang . . . . . . . 53 Vice President, Advanced Technology
Solutions
Naeem Zafar . . . . . . . . . . . 40 Vice President, Marketing
</TABLE>
The Company's executive officers and vice presidents are appointed by,
and serve at, the discretion of the Board of Directors. Each executive
officer and vice president is a full-time employee of the Company. There is
no family relationship among any executive officer, vice president or
director of the Company.
Keith R. Lobo joined the Company in November 1992 as President, Chief
Executive Officer and as a Director. From March 1992 to October 1992, Mr.
Lobo served as a consultant in the venture capital field and was a private
investor. From March 1988 to February 1992, he served as Executive Vice
President and Chief Operating Officer of Chips & Technologies, Inc., a
semiconductor supplier of microcomputer components to the personal computer
industry. From August 1981 to March 1988, he served in a variety of
positions, most recently as Vice President of Advanced Products and General
Manager of the RISC Microprocessor Group at LSI Logic Corporation, a supplier
of ASICs.
Raymond K. Ostby joined the Company in September 1993 as Vice President,
Finance and Administration, Chief Financial Officer and Secretary. From July
1991 to September 1993, he served as Vice President, Finance and
Administration and Chief Financial Officer at Force Computers, Inc., a
computer products company. From June 1985 to July 1991, he served as Vice
President, Finance and Administration and Chief Financial Officer of Atmel
Corporation, a manufacturer of semiconductor products.
Donald J. McInnis has served as Senior Vice President, Advanced
Simulation Division of the Company from February 1997. From June 1994 to
February 1997, he served as President and Chief Executive Officer of
SpeedSim, Inc. From May 1990 to February 1994, Mr. McInnis was Vice
President and General Manager, Software Business Unit of ComputerVision
Corporation, a provider of CAD/CAM software services.
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Dr. K.C. Chu joined the Company in June 1995 as Vice President, Entry
Systems and HDL-ICE Development and has served as Vice President, Software
Development since January 1996. From July 1992 to June 1995, he served as
Director, Sunnyvale Research and Development Lab of Mitsubishi Electric
Research Labs, Inc., a research and development facility, and from May 1990
to June 1992, he served as Senior Manager, Research and Development at
Mitsubishi Electronics America, Inc., a supplier of semiconductor products.
Bernard A. Gilbert has served as Vice President, Engineering Operations
of the Advanced Simulation Division of the Company since February 1997. From
March 1996 to February 1997 he was Vice President, Engineering Operations at
SpeedSim, Inc., a provider of cycle-based simulation technology, and from
March 1985 to March 1996, he served as Director of Core Technology Research
and Development at ComputerVision Corp., a provider of CAD/CAM software
services.
Jeffrey K. Jordan has served as Vice President, North American Sales since
October 1996. From May 1994 to October 1996 he was Eastern Area Sales Director
and from April 1993 to May 1994 he served as Eastern Area Sales Manager. From
August 1989 to April 1993, Mr. Jordan served as Eastern Regional Sales Manager
at Integrated Measurement Systems, a provider of test station hardware and
software.
Kevin L. Ladd has served as Vice President and Chief Technologist of the
Advanced Simulation Division of the Company since February 1997. From June
1994 to February 1997 he served as Chairman and Vice President of Research
and Development of SpeedSim, Inc. Mr. Ladd was a consulting engineer for
ViewLogic Systems, Inc., a provider of software products used in IC design
and simulation, from August 1992 to December 1993. From May 1982 to August
1992 he served in a variety of positions most recently as Principal Engineer,
at Digital Equipment Corporation, a manufacturer of computer systems and
software.
Harlen Ng has served as Vice President, Program Development since August
1995. From January 1995 to August 1995, he was Vice President of Systems
Engineering Assurance, and from August 1991 to January 1995, he served as
Director, Engineering Operations for PiE Design Systems ("PiE"), a provider of
emulation systems for system-level verification. From November 1983 to July
1991, Mr. Ng served in a variety of positions at Cadence Design Systems, Inc., a
provider of automation tools used in IC design, most recently as Director,
Customer Support.
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<PAGE>
Stephen P. Sample co-founded the Company and served as Director, Hardware
Design from its inception in July 1987. In July 1993, he became Vice President,
Hardware Design, and since August 1994 he has served as Vice President, Advanced
Development.
Dugald H. Stewart joined the Company in January 1989 as Director of
Manufacturing, and has served as Vice President, Manufacturing since June 1993.
From August 1979 to January 1989, he served as Director of Manufacturing at KLA
Instruments, Inc., a semiconductor equipment manufacturer.
Christopher J. Tice has served as Vice President, World-Wide Support
Services since March 1995. Previously he was Director, World-Wide Support
Services from June 1993 to March 1995. From November 1991 to June 1993, Mr.
Tice served as Director, Support for PiE. From November 1985 to November
1991, he served as General Manager, Processor Business Group at Weitek, a
provider of enhancement processors and controllers.
Tung-sun Tung has served as Vice President, Research and Development since
January 1996, and as Vice President , Emulation System Development from October
1994 to January 1996. From June 1993 to October 1994, he was Director, Hardware
Design. From October 1991 to June 1993, he served as Director, Manufacturing at
PiE. From April 1988 to October 1991, he was Director, Engineering at NetFRAME
Systems, Inc., a designer and manufacturer of fault tolerant servers.
Dr. Ming Yang Wang has served as Vice President, Advanced Technology
Solutions from December 1996, and as Director, Solutions Development from July
1993 to December 1996. From April 1990 to July 1993, Dr. Wang was Program
Manager at PiE.
Naeem Zafar joined the Company in June 1988 and has served as Vice
President, Marketing since September 1995. From March 1995 to September 1995,
he was Vice President, Technology Strategy and Planning, from December 1994 to
March 1995, he was Director, Advanced Products, and from June 1993 to December
1994, Mr. Zafar was Director, Marketing. From April 1992 to June 1993, he was
Director, Product Marketing, from October 1990 to April 1992, he was Senior
Product Marketing Manager, from April 1989 to October 1990, he was Technical
Marketing Manager, and from June 1988 to April 1989, he was Senior Hardware
Engineer.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference to the
section entitled "Selected Consolidated Financial Data" on page 17 of the
Company's 1997 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated by reference to the
section entitled "Financial Highlights" on page 2 of the Company's 1997 Annual
Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 18 through 22 of the Company's 1997 Annual
Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is incorporated by reference to the
section entitled "Selected Consolidated Financial Data" on page 17 of the
Company's 1997 Annual Report to Stockholders, the Consolidated Financial
Statements, the related notes thereto and Report of Independent Accountants on
pages 23 through 38 of the Company's 1997 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOURE.
Not applicable.
With the exception of the information specifically incorporated by
reference from the 1997 Annual Report to Stockholders in Parts II and IV of this
Form 10-K, the Company's 1997 Annual Report to Stockholders is not to be deemed
filed as part of this Report.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the section entitled
"Proposal No. 1: Election of Directors" in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders filed with the Commission on March 10,
1998 (the "1998 Proxy Statement"). The information required by this item
concerning the executive officers of the Company is incorporated by reference to
the information set forth in the section entitled "Executive Officers and Vice
Presidents of the Company" at the end of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the section entitled
"Executive Officer Compensation" in the Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Beneficial Security Ownership
of Management and Certain Beneficial Owners" in the Company's 1998 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-K.
1. FINANCIAL STATEMENTS. The following consolidated financial
statements of the Company and the Report of Independent
Accountants are incorporated by reference to pages 23
through 38 of the Company's 1997 Annual Report to Stockholders.
Report of Coopers & Lybrand L.L.P., Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES. The following financial
statement schedule of the Company for the years ended
December 31, 1997, 1996 and 1995 is filed as part of this
Form 10-K and should be read in conjunction with the
Consolidated Financial Statements, and related notes thereto,
of the Company.
Schedule Title Page
-------- ----- ----
Report of Independent Accountants S-1
on Financial Statement Schedule
II Valuation and Qualifying Accounts S-2
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<PAGE>
Schedules other than those listed above have been omitted since
they are either not required, not applicable or the information
is otherwise included.
3. EXHIBITS: The exhibits listed on the accompanying index to
exhibits immediately following the financial statement schedule
are filed as part of, or incorporated by reference into, this
Form 10-K.
(b) REPORT ON FORM 8-K. No reports on Form 8-K were filed by the Company
during the last quarter of the fiscal year ended December 31, 1997.
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<PAGE>
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 on this 27th day of March
1998.
QUICKTURN DESIGN SYSTEMS, INC.
By: /s/ RAYMOND K. OSTBY
---------------------------
Raymond K. Ostby,
Vice President, Finance and
Administration,
Chief Financial Officer and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed below by the following persons on March 27, 1998 on behalf
of the Registrant and in the capacities indicated:
Signatures Title
----------------------------- ---------------------------------------
/s/ KEITH R. LOBO President and Chief Executive Officer
----------------------------- (Principal Executive Officer)
Keith R. Lobo
/s/ RAYMOND K. OSTBY Vice President, Finance and
----------------------------- Administration, Chief Financial Officer
Raymond K. Ostby and Secretary (Principal Financial and
Accounting Officer)
/s/ GLEN M. ANTLE Chairman of the Board
-----------------------------
Glen M. Antle
/s/ RICHARD C. ALBERDING Director
-----------------------------
Richard C. Alberding
/s/ MICHAEL R. D'AMOUR Director
-----------------------------
Michael R. D'Amour
/s/ DR. YEN-SON (PAUL) HUANG Director
-----------------------------
Dr. Yen-Son (Paul) Huang
/s/ DR. DAVID K. LAM Director
-----------------------------
Dr. David K. Lam
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Quickturn Design Systems,
Inc. has been incorporated by reference in this Form 10-K from page 38 of the
1997 Annual Report to Stockholders of Quickturn Design Systems, Inc. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 27 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material aspects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
January 20, 1998
S-1
<PAGE>
SCHEDULE II - PURSUANT TO REGULATION S-X RULE 12-09
QUICKTURN DESIGN SYSTEMS, INC.
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Deductions Balance
Balance at Additions (Charges at
Beginning (Charges to Against End
Description of Period Expenses) Reserves) of Period
- ------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts $ 1,840 $ ----- $ ----- $ 1,840
--------- --------- --------- ---------
--------- --------- --------- ---------
Year ended December 31, 1996
Allowance for doubtful accounts $ 1,840 $ ----- $ ----- $ 1,840
--------- --------- --------- ---------
--------- --------- --------- ---------
Year ended December 31, 1997
Allowance for doubtful accounts $ 1,840 $ ----- $ ----- $ 1,840
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-2
<PAGE>
QUICKTURN DESIGN SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1997
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated January 16, 1997 among the
Company, SpeedSim, Inc. and QT Corporation (which is incorporated
herein by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated February 7, 1997).
3.1 Certificate of Incorporation of the Registrant, as amended (which
is incorporated herein by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, Registration No.
33-71022 ("Registrant's 1993 Form S-1")).
3.2 Certificate of Amendment of the Certificate of Incorporation of the
Registrant, dated April 11, 1997.
3.3 Bylaws of the Registrant (which are incorporated herein by
reference to Exhibit 3.2 to the Registrant's 1993 Form S-1).
4.1 Form of Registrant's Common Stock certificate (which is incorporated
herein by reference to Exhibit 4.1 to the Registrant's 1993 Form S-1).
10.1 * Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers (which is incorporated herein
by reference to Exhibit 10.1 to the Registrant's 1993 Form S-1).
10.2 * 1988 Stock Option Plan and related agreements (which is incorporated
herein by reference to Exhibit 10.2 to the Registrant's 1993
Form S-1).
10.3 * Key Executive Stock Option Plan and related agreements (which is
incorporated herein by reference to Exhibit 10.3 to the Registrant's
1993 Form S-1).
10.4 * 1993 Employee Qualified Stock Purchase Plan and related agreements
(which is incorporated herein by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8, Registration
No. 333-25459 ("Registrant's 1997 Form S-8")).
10.5 Software License Agreement dated December 18, 1987 between Xilinx,
Inc. and Registrant (which is incorporated herein by reference to
Exhibit 10.8 to the Registrant's 1993 Form S-1).
-i-
<PAGE>
QUICKTURN DESIGN SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1997
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
10.6 Lease dated December 6, 1996 between San Jose Acquisition Co., L.L.C.
and Registrant.
10.8 * Offer letter dated November 4, 1992 between Keith R. Lobo and
Registrant, as amended (which is incorporated herein by reference to
Exhibit 10.18 to Registrant's 1993 Form S-1).
10.9 * 1994 Outside Director Stock Option Plan (which is incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8, Registration No. 33-82452).
10.10 * SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option Plan
(which is incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8, Registration No. 333-21587).
10.11 * 1996 Supplemental Stock Plan (which is incorporated herein by
reference to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8, Registration No. 333-18407).
10.12 * 1997 Stock Option Plan (which is incorporated herein by reference to
Exhibit 4.1 to Registrant's Registration Statement on Form S-8,
Registration No. 33-25459).
13.1 Portions of 1997 Annual Report to Stockholders expressly incorporated
by reference herein.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
27.1 Financial Data Schedule for fiscal year of 1997 (EDGAR).
27.2 Restated Financial Data Schedule for fiscal year of 1996 and
quarters 1, 2, 3 of 1996 (EDGAR).
27.3 Restated Financial Data Schedule for fiscal year of 1995 (EDGAR).
- ----------------------------
* Indicates management compensatory plan, contract or arrangement.
-ii-
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
QUICKTURN DESIGN SYSTEMS, INC.
Quickturn Design Systems, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), pursuant to the
provisions of the General Corporation Law of the State of Delaware (the
"DGCL"), DOES HEREBY CERTIFY as follows:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended by deleting the first paragraph of the Article numbered "Fourth" in
its present form and substituting therefor a new first paragraph of the
Article numbered "Fourth" in the following form:
"This corporation is authorized to issue two classes of shares to be
designated respectively Preferred Stock ("Preferred") and Common Stock
("Common"). The total number of shares of Preferred this corporation shall
have authority to issue shall be 2,000,000, $.001 par value, and the total
number of shares of Common which this corporation shall have the authority
to issue shall be 40,000,000, $.001 par value."
SECOND: The amendment to the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment has been duly adopted
in accordance with the provisions of Section 242 of the DGCL by (a) the Board
of Directors of the Corporation having duly adopted a resolution setting
forth such amendment and declaring its advisability and submitting it to the
stockholders of the Corporation for their approval, and (b) the stockholders
of the Corporation having duly adopted such amendment by vote of the holders
of a majority of the outstanding stock entitled to vote thereon at an annual
meeting of stockholders called and held upon notice in accordance with
Section 222 of the DGCL.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate of Amendment to be signed by Keith R.
Lobo, its President and Chief Executive Officer, and attested by Raymond K.
Ostby, its Vice President, Finance and Administration, Chief Financial
Officer and Secretary, this 11th day of April 1997.
QUICKTURN DESIGN SYSTEMS, INC.
By: /s/ Keith R. Lobo
-----------------------
Keith R. Lobo
President and Chief Executive Officer
ATTEST:
/s/ Raymond K. Ostby
- -------------------------
Raymond K. Ostby
Vice President, Finance and Administration,
Chief Financial Officer and Secretary
<PAGE>
Exhibit 10.6
LEASE
DATED December 6, 1996
BY AND BETWEEN
San Jose Acquisition Company
As Landlord
and
Quickturn Design Systems, Inc.
As Tenant
AFFECTING PREMISES COMMONLY KNOWN AS
2610 Orchard Parkway and 55 W. Trimble Road
San Jose, Ca 95131 - 1013
[12/15/95 MULTI TENANT NET INDUSTRIAL LEASE]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE:
-----
<S> <C>
ARTICLE 1 - DEFINITIONS
- -----------------------
1.1 General 1
1.2 Additional Rent 1
1.3 Address for Notices 1
1.4 Agents 1
1.5 Agreed Interest Rate 1
1.6 Base Monthly Rate 1
1.7 Building 1
1.8 Commencement Date 1
1.9 Common Area 1
1.10 Common Operating Expense 1
1.11 Consumer Price Index 1
1.12 Effective Date 1
1.13 Event of Tenant's Default 1
1.14 Hazardous Materials 1
1.15 Insured and Uninsured Peril 1
1.16 Law 1
1.17 Lease 1
1.18 Lease Term 1
1.19 Lender 1
1.20 Permitted Use 2
1.21 Premises 2
1.22 Project 2
1.23 Private Restrictions 2
1.24 Real Property Taxes 2
1.25 Scheduled Commencement Date 2
1.26 Security Instrument 2
1.27 Summary 2
1.28 Tenant's Alterations 2
1.29 Tenant's Share 2
1.30 Trade Fixtures 2
ARTICLE 2 - DEMISE, CONSTRUCTION, AND ACCEPTANCE 2
- ------------------------------------------------
2.1 Demise of Premises 2
2.2 Commencement Date 2
2.3 Construction of Improvements 2
2.4 Delivery and Acceptance of Possession 2
2.5 Early Occupancy 3
ARTICLE 3 - RENT 3
- ----------------
3.1 Base Monthly Rent 3
3.2 Additional Rent 3
3.3 Payment of Rent 3
3.4 Late Charge and Interest on Rent in Default 3
3.5 Security Deposit 3
ARTICLE 4 - USE OF PREMISES 3
- ---------------------------
4.1 Limitation on Use 3
4.2 Compliance with Regulations 4
4.3 Outside Areas 4
4.4 Signs 4
4.5 Parking 4
4.6 Rules and Regulations 4
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE:
-----
<S> <C>
ARTICLE 5 - TRADE FIXTURES AND ALTERATIONS 4
- ------------------------------------------
5.1 Trade Fixtures 4
5.2 Tenant's Alterations 4
5.3 Alterations Required by Law 5
5.4 Amortization of Certain Capital Improvements 5
5.5 Mechanic's Liens 5
5.6 Taxes on Tenant's Property 6
ARTICLE 6 - REPAIR AND MAINTENANCE 6
- ----------------------------------
6.1 Tenant's Obligation to Maintain 6
6.2 Landlord's Obligation to Maintain 6
6.3 Control of Common Area 6
ARTICLE 7 - WASTE DISPOSAL AND UTILITIES 7
- ----------------------------------------
7.1 Waste Disposal 7
7.2 Hazardous Materials 7
7.3 Utilities 8
7.4 Compliance with Governmental Regulations 8
ARTICLE 8 - COMMON OPERATING EXPENSES 8
- -------------------------------------
8.1 Tenant's Obligation to Reimburse 8
8.2 Common Operating Expenses Defined 8
8.3 Real Property Taxes Defined 9
ARTICLE 9 - INSURANCE 9
- ---------------------
9.1 Tenant's Insurance 9
9.2 Landlord's Insurance 10
9.3 Tenant's Obligation to Reimburse 10
9.4 Release and Waiver of Subrogation 10
ARTICLE 10 - LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 10
- -------------------------------------------------------------
10.1 Limitation on Landlord's Liability 10
10.2 Limitation on Tenant's Recourse 11
10.3 Indemnification of Landlord 11
ARTICLE 11 - DAMAGE TO PREMISES 11
- -------------------------------
11.1 Landlord's Duty to Restore 11
11.2 Landlord's Right to Terminate 11
11.3 Tenant's Right to Terminate 12
11.4 Abatement of Rent 12
ARTICLE 12 - CONDEMNATION 12
- -------------------------
12.1 Landlord's Termination Right 12
12.2 Tenant's Termination Right 12
12.3 Restoration and Abatement of Rent 12
12.4 Temporary Taking 12
12.5 Division of Condemnation Award 12
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE:
-----
<S> <C>
ARTICLE 13 - DEFAULT AND REMEDIES 13
- ---------------------------------
13.1 Events of Tenant's Default 13
13.2 Landlord's Remedies 13
13.3 Waiver 14
13.4 Limitation on Exercise of Rights 14
13.5 Waiver by Tenant of Certain Remedies 14
ARTICLE 14 - ASSIGNMENT AND SUBLETTING 14
- --------------------------------------
14.1 Transfer by Tenant 14
14.2 Transfer by Landlord 16
ARTICLE 15 - GENERAL PROVISIONS 16
- -------------------------------
15.1 Landlord's Right to Enter 16
15.2 Surrender of the Premises 17
15.3 Holding Over 17
15.4 Subordination 17
15.5 Mortgagee Protection and Attornment 17
15.6 Estoppel Certificates and Financial Statements 17
15.7 Reasonable Consent 18
15.8 Notices 18
15.9 Attorney's Fees 18
15.10 Corporate Authority 18
15.11 Miscellaneous 18
15.12 Termination by Exercise of Right 18
15.13 Brokerage Commissions 19
15.14 Force Majeure 19
15.15 Entire Agreement 19
EXHIBITS
- --------
Exhibit A - Site plan of the Project containing a description of the Premises
Exhibit B - Improvement Agreement
Exhibit C - Approved Specifications
Exhibit D - PUNCH LIST
Exhibit E - Description of Private Restrictions
Exhibit F - Sign Criteria
Exhibit G - Form of Subordination Agreement
Exhibit H - Hazardous Materials Questionnaire
</TABLE>
iii
<PAGE>
SUMMARY OF BASIC LEASE TERMS
SECTION TERMS
(LEASE REFERENCE)
A. LEASE REFERENCE DATE: December 6, 1996
(Introduction)
B. LANDLORD: San Jose Acquisition Co., L.L.C.,
(Introduction) a Delaware limited liability company
C. TENANT: Quickturn Design Systems, Inc.,
(Introduction) a Delaware corporation
D. PREMISES: That area consisting of 145,815 square
(Section 1.21) feet of gross leasable area the address
of which is 2610 Orchard Parkway and 55
West Trimble Road, San Jose, CA within
the as Shown on Exhibit A. Buildings and
connector
E. PROJECT: The land and improvements shown on
(Section 1.22) Exhibit A consisting of three (3)
buildings the aggregate gross leasable
area of which is 206,448 square feet.
F. BUILDINGS: The buildings in which the Premises are
(Section 1.7) located known as 2610 Orchard Parkway
and 55 W. Trimble Road, San Jose, Ca
containing 145,815 square feet of gross
leasable area.
G. TENANT'S SHARE: 100% of the Premises; 100% of the
(Section 1.29) Building; and 70.63% of the Project.
H. TENANT'S ALLOCATED PARKING STALLS: 580 stalls.
(Section 4.5)
I. COMMENCEMENT DATE: August 3, 1997. Also see Paragraph 6 of
(Section 1.26) the First Addendum To Lease:
J. LEASE TERM: 84 calendar months (plus the partial
(Section 1.18) month following the Commencement Date if
such date is not the first day of a
month).
K BASE MONTHLY RENT: Months 1 - 12: $218,722.50 per month
(Section 3.1) Months 13 - 24: $226,013.25 per month
Months 25 - 36: $233,304.00 per month
Months 37 - 48: $240,594.75 per month
Months 49 - 60: $247,885.50 per month
Months 61 - 72: $255,176.25 per month
Months 73 - 84: $262,467.00 per Month
L. PREPAID RENT: $218.722.50
(Section 3.3)
M. SECURITY DEPOSIT: $262,467.00
(Section 3.5)
N. PERMITTED USE: Office, marketing, research,
(Section 4.1) development, test, assembly, storage
and distribution of electronic
components.
0. PERMIT TENANT'S ALTERATIONS LIMIT: $10,000.00
(Section 5.2)
P. TENANT'S LIABILITY INSURANCE MINIMUM: $3,000,000.00
(Section 9.1)
<PAGE>
Q. Landlord's Address: Suite 300
(Section 1.3) 2290 North First Street
San Jose, Ca 95131
R. Tenant's Address: 440 Clyde Avenue
(Section 1.3) Mountain View, Ca 94043
S. Retained Real Estate Brokers: Wayne Mascia Associates
(Section 15.13)
T. Lease: This Lease includes the summary of the Basic Lease
(Section 1.17) Terms, the Lease, and the following exhibits and
addenda: First Addendum to Lease, EXHIBIT A (site
plan of the Project containing description of the
Premises), EXHIBIT B (Improvement Agreement),
EXHIBIT C (Approved Specifications), EXHIBIT D
(Punch List), EXHIBIT E description of Private
restrictions), EXHIBIT F (sign criteria), EXHIBIT
G (form of subordination agreement), EXHIBIT H
(Hazardous Materials Questionnaire)
LANDLORD: TENANT:
SAN JOSE ACQUISITION CO., L.L.C. QUICKTURN DESIGN SYSTEMS, INC.
A DELAWARE LIMITED LIABILITY COMPANY A DELAWARE CORPORATION
BY: ARGO PARTNERSHIP, L.P.,
ITS GENERAL PARTNER BY: /s/ Ray Ostby
RAY OSTBY
BY: ARGO MANAGEMENT COMPANY, L.P.
ITS GENERAL PARTNER TITLE: CHIEF FINANCIAL OFFICER
BY: O'CONNER CAPITAL PARTNERS, L.P., DATE: 12/16/96
ITS GENERAL PARTNER
BY: 0'CONNER CAPITAL INCORPORATED,
ITS GENERAL PARTNER
BY: /s/ K.J. Artingstall
K.J. ARTINGSTALL
VICE PRESIDENT
BY: ARGO PARTNERSHIP II L.P.,
ITS MANAGER
BY: ARGO II MANAGEMENT COMPANY, L.P.,
ITS GENERAL PARTNER
BY: O'CONNER CAPITAL PARTNERS II, L.P.,
ITS GENERAL PARTNER
BY: O'CONNER CAPITAL II INCORPORATED
ITS GENERAL PARTNER
BY: /s/ K.J. Artingstall
K.J. ARTINGSTALL
VICE PRESIDENT
DATE: 12/18/96
<PAGE>
LEASE
This Lease is dated as of the lease reference date specified in SECTION A
of the Summary and is made by and between the party identified as Landlord in
SECTION B of the Summary and the party identified as Tenant in SECTION C of the
Summary.
ARTICLE 1
DEFINITIONS
1.1 GENERAL: Any initially capitalized term that is given a special
meaning by this Article 1, the Summary, or by any other provision of this
Lease (including the exhibits attached hereto) shall have such meaning when
used in this Lease or any addendum or amendment hereto unless otherwise
clearly indicated by the context.
1.2 ADDITIONAL RENT: The term "Additional Rent" is defined in Paragraph 3.2.
1.3 ADDRESS FOR NOTICES: The term "Address for Notices" shall mean the
addresses set forth in SECTIONS Q and R of the Summary, provided, however,
that after the Commencement Date, Tenant's Address for Notices shall be the
address of the Premises.
1.4 AGENTS: The term "Agents" shall mean the following: (i) with respect
to Landlord or Tenant, the agents, employees, contractors, and invitees of such
party; and (ii) in addition with respect to Tenant, Tenant's subtenants and
their respective agents, employees, contractors, and invitees.
1.5 AGREED INTEREST RATE: The term "Agreed Interest Rate" shall mean
that interest rate determined as of the time it is to be applied that is
equal to the lesser of (i) 5% in excess of the discount rate established by
the Federal Reserve Bank of San Francisco as it may be adjusted from time to
time, or (ii) the maximum interest rate permitted by Law.
1.6 BASE MONTHLY RENT: The term "Base Monthly Rent" shall mean the fixed
monthly rent payable by Tenant pursuant to Paragraph 3.1 which is specified in
Section K of the Summary.
1.7 BUILDING. The term "Building" shall mean the buildings in which the
Premises are located which buildings are identified in SECTION F of the Summary,
the gross leasable area of which is referred to herein as the "Building Gross
Leasable Area."
1.8 COMMENCEMENT DATE: The term "Commencement Date" is the date the
Lease Term commences, which term is defined in Paragraph 2.2. See Paragraph
2.2 of the Lease and Paragraph 6 of the First Addendum to Lease.
1.9 COMMON AREA: The term "Common Area" shall mean all areas and
facilities within the Project that are not designated by Landlord for the
exclusive use of Tenant or any other lessee or other occupant of the Project,
including the parking areas, access and perimeter roads, pedestrian sidewalks,
landscaped areas, trash enclosures, recreation areas and the like.
1.10 COMMON OPERATING EXPENSES: The term "Common Operating Expenses" is
defined in Paragraph 8.2.
1.11 CONSUMER PRICE INDEX: The term "Consumer Price Index" shall refer to
the Consumer Price Index, All Urban Consumers, subgroup "All items", for the San
Francisco-Oakland-San Jose metropolitan area (base year 1982-84 equals 100),
which is presently being published monthly by the United States Department of
Labor, Bureau of Labor Statistics. However, if this Consumer Price Index is
changed so that the base year is altered from that used as of the commencement
of the initial term of this Lease, the Consumer Price Index shall be converted
in accordance with the conversion factor published by the United States
Department of Labor, Bureau of Labor Statistics to obtain the same results that
would have been obtained had the base year not been changed. If no conversion
factor is available, or if the Consumer Price Index is otherwise changed,
revised or discontinued for any reason, there shall be substituted in lieu
thereof and the term "Consumer Price Index" shall thereafter refer to the most
nearly comparable official price index of the United States government in order
to obtain substantially the same result as would have been obtained had the
original Consumer Price Index not been discontinued, revised or changed, which
alternative index shall be selected by Landlord and shall be subject to Tenant's
written approval.
1.12 EFFECTIVE DATE: The term "Effective Date" shall mean the date the
last signatory to this Lease whose execution is required to make it binding on
the parties hereto shall have executed this Lease.
1.13 EVENT OF TENANT'S DEFAULT: The term "Event of Tenant's Default" is
defined in Paragraph 13.1.
1.14 HAZARDOUS MATERIALS: The terms "Hazardous Materials" and "Hazardous
Materials Laws" are defined in Paragraph 7.2E.
1.15 INSURED AND UNINSURED PERIL: The terms "Insured Peril" and "Uninsured
Peril" are defined in Paragraph 11.2E.
1.16 LAW: The term "Law" shall mean any judicial decision, statute,
constitution, ordinance, resolution, regulation, rule, administrative order, or
other requirement of any municipal, county, state, federal or other government
agency or authority having jurisdiction over the parties to this Lease or the
Premises, or both, in effect either at the Effective Date or any time during the
Lease Term.
1.17 LEASE: The term "Lease" shall mean the Summary and all elements of
this Lease identified in SECTION T of the Summary, all of which are attached
hereto and incorporated herein by this reference.
1.18 Lease Term: The term "Lease Term" shall mean the term of this Lease
which shall commence on the Commencement Date and continue for the period
specified in SECTION J of the Summary.
1.19 LENDER: The term "Lender" shall mean any beneficiary, mortgagee,
secured party, lessor, or other holder of any Security Instrument.
1.20 PERMITTED USE: The term "Permitted Use" shall mean the use specified
in SECTION N of the Summary.
<PAGE>
LEASE
1.21 PREMISES: The term "Premises" shall mean those Buildings and
connector described in SECTION D of the Summary.
1.22 PROJECT: The term "Project" shall mean that real property and the
improvements thereon which are specified in SECTION E of the Summary, the
aggregate gross leasable area of which is referred to herein as the "Project
Gross Leasable Area."
1.23 PRIVATE RESTRICTIONS: The term "Private Restrictions" shall mean all
recorded covenants, conditions and restrictions, private agreements, reciprocal
easement agreements, and any other recorded instruments affecting the use of the
Premises which (i) exist as of the Effective Date, or (ii) are recorded after
the Effective Date and are approved by Tenant.
1.24 REAL PROPERTY TAXES: The term "Real Property Taxes" is defined in
Paragraph 8.3.
1.26 SECURITY INSTRUMENT: The term "Security Instrument" shall mean any
underlying lease, mortgage or deed of trust which now or hereafter affects the
Project, and any renewal, modification, consolidation, replacement or extension
thereof.
1.27 SUMMARY: The term "Summary" shall mean the Summary of Basic Lease
Terms executed by Landlord and Tenant that is part of this Lease.
1.28 TENANT'S ALTERATIONS: The term "Tenant's Alterations" shall mean all
improvements, additions, alterations, and fixtures installed in the Premises by
Tenant at its expense which are not Trade Fixtures.
1.29 TENANT'S SHARE: The term 'Tenant's Share" shall mean the percentage
identified in SECTION G of the Summary.
1.30 TRADE FIXTURES: The term "Trade Fixtures" shall mean (i) Tenant's
inventory, furniture, signs, and business equipment, and (ii) anything affixed
to the Premises by Tenant at its expense for purposes of trade, manufacture,
ornament or domestic use (except replacement of similar work or material
originally installed by Landlord) which can be removed without material injury
to the Premises unless such thing has, by the manner in which it is affixed,
become an integral part of the Premises.
ARTICLE 2
DEMISE, CONSTRUCTION, AND
ACCEPTANCE
2.1 DEMISE OF PREMISES: Landlord hereby leases to Tenant, and Tenant
leases from Landlord, for the Lease Term upon the terms and conditions of this
Lease, the Premises for Tenant's own use in the conduct of Tenant's business
together with (i) the non-exclusive right to use the number of Tenant Allocated
Parking Stalls within the Common Area (subject to the limitations set forth in
Paragraph 4.5), and (ii) the non-exclusive right to use the Common Area for
ingress to and egress from the Premises. Landlord reserves the use of the
exterior walls, the roof and the area beneath and above the Premises, together
with the right to install, maintain, use, and replace ducts, wires, conduits and
pipes leading through the Premises in locations which will not materially
interfere with Tenant's use of the Premises.
2.2 COMMENCEMENT DATE: The Commencement Date shall be August 3, 1997.
Also see paragraph 6 of the First Addendum to Lease.
2.3 CONSTRUCTION OF IMPROVEMENTS: Landlord shall construct certain
improvements that shall constitute or become part of the Premises if required
by, and then in accordance with, the terms of EXHIBIT B and EXHIBIT C.
2.4 DELIVERY AND ACCEPTANCE OF POSSESSION: If this Lease provides that
Landlord must deliver possession of the Premises to Tenant on a certain date,
then if Landlord is unable to deliver possession of the Premises to Tenant on or
before such date for any reason whatsoever, this Lease shall not be void or
voidable for a period of 180 days thereafter, and Landlord shall not be liable
to Tenant for any loss or damage resulting there from. Tenant shall accept
possession and enter into good faith occupancy of the entire Premises. Tenant
acknowledges that it has had an opportunity to conduct, and has conducted, such
inspections of the Premises as it deems necessary to evaluate its condition.
Except as otherwise specifically provided herein, Tenant agrees to accept
possession of the Premises in its then existing condition, "as-is", including
all patent and latent defects. Tenant's taking possession of any part of the
Premises shall be deemed to be an acceptance by Tenant of any work of
improvement done by Landlord in such part as complete and in accordance with the
terms of this Lease except for defects of which Tenant has given Landlord
written notice prior to the time Tenant takes possession. At the time Landlord
delivers possession of the Premises to Tenant, Landlord and Tenant shall
together execute an Punch List Agreement in the form attached as
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EXHIBIT D, appropriately completed. Landlord shall have no obligation to
deliver possession, nor shall Tenant be entitled to take occupancy, of the
Premises until such Punch List agreement has been executed, and Tenant's
obligation to pay Base Monthly Rent and Additional Rent shall not be excused or
delayed because of Tenant's failure to execute such Punch List agreement.
2.5 EARLY OCCUPANCY: If Tenant enters or permits its contractors to enter
the Premises prior to the Commencement Date with the written permission of
Landlord, it shall do so upon all of the terms of this Lease (including its
obligations regarding indemnity and insurance) except those regarding the
obligation to pay Base Monthly Rent, utilities, and Additional Rent which shall
commence on the Commencement Date.
ARTICLE 3
RENT
3.1 BASE MONTHLY RENT: Commencing on the Commencement Date and
continuing throughout the Lease Term, Tenant shall pay to Landlord the Base
Monthly Rent set forth in SECTION K of the Summary.
3.2 ADDITIONAL RENT: Commencing on the Commencement Date and continuing
throughout the Lease Term, Tenant shall pay the following as additional rent
(the "Additional Rent"): (i) any late charges or interest due Landlord pursuant
to Paragraph 3.4; (ii) Tenant's Share of Common Operating Expenses as provided
in Paragraph 8.1; (iii) Landlord's share of any Subrent received by Tenant upon
certain assignments and sublettings as required by Paragraph 14.1; (iv) any
legal fees and costs due Landlord pursuant to Paragraph 15.9; and (v) any other
charges due Landlord pursuant to this Lease.
3.3 PAYMENT OF RENT. Concurrently with the execution of this Lease by
both parties, Tenant shall pay to Landlord the amount set forth in SECTION L
of the Summary as prepayment of rent for credit against the first
installment(s) of Base Monthly Rent. All rent required to be paid in monthly
installments shall be paid in advance on the first day of each calendar month
during the Lease Term. If SECTION K of the Summary provides that the Base
Monthly Rent is to be increased during the Lease Term and if the date of such
increase does not fall on the first day of a calendar month, such increase
shall become effective on the first day of the next calendar month. All rent
shall be paid in lawful money of the United States, without any abatement,
deduction or offset whatsoever (except specifically provided in Paragraph
11.4 and Paragraph 12.3), an without any prior demand therefor. Rent shall
be paid to Landlord at its address set forth in SECTION P of the Summary, or
at such other place as Landlord may designate from time to time. Tenant's
obligation to pay Base Monthly Rent and Tenant's Share of Common Operating
Expense shall be prorated at the commencement and termination of the Lease.
3.4 LATE CHARGE AND INTEREST ON RENT IN DEFAULT: If any Base Monthly Rent
or Additional Rent is not received by Landlord from Tenant within three business
days after Landlord has notified Tenant writing that payment of such rent has
not been received by Landlord, then Tenant shall immediately pay to Landlord a
late charge equal to 5% of such delinquent rent as liquidated damages for
Tenant's failure to make timely payment. In no event shall this provision for a
late charge be deemed to grant to Tenant a grace period or extension of time
within which to pay any rent or prevent Landlord from exercising any right or
remedy available to Landlord upon Tenant's failure to pay any rent due under
this Lease in a timely fashion, including any right to terminate this Lease
pursuant to Paragraph 13.2B. If any rent remains delinquent for a period in
excess of 30 days then, in addition to such late charge, Tenant shall pay to
Landlord interest on any rent that is not paid when due at the Agreed Interest
Rate following the date such amount became due until paid.
