<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-27764
______________________________
XYLAN CORPORATION
(Exact name of registrant as specified in its charter)
California 95-4433911
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26707 WEST AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(Address of principal executive offices)
TELEPHONE: (818) 880-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filled by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 [_]
The number of shares outstanding of the registrant's Common Stock as of July 31,
1998, was 43,429,616.
<PAGE>
XYLAN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998
INDEX
Page
----
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -- June 30,
1998 and December 31, 1997 3
Condensed Consolidated Income Statements --
Three Months Ended June 30, 1998, March 31,
1998 and June 30, 1997 4
Condensed Consolidated Income Statements --
Six months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1998, and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risks N/A
PART II Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 27
Exhibit Index 28
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
XYLAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 31,822 $ 35,917
Short-term investments................................ 22,070 43,171
Accounts receivable, net.............................. 56,475 53,013
Inventories, net...................................... 23,807 17,731
Deferred income taxes, net............................ 6,866 6,100
Prepaid expenses and other current assets............. 3,940 2,892
-------- --------
Total current assets................................. 144,980 158,824
Investments............................................ 78,893 59,382
Note receivable........................................ 7,500 7,500
Property and equipment, net............................ 25,668 20,894
Other assets........................................... 5,507 4,306
-------- --------
Total assets......................................... $262,548 $250,906
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................. $ 25,356 $ 26,382
Current installments of capital lease obligations..... 92 189
Deferred revenue...................................... 7,598 4,317
Income taxes payable.................................. 521 3,002
-------- --------
Total current liabilities............................ 33,567 33,890
Capital lease obligations, less current installments... -- 17
Deferred revenue....................................... 2,685 899
-------- --------
Total liabilities.................................... 36,252 34,806
-------- --------
Total shareholders' equity:
Common stock and additional paid-in capital........... 182,982 190,774
Retained earnings..................................... 43,314 25,326
-------- --------
Total shareholders' equity........................... 226,296 216,100
-------- --------
Total liabilities and shareholders' equity........... $262,548 $250,906
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
XYLAN CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
June 30, March 31, June 30,
1998 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Revenue...................................... $83,678 $75,370 $45,122
Cost of revenue.............................. 36,128 32,652 20,255
------- ------- -------
Gross profit......................... 47,550 42,718 24,867
------- ------- -------
Operating expenses:
Research and development.................. 9,886 8,787 6,079
Sales and marketing....................... 21,769 20,108 13,925
General and administrative................ 2,295 2,237 1,601
------- ------- -------
Total operating expenses..................... 33,950 31,132 21,605
------- ------- -------
Operating income..................... 13,600 11,586 3,262
Interest income, net......................... 1,363 1,491 1,812
------- ------- -------
Income before income taxes................... 14,963 13,077 5,074
Income tax expense (benefit).............. 5,360 4,692 (2,016)
------- ------- -------
Net income........................... $ 9,603 $ 8,385 $ 7,090
======= ======= =======
Net income per share:
Basic..................................... $ .22 $ .19 $ .17
Diluted................................... $ .20 $ .18 $ .15
======= ======= =======
Shares used in per share calculations:
Basic..................................... 43,159 43,109 42,399
Diluted................................... 48,246 47,434 46,594
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
XYLAN CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
-------------------
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
Revenue.............................................. $159,048 $93,130
Cost of revenue...................................... 68,780 40,918
-------- -------
Gross profit................................. 90,268 52,212
-------- -------
Operating expenses:
Research and development.......................... 18,673 11,585
Sales and marketing............................... 41,877 26,546
General and administrative........................ 4,532 3,178
-------- -------
Total operating expenses............................. 65,082 41,309
-------- -------
Operating income............................. 25,186 10,903