3.5 SECURITY DEPOSIT: On the Effective Date, Tenant shall deposit with
Landlord the amount set forth in Section M of the Summary as security for the
performance by Tenant of its obligations under this Lease, and not as prepayment
of rent (the "Security Deposit"). Landlord may from time to time apply such
portion of the Security Deposit as is reasonably necessary for the following
purposes: (i) to remedy any default by Tenant in the payment of rent; (ii) to
repair damage to the Premises caused by Tenant; (iii) to clean the Premises upon
termination of the Lease; and (iv) to remedy any other default of Tenant to the
extent permitted by Law and, in this regard, Tenant hereby waives any
restriction on the uses to which the Security Deposit may be put contained in
California Civil Code Section 1950.7. In the event the Security Deposit or any
portion thereof is so used, Tenant agrees to pay to Landlord promptly upon
demand an amount in cash sufficient to restore the Security Deposit to the full
original amount. Landlord shall not be deemed a trustee of the Security
Deposit, may use the Security Deposit in business, and shall not be required to
segregate it from its general accounts. Tenant shall not be entitled to any
interest on the Security Deposit. If Landlord transfers the Premises during the
Lease Term, Landlord shall pay the Security Deposit to any transferee of
Landlord's interest in conformity with the provisions of California Civil Code
Section 1950.7 and/or any successor statute, in which event the transferring
Landlord will be released from all liability for the return of the Security
Deposit.
ARTICLE 4
USE OF PREMISES
4.1 LIMITATION ON USE: Tenant shall use the Premises solely for the
Permitted Use specified in SECTION N of the Summary. Tenant shall not do
anything in or about the Premises which will (i) cause structural injury to the
Building, or (ii) cause damage to any part of the Building except to the extent
reasonably necessary for the installation of Tenant's Trade Fixtures and
Tenant's Alterations, and then only in a manner which has been first approved by
Landlord in writing. Tenant shall not operate any equipment within the Premises
which will (i) materially damage the Building or the Common Area, (ii) overload
existing electrical systems or other mechanical equipment servicing the
Building, (iii) impair the efficient operation of the sprinkler system or the
heating, ventilating or air
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conditioning ("HVAC") equipment within or servicing the Building, or (iv)
damage, overload or corrode the sanitary sewer system. Tenant shall not attach,
hang or suspend anything from the ceiling, roof, walls or columns of the
Building or set any load on the floor in excess of the load limits for which
such items are designed nor operate hard wheel forklifts within the Premises.
Any dust, fumes, or waste products generated by Tenant's use of the Premises
shall be contained and disposed so that they do not (i) create an unreasonable
fire or health hazard, (ii) damage the Premises, or (iii) result in the
violation of any Law. Except as approved by Landlord, Tenant shall not change
the exterior of the Building or install any equipment or antennas on or make any
penetrations of the exterior or roof of the Building. Tenant shall not commit
any waste in or about the Premises, and Tenant shall keep the Premises in an
neat, clean, attractive and orderly condition, free of a nuisances. If Landlord
designates a standard window covering for use throughout the Building, Tenant
shall use this standard window covering to cover all windows in the Premises.
Tenant shall not conduct on any portion of the Premises or the Project any sale
of any kind, including any public or private auction, fire sale,
going-out-of-business sale, distress sale or other liquidation sale.
4.2 COMPLIANCE WITH REGULATIONS: Tenant shall not use the Premises in
any material manner which violate any Laws or Private Restrictions which
affect the Premises. Tenant shall abide by and promptly observe and comply
with all Laws and Private Restrictions. Tenant shall not use the Premises in
any manner which will cause a cancellation of any insurance policy covering
Tenant's Alternations of any improvements installed by Landlord at its expense
or which poses an unreasonable risk of damage or injury to the Premises.
Tenant shall not sell, or permit to be kept, used, or sold in or about the
Premises any article which may be prohibited by the standard form of fire
insurance policy. Tenant shall comply with all reasonable requirements of
any insurance company, insurance underwriter, or Board of Fire Underwriters
which are necessary to maintain the insurance coverage carried by either
Landlord or Tenant pursuant to this Lease.
4.3 OUTSIDE AREAS: No materials, supplies, tan or containers, equipment,
finished products or semi finished products, raw materials, inoperable vehicle
or articles of any nature shall be stored upon or permitted to remain outside of
the Premises except in fully fenced and screened areas outside the Building
which have been designed for such purpose and have been approved in writing by
Landlord of such use by Tenant.
4.4 SIGNS: Tenant shall not place on any portion of the Premises any
sign, placard, lettering in or on windows, banner, displays or other advertising
or communicative material which is visible from the exterior of the Building
without the prior written approval of Landlord. All such approved signs shall
strictly conform to all Laws, Private Restriction, and Landlord's sign criteria
attached as EXHIBIT F and shall be installed at the expense of Tenant. Tenant
shall maintain such signs in good condition and repair.
4.5 PARKING: Tenant is allocated and shall have the non-exclusive right to
use not more than the number of Tenant's Allocated Parking Stalls contained
within the Project described in SECTION H of the Summary for its use and the use
of Tenant's Agents, the location of which may be designated from time to time by
Landlord. Tenant shall not at any time use more parking spaces than the number
so allocated to Tenant or park its vehicles or the vehicles of others in any
portion of the Project not designated by Landlord as a non-exclusive parking
area. Tenant shall not have the exclusive right to use any specific parking
space. If Landlord grants to any other tenant the exclusive right to use any
particular parking space(s) (which shall not materially fringe upon Tenant's
parking rights), Tenant shall not use such spaces. Landlord reserves the right,
after having given Tenant reasonable notice, to have any vehicles owned by
Tenant or Tenant's Agent utilizing parking spaces in excess of the parking
spaces allowed for Tenant's use to be towed away at Tenant's cost. All trucks
and delivery vehicles shall be (i) parked at the rear of the Building, (ii)
loaded and unloaded in a manner which does not interfere with the businesses of
other occupants of the Project, and (iii) permitted to remain on the Project
only so long as is reasonably necessary to complete loading and unloading. In
the event Landlord elects or is required by any Law to limit or control parking
in the Project, whether by validation of parking tickets or any other method of
assessment, Tenant agrees to participate in such validation or assessment
program under such reasonable rules and regulations as are from time to time
established by Landlord.
4.6 RULES AND REGULATIONS: Landlord may from time to time promulgate
reasonable and nondiscriminatory rules and regulations applicable to all
occupants of the Project for the care and orderly management of the Project and
the safety of its tenants and invitees. Such rules and regulations shall be
binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees
to abide by such rules and regulations. If there is a conflict between the
rules and regulations and any of the provisions of this Lease, the provisions of
this Lease shall prevail. Landlord shall not be responsible for the violation
by any other tenant of the Project of any such rules and regulations.
ARTICLE 5
TRADE FIXTURES AND ALTERATIONS
5.1 TRADE FIXTURE: Throughout the Lease Term, Tenant may provide and
install any Trade Fixtures required in the conduct of its business in the
Premises. All Trade Fixtures shall remain Tenant's property.
5.2 TENANT'S ALTERATIONS: Construction by Tenant of Tenant's Alterations
shall be governed by the following:
A. Tenant shall not construct any Tenant's Alterations or
otherwise alter the Premises without Landlord's prior written approval. Tenant
shall be entitled, without Landlord's prior approval, to make Tenant's
Alterations (i) which do not affect the structural or exterior parts or water
tight character of the Building, and (ii) the reasonably estimated cost of
which, plus the original cost of any part of
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the Premises removed or materially altered in connection with such Tenant's
Alterations, together do not exceed the Permitted Tenant Alterations Limit
specified in SECTION O of the Summary per work of improvement. In the event
Landlord's approval for any Tenant's Alterations is required, Tenant shall not
construct the Leasehold improvement until Landlord has approved in writing the
plans and specifications therefor, and such Tenant's Alterations shall be
constructed substantially in compliance with such approved plans and
specifications by a licensed contractor first approved by Landlord. All
Tenant's Alterations constructed by Tenant shall be constructed by a licensed
contractor in accordance with all Law using new materials of good quality.
B. Tenant shall not commence construction of any Tenant's
Alterations until (i) all required governmental approvals and permits have
been obtained, (ii) all requirements regarding insurance imposed by this
Lease have been satisfied, (iii) Tenant has given Landlord at least five
days' prior written notice of its intention to commence such construction,
and (iv) if reasonably requested Landlord, Tenant has obtained contingent
liable and broad form builders' risk insurance in a amount reasonably
satisfactory to Landlord if there are any perils relating to the proposed
construction not covered by insurance carried pursuant to Article 9.
C. All Tenant's Alterations shall remain the property of Tenant
during the Lease Term shall not be altered or removed from the Premises. At the
expiration or sooner termination of the Lease Term, all Tenant's Alterations
shall be surrendered to Landlord as part of the realty and shall then become
Landlord's property, and Landlord shall have no obligation to reimburse Tenant
for all or any portion of the value or cost thereof, provided, however, that if
Landlord requires Tenant to remove any Tenant's Alterations, Tenant shall so
remove such Tenant's Alterations prior to the expiration or sooner termination
of the Lease Term. Notwithstanding the foregoing, Tenant shall not be obligated
to remove any Tenant's Alteration with respect to which the following is true:
(i) Tenant was required, or elected, to obtain the approval of Landlord to the
installation of the Leasehold Improvement in question; (ii) at the time Tenant
requested Landlord's approval, Tenant requested of Landlord in writing that
Landlord inform Tenant of whether or not Landlord would require Tenant to remove
such Leasehold Improvement at the expiration of the Lease Term; and (iii) at the
time Landlord granted its approval, it did not inform Tenant that it would
require Tenant to remove such Leasehold Improvement the expiration of the Lease
Term.
5.3 ALTERATIONS REQUIRED BY LAW: Tenant shall make any alteration,
addition or change of any sort to the Premises that is required by any Law
because of (i) Tenant's particular use or change of use the Premises; (ii)
Tenant's application for a permit or governmental approval; or (iii) Tenant
construction or installation of any Tenant Alterations or Trade Fixtures.
Any other alteration, addition, or change required by Law which is the
responsibility of Tenant pursuant to foregoing shall be made by Landlord
(subject to Landlord's right to reimbursement from Tenant specified in
Paragraph 5.4).
5.4 AMORTIZATION OF CERTAIN CAPITAL IMPROVEMENTS: Tenant shall pay
Additional Rent in the event Landlord reasonably elects or is required to make
any of the following kinds of capital improvements to the Project and the cost
thereof is not reimbursable as a Common Operating Expense: (i) capital
improvements required to be constructed in order to comply with any Law
(excluding any Hazardous Materials Law) not in effect or applicable to the
Project as of the Effective Date; (ii) modification of existing or construction
of additional capital improvements or building service equipment for the purpose
of reducing the consumption of utility services or Common Operating Expenses of
the Project (but not in excess of the savings realized as a consequence of the
capital improvement); (iii) replacement of capital improvements or building
service equipment existing as of the Effective Date when required because of
normal wear and tear; and (iv) restoration of any part of the Project that has
been damaged by any peril to the extent the cost thereof is not covered by
insurance proceeds actually recovered by Landlord up to a maximum amount per
occurrence of 10% of the then replacement cost of the Premises. The amount of
Additional Rent Tenant is to pay with respect to each such capital improvement
shall be determined as follows:
A. All costs reasonably paid by Landlord to construct such
improvements (including financing costs) shall be amortized over the useful life
of such improvement (as reasonably determined by Landlord in accordance with
generally accepted accounting principles) with interest on the unamortized
balance at the then prevailing market rate Landlord would pay if it borrowed
funds to construct such improvements from an institutional lender, and Landlord
shall inform Tenant of the monthly amortization payment required to so amortize
such costs, and shall also provide Tenant with the information upon which such
determination is made.
B. As Additional Rent, Tenant shall pay at the same time the Base
Monthly Rent is due an amount equal to Tenant's Share of that portion of
such monthly amortization payment fairly allocable to the Buildings (as
reasonably determined by Landlord) for each month after such improvements are
completed until the first to occur of (i) the expiration of the Lease Term (as
it may be extended), or (ii) the end of the term over which such costs were
amortized.
5.5 MECHANIC'S LIENS: Tenant shall keep the Project free from any
liens and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant or Tenant's Agents
relating to the Project. If any claim of lien is recorded (except those
caused by Landlord or Landlord's Agents), Tenant shall bond against or
discharge the same within 10 days after the same has been recorded against
the Project. Should any lien be filed against the Project or any action be
commenced affecting title to the Project, the party receiving notice of such
lien or action shall immediately give the other party written notice thereof.
5.6 TAXES ON TENANT'S PROPERTY: Tenant shall
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pay before delinquency any and all taxes, assessments, license fees and public
charges levied, assessed or imposed against Tenant or Tenant's estate in this
Lease or the property of Tenant situated within the Premises which become due
during the Lease Term. If any tax or other charge is assessed by any
governmental agency because of the execution of this Lease, such tax shall be
paid by Tenant. On demand by Landlord, Tenant shall furnish Landlord with
satisfactory evidence of these payments.
ARTICLE 6
REPAIR AND MAINTENANCE
6.1 TENANT'S OBLIGATION TO MAINTAIN: Except as otherwise provided in the
Addendum, Exhibit B, or Paragraph 6.2, Paragraph 11.1, and Paragraph 12.3,
Tenant shall be responsible for the following during the Lease Term:
A. Tenant shall clean and maintain in good order, condition, and
repair and replace when necessary the Premises and every part thereof, through
regular inspections and servicing, including, but not limited to: (i) all
plumbing and sewage facilities (including all sinks, toilets, faucets and
drains), and all ducts, pipes, vents or other parts of the HVAC or plumbing
system; (ii) all fixtures, interior walls, floors, carpets and ceilings; (iii)
all windows, doors, entrances, plate glass, showcases and skylights (including
cleaning both interior and exterior surfaces); (iv) all electrical facilities
and all equipment (including all lighting fixtures, lamps, bulbs, tubes, fans,
vents, exhaust equipment and systems); and (v) any automatic fire extinguisher
equipment in the Premises.
B. With respect to utility facilities serving the Premises
(including electrical wiring and conduits, gas lines, water pipes, and plumbing
and sewage fixtures and pipes), Tenant shall be responsible for the maintenance
and repair of any such facilities which serve only the Premises, including all
such facilities that are within the walls or floor, or on the roof of the
Premises, and any part of such facility that is not within the Premises, but
only up to the point where such facilities join a main or other junction (e.g.,
sewer main or electrical transformer) from which such utility services are
distributed to other parts of the Project as well as to the Premises. Tenant
shall replace any damaged or broken glass in the Premises (including all
interior and exterior doors and windows) with glass of the same kind, size and
quality. Tenant shall repair any damage to the Premises (including exterior
doors and windows) caused by vandalism or any unauthorized entry.
C. Tenant shall (i) maintain, repair and replace when necessary all
HVAC equipment which services only the Premises, and shall keep the same in good
condition through regular inspection and servicing, and (maintain continuously
throughout the Lease Term a service contract for the maintenance of all such
HVAC equipment with a licensed HVAC repair and maintenance contractor approved
by Landlord, which contract provides for the periodic inspection and servicing
of the HVAC equipment at least once every 60 days during the Lease Term.
Notwithstanding the foregoing, Landlord may elect at any time to assume
responsibility for the maintenance, repair and replacement of such HVAC
equipment which serves only the Premises. Tenant shall maintain continuously
throughout the Lease Term a service contract for the washing of all exterior
windows (both interior and exterior surfaces) in the Premises with a contractor
approved by Landlord, which contract provides for the periodic washing of all
such windows at least once every 60 days during the Lease Term. Tenant shall
furnish Landlord with copies of all such service contracts, which shall provide
that they may not be cancelled or changed without at least 30 days' prior
written notice to Landlord.
D. All repairs and replacements required of Tenant shall be promptly
made with new materials of like kind and quality. If the work affects the
structural parts of the Building or if the estimated cost of any item of repair
or replacement is in excess of the Permitted Tenant's Alterations Limit, then
Tenant shall first obtain Landlord's written approval of the scope of the work,
plans therefor, materials to be used, and the contractor in accordance with
Section 5.2.
6.2 LANDLORD'S OBLIGATION TO MAINTAIN: Landlord shall repair, maintain
and operate the Common Area and repair and maintain the roof, exterior and
structural parts of the building(s) located on the Project so that the same are
kept in good order and repair. If there is central HVAC or other building
service equipment and/or utility facilities serving portions of the Common Area
and/or both the Premises and other parts of the Building, Landlord shall
maintain and operate (and replace when necessary) such equipment. Landlord
shall not be responsible for repairs required by an accident, fire or other
peril or for damage caused to any part of the Project by any act or omission of
Tenant or Tenant's Agents except as otherwise required by Article 11. Landlord
may engage contractors of its choice to perform the obligations required of it
by this Article, and the necessity of any expenditure to perform such
obligations shall be at the sole discretion of Landlord.
6.3 CONTROL OF COMMON AREA: Landlord shall at all times have exclusive
control of the Common Area. Landlord shall have the right, without the same
constituting an actual or constructive eviction and without entitling Tenant to
any abatement of rent, to: (i) close any part of the Common Area to whatever
extent required in the opinion of Landlord's counsel to prevent a dedication
thereof or the accrual of any prescriptive rights therein; (ii) temporarily
close the Common Area to perform maintenance or for any other reason deemed
sufficient by Landlord; (iii) change the shape, size, location and extent of the
Common Area; (iv) eliminate from or add to the Project any land or improvement,
including multi-deck parking structures; (v) make changes to the Common Area
including, without limitation, changes in the location of driveways, entrances,
passageways, doors and doorways, elevators, stairs, restrooms, exits, parking
spaces, parking areas, sidewalks or the direction of the flow of traffic and the
site of the Common Area; (vi) remove unauthorized persons from the Project;
and/or (vii) change the name or address of the Building or Project. In
exercising the foregoing rights, Landlord shall not materially infringe upon
Tenant's parking rights except as otherwise required by Law. Tenant shall keep
the Common Area clear of all obstructions created or permitted by Tenant. If in
the opinion of Landlord unauthorized persons are using any of the Common
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Area by reason of the presence of Tenant in the Building, Tenant, upon demand of
Landlord, shall restrain such unauthorized use by appropriate proceedings. In
exercising any such rights regarding the Common Area, (i) Landlord shall make a
reasonable effort to minimize any disruption to Tenant's business, and (ii)
Landlord shall not exercise its rights to control the Common Area in a manner
that would materially interfere with Tenant's use of the Premises without first
obtaining Tenant's written consent. Landlord shall have no obligation to
provide guard services or other security measures for the benefit of the
Project. Tenant assumes all responsibility for the protection of Tenant and
Tenant's Agents from acts of third parties; provided, however, that nothing
contained herein shall prevent Landlord, at its sole option, from providing
security measures for the Project.
ARTICLE 7
WASTE DISPOSAL AND UTILITIES
7.1 WASTE DISPOSAL: Tenant shall store its waste either inside the
Premises or within outside trash enclosures that are fully fenced and screened
in compliance with all Private Restrictions, and designed for such purpose. All
entrances to such outside trash enclosures shall be kept closed, and waste shall
be stored in such manner as not to be visible from the exterior of such outside
enclosures. Tenant shall cause all of its waste to be regularly removed from
the Premises at Tenant's sole cost. Tenant shall keep all fire corridors and
mechanical equipment rooms in the Premises free and clear of all obstructions at
all times.
7.2 HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with
respect to the existence or use of Hazardous Materials on the Project:
A. Any handling, transportation, storage, treatment, disposal or use
of Hazardous Materials by Tenant and Tenant's Agents after the Effective Date in
or about the Project shall strictly comply with all applicable Hazardous
Materials Laws. Tenant shall indemnify, defend upon demand with counsel
reasonably acceptable to Landlord, and hold harmless Landlord from and against
any liabilities, losses, claims, damages, lost profits, consequential damages,
interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees,
court costs, redemption costs, investigation costs, and other expenses which
result from or arise in any manner whatsoever out of the use, storage,
treatment, transportation, release, or disposal of Hazardous Materials on or
about the Project by Tenant or Tenant's Agents after the Effective Date.
B. If the presence of Hazardous Materials on the Project caused or
permitted by Tenant or Tenant's Agents after the Effective Date results in
contamination or deterioration of water or soil resulting in a level of
contamination greater than the levels established as acceptable by any
governmental agency having jurisdiction over such contamination, then Tenant
shall promptly take any and all action necessary to investigate and remediate
such contamination if required by Law or as a condition to the issuance or
continuing effectiveness of any governmental approval which relates to the use
of the Project or any part thereof. Tenant shall further be solely responsible
for, and shall defend, indemnify and hold Landlord and its agents harmless from
and against, all claims, costs and liabilities, including attorneys fees and
costs, arising out of or in connection with any investigation and redemption
required hereunder to return the Project to its condition existing prior to the
appearance of such Hazardous Materials.
C. Landlord and Tenant shall each give written notice to the other
as soon as reasonably practicable of (i) any communication received from any
governmental authority concerning Hazardous Materials which relates to the
Project, and (ii) any contamination of the Project by Hazardous Materials which
constitutes a violation of any Hazardous Materials Law. Tenant may use small
quantities of household chemicals such as adhesives, lubricants, and cleaning
fluids in order to conduct its business at the Premises and such other Hazardous
Materials as are necessary for the operation of Tenant's business of which
Landlord receives notice prior to such Hazardous Materials being brought onto
the Premises and which Landlord consents in writing may be brought onto the
Premises. At any time during the Lease Term, Tenant shall, within five days
after written request therefor received from Landlord, disclose in writing all
Hazardous Materials that are being used by Tenant on the Project, the nature of
such use, and the manner of storage and disposal.
D. Landlord may cause testing wells to be installed on the Project,
and may cause the ground water to be tested to detect the presence of Hazardous
Material by the use of such tests as are then customarily used for such
purposes. If Tenant so requests, Landlord shall supply Tenant with copies of
such test results. The cost of such tests and of the installation, maintenance,
repair and replacement of such wells shall be paid by Tenant if such tests
disclose the existence of facts which gives rise to liability of Tenant pursuant
to its indemnity given in Paragraph 7.2A and/or Paragraph 7.2B.
E. As used herein, the term "Hazardous Material," means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the State of California or the United
States Government. The term "Hazardous Material," includes, without limitation,
petroleum products, asbestos, PCBs, and any material or substance which is (i)
listed under Article 9 or defined as hazardous or extremely hazardous pursuant
to Article 11 of Title 22 of the California Administrative Code, Division 4,
Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. (42
U.S.C. 6903), or (iii) defined as a "hazardous substance" pursuant to Section
101 of the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. 9601 et seq. (42 U.S.C. 9601). As used herein, the term
"Hazardous Material Law" shall mean any statute, law, ordinance, or regulation
of any governmental body or agency (including the U.S. Environmental Protection
Agency, the California Regional Water Quality Control Board, and the California
Department of Health Services) which regulates the use, storage, release or
disposal of any Hazardous Material.
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F. The obligations of Landlord and Tenant under this Paragraph 7.2
shall survive the expiration or earlier termination of the Lease Term. The
rights and obligations of Landlord and Tenant with respect to issues relating to
Hazardous Materials are exclusively established by this Paragraph 7.2 and
Paragraph 22 of the First Addendum to Lease. In the event of any inconsistency
between any other part of this Lease and this Paragraph 7.2, the terms of this
Paragraph 7.2 shall control.
7.3 UTILITIES: Tenant shall promptly pay, as the same become due, all
charges for water, gas, electricity, telephone, sewer service, waste pick-up and
any other utilities, materials or services furnished directly to or used by
Tenant on or about the Premises during the Lease Term, including, without
limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fee
(excluding any connection fees or hook-up fees which relate to making the
existing electrical, gas, and water service available to the Premises as of the
Commencement Date), and (ii) penalties for discontinued or interrupted service.
If any utility service is not separately metered to the Premises, then Tenant
shall pay its pro rata share of the cost of such utility service with all others
served by the service not separately metered. However, if Landlord determines
that Tenant is using a disproportionate amount of any utility service not
separately metered, then Landlord at its election may (i) periodically charge
Tenant, as Additional Rent, a sum equal to Landlord's reasonable estimate of the
cost of Tenant's excess use of such utility service, or (ii) install a separate
meter (at Tenant's expense) to measure the utility service supplied to the
Premises.
7.4 COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Landlord and Tenant shall
comply with all rules, regulations and requirements promulgated by national,
state or local governmental agencies or utility suppliers concerning the use of
utility services, including any rationing, limitation or other control. Except
as expressly provided to the contrary in this Lease, Tenant shall not be
entitled to terminate this Lease nor to any abatement in rent by reason of such
compliance.
ARTICLE 8
COMMON OPERATING EXPENSES
8.1 TENANT'S OBLIGATION TO REIMBURSE: As Additional Rent, Tenant shall
pay Tenant's Share (specified in SECTION G of the Summary) of all Common
Operating Expenses; provided, however, if the Project contains more than one
building, then Tenant shall pay Tenant's Share of all Common Operating
Expenses fairly allocable to the Buildings including (i) all Common Operating
Expenses paid with respect to the maintenance, repair, replacement and use of
the Building, and (ii) a proportionate share (based on the Building Gross
Leasable Area as a percentage of the Project Gross Leasable Area) of all
Common Operating Expenses which relate to the Project in general are not
fairly allocable to any one building that is part of the Project. Tenant
shall pay such share of the actual Common Operating Expenses incurred or paid
by Landlord but not theretofore billed to Tenant within 10 days after receipt
of a written bill therefor from Landlord, on such periodic basis as Landlord
shall designate, but in no event more frequently than once a month.
Alternatively, Landlord may from time to time require that Tenant pay
Tenant's Share of Common Operating Expenses in advance in estimated monthly
installments, in accordance with the following: (i) Landlord shall deliver to
Tenant Landlord's reasonable estimate of the Common Operating expenses it
anticipates will be paid or incurred for the Landlord's fiscal year in
question; (ii) during such Landlord's fiscal year Tenant shall pay such share
of the estimated Common Operating Expenses in advance in monthly installments
as required by Landlord due with the installments of Base Monthly Rent; and
(iii) within 90 days after the end of each Landlord's fiscal year, Landlord
shall furnish to Tenant a statement in reasonable detail of the actual Common
Operating Expenses paid or incurred by Landlord during the just ended
Landlord's fiscal year and thereupon there shall be an adjustment between
Landlord and Tenant, with payment to Landlord or credit by Landlord against
the next installment of Base Monthly Rent, as the case may require, within 10
days after delivery Landlord to Tenant of said statement (or if the Lease has
terminated by a cash payment delivered concurrently with the reconciliation),
so that Landlord shall receive the entire amount of Tenant's Share of all
Common Operating Expenses for such Landlord's fiscal year and no more.
Tenant shall have the right at its expense, exercisable upon reasonable prior
written notice to Landlord, to inspect at Landlord's office during normal
business hours Landlord's books and records as they relate to Common
Operating Expenses. Such inspection must be within 90 days of Tenant's
receipt of Landlord's annual statement for the same, and shall be limited to
verification of the charges contained in such statement. Tenant may not
withhold payment of such bill pending completion of such inspection, but, if an
error of more than 10% of the annual amount of Common Operating Expenses is
made, Landlord shall pay the reasonable costs of the audit and make
reimbursement of the overpayment within 30 days of Tenant's demand.
8.2 COMMON OPERATING EXPENSES DEFINED: The term "Common Operating
Expenses" shall mean the following:
A. All costs and expenses paid or incurred by Landlord in doing
the following (including payments to independent contractors providing services
related to the performance of the following): (i) maintaining, cleaning,
repairing and resurfacing the roof (including repair of leaks) and the exterior
surfaces (including painting) of all buildings located on the Project; (ii)
maintenance of the liability, fire and property damage insurance covering the
Project carried by Landlord pursuant to Paragraph 9.2 (including the prepayment
of premiums for coverage of up to one year); (iii) maintaining, repairing,
operating and replacing when necessary HVAC equipment, utility facilities and
other building service equipment; (iv) providing utilities to the Common Area
(including lighting, trash removal and water for landscaping irrigation); (v)
complying with all applicable Laws and Private Restrictions; (vi) operating,
maintaining, repairing, cleaning, painting, restriping and resurfacing the
Common Area; (vii) replacement or installation of lighting fixtures, directional
or other signs and signals, irrigation systems, trees, shrubs, ground cover and
other plant materials, and all landscaping in the Common Area; and (viii)
providing security;
B. The following costs: (i) Real Property Taxes as defined in
Paragraph 8.3; (ii) the amount of any "deductible" paid by Landlord with respect
to damage caused by any Insured Peril; (iii) the cost to repair damage caused by
an Uninsured Peril up to
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a maximum amount in any 12 month period equal to 2% of the replacement cost of
the buildings or other improvements damaged; and (iv) that portion of all
compensation (including benefits and premiums for workers' compensation and
other insurance) paid to or on behalf of employees of Landlord but only to the
extent they are involved in the performance of the work described by Paragraph
8.2A that is fairly allocable to the Project;
C. Fees for management services rendered by either Landlord or a
third party manager engaged by Landlord (which may be a party affiliated with
Landlord), except that the total amount charged for management services and
included in Tenant Share of Common Operating Expenses shall not exceed the
monthly rate of 5% of the Base Monthly Rent.
D. All additional costs and expenses incurred by Landlord with
respect to the operation, protection, maintenance, repair and replacement of
the Project which would be considered a current expense (and not a capital
expenditure) pursuant to generally accepted accounting principles; provided,
however, that Common Operating Expenses shall not include any of the
following: (i) payments on any loans or ground leases affecting the Project;
(ii) depreciation of any buildings or any major systems of building service
equipment within the Project; (iii) leasing commissions; (iv) the cost of
tenant improvements installed for the exclusive use of other tenants of the
Project; (v) any cost incurred in complying with Hazardous Materials Laws,
which subject is governed exclusively by Paragraph 7.2 and (vi) reserves for
expenditures beyond the calendar year in question.
8.3 REAL PROPERTY TAXES DEFINED: The term "Real Property Taxes" shall
mean all taxes, assessments, levies, and other charges of any kind or nature
whatsoever, general and special, foreseen and unforeseen (including all
installments of principal and interest required to pay any existing or future
general or special assessments for public improvements, services or benefits,
and any increases resulting from reassessments resulting from a change in
ownership, new construction, or any other cause), now or hereafter imposed by
any governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to the value, occupancy or use of a or any
portion of the Project (as now constructed or as may at any time hereafter be
constructed, altered, or otherwise changed) or Landlord's interest therein, the
fixtures, equipment and other property of Landlord, real or personal, that are
an integral part of and located on the Project, the gross receipts, income, or
rentals from the Project, or the use of parking areas, public utilities, or
energy within the Project, or Landlord's business of leasing the Project. If at
any time during the Lease Term the method of taxation or assessment of the
Project prevailing as of the Effective Date shall be altered so that in lieu of
or in addition to any Real Property Tax described above there shall be levied,
assessed or imposed (whether by reason of a change in the method of taxation or
assessment, creation of a new tax or charge or any other cause) an alternate or
additional tax or charge (i) on the value, use or occupancy of the Project or
Landlord's interest therein, or (ii) on or measured by the gross receipts,
income or rentals from the Project, on Landlord's business of leasing the
Project, or computed in any manner with respect to the operation of the Project,
then any such tax or charge, however designated, shall be included within the
meaning of the term "Real Property Taxes" for purposes of this Lease. If any
Real Property Tax is based upon property or rents unrelated to the Project, then
only that part of such Real Property Tax that is fairly allocable to the Project
shall be included within the meaning of the term "Real Property Taxes".
Notwithstanding the foregoing, the term "Real Property Taxes" shall not include
estate, inheritance, transfer, gift or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from all sources.
ARTICLE 9
INSURANCE
9.1 TENANT'S INSURANCE: Tenant shall maintain insurance complying with
all of the following:
A. Tenant shall procure, pay for and keep in full force and
effect the following:
(1) Commercial general liability insurance, including
property damage, against liability for personal injury, bodily injury, death and
damage to property occurring in or about, or resulting from an occurrence in or
about, the Premises with combined single limit coverage of not less than the
amount of Tenant's Liability Insurance Minimum specified in SECTION P of the
Summary, which insurance shall contain a "contractual liability" endorsement
insuring Tenant's performance of Tenant's obligation to indemnify Landlord
contained in Paragraph 10.3;
(2) Fire and property damage insurance in so-called
"all risk" form insuring Tenant's Trade Fixtures and Tenant's Alterations for at
least 90% the value thereof;
(3) Such other insurance that is either (i) required
by any Lender, or (ii) reasonably required by Landlord and customarily carried
by tenants of similar property in similar businesses.
B. Where applicable and required by Landlord, each policy of
insurance required to be carried by Tenant pursuant to this Paragraph 9.1: (i)
shall name Landlord and such other parties in interest as Landlord reasonably
designates as additional insured; (ii) shall be primary insurance which provides
that the insurer shall be liable for the full amount of the loss up to and
including the total amount of liability set forth in the declarations without
the right of contribution from any other insurance coverage of Landlord; (iii)
shall be in a form reasonably satisfactory to Landlord; (iv) shall be carried
with companies reasonably acceptable to Landlord; (v) shall provide that such
policy shall not be subject to cancellation, lapse or change except after at
least 30 days prior written notice to Landlord so long as such provision of 30
days notice is reasonably obtainable, but in any event not less than 10 days
prior written notice; (vi) shall not have a "deductible" in excess of such
amount as is approved by Landlord; (vii) shall contain a cross liability
endorsement; and (viii) shall contain a "severability" clause. If Tenant has in
full force and effect a
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blanket policy of liability insurance with the same coverage for the Premises as
described above, as well as other coverage of other premises and properties of
Tenant, or in which Tenant has some interest, such blanket insurance shall
satisfy the requirements of this Paragraph 9.1.
C. A copy of each paid-up policy evidencing the insurance required
to be carried by Tenant pursuant to this Paragraph 9.1 (appropriately
authenticated by the insurer) or a certificate of the insurer, certifying that
such policy has been issued, providing the coverage required by this Paragraph
9.1, and containing the provisions specified herein, shall be delivered to
Landlord prior to the time Tenant or any of its Agents enters the Premises and
upon renewal of such policies, but not less than 5 days prior to the expiration
of the term of such coverage. Landlord may, at any time, and from time to time,
inspect and/or copy any and all insurance policies required to be procured by
Tenant pursuant to this Paragraph 9.1. If any Lender reasonably determines at
any time that the amount of coverage required for any policy of insurance Tenant
is to obtain pursuant to this Paragraph 9.1 is not adequate, then Tenant shall
increase such coverage for such insurance to such amount as such Lender
reasonably deems adequate, not to exceed the level of coverage for such
insurance commonly carried by comparable businesses similarly situated.
9.2 LANDLORD'S INSURANCE: Landlord shall have the following
obligations and options regarding insurance:
A. Landlord shall maintain a policy or policies of fire and
property damage insurance in so-called "all risk" form insuring Landlord (and
such others as Landlord may designate) against loss of rents for a period of
not less than 12 months and from physical damage to the Project with coverage
of not less than the full replacement cost thereof. Landlord may so insure
the Project separately, or may insure the Project with other property owned
by Landlord which Landlord elects to insure together under the same policy or
policies. Such fire and property damage insurance (i) may be endorsed to
cover loss caused by such additional perils against which Landlord may elect
to insure, including earthquake and/or flood, and to provide such additional
coverage as Landlord reasonably requires, and (ii) shall contain reasonable
"deductibles" which, in the case of earthquake and flood insurance, may be up
to 15% of the replacement value of the property insured or such higher amount
as is then commercially reasonable. Landlord shall not be required to cause
such insurance to cover any Trade Fixtures or Tenant's Alterations of Tenant.
B. Landlord may maintain a policy or policies of commercial general
liability insurance insuring Landlord (and such others as are designated by
Landlord) against liability for personal injury, bodily injury, death and damage
to property occurring or resulting from an occurrence in, on or about the
Project, with combined single limit coverage in such amount as Landlord from
time to time determines is reasonably necessary for its protection.
9.3 TENANT'S OBLIGATION TO REIMBURSE: If Landlord's insurance rates for
the Building are increased at any time during the Lease Term as a result of the
nature of Tenant's use of the Premises, Tenant shall reimburse Landlord for the
full amount of such increase immediately upon receipt of a bill from Landlord
therefor.
9.4 RELEASE AND WAIVER OF SUBROGATION: Notwithstanding anything to the
contrary in this Lease, parties hereto release each other, and their
respective Agents and employees, from any liability for injury to any person
or damage to property that is caused by or results from any risk insured
against under any valid and collectible insurance policy carried by either of
the parties which contains a waiver of subrogation by the insurer and is in
force at the time of such injury or damage or which is required by this
Article 9 to be insured against (without regard to whether such insurance is
actually in force); subject to the following limitations: (i) the foregoing
provision shall not apply to the commercial general liability insurance
described by subparagraphs Paragraph 9.1A and 9.2B; (iii) Paragraph) such
release shall apply to liability resulting from any risk insured against or
covered by self-insurance maintained or provided by Tenant to satisfy the
requirements of Paragraph 9.1 to the extent permitted by this Lease; and
(iii) Tenant shall not be released from any such liability to the extent any
damages resulting from such injury or damage are not covered by the recovery
obtained by Landlord from such insurance, but only if the insurance in
question permits such partial release in connection with obtaining a waiver
of subrogation from the insurer. This release shall be in effect only so
long as the applicable insurance policy contains a clause to the effect that
this release shall not affect the right of the insured to recover under such
policy. Each party shall use reasonable efforts to cause each insurance
policy obtained by it to provide that the insurer waives all right of
recovery by way of subrogation against the other party and its Agents and
employees in connection with any injury or damage covered by such policy.
However, if any insurance policy cannot be obtained with such a waiver of
subrogation, or if such waiver of subrogation is only available at additional
cost and the party for whose benefit the waiver is to be obtained does not
pay such additional cost, then the party obtaining such insurance shall
notify the other party of that fact and thereupon shall be relieved of the
obligation to obtain such waiver of subrogation rights from the insurer with
respect to the particular insurance involved.
ARTICLE 10
LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY
10.1 LIMITATION ON LANDLORD'S LIABILITY: Landlord shall not be liable to
Tenant, nor shall Tenant be entitled to terminate this Lease or to any abatement
of rent (except as expressly provided otherwise herein), for any injury to
Tenant or Tenant's Agents, damage to the property of Tenant or Tenant's Agents,
or loss to Tenant's business resulting from any cause, including without
limitation any: (i) failure, interruption or installation of any HVAC or other
utility system or service; (ii) failure to furnish or delay in furnishing any
utilities or services when such failure or delay is caused by fire or other
peril, the elements, labor disturbances of any character, or any other accidents
or other conditions beyond the reasonable control of
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Landlord; (iii) limitation, curtailment, rationing or restriction on the use of
water or electricity, gas or any other form of energy or any services or utility
serving the Project; (iv) vandalism or forcible entry by unauthorized persons or
the criminal act of any person; or (v) penetration of water into or onto any
portion of the Premises or the Building through roof leaks or otherwise.
Notwithstanding the foregoing but subject to Paragraph 9.4 Paragraph shall be
liable for any such injury, damage or loss which is proximately caused by
Landlord's willful misconduct or active negligence of which Landlord has actual
notice and a reasonable opportunity to cure but which it fails to so cure.
10.2 LIMITATION ON TENANT'S RECOURSE: If Landlord is a corporation,
trust, partnership, joint venture, unincorporated association or other form
of business entity: (i) the obligations of Landlord shall not constitute
personal obligations of the officers, directors, trustees, partners, joint
venturers, members, owners, stockholders, or other principals or
representatives of such business entity; and (ii) Tenant shall not have
recourse to the assets of such officers, directors, trustees, partners, joint
venturers, members, owners, stockholders, principals or representatives
except to the extent of their interest in the Project. Tenant shall have
recourse only to the interest of Landlord in the Project for the satisfaction
of the obligations of Landlord and shall not have recourse to any other
assets of Landlord for the satisfaction of such obligations.
10.3 INDEMNIFICATION OF LANDLORD: Tenant shall hold harmless, indemnify
and defend Landlord, and its employees, agents and contractors, with competent
counsel reasonably satisfactory to Landlord (and Landlord agrees to accept
counsel that any insurer requires be used), from all liability, penalties,
losses, damages, costs, expenses, causes of action, claims and/or judgments
arising by reason of any death, bodily injury, personal injury or property
damage resulting from (i) any cause or causes whatsoever (other than the willful
misconduct or active negligence of Landlord of which Landlord has had notice and
a reasonable time to cure, but which Landlord has failed to cure) occurring in
or about or resulting from an occurrence in or about the Premises during the
Lease Term, (ii) the negligence or willful misconduct of Tenant or its agents,
employees and contractors, wherever the same may occur, or (iii) an Event of
Tenant's Default. The provisions of this Paragraph 10.3 shall survive the
expiration or sooner termination of this Lease.
ARTICLE 11
DAMAGE TO PREMISES
11.1 LANDLORD'S DUTY TO RESTORE: If the Premises are damaged by any peril
after the Effective Date, Landlord shall restore the Premises unless the Lease
is terminated by Landlord pursuant to Paragraph 11.2 or by Tenant pursuant to
Paragraph 11.3. All insurance proceeds available from the fire and property
damage insurance carried by Landlord pursuant to Paragraph 9.2 shall be paid to
and become the property of Landlord. If this Lease is terminated pursuant to
either Paragraph 11.2 or Paragraph 11.3, then all insurance proceeds available
from insurance carried by Tenant which covers loss to property that is
Landlord's property or would become Landlord's property on termination of this
Lease shall be paid to and become the property of Landlord. If this Lease is
not so terminated, then upon receipt of the insurance proceeds (if the loss is
covered by insurance) and the issuance of all necessary governmental permits,
Landlord shall commence and diligently prosecute to completion the restoration
of the Premises, to the extent then allowed by Law, to substantially the same
condition in which the Premises were immediately prior to such damage.
Landlord's obligation to restore shall be limited to the Premises and interior
improvements constructed by Landlord as they existed as of the Commencement
Date, excluding any Tenant's Alterations, Trade Fixtures and/or personal
property constructed or installed by Tenant in the Premises. Tenant shall
forthwith replace or fully repair all Tenant's Alterations installed by Tenant
and existing at the time of such damage or destruction, and all insurance
proceeds received by Tenant from the insurance carried by it pursuant to
Paragraph 9.1A(2) shall be used for such purpose.
11.2 LANDLORD'S RIGHT TO TERMINATE: Landlord shall have the right to
terminate this Lease in the event any of the following occurs, which right may
be exercised only by delivery to Tenant of a written notice of election to
terminate within 30 days after the date of such damage:
A. Either the Project or the Premises is damaged by an Insured Peril
to such an extent that the estimated cost to restore exceeds 33% of the then
actual replacement cost thereof;
B. Either the Project or the Premises is damaged by an Uninsured
Peril to such an extent that the estimated cost to restore exceeds 2% of the
then actual replacement cost thereof, provided, however, that Landlord may not
terminate this Lease pursuant to this Paragraph 11.2B if one or more tenants of
the Project agree in writing to pay the amount by which the cost to restore the
damage exceeds such amount and subsequently deposit such amount with Landlord
within 30 days after Landlord has notified Tenant of its election to terminate
this Lease, or provides other reasonable assurances reasonably acceptable to
Landlord, of Tenant's ability to pay the excess amount as the work progresses.
C. The Premises are damaged by any peril within 12 months of the
last day of the Lease Term to such an extent that the estimated cost to restore
equals or exceeds an amount equal to six times the Base Monthly Rent then due;
provided, however, that Landlord may not terminate this Lease pursuant to this
Paragraph 11.2C if Tenant, at the time of such damage, has a then valid express
written option to extend the Lease Term and Tenant exercises such option to
extend the Lease Term within 15 days following the date of notice to Tenant that
the Lease will be terminated, unless Tenant exercises its option.
D. Either the Project or the Premises is damaged by any peril and,
because of the Laws then in force, (i) cannot be restored at reasonable cost to
substantially the same condition in which it was prior to such damage, or (ii)
cannot be used for the same use being made thereof before such damage if
restored as required by this Article.
E. As used herein, the following terms shall have the following
meanings (i) the term "Insured Peril" shall mean a peril actually insured
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against or which Landlord is required by this Lease to insure against
which the insurance proceeds actually received by Landlord or which would be
received by Landlord if it had caused the insurance required by this Lease,
plus any sums Tenant is required by this Lease to contribute or which Tenant
elects to contribute to the restoration are sufficient (except for any
"deductible" amount specified by such insurance) to restore the Project under
then existing building codes to substantially the condition existing
immediately prior to the damage; and (a) the term "Uninsured Peril" shall
mean any peril which is not an Insured Peril. Notwithstanding the foregoing,
if the "deductible" for earthquake or flood insurance exceeds 2% of the
replacement cost of the improvements insured, such peril shall be deemed an
"Uninsured Peril".
11.3 TENANT'S RIGHT TO TERMINATE: If the Premises are damaged by any
peril and Landlord does not elect to terminate this Lease or is not entitled
to terminate this Lease pursuant to Paragraph 11.2, then as soon as
reasonably practicable, Landlord shall furnish Tenant with the written
opinion of Landlord's architect or construction consultant as to when the
restoration work required of Landlord may be completed. Tenant shall have
the right to terminate this Lease in the event any of the following occurs,
which right may be exercised only by delivery to Landlord of a written notice
of election to terminate within 10 days after Tenant receives from Landlord
the estimate of the time needed to complete such restoration.
A. The Premises are damaged by any peril and, in the reasonable
opinion of Landlord's architect or construction consultant, the restoration of
the Premises cannot be substantially completed within 270 days after the date of
such damage; or
B. The Premises are damaged by any peril within 12 months of the
last day of the Lease Term and, in the reasonable opinion of Landlord's
architect or construction consultant, the restoration of the Premises cannot be
substantially completed within 90 days after the date of such damage and such
damage renders unusable more than 30% of the Premises.
C. The Premises are not actually restored within 90 days following
the date for completion estimated by Landlord's architect.
11.4 ABATEMENT OF RENT: In the event of damage to the Premises which
does not result in the termination of this Lease, the Base Monthly Rent and
the Additional Rent shall be temporarily abated during the period following
the destruction and during restoration in proportion to the degree to which
Tenant's use of the Premises is impaired by such damage. Tenant shall not be
entitled to any compensation or damages from Landlord for loss of Tenant's
business or property or for any inconvenience or annoyance caused by such
damage or restoration. Tenant hereby waives the provisions of California
Civil Code Sections 1932(2) and 1933(4) and the provisions of any similar law
hereinafter enacted.
ARTICLE 12
CONDEMNATION
12.1 LANDLORD'S TERMINATION RIGHT: Landlord shall have the right to
terminate this Lease if, as a result of a taking by means of the exercise of the
power of eminent domain (including a voluntary sale or transfer by Landlord to a
condemnor under threat of condemnation), (i) all or any part of the Premises is
so taken, (ii) more than 10% of the Building Leasable Area is so taken, or (iii)
more than 50% of the Common Area is so taken. Any such right to terminate by
Landlord must be exercised within a reasonable period of time, to be effective
as of the date possession is taken by the condemnor.
12.2 TENANT'S TERMINATION RIGHT: Tenant shall have the right to terminate
this Lease if, as a result of any taking by means of the exercise of the power
of eminent domain (including any voluntary sale or transfer by Landlord to any
condemnor under threat of condemnation), (i) 10% or more of the Premises is so
taken and that part of the Premises that remains cannot be restored within a
reasonable period of time and thereby made reasonably suitable for the continued
operation of the Tenant's business, or (ii) there is a taking affecting the
Common Area and, as a result of such taking, Landlord cannot provide parking
spaces within reasonable walking distance of the Premises equal in number to at
least 80% of the number of spaces allocated to Tenant by Paragraph 2.1, whether
by rearrangement of the remaining parking areas in the Common Area (including
construction of multi-deck parking structures or restriping for compact cars
where permitted by Law) or by alternative parking facilities on other land.
Tenant must exercise such right within a reasonable period of time, to be
effective on the date that possession of that portion of the Premises or Common
Area that is condemned is taken by the condemnor.
12.3 RESTORATION AND ABATEMENT OF RENT: If any part of the Premises or the
Common Area is taken by condemnation and this Lease is not terminated, then
Landlord shall restore the remaining portion of the Premises and Common Area and
interior improvements constructed by Landlord as they existed as of the
Commencement Date, excluding any Tenant's Alterations, Trade Fixtures and/or
personal property constructed or installed by Tenant. Thereafter, except in the
case of a temporary taking, as of the date possession is taken the Base Monthly
Rent shall be reduced in the same proportion that the floor area of that part of
the Premises so taken (less any addition thereto by reason of any
reconstruction) bears to the original floor area of the Premises.
12.4 TEMPORARY TAKING: If any portion of the Premises is temporarily taken
for one year or less, this Lease shall remain in effect. If any portion of the
Premises is temporarily taken by condemnation for a period which exceeds one
year or which extends beyond the natural expiration of the Lease Term, and such
taking materially and adversely affects Tenant's ability to use the Premises for
the Permitted Use, then Tenant shall have the right to terminate this Lease,
effective on the date possession is taken by the condemnor.
12.5 DIVISION OF CONDEMNATION AWARD: Any award made as a result of any
condemnation of the Premises or the Common Area shall belong to and be paid to
Landlord, and Tenant hereby assigns to Landlord all of its right, title and
interest in any such award; provided, however, that Tenant shall be entitled to
receive any condemnation award that is made directly to Tenant for the following
so long as the award made to Landlord is not thereby reduced: (i) for the taking
of Tenant's Property or Trade Fixtures belonging to Tenant, (ii) for the
interruption of Tenant's business or its moving costs, (iii) for loss of
Tenant's goodwill; or (iv) for
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any temporary taking where this Lease is not terminated as a result of such
taking. The rights of Landlord and Tenant regarding any condemnation shall be
determined as provided in this Article, and each party hereby waives the
provisions of California Code of Civil Procedure Section 1265.130 and the
provisions of any similar law hereinafter enacted allowing either party to
petition the Superior Court to terminate this Lease in the event of a partial
taking of the Premises.
ARTICLE 13
DEFAULT AND REMEDIES
13.1 EVENTS OF TENANT'S DEFAULT: Tenant shall be in default of its
obligations under this Lease if any of the following events occurs (an "Event of
Tenant's Default"):
A. Tenant shall have failed to pay Base Monthly Rent or Additional
Rent when due, and such failure is not cured within 3 days after delivery of
written notice from Landlord specifying such failure to pay; or
B. Tenant shall have failed to perform any term, covenant, or
condition of this Lease except those requiring the payment of Base Monthly Rent
or Additional Rent, and Tenant shall have failed to cure such breach within 30
days after written notice from Landlord specifying the nature of such breach
where such breach could reasonably be cured within said 30 day period, or if
such breach could not be reasonably cured within said 30 day period, Tenant
shall have failed to commence such cure within said 30 day period and thereafter
continue with due diligence to prosecute such cure to completion within such
time period as is reasonably needed; or
C. Tenant shall have sublet the Premises or assigned its interest in
the Lease in violation of the provisions contained in Article 14; or
D. Tenant shall have abandoned the Premises and failed to perform
its obligation hereunder; or
E. The occurrence of the following: (i) the making by Tenant of any
general arrangements or assignments for the benefit of creditors; (ii) Tenant
becomes a "debtor" as defined in 11 USC Section 101 or any successor statute
thereto (unless, in the case of a petition filed against Tenant, the same is
dismissed within 60 days); (iii) the appointment of a trustee or receiver to
take possession of substantially all of Tenant's assets located at the Premises
or of Tenant's interest in this Lease, where possession is not restored to
Tenant within 30 days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease, where such seizure is not discharged within 30
days; provided, however, in the event that any provision of this Section 13.1E
is contrary to any applicable Law, such provision shall be of no force or
effect; or
F. Tenant shall have failed to deliver documents required of it
pursuant to Paragraph 15.4 or 15.6 within the time periods specified therein.
13.2 LANDLORD'S REMEDIES: If an Event of Tenant's Default occurs, Landlord
shall have the following remedies, in addition to all other rights and remedies
provided by any Law or otherwise provided in this Lease, to which Landlord may
resort cumulatively or in the alternative:
A. Landlord may keep this Lease in effect and enforce by an action
at law or in equity all of its rights and remedies under this Lease, including
(i) the right to recover the rent and other sums as they become due by
appropriate legal action, (ii) the right to make payments required of Tenant or
perform Tenant's obligations and be reimbursed by Tenant for the cost thereof
with interest at the Agreed Interest Rate from the date the sum is paid by
Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of
injunctive relief and specific performance to compel Tenant to perform its
obligations under this Lease. Notwithstanding anything contained in this Lease,
in the event of a breach of an obligation by Tenant which results in a condition
which poses an imminent danger to safety of persons or damage to property, an
unsightly condition visible from the exterior of the Building, or a threat to
insurance coverage, then if Tenant does not cure such breach within 3 days after
delivery to it of written notice from Landlord identifying the breach, Landlord
may cure the breach of Tenant and be reimbursed by Tenant for the cost thereof
with interest at the Agreed Interest Rate from the date the sum is paid by
Landlord until Landlord is reimbursed by Tenant.
B. Landlord may enter the Premises and release them to third parties
for Tenant's account for any period, whether shorter or longer than the
remaining Lease Term. Tenant shall be liable immediately to Landlord for all
costs Landlord incurs in releasing the Premises, including brokers' commissions,
expenses of altering and preparing the Premises required by the releasing.
Tenant shall pay to Landlord the rent and other sums due under this Lease on the
date the rent is due, less the rent and other sums Landlord received from any
releasing. No act by Landlord allowed by this subparagraph shall terminate this
Lease unless Landlord notifies Tenant in writing that Landlord elects to
terminate this Lease. Notwithstanding any releasing without termination,
Landlord may later elect to terminate this Lease because of the default by
Tenant.
C. Landlord may terminate this Lease by giving Tenant written notice
of termination, in which event this Lease shall terminate on the date set forth
for termination in such notice. Any termination under this Paragraph 13.2C
shall not relieve Tenant from its obligation to pay sums then due Landlord or
from any claim against Tenant for damages or rent previously accrued or then
accruing. In no event shall any one or more of the following actions by
Landlord, in the absence of a written election by Landlord to terminate this
Lease, constitute a termination of this Lease: (i) appointment of a receiver or
keeper in order to protect Landlord's interest hereunder; (ii) consent to any
subletting of the Premises or assignment of this Lease by Tenant, whether
pursuant to the provisions hereof or otherwise; or (iii) any other action by
Landlord or Landlord's Agents intended
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to mitigate the adverse effects of any breach of this Lease by Tenant, including
without limitation any action taken to maintain and preserve the Premises or any
action taken to relet the Premises or any portions thereof to the extent such
actions do not affect a termination of Tenant's right to possession of the
Premises.
D. In the event Tenant breaches this Lease and abandons the
Premises, this Lease shall not terminate unless Landlord gives Tenant written
notice of its election to so terminate this Lease. No act by or on behalf of
Landlord intended to mitigate the adverse effect of such breach, including those
described by Paragraph 13.C, shall constitute a termination of Tenant's right to
possession unless Landlord gives Tenant written notice of termination. Should
Landlord not terminate this Lease by giving Tenant written notice, Landlord may
enforce all its rights and remedies under this Lease, including the right to
recover the rent as it becomes due under the Lease as provided in California
Civil Code Section 1951.4.
E. In the event Landlord terminates this Lease, Landlord shall be
entitled, at Landlord's election, to damages in an amount as set forth in
California Civil Code Section 1951.2 as in effect on the Effective Date. For
purposes of computing damages pursuant to California Civil Code Section 1951.2.,
(i) an interest rate equal to the Agreed Interest Rate shall be used where
permitted, and (ii) the term "rent" includes Base Monthly Rent and Additional
Rent. Such damages shall include:
(1) The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided,
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%); and
(2) Any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease, or which in the ordinary course of things would be likely to
result therefrom, including the following: (i) expenses for cleaning, repairing
or restoring the Premises; (ii) expenses for altering, remodeling or otherwise
improving the Premises for the purpose of reletting, including installation of
leasehold improvements (whether such installation be funded by a reduction of
rent, direct payment or allowance to a new tenant, or otherwise); (iii) broker's
fees, advertising costs and other expenses of reletting the Premises; (i) costs
of carrying the Premises, such as taxes, insurance premiums, utilities and
security precautions; (v) expenses in retaking possession of the Premises; and
(vi) attorneys' fees and court costs incurred by Landlord in retaking possession
of the Premises and in releasing the Premises or otherwise incurred as a result
of Tenant's default.
F. Nothing in this 13.2 shall limit Landlord's right to
indemnification from Tenant as provided in Paragraph 17.2 and Paragraph 10.3.
Any notice given by Landlord in order to satisfy the requirements of
Paragraph 13.1A or Paragraph 13.1B above shall also satisfy the notice
requirements of California Code of Civil Procedure Section 1161 regarding
unlawful detainer proceedings, if it is delivered in the form and by means
described in said Code Sections.
13.3 WAIVER: One party's consent to or approval of any act by the other
party requiring the first party's consent or approval shall not be deemed to
waive or render unnecessary the list party consent to or approval of any
subsequent similar act by the other party. The receipt by Landlord of any rent
or payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach unless such waiver is in writing
and signed by Landlord. No delay or omission in the exercise of any right or
remedy accruing to either party upon any breach by the other party under this
Lease shall impair such right or remedy or be construed as a waiver of any such
breach theretofore or thereafter occurring. The waiver by either party of any
breach of any provision of this Lease shall not be deemed to be a waiver of any
subsequent breach of the same or of any other provisions herein contained.
13.4 LIMITATION ON EXERCISE OF RIGHT: At any time that an Event of
Tenant's Default has occurred and remains uncured, (i) it shall not be
unreasonable for Landlord to deny or withhold any consent or approval
requested of it by Tenant which Landlord would otherwise be obligated to give
unless as a consequence of the transaction the Default will be cured, and
(ii) Tenant may not exercise any option to extend, right to terminate this
Lease, or other right granted to it by this Lease which would otherwise be
available to it.
13.5 WAIVER BY TENANT OF CERTAIN REMEDIES. Tenant waives the provisions
of Sections 1932(l), 1941 and 1942 of the California Civil Code and any
similar or successor law regarding Tenant's right to terminate this Lease or
to make repairs and deduct the expenses of such repairs from the rent due
under this Lease. Tenant hereby waives any right of redemption or relief
from forfeiture under the laws of the State of California, or under any other
present or future law, including the provisions of Sections 1174 and 1179 of
the California Code of Civil Procedure.
ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 TRANSFER BY TENANT: The following provisions shall apply to any
assignment, subletting or other transfer by Tenant or any subtenant or assignee
or other successor in interest of the original Tenant (collectively referred to
in this Paragraph 14.1 as "Tenant"):
A. Tenant shall not do any of the following (collectively referred
to herein as a "Transfer"), whether voluntarily, involuntarily or by operation
of law, without the prior written consent of Landlord, which consent shall not
be unreasonably withheld or delayed: (i) sublet all or any part of the Premises
or allow it to be sublet, occupied or used by any person or entity other than
Tenant; (ii) assign its interest in this Lease; (iii) mortgage or encumber the
Lease (or otherwise use the Lease as a security device) in any manner; or (iv)
materially amend or modify an assignment, sublease or other transfer that has
been previously approved by Landlord. Tenant shall reimburse Landlord for all
reasonable
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costs and attorney fees incurred by Landlord in connection with the
evaluation, processing, and/or documentation of any requested Transfer,
whether or not Landlord's consent is granted. Landlord's reasonable costs
shall include the cost of any review or investigation performed by Landlord
or consultant acting on Landlord's behalf of (i) Hazardous Materials (as
defined in Section 7.2E of this Lease) used, stored, released, or disposed of
by the potential Subtenant or Assignee, and/or (ii) violations of Hazardous
Materials Law (as defined in Section 7.2E of this lease) by the Tenant or the
proposed Subtenant or Assignee. Any Transfer so approved by Landlord shall
not be effective until Tenant has delivered to Landlord an executed
counterpart of the document evidencing the Transfer which (i) is in a form
reasonably approved by Landlord, (ii) contains the same terms and conditions
as stated in Tenant's notice given to Landlord pursuant to Paragraph 14.1B,
and (iii) in the case of an assignment of the Lease, contains the agreement
of the proposed transferee to assume all obligations of Tenant under this
Lease arising after the effective date of such Transfer and to remain jointly
and severally liable therefor with Tenant. Any attempted Transfer without
any required Landlord's consent shall constitute an Event of Tenant's Default
and shall be voidable at Landlord's option. Landlord's consent to any one
Transfer shall not constitute a waiver of the provisions of this Paragraph
14.1 as to any subsequent Transfer or a consent to any subsequent Transfer.
No Transfer, even with the consent of Landlord, shall relieve Tenant of its
personal and primary obligation to pay the rent and to perform all of the
other obligations to be performed by Tenant hereunder. The acceptance of
rent by Landlord from any person shall not be deemed to be a waiver by
Landlord of any provision of this Lease nor to be a consent to any Transfer.
B. At least 15 days before a proposed Transfer is to become
effective, Tenant shall give Landlord written notice of the proposed terms of
such Transfer and request Landlord's approval, which notice shall include the
following: (i) the name and legal composition of the proposed transferee;
(ii) a current best available Financial statement of the transferee, best
available financial statements of the transferee covering the preceding three
years if the same exist, and (if available) an audited financial statement of
the transferee for a period ending not more than one year prior to the
proposed effective date of the Transfer, all of which statements are prepared
in accordance with generally accepted accounting principles; (iii) the nature
of the proposed transferee's business to be carried on in the Premises; (iv)
all consideration to be given on account of the Transfer; (v) a current
financial statement of Tenant; and (vi) an accurately filled out response to
Landlord's standard Hazardous Materials Questionnaire in use by Landlord with
other tenants at the time of the Transfer. Tenant shall provide to Landlord
such other information as may be reasonably requested by Landlord within
seven days after Landlord's receipt of such notice from Tenant. Landlord
shall respond in writing to Tenant's request for Landlord's consent to a
Transfer within the later of (i) 10 days of receipt of such request together
with the required accompanying documentation, or (ii) seven days after
Landlord's receipt of all information which Landlord reasonably requests
within seven days after it receives Tenant's first notice regarding the
Transfer in question. If Landlord fails to respond in writing within said
period, Landlord will be deemed to have withheld consent to such Transfer.
Tenant shall immediately notify Landlord of any material modification to the
proposed terms of such Transfer.
C. In the event that Tenant seeks to assign or sublease for the
balance of the Lease Term, Landlord shall have the right to terminate this Lease
or, in the case of a sublease of less than all of the Premises, terminate this
Lease as to that part of the Premises proposed to be so sublet, either (i) on
the condition that the proposed transferee immediately enter into a direct lease
of the Premises with Landlord (or, in the case of a partial sublease, a lease
for the portion proposed to be so sublet) on the same terms and conditions
contained in Tenant's notice, or (ii) so that Landlord is thereafter free to
lease the Premises (or, in the case of a partial sublease, the portion proposed
to be so sublet) to whomever it pleases on whatever terms are acceptable to
Landlord. In the event Landlord elects to so terminate this Lease, then (i) if
such termination is conditioned upon the execution of a lease between Landlord
and the proposed transferee, Tenant's obligations under this Lease shall not be
terminated until such transferee executes a new lease with Landlord, enters into
possession and commences the payment of rent, and (ii) if Landlord elects simply
to terminate this Lease (or, in the case of a partial sublease, terminate this
Lease as to the portion to be so sublet), the Lease shall so terminate in its
entirety (or as to the space to be so sublet) fifteen (15) days after Landlord
has notified Tenant in writing of such election. Upon such termination, Tenant
shall be released from any further obligation under this Lease if it is
terminated in its entirety, or shall be released from any further obligation
under the Lease with respect to the space proposed to be sublet in the case of a
proposed partial sublease. In the case of a partial termination of the Lease,
the Base Monthly Rent and Tenant's Share shall be reduced to an amount which
bears the same relationship to the original amount thereof as the area of that
part of the Premises which remains subject to the Lease bears to the original
area of the Premises. Landlord and Tenant shall execute a cancellation and
release with respect to the Lease to effect such termination. Landlord shall
not unreasonably withhold consent to a change in use in order to accommodate any
Transfer which does not pose a health or safety risk to the Project and conforms
to all applicable laws.
D. If Landlord consents to a Transfer proposed by Tenant or if
Landlord's consent is not required, Tenant may enter into such Transfer, and if
Tenant does so, the following shall apply:
(1) Tenant shall not be released of its liability for the
performance of all of its obligations under the Lease.
(2) If Tenant assigns its interest in this Lease, then Tenant
shall pay to Landlord 50% of all Subrent (as defined in Paragraph 14.1D)(5))
received by Tenant over and above (i) the assignee's agreement to assume the
obligations of Tenant under this Lease, and (ii) all Permitted Transfer Costs
related to such assignment. In the case of assignment, the amount of Subrent
owed to Landlord shall be paid to Landlord on the same basis, whether periodic
or in lump sum, that such Subrent is paid to Tenant by the assignee.
(3) If Tenant sublets any part of the Premises, then with respect to
the space so
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subleased, Tenant shall pay to Landlord 50% of the positive difference, if any,
between (i) all Subrent paid by the subtenant to Tenant, after deduction of (ii)
the sum of all base Monthly Rent and Additional Rent allocable to the space
sublet and all Permitted Transfer Costs related to such sublease. Such amount
shall be paid to Landlord on the same basis, whether periodic or in lump sum,
that such Subrent is paid to Tenant by its subtenant. In calculating Landlord's
share of any periodic payments, all Permitted Transfer Costs shall be first
recovered by Tenant.
(4) Tenant's obligations under this Paragraph 14.1D shall survive any
Transfer, and Tenant's failure to perform its obligations hereunder shall be an
Event of Tenant's Default. At the time Tenant makes any payment to Landlord
required by this Paragraph 14.1D, Tenant shall deliver an itemized statement of
the method by which the amount to which Landlord is entitled was calculated,
certified by Tenant as true and correct. Landlord shall have the right at
reasonable intervals to inspect Tenant's books and records relating to the
payments due hereunder. Upon request therefor, Tenant shall deliver to Landlord
copies of all bills, invoices or other documents upon which its calculations are
based. Landlord may condition its approval of any Transfer requiring Landlord's
consent upon obtaining a certification from both Tenant and the proposed
transferee of all Subrent and other amounts that are to be paid to Tenant in
connection with such Transfer.
(5) As used in this Paragraph 14.1D, the term "Subrent" shall mean
any consideration of any kind received, or to be received, by Tenant as a
consideration for the Transfer, if such sums are related to Tenant's interest
in this Lease or in the Premises. As used in this Paragraph 14.1D, the term
"Permitted Transfer Costs" shall mean (i) all reasonable leasing commissions
paid to third parties not affiliated with Tenant in order to obtain the
Transfer in question, (ii) all reasonable attorneys' fees incurred by Tenant
with respect to the Transfer in question, (iii) all other reasonable cost
paid or incurred by Tenant to perform its obligations under the Transfer
document/sublease reflected in the Subrent.
E. If Tenant is a corporation, the following shall be deemed a
voluntary assignment of Tenant" interest in this Lease: (i) any dissolution,
merger, consolidation, or other reorganization of or affecting Tenant, whether
or not Tenant is the surviving corporation; and (ii) if the capital stock of
Tenant is not publicly traded, the sale or transfer to one person or entity (or
to any group of related persons or entities) stock possessing more than 50% of
the total combined voting power of all classes of Tenant's capital stock issued,
outstanding and entitled to vote for the election of directors. If Tenant is a
partnership, any withdrawal or substitution (whether voluntary, involuntary or
by operation of law, and whether occurring at one time or over a period of time)
of any partner owning 25% or more (cumulatively) of any interest in the capital
or profits of the partnership, or the dissolution of the partnership, shall be
deemed a voluntary assignment of Tenant's interest in this Lease.
F. Notwithstanding anything contained in Paragraph 14.1, so long as
Tenant otherwise complies with the provisions of Paragraph 14.1 Tenant may enter
into any of the following transfers (a "Permitted Transfer") without Landlord's
prior written consent, and Landlord shall not be entitled to terminate the Lease
pursuant to Paragraph 14.1C or to receive any part of any Subrent resulting
therefrom that would otherwise be due it pursuant to Paragraph 14.1D:
(1) Tenant may sublease all or part of the Premises or assign
its interest in this Lease to any corporation which controls, is controlled by,
or is under common control with the original Tenant to this Lease by means of an
ownership interest of more than 50%;
(2) Tenant may assign its interest in the Lease to a corporation
which results from a merger, consolidation or other reorganization in which
Tenant is not the surviving corporation, so long as the surviving corporation
has a net worth at the time of such assignment that is equal to or greater than
the net worth of Tenant immediately prior to such transaction; and
(3) Tenant may assign this Lease to a corporation which
purchases or otherwise acquires all or substantially all of the stock of Tenant
or substantially all of the assets of Tenant, so long as the Tenant after the
transaction has a net worth at the time of such assignment that is equal to or
greater than the net worth of Tenant immediately prior to such transaction.
14.2 TRANSFER BY LANDLORD: Landlord and its successors in interest shall
have the right to transfer their interest in this Lease and the Project at any
time and to any person or entity. In the event of any such transfer, the
Landlord originally named herein (and, in the case of any subsequent transfer,
the transferor) from the date of such transfer, shall be automatically relieved,
without any further act by any person or entity, of all liability for the
performance of the obligations of the Landlord hereunder which may accrue after
the date of such transfer and which are assumed by Landlord's transferee. After
the date of any such transfer, term "Landlord" as used herein shall mean the
transferee of such interest in the Premises.
ARTICLE 15
GENERAL PROVISIONS
15.1 LANDLORD'S RIGHT TO ENTER: Landlord and its agents may enter the
Premises at any reasonable time after giving at least 24 hours' prior notice
to Tenant (and immediately in the case of emergency) for the purpose of: (i)
inspecting the same; (ii) posting notices of non-responsibility; (iii)
supplying any service to be provided by Landlord to Tenant; (iv) showing the
Premises to prospective purchasers, mortgagees or tenants; (v) making
necessary alterations, additions or repairs; (vi) performing Tenant's
obligations when Tenant has failed to do so after written notice from
Landlord; (vii) placing upon the Premises ordinary "for lease" signs or "for
sale" signs (clearly indicating the Project, not the business, is for sale)
and (viii) responding to an emergency. Landlord shall have the right to use
any and all means Landlord may deem necessary and proper to enter the
Premises in an emergency. Any entry into the Premises obtained by Landlord
in accordance with this Paragraph 15.1 shall not be a forcible or unlawful
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entry into, or a detainer of, the Premises, or an eviction, actual or
constructive, of Tenant from the Premises.
15.2 SURRENDER OF THE PREMISES: Upon the expiration or sooner termination
of this Lease, Tenant shall vacate and surrender the Premises to Landlord in the
same condition as existed at the Commencement Date, (unless Landlord has agreed,
prior to the construction of such Tenant Alterations, that such will not be
required to be removed at the termination of the Lease) except for (i)
reasonable wear and tear, (ii) damage caused by any peril or condemnation, and
(iii) contamination by Hazardous Material for which Tenant is not responsible
pursuant to Paragraph 7.2A or Paragraph 7.2B. In this regard, normal wear and
tear shall be construed to mean wear and tear caused to the Premises by the
natural aging process which occurs in spite of prudent application of the best
standards for maintenance, repair and janitorial practices, and does not include
items of neglected or deferred maintenance required of Tenant by the Lease. In
any event, Tenant shall cause the following to be done prior to the expiration
or the sooner termination of this Lease: (i) all interior walls shall be
cleaned; (ii) all tiled floors shall be cleaned and waxed; (iii) all carpets
shall be cleaned and shampooed; (iv) all broken, marred, stained or
nonconforming acoustical ceiling tiles shall be replaced; (v) all windows shall
be washed; (vi) the HVAC system shall be serviced by a reputable and licensed
service firm and left in good operating condition and repair as so certified by
such firm; and (vii) the plumbing and electrical systems and lighting shall be
placed in good order and repair (including replacement of any burned out,
discolored or broken light bulbs, ballasts, or lenses). If Landlord so
requests, Tenant shall, prior to the expiration or sooner termination of this
Lease, (i) remove any Tenant's Alterations which Tenant is required to remove
pursuant to Paragraph 15.2 and repair all damage caused by such removal, and
(ii) return the Premises or any part thereof to its original configuration
existing as of the time the Premises were delivered to Tenant (unless Landlord
has agreed, prior to the construction of such Tenant Alterations, that such will
not be required to be removed at the termination of the Lease). If the Premises
are not so surrendered at the termination of this Lease, Tenant shall be liable
to Landlord for all costs incurred by Landlord in returning the Premises to the
required condition, plus interest on all costs incurred at the Agreed Interest
Rate. Tenant shall indemnify Landlord against loss or liability resulting from
delay by Tenant in so surrendering the Premises, including, without limitation,
any claims made by any succeeding tenant or losses to Landlord due to lost
opportunities to lease to succeeding tenants.
15.3 HOLDING OVER: This Lease shall terminate without further notice at
the expiration of the Lease Term. Any holding over by Tenant after expiration
of the Lease Term shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the Premises except as expressly provided in
this Lease. Any holding over after such expiration with the written consent of
Landlord shall be construed to be a tenancy from month to month on the same
terms and conditions herein specified insofar as applicable except that Base
Monthly Rent shall be increased to an amount equal to 150% of the Base Monthly
Rent payable during the last full calendar month of the Lease Term.
15.4 SUBORDINATION: The following provisions shall govern the relationship
of this Lease to any Security Instrument:
A. The Lease is subject and subordinate to all Security Instruments
existing as of the Effective Date. However, if any Lender so requires, this
Lease shall become prior and superior to any such Security Instrument. Upon
written request from Tenant, Landlord shall use all reasonable efforts to obtain
a non-disturbance agreement from Landlord's Lender on the Lender's standard
form. All costs, if any, in obtaining agreement shall be paid by Tenant.
B. At Landlord's election, this Lease shall become subject and
subordinate to any Security Instrument created after the Effective Date.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed so long as Tenant is not in default and performs
all of its obligations under this Lease, unless this Lease is otherwise
terminated pursuant to its terms.
C. Tenant shall upon request execute any document or instrument
reasonably required by any Lender to make this Lease either prior or subordinate
to a Security Instrument, which may include such other matters as the Lender
customarily and reasonably requires in connection with such agreements,
including provisions that the Lender not be liable for (i) the return of any
security deposit unless the Lender receives it from Landlord, and (ii) any
defaults on the part of Landlord occurring prior to the time the Lender takes
possession of the Project in connection with the enforcement of its Security
Instrument. Tenant's failure to execute any such document or instrument within
10 days after written demand therefor shall constitute an Event of Tenant's
Default. Tenant approves as reasonable the form of subordination agreement
attached to this Lease as EXHIBIT G.