Interest income, net................................. 2,854 3,640
-------- -------
Income before income taxes........................... 28,040 14,543
Income tax expense................................ 10,052 1,585
-------- -------
Net income................................... $ 17,988 $12,958
======== =======
Net income per share:
Basic............................................. $ .42 $ .31
Diluted........................................... $ .38 $ .28
======== =======
Shares used in per share calculations:
Basic............................................. 43,134 42,274
Diluted........................................... 47,907 46,507
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
XYLAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-------------------
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 17,988 $ 12,958
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 5,141 3,326
Deferred income taxes................................. (766) (4,000)
Expense related to warrants........................... -- 336
Unearned compensation amortization.................... 228 229
Change in:
Accounts receivable.................................. (3,462) (11,954)
Inventories.......................................... (6,076) (3,722)
Prepaid expenses and other current assets............ (1,048) (911)
Other assets......................................... (1,201) (2,273)
Accounts payable and accrued expenses................ (1,026) 5,562
Deferred revenue..................................... 5,067 1,094
Income taxes payable................................. 3,021 1,524
-------- --------
Net cash provided by operating activities........... 17,866 2,169
-------- --------
Cash flows from investing activities:
Purchases of property and equipment..................... (9,915) (5,530)
Sales of investments.................................... 1,590 1,862
-------- --------
Net cash used in investing activities............... (8,325) (3,668)
-------- --------
Cash flows from financing activities:
Common stock issued..................................... 7,190 1,648
Common stock repurchased................................ (20,712) --
Principal payments under capital lease obligations...... (114) (169)
-------- --------
Net cash provided by (used in) financing activities... (13,636) 1,479
-------- --------
Net decrease in cash and cash equivalents........... (4,095) (20)
Cash and cash equivalents at beginning of period......... 35,917 62,483
-------- --------
Cash and cash equivalents at end of period............... $ 31,822 $ 62,463
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............ $ 10 $ 21
Cash paid during the period for taxes............... $ 7,554 $ 4,061
======== ========
Supplemental disclosure of noncash investing and
financing activities:
Income tax benefit resulting from exercise of
employee stock options............................ $ 5,502 $ 1,085
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
XYLAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Basis Of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these statements include
all adjustments, consisting of normal and recurring adjustments, considered
necessary for a fair presentation of results for such periods. The results of
operations for the three and six month periods ending June 30, 1998, are not
necessarily indicative of results which may be achieved for the full fiscal year
or for any future period. The unaudited consolidated interim financial
statements should be read in conjunction with the financial statements and notes
thereto contained in Xylan Corporation's ("Xylan" or the "Company") Form 10-K.
NOTE 2. Investments
Investments at June 30, 1998, and December 31, 1997, consist of corporate and
municipal debt, U.S. Treasuries and Federal Government Agency debt. In
accordance with the provisions of Statement of Financial Accounting Standards
Board No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company classifies its investments as held-to-maturity
securities. The market value of these securities at June 30, 1998, and December
31, 1997, approximated cost.
NOTE 3. Inventories
Inventories, primarily component parts, are stated at the lower of cost or
market, cost being determined using the first-in, first-out method.
NOTE 4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- ------------
(Unaudited)
<S> <C> <C>
Accounts payable..................................... $ 8,055 $10,926
Accrued payroll and related costs.................... 8,932 7,890
Accrued warranty..................................... 1,109 1,256
Other accrued expenses............................... 7,260 6,310
------- -------
Total accounts payable and accrued expenses......... $25,356 $26,382
======= =======
</TABLE>
NOTE 5. Shareholder's Equity
In January 1998, the Company's Board of Directors authorized the Company to
repurchase up to 2,000,000 shares of the Company's common stock to offset the
dilutive effect of new issuances of common stock under the Company's stock
option and stock purchase plans. During the three months ended June 30, 1998,
the Company repurchased 483,000 shares of its common stock for $11,658,000.
During the six months ended June 30, 1998, the Company repurchased 785,500
shares of common stock for $20,712,500.