15.5 MORTGAGE PROTECTION AND ATTORNMENT: In the event of any default on
the part of the Landlord, Tenant will use reasonable efforts to give notice by
registered mail to any Lender whose name has been provided to Tenant and shall
offer such Lender a reasonable opportunity to cure the default, including time
to obtain possession of the Premises by power of sale or judicial foreclosure or
other appropriate legal proceedings, if such should prove necessary to effect a
cure. Tenant shall attorn to any purchaser of the Premises at any foreclosure
sale or private sale conducted pursuant to any Security Instrument encumbering
the Premises, or to any grantee or transferee designated in any deed given in
lieu of foreclosure.
15.6 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS: At all times during
the Lease Term, each party agrees, following any request by the other party,
promptly to execute and deliver to the requesting party within 15 days following
delivery of such request an estoppel certificate: (i) certifying that this Lease
is unmodified and in full force and effect or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in full
force and effect, (ii) stating the date to which the rent and other charges are
paid in advance, if any, (iii) acknowledging that there are not, to the
certifying party's knowledge, any uncured defaults on the part of any party
hereunder or, if there are uncured defaults, specifying the nature of such
defaults, and (iv) certifying such other information about the Lease as may be
reasonably required by the requesting party. A failure to
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deliver an estoppel certificate within 15 days after delivery of a request
therefor shall be a conclusive admission that, as of the date of the request
for such statement: (i) this Lease is unmodified except as may be represented
by the requesting party in said request and is in full force and effect, (ii)
there are no uncured defaults in the requesting party's performance, and
(iii) no rent has been paid more than 30 days in advance of its due date
hereunder. At any time during the Lease Term Tenant shall, upon 15 days'
prior written notice from Landlord, provide Tenant's most recent financial
statement and financial statements covering the 24 month period prior to the
date of such most recent financial statement to any existing Lender or to any
potential Lender or buyer of the Premises. Such statements shall be prepared
in accordance with generally accepted accounting principles and, if such is
the normal practice of Tenant, shall be audited by an independent certified
public accountant.
15.7 REASONABLE CONSENT: Whenever any party's approval or consent is
required by this Lease before an action may be taken by the other party, such
approval or consent shall not be unreasonably withheld or delayed.
15.8 NOTICES. Any notice required or desired to be given regarding
this Lease shall be in writing and may be given by personal delivery, by
facsimile telecopy, by courier service or by mail. A notice shall be deemed
to have been given (i) on the third business day after mailing if such notice
was deposited in the United States mail, certified or registered, postage
prepaid, addressed to the party to be served at its Address for Notices
specified in SECTION Q or SECTION R of the Summary (as applicable), (ii) when
delivered if given by personal delivery, and (iii) in all other cases when
actually received at the party's Address for Notices. Either party may
change its address by giving notice of the same in accordance with this
Paragraph 15.8, provided, however, that any address to which notices may be
sent must be a California address. Notwithstanding the foregoing, no notice
of default may be delivered by fax.
15.9 ATTORNEYS' FEES: In the event either Landlord or Tenant shall
bring any action or legal proceeding for an alleged breach of any provision
of this Lease, to recover rent, to terminate this Lease or otherwise to
enforce, protect or establish any term or covenant of this Lease, the
prevailing party shall be entitled to recover as a part of such action or
proceeding, or in a separate action brought for that purpose, reasonable
attorneys' fees, court costs, and experts' fees as may be fixed by the court.
15.10 CORPORATE AUTHORITY: If Tenant is a corporation (or partnership),
each individual executing this Lease on behalf of Tenant represents and
warrants that he is duly authorized to execute and deliver this Lease on
behalf of such corporation in accordance with the by-laws of such corporation
(or partnership in accordance with the partnership agreement of such
partnership) and that this Lease is binding upon such corporation (or
partnership) in accordance with its terms. Each of the persons executing
this Lease on behalf of a corporation does hereby covenant and warrant that
the party of whom it is executing this Lease is a duly authorized and
existing corporation, that it is qualified to do business in California, and
that the corporation has full right and authority to enter into this Lease.
15.11 MISCELLANEOUS: Should any provision of this Lease prove to be
invalid or illegal, such invalidity or illegality shall in no way affect,
impair or invalidate any other provision hereof, and such remaining
provisions shall remain in full force and effect. Time is of the essence
with respect to the performance of every provision of this Lease in which
time of performance is a factor. The captions used in this Lease are for
convenience only and shall not be considered in the construction or
interpretation of any provision hereof. Any executed copy of this Lease shall
be deemed an original for all purposes. This Lease shall, subject to the
provisions regarding assignment, apply to and bind the respective heirs,
successors, executors, administrators and assigns of
<PAGE>
Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context
implies. If Tenant consists of more than one person or entity, then all
members of Tenant shall be jointly and severally liable hereunder. This
Lease shall be construed and enforced in accordance with the laws of the
State of California. The language in all parts of this Lease shall in all
cases be construed as a whole according to its fair meaning, and not strictly
for or against either Landlord or Tenant. When the context of this Lease
requires, the neuter gender includes the masculine, the feminine, a
partnership or corporation or joint venture, and the singular includes the
plural. The terms "shall", "will" and "agree" are mandatory. The term "may"
is permissive. When a party is required to do something by this Lease, it
shall do so at its sole cost and expense without right of reimbursement from
the other party unless a provision of this Lease expressly requires
reimbursement. Landlord and Tenant agree that (i) the gross leasable area of
the Premises includes any atriums, depressed loading docks, covered entrances
or egresses, and covered loading areas, (ii) each has had an opportunity to
determine to its satisfaction the actual area of the Project and the
Premises, (iii) all measurements of area contained in this Lease are
conclusively agreed to be correct and binding upon the parties, even if a
subsequent measurement of any one of these areas determines that it is more
or less than the amount of area reflected in this Lease, and (iv) any such
subsequent determination that the area is more or less than shown in this
Lease shall not result in a change in any of the computations of rent,
improvement allowances, or other matters described in this Lease where area
is a factor. Where a party hereto is obligated not to perform any act, such
party is also obligated to restrain any others within its control from
performing said act, including the Agents of such party. Landlord shall not
become or be deemed a partner or a joint venturer with Tenant by reason of
the provisions of this Lease.
15.12 TERMINATION BY EXERCISE OF RIGHT: If this Lease is terminated
pursuant to its terms by the proper exercise of a right to terminate
specifically granted to Landlord or Tenant by this Lease, then this Lease
shall terminate on a date thereafter selected by Tenant, which date shall not
be more than 180 days after the date the right to terminate is properly
exercised (unless another date is specified in that part of the Lease
creating the right, in which event the date so specified for termination
shall prevail), the rent and all other charges due hereunder shall be
prorated as of the date of termination, and neither Landlord nor Tenant shall
have any further rights or obligations under this Lease except for those that
have accrued
18
<PAGE>
LEASE
prior to the date of termination or those obligations which this Lease
specifically provides are to survive termination. This Paragraph 15.12 does
not apply to a termination of this Lease by Landlord as a result of an Event
of Tenant's Default.
15.13 BROKERAGE COMMISSIONS: Each party hereto (i) represents and
warrants to the other that it has not had any dealings with any real estate
brokers, leasing agents or salesmen, or incurred any obligations for the
payment of real estate brokerage commissions or finder's fees which would be
earned or due and payable by reason of the execution of this Lease, other
than to the Retained Real Estate Brokers described in SECTION S of the
Summary, and (ii) agrees to indemnify, defend, and hold harmless the other
party from any claim for any such commission or fees which result from the
actions of the indemnifying party. Landlord shall be responsible for the
payment of any commission owed to the Retained Real Estate Brokers if there
is a separate written commission agreement between Landlord and the Retained
Real Estate Brokers for the payment of a commission as a result of the
execution of this Lease.
15.14 FORCE MAJEURE: Any prevention, delay or stoppage due to strikes,
lock-outs, inclement weather, labor disputes, inability to obtain labor,
materials, fuels or reasonable substitutes therefor, governmental
restrictions, regulations, controls, action or inaction, civil commotion,
fire or other acts of God, and other causes beyond the reasonable control of
the party obligated to perform (except financial inability) shall excuse the
performance, for a period equal to the period of any said prevention, delay
or stoppage, of any obligation hereunder except the obligation of Tenant or
Landlord to pay rent or any other sums due hereunder.
15.15 ENTIRE AGREEMENT: This Lease constitutes the entire agreement
between the parties, and there are no binding agreements or representations
between the parties except as expressed herein. Tenant acknowledges that
neither Landlord nor Landlord's Agents has made any legally binding
representation or warranty as to any matter except those expressly set forth
herein, including any warranty as to (i) whether the Premises may be used for
Tenant's intended use under existing Law, (ii) the suitability of the
Premises or the Project for the conduct of Tenant's business, or (iii) the
condition of any improvements. There are no oral agreements between Landlord
and Tenant affecting this Lease, and this Lease supercedes and cancels any
and all previous negotiations, arrangements, brochures, agreements and
understandings, if any, between Landlord and Tenant or displayed by Landlord
to Tenant with respect to the subject matter of this Lease. This instrument
shall not be legally binding until it is executed by both Landlord and
Tenant. No subsequent change or addition to this Lease shall be binding
unless in writing and signed by Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenants have executed this Lease with
the intent to be legally bound thereby, to be effective as of the Effective
Date.
LANDLORD:
SAN JOSE ACQUISITION CO., L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
BY: ARGO PARTNERSHIP L.P.
ITS GENERAL PARTNER
BY: ARGO MANAGEMENT COMPANY, L.P.
ITS GENERAL PARTNER
BY: 0'CONNER CAPITAL PARTNERS, L.P.,
<PAGE>
ITS GENERAL PARTNER
BY: O'CONNER CAPITAL INCORPORATED
ITS GENERAL PARTNER
BY: /s/ K.J. Artingstall
K.J. ARTINGSTALL
VICE PRESIDENT
BY: ARGO PARTNERSHIP II, L.P.,
ITS MANAGER
BY: ARGO II MANAGEMENT COMPANY, L.P.
ITS GENERAL PARTNER
BY: O'CONNER CAPITAL PARTNERS II L.P.,
ITS GENERAL PARTNER
BY: 0'CONNER CAPITAL II INCORPORATED
ITS GENERAL PARTNER
BY: /s/ K.J. Artingstall
K.J. ARTINGSTALL
VICE PRESIDENT
DATE: 12-18-96
TENANT:
QUICKTURN DESIGN SYSTEMS, INC.
A DELAWARE CORPORATION
BY: /s/ Ray Ostby
RAY OSTBY
TITLE: CHIEF FINANCIAL OFFICER
DATE: 12/16/96
<PAGE>
FIRST ADDENDUM TO LEASE
THIS FIRST ADDENDUM is dated for reference purposes as December 6, 1996,
and is made a part of that Lease Agreement (the "Lease") dated December 6,
1996, by and between SAN JOSE ACQUISITION CO., L.L.C., a Delaware limited
liability company ("Landlord") and QUICKTURN DESIGN SYSTEMS, INC., a Delaware
corporation ("Tenant") affecting certain real property commonly known as 2610
Orchard Parkway and 55 W. Trimble Road, San Jose, California , with reference
to the following facts:
1. TENANT IMPROVEMENT ALLOWANCES:
A. The term "First Level Tenant Improvement Allowance" shall mean
the maximum amount Landlord is required to spend toward the payment of
Interior Improvement Costs for all Interior Improvements constructed in the
Premises, which amount is $729,075.00 (i.e., $5.00 per square foot for
Tenant's Gross Leasable Area within the entire Premises).
B. A second level Tenant Improvement Allowance ("Second Level
Tenant Improvement Allowance") of $291,630 (i.e., $2.00 per square foot for
Tenant's Gross Leasable Area within the entire Premises) shall be made
available for an increase in the Base Monthly Rent as provided for in
paragraph 2 of this Addendum To Lease.
C. The First Level Tenant Improvement Allowance plus the Second
Level Tenant Improvement Allowance shall be termed the "Total Tenant
Improvement Allowance" consisting of $1,020,705.00 (i.e., $7.00 per square
foot for Tenant's Gross Leasable Area within the entire Premise).
D. Landlord shall not be obligated to provide future use of any
Tenant Improvement Allowance not spent within ninety (90) days after the
Commencement Date, subject to delays caused by Landlord, its employees, its
contractors, or Agents.
2. ADJUSTMENTS TO THE BASE MONTHLY RENT: The Base Monthly Rent as
provided for in Article 3 of the Lease shall be adjusted as follows:
A. For every increment of $145,815 (i.e., $0.0166 per square foot
of Gross Leasable Area), or proportion thereof of the Second Level Tenant
Improvement Allowance that Tenant elects to spend for the payment of the
Interior Improvement Costs as defined in Exhibit B, "Interior Improvement
Agreement", the Base Monthly Rent shall increase $0.0166 per square foot per
month. As an example, if $218,722.50 of Second Level Tenant Improvement
Allowance is spent, the Base Monthly Rent shall increase $3,630.79 per month.
B. No credit in the Base Monthly Rent shall be made if a portion
of the Tenant Improvement Allowance is not spent.
3. CALCULATION OF FINAL PREPAID RENT AND SECURITY DEPOSIT:
Notwithstanding the provisions of Section L and M of the Summary to this
Lease, upon execution of Exhibit D ("Punch List Agreement"), Tenant shall
increase: (i) the Prepaid Rent to an amount equal to the first month's Base
Monthly Rent; and, (ii) the Security Deposit to an amount equal to the last
month's Base Monthly Rent, as those amounts are finally calculated as
provided for in Paragraph 2 of this First Addendum to Lease.
4. TENANT'S RIGHT OF FIRST NEGOTIATION FOR ADDITIONAL SPACE:
A. GRANT AND RIGHT OF FIRST NEGOTIATION: Landlord hereby grants
to Tenant a Right of First Negotiation regarding the leasing of the "First
Negotiation Space", which consists of the portion of the Building which is
identified and described on Exhibit "A" as the First Negotiation Space, being
approximately 60,633 square feet of rentable space commonly known as 2630
Orchard Parkway, San Jose, California on the terms
<PAGE>
contained in this Paragraph.
B. NEGOTIATION NOTICE: If Landlord proposes to lease all or part
of the First Negotiation Space at any time after the Effective Date of this
Lease and before the expiration or earlier termination of this Right of First
Negotiation, Landlord shall notify Tenant in writing (the "Negotiation
Notice") of the following basic business terms upon which Landlord would be
willing to lease the First Negotiation Space; (i) the portion of the First
Negotiation Landlord propose to lease (the "Offered Space"), (ii) the term of
the proposed lease; (iii) the
<PAGE>
Page Two
tenant improvements Landlord is willing to construct or that it will require
be constructed and the contribution Landlord is willing to make to pay for
such tenant improvements; (iv) the rent for the terms of the lease or formula
to be used to determine such rent, and (v) any other material business terms
Landlord elects to specify.
C. NEGOTIATION PERIOD: Tenant shall have fifteen (15) days (the
"Negotiation Period") from the Negotiation Notice within which to accept the
terms specified in the Negotiation Notice or to conduct negotiations with
Landlord regarding Tenant's leasing of the Offered Space, whether on the
terms set forth in Landlord's notice or otherwise.
D. DUTIES DURING NEGOTIATION PERIOD: During the Negotiation
Period, Landlord and Tenant will negotiate in good faith in an attempt to
agree on a lease of the Offered Space. Neither Landlord nor Tenant shall be
bound to agree to or accept any terms and conditions for such lease except
those which each party, in its sole discretion, wishes to agree to. "Good
Faith" in such negotiations does not require either party to make concessions
to the other party's position, but only requires that each party give the
other party a reasonable opportunity, within the Negotiation Period, to
present and discuss the party's proposals. Landlord is not bound to agree to
any or all of the terms set forth in the Negotiation Notice if Tenant does
not accept such terms without change and Landlord determines during
negotiations that one or more of said terms is not in landlord's best
interest.
E. LANDLORD'S RIGHT TO LEASE ABSENT AGREEMENT: If Tenant does not
accept the terms set forth in the Negotiation Notice and Landlord and Tenant
do not reach agreement in writing on other terms for Tenant to lease the
Offered Space within the Negotiation Period, Landlord thereafter shall have
the right to offer the Offered Space to any third party, on such terms and
conditions as Landlord may elect which are not more favorable to Tenant than
those contained in Landlord's notice, provided such transaction is
consummated within 180 days following the end of the Negotiation Period and
in such case Landlord shall not thereafter, have any duty to further offer
the Offered Space to Tenant.
F. TERMINATION: The right granted to Tenant in this Paragraph is
personal to Tenant, and may not be assigned by Tenant to any third party,
either alone on in conjunction with an assignment of this Lease or a sublease
of all or any part of the Premises. The rights granted to Tenant under this
paragraph shall terminate upon the earliest of the following to occur: (i)
the expiration or earlier termination of the Lease; (ii) any assignment by
Tenant of its interest in this Lease; (iii) any subletting by Tenant of
substantially all of the Premises for substantially all of the remainder of
the Lease Term, (iv) the termination of this right by default as set forth in
Subparagraph G below, or (v) as to any Offered Space, when the Negotiation
Period ends without Tenant and Landlord reaching a written agreement for
Tenant to lease the Offered Space.
G. TERMINATION BY DEFAULT: The rights of Tenant under this
Paragraph shall not be effective at any time when Tenant is in default under
this Lease beyond any applicable cure period provided in this Lease. If
Tenant, with the agreement of landlord, shall nevertheless cure such default,
then the rights provided hereunder shall be reinstated, but any transaction
to lease any or all of the First Negotiation Space entered into by Landlord
during such period of default shall be valid and Tenant shall have no further
Right of First Negotiation as to any such space leased by Landlord while
Tenant is in default under this Subparagraph.
H. NO RIGHT TO NEGOTIATION FOR RENEWAL OR EXTENSION SPACE: The
right
<PAGE>
granted to Tenant by this Paragraph shall not arise on account of or in
connection with the renewal or extension of the term of any then existing
lease affecting all or any portion of the First Negotiation Space as with the
existing tenant thereunder or its permitted assignee.
5. WARRANTY OF EXISTING CONDITION: Landlord shall provide the Premises
to Tenant with all electrical, plumbing, HVAC, elevator, fire safety system,
and roof systems in good working condition as of the Commencement Date.
6. COMMENCEMENT DATE: Landlord represents to Tenant, and Tenant
acknowledges, that (i) Landlord's existing lease with Altera Corporation
("Altera") for the Premises expires on July 4, 1997, (ii) that Altera has a
"hold-over" right to remain in the Premises for up to three (3) months after
the July 4, 1997 date, and (iii) Altera must exercise its "hold-over" right
and state the length
<PAGE>
Page Three
of the hold-over period no later than February 1, 1997. Therefore, the
Commencement Date of August 3, 1997 of this Lease shall be delayed for up to
three (3) months beyond August 3, 1997 (i) only if Landlord provides written
notice to Tenant that Altera has exercised its "hold-over" right, and (ii)
the Commencement Date of this Lease shall be delayed a period equal to
Landlord's written notice to Tenant stating the period of time of Altera's
hold-over, which notice shall be delivered to Tenant no later than February
15, 1997. If Altera does not deliver possession of the Premises to Landlord
on or before the date Altera is required to surrender, whether such date is
July 4, 1997, or an extended date set by a hold-over notice, then the
Commencement Date shall be delayed one day for every day beyond such required
surrender date, during which Altera continues in possession of the Premises.
Although the Commencement Date shall not be affected by the date of
Substantial Completion of Interior Improvements under Exhibit "B" hereto,
Landlord agrees that it will keep Tenant advised on negotiations for the
construction contract with the Prime Contractor, that it will provide in such
contract for penalties for delay in completion of construction by the Prime
Contractor, and that Tenant will have the right to approve the Prime
Construction Contract, approval not be unreasonably withheld or delayed,
solely with regard to the timeline schedule for construction, the penalties
which are to be charged to the Prime Contractor in the event of delay, and
construction warranties.
7. PARKING. Notwithstanding anything to the contrary in the Lease
without change Tenant as part of its Allocated Parking Stalls shall have the
exclusive use of not more than fifteen (15) reserved parking spaces, at the
immediate entrance to both Buildings constituting the Premises. Landlord
shall in no event oversubscribe parking or grant any exclusive parking within
the parking area designated for Tenant's exclusive use.
8. RULES AND REGULATION: Notwithstanding anything to the contrary in
the Lease, Tenant shall not be required to comply with any new rule or
regulation enacted solely by Landlord, unless the same applies
nondiscriminatory to all occupants of the Project and does not unreasonably
interfere with Tenant's use of the Premises, the Common Area, or Tenant's
parking rights.
9. ALTERATIONS, ADDITIONS AND IMPROVEMENTS: Notwithstanding anything
to the contrary in the Lease Form:
A. LANDLORD'S CONSENT: If Landlord's consent is required for a
Tenant's Alteration or any repair pursuant to Section 6.1.D of the Lease
form, Landlord's approval shall not be unreasonably withheld or delayed.
B. TENANT'S PROPERTY: All Tenant Trade Fixtures, and any other
personal property installed in the Premises at Tenant's expense ("Tenant's
Property") shall at all times remain Tenant's property and Tenant shall be
entitled to all depreciation, amortization and other tax benefits with
respect to all Tenant Alterations and Tenant's Property installed in the
Premises at Tenant's expense. Tenant may remove Tenant's Property from the
Premises at any time, provided Tenant repairs all damage caused by such
removal.
C. INSURANCE: Tenant shall have no obligation to insure any
property in the Premises other than Tenant's Property and Tenant Alterations
from fire or any other casualty, and Tenant shall be entitled to all
insurance proceeds and condemnation awards and settlements payable with
respect to Tenant's Property.
10. COMMON OPERATING EXPENSES: Notwithstanding anything to the contrary
in the
<PAGE>
Lease, in no event shall Common Operating Expenses include nor shall Tenant
have any other obligation to perform or to pay directly, or to reimburse
Landlord for, all or any portion of the following repairs, maintenance,
improvements, replacements, premiums, claims, losses, liabilities, fees,
charges, costs and expenses (collectively, "Costs"):
A. CAPITAL IMPROVEMENTS: Costs for capital improvements, except
to the except to the extent provided in Section 5.4, and as a result of
operations due to the performance of Sections 6.1 and 8.2 of the Lease.
B. REIMBURSABLE EXPENSES: Costs for which Landlord has a right of
reimbursement from others.
<PAGE>
Page Four
C. REAL ESTATE TAXES: Real Property Taxes (i) on land and
improvements not reserved for Tenant's exclusive or nonexclusive use, (ii) on
improvements reserved for the exclusive use of other occupants of the
Project, (iii) for Hazardous Materials remediation or removal (except to the
extent provided otherwise in Section 7.2), any interest on taxes or penalties
resulting from Landlord's failure to pay Real Property Taxes, and (iv) in any
tax year the amount of any assessment payable in installments in excess of
the installment payable for such tax year.
D. LEASING COSTS: Fees, commissions, attorneys' fees, costs or
other disbursements incurred in connection with the negotiation of this Lease
or any negotiations or disputes with any other occupant of the Project, and
costs arising from the violation by Landlord or any occupant of the Project
(other than Tenant) of the terms and conditions of any lease or other
agreement.
E. MANAGEMENT: Wages, salaries, compensation, and labor burden
for any employee of Landlord (except as provided in subpart 8.2B.(iv) of the
Lease Form and any management fee in excess of the amount described in
Section 8.2.C of the Lease Form.
I. DUPLICATION: Costs and expenses for which Tenant reimburses
Landlord directly or which Tenant pays directly to a third person.
J. STRUCTURAL: Costs for maintenance, repair or replacement to or
of the structural elements of the Buildings.
11. REAL PROPERTY TAXES: Any and all rebates on account of Real
Property Taxes paid or reimbursed to Landlord by Tenant covering any period
of the Lease Term under the provisions of this Lease shall belong to Tenant,
and Landlord will, on the request of Tenant, execute any receipts,
assignments, or other acquaintances that may be necessary in order to secure
the recovery of the rebates, and will pay over to Tenant any rebates that may
be received by Landlord. Tenant shall have the right to contest any Real
Property Tax payable by Tenant hereunder, provided that during any such
contest, (i) Tenant shall take any such action required to protect the
Project from a tax lien resulting from such contest, (ii) Tenant shall
promptly pay any Real Property Tax payable as a consequence of such contest,
and (iii) Tenant may not withhold payment of any Real Property Tax pending
completion of such contest.
12. ASSIGNMENT AND SUBLETTING: For the purpose of this Lease, the sale
of Tenant's capital stock, through any public exchange, shall not be deemed
an assignment, subletting, or any other transfer of the Lease or the Premises.
13. REASONABLE EXPENDITURES: Notwithstanding anything to the contrary
in the Lease, any expenditure by a party permitted or required under the
Lease, for which such party is entitled to demand and does demand
reimbursement from the other party, shall be limited to the fair market value
of the goods and services involved, shall be reasonably incurred, and shall
be substantiated by documentary evidence available for inspection and review
by the other party or its representative during normal business hours.
14. LANDLORD'S ENTRY OF PREMISES: Notwithstanding anything to the
contrary in the Lease any entry by Landlord and Landlord's Agents shall not
impair Tenant's operations more than reasonably necessary. During any such
entry, Landlord and Landlord's Agents shall at all times be accompanied by
Tenant and shall conform to Tenant's reasonable
<PAGE>
security requirements.
15. LANDLORD'S AUTHORITY TO EXECUTE: Landlord warrants and represents
to Tenant that Landlord has the full right, power and authority to enter into
this Lease and has obtained all necessary consents and approvals from its
partners, officers, board of directors or other members required under the
documents governing is affairs in order to consummate the Lease contemplated
hereby. The persons executing this Lease on behalf of Landlord have the full
right, power and authority so to do and affirm the foregoing warranty on
behalf of Landlord and on their own behalf.
16. OPTION TO EXTEND LEASE TERM: Landlord hereby grants to Tenant one
option to extend the Lease Term for a five (5) year term on the following
terms and conditions:
<PAGE>
Page Five
A. Tenant must give Landlord notice in writing of its exercise of
the option in question no earlier than one hundred eight (180) days and no
later than one hundred twenty (120) days before the date the Lease Term would
end but for said exercise.
B. Tenant may not extend the Lease Term pursuant to any option
granted by this paragraph if Tenant is materially in default beyond any
applicable cure period as of the date of exercise of the option in question
or as of the date this Lease would have been terminated but for said exercise.
C. All terms and conditions of this Lease shall apply during the
option period, except that the Base Monthly Rent for the option period shall
be determined as provided in Paragraph D.
D. The Base Monthly Rent for the Option Period shall be the
greater of (i) one hundred percent (100%) of the Base Monthly Rent due the
last month of the previous Lease Term, or (ii) one-hundred percent (100%) of
the then fair market monthly rent determined as of the commencement of the
option period in question based upon like buildings with like improvements in
the San Jose area within the boundaries of Highways 237,101 and 880. If the
parties are unable to agree upon the fair market monthly rent for the
Premises for the option period in question at least seventy-five (75) days
prior to the commencement of the option period in question, then the fair
market monthly rent shall be determined by appraisal conducted pursuant to
subparagraph E.
E. In the event it becomes necessary to determine by appraisal
the fair market rent of the Premises for the purpose of establishing the Base
Monthly Rent during the Option Period, then such fair market monthly rent
shall be determined by three (3) real estate appraisers, all of whom shall be
members of the American Institute of Real Estate Appraisers with not less
than five (5) years experience appraising real property (other than
residential or agricultural property) located in Santa Clara County,
California, in accordance with the following procedures:
(1) The party demanding an appraisal (the "Notifying Party")
shall notify the other party (the "Non-Notifying Party") thereof by
delivering a written demand for appraisal, which demand, to be effective,
must give the name, address, and qualifications of an appraiser selected by
the Notifying Party. Within ten (10) days of receipt of said demand, the
Non-Notifying Party shall select its appraiser and notify the Notifying
Party, in writing, of the name, address, and qualifications of an appraiser
selected by it. Failure by the Non-Notifying Party to select a qualified
appraiser within said ten (10) day period shall be deemed a waiver of its
right to select a second appraiser on its own behalf and the Notifying Party
shall select a second appraiser on behalf of the Non-Notifying Party within
five (5) days after the expiration of said ten (10) day period. Within ten
(10) days from the date the second appraiser shall have been appointed, the
two (2) appraisers so selected shall appoint a third appraiser. If the two
appraisers fail to select a third qualified appraiser, the third appraiser
shall be selected by the American Arbitrations Association or if it shall
refuse to perform this function, then at the request of either Landlord or
Tenant, such third appraiser shall be promptly appointed by the then
Presiding Judge of the Superior Court of the State of California for the
County of Santa Clara.
(2) The three (3) appraisers so selected shall meet in San
Jose, California, not later than twenty (20) days following the selection of
the third appraiser. At said meeting the appraisers so selected shall
attempt to determine the fair market monthly rent of the Premises for the
option period in question (including the timing and amount of periodic
increases).
(3) If the appraisers so selected are unable to complete
their determinations in one meeting, they may continue to consult at such
times as they deem necessary for a fifteen (15) day period from the date of
the first meeting, in an attempt to have at least two (2) of them agree. If,
at the initial meeting or at any time during said fifteen (15) day period,
two (2) or more of the appraisers so selected agree on the
<PAGE>
fair market rent of the Leased Premises, such agreement shall be
determinative and binding on the parties hereto, and the agreeing appraisers
shall, in simple letter form executed by the agreeing appraisers, forthwith
notify both Landlord and Tenant of the amount set by such agreement.
<PAGE>
Page Six
(4) If two (2) or more appraisers do not so agree within said
fifteen (15) day period, then each appraiser shall, within five (5) days
after the expiration of said fifteen (15) day period, submit his independent
appraisal in simple letter form to Landlord and Tenant stating his
determination of the fair market rent of the Premises for the option period
in question. The parties shall then determine the fair market rent for the
Premises by determining the average of the fair market rent set by each of
the appraisers. However, if the lowest appraisal is less than eighty-five
percent (85%) of the middle appraisal then such lowest appraisal shall be
disregarded and/or if the highest appraisal is greater than one hundred
fifteen percent (115%) of the middle appraisal then such highest appraisal
shall be disregarded. If the fair market rent set by any appraisal is so
disregarded, then the average shall be determined by computing the average
set by the other appraisals that have not been disregarded.
(5) Nothing contained herein shall prevent Landlord and
Tenant from jointly selecting a single appraiser to determine the fair market
rent of the Premises, in which event the determination of such appraisal
shall be conclusively deemed the fair market rent of the Premises.
(6) Each party shall bear the fees and expenses of the
appraiser selected by or for it, and the fees and expenses of the third
appraiser (or the joint appraiser if one joint appraiser is used) shall be
borne fifty percent (50%) by Landlord and fifty percent (50%) by Tenant.
17. AMORTIZATION OF LARGE EXPENSES: Any expenses of repair or
replacement of a single item which are the responsibility of Landlord under
the Lease, which Landlord has the right to pass through to Tenant as Common
Operating Expenses or other form of Additional Rent, and which exceed, on any
single item, the sum of $50,000.00, shall be amortized over a time period to
be selected in Landlord's sole discretion, to be exercised in good faith, and
shall be charged to Tenant as Common Operating Expenses on such an amortized
basis.
18. EXTERIOR PLATE GLASS: Notwithstanding anything to the contrary in
the Lease, Landlord shall be solely responsible to pay any necessary and
reasonable expenses of replacement of any exterior plate glass which breaks
as a direct result of a structural defect in the Building.
19. FAILURE TO INSURE: If a loss is not covered by insurance due to a
party's failure to obtain such insurance in breach of said party's
obligations under this Lease, then the party which should have been insured
shall have the benefit of the above release notwithstanding the lack of
insurance, but solely to the extent that said party would have been released
had the party with the duty to insure performed that duty.
20. DAMAGE TO PREMISES: If, because of damage to the Premises, Landlord
has the right to terminate the Lease (a) under Paragraph 11.2A of this Lease,
or (b) under Paragraph II. 2D (I) of this Lease solely on the ground that the
cost of restoration are not reasonable within the meaning of said Paragraph
11.2D(I); then in either case Tenant shall have the option to avoid such
termination and have the Lease continue if Tenant fulfills the conditions set
forth in this Paragraph. The option shall be exercised by written notice to
Landlord that Tenant will pay for all of the costs and expenses of said
restoration to the extent that same are not covered and paid by insurance.
Such notice must be given within ten (10) days after Landlord has given
Tenant notice of termination under such Paragraphs, and if such notice is not
given within the specified time, such option shall be of no further force or
effect. If Tenant exercised such an option, then Landlord shall give Tenant
written notice of Landlord's estimate of (a) the costs and expenses of
restoration, and (b) the Landlord's anticipated insurance proceeds, if any.
Within thirty (30) days of Tenant's receipt of this notice, Tenant shall
deposit with
<PAGE>
Landlord the amount of the difference stated in Landlord's written estimate
between Landlord's insurance proceeds and the costs and expenses of
restoration. If Tenant does not deposit such funds within the specified
time, then Landlord's notice of termination shall be deemed valid as
originally given, and Tenant's exercise of the option granted in this
Paragraph shall be null and void. When the Premises have been rebuilt,
Landlord shall account to Tenant for the actual costs and expenses of
rebuilding and the actual insurance proceeds. Within thirty (30) days of
Landlord's accounting, Tenant shall pay to Landlord any further sum necessary
to fully reimburse Landlord for the difference between its actually recovered
insurance proceeds and its actual costs of construction, or Landlord shall
reimburse the Tenant for any amount paid by Tenant in excess of the
difference between Landlord's actually recovered insurance proceeds and its
actual costs of construction, as the case may be
<PAGE>
Page Seven
21. QUIET POSSESSION: Tenant's right to quiet possession of the
Premises shall not be disturbed so long as Tenant is not in default and
performs all of its obligations under this Lease, unless this Lease is
otherwise terminated pursuant to its terms.
22. HAZARDOUS MATERIALS: No expenses of investigating, responding to,
or removing Hazardous Materials from the Property shall be recoverable by
Landlord from Tenant, as a Common Operating Expense or otherwise, if Tenant
shows by clear and convincing evidence that (a) the expenses were incurred as
a result of contamination caused solely by one of the other tenants of the
Property; or (b) the expenses were incurred because of contamination of the
Property which took place before the earlier of Tenant's first date of
occupancy of the Premises or the Commencement Date. In the event of
contamination of the Property with Hazardous Materials which is not caused by
Tenant or its Agents, but as to which Tenant is not exculpated under (a) and
(b) above, Tenant shall be liable for all of the expenses for any
contamination, release, or spill which takes place within the Premises, but
Tenant shall be liable only for Tenant's Share of such expenses for such
contamination which takes place outside the Premises.
LANDLORD: TENANT:
SAN JOSE ACQUISITION CO., L.L.C. QUICKTURN DESIGN SYSTEMS, INC.
A DELAWARE LIMITED LIABILITY COMPANY A DELAWARE CORPORATION
BY: ARGO PARTNERSHIP, L.P.,
ITS GENERAL PARTNER BY: /s/ Ray Ostby
RAY OSTBY
BY: ARGO MANAGEMENT COMPANY, L.P.
ITS GENERAL PARTNER TITLE: CHIEF FINANCIAL OFFICER
BY: O'CONNER CAPITAL PARTNERS, L.P.,
ITS GENERAL PARTNER DATE: 12/16/96
BY: 0'CONNER CAPITAL INCORPORATED,
ITS GENERAL PARTNER
BY: /s/ K. J. Artingstall
K. J. ARTINGSTALL
VICE PRESIDENT
BY: ARGO PARTNERSHIP II, L.P.,
ITS MANAGER
BY: ARGO II MANAGEMENT COMPANY, L.P.,
ITS GENERAL PARTNER
BY: O'CONNER CAPITAL PARTNERS II, L.P.,
ITS GENERAL PARTNER
BY: O'CONNER CAPITAL II INCORPORATED
ITS GENERAL PARTNER
BY: /s/ K. J. Artingstall
K. J. ARTINGSTALL
VICE PRESIDENT
DATE: 12/18/96
<PAGE>
SITE PLAN
EXHIBIT A
[Graphical representation of site plan of leased premises located at
2610 Orchard Parkway and 55 W. Trimble Road, San Jose, CA 95131-1013.]
<PAGE>
EXHIBIT B
INTERIOR IMPROVEMENT AGREEMENT
THIS IMPROVEMENT AGREEMENT is made part of that Lease dated December 6,
1996, (the "Lease") by and between SAN JOSE ACQUISITION CO., L.L.C.,
("Landlord"), and QUICKTURN DESIGN SYSTEMS, INC. ("Tenant"). Landlord and
Tenant agree that the following terms are part of the Lease:
1. PURPOSE OF IMPROVEMENT AGREEMENT: The purpose of this Improvement
Agreement is to set forth the rights and obligations of Landlord and Tenant
with respect to the construction of Interior Improvements within the Premises
prior to the Commencement Date.
2. DEFINITIONS: As used in this Interior Improvement Agreement, the
following terms shall have the following meanings, and terms which are not
defined below, but which are defined in the Lease and which are used in this
Interior Improvement Agreement, shall have the meanings ascribed to them by
the Lease:
A. APPROVED SPECIFICATIONS: The term "Approved Specifications"
shall mean those specifications for the Interior Improvements to be
constructed by Landlord which are described by Exhibit "C" to the Lease.
B. ARCHITECT: Design and Engineering Systems.
C. INTERIOR IMPROVEMENTS: The term "Interior Improvements" shall
mean all interior improvements to be constructed by Landlord in accordance
with the Approved Specifications (e.g., HVAC equipment and distribution,
transformer and power distribution, partitions, floor, wall, and window
covering, lighting fixtures), whether within or outside the exterior Premise
walls.