7
<PAGE>
The Company has a 1993 Stock Incentive Plan which reserves 8,000,000 shares
of the Company's authorized but unissued common stock for option or stock
purchase grants. As of June 30, 1998, the Company has issued 3,051,136 shares
of common stock under this plan and options to purchase 4,864,148 shares of
common stock are outstanding. In connection with the grant of stock options,
for financial statement presentation purposes, the Company has recorded unearned
compensation, net of cancellations, of $2,336,000 representing the difference
between the grant price and the deemed fair market value. This amount will be
recorded as compensation expense ratably over the vesting period for each
option. For the quarters ended June 30, 1998, March 31, 1998 and June 30, 1997,
the Company recorded $114,000, $114,000 and $115,000, respectively, of
compensation expense. For the six months ended June 30, 1998 and 1997, the
Company recorded $228,000 and $229,000, respectively, of compensation expense.
The Company has a 1996 Stock Plan which reserves 8,000,000 shares of the
Company's authorized but unissued common stock for option grants. As of June 30,
1998, the Company has issued 276,145 shares of common stock under this plan and
options to purchase 5,393,662 shares of common stock are outstanding.
The Company has a 1996 Directors' Stock Option Plan which reserves 150,000
shares of the Company's authorized but unissued common stock for option grants.
As of June 30, 1998, the Company has not issued any shares of common stock under
this plan and options to purchase 65,000 shares of common stock are outstanding.
The Company has a 1996 Employee Stock Purchase Plan which reserves
1,500,000 shares of authorized but unissued common stock for issuance. As of
June 30, 1998, the Company has issued 120,856 shares of common stock under this
plan.
The Company has a 1998 Employee Stock Option Plan which reserves 1,000,000
shares of the Company's authorized but unissued common stock for option grants.
As of June 30, 1998, the Company has issued 1,755 shares of common stock under
this plan and options to purchase 976,016 shares of common stock are
outstanding.
In 1996, the Company and IBM entered into an agreement whereby Xylan
committed to grant IBM warrants to purchase up to 2,350,000 shares of Xylan
common stock based on the achievement of specific business goals. During 1996,
the Company recognized $274,000 of expense related to these warrants. In 1997,
the commitment to grant warrants to IBM was cancelled and the $274,000 of
expense was reversed.
NOTE 6. Income Taxes
The Company's quarterly provision for income taxes is based upon the Company's
estimate of the effective tax rate for the respective fiscal year. For the
three and six months ended June 30, 1998, the Company recorded an effective tax
rate of approximately 36%. For the three and six months ended June 30, 1997,
the Company recorded an effective tax rate of approximately 38% and a $4 million
income tax benefit for the recognition of deferred tax assets. The realization
of the deferred tax assets resulted from the reversal of the valuation allowance
based on management's assessment that it is more likely than not that the net
deferred tax assets will be realized based on carryback potential, existing
temporary differences and expectations of future taxable income levels. For the
remainder of 1998, the Company expects to record a 36% provision for income
taxes, although such percentage may vary depending on several factors, including
the international component of the Company's business.
8
<PAGE>
For the quarters ended June 30, 1998, March 31, 1998 and June 30, 1997 the
Company realized an income tax benefit of $4 million, $1.5 million and $485,000,
respectively, for certain stock option transactions. For the six months ended
June 30, 1998 and 1997 the income tax benefit for certain stock option
transactions was $5.5 million and $1.1 million, respectively. This benefit is
used to reduce taxable income prior to the utilization of net operating loss
carryforwards, and results in a decrease in current income taxes payable and an
increase in additional paid-in capital.
NOTE 7. Computation of Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per share
and became effective for both interim and annual periods ending after December
15, 1997. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been restated to
conform to the SFAS No. 128 requirements.