D. INTERIOR IMPROVEMENT COSTS: The term "Interior Improvement
Costs" shall mean the following: (i) the total amount due pursuant to the
general construction contract entered into by Landlord to construct the
Interior Improvements; (ii) the cost of all governmental approvals required
as a condition to the construction of the Interior Improvements (including
all construction taxes imposed by the City of San Jose) in connection with
the issuance of a building permit for the Interior Improvements; (iii) all
utility connection or use fees; (iv) fees of Architect or engineers for
services rendered in connection with the design and construction of the
Interior Improvements; and (v) the cost of payment and performance bonds
obtained by Landlord or Prime Contractor to assure completion of the Interior
Improvement. Notwithstanding the foregoing, in no event shall Interior
Improvement Costs include, and Landlord shall be solely responsible to pay:
(1) costs for which Landlord actually recovers from a third party (e.g.,
insurers, warrantors, tortfeasors), (2) cost for any work not shown on the
Final Interior Improvement Plans as the same may be modified by Change Orders
approved in writing by Tenant, or (3) construction management fees on that
portion of the Interior Improvement Costs paid out of any portion of the
Total Tenant Improvement Allowance. However, Landlord may charge a
construction management fee, not to exceed 3%, on any Tenant contribution to
the payment of Interior Improvement Costs. The parties acknowledge that the
City of San Jose imposes certain taxes as a condition to the issuance of
building permits in certain circumstances, including the "Building and
Structure Construction Tax" imposed by Chapter 4.46 of the City of San Jose
Municipal Code (the "BSC Tax") and the "Commercial-Residential-Mobile Home
Park Building Tax" imposed by Chapter 4.47 of the City of San Jose Municipal
Code (the "CRM Tax"). The parties further acknowledge that the rate for
these two taxes is higher for a structure designed or intended to be used for
"industrial purposes". However, the parties acknowledge and agree that (i)
an
<PAGE>
additional BSC Tax will be due upon the issuance of a building permit for all
Interior Improvements if the City of San Jose determines that the Interior
Improvements are intended for "industrial purposes" or (ii) a BSC Tax and a
CRM Tax based on the value of the Interior Improvements, plus an additional
BSC Tax and a CRM Tax based on the value of the shell, will be due if the
City of San Jose determines that the Building is intended for "commercial
purposes", and (iii) any of such taxes that must be paid in order to obtain
building permits for the Interior Improvements shall be "Interior Improvement
Costs".
E. SUBSTANTIAL COMPLETION AND SUBSTANTIALLY COMPLETE: The terms
"Substantial Completion" and "Substantially Complete" shall each mean the
date when all the
EXHIBIT B
<PAGE>
Page Two
following have occurred with respect to the Interior Improvements in
question: (i) the construction of the Interior Improvements in question has
been substantially completed in accordance with the requirements of this
Lease, except for Punchlist items which do not unreasonably interfere with
Tenant's use of the Premises for Tenant's intended purpose; (ii) the
Architect responsible for preparing the plans shall have executed a
certificate or statement representing that the Interior Improvements in
question have been substantially completed in accordance with the plans and
specifications therefor; and (iii) the Building Department of the City of San
Jose or any other approvals required by applicable Law has completed its
final inspection of such improvements and has "signed off' the building
inspection card approving such work as complete.
3. SCHEDULE OF PERFORMANCE: Set forth in this paragraph is a schedule
of certain critical dates relating to Landlord's and Tenant's respective
obligations regarding the construction of the Interior Improvements (the
"Schedule of Performance"). Landlord and Tenant shall each be obligated to
use reasonable efforts to perform their respective obligations within the
time periods set forth in the Schedule of Performance and elsewhere in this
Interior Improvement Agreement. The Schedule of Performance is as follows:
Action Responsible
Items Due Date Party
---------- -------- ------------
A. Delivery to March 1, 1997 Tenant
Landlord of
Tenant's
Interior
Requirements
B. Delivery to Within ten (10) business days Landlord
Tenant of after delivery to Landlord of
Preliminary conceptual plans for the Interior
Interior Improvements.
Improvement
Plans
C. Approval by Within five (5) business Tenant
Tenant of days after Tenant receives
Preliminary Preliminary Interior Plans.
Interior
Plans
D. Delivery to Within fifteen (15) business Landlord
Tenant of days after approval of the.
Final Preliminary Interior Plans
Interior
Plans
E. Approval by Within two (2) business days after Tenant
Tenant of Tenant receives Final Interior Plans
Final
Interior
Plans
F. Commence- Within five (5) days after Landlord
ment of issuance of all necessary
construction governmental approvals
of Interior
Improvement
<PAGE>
Page Three
G. Substantial Within sixty (60) days after Landlord
Completion issuance of building permit for
of Interior the Interior Improvements, subject
Improvements to any delay for specialized
improvements or long lead items.
4. CONSTRUCTION OF INTERIOR IMPROVEMENTS: Landlord shall construct the
Interior Improvements in accordance with the following:
A. DEVELOPMENT AND APPROVAL OF PRELIMINARY INTERIOR PLANS: On or
before the due date specified in the Schedule of Performance, Tenant shall
deliver to Landlord a proposed floor plan identifying its requirements for
the Interior Improvements that is consistent with the Approved Specifications
("Tenant's Interior Requirements"). On or before the due date specified in
the Schedule of Performance, Landlord shall and deliver to Tenant for its
review and approval preliminary plans for the Interior Improvements which are
consistent with and conform to Tenant's Interior Requirements and the
Approved Specifications (the "Preliminary Interior Plans"). On or before the
due date specified in the Schedule of Performance, Tenant shall either
approve such plans or notify Landlord in writing of its specific objections
to the Preliminary Interior Plans. If Tenant so objects, Landlord shall
revise the Preliminary Interior Plans to address such objections in a manner
consistent with the parameters for the Interior Improvements set forth in
this Improvement Agreement and the Approved Specifications and shall resubmit
such revised Preliminary Interior Plans as soon as reasonably practicable to
Tenant for its approval. When such revised Preliminary Interior Plans are
resubmitted to Tenant, it shall either approve such plans or notify Landlord
of any further objections in writing within two (2) business days after
receipt thereof. If Tenant has further objections to the revised Preliminary
Interior Plans, the parties shall meet and confer to develop Preliminary
Interior Plans that are acceptable to both Landlord and Tenant within five
(5) business days after Tenant has notified Landlord of its second set of
objections. In the event Tenant and Landlord do not resolve all of Tenant's
objections within such five (5) business day period, Landlord and Tenant
shall immediately cause Landlord's Architect to meet and confer with Tenant's
architect or construction consultant, who shall apply the standards set forth
in this Improvement Agreement to resolve Tenant's objections and incorporate
such resolution into the Preliminary Interior Plans, which process Landlord
and Tenant shall cause to be completed within five (5) business days after
the conclusion of the five (5) business day period referred to in the
immediately preceding sentence.
B. DEVELOPMENT AND APPROVAL OF FINAL INTERIOR PLANS: Once the
Preliminary Interior Plans have been approved by Landlord and Tenant
(including all changes made to resolve Tenant's objections approved by
Landlord's Architect and Tenant's representative or construction consultant
pursuant to subparagraph 4A), Landlord shall complete and submit to Tenant
for its approval final working drawings for the Interior Improvements by the
due date specified in the Schedule of Performance. Tenant shall approve the
final plans for the Interior Improvements or notify Landlord in writing of
its specific objections by the due date specified in the Schedule of
Performance. If Tenant so objects, the parties shall confer and reach
agreement upon final working drawings for the Interior Improvements within
five (5) business days after Tenant has notified Landlord of its objections.
In the event Tenant and Landlord do not resolve all of Tenant's objections
within such five (5) business day period, Landlord and Tenant shall
immediately cause the Architect to meet and confer with Tenant's
representative or construction consultant, who shall apply the standards set
forth in the Improvement Agreement to resolve Tenant's objections and
incorporate such resolution into the Final Interior Plans, which process
Landlord and Tenant shall cause to be completed within five (5) business days
after the conclusion of the five (5) business day period referred to in the
immediately preceding sentence. The final working drawings so approved by
Landlord and Tenant (including all changes made to resolve Tenant's
objections approved by the Architect and Tenant's representative or
construction consultant) are referred to herein
<PAGE>
as the "Final Interior Plans".
C. STANDARD FOR CONSENT: Landlord's and Tenant's approval of the
Tenant Interior Requirements, the Preliminary Interior Plans, the Final
Interior Plans, the Final Improvement Cost Budget, and any modifications
thereto or to the Schedule of Performance shall not be unreasonably withheld
or delayed, provided, however, that:
<PAGE>
Page Four
1. Landlord may withhold its approval in its sole discretion
to any work, which adversely affects the building structure, roof or building
service equipment, is visible from the exterior of the premises and is not
aesthetically in keeping with the Project, and
2. Tenant may withhold is approval in its sole discretion to
any work, which causes the Final Improvement Cost Budget to exceed the Total
Landlord's Allowance by more than $50,000.00, delays the expected Substantial
Completion Date more than 60 days, or modifies the Interior Improvements
within the demising wall of the Premises.
Any disapproval by Landlord or Tenant shall be accompanied by a written
statement of the disapproved item, the reasons for disapproval, and the
specific changes required to make the item acceptable. If a party's written
notice of disapproval is not delivered in accordance with the time limits and
standards set forth in this Agreement, such disapproval shall be deemed not
given.
D. BUILDING PERMIT: As soon as the Final Interior Plans have been
approved by Landlord and Tenant, Landlord shall apply for a building permit
for the Interior Improvements, and shall diligently prosecute to completion
such approval process.
E. CONSTRUCTION CONTRACT: Landlord and Tenant shall cooperate to
cause the Interior Improvements to be constructed by a general contractor who
is engaged by Landlord in accordance with the procedures set forth in
subparagraph 4D(1) hereof.
(1) The job of constructing the Interior Improvements shall
be offered for "competitive bid", on a fixed price basis, to three (3)
general contractors selected by Landlord and approved by Tenant. The
construction contract in form reasonably acceptable to Tenant shall be
awarded to the bidder submitting the lowest bid for the job. Landlord shall
submit to Tenant a list of general contractors acceptable to Landlord to whom
the job may be bid, and Tenant shall notify Landlord within three (3)
business days after receipt of such list of its objection to any proposed
contractor. Tenant's failure to object within such period of time shall be
deemed to be its approval of all bidders on the list so submitted by
Landlord. If the lowest bid resulting from such competitive bidding process
indicates that the Interior Improvement Costs will exceed $1,020,705.00
Dollars ($7.00 per gross leasable square foot of the Premises), Landlord
shall promptly notify Tenant, in writing, to that effect, and Tenant shall
have the right to propose modifications to the Final Interior Plans within
five (5) business days after Tenant's receipt of Landlord's notice, subject
to Landlord's approval of such changes, for the purpose of reducing the
Interior Improvement Costs. Such revision of the final Interior Plans shall
be completed as expeditiously as possible; provided, however, that (i) the
job shall nonetheless be awarded to the low bidder whose price shall be
adjusted based upon the changes requested by Tenant and approved by Landlord
made to the Final Interior Plans; and (ii) if Tenant should choose to
exercise its right to modify the final Interior Plans for the purpose of
reducing the Interior Improvement costs, any delay resulting from the failure
by Tenant to timely exercise its right to do so shall be a delay caused by
Tenant for purposes of paragraph 7 hereof.
(2) Landlord and Tenant shall use their best efforts to
approve the general contractor and all subcontractors all major material
suppliers and the form of contract for such parties so that the construction
contract may be executed as soon as possible.
F. COMMENCEMENT OF INTERIOR IMPROVEMENTS: On or before the due
date specified in the Schedule of Performance, Landlord shall commence
construction for the Interior Improvements and shall diligently prosecute
such construction to completion, using all reasonable efforts to achieve
Substantial Completion of the Interior
<PAGE>
Improvements by the due date specified in the Schedule of Performance.
5. PAYMENT OF INTERIOR IMPROVEMENT COSTS: Landlord and Tenant shall
have the following obligations with respect to the payment of Interior
Improvement Costs:
A. Landlord shall be obligated to pay an amount equal to the
Tenant Improvement Allowance (including the First Level Tenant Improvement
Allowance and so much of the Second Level Tenant Improvement Allowance as
Tenant shall elect to utilize) as provided for in Paragraph 1 of the First
Addendum To Lease for the Payment of Interior Improvement costs. If the
total of Interior Improvement Costs exceeds the amount of Landlord's
required
<PAGE>
Page Five
contribution, Tenant shall be obligated to pay the entire amount of such
excess either in cash or, if the Second Level Tenant Improvement Allowance
has not been depleted, from such portion of the Second Level Tenant
Improvement Allowance as Tenant shall elect to utilize. In the event that
Tenant elects to utilize all or a portion of the Second Level Tenant
Improvement Allowance for these purposes, then the Base Monthly Rent shall be
increased as provided for in Paragraph 2 of the First Addendum to Lease. In
no event shall Landlord be obligated to pay for Interior Improvement Costs in
excess of the allowances provided for in Paragraph 1 of the First Addendum To
Lease. If Tenant becomes obligated to contribute toward paying Interior
Improvement Costs pursuant to this subparagraph 5A, then Landlord shall
estimate the amount of such excess prior to commencing construction of the
Interior Improvements and Tenant shall pay to Landlord a proportionate share
of each progress payment due to the general contractor which bears the same
relationship to the total amount of the progress payment in question as the
amount Tenant is obligated to contribute to the payment of Interior
Improvement Costs bears to the total estimated Interior Improvement Costs
approved by Tenant at the time the final Improvement Plans are approved.
Tenant shall pay Tenant's share of any progress payment to Landlord within
five (5) business days after receipt of a statement therefor from landlord.
At the time the final accounting is rendered by Landlord pursuant to
subparagraph 5C hereof, there shall be an adjustment between Landlord and
Tenant such that each shall only be required to contribute to the payment of
Interior Improvement Costs in accordance with the obligations set forth in
this subparagraph 5A, which adjustment shall be made within five (5) days
after Landlord notifies Tenant of the required adjustment. If Tenant is
required to make a payment to Landlord, Tenant shall make such payment even
if Tenant elects to audit the statement submitted by Landlord pursuant to
subparagraph 5C. In the event Tenant's audit discloses that an overpayment
or underpayment was made by Tenant, there shall be an adjustment between
Landlord and Tenant as soon as reasonably practicable such that each shall
only be required to contribute to the payment of costs in accordance with the
obligations set forth in this subparagraph 5A.
B. If Tenant fails to pay any amount when due pursuant to this
paragraph 5, then (i) Landlord may (but without the obligation to do so)
advance such funds on Tenant's behalf, and Tenant shall be obligated to
reimburse Landlord for the amount of funds so advanced on its behalf, and
(ii) Tenant shall be liable for the payment of a late charge and interest in
the same manner as if Tenant had failed to pay Base Monthly Rent when due as
described in paragraph 3.4 of the Lease. Any amounts paid to Landlord by
Tenant pursuant to this subparagraph shall be held by Landlord as Tenant's
agent, for disbursal to the general contractor in payment for work costing in
excess of Landlord's required contribution.
C. When the Interior Improvements are Substantially Completed,
Landlord shall submit to Tenant a final and detailed accounting of all
Interior Improvement Costs paid by Landlord, certified as true and correct by
Landlord's financial officers. Tenant shall have the right to audit the
books, records, and supporting documents of Landlord to the extent necessary
to determine the accuracy of such accounting during normal business hours
after giving Landlord at least two (2) days prior written notice. Tenant
shall bear the cost of such audit, unless such audit discloses that Landlord
has overstated the total of such costs by more than two percent (2%) of the
actual amount of such costs, in which event Landlord shall pay the cost of
Tenant's audit. Any such audit must be conducted, if at all, within ninety
(90) days after Landlord delivers such accounting to Tenant.
6. CHANGES TO APPROVED PLANS: Once the Final Interior Plans have been
approved by Landlord and Tenant, neither shall have the right to order extra
work or change orders with respect to the construction of the Interior
Improvements without the prior written consent of the other which consent
shall be given or withheld in accordance with Section 4.C above. All extra
work or change orders requested by either Landlord or Tenant shall be made in
writing, shall specify any added or reduced cost and/or construction time
resulting therefrom, and shall become effective and a part of the Final
Interior Plans
<PAGE>
once approved in writing by both parties. If a change order requested by
Tenant results in an increase in the cost of constructing the Interior
Improvements, Tenant shall pay the amount of such increase caused by the
change order requested by Tenant at the time the change order is approved by
both Landlord and Tenant if and to the extent such change order causes the
Interior Improvement Costs to exceed Landlord's required contribution thereto
described in subparagraph 5A. If a change order results in an
<PAGE>
Page Six
increase in the amount of construction time needed by Landlord to complete
the Interior Improvements, paragraph 7 hereof may apply.
7. DELIVERY OF POSSESSION AND PUNCH LIST AGREEMENT: As soon as the
Interior Improvements are Substantially Completed, Landlord and Tenant shall
together walk through the Premises and inspect all Interior Improvements so
completed, using reasonable efforts to discover all uncompleted or defective
construction in the Interior Improvements. After such inspection has been
completed, each party shall sign an punch list agreement in the form attached
to the Lease as EXHIBIT "D", which shall include a list of all "punch list"
items which the parties agree are to be corrected by Landlord. As soon as
such inspection has been completed and such agreement executed, Landlord
shall use reasonable efforts to complete and/or repair such "punch list"
items within thirty (30) days after executing the punch list agreement.
Tenant's taking possession of any part of the Premises shall be deemed to be
an acceptance by Tenant of Landlord's work of improvement in such part as
complete and in accordance with the terms of the Lease except for the punch
list items noted and latent defects that could not reasonable have been
discovered by Tenant during its inspection of the Interior Improvements prior
to completion of the punch list agreement. Notwithstanding anything
contained herein, Tenant's obligation to pay the Base Monthly Rent and
Additional Rent shall commence as provided in the Lease, regardless of
whether Tenant completes such inspection or executes such punch list
agreement.
8. STANDARD OF CONSTRUCTION AND WARRANTY: Landlord hereby warrants
that the Interior Improvements shall be constructed in accordance with the
Final Interior Plans (as modified by change orders approved by Landlord and
Tenant), all Private Restrictions and all Laws, in a good and workmanlike
manner, and all materials and equipment furnished shall conform to such final
plans and shall be new and otherwise of good quality. The foregoing warranty
shall be subject to, and limited by, the following:
A. Once Landlord is notified in writing of any breach of the
above-described warranty, Landlord shall promptly commence the cure of such
breach and complete such cure with diligence at Landlord's sole cost and
expense.
B. Landlord's liability pursuant to such warranty shall be
limited to the cost of correcting the defect or other matter in question. In
no event shall Landlord be liable to Tenant for any damages or liability
incurred by Tenant as a result of such defect or other matter, including
without limitation damages resulting from any loss of business by Tenant or
other consequential damages, provided Landlord promptly commences and
diligently completes the cure of the breach of warranty after the delivery of
written notice of the need for cure to Landlord.
C. Notwithstanding anything contained herein, Landlord shall not
be liable for any defect in design, construction, or equipment furnished
which is discovered and of which Landlord receives written notice from Tenant
after the first (1st) anniversary of the recordation of a notice of
completion for the work of improvement affected by the defect.
D. With respect to defects for which Landlord is not responsible
pursuant to this Lease or with respect to repairs for which Landlord is
responsible hereunder, but which Landlord fails to complete within thirty
(30) days (or such longer time as is reasonably required to complete the
repair) following delivery to Landlord of notice of the need for repairs,
Tenant shall have the benefit of any construction or equipment warranties
existing in favor of Landlord that would assist Tenant in correcting such
defect and in discharging its obligations regarding the repair and
maintenance of the Premises. Upon request by Tenant, Landlord shall inform
Tenant of all written construction and equipment warranties existing in favor
of Landlord which affect the Interior Improvements. Landlord shall cooperate
with Tenant in enforcing such warranties
<PAGE>
and in bringing any suit that may be necessary to enforce liability with
regard to any defect for which Landlord is not responsible pursuant to this
paragraph so long as Tenant pays all costs reasonably incurred by Landlord in
so acting.
E. Landlord makes no other express or implied warranty with
respect to the design, construction or operation of the Interior Improvements
except as set that forth in this Lease.
<PAGE>
Page Seven
F. EFFECT OF ACCEPTANCE OF INTERIOR IMPROVEMENTS: Notwithstanding
anything to the contrary in the Lease or this Improvement Agreement, Tenant's
acceptance of the Interior Improvements shall not waive the foregoing
warranty.
9. EFFECT OF AGREEMENT: In the event of any inconsistency between this
Improvement Agreement and the Lease, the terms of this Improvement Agreement
shall prevail.
LANDLORD: TENANT:
SAN JOSE ACQUISITION CO., L.L.C. QUICKTURN DESIGN SYSTEMS, INC.
A DELAWARE LIMITED LIABILITY COMPANY A DELAWARE CORPORATION
BY: ARGO PARTNERSHIP, L.P.,
ITS GENERAL PARTNER BY: /s/ Ray Ostby
RAY OSTBY
BY: ARGO MANAGEMENT COMPANY, L.P.
ITS GENERAL PARTNER TITLE: CHIEF FINANCIAL OFFICER
BY: O'CONNER CAPITAL PARTNERS, L.P.,
ITS GENERAL PARTNER DATE: 12/16/96
BY: O'CONNER CAPITAL INCORPORATED,
ITS GENERAL PARTNER
BY: /s/ K. J. Artingstall
K. J. ARTINGSTALL
VICE PRESIDENT
BY: ARGO PARTNERSHIP II, L.P.,
ITS MANAGER
BY: ARGO II MANAGEMENT COMPANY, L.P.,
ITS GENERAL PARTNER
BY: 0'CONNER CAPITAL PARTNERS II, L.P.,
ITS GENERAL PARTNER
BY: O'CONNER CAPITAL II INCORPORATED
ITS GENERAL PARTNER
BY: /s/ K. J. Artingstall
K. J. ARTINGSTALL
VICE PRESIDENT
DATE: 12/18/96
<PAGE>
EXHIBIT "C"
APPROVED SPECIFICATIONS
(To be attached at a later date)
Multi-Tenant Net Industrial
EXHIBIT C
<PAGE>
PUNCH LIST
Tenant: Page: Of
Address: Job No.:
Contractor:
Walk-thru Date: Time:
Room Description Compl. App.
No./Name of Work Item Date By
Orchard: Date:
Tenant Date:
Contractor: Date:
Completion Approved: Date:
EXHIBIT D
<PAGE>
SANTA CLARA COUNTY TITLE CO.
636 NO. FIRST ST.
SAN JOSE CA 95112
DECLARATION OF COVENANTS, CONDITIONS
AND RESTRICTIONS OF THE
ORCHARD TECHNOLOGY PARK
THIS DECLARATION is made on June 12 1978, by NEW ENGLAND MUTUAL LIFE
INSURANCE COMPANY, a Massachusetts corporation (hereinafter called
"Declarant") as owner of that certain real property situated in the City of
San Jose, County of Santa Clara, State of California described in Exhibit "A"
hereto which exhibit is by this reference incorporated herein as if fully set
forth herein.
ARTICLE 1
DEFINITIONS
1.1 Unless the context otherwise specifies or requires, the terms
defined in this Article shall, for all purposes of this Declaration, have the
meanings herein specified.
1.2 ARCHITECT: The term "Architect" shall mean a person holding a
certificate to practice architecture in the State of California under
authority of the Business and Professions Code of the State of California.
1.3 DECLARATION: The term "Declaration" shall mean this Declaration of
Covenants, Conditions and Restrictions.
1.4 DEED OF TRUST: The term "Deed of Trust" or "Trust Deed" shall mean
a mortgage as well as a deed of trust.
1.5 APPROVING AGENT: The term "Approving Agent" shall mean, in the
following order or precedence:
A. NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY, a Massachusetts
corporation whose present address is 501 Boylston Street, Boston,
Massachusetts, (hereinafter referred to as "New England"), shall be the
Approving Agent until New England shall have resigned as Approving Agent by
executing a written resignation and causing an original of same to be
recorded, and by giving written notice of such resignation to each Owner of
record, as shown on the most recent county assessor's roll, of real property
then subject to this Declaration; provided, New England may delegate its
duties and rights as Approving Agent to a third party (the "Appointed
Approving Agent") selected by New England, in New England's sole discretion,
including without limitation Orchard Properties, a California corporation
("Orchard") by executing a written assignment, which shall have been accepted
in writing by such Appointed Approving Agent, and causing an original of such
assignment to be recorded and by giving written notice of such Assignment to
each Owner of record as shown an the most recent county assessor's roll, of
real property then subject to this Declaration, in which event such Appointed
Approving Account shall be the Approving Agent until the first to occur of
(1) such Appointed Approving Agent shall have resigned as Approving Agent by
executing a written resignation
EXHIBIT E
<PAGE>
and causing an original of same to be recorded and by giving written notice
of such resignation to each owner of record, as shown on the most recent
county assessor's roll, of real property then subject to this Declaration or
(ii) Now England shall have removed such Appointed Approving Agent by
delivering a "Notice of Removal" to the Appointed Approving Agent and causing
an original of same to be recorded and by giving written notice of such
removal to each owner of record, as shown on the most recent county
assessor's roll, of real property then subject to this Declaration; provided,
that in the event of such a resignation or removal of an Appointed Approving
Agent, New England shall once again become Approving Agent with the right and
power to appoint another Appointed Approving Agent, an herein a set forth.
B. If at any time during which Now England shall serve as
Approving Agent, or shall re-acquire the right to so serve pursuant to
subparagraph A above, any corporation, association or trust controlled by New
England or with which New England has been merged or consolidated or by which
New England has been acquired, is certified of record by New England
(hereinafter referred to as "New England's Successor") then New England's
Successor shall be the Approving Agent provided it has been granted of record
by New England the exclusive right to act as Approving Agent pursuant to this
Declaration, in which event New England's Successor shall be the Approving
Agent until New England's successor shall have resigned an Approving Agent by
executing a written resignation and causing an original of same to be
recorded, and by giving written notice of such resignation to each Owner of
record, as shown on the most recent county assessor's roll, of real property
then subject to this Declaration; and thereafter,
C. Any association (whether or not incorporated) organized by the
owners of sixty six and two-thirds percent (66-2/3%) of the land area
(exclusive of portions dedicated to a public agency or authority for a public
use) then subject to this Declaration for the purpose of acting as and
assuming the functions of an Approving Agent, in which membership is
available to all Owners and decisions are made on the basis of majority vote
with one vote assigned for each square foot of land owned by each Owner, but
only if the Owners organizing such association within not less than six (6)
months from the date that New England or New England's Successor, as the case
may be shall have ceased to be the Approving Agent, shall have (i) organized
such association and (ii) executed and recorded a statement in the form of an
amendment to this Declaration as described in Paragraph 8.2 Setting forth
that such organization has been formed for the purpose of acting as Approving
Agent pursuant to this Declaration and (iii) shall have, given written notice
to
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all owners of record of real property then subject to this Declaration that
such association has been formed; and
D. If New England, Orchard or New England's Successor, as the
case may be, shall cease to be the Approving Agent and no organization is
formed pursuant to Paragraph 1.5B satisfying all the conditions precedent
contained therein within the specified time period, there shall be no
Approving Agent for the remainder of the life of this Declaration.
1.6 STRUCTURES: The term "structure(s)" shall include all structures,
buildings, outbuildings, sheds, fences and screening walls over three (3)
feet in height, barriers or retaining walls.
1.7 MORTGAGEE: The term "Mortgagee" shall mean a beneficiary under or a
holder of a Deed of Trust as well as a mortgagee under a mortgage,
1.8 THE ORCHARD TECHNOLOGY PARK: The term "The Orchard Technology Park"
shall mean all of the real property described in Exhibit "A" hereto.
1.9 RESTRICTIONS: The term "Restrictions" shall mean the Covenants,
Conditions and Restrictions set forth in this Declaration, as it may from
time to time be amended, or supplemented.
1.10 OWNER: The term "Owner" shall mean and refer to any person owning a
fee estate in the land, or any portion thereof, contained within the Orchard
Technology Park, but excluding either (a) any person who holds such interest
as security for the payment of an obligation or (b) any person holding a
leasehold estate.
1.11 RECORD, RECORDED: the terms "record" or "recorded" shall mean, with
respect to any document, the recordation of said document in the office of
the County Recorder of the County of Santa Clara, State of California.
1.12 SIGN: The term "sign" shall mean any structures device or
contrivance, electric or non-electric, and all parts thereof which are
erected or used for advertising purposes upon or within which any poster,
bill, bulletin, printing, lettering, painting, device or other advertising of
any kind whatsoever is used, placed, posted or otherwise fastened or affixed
to ground or structures.
1.13 STREETS: The term "street(s)" shall mean any publicly dedicated
street highway, or other publicly dedicated thoroughfare within or adjacent to
the Orchard Technology Park and shown on any recorded subdivision or parcel map,
or record of survey, whether designated thereon as a publicly dedicated street,
boulevard, place, drive, road, terrace, way, lane, circle or court,
1.14 VISIBLE FROM NEIGHBORING PROPERTY: The term "visible from
neighboring property" shall mean, with respect to any given object, that such
object is or would be visible
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to a person six (6) feet tall having 20/20 vision and standing on any part of
such neighboring property at an elevation no greater than the elevation of
the base of the object being viewed.
1.15 PERSON: The term "person" shall mean an individual, group of
individuals, corporation, partnership, trust, unincorporated business
association or such other legal entity as the context in which such term is
used may imply.
1.16 LOT: The term "lot" shall mean any parcel of land contained within
the Orchard Technology Park as divided or subdivided on subdivision or parcel
map(s) recorded in the official records of the Recorder of Santa Clara
County, California, as they from time to time become currents.
1.17 FRONT: The term "front" shall mean, with respect to any structure,
any wall facing a street.
ARTICLE 2
PROPERTY SUBJECT TO THE
ORCHARD TECHNOLOGY PARK RESTRICTIONS
2.1 GENERAL DECLARATION CREATING THE MUTUAL RESTRICTIONS: Declarant
hereby declares that all of the real property located in the County of Santa
Clara, State of California as described in Exhibit "A", which exhibit is
attached hereto and incorporated herein by this reference, (sometimes
hereinafter called the "Orchard Technology Park") is and shall be, conveyed,
hypothecated, encumbered, leased, occupied, built upon or otherwise used,
improved or transferred, in whole or in part, subject to the Restrictions and
that all of said Restrictions, and all the covenants, conditions and
agreements herein contained are declared and agreed to be in furtherance of a
general plan for the subdivision, improvement and sale of said real property
and are established for the purpose of enhancing and perfecting the value,
desirability, and attractiveness of said real property and every part
thereof. Declarant further declares that (a) that the Restrictions and each
of the covenants, conditions and agreements herein contained are made for the
direct, mutual and reciprocal benefit of each and every lot contained within
the orchard Technology Park and that such Restrictions are and shall be
mutual equitable servitudes burdening each lot for the benefit of all other
lots within the Orchard Technology Park and (b) the Restrictions and each of
the covenants, conditions and agreements herein contained shall be "covenants
running with the land" burdening each lot within the Orchard Technology Park
for the benefit of all other lots within the Orchard Technology Park, the
burdens of which shall be binding upon each Owner, lessee, licensee, occupant
or user of each lot within the Orchard Technology Park, his successors and
assigns, for the benefit of each owner of all other lots within the Orchard
Technology Park, his successors and assigns.
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ARTICLE 3
---------
APPROVAL OF PLANS FOR STRUCTURES
3.1 APPROVAL REQUIRED: So long as there is a then serving Approving Agent,
no structure shall be erected, placed, constructed, substantially remodeled,
rebuilt or reconstructed on any land subject to this Declaration until the
following procedures have been fully complied with and the Approving Agent has
approved in writing the Preliminary Plans (as defined below) and the Final Plans
(as defined below):
A. The owner, or lessee, licensee, or other occupant of the lot to
be improved or his authorized agent (the "Applicant") shall deliver to the
Approving Agent preliminary plans and specifications (the "Preliminary Plans")
in such form and containing such information an may be required by the Approving
Agent for the following:
(1) A site development plan showing the location of all proposed
driveways, parking areas, walkways, landscaped areas, storage and refuse areas,
and building area;
(2) A landscaping plan for the particular lot;
(3) A sign and lighting plan;
(4) A building elevation plan showing dimensions, materials and
exterior color schemes;
(5) A grading plan.
Such Preliminary Plans shall be submitted in writing in duplicate over the
authorized signature of the Applicant.
B. At such time as the Approving Agent shall have approved in
writing the Preliminary Plans and prior to the submission of said Final Plans to
the City of San Jose the Applicant shall submit to the Approving Agent complete
and detailed final plans, specifications and working drawing (the "Final Plans")
with regard to the proposed improvements, which Final Plans will be in such form
as may then be required by the City of San Jose for review by said City and
shall contain such additional information as may be required by the Approving
Agent; provided, such Final Plans need not include detailing with regard to
interior improvements such an interior partitioning walls.
C. No such prior approval of any Preliminary Plans or Final Plans
shall be required if there is no then serving Approving Agent to so approve such
plans. Changes in approved Preliminary Plans or approved Final Plans which
materially affect landscaping, signing, building size, placement or external
appearance must be similarly submitted to and approved by the Approving Agent.
3.2 ADDITIONAL APPROVAL REQUIRED: So long as there is a then serving
Approving Agent, no exterior surface of any structure or improvement existing on
any lot subject to this
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<PAGE>
Declaration shall be painted, texturized or otherwise changed, no alterations,
additions or changes of any type whatsoever shall be made to any landscaping
placed on any lot subject to this Declaration, and no additions or alterations
to any paved area on any lot subject to this Declaration shall be made until
plans for such painting, alterations, additions or changes, including samples of
colors, materials, landscaping plans, and/or plans and specifications with
regard to paving, as the case may require, together with such other information
as shall be required by the Approving Agent, shall have been submitted to the
Approving Agent and the Approving Agent shall have approved in writing such
requested change.
3.3 BASIS FOR APPROVAL: The Approving Agent shall have the right to
disapprove any plans and specifications submitted hereunder for any reason
(provided that such approval shall not be unreasonably withheld), including but
not limited to any of the following:
A. Failure to comply with any of the Restrictions;
B. Failure to include information in such plans and specifications
as may have been reasonably requested by the Approving Agent;
C. Objection to the exterior design of the proposed structures or
the appearance of materials to be used in the construction of any proposed
structure which are found by the Approving Agent to be incompatible with
existing structures in the Orchard Technology Park;
D. Objections based upon the inadequacy of the number of onsite
parking spaces considering (1) the contemplated use or future possible use of
the structures proposed and (2) the availability of additional parking offsite.
E. Objection to the location of any proposed structure upon any lot
as it relates to other lots within the Orchard Technology Park;
F. Objection to the grading plan for any lot;
G. Objection to the color scheme, finish, proportions, style or
architecture, height, bulk or appropriateness of any structure as they relate to
other structures within the Orchard Technology Park;
H. Objection to the landscaping materials an they relate to other
landscaping materials then used or contemplated for use within the Orchard
Technology Park;
I. Any other matter which, in the judgment of the Approving Agent.
would render the proposed structure or structures or use inharmonious with the
general plan for improvement of Orchard Technology Park or with structures or
landscaping then located upon or proposed to be located upon other lots or other
properties within Orchard Technology Park.
3.4 APPROVAL: Upon approval by the Approving Agent of any plans and
specifications submitted hereunder, a copy of
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such plans and specifications as approved shall be deposited for permanent
record with the Approving Agent, and a copy of ouch plans and specifications
bearing such approval, in writing, shall be returned to the applicant submitting
the same.
3.5 RESULT OF INACTION: if the Approving Agent fails either to approve
or disapprove either the Preliminary Plans or the Final Plans within thirty
(30) days after such Preliminary Plans or Final Plans, as the case may be,
have been submitted to it, it shall be conclusively presumed that the
Approving Agent has approved said Preliminary or Final Plans; provided,
however, that if within said thirty (30) day period, the Approving Agent
gives written notice of the fact that more time is required for the review of
such plans, there shall be no presumption that the same are approved until
the expiration of a reasonable period of time as set forth in said notice not
to exceed thirty(30) days. Such presumption shall not apply if the review
fee required by Paragraph 3.9 was not paid at the time the plans were first
submitted to the Approving Agent.
3.6 PROCEEDING WITH WORK: Upon receipt of approval from the Approving
Agent pursuant to this Article, the Owner or lessee to whom the same is given
shall as soon as practicable satisfy all conditions thereof and diligently
proceed with the commencement and completion of all approved construction,
refinishing, alterations and excavations. In all cases work shall be commenced
within one (1) year from the date of such approval. If Applicant fails to
commence construction of the structures within one (1) year from date of such
approval, then the approval given pursuant to this Article shall be deemed
revoked unless the Approving Agent upon request made prior to the expiration of
said one (1) year period extends in writing the time for commencing work. In
all cases work shall be completed in accordance with the Preliminary Plans and
the Final Plans within two years from date of issuance of the first (or only)
building permit with regard to such work.
3.7 LIMITATION ON APPROVING AGENT: In no event shall the Approving Agent
disapprove any plans and specifications solely by reason of the Applicant's
proposed use of the lot if such use is specifically permitted pursuant to
Section 5.1.
3.8 LIABILITY: Neither the Declarant nor the Approving Agent shall be
liable for any damage, loss or prejudice suffered or claimed on account of:
A. The approval or disapproval of any plans, drawings and
specifications, whether or not defective;
B. The construction or performance of any work, whether or not done
pursuant to approved plans, drawings and specifications; or
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C. The development of any property within Orchard Technology Park.
3.9 REVIEW FEE: An architectural review fee shall be paid to the Approving
Agent as follows:
A. At such time as Preliminary Plans pertaining to erection,
placement, construction, remodeling or reconstruction of structures within the
Orchard Technology are submitted for approval based on the following schedule:
(1) When the plans submitted are prepared by an architect, the
architectural review fee shall be Two Hundred Fifty Dollars ($250.00);
(2) In all other cases the architectural review fee shall be
Four Hundred Dollars ($400.00).
B. At such time as documents required to be submitted pursuant to
paragraph 3.2 above are submitted for approval, the architectural review fee
shall be the sum of Fifty Dollars ($50.00).
3.10 CERTIFICATE OF COMPLIANCE: So long as there is an Approving Agent,
such Approving Agent shall within twenty one (21) days following written request
therefor by an Owner, execute and deliver to such requesting Owner a
"Certificate of Compliance" stating that the lot specified by such Owner in said
request for Certificate of Compliance is in compliance with Article 3 of these
Restrictions, or, if such lot shall not be in compliance with Article 3 of these
Restrictions, stating the nature of such noncompliance and the specific
paragraph of this Article 3 with which said lot does not comply.
ARTICLE 4
---------
LIMITATIONS ON IMPROVEMENTS
4.1 UTILITY LINES: All onsite utility transmission lines shall be placed
underground.
4.2 COVERAGE: No more than thirty-five percent (35%) of the square foot
area of any lot shall be occupied by structures.
4.3 MINIMUM SETBACK LINES: No structures, and no part thereof, shall be
placed closer than forty (40) feet from a property line fronting any street
("frontage setback area"); provided, however, no structure shall be placed
closer than twenty (20) feet from any property line not fronting on any
street ("interior setback area").
4.4 PARKING AREAS: No parking spaces shall be located within, and no
parking shall be permitted within, a frontage setback area adjacent to any
street, except that parking shall be permitted within said setback area if such
parking is screened from view from the street by a screen wall, shrubbery or
berms extending at least forty-two (42) inches above the high point of the
finished adjacent pavement in said parking area. in no case shall such parking
area be closer than twenty five (25) feet from a property line
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fronting on any street or closer than ten (10) feet from any property line not
fronting on any street.
4.5 STORAGE AND LOADING AREAS: No loading dock, truck loading, storage
area or other such facility shall be located in the front of any building or
structure or within any frontage setback area or between a front of any building
or structure and the street which said front faces.
ARTICLE 5
---------
RESTRICTIONS ON OPERATION AND USE
5.1 PERMITTED USES: Subject to compliance with these Restrictions, the
following uses shall be permitted in the Orchard Technology Park.
A. Manufacture (including storage of raw materials and finished
products therefrom) of the following:
(1) Pharmaceutical and cosmetic products;
(2) Optical, electronic, timing and measuring instruments for
use in research, development, business and professional facilities; and
(3) Industrial, communication, transportation and utility
equipment;
B. Wholesaling, warehousing and distribution establishments and
public utility facility (excluding storing and warehousing of acids,
chemicals, cement, plaster, petroleum products or explosive material);
C. Research, experimental and engineering laboratories;
D. Catalog sales and mail order establishments;
E. Establishments for the repair, cleaning and servicing of
commercial or industrial equipment or products;
F. Construction firms but only such construction firms whose
activities are carried on entirely within an enclosed building and which have
no construction yard on said lot;
G. So long as there is an Approving Agent, any commercial use not
specifically prohibited by Paragraph 5.3 which is first approved in writing
by the Approving Agent;
H. So long as there is an Approving Agents any industrial or
manufacturing use not specifically prohibited by Paragraph 5.3 which is first
approved in writing by the Approving Agent;
I. If there is no Approving Agent, any industrial manufacturing or
commercial use permitted by the then existing zoning or other applicable land
use regulations as promulgated by requisite governmental authorities, except
those uses specifically prohibited by Paragraph 5.3.
5.2 CONDUCT OF PERMITTED USES: All permitted uses shall be performed or
carried out entirely within a building that is so designed and constructed,
Certain activities which cannot be carried on within a building may be
permitted, but only (a) so long as there is then serving an Approving
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Agent, if the Approving Agent specifically consents to use and the location for
such activity, in writing, or (b) if there is no then serving Approving Agent,
if allowed under then existing zoning or other applicable land use regulations
except for uses which are specifically prohibited pursuant to Paragraph 5.31;
provided, however, that in either of the foregoing situations such use shall be
permitted only if (i) such activity is screened so as not to be visible from
neighboring property and streets and (ii) all lighting required for such use is
shielded from adjacent streets.
5.3 PROHIBITED USES: The following operations and uses shall not be
permitted on any property subject to these Restrictions:
A. Residential of any type;
B. Trailer courts, mobile home parks or recreation vehicle
campgrounds;
C. Junk yards or recycling facilities;
D. Drilling for and/or the removal of oil, gas or other hydrocarbon
substances (except that this provision shall not be deemed to prohibit the entry
of the property below a depth of five hundred (500) foot for such purposes);
E. Commercial excavation except in the course of approved
construction;
F. Distillation of bones;
G. Dumping, disposal, incineration or reduction of garbage, sewage,
offal, dead animals or refuse;
H. Fat rendering;
I. Stockyard or slaughter of animals;
J. Cemeteries;
K. Refining of petroleum or of its products;
L. Smelting of iron, tin, zinc, or other ores;
M. Jail or honor farms;
N. Labor or migrant worker camps;
O. Truck, bus terminals;
P. Petroleum storage yards.
Q. Auto wrecking, auto repair or auto painting establishment.
5.4 EMISSIONS: No use shall be permitted to exist or operate any lot
which:
A. Emits dust, sweepings, dirt, cinders, fumes, odors, radiation,
gases, vapors or discharged liquid or solid wastes or other harmful matter into
the atmosphere or any stream, river or other body of water which may adversely
affect (i) the health or safety of persons within the area or (ii) the use of
property within the Orchard Technology Park or (iii) vegetation within the
Orchard Technology Park, nor shall waste or any substance or materials of any
kind be discharged into any public sewer serving the Orchard Technology Park or
any part thereof, in violation of any regulations of any public body having
jurisdiction.
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B. Produces intense glare or heat unless such use is performed only
within an enclosed or screened area and then only in such manner that the glare
or heat emitted will not be discernible from any exterior lot line.
C. Creates a sound pressure level in violation of any regulation of
any public body having jurisdiction.
D. Allows the visible emissions of smoke (outside any building)
other than the exhausts emitted by motor vehicles or other transportation
facilities in violation of any regulation of any public body having
jurisdiction. This requirement shall also be applicable to the disposal of
trash and waste materials.
E. Creates a ground vibration that is perceptible, without
instruments, at any point along any of the exterior lot lines.
5.5 SIGNS: The Approving Agent may, from time to time, enact sign
criteria setting forth such requirements for signs to be erected within the
Orchard Technology Park as the Approving Agent may doom desirable, which sign
criteria shall become effective upon recordation thereof in the official
records of Santa Clara County. All signs erected by any owner on a lot
within the Orchard Technology Park subsequent to the recordation of said sign
criteria shall be in conformance with the criteria set forth therein. Except
as specifically otherwise allowed in any then existing sign criteria, no sign
shall be installed or erected or placed on any lot other than those signs
identifying the name, business and products of the person or firm occupying
the lot and those offering the lots for sale or lessee.
5.6 LANDSCAPING CRITERIA: The Approving Agent may, from time to time,
enact landscaping criteria setting forth such requirements for landscaping to be
placed an or in lots located within the Orchard Technology Park as the Approving
Agent may doom desirable including, without limitations, amount of area to be
plated in sod lawns or other plantings, type of plantings, placement of
irrigation systems, requirements for trees and raised planter boxes, which
landscape criteria shall become effective upon recordation thereof in the
official records of Santa Clara County. All landscaping placed by any owner on
a lot within the Orchard Technology Park subsequent to the recordation of said
landscape criteria shall be in conformance with the criteria met forth therein.
5.7 STORAGE AND REFUSE COLLECTION AREAS:
A. No materials, supplies or equipment, including company owned or
operated trucks or motor vehicles, shall be stored in any area an a lot except
inside a closed building, or behind a visual barrier screening such areas so
that they are not visible from the neighboring properties or streets. No
storage areas shall be maintained between a street and the front of the
structure nearest such street.
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B. All outdoor refuse collection areas shall be visually screened so
as not to be visible from streets and neighboring property. No refuse
collection areas shall he maintained between a street and the front of the
structure nearest such street.
5.8 CONDITION OF PROPERTY: The Owner of each lot shall at all times keep
and properly maintain the promises structures, improvements, landscaping, paving
and appurtenances situate thereon in a safe, clean, sightly and wholesome
condition and in a good state of repair and shall comply in all respects with
all governmental, health, fire and police requirements and regulations, and
shall cause to be regularly removed at its own expense any rubbish of any
character whatsoever which may accumulate on such lot, and in particular and
without limitation:
A. All areas of each lot not used for structures, walkways, paved
driveways, parking or storage areas shall be at all times maintained by a
professional landscape engineer or gardener in a fully and well kept landscaped
condition utilizing ground cover and/or shrub and tree materials. Undeveloped
areas proposed for future expansion shall be maintained in a weed-free
condition. An automatic underground landscape irrigation system shall be
provided by the Owner of each lot which is sufficient to properly irrigate all
landscaped areas within such lot.
B. Parking areas shall be paved so an to provide all-weather
surfaces. Each parking space shall be designated by lines painted on the paved
surfaces and shall be adequate in area, and all parking areas shall provide, in
addition to parking spaces, adequate driveways and space for the pavement of
vehicles.
5.9 EXCAVATION: No excavation shall be made on, and no sand, gravel, soil,
or other material shall be removed from, any lot, except in connection with the
construction of structures. Upon completion of much construction exposed
openings shall be backfilled to grade, and disturbed ground shall be graded
level and paved or landscaped in conformity with the requirements of this
Declaration.
ARTICLE 6
---------
VARIANCES
6.1 VARIANCE BY APPROVING AGENT: So long as there shall be Approving Agent
then serving, it shall have the exclusive right to grant variances from
requirements set forth in Article 4 or waive entirely the restrictions set forth
in said Article 4 with respect to any given lot, as the Approving Agent, in its
sole discretion, shall determine is necessary for the successful development of
the Orchard Technology Park.
6.2 GRANTING OF VARIANCE: Any variance granted hereunder shall be
effective upon, and only upon, the recordation of a Notice of Variance executed
by the Approving Agents.
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<PAGE>
ARTICLE 7
---------
ENFORCEMENT
7.1 REMEDY: So long as there in an Approving Agent, it shall have e
exclusive right to enforce the provisions hereof, but without liability for
failure so to do. In the event that the Approving Agent shall fail to take
action respecting the breach or violation of any of the provisions of this
Declaration within thirty (30) days from the written demand by any Owner
within the Orchard Technology Park to take such action or if such breach or
violation of this Declaration shall occur at such time as there in no
Approving Agent, then any Owner of a lot within the Orchard Technology Park
shall have the right to enforce the provisions contained in this Declaration.
7.2 RIGHT TO ENTER: So long as New England shall be serving as the
Approving Agent, New England, and only New England, in addition to any other
remedy available, may, with respect to a violation or breach of the covenants
to maintain a set forth in Paragraph 5.8, and only with respect to a breach
violation of the covenants to maintain at contained in paragraph 5.8, enter
upon the lot on which such violation or breach shall then be occurring and
take whatever action it may deem necessary to effect compliance with the
provisions of said Paragraph 5.8, including without limitation making of such
repairs or the performance of such required maintenance necessary to conform
to the requirements imposed by these Restrictions at the expense of the Owner
of said lot, provided that Orchard shall have first given to the Owner of
such lot at least sixty (60) days prior written notice of its intention to do
so and then, only if said Owner of such lot shall have failed to correct said
violation or breach within said sixty (60) day period if such violation or
breach was curable within sixty (60) days, or if not curable within sixty
(60) days then only if such Owner shall have failed to commence and then be
diligently seeking to so cure such violation or breach in the event that New
England shall, after having complied with the above notice requirements,
enter such lot and remedy such breach or violation, the Owner of such lot
shall be responsible to reimburse New England forthwith upon demand for all
costs and expenses incurred in connection therewith ("Non-Compliance
Expenses") in accordance with the provisions of this Section. Each Owner of
any lot within the Orchard Technology Park by acceptance of a deed or other
conveyance whether or not it hall be so expressed in any such deed or other
conveyance, is and shall be deemed to covenant and agree to pay to New
England an assessment for any Non-Compliance Expenses incurred by New England
in connection with such Owner's lot,
A. New England shall maintain accurate books and records reflecting
any Non-Compliance Expenses, and shall
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<PAGE>
provide each Owner of an affected lot a statement with respect thereto. Each
affected Owner shall pay Non-Compliance Expenses incurred applicable to such
Owner's lot within ten (10) days of receipt of a statement. If such
statement is deposited in the United States mail duly certified or registered
with postage prepaid and addressed to the Owner affected thereby at his lot,
the same shall be deemed received by such Owner on the fifth (5th) business
day after such deposit.
B. Any Non-Compliance Expenses assessments, together with such
interest thereon and costs of collection thereof as provided hereinbelow, shall
be a charge on the lot and shall be a continuing lien upon the lot against which
such assessments are made. The lien shall become effective upon recordation of
a notice of claim of lien as provided herein. Such assessment, together with
such interest and costs, shall also be the personal obligation of the person who
is the Owner of such lot at the time when the assessment, or any portion
thereof, fell due but in no events shall the person who is the owner of such lot
be personally obligated for a sum in excess of One Thousand Dollars ($1,000.00)
for any given violation (but without limiting the amount that may become upon
such lot for any given violation or the aggregate the personal obligation for
successive violations). Any personal obligation created hereunder shall not
pass to such Owners successors in title unless it is expressly assumed by them
but any lien created hereunder shall remain a charge against the lot except as
to "bona fide purchasers or encumbrancers for value", without notice of same.
No Owner may waive or otherwise escape personal liability for the personal
assessment provided herein by non-use or abandonment of his lot.
C. If any Non-Compliance Expenses assessment or any portion thereof
is not paid within ten (10) days after the date due it shall bear interest from
the date of delinquency at the then legal rate, and, in addition to all other
legal and equitable rights or remedies, New England may, at its option, bring an
action at law against the Owner who is personally obligated to pay the same, or
upon compliance with the notice provisions set forth hereinbelow, to foreclose
the lien against the affected lot, and there shall be added to the amount of
such assessment or any portion thereof, the interest thereon, all costs and
expenses, including reasonable attorneys fees, incurred by New England and in
collecting the delinquent assessment. In lieu of judicially foreclosing the
lien, New England, at its option, may foreclose such lien by proceeding under a
power of sale as provided hereinbelow, such a power of sale being given to New
England as to each and every lot for the purpose of collecting assessments.
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<PAGE>
D. No action shall be brought to foreclose the lien, or to proceed
under the power of sale, less than thirty (30) days after the date that a notice
of claim of lien, executed by New England, is recorded, stating the amount
claimed (which may include interest and cost of collection, including reasonable
attorneys' fees), a good and sufficient legal description of the lot being
assessed, the name of the record Owner or reputed Owner thereof, and the name
and address of New England as claimant. A copy of said notice of claim shall be
deposited in the United States mail, certified or registered, with postage
prepaid, to the Owner of said lot.
E. Any such sale provided for above shall be conducted in accordance
with Sections 2924, 2924(b), and 2924(c) of the Civil Code of the State of
California, applicable to the exercise of powers of sale in mortgages and deeds
of trust, or in any other manner permitted or provided by law, New England shall
have the power to bid on the lot at the foreclosure sale, and to acquire and
hold, mortgage and convey the same.
F. Upon the timely curing of any default for which a notice of claim
of lien was recorded by New England, New England is hereby authorized to file or
record, as the case may be, an appropriate release of such notice, upon payment
by the defaulting Owner of a fee to be determined by New England but not to
exceed Twenty-five Dollars ($25.00), to cover the costs of preparing and filing
or recording such release together with the payment of such other costs,
interest or fees as shall have been incurred.
G. The assessment lien and the rights to foreclosure and sale
thereunder shall be in addition to and not in substitution for all other rights
and remedies which New England may have hereunder, at law or in equity.
7.3 RESULT OF VIOLATION: The result of every action or omission whereby
the provisions of this Declaration are violated in whole or in part is hereby
declared to be and to constitute a nuisance, and every remedy allowed by law or
equity shall be available to any Owner of any lot within the Orchard Technology
Park.
7.4 ATTORNEY'S FEES: In any legal or equitable proceeding for the
enforcement or the provisions of this Declaration, whether it be an action for
damages, declaratory relief or injunctive relief, the losing party or parties
shall pay the attorneys' fees of the prevailing party or parties, in such
reasonable amount as may be fixed by the court in such proceedings, or in a
separate action brought for that purpose. The prevailing party shall be
entitled to said attorneys' fees, even though said proceeding is settled prior
to judgments.
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<PAGE>
7.5 REMEDIES CUMULATIVE: All remedies provided herein, or at law or in
equity shall be cumulative and not exclusive.
7.6 WAIVER: Failure by the Approving Agent to enforce the provisions of
this Declaration shall in no event be deemed a waiver of the right to do so
thereafter, nor of the right to enforce any other covenants or restrictions
herein, nor of the rights of other owners of the property within the Orchard
Technology Park to enforce same.
7.7 ORCHARD: For Purposes of this Article 7 the term "New England" shall
include New England, New England's Successor as defined in Paragraph 1.5A and
Orchard.
ARTICLE 8
---------
DURATION, MODIFICATION AND REPEAL
8.1 DURATION OF RESTRICTIONS: These Restrictions shall continue and
remain in full force and effect at all times with respect to all property,
and each part thereof, now or hereafter made subject to these Restrictions
(subject, however, to the right to amend and repeal an provided for herein)
until January 1, 2009.
8.2 TERMINATION AND MODIFICATIONS: This Declaration or any provision
thereof, or any covenant, condition or restriction contained herein, may be
terminated, extended, modified or amended, as to the whole of the Orchard
Technology Park upon the written consent of the owners of sixty-six and
two-thirds percent (66-2/3%) of the total square footage of the land area
contained within the Orchard Technology Park (exclusive of dedicated public
streets); provided, however, that so long as New England, New England's
successor or Orchard (as defined in paragraph 1.5A) is the Approving Agent, no
such termination, extension or modification or amendment shall be effective
without the written approval of New England, New England's successor or Orchard
as the case may be. No such termination, extension, modification or amendment
shall be effective until a proper instrument in writing describing such
termination, extension, modification or amendment has been executed by the
requisite number of Owners and by New England, New England's successor or
Orchard, if so required, and recorded.
ARTICLE 9
---------
MISCELLANEOUS PROVISIONS
9.1 CONSTRUCTIVE NOTICE AND ACCEPTANCE: Every person who now or hereafter
owns, occupies or acquires any right, title or interest in or to any portion of
the property made subject to these Restrictions is and shall be conclusively
deemed to have consented and agreed to every covenant, condition and restriction
contained herein whether or not any reference to this Declaration in contained
in the instrument by which such person acquired an interest in said property.
-16-
<PAGE>
9.2 WAIVER OF LIABILITY: Neither the Declarant nor the Approving Agent
shall be liable to any Owner, lessee, licensee, or occupant of land subject to
this Declaration by reason of any mistake in judgment, negligence, nonfeasance,
action or inaction or for the enforcement or failure to enforce any provision of
this Declaration. Every Owner, lessee, licensee or occupant of any of said
property by acquiring his interest therein agrees that he will not bring any
action or suit against New England (or New England's Successor or Orchard, as
the case may be) or any other Approving Agent to recover any such damages from
or to seek equitable relief against the Declarant by reason of same.
9.3 RIGHTS OF MORTGAGEE: No breach of the Restrictions and other
provisions contained herein, or any enforcement thereof, shall defeat or render
invalid the lion of any mortgage or deed of trust now or hereafter executed upon
land subject to these Restrictions; provided, however, that if any portion of
said property is sold under a foreclosure of any mortgage or under the
provisions of any deed of trust, any purchaser at such sale and his successors
and assigns shall hold any and all property so purchased subject to all of the
Restrictions and other provisions of this Declaration. Any notice of claim of
lien recorded pursuant to paragraph 7.2 hereof shall take its priority vis-a-vis
other encumbrances as of the date of its recordation.
9.4 PARAGRAPH HEADINGS: Paragraph headings, where used herein, are
inserted for convenience only and are not intended to be a part of this
Declaration or in any way to define, limit or describe the scope and intent of
the particular paragraphs to which they refer.
9.5 EFFECT OF INVALIDATION: If any provision of this Declarations is held
to be invalid by any Court, the invalidity of such provision shall not effect
the validity of the remaining provisions hereof.
9.6 ASSIGNMENT AND DELEGATION: New England (or an Appointed Approving
Agent or New England's Successor as defined in paragraphs 1.5A and 1.5B
respectively) shall have no right to assign its rights granted hereunder as
Approving Agent nor to delegate its duties imposed hereunder as Approving Agent
except as set forth in Article I of this Declaration.
IN WITNESS WHEREOF, the undersigned have executed this Declaration the day
and year first above written.
NEW ENGLAND MUTUAL
LIFE INSURANCE COMPANY
a Massachusetts corporation
By /s/ Joseph W. O'Connor
Its second Vice President
ATTEST:
/s/ John R. Hicinbothem
Its Assistant Secretary
#571 5/5/78
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<PAGE>
New England
COMMONWEALTH OF MASSACHUSETTS )
) ss:
COUNTY OF SUFFOLK )
On this 26th day of May, 1978, before me, Daniel J. Kelliher, Jr., the
undersigned, a Notary Public in and for said County of Suffolk and the
Commonwealth of Massachusetts, personally appeared Joseph W. O'Connor and John
R. Hicinbothem known to me to be the Second Vice President and the Assistant
Secretary, respectively, of NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY, a
Massachusetts corporation, the corporation that executed the within instrument
and known to me to be the persons who executed the within instrument on behalf
of the corporation therein named and acknowledged to me that they executed the
within instrument on behalf of said corporation and that such corporation
executed the same pursuant to a rule if its board of directors or its by-laws.
WITNESS my hand official seal.
NOTARY PUBLIC, COMMONWEALTH OF MASSACHUSETTS
DANIEL J. KELLIHER, Notary Public
My Commission Expires: June 29, 1981
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION:
All that certain real property situate in the City of San Jose, County of Santa
Clara, State of California, described as follows:
A. Parcel 2 as shown on a Parcel Map recorded March 29, 1978 in Book 415, Page
48 of Maps, Official Records of Santa Clara County, California.
B. Parcels 1, 2, 3, 4 and 5, as shown on a Parcel Map recorded June 21, 1978
in Book 421, Pages 6 and 7 of Maps, Official Records of Santa Clara County,
California.
<PAGE>
WHEN RECORDED RETURN TO:
WILSON, SONSINI, GOODRICH & ROSATI
Two Palo Alto Square, Suite 900
Palo Alto, CA 94306
Attn: Real Estate Department
FIRST AMENDMENT TO FIRST SIGN
CRITERIA OF DECLARATION OF COVENANTS, CONDITIONS,
AND RESTRICTIONS OF THE ORCHARD TECHNOLOGY PARK
This First Amendment to First Sign Criteria is made to be effective this
13th day of August, 1985, by ORCHARD PROPERTIES, a California corporation
("Approving Agent").
R E C I T A L S:
WHEREAS, New England Mutual Life Insurance Company, a Massachusetts
corporation, as Declarant, as then owner of all that real property located in
the City of San Jose, County of Santa Clara, California described in EXHIBIT A
hereto (the "Orchard Technology Park") has executed, effective as of June 12,
1978, that certain Declaration of Covenants, Conditions and Restrictions of the
Orchard Technology Park (the "CC&Rs") and caused same to be recorded on June 23,
1978 in the official records of Santa Clara County in Book D762 at pages 474
through 492; and
WHEREAS, the CC&Rs provide, among other things, that from time to time the
"Approving Agent" as defined in paragraph 1.5 of the CC&Rs may enact sign
criteria to affect all property located in the Orchard Technology Park, which
"First Sign Criteria of Declaration
VIID-5
EXHIBIT F
<PAGE>
of Covenants, Conditions and Restrictions of the Orchard Technology Park" (the
"First Sign Criteria") is dated October 25, 1978 and recorded November 17, 1978
in Book E104, Page 74 of the Official Records of Santa Clara County; and
WHEREAS, Orchard Properties is the Approving Agent under the CC&Rs and
desires to enact this First Amendment to First Sign Criteria in order (i) to
assist lot owners in preparation of their graphic design and (ii) to set forth
minimum requirements for signs to be placed on or in lots located within the
Orchard Technology Park, with the understanding that the First Sign Criteria are
minimum requirements only and that so long as there exists an Approving Agent,
as defined in the CC&Rs, then prior to installation or replacement of any sign
upon any lot(s) in the Orchard Technology Park, the then serving Approving Agent
must approve a sign plan related thereto, as more specifically provided in the
CC&Rs.
NOW, THEREFORE, the Approving Agent herein enacts this First Amendment to
First Sign Criteria, as follows:
1. MINIMUM CRITERIA FOR SIGNS: Article 2 of the First Sign Criteria,
entitled "Minimum Criteria for Signs", is hereby deleted in its entirety and
replaced by the following:
"2.1 LOCATION: Any sign permitted to be placed upon a lot within the
Orchard Technology Park shall be located in the frontage setback area of such
lot, and only in such frontage setback area; provided, no part of any such sign
shall be less than ten (10) feet
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<PAGE>
from the public street right of way line adjacent to such frontage setback
area. In determining the location of such sign within said frontage setback
area, the location of the meandering sidewalk and landscaping contained
within said frontage setback are shall be considered. No signs shall be
permitted to be placed upon any structure located on a lot located within the
Orchard Technology Park, except in the event multiple users occupy such lot
in which event the location of each such user in said structure may be
designated by means of a master sign plan which has been previously approved
by the then serving Approving Agent.
"2.2 NUMBER OF SIGNS: The number of signs permitted shall depend upon the
number of buildings, the number of street frontages and the number of users of
the Property, as follows:
1. One (1) User One (1) sign face not to exceed
One (1) Building forty (40) square feet per side.
One (1) Street Frontage
2. One (1) User One (1) sign face not to exceed
One (1) Building forty (40) square feet per side
More than one (1) Street or one (1) sign face per street
Frontage frontage not to exceed twenty (20)
square feet per side.
3. One (1) User One (1) sign face not to exceed
More than one (1) Building forty (40) square feet per side per
More than one (1) Street street frontage or one (1) sign per
Frontage building not to exceed twenty (20)
square feet per side.
4. One (1) User One (1) sign face not to exceed
More than one (1) Building forty (40) square feet per side or
One (1) Street Frontage one (1) sign face per building not
to exceed twenty (20) square feet
per side.
5. More than one (1) User One (1) sign face not to exceed
One (1) Building forty (40) square feet per side
One (1) Street Frontage with spaces of equal sizes for
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<PAGE>
multiple identification or one (1)
sign face per tenant not to exceed
twenty (20) square feet per side.
6. More than one (1) User One (1) sign face per street
One (1) Building frontage not to exceed forty
More than one (1) (40) square feet per side with
Street Frontage spaces of equal size for multiple
identification or one (1) sign
face per tenant per street front-
age not to exceed twenty (20)
square feet per side.
"2.3 DIMENSIONS OF PERMITTED SIGNS: No sign permitted hereunder shall have
a total area in excess of forty (40) square feet per side nor shall any single
dimension in any such sign exceed twelve (12) feet, No portion of any such sign
shall extend more than six (6) feet above the ground level as measured
perpendicular from the high point of any such sign.
"2.4 MECHANICAL DEVICES:
A. All portions of any sign installed within the Orchard Technology
Park shall be stationary and no sign, and no portion thereof, shall revolve,
rotate, move, or create the illusion of revolvement, rotation or movement.
B. No sign shall be internally illuminated nor shall there be any
exterior spotlighting or other illumination on any sign installed in the Orchard
Technology Park.
"2.5 CONTENTS OF SIGN: Any sign located on any lot located within the
Orchard Technology Park shall contain the business name of the entity occupying
said lot and no other name, lettering, logo, trademark or copy shall be
permitted on any such sign. Copy shall be permitted only upon two sides of any
sign permitted hereunder.
-4-
<PAGE>
In the event more than one business shall occupy any lot within the Orchard
Technology Park, then the location of such multiple occupants shall be
designated by means of a master sign plan approved by the then serving Approving
Agent.
"2.6 SIGN MATERIAL: Each sign placed upon a lot located within the Orchard
Technology Park shall be constructed of materials which will:
A. Complement and harmonize with the materials used in any structure
located on such lot and with structures located an adjacent lots; and
B. Resist the impact of weather elements.
"2.7 TEMPORARY SIGNS: The foregoing notwithstanding, during the period
from commencement of construction of a structure on any lot contained within
Orchard Technology Park until completion of such structure, New England
Mutual Life Insurance Company will provide at its sole cost and expense one
standard project identification sign (of a design substantially as described
in Exhibit B hereto) of sufficient size to describe the proposed occupant of
the structure under construction, the architect of such structure, the
contractor, the developer, and the lender (or any portion of the above named
as selected by the owner). The owner of such lot shall pay at its own cost
and expense for all the graphic work and copy to place the above described
information upon the sign either (i) by installing his own copy, subject to
previous approval by the then serving Approving Agent, or (ii) by request to
Declarant that Declarant prepare and install such sign copy, in which event
such owner shall
-5-
<PAGE>
promptly, upon request therefor by Declarant, reimburse Declarant for all costs
and expenses incurred for such preparation and installation, The copy, size,
dimensions and location of such project identification sign shall be subject to
prior approval by the Approving Agent in its sole discretion. No other signs of
any type shall be permitted on any lot located within the Orchard Technology
Park during construction of a structure on any such lot."
2. CONTINUED EFFECTIVENESS: Except as expressly amended by this
instrument, the First Sign Criteria remains in full force and effect.
IN WITNESS WHEREOF, the undersigned has executed this Amendment the day and
year first above written.
ORCHARD PROPERTIES, a California
corporation
By /s/ Signature Illegible
Its President
By /s/ Craig Duncan
Its Secretary
-6-
VIID-10
<PAGE>
[Section containing graphical representation of permitted number, types,
dimensions and positions of signs on property located in the Orchard
Technology Park.]
<PAGE>
SPECIFICATIONS FOR ADDRESS NUMBERS ON BUILDINGS
-----------------------------------------------
1. Height: 8"
2. Color: Contrasting to background of building and matching accent trim on
building.
3. Location: Viewable from the street upper corner of building
4. Example: IBM building at the corner of Brokaw Road and Zanker Road
5. Composition: Metal
6. Paint: Primer plus two coats of finish paint
7. Approval: By Orchard Properties in writing previous to installation. May
desire approval from San Jose Fire Department, Station #5 on
North Tenth Street, telephone 277-4365
11/1984
VIIA-8
<PAGE>
[Section containing graphical representation of size, style and content of a
standard "unauthorized parking" sign.]
<PAGE>
ORCHARD PROPERTIES
VISITOR PARKING SPACE DESIGNATION
Signs designating visitor parking spaces are allowed in parking areas of single
user buildings only, and conform to the following criteria:
1. A maximum of 3 inches high and consisting of only the word "Visitor".
2. Painted with a flat white exterior paint.
3. Applied to either the curb or bumpers of the approved designated
spaces.
4. Painted by the tenant at tenant's expense but with the prior written
approval of Orchard Properties.
5. Repainted a minimum of every three years.
6. Upon request from Orchard Properties, removed at the termination of
the lease.
No other designated parking signs are acceptable.
11/1984
VIIA-14
<PAGE>
EXHIBIT "G"
-----------
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
THIS AGREEMENT is entered into as of the _________ day of ______ , ______,
by and between _____________, a__________________(the "Beneficiary"),
____________________, __________________(the "Tenant") and ______________,
a _______________(the "Landlord").
WITNESSETH
A. Tenant has entered into a certain lease dated __________, ______, (the
"Lease") with Landlord covering certain space (the "Premises") located in and
upon the real property described in Schedule 1 attached hereto (the "Property");
B. Beneficiary is the holder of a mortgage loan (the "Loan") to Landlord
in the amount of_____________ Dollars ($___________________) which is secured by
a_______________________________(the "Deed of Trust") covering the Property;
C. The parties hereto desire expressly to confirm the subordination of
the Lease to the lien of the Deed of Trust, it being a requirement by
Beneficiary that the lien and charge of the Deed of Trust be unconditionally and
at all times prior and superior to the leasehold interests and estates created
by the Lease; and
D. Tenant has requested that Beneficiary agree not to disturb Tenant's
possessory rights in the Premises in the event Beneficiary should foreclose the
Deed of Trust, provided that Tenant is now in default under the Lease and
provided that Tenant attorns to Beneficiary or the purchaser at any foreclosure
or Trustee's sale of the Property.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and of other good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, the parties hereby agree as follows:
1. Notwithstanding anything to the contrary set forth in the Lease, the
Lease and the leasehold estate created thereby and all of Tenant's rights
thereunder shall be and shall at all times remain subject, subordinate to the
Deed of Trust and the lien thereof and all rights of Beneficiary thereunder and
to any and all renewals, modifications, consolidations, replacements and
extensions thereof.
2. Tenant hereby declares, agrees and acknowledges that:
A. Beneficiary would not have agreed to recognize the Lease without
this Agreement; and
B. Beneficiary, in making disbursements pursuant to the agreements
evidencing and securing the Loan, is under no obligation or duty to oversee or
direct the application of the proceeds of such disbursements and such proceeds
may be used by Landlord for purposes other than improvement of the Premises.
3. In the event of foreclosure of the Deed of Trust, or upon a sale of
the Property pursuant to the Trustee's power of sale contained therein, or upon
a transfer of the Property by deed in lieu of foreclosure, then so long as
Tenant is not in default under any of the terms, covenants, or conditions of the
Lease, the Lease shall continue in full force and effect as a direct lose
between the succeeding owner of the Property and Tenant, upon and subject to all
of the terms, covenants and conditions of the Lease for the balance of the term
of the Lease. Tenant hereby agrees to attorn to and accept any such successor
owner as landlord under the Lease, and to be bound by and perform all of the
obligations imposed by the Lease, and Beneficiary or any such successor owner of
<PAGE>
the Property will not disturb the possession of Tenant, and will be bound by all
of the obligations imposed by the Lease upon the landlord thereunder: provided,
however, that the Beneficiary, or any purchaser at a trustee's or sheriff's sale
or any successor owner of the Property shall not be:
A. liable for any act or omission of a prior landlord (including
Landlord); or
B. subject to any offsets or defenses which the Tenant might have
against any prior landlord (including Landlord); or
EXHIBIT G
<PAGE>
C. bound by any rent or additional rent which the Tenant might have
paid in advance to any prior landlord (including Landlord) for a period in
excess of one month; or
D. bound by any agreement or modification of the Lease made without
the written consent of the Beneficiary; or
E. liable or responsible for or with respect to the retention,
application and/or return to Tenant of any security deposit paid to any prior
lessor (including Landlord), whether or not still held by such prior lessor,
unless and until Beneficiary or such other purchaser has actually received for
its own account as lessor the full amount of such security deposit; or
F. bound by or liable under any representations, warranties,
covenants or indemnities made to Tenant by any prior landlord (including
Landlord) regarding Hazardous Materials (as defined in the Lease); or
G. obligated to construct the building in which the Premises are
located or any improvements for Tenant's use.
4. Upon the written request of Beneficiary at the time of a
foreclosure, Trustee's sale or deed in lieu thereof or at any time
thereafter, the parties agree to execute a lease of the Premises upon the
same terms and conditions as the Lease between Landlord and Tenant, which
lease shall cover any unexpired term of the Lease existing prior to such
foreclosure, Trustee's sale or conveyance in lieu of foreclosure.
5. Tenant agrees to give to Beneficiary, by registered mail, a copy of
any notice or statement served upon Landlord. Tenant agrees not to exercise any
rights of termination available by virtue of a default unless (i) Landlord shall
have failed to cure such default, and (ii) following expiration of the
applicable period under the Lease for cure by Landlord of such default, Tenant
shall have furnished to Beneficiary notice of Landlord's failure to cure such
default and afforded Beneficiary an additional thirty (30) days following
receipt of such notice within which to cure such default or if such default
cannot be cured within that time, then such additional time as may be necessary
if within such thirty (30) days Beneficiary has commenced and is diligently
pursuing the remedies necessary to cure such default (including, but not limited
to, commencement of foreclosure proceedings if necessary to effect such cure),
in which event such right, if any, as Tenant might otherwise have to terminate
the Lease shall not be exercised while such remedies are being so diligently
pursued.
6. Landlord, as landlord under the Lease and trustor under the Deed of
Trust, agrees for itself and its heirs, successors and assigns, that: (i) this
Agreement does not constitute a waiver by Beneficiary of any of its rights under
the Deed of Trust, or in any way release Landlord from its obligation to comply
with the terms, provisions, conditions, covenants, agreements and clauses of the
Deed of Trust; and (ii) the provisions of the Deed of Trust remain in full force
and effect and must be complied with by Landlord, if Beneficiary so requires.
7. Tenant acknowledges that it has notice that the Lease and the rent and
all other sums due thereunder have been assigned or are to be assigned to
Beneficiary as security for the Loan secured by the Deed of Trust. In the event
that Beneficiary notifies Tenant of a default under the Deed of Trust and
demands that Tenant pay its rent and all other sums due under the Lease to
Beneficiary, Tenant agrees that it will honor such demand and pay its rent and
all other sums due under the Lease directly to the Beneficiary or as otherwise
required pursuant to such notice.
8. All notices hereunder shall be deemed to have been duly given if
mailed by United States registered or certified mail, with return receipt
requested, postage prepaid, to Beneficiary at the following address (or at such
other address as shall be given in writing by Beneficiary to the Tenant) and
shall be deemed complete upon any such mailing:
___________________________
<PAGE>
___________________________
___________________________
___________________________
Attention: ________________
with a copy to: ____________________
____________________
____________________
____________________
9. This Agreement supersedes any inconsistent provisions of the Lease.
-2-
<PAGE>
10. This Agreement shall inure to the benefit of the parties hereto, their
successors and permitted assigns; provided however, that in the event of the
assignment or transfer of the interest of Beneficiary, all obligations and
liabilities of Beneficiary under this Agreement shall terminate, and thereupon
all such obligations and liabilities shall be the responsibility of the party to
whom Beneficiary's interest is assigned or transferred.
11. Tenant agrees that this Agreement satisfies any condition or
requirement in the Lease relating to the granting of a non-disturbance
agreement.
12. This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year first set forth above.
"Beneficiary": "Landlord":
________________________ ________________________
________________________, a a_______________________
By:__________________ By:____________________
Printed Printed
Name:_______________ Name:___________________
Title:______________ Title:__________________
"Tenant":
_______________________,
a _____________________
By:____________________
Printed
Name:___________________
Title:__________________
-3-
<PAGE>
ACKNOWLEDGMENT
--------------
THE UNDERSIGNED HEREBY ACKNOWLEDGES THAT IT (Mark One):
X Does not use any hazardous materials other than minor amounts of
- ----- reproduction and janitorial chemicals consistent with routine office
uses.
(NO NEED TO FILL OUT THE ATTACHED HAZARDOUS MATERIALS QUESTIONNAIRE.)
Does not use hazardous materials in a manner or in a quantity
- ----- requiring the preparation of a hazardous material management plan or
any other documents under California Health and Safety Code Section
25503.5.
(PLEASE FILL OUT THE ATTACHED HAZARDOUS MATERIALS QUESTIONNAIRE.)
Uses only those chemicals identified in the attached
- ----- questionnaire in accordance with the provisions of the attached
hazardous materials management plan, which has been approved by the
Fire Department of the City of _______________ and is in full force
and effect.
(PLEASE FILL OUT THE ATTACHED HAZARDOUS MATERIALS QUESTIONNAIRE AND
ATTACH COPY OF YOUR HAZARDOUS MATERIALS MANAGEMENT PLAN.)
THE UNDERSIGNED FURTHER ACKNOWLEDGES THAT IT HAS COMPLIED IN ALL RESPECTS TO
THE PROVISIONS OF LOCAL, STATE AND FEDERAL LAW AND THE HAZARDOUS MATERIALS
MANAGEMENT PLAN ATTACHED HERETO IN CONNECTION WITH ITS STORAGE, USE AND
DISPOSAL OF HAZARDOUS MATERIALS AND THAT IT HAS DISPOSED OF HAZARDOUS
MATERIALS ONLY BY (1) DISCHARGE TO APPROPRIATELY TREATED WASTE TO A PUBLICLY
OWNED TREATMENT WORK IN ACCORDANCE WITH A VALID AND ENFORCEABLE WASTE
DISCHARGE PERMIT AND (2) DELIVERY OF HAZARDOUS WASTES TO A PROPERLY LICENSED
WASTE DISPOSAL AGENT.
IN WITNESS WHEREOF, the undersigned, an authorized officer of the
aforementioned company has executed this acknowledgment as of the date
written below.
Quickturn Design Systems, Inc.
(Company Name)
a Delaware Corporation
By: /s/ R.K. Ostby
R.K. Ostby Vice President
(Print Name and title)
EXHIBIT H
<PAGE>
p 2. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(amounts in thousands of dollars except
per share and employee data) 1993 1994 1995(1) 1996(1) 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE FISCAL YEAR
Total revenue $ 54,865 $ 65,523 $ 82,442 $ 109,578 $ 110,404
Net income (loss) $ (5,356) $ 4,601 $ 12,478(2) $ 14,131(3) $ (5,346)(4)
Diluted net income (loss) per share $ (0.96)(5) $ 0.32 $ 0.74(2) $ 0.79(3) $ (0.31)(4)
Total revenue by geographic area
North America $ 40,872 $ 48,594 $ 56,702 $ 70,658 $ 73,186
Asia-Pacific 8,940 9,336 16,496 30,138 26,025
Europe 5,053 7,593 9,244 8,782 11,193
-----------------------------------------------------------
Total $ 54,865 $ 65,523 $ 82,442 $ 109,578 $ 110,404
-----------------------------------------------------------
-----------------------------------------------------------
AT YEAR END
Working capital $ 33,927 $ 34,998 $ 44,381 $ 49,243 $ 51,143
Total assets $ 56,199 $ 77,349 $ 94,240 $ 111,977 $ 129,192
Long-term debt $ 3,487 $ 3,819 $ 3,701 $ -- $ --
Stockholders' equity $ 38,296 $ 49,895 $ 66,337 $ 84,045 $ 91,898
Employees 177 244 285 363 382
</TABLE>
(1) The 1995 and 1996 results have been restated to reflect the February 1997
merger of the Company with SpeedSim-TM-, Inc. which was accounted for as a
pooling of interests.
(2) The 1995 results include a net year-to-date tax benefit of $3.7 million
or $0.22 per share.
(3) The 1996 results include a net year-to-date tax benefit of $891,000 or
$0.05 per share.
(4) The 1997 results include one-time acquisition and merger related charges
of $19.2 million or ($0.61) per share, net of tax.
(5) Diluted net loss per share has been calculated in accordance with
application of Statement of Financial Accounting Standards No. 128, which
resulted in a restatement of diluted net loss per share for the fiscal
year 1993.
TOTAL REVENUE
(in thousands)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 $54,865
1994 $65,523
1995 $82,442
1996 $109,578
1997 $110,404
</TABLE>
STOCKHOLDERS' EQUITY
(in thousands)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 $38,296
1994 $49,895
1995 $66,337
1996 $84,045
1997 $91,898
</TABLE>
WORKING CAPITAL
(in thousands)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 $33,927
1994 $34,998
1995 $44,381
1996 $49,243
1997 $51,143
</TABLE>
EMPLOYEES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 177
1994 244
1995 285
1996 363
1997 382
</TABLE>
<PAGE>
Financial Review
<PAGE>
p 17. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------------
(amounts in thousands except Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
per share data) 1997 1997 1997 1997 1996 1996 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 32,500 $ 30,064 $ 26,438 $ 21,402 $ 30,664 $ 28,787 $ 26,259 $ 23,868
Cost of revenue 8,841 8,813 8,392 6,834 9,124 8,482 7,913 7,144
---------------------------------------------------------------------------------------------------
Gross profit 23,659 21,251 18,046 14,568 21,540 20,305 18,346 16,724
Operating expenses
Research and development 5,944 5,884 5,884 5,787 5,600 5,158 4,681 4,267
Sales and marketing 10,065 9,389 8,787 8,534 8,511 8,318 7,966 7,187
General and administrative 3,094 3,034 2,849 2,508 2,146 1,790 1,755 1,563
Acquisition and merger
related charges -- 18,031 -- 1,200 -- -- -- --
---------------------------------------------------------------------------------------------------
Total operating expenses 19,103 36,338 17,520 18,029 16,257 15,266 14,402 13,017
---------------------------------------------------------------------------------------------------
Operating income (loss) 4,556 (15,087) 526 (3,461) 5,283 5,039 3,944 3,707
Interest and other, net 629 636 518 392 547 533 487 312
---------------------------------------------------------------------------------------------------
Net income (loss) before
provision for (benefit
from) income taxes 5,185 (14,451) 1,044 (3,069) 5,830 5,572 4,431 4,019
Provision for (benefit
from) income taxes 1,607 (6,925) 324 (951) 1,305 1,700 1,441 1,275
---------------------------------------------------------------------------------------------------
Net income (loss) $ 3,578 $ (7,526) $ 720 $ (2,118) $ 4,525 $ 3,872 $ 2,990 $ 2,744
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Diluted net income
(loss) per share $ 0.19 $ (0.43) $ 0.04 $ (0.13) $ 0.25 $ 0.22 $ 0.17 $ 0.16
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Number of shares used
in diluted per
share calculation 18,971 17,462 18,025 16,562 18,378 17,967 17,857 17,445
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Market price range
High $ 16.31 $ 16.63 $ 15.88 $ 21.00 $ 21.63 $ 15.13 $ 16.50 $ 11.50
Low $ 10.69 $ 12.13 $ 6.69 $ 15.00 $ 11.75 $ 11.88 $ 11.13 $ 9.00
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------------
(as a percentage of Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
total revenue) 1997 1997 1997 1997 1996 1996 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue 27.2% 29.3% 31.7% 31.9% 29.8% 29.5% 30.1% 29.9%
---------------------------------------------------------------------------------------------------
Gross profit 72.8% 70.7% 68.3% 68.1% 70.2% 70.5% 69.9% 70.1%
Operating expenses
Research and development 18.3% 19.6% 22.3% 27.0% 18.2% 17.9% 17.8% 17.9%
Sales and marketing 31.0% 31.2% 33.2% 39.9% 27.8% 28.9% 30.4% 30.1%
General and administrative 9.5% 10.1% 10.8% 11.7% 7.0% 6.2% 6.7% 6.6%
Acquisition and merger
related charges -- 60.0% -- 5.6% -- -- -- --
---------------------------------------------------------------------------------------------------
Total operating expenses 58.8% 120.9% 66.3% 84.2% 53.0% 53.0% 54.9% 54.6%
---------------------------------------------------------------------------------------------------
Operating income (loss) 14.0% (50.2%) 2.0% (16.1%) 17.2% 17.5% 15.0% 15.5%
Interest and other, net 2.0% 2.1% 1.9% 1.8% 1.8% 1.9% 1.9% 1.3%
---------------------------------------------------------------------------------------------------
Net income (loss) before
provision for (benefit
from) income taxes 16.0% (48.1%) 3.9% (14.3%) 19.0% 19.4% 16.9% 16.8%
Provision for (benefit from)
income taxes 5.0% (23.1%) 1.2% (4.4%) 4.2% 5.9% 5.5% 5.3%
---------------------------------------------------------------------------------------------------
Net income (loss) 11.0% (25.0%) 2.7% (9.9%) 14.8% 13.5% 11.4% 11.5%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
The 1996 quarterly results have been restated to reflect the February 1997
merger of the Company with SpeedSim, Inc. which was accounted for as a
pooling of interests.
The Company's common stock is traded on the Nasdaq National Market under the
symbol "QKTN." As of December 31, 1997, there were approximately 207
stockholders of record and an estimated 6,500 additional stockholders who held
stock in "street name."
<PAGE>
p 18. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Quickturn Design Systems, Inc. (the "Company" or "Quickturn") designs,
manufactures, sells and supports products that verify the designs of complex
integrated circuits ("ICs") and electronic systems. The Company derives
substantially all of its revenue from its design verification products and
related maintenance and consulting services. The principal design verification
products include System Realizer and CoBALT emulators and SpeedSim cycle-based
simulators. Emulation systems are sold in modules of various capacities measured
in "logic gates," a unit describing the design elements created and verified by
Quickturn's customers. As system capacity increases, the selling price of these
systems increases correspondingly. Simulation revenue is charged on a
per-license basis. Quickturn's products serve the needs of IC and systems design
engineers in a variety of markets including microprocessors, computers,
workstations and PCs, telecommunications and networking, multimedia and
graphics.
The Company began operations in 1987 and commenced product shipments in 1989. In
January 1997, the Company commenced shipments of its CoBALT emulation system
which resulted from the Company's technology relationship with IBM. In February
1997, the Company merged with SpeedSim, Inc. ("SpeedSim"), a provider of
cycle-based simulation software (the "SpeedSim Merger"). See Note 3 of the Notes
to Consolidated Financial Statements. In June 1997, the Company purchased from
Synopsys, Inc. ("Synopsys") certain assets relating to Synopsys's emulation
business of Arkos Design, Inc. (the "Arkos Acquisition"). See Note 3 of the
Notes to Consolidated Financial Statements. Also in June 1997, the Company
extended its relationship with IBM to develop the next generation of custom
processor-based emulation systems. In November 1997, Quickturn moved its
corporate headquarters to San Jose, California. Late in 1997, the Company
introduced release 5.1 of its Quest II software, designed to enable customers to
more quickly and easily compile their IC designs.
RESULTS OF OPERATIONS
The following table sets forth certain financial data from the Company's
consolidated statements of operations as a percentage of total revenue:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenue 100.0% 100.0% 100.0%
Cost of revenue 29.8% 29.8% 30.5%
--------------------------
Gross margin 70.2% 70.2% 69.5%
Operating expenses
Research and development 21.3% 18.0% 18.7%
Sales and marketing 33.3% 29.2% 31.3%
General and administrative 10.4% 6.6% 6.1%
Acquisition and merger related charges 17.4% -- --
--------------------------
Total operating expenses 82.4% 53.8% 56.1%
--------------------------
Operating income (loss) (12.2%) 16.4% 13.4%
Interest and other, net 2.0% 1.7% 1.0%
--------------------------
Net income (loss) before provision
for (benefit from) income taxes (10.2%) 18.1% 14.4%
Provision for (benefit from) income taxes (5.4%) 5.2% (0.7%)
--------------------------
Net income (loss) (4.8%) 12.9% 15.1%
--------------------------
--------------------------
</TABLE>
TOTAL REVENUE
The Company derives its total revenue from the sales of its products,
maintenance and services. Product revenue consists primarily of sales of its
System Realizer and CoBALT emulation systems, and cycle-based simulation
software. Maintenance and service revenue consists of fees for maintenance and
support services, training and consulting.
Total revenue increased by $826,000, or 1%, to $110.4 million in 1997 over 1996
compared with an increase of $27.1 million, or 33%, in 1996 over 1995. The
relatively flat growth in total revenue in 1997 was attributable to an increase
in maintenance and service revenue due to a larger installed customer base,
partially offset by a decrease in product revenue. The decrease in product
revenue in 1997 was due to lower product volume somewhat offset by a higher mix
of emulation systems containing more emulation modules. The total revenue growth
in 1996 and 1995 was primarily attributable to an increase of product revenue
due to a higher mix of emulation systems containing more emulation modules.
Product revenue accounted for 73%, 80% and 83% of total revenue in 1997, 1996
and 1995, respectively, while maintenance and service revenue accounted for 27%,
20% and 17% of total revenue in 1997, 1996 and 1995, respectively. On a price
per logic gate basis, both product costs and the average price for an emulation
system with equivalent capacity decreased due to increased efficiency of repro-
grammable system components and lower component costs.
Domestic revenue (North American sales) grew by 4%, 25% and 17% in 1997, 1996
and 1995, respectively, while international revenue decreased by 4% in 1997,
and increased by 51% and 52% in 1996 and 1995, respectively. See Note 14 of the
Notes to Consolidated Financial Statements. International revenue (sales outside
of North America) accounted for approximately 34%, 36% and 31% of total revenue
in 1997, 1996 and 1995, respectively. The decrease in international revenue in
1997 in dollar amounts was largely due to lower revenue in the Asia-Pacific
markets, excluding Japan, which decreased by 64% to $2.9 million, somewhat
offset by higher revenue in Europe which increased 27% to $11.2 million. The
Company is uncertain whether the softness in the Asia-Pacific markets, excluding
Japan, will continue in the foreseeable future due to extreme currency
devaluation and liquidity problems in this region. The increase in international
revenue in 1996 and 1995 was largely due to revenue growth in the Asia-Pacific
markets which increased by 83% to $30.1 million in 1996 and by 77% to $16.5
million in 1995.
Revenue from most international customers is denominated in U.S. dollars.
However, receivables from certain other international customers are denominated
in local currencies. Such receivables are hedged, where practicable, by forward
exchange contracts to minimize the impact of foreign
<PAGE>
p 19. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
exchange rate movements on the Company's operating results. There have been no
material gains or losses associated with the Company's hedging program. However,
there can be no assurance that fluctuations in the currency exchange rates in
the future will not have a material adverse impact on the receivables derived
from foreign currency denominated sales and thus the Company's operating results
and financial condition. See Note 2 of the Notes to Consolidated Financial
Statements.
Many of the Company's customers order on an as-needed basis and often delay
delivery of firm purchase orders until the commencement dates of such customers'
development projects are determined. Moreover, a significant portion of the
Company's total revenue in each quarter generally results from shipments in the
last few weeks of the quarter. Therefore, a delay in the shipment of a few
orders can have a significant impact upon total revenue and results of
operations in a given quarter.
A relatively limited number of customers have historically accounted for a
substantial portion of the Company's revenue. These customers represent early
adopters of emulation technology, typically for the design of complex integrated
circuits. In particular, the Company's top ten customers represented 43%, 52%
and 48% of total revenue in 1997, 1996 and 1995, respectively. One customer,
Fujitsu, comprised 12% of the Company's total revenue in 1996, and no customer
individually comprised more than 10% of the Company's total revenue in 1997 and
1995. The Company expects that sales of its products to a relatively limited
number of customers will continue to account for a high percentage of total
revenue for the foreseeable future. The loss of a major customer or any
reduction in orders by such a customer could have an adverse effect on the
Company's financial condition or results of operations.
The Company believes that in the future its results of operations in a quarterly
period could be impacted by the timing of customer development projects and
related purchase orders for the Company's emulation systems, new product
announcements and releases by the Company, and economic conditions generally and
in the electronics industry specifically.
The Company recognizes revenue from sales of its design verification products
and services when all substantial conditions have been met, including shipment
to the customer, fulfillment of acceptance terms, if any, and completion of all
significant contractual terms. Maintenance revenue is deferred and recognized
ratably over the term of the maintenance agreement, which is typically twelve
months. Maintenance contracts are typically renewed annually. Warranty and
similar costs related to post-contract customer support are accrued at the time
of sale.
GROSS MARGINS
Cost of revenue includes materials, labor and overhead incurred in the
manufacture of emulation systems and cycle-based simulation software as well as
the cost of providing service and maintenance. Total gross margins, which
consist of product, and maintenance and service gross margins, were 70% in each
of the three years 1997, 1996 and 1995. Product gross margins were
70% in each of the three years 1997, 1996 and 1995. Maintenance and service
gross margins were 70% in 1997 and 69% in 1996 and 1995. The Company was able to
maintain its gross margins primarily due to a sufficiently large revenue base
over which to spread fixed costs and to continued manufacturing efficiencies.
The Company expects competitive pressures to increase in its market from
existing companies and new entrants, which among other things could result in a
decreasing average sales price. Accordingly, there can be no assurance that the
Company will be able to sustain its recent gross margins. Furthermore, to the
extent that the Company's cost reduction goals are achieved, any resulting cost
savings that are passed on to the Company's customers may also have an adverse
effect on gross margins.
RESEARCH AND DEVELOPMENT
Research and development expenses were $23.5 million, $19.7 million and $15.4
million in 1997, 1996 and 1995, respectively. The increases in research and
development expenses were primarily attributable to increased staffing and
equipment costs necessary to enhance current products and carry out research and
development activities for the next generation emulation and cycle-based
simulation products. Research and development expenses as a percentage of total
revenue were approximately 21%, 18% and 19% in 1997, 1996 and 1995,
respectively. The Company expects to continue to invest a significant amount of
its resources in research and development.
SALES AND MARKETING
Sales and marketing expenses were $36.8 million, $32.0 million and $25.8 million
in 1997, 1996 and 1995, respectively. Sales and marketing expenses increased in
each period due to the expansion of the Company's sales and marketing
organizations. As a percentage of total revenue, sales and marketing expenses
were approximately 33%, 29% and 31% in 1997, 1996 and 1995, respectively. The
Company expects that sales and marketing expenses will continue to increase in
dollar amounts as the Company expands its sales and marketing efforts.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $11.5 million, $7.3 million and $5.0
million in 1997, 1996 and 1995, respectively. The increases in general and
administrative expenses in 1997 and 1996 were primarily attributable to
increased legal costs related to a patent infringement
<PAGE>
p 20. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
lawsuit filed by the Company in January 1996. See Note 16 of the Notes to
Consolidated Financial Statements. The Company expects general and
administrative expenses to increase in 1998 due primarily to continued legal
costs. General and administrative expenses represented approximately 10%, 7%
and 6% of total revenue in 1997, 1996 and 1995, respectively.
ACQUISITION AND MERGER RELATED CHARGES
In connection with the SpeedSim Merger, the Company recorded a one-time charge
of $1.2 million in the first quarter of 1997 that included fees for investment
banking, legal and accounting services and other costs of consolidating.
In connection with the Arkos Acquisition, the Company incurred charges of $18.0
million in the third quarter of 1997 representing the portion of the purchase
price expensed. The balance of the purchase price will be amortized over three
to five years. The Company acquired certain in-process technology which was
expensed in accordance with Interpretation 4 to Statement of Financial
Accounting Standard No. 2, "Accounting for Research and Development Costs." Such
in-process technology was valued, along with other acquired net assets, in
accordance with valuation techniques commonly used in the technology industry.
See Note 3 of the Notes to Consolidated Financial Statements.
INTEREST INCOME AND EXPENSE
Interest income was $2.4 million, $2.2 million and $1.8 million in 1997, 1996
and 1995, respectively. The increases in interest income in 1997 and 1996 were
due primarily to a greater average balance of cash and cash equivalents and
marketable securities. Interest expense was $272,000, $429,000 and $750,000 in
1997, 1996 and 1995, respectively. The decreases in interest expense in 1997 and
1996 were due primarily to the payoff of lease lines used to purchase certain
fixed assets and the reduction of other debt.
PROVISION FOR INCOME TAXES
The provision for federal, state and foreign income taxes was a benefit of $5.9
million in 1997, an expense of $5.7 million in 1996 and a benefit of $612,000 in
1995, representing effective tax provision (benefit) rates of approximately
(53%), 29% and (5%), respectively. The effective income tax rate was impacted by
a reduction in the Company's valuation allowance against deferred tax assets of
none, $1.9 million and $6.8 million for 1997, 1996 and 1995, respectively. The
effective tax rate was also reduced by the tax benefit from the Company's
foreign sales corporation, and by utilization of federal and state tax credits
in all years presented.
At December 31, 1997, the Company had federal net operating loss carryforwards
of $5.7 million and federal and state tax credit carryforwards of $1.3 million
and $1.1 million, respectively. A portion of the Company's net operating loss
and tax credit carryforwards were acquired in a merger and are subject to an
annual limitation of approximately $1.2 million.
FACTORS AFFECTING OPERATING RESULTS
COMPETITION
The Electronic Design Automation ("EDA") industry is highly competitive and
rapidly changing. The Company faces significant competition for emulation-based
system-level verification and cycle-based simulation, in addition to competition
from traditional design verification methodologies which rely on the approach of
building and then testing complete system prototypes. Because of the growing
demand for a design verification methodology which reduces the number of costly
design iterations and improves product quality, the Company expects competition
in the market for system-level verification and cycle-based simulation to
increase as other companies attempt to introduce emulation and cycle-based
simulation products and product enhancements, and as major new EDA technologies
may emerge. Moreover, the Company competes with companies that have
significantly greater financial, technical and marketing resources, greater name
recognition and larger installed bases than the Company. In addition, many of
these competitors have established relationships with current and potential
customers of the Company. Increased competition could result in price
reductions, reduced margins and loss of market share, all of which could
materially adversely affect the Company. The Company believes that the principal
competitive factors in the EDA market are quality of results, the
mission-critical nature of the technology, technical support, product
performance, reputation, price and support of industry standards. The Company
believes that it currently competes favorably with respect to these factors.
However, there can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results and financial condition.
In addition, competitors may resort to litigation as a means of competition.
Such litigation may result in substantial costs to the Company and significant
diversion of management time. In 1995, Mentor Graphics Corporation ("Mentor")
filed a suit against the Company for declaratory judgment of noninfringement,
invalidity and unenforceability of several of the Company's patents. Several
actions between these parties were consolidated in the U.S. District Court for
the District of Oregon, where six of the Company's patents are now involved in
the disputes.
The Company has filed counterclaims against Mentor and Mentor's French
subsidiary, Meta Systems ("Meta"), for
<PAGE>
p 21. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
infringement and threatened infringement of those six patents. Mentor has
also filed claims against the Company for defamation and tortious
interference. In January 1996, the Company filed a complaint with the
International Trade Commission, seeking to stop unfair importation of
hardware logic emulation systems and components manufactured by Meta on the
grounds that such systems infringe the Company's patents. In November 1996,
Aptix Corporation filed a suit against the Company alleging antitrust
violations and unfair competition. In August 1997, a preliminary injunction
sought by Mentor's German subsidiary, Mentor Graphics (Deutschland) GmbH, was
issued by a regional court in Munich, enjoining agents of the Company from
making certain statements concerning U.S. litigation matters between Mentor
and the Company. In October 1997, the Company filed suit in Germany against
Mentor's German subsidiary, Mentor Graphics (Deutschland) GmbH, for
infringement of the Company's German patent. See Note 16 of the Notes to
Consolidated Financial Statements. Although patent, intellectual property and
related antitrust disputes in the EDA industry are often settled through
licensing, cross-licensing or similar arrangements, costs associated with
such litigation and arrangements may be substantial.
IMPACT OF THE YEAR 2000 ISSUE
Many existing computer systems, applications and other control devices use
computer programs that recognize only two digits rather than four digits to
define an applicable year. Therefore, any of the Company's computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000 (the "Year 2000 Issue"). This could result in a
system failure or miscalculations causing disruptions of the Company's
operations or in the ability of the Company's customers to effectively utilize
the Company's design verification products.
Based on recent assessments, the Company has determined that it will be required
to modify or replace portions of its software so that its computer systems and
design verification products will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications to existing
software or conversion to new software, the Year 2000 Issue can be mitigated.
However, if such modifications and/or conversions are not made, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with its significant suppliers
to determine the extent to which the Company is vulnerable to those third
parties' failure to remedy their own Year 2000 Issue. However, there can be no
assurance that the systems of other companies on which the Company's systems
rely upon will be converted in a timely fashion, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram or
replace, and test software for Year 2000 Issue modifications. The costs and
timing of the project on which the Company plans to complete the Year 2000 Issue
modifications are based on management's best estimates. Management has
determined that the costs of the Year 2000 Issue project will not be material to
the Company's results of operations, liquidity and capital resources. There can
be no assurance that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material difference include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
OTHER FACTORS
Other factors which could adversely affect the Company's quarterly operating
results in the future include efficiencies as they relate to managing
inventories and fixed assets, the timing of expenditures in anticipation of
increased revenue, customer product delivery requirements and shortages of
components or labor. Moreover, a significant portion of the Company's total
revenue in each quarter generally results from shipments in the last few weeks
of the quarter; therefore, a delay in the shipment of a few orders can have a
significant impact upon total revenue and results of operations in a given
quarter. Additionally, since a significant portion of the Company's revenue and
net income is derived from international operations, fluctuations of the U.S.
dollar against foreign currencies and the seasonality of Asia-Pacific, European
and other international markets could impact the Company's results of operations
and financial condition in a particular quarter.
Due to the factors above, the Company's future earnings and stock price may be
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in total revenue or earnings from levels expected by securities
analysts has had and could in the future have an immediate and significant
adverse effect on the trading price of the Company's common stock. Additionally,
the Company may not learn of such shortfalls until late in a fiscal quarter,
which could result in an even more immediate and adverse effect on the trading
price of the Company's common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative
<PAGE>
p 22. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions
by stockholders. The Company is evaluating alternative formats for presenting
this information, but does not expect this pronouncement to materially impact
the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supercedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise." The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated
to conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had $53.1 million in cash, cash equivalents
and marketable securities. Additionally, the Company had $9.8 million in
unsecured revolving bank lines of credit. To date, no funds have been drawn from
the bank lines of credit. The Company's credit agreements contain certain
affirmative and restrictive covenants that are typical of such commercial
lending arrangements. The agreements require, among other things, that the
Company maintain a stipulated tangible net worth, meet certain financial ratios
(quick asset to current liability and debt to tangible net worth), achieve
annual profitability excluding the one-time write-off of the Arkos Acquisition
and maintain quarterly debt service. The agreements also prohibit, among other
things, the Company from paying cash dividends. See Note 8 of the Notes to
Consolidated Financial Statements.
Net cash provided by operating activities was $9.2 million, $22.4 million and
$10.2 million in 1997, 1996 and 1995, respectively. The decrease in cash
provided by operating activities in 1997 as compared to 1996 was primarily
attributable to a decrease in net income and increase in accounts receivable,
partially offset by the write-off of the Arkos Acquisition. Additionally, the
increase in cash provided by operations in 1996 as compared to 1995 was
primarily attributable to a significantly smaller decrease in deferred income
taxes and an increase in deferred revenue.
Net cash used in investing activities was $20.6 million, $13.3 million and
$171,000 in 1997, 1996 and 1995, respectively. Net cash used in investing
activities was related primarily to net purchases of marketable securities, and
to acquisitions of property and equipment. The increase in cash used in
investing activities in 1997 as compared to 1996 was primarily attributable to
the Arkos Acquisition, while the increase in 1996 against 1995 was primarily due
to an increase in net purchases of marketable securities. The Company expects
that investment levels and net cash used in investing activities will increase
in future periods.
Capital expenditures, including capital leases, were approximately $7.5 million,
$6.4 million and $7.8 million in 1997, 1996 and 1995, respectively. These
expenditures were primarily for the expansion of production capacity and the
addition of research and development equipment. While the Company has no
material capital commitments, the Company anticipates that its planned purchases
of capital equipment in 1998 will require additional expenditures of
approximately $9.0 million, a portion of which may be financed with cash and a
portion of which may be financed through capital leases.
The Company believes that its cash and cash equivalents, together with its
existing credit facility and the cash flows expected to be generated by
operations, will be sufficient to meet its anticipated cash needs for working
capital, capital expenditures and marketing expansion through at least 1998.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may sell additional equity or debt
securities or obtain additional credit facilities.
<PAGE>
p 23. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
(amounts in thousands except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
Product revenue $ 80,850 $ 88,090 $ 68,321
Maintenance and service revenue 29,554 21,488 14,121
--------------------------------------
Total revenue 110,404 109,578 82,442
Cost of revenue
Cost of product revenue 23,984 26,050 20,776
Cost of maintenance and service revenue 8,896 6,613 4,330
--------------------------------------
Total cost of revenue 32,880 32,663 25,106
--------------------------------------
Gross profit 77,524 76,915 57,336
Operating expenses
Research and development 23,499 19,706 15,436
Sales and marketing 36,775 31,982 25,809
General and administrative 11,485 7,254 5,006
Acquisition and merger related charges 19,231 -- --
--------------------------------------
Total operating expenses 90,990 58,942 46,251
--------------------------------------
Operating income (loss) (13,466) 17,973 11,085
Interest income 2,370 2,229 1,792
Interest expense (272) (429) (750)
Other income (expense), net 77 79 (261)
--------------------------------------
Net income (loss) before provision for
(benefit from) income taxes (11,291) 19,852 11,866
Provision for (benefit from) income taxes (5,945) 5,721 (612)
--------------------------------------
Net income (loss) $ (5,346) $ 14,131 $ 12,478
--------------------------------------
--------------------------------------
Basic net income (loss) per share $ (0.31) $ 0.87 $ 0.81
--------------------------------------
--------------------------------------
Number of shares used in basic per share
calculation 17,110 16,323 15,497
--------------------------------------
--------------------------------------
Diluted net income (loss) per share $ (0.31) $ 0.79 $ 0.74
--------------------------------------
--------------------------------------
Number of shares used in diluted per
share calculation 17,110 17,912 16,806
--------------------------------------
--------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
p 24. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
(amounts in thousands except share data) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 14,589 $ 25,790
Marketable securities 18,219 10,614
Accounts receivable, net of allowance
for doubtful accounts of $1,840 in
1997 and 1996 31,709 21,768
Inventories 10,899 10,141
Prepaid expenses and other current assets 4,324 2,991
Deferred income taxes 8,697 5,871
------------------------
Total current assets 88,437 77,175
Marketable securities 20,326 18,198
Fixed assets, net 11,118 11,243
Deferred income taxes 8,029 2,939
Other assets 1,282 2,422
------------------------
Total assets $ 129,192 $ 111,977
------------------------
------------------------
Liabilities
Current liabilities
Short term debt $ 1,095 $ 3,502
Accounts payable 6,231 894
Accrued liabilities 20,351 14,586
Deferred revenue 9,617 8,950
------------------------
Total current liabilities 37,294 27,932
------------------------
Total liabilities 37,294 27,932
------------------------
Commitments and contingencies
(Notes 10 and 16).
Stockholders' Equity
Preferred stock, $.001 par value: Authorized:
2,000,000 shares; Issued and outstanding:
no shares -- --
Common stock, $.001 par value: Authorized:
40,000,000 shares; Issued and outstanding:
17,606,006 shares in 1997; 16,526,904
shares in 1996 18 17
Additional paid-in capital 91,122 77,545
Cumulative translation adjustment (653) --
Unrealized holding gains on marketable
securities 88 10
Retained earnings 1,896 7,242
Deferred compensation (573) (769)
------------------------
Total stockholders' equity 91,898 84,045
------------------------
Total liabilities and stockholders' equity $ 129,192 $ 111,977
------------------------
------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
p 25. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Cumulative
------------------ Paid-in Translation
(amounts in thousands except share data) Shares Amount Capital Adjustment
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, Dec 31, 1994 13,102,067 $ 13 $ 69,297 $ --
Issuance of common stock 2,399,039 2 1,601 --
Issuance of common stock,
employee stock purchase plan 158,488 -- 1,091 --
Exercise of stock options 335,505 1 574 --
Tax benefit from option exercises -- -- 545 --
Unrealized holding gains on
marketable securities -- -- -- --
Net income -- -- -- --
---------------------------------------------
Balance, Dec 31, 1995 15,995,099 16 73,108 --
Issuance of common stock,
employee stock purchase plan 198,117 -- 1,452 --
Exercise of stock options 333,688 1 1,161 --
Tax benefit from option exercises -- -- 999 --
SpeedSim issuance of stock options
in lieu of compensation -- -- 825 --
Unrealized holding losses on
marketable securities -- -- -- --
Amortization of deferred
compensation -- -- -- --
Net income -- -- -- --
---------------------------------------------
Balance, Dec 31, 1996 16,526,904 17 77,545 --
Issuance of common stock,
employee stock purchase plan 176,733 -- 1,812 --
Exercise of stock options
and warrants 402,369 -- 1,406 --
Tax benefit from option exercises -- -- 860 --
Issuance of common stock for
Arkos Acquisition 500,000 1 6,499 --
Issuance of warrants for
Arkos Acquisition -- -- 3,000 --
Unrealized holding gains on
marketable securities -- -- -- --
Cumulative translation adjustment -- -- -- (653)
Amortization of deferred
compensation -- -- -- --
Net loss -- -- -- --
---------------------------------------------
Balance, Dec 31, 1997 17,606,006 $ 18 $ 91,122 $ (653)
---------------------------------------------
---------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Holding Gains
(Losses) on Retained
Marketable Earnings Deferred
Securities (Deficit) Compensation Total
-----------------------------------------------
<S> <C> <C> <C> <C>
Balance, Dec 31, 1994 $ (336) $(19,367) $ -- $ 49,607
Issuance of common stock -- -- -- 1,603
Issuance of common stock,
employee stock purchase plan -- -- -- 1,091
Exercise of stock options -- -- -- 575
Tax benefit from option exercises -- -- -- 545
Unrealized holding gains on
marketable securities 438 -- -- 438
Net income -- 12,478 -- 12,478
-----------------------------------------------
Balance, Dec 31, 1995 102 (6,889) -- 66,337
Issuance of common stock,
employee stock purchase plan -- -- -- 1,452
Exercise of stock options -- -- -- 1,162
Tax benefit from option exercises -- -- -- 999
SpeedSim issuance of stock options
in lieu of compensation -- -- (825) --
Unrealized holding losses on
marketable securities (92) -- -- (92)
Amortization of deferred
compensation -- -- 56 56
Net income -- 14,131 -- 14,131
-----------------------------------------------
Balance, Dec 31, 1996 10 7,242 (769) 84,045
Issuance of common stock,
employee stock purchase plan -- -- -- 1,812
Exercise of stock options
and warrants -- -- -- 1,406
Tax benefit from option exercises -- -- -- 860
Issuance of common stock for
Arkos Acquisition -- -- -- 6,500
Issuance of warrants for
Arkos Acquisition -- -- -- 3,000
Unrealized holding gains on
marketable securities 78 -- -- 78
Cumulative translation adjustment -- -- -- (653)
Amortization of deferred
compensation -- -- 196 196
Net loss -- (5,346) -- (5,346)
-----------------------------------------------
Balance, Dec 31, 1997 $ 88 $ 1,896 $ (573) $ 91,898
-----------------------------------------------
-----------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
p 26. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
(amounts in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (5,346) $ 14,131 $ 12,478
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 7,820 8,524 7,902
Amortization of deferred compensation 196 56 --
Write-off of Arkos Acquisition 18,031 -- --
Write-down of inventories 1,551 719 244
Deferred income taxes (7,378) (782) (6,814)
Changes in current assets and liabilities
Accounts receivable (9,941) (710) (1,133)
Inventories (6,481) (3,055) (1,771)
Prepaid expenses and other current assets (1,871) (1,094) (1,243)
Accounts payable and accrued liabilities 11,962 (285) 56
Deferred revenue 667 4,912 464
-----------------------------------
Net cash provided by operating activities 9,210 22,416 10,183
-----------------------------------
Cash flows from investing activities
Acquisition of fixed assets (7,529) (6,413) (4,833)
Sale of marketable securities 16,173 20,527 28,926
Purchase of marketable securities (25,828) (25,544) (23,706)
Purchase of Arkos (5,000) -- --
Increase (decrease) in other assets 1,615 (1,868) (558)
-----------------------------------
Net cash used in investing activities (20,569) (13,298) (171)
-----------------------------------
Cash flows from financing activities
Proceeds from equipment financing -- -- 1,500
Payments of debts (2,407) (3,600) (4,020)
Proceeds from stock issuances 3,218 2,614 3,269
-----------------------------------
Net cash provided by (used in) financing activities 811 (986) 749
-----------------------------------
Effect of exchange rates on cash and cash equivalents (653) -- --
-----------------------------------
Net increase (decrease) in cash and cash equivalents (11,201) 8,132 10,761
Cash and cash equivalents at beginning of year 25,790 17,658 6,897
-----------------------------------
Cash and cash equivalents at end of year $ 14,589 $ 25,790 $ 17,658
-----------------------------------
-----------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 278 $ 417 $ 828
Income taxes $ 3,187 $ 5,112 $ 776
Supplemental disclosure of noncash investing
and financing activities
Additions to fixed assets through capital lease
obligations $ -- $ -- $ 2,994
Unrealized holding gains (losses) on marketable
securities $ 78 $ (92) $ 438
Tax benefit from stock option exercises $ 860 $ 999 $ 545
Assets acquired in Arkos Acquisition $ 641 $ -- $ --
Common stock and warrants issued in Arkos Acquisition $ 9,500 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
p 27. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Quickturn Design Systems, Inc. (the "Company" or "Quickturn") designs,
manufactures, sells and supports emulation and cycle-based simulation
system-level verification solutions for the design of integrated circuits and
electronic systems. The Company's development and manufacturing facilities are
located in San Jose, California, and additional development facilities are
located in North Chelmsford, Massachusetts. The Company's principal markets are
in North America, Asia-Pacific and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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 amount of assets and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reported period. Actual results could differ
from those estimates.
CERTAIN RISKS AND CONCENTRATIONS
The Company's products are concentrated in the Electronic Design Automation
("EDA") industry which is highly competitive and rapidly changing. Revenue is
concentrated with a relatively limited number of customers, and supplies for
certain components are concentrated among a few providers. The loss of a major
customer or any reduction in orders by such a customer, the interruption of
certain supplier relationships, significant technological changes in the
industry or customer requirements, the infringement or expropriation of
proprietary intellectual property rights or patents, or the emergence of a major
direct competitor could affect operating results adversely. In addition, a
significant portion of the Company's revenue is derived from international
sales; therefore, fluctuations of the U.S. dollar against foreign currencies or
local economic conditions could adversely affect operating results.
All marketable securities are classified as available-for-sale and are carried
at fair value. Unrealized gains and losses on marketable securities classified
as available-for-sale, when material, are reported as a separate component of
stockholders' equity. Realized gains and losses on sales of all such investments
are reported in earnings and computed using the specific identification cost
method.
Financial instruments which potentially subject the Company to a concentration
of credit risk principally consist of cash and cash equivalents, marketable
securities and accounts receivable.
The Company sells products to companies in the electronics industry in North
America, Asia-Pacific and Europe. To reduce credit risk, management performs
ongoing credit evaluations of its customers' financial condition. The Company
maintains reserves for potential credit losses on its trade accounts receivable
which are uncollateralized. The Company has not experienced any significant
losses related to individual customers or groups of customers in any particular
industry or geographic area.
The Company maintains its excess cash balances in a variety of financial
instruments such as money market securities in various financial institutions
and securities backed by the U.S. government. The Company has not experienced
any material losses in any of the instruments it has used for excess cash
balances.
The Company uses forward exchange contracts to hedge certain assets denominated
in foreign currencies. For these instruments, risk reduction is assessed on a
transaction basis and the instruments are designated and deemed effective as a
hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles. Gains and losses on these hedges are
included in the carrying amounts of the assets and are ultimately recognized in
income as part of those carrying amounts. If a hedging instrument ceases to
qualify as a hedge, any subsequent gains and losses are recognized currently in
income. The Company does not use any derivatives for trading or speculative
purposes. If a derivative ceases to qualify for hedge accounting, it is
accounted for on a mark to market basis.
<PAGE>
p 28. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
TRANSLATION OF FOREIGN CURRENCIES
Effective in 1997, the Company's foreign subsidiary in Japan is considered an
independent operation having the local currency as its functional currency.
Accordingly, its net assets are translated at year-end exchange rates, while its
income and expense accounts are translated at average rates in effect during the
year. Adjustments resulting from these translations are reflected in the
Stockholders' Equity section titled "Cumulative translation adjustment."
Prior to 1997, all of the Company's foreign subsidiaries, including Japan, were
considered to be extensions of the U.S. operation having the U.S. dollar as
their functional currency.
The Company's foreign subsidiaries whose functional currency is the U.S. dollar
translate monetary assets and liabilities at year-end exchange rates while
non-monetary items are translated at historical rates. Income and expense
accounts are translated at average rates, except for depreciation and cost of
revenue which are translated at historical rates. Translation gains and losses
related to these subsidiaries are included in income.
REVENUE RECOGNITION
The Company recognizes revenue from sales of its design verification products
and services when all substantial conditions have been met, including shipment
to the customer, fulfillment of acceptance terms, if any, and completion of all
significant contractual terms. Maintenance revenue is deferred and recognized
ratably over the term of the maintenance agreement, which is typically twelve
months. Maintenance contracts are typically renewed annually. Warranty and
similar costs related to post-contract customer support are accrued at the time
of sale.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to operations as incurred.
CASH EQUIVALENTS
Investments and deposits with original maturities of three months or less at the
date of purchase are considered to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable and other
accrued liabilities approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with similar
terms, the carrying values of the note payable and capital lease obligations
approximate fair value. Estimated fair values for marketable securities (See
Note 4) and forward exchange contracts (see Certain Risks and Concentrations,
above) are based on quoted market prices for the same or similar instruments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company's inventories include high technology parts and components
that may be specialized in nature or subject to rapid technological
obsolescence. While the Company has programs to minimize the required
inventories on hand and considers technological obsolescence when estimating
required reserves to reduce recorded amounts to market values, it is reasonably
possible that such estimates could change in the near term.
DEPRECIATION AND AMORTIZATION
Fixed assets are stated at cost and are depreciated generally based on a
straight-line method over the estimated useful lives of the assets, generally
one to three years. Leasehold improvements are amortized based on a straight-
line method over the shorter of the remaining lease term or the estimated useful
life of the asset, typically three to five years. Amortization of equipment
under capital leases is computed using the straight-line method over the shorter
of the remaining lease term or the estimated useful life of the related asset,
typically three years.
ACCRUED WARRANTY
The Company provides an accrual for future warranty costs based on the
historical relationship of revenue to warranty costs incurred.
INCOME TAXES
The Company provides for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No.109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities, measured at the tax rates that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
NET INCOME (LOSS) PER SHARE
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share." All prior-period earnings
per share data presented have been restated to comply with SFAS 128. The
adoption of this standard did not have a material impact on the Company's
earnings per share.
<PAGE>
p 29. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
Basic net income (loss) per share is calculated using the weighted average
number of common shares outstanding for the period. Diluted net income (loss)
per share is calculated using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of common stock issuable upon exercise of stock
options and warrants (using the treasury stock method).
Fiscal Year-end
Effective in 1997, the Company changed its fiscal year to December 31 from a
52-week or 53-week year, ending on the last Sunday in December. The change had
no significant impact on the current period results of operations. For purposes
of presentation, the Company has indicated that its fiscal year ended on
December 31 for 1995 and 1996, although it operated on a 52-week or 53-week
fiscal year for those years.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes requirements for disclosure of comprehensive income and
becomes effective for the Company for fiscal years beginning after December 15,
1997, with reclassification of earlier financial statements for comparative
purposes. Comprehensive income generally represents all changes in stockholders'
equity except those resulting from investments or contributions by stockholders.
The Company is evaluating alternative formats for presenting this information,
but does not expect this pronouncement to materially impact the Company's
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supercedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise." The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
3. BUSINESS COMBINATIONS
In February 1997, the Company merged with SpeedSim, Inc. ("SpeedSim"), a
provider of cycle-based simulation software for the verification of digital
logic designs (the "SpeedSim Merger"), for 2.8 million shares of Quickturn
common stock. The merger was accounted for as a pooling of interests. The
Company incurred direct transaction costs of $1.2 million associated with the
merger, which were charged to operations during the quarter ended March
31, 1997. All financial information herein has been restated to include the
results of operations of SpeedSim.
Revenue and net income (loss) of the separate companies during the periods
preceding the SpeedSim Merger are presented below.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
(in thousands) 1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Revenue
The Company $ 104,370 $ 81,800
SpeedSim 5,208 642
--------- --------
Combined $ 109,578 $ 82,442
--------- --------
--------- --------
Net income (loss)
The Company $ 12,639 $ 13,083
SpeedSim 1,492 (605)
--------- --------
Combined $ 14,131 $ 12,478
--------- --------
--------- --------
</TABLE>
In June 1997, pursuant to an asset purchase agreement among the Company,
Synopsys, Inc. ("Synopsys") and Arkos Design, Inc. ("Arkos"), the Company
purchased from Synopsys certain assets relating to Synopsys's emulation
business, including all the outstanding capital stock of Arkos (the "Arkos
Acquisition"). The consideration paid by the Company was valued at $14.5 million
and consisted of $5.0 million cash, 500,000 shares of Quickturn common stock and
warrants to purchase 1.0 million shares of Quickturn common stock. The exercise
price of the warrants is $13.34 per share. The acquisition was accounted for as
a purchase. The Company recognized charges of $18.0 million in the third quarter
of 1997, which consisted of a $2.8 million write-off of the portion of the
purchase price which was allocated to in-process research and development and
marketing rights, and $15.2 million for the accrual of certain liabilities
incurred in connection with the acquisition and other costs related to the
acquisition. The balance of the purchase price, consisting of intellectual
property of $541,000 and fixed assets of $100,000, is being amortized over three
to five years.
<PAGE>
p 30. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
4. MARKETABLE SECURITIES
At December 31, 1997 and 1996, all marketable securities are classified as
available-for-sale and are summarized as follows:
Marketable securities at December 31, 1997
<TABLE>
<CAPTION>
Net
Unrealized
Market Cost Unrealized Unrealized Gains
(in thousands) Value Basis Gains Losses (Losses)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government debt securities $ 14,562 $ 14,549 $ 21 $ (8) $ 13
Municipal debt securities 22,424 22,348 78 (2) 76
Corporate debt securities 1,559 1,560 2 (3) (1)
----------------------------------------------------------------
$ 38,545 $ 38,457 $ 101 $(13) $ 88
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
Marketable securities at December 31, 1996
<TABLE>
<CAPTION>
Net
Unrealized
Market Cost Unrealized Unrealized Gains
(in thousands) Value Basis Gains Losses (Losses)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government debt securities $ 6,655 $ 6,664 $ 6 $ (15) $ (9)
Municipal debt securities 17,815 17,800 39 (24) 15
Corporate debt securities 4,342 4,338 5 (1) 4
----------------------------------------------------------------
$ 28,812 $ 28,802 $ 50 $ (40) $ 10
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, all marketable debt securities classified as
current had scheduled maturities of less than one year. Marketable debt
securities classified as noncurrent had scheduled maturities of one to three
years.
5. INVENTORIES
Inventories comprise:
<TABLE>
<CAPTION>
December 31,
---------------------
(in thousands) 1997 1996
- -----------------------------------------------------
<S> <C> <C>
Raw materials $ 6,780 $ 8,431
Work in process 4,119 1,710
---------------------
$ 10,899 $ 10,141
---------------------
---------------------
</TABLE>
6. FIXED ASSETS
Fixed assets comprise:
<TABLE>
<CAPTION>
December 31,
------------------
(in thousands) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Equipment $ 23,070 $ 24,731
Furniture, fixtures and
leasehold improvements 6,072 3,598
Demonstration and rental equipment 1,698 4,829
--------------------
30,840 33,158
Less accumulated depreciation
and amortization (19,722) (21,915)
--------------------
$ 11,118 $ 11,243
--------------------
--------------------
</TABLE>
Depreciation and amortization expense amounted to $7,754,000, $8,238,000 and
$7,008,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Fixed assets include equipment under capital leases
as follows:
<TABLE>
<CAPTION>
December 31,
------------------
(in thousands) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Cost $ 495 $ 2,302
Less accumulated amortization (389) (1,313)
---------------------
$ 106 $ 989
---------------------
---------------------
</TABLE>
The equipment under capital leases is pledged as collateral for repayment of the
related lease obligations.
7. ACCRUED LIABILITIES
Accrued liabilities comprise:
<TABLE>
<CAPTION>
December 31,
------------------
(in thousands) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Accrued payroll and related items $ 7,218 $ 5,466
Income taxes payable 5,789 6,298
Other accrued liabilities 7,344 2,822
--------------------
$20,351 $ 14,586
--------------------
--------------------
</TABLE>
<PAGE>
p 31. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
8. BANK BORROWING ARRANGEMENTS
The Company has unsecured revolving lines of credit totaling $9.8 million which
provide for borrowings through June 1, 1998. Borrowings under these agreements
bear interest at the banks' prime rate (8.5% at December 31, 1997). The
agreements are subject to certain restrictive covenants which include achieving
annual profitability, excluding the one-time write-off of the Arkos Acquisition,
and meeting certain financial ratios and minimum tangible net worth
requirements. The Company is currently in compliance with the agreement. The
agreements also prohibit the payment of cash dividends. To date, no funds have
been drawn against the lines of credit.
9. SHORT TERM DEBT
Capital Lease Obligations
The Company has equipment leases totaling $495,000 at interest rates varying
from 8.7% to 9.4%. Certain lease obligations were collateralized by restricted
deposits at December 31, 1997 and 1996 of $73,000 and $85,000, respectively,
which are included in other assets.
Minimum future lease payments for the year ending December 31, 1997, under all
equipment lease arrangements, are $510,000, of which $15,000 represents
interest.
Note Payable
At December 31, 1997, the Company had an uncollateralized note payable of
$600,000. The note had an original principal balance of $3.0 million and bears
interest at 4% per annum, payable quarterly.
10. COMMITMENTS
The Company leases its operating facilities under noncancellable operating
leases with terms greater than one year. At December 31, 1997, future minimum
rent payments under these leases are as follows:
<TABLE>
<CAPTION>
(in thousands) Year ending December 31,
- ------------------------------------------------------------
<S> <C>
1998 $ 4,806
1999 4,853
2000 3,924
2001 3,345
2002 3,436
Thereafter 5,262
--------
$ 25,626
--------
--------
</TABLE>
Rent expense related to the facilities and various equipment leases was
$2,704,000, $1,615,000 and $1,359,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
11. STOCKHOLDERS' EQUITY
Stock Option Plans
As of December 31, 1997, the Company had reserved 4,743,060 shares of common
stock for issuance under various stock option plans. Except for the 1994 Outside
Director Stock Option Plan, which provides for automatic grants to non-employee
directors, the Board of Directors may, under these plans, issue incentive stock
options to employees and nonstatutory stock options to employees or paid
consultants of the Company at prices no less than fair market value for
incentive and 85% of fair market value for nonstatutory stock options. The
options are exercisable at times and in increments as specified by the Board of
Directors. Options generally vest over four years and expire ten years from date
of grant. Options are exercisable prior to vesting, however such unvested shares
are subject to repurchase by the Company at their original cost. At December 31,
1997, there were no shares subject to repurchase.
In accordance with Accounting Principles Board Opinion No.25 ("APB 25"), the
Company recognized $825,000 of deferred compensation which is amortized over the
vesting period of the options. The amortization expense for the years ended
December 31, 1997, 1996 and 1995 was $196,000, $56,000 and none, respectively.
Employee Stock Purchase Plan
As of December 31, 1997, the Company had reserved 579,302 shares of common stock
for issuance under the Employee Stock Purchase Plan ("ESPP"). Shares are
purchased through employees' payroll deductions at exercise prices equal to 85%
of the lesser of the fair market value of the Company's common stock at either
the first day of an offering period or the last day of such offering period.
Shares issued under the ESPP in 1997, 1996 and 1995 were 176,733, 198,117 and
158,488, respectively.
Warrants
At December 31, 1997, warrants to purchase 1.2 million shares of common stock
(of which 700,000 were exercisable) were outstanding which may be exercised at
prices ranging from $13.34 to $30.00 per share. The warrants expire over periods
ranging from 2 to 3 years.
<PAGE>
p 32. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
Information with respect to activity under these stock option plans is set forth
below:
<TABLE>
<CAPTION>
Outstanding Options
Shares ----------------------------------------------------------
(amounts in thousands, Available Options Number Price Aggregate Weighted Avg.
except share data) for Grant Exercised of Shares Per Share Price Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 207,025 677,346 2,194,188 $ 0.26 - $ 13.25 $ 8,519 $ 3.62
Additional shares reserved 1,428,164 -- -- -- -- --
Options granted (926,078) -- 926,078 $ 0.19 - $ 11.63 6,357 $ 6.86
Options exercised -- 336,401 (336,401) $ 0.26 - $ 10.38 (575) $ 1.71
Options terminated 314,217 -- (314,217) $ 0.30 - $ 11.63 (1,932) $ 6.15
Options repurchased 896 -- -- $ 0.30 - $ 0.50 -- $ 0.36
Options retired -- -- (13,497) $ 0.64 - $ 6.30 (38) $ 2.82
-------------------------------------- --------
Balance, December 31, 1995 1,024,224 1,013,747 2,456,151 $ 0.19 - $ 13.25 12,331 $ 5.02
Additional shares reserved 1,000,000 -- -- -- -- --
Options granted (1,436,110) -- 1,436,110 $ 0.19 - $ 19.00 15,206 $10.59
Options exercised -- 333,688 (333,688) $ 0.30 - $ 11.63 (1,166) $ 3.49
Options terminated 363,852 -- (363,852) $ 0.50 - $ 13.25 (3,302) $ 9.08
Options retired -- -- (117) $ 0.64 - $ 0.64 -- $ 0.64
-------------------------------------- --------
Balance, December 31, 1996 951,966 1,347,435 3,194,604 $ 0.19 - $ 19.00 23,069 $ 7.22
Additional shares reserved 1,000,000 -- -- -- -- --
Options granted (751,097) -- 751,097 $ 2.83 - $ 18.63 8,617 $11.47
Options exercised -- 389,156 (389,156) $ 0.19 - $ 13.50 (1,406) $ 3.61
Options terminated 267,791 -- (267,791) $ 6.13 - $ 19.00 (3,330) $12.44
Options retired -- -- (14,354) $ 0.19 - $ 6.30 (33) $ 2.30
-------------------------------------- --------
Balance, December 31, 1997 1,468,660 1,736,591 3,274,400 $ 0.19 - $ 19.00 $ 26,917 $ 8.22
-------------------------------------- --------
-------------------------------------- --------
</TABLE>
At December 31, 1997 and 1996, vested options to purchase 1,657,860 and
1,251,457 shares, respectively, were unexercised.
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------
Number Weighted Average Weighted Average Number Weighted Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Contractual Life (Years) Price at 12/31/97 Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.19 - $ 0.95 373,101 6.24 $ 0.49 322,696 $ 0.44
$ 1.42 - $ 6.13 825,675 5.68 $ 3.80 713,679 $ 3.77
$ 6.30 - $ 10.50 761,884 8.06 $ 8.45 318,484 $ 8.60
$ 11.50 - $ 13.13 741,065 8.67 $ 12.01 232,891 $ 11.97
$ 13.38 - $ 19.00 572,675 9.30 $ 14.41 70,110 $ 15.19
--------- ---------
$ 0.19 - $ 19.00 3,274,400 7.61 $ 8.22 1,657,860 $ 5.68
--------- ---------
--------- ---------
</TABLE>
<PAGE>
p 33. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
The Company accounts for its stock option and employee stock purchase plans in
accordance with APB 25 and related interpretations. The following information
concerning such plans is provided in accordance with Statement of Financial
Accounting Standards No.123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997:
<TABLE>
<CAPTION>
Group A Group B
- -----------------------------------------------------
<S> <C> <C>
Risk-free interest rates 6.16% 6.16%
Expected life 5 years 4 years
Volatility 0.80 0.80
Dividend yield -- --
</TABLE>
Similarly, the following weighted average assumptions were used for grants in
1996 and 1995:
<TABLE>
<CAPTION>
Group A Group B
- -----------------------------------------------------
<S> <C> <C>
Risk-free interest rates 6.30% 6.22%
Expected life 5 years 4 years
Volatility 0.70 0.70
Dividend yield -- --
</TABLE>
The weighted average expected life was calculated based on the exercise behavior
of each group. Group A represents officers and directors who are a smaller group
holding a greater average number of options than other option holders and who
tend to exercise later in the vesting period. Group B represents all other
option holders, virtually all of whom are employees. This group tends to
exercise earlier in the vesting period.
The weighted average fair values of those options granted in 1997, 1996 and 1995
were $7.24, $8.43 and $5.84, respectively.
The Company has also estimated the fair value of the purchase rights issued
under the Company's Employee Stock Purchase Plan, using the Black-Scholes
valuation model with the following weighted average assumptions for all years
reported:
<TABLE>
<S> <C>
Risk-free interest rates 5.84%
Expected life 1.25 years
Volatility 0.72
Dividend yield --
</TABLE>
The weighted average fair values of those purchase rights granted in 1997, 1996
and 1995 were $6.14, $5.15 and $3.74, respectively.
The following pro forma income information has been prepared in accordance with
the provisions of SFAS 123:
<PAGE>
<TABLE>
<CAPTION>
(amounts in thousands except
per share data) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) -
pro forma $ (7,516) $ 12,430 $ 11,701
Basic net income (loss)
per share - pro forma $ (0.44) $ 0.76 $ 0.76
Diluted net income (loss)
per share - pro forma $ (0.44) $ 0.69 $ 0.70
</TABLE>
The above pro forma effects on net income (loss) may not be representative of
the effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
<PAGE>
p 34. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
12. INCOME TAXES
Income before taxes and details of the income tax provision consist of the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Domestic income (loss)
before taxes $ (11,813) $ 18,856 $ 11,530
Foreign income
before taxes 522 996 336
----------------------------------
Income (loss)
before taxes $ (11,291) $ 19,852 $ 11,866
----------------------------------
----------------------------------
Income tax provision (benefit)
Federal
Current payable (net of
benefit from utilization
of net operating loss
carryforwards of
$1,292 and $2,068
for 1996 and 1995,
respectively) $ 703 $ 5,235 $ 5,279
Deferred (6,155) (678) (5,579)
----------------------------------
(5,452) 4,557 (300)
State
Current payable 365 692 749
Deferred (1,223) (103) (1,235)
----------------------------------
(858) 589 (486)
Foreign
Current payable 365 575 174
Deferred -- -- --
----------------------------------
365 575 174
----------------------------------
Income tax
provision (benefit) $ (5,945) $ 5,721 $ (612)
----------------------------------
----------------------------------
</TABLE>
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate (35.0%) 35.0% 35.0%
State income taxes, net of
federal benefit (10.8%) 5.5% 6.2%
Change in valuation
allowance -- (9.5%) (55.0%)
Benefit of foreign sales
corporation (2.4%) (3.0%) (0.4%)
Nondeductible expenses -- 0.5% 2.1%
Foreign taxes 0.7% 1.4% 4.1%
Research and development
and business tax credits (7.6%) (3.7%) (2.0%)
Other 2.4% 2.6% 4.9%
----------------------------------
Effective tax provision
(benefit) rate (52.7%) 28.8% (5.1%)
----------------------------------
----------------------------------
</TABLE>
The effective income tax provision (benefit) rate in 1997, 1996 and 1995 was
impacted by a reduction in the Company's valuation allowance against deferred
tax assets of none, $1.9 million and $6.8 million, respectively.
The components of the net deferred tax assets are:
<TABLE>
<CAPTION>
December 31,
---------------------
(in thousands) 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Accrued vacation and bonus $ 391 $ 283
Reserve for inventories 4,386 1,793
Depreciation expense 1,806 1,864
Deferred revenue 1,129 970
Other liabilities and reserves 4,312 2,666
State taxes, net of federal benefit -- 118
Net operating loss carryforwards 2,049 767
Research and development and
business credits 2,653 350
-----------------------
Net deferred tax assets $ 16,726 $ 8,811
-----------------------
-----------------------
</TABLE>
No provision has been made for federal, state or foreign taxes that may result
from future remittances of undistributed earnings of foreign subsidiaries
($806,000 at December 31, 1997) because it is expected that such earnings will
be reinvested in these foreign operations. It is not practical to estimate the
amount of taxes that might be payable on the eventual remittance of such
earnings.
The Company's income taxes currently payable for both federal and state purposes
have been reduced by the tax benefit derived from the disqualifying dispositions
of incentive stock options and the exercise of nonqualified stock options. The
benefit, which totaled $860,000 in 1997 and $999,000 in 1996 was credited
directly to additional paid-in capital.
At December 31, 1997, the Company had approximately $5.7 million of federal net
operating loss carryforwards and federal and state tax credit carryforwards of
$1.3 million and $1.1 million, respectively. The carryforwards expire in 2005
through 2011, if not utilized. A portion of the Company's net operating loss and
tax credit carryforwards is subject to an annual limitation of approximately
$1.2 million.
<PAGE>
p 35. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
13. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
(amounts in thousands except Per share Net Per share Net Per share
per share amounts) Net Loss Shares Amount Income Shares Amount Income Shares Amount
- ------------------------------------------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income (loss) ($5,346) $14,131 $12,478
BASIC EPS
Net Income (loss) available to
common stockholders ($5,346) 17,110 ($0.31) $14,131 16,323 $0.87 $12,478 15,497 $0.81
------ ----- -----
------ ----- -----
EFFECT OF DILUTIVE SECURITIES
Options -- -- -- 1,554 -- 1,303
Warrants -- -- -- 35 -- 6
---------------- ---------------- ---------------
-- -- -- 1,589 -- 1,309
DILUTED EPS
Income (loss) available to
common stockholders plus
assumed conversions ($5,346) 17,110 ($0.31) $14,131 17,912 $0.79 $12,478 16,806 $0.74
-------------------------- --------------------------- ---------------------------
-------------------------- --------------------------- ---------------------------
</TABLE>
Options to purchase 1,547,522 shares and warrants for 50,802 shares were
outstanding during 1997 but were not included in the computation of diluted EPS
because their inclusion would have an anti-dilutive effect on the net loss per
share. During 1997, 1996 and 1995, options to purchase 174,118, 73,281 and
142,731 shares, respectively, at weighted average exercise prices of $17.25,
$14.64 and $11.31 per share, respectively, were outstanding, but were not
included in the computation of diluted EPS because the exercise price of the
options was greater than the average market price of the common shares. During
1997 and 1996, warrants for 200,000 shares at a weighted average exercise price
of $30.00 per share, and during 1995, warrants for 450,000 shares at a weighted
average exercise price of $20.00 per share were outstanding but were not
included in the computation of diluted EPS because the exercise price of the
warrants was greater than the average market price of the common shares. At the
end of 1997, anti-dilutive options for 174,118 shares and anti-dilutive warrants
for 200,000 shares were still outstanding.
<PAGE>
p 36. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
14. BUSINESS SEGMENTS AND MAJOR CUSTOMERS
The Company operates in a single industry segment encompassing the development,
manufacture, sale and support of system-level verification solutions for the
design of integrated circuits and electronic systems.
The Company's top ten customers represented 43%, 52% and 48% of total revenue
for the years ended December 31, 1997, 1996 and 1995, respectively. In the year
ended December 31, 1996, one customer, Fujitsu, comprised 12% of the Company's
total revenue, and in the years ended December 31, 1997 and 1995, no customer
individually constituted more than 10% of the Company's total revenue.
The Company markets its products to customers in North America, Asia-Pacific and
Europe, and offers technical support, design consulting services, training,
hardware maintenance and software upgrades to its customers. Products and
services are marketed through a direct sales force in North America, Japan and
Europe. The Company also maintains distributorship relationships in Israel,
Korea, Singapore and Taiwan.
Revenue information by geographic region is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
North America $ 73,186 $ 70,658 $ 56,702
Asia-Pacific 26,025 30,138 16,496
Europe 11,193 8,782 9,244
----------------------------------
$ 110,404 $ 109,578 $ 82,442
----------------------------------
----------------------------------
</TABLE>
North America sales include sales to U.S. customers of $71.1 million, $69.4
million and $55.1 million in 1997, 1996 and 1995, respectively.
Identifiable assets of foreign operations are not significant. The net income
(loss) for all periods presented are derived primarily from the Company's North
American operations.
15. EMPLOYEE BENEFIT PLANS
The Company maintains 401(k) savings plans to provide retirement benefits
through tax deferred salary deductions for all its employees. The Company may
make discretionary contributions, as determined by the Board of Directors, which
cannot exceed a percentage of the annual aggregate salaries of those employees
eligible to participate. The Company made total contributions to the plans of
$497,000 and $394,000 for the years ended December 31, 1997 and 1996,
respectively, and none for the year ended December 31, 1995.
16. CONTINGENCIES
In January 1996, the Company filed a complaint with the International Trade
Commission (the "ITC") in Washington, DC, seeking to stop unfair importation of
logic emulation systems manufactured by Meta Systems, a French subsidiary of
Mentor. In the complaint, the Company alleges that Mentor's hardware logic
emulation systems infringe the Company's patents. In July 1996, an ITC
Administrative Law Judge issued an Initial Determination granting a Temporary
Exclusion Order stopping the importation of Mentor's emulation systems into the
United States, absent the posting of a bond by Mentor. The ITC Initial
Determination included a Cease and Desist Order against all sales activities
regarding unbonded Mentor emulation products imported into the United States. In
August 1996, the ITC ratified the judge's Initial Determination. Mentor and Meta
appealed the Temporary Exclusion Order to the Federal Circuit Court of Appeals,
asking that the ITC's Interpretation of Quickturn's patent claims be overturned.
On August 15, 1997, the Federal Circuit Court of Appeals affirmed the ITC's
decision granting temporary relief to the Company and adopted the patent claim
interpretation of the ITC as being correct and derived in accordance with the
Federal Circuit's case law. Meanwhile, on August 1, 1997, the ITC Administrative
Law Judge issued an Initial Determination that Mentor's SimExpress emulation
systems and components, including software components, infringe five of the
Company's patents. The Administrative Law Judge recommended that the ITC issue a
Permanent Exclusion Order prohibiting the importation of infringing SimExpress
systems and components. The Administrative Law Judge further
<PAGE>
p 37. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
recommended that the ITC issue a Cease and Desist Order prohibiting Mentor from
distributing any SimExpress software of non-U.S. origin in the United States. On
October 2, 1997, the ITC ratified the Administrative Law Judge's Initial
Determination. On December 3, 1997, the ITC issued a Permanent Limited Exclusion
Order permanently prohibiting the importation of hardware logic emulation
systems, subassemblies or components (including software) manufactured by Mentor
and/or Meta. At the same time, the ITC issued a Permanent Cease and Desist Order
permanently prohibiting Mentor from, among other things, selling, offering for
sale or advertising the same hardware logic emulation devices. The period in
which President Clinton had to review the ITC's actions expired on February 2,
1998 and the two orders became final by operation of law.
The Company also is engaged in a Federal District Court case with Mentor and
Meta involving six of the Company's patents. Mentor and Meta are seeking a
declaratory judgment of noninfringement, invalidity and unenforceability of the
patents in dispute, and the Company has filed counteractions against Mentor and
Meta for infringement and threatened infringement of the six patents. Mentor has
also claimed in this Federal District Court case that press releases issued by
the Company were defamatory and interfered with Mentor's prospective economic
relations. In June 1997, Quickturn filed a motion for preliminary injunction,
asking the District Court to prohibit Mentor from manufacturing, assembling,
marketing, loaning or otherwise distributing emulation products and components
in the United States, which products and components infringe certain claims
in Quickturn's U.S. Patent No. 5,036,473. On August 1, 1997, the U.S. District
Court in Oregon granted Quickturn's motion for a preliminary injunction against
Mentor's domestic emulation activities.
In August 1997, a preliminary injunction sought by Mentor's German subsidiary,
Mentor Graphics (Deutschland) GmbH, was issued by a regional court in Munich,
enjoining agents of the Company from making certain statements concerning U.S.
litigation matters between the Company and Mentor. On October 17, 1997, the
Company filed a complaint alleging infringement of the German part of the
Company's European Patent No. 0 437 491 B1 against Mentor Graphics (Deutschland)
GmbH, in the District Court of Dusseldorf. A preliminary hearing in this case
is set for mid-February.
Aptix Corporation ("Aptix") also filed a suit against the Company alleging
various violations of the antitrust laws and unfair competition. The discovery
phase of this case was recently completed.
The Company has mounted vigorous defenses against Mentor's defamation and
tortious interference claims and the antitrust and unfair competition claims by
Aptix. The outcome of these actions cannot be predicted with certainty.
The Company is engaged in certain other legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's consolidated financial position or results of operations.
<PAGE>
p 38. 1997 annual report QUICKTURN DESIGN SYSTEMS, INC.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Quickturn Design Systems, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheets of Quickturn Design
Systems, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material aspects, the consolidated financial position of
Quickturn Design Systems, Inc. as of December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
January 20, 1998
<PAGE>
Exhibit 21.1
QUICKTURN DESIGN SYSTEMS, INC.
SUBSIDIARIES OF THE REGISTRANT
The following companies are subsidiaries of the Registrant:
1. Quickturn Design Systems GmbH
2. Quickturn Design Systems S.A.R.L.
3. Quickturn Design Systems Ltd.
4. Quickturn Design Systems K.K.
5. QDS Sweden AB
6. SpeedSim, Inc. (the Company's Advanced
Simulation Division)
7. Quickturn Design Systems Israel Ltd.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8: No. 33-72970, No. 33-82452, No. 33-93092, No. 333-21587,
No. 333-18407 and No. 33-25459) pertaining to the 1988 Stock Option Plan, 1990
Stock Option Plan, 1992 Key Executive Stock Option Plan, 1993 Employee Qualified
Stock Purchase Plan, 1994 Outside Director Stock Option Plan, SpeedSim, Inc.
1995 Incentive and Nonqualified Stock Option Plan, 1996 Supplemental Stock Plan
and 1997 Stock Option Plan, and in the Registration Statement (Form S-3,
No. 333-22907) of our reports, dated January 20, 1998, on our audits of the
consolidated financial statements and financial statement schedule of Quickturn
Design Systems, Inc. as of December 31, 1997 and 1996, and for the three years
in the period ended December 31, 1997, which reports are incorporated by
reference or included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K
FOR THE PERIOD ENDING DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,589
<SECURITIES> 18,219
<RECEIVABLES> 33,549
<ALLOWANCES> 1,840
<INVENTORY> 10,899
<CURRENT-ASSETS> 88,437
<PP&E> 30,840
<DEPRECIATION> 19,722
<TOTAL-ASSETS> 129,192
<CURRENT-LIABILITIES> 37,294
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 91,880
<TOTAL-LIABILITY-AND-EQUITY> 129,192
<SALES> 110,404
<TOTAL-REVENUES> 110,404
<CGS> 32,880
<TOTAL-COSTS> 32,880
<OTHER-EXPENSES> 90,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 272
<INCOME-PRETAX> (11,291)
<INCOME-TAX> (5,945)
<INCOME-CONTINUING> (5,346)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,346)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K AND FORMS 10-Q FOR FISCAL YEAR 1996. THE FIGURES
HEREIN REFLECT THE FEBRUARY 1997 MERGER OF THE COMPANY WITH SPEEDSIM, INC.
WHICH WAS ACCOUNTED FOR AS A POOLING OF INTERESTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 25,790 21,339 24,078 29,425
<SECURITIES> 10,614 15,927 15,109 13,678
<RECEIVABLES> 23,608 17,825 23,221 21,352
<ALLOWANCES> 1,840 1,840 1,867 1,840
<INVENTORY> 10,141 9,284 10,055 10,059
<CURRENT-ASSETS> 77,175 70,033 78,551 80,241
<PP&E> 33,158 28,331 30,698 31,433
<DEPRECIATION> 21,915 15,424 17,469 19,419
<TOTAL-ASSETS> 111,977 97,115 106,398 107,773
<CURRENT-LIABILITIES> 27,932 24,162 30,352 27,932
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 17 16 16 16
<OTHER-SE> 84,028 69,799 73,414 78,388
<TOTAL-LIABILITY-AND-EQUITY> 111,977 97,115 106,398 107,773
<SALES> 109,578 23,868 50,127 78,914
<TOTAL-REVENUES> 109,578 23,868 50,127 78,914
<CGS> 32,663 7,144 15,057 23,539
<TOTAL-COSTS> 32,663 7,144 15,057 23,539
<OTHER-EXPENSES> 58,942 13,017 27,419 42,685
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 429 132 240 354
<INCOME-PRETAX> 19,852 4,019 8,450 14,022
<INCOME-TAX> 5,721 1,275 2,716 4,416
<INCOME-CONTINUING> 14,131 2,744 5,734 9,606
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 14,131 2,744 5,734 9,606
<EPS-PRIMARY> 0.87 0.17 0.35 0.59
<EPS-DILUTED> 0.79 0.16 0.32 0.54
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR FISCAL YEAR 1995. THE FIGURES HEREIN REFLECT THE
FEBRUARY 1997 MERGER OF THE COMPANY WITH SPEEDSIM, INC. WHICH WAS
ACCOUNTED FOR AS A POOLING OF INTERESTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 17,658
<SECURITIES> 14,777
<RECEIVABLES> 22,898
<ALLOWANCES> 1,840
<INVENTORY> 7,805
<CURRENT-ASSETS> 68,583
<PP&E> 26,895
<DEPRECIATION> 13,828
<TOTAL-ASSETS> 94,240
<CURRENT-LIABILITIES> 24,202
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 66,321
<TOTAL-LIABILITY-AND-EQUITY> 94,240
<SALES> 82,442
<TOTAL-REVENUES> 82,442
<CGS> 25,106
<TOTAL-COSTS> 25,106
<OTHER-EXPENSES> 46,251
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 750
<INCOME-PRETAX> 11,866
<INCOME-TAX> (612)
<INCOME-CONTINUING> 12,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,478
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.74
</TABLE>