The following table sets forth the computation of basic and diluted net income
per share (In thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
June 30, March. 31, June 30,
1998 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Numerator for basic and diluted per share computations:
Net income available to common shareholders................................ $ 9,603 $ 8,385 $ 7,090
======= ======= =======
Denominator:
Shares used for basic per share computations
weighted average shares outstanding....................................... 43,159 43,109 42,399
Effect of dilutive securities stock options................................ 5,087 4,325 4,195
------- ------- -------
Shares used for diluted per share computations........................... 48,246 47,434 46,594
======= ======= =======
Net income per share:
Basic....................................................................... $ .22 $ .19 $ .17
Diluted..................................................................... $ .20 $ .18 $ .15
======= ======= =======
</TABLE>
Options to purchase 623,000, 1,040,000 and 4,026,000 shares at an average
exercise price of $28.45, $21.86 and $30.98 were outstanding at June 30, 1998,
March 31, 1998 and June 30, 1997, respectively, but were not included in the
above computation of diluted net income per share for the respective periods
because the exercise price of the options was greater than the average market
price of the common shares and therefore, the effect would be antidilutive.
9
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
----------------------
June 30, June. 30,
1998 1997
-------- ---------
<S> <C> <C>
Numerator for basic and diluted per share computations:
Net income available to common shareholders............................... $17,988 $12,958
======= =======
Denominator:
Shares used for basic per share computations
weighted average shares outstanding...................................... 43,134 42,274
Effect of dilutive securities stock options............................... 4,773 4,233
------- -------
Shares used for diluted per share computations.......................... 47,907 46,507
======= =======
Net income per share:
Basic...................................................................... $ .42 $ .31
Diluted.................................................................... $ .38 $ .28
======= =======
</TABLE>
Options to purchase 1,365,000 and 3,160,000 shares at an average exercise
price of $26.04 and $34.41 were outstanding at June 30, 1998 and 1997,
respectively, but were not included in the above computation of diluted net
income per share for the respective periods because the exercise price of the
options was greater than the average market price of the common shares and
therefore, the effect would be antidilutive.
NOTE 8. Recently Adopted Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The Company
adopted SFAS No. 130 effective January 1, 1998. Under the provisions of SFAS
No. 130 no amounts are required to be disclosed as they are either not
applicable or immaterial.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" effective
for financial statements for periods beginning after December 15, 1997. SFAS No.
131 establishes standards for the way that public business enterprises report
financial and descriptive information about reportable operating segments. The
Company adopted SFAS No. 131 effective January 1, 1998. The disclosures
regarding operating segments is not applicable as the Company only has one
operating segment. Substantially all of the Company's long-lived assets are
located in the United States. Disclosure regarding the Company's revenue by
sales channel, geographic region, product line and significant customers in
dollars and as a percentage of total revenue is on page 12.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This quarterly report on Form 10-Q may consist of forward-looking statements
that involve risks and uncertainties. These statements may differ materially
from actual future events or results. Readers are referred to the "Factors
Affecting Future Results" section of this Management's Discussion and Analysis
of Financial Condition and Results of Operations which identifies important risk
factors that could cause actual results to differ from those contained in the
forward looking statements. The Company undertakes no obligation to update the
information, including the forward-looking statements, in this Report on Form
10-Q.
10
<PAGE>
Overview
Xylan is a leading provider of high-bandwidth switching systems that enhance
the performance of existing local area networks ("LANs") and facilitate
migration to next generation networking technologies such as asynchronous
transfer mode ("ATM"). From inception (July 9, 1993) to December 31, 1994, the
Company was primarily engaged in product research and development and in the
development of systems and operations. The Company began commercial shipments
of its initial OmniSwitch products in January 1995. Since then, revenue has
increased significantly to an aggregate of $210.5 million in fiscal year 1997
from $29.7 million in fiscal year 1995. On a quarterly basis revenue increased
to $83.7 million in the quarter ended June 30, 1998 from $45.1 million in the
quarter ended June 30, 1997. The increases in revenue are discussed below. The
Company markets its products worldwide through OEM partners, system integrators
and its own sales force and first achieved profitability in the fourth quarter
of 1995. As of June 30, 1998, the Company had retained earnings of $43.3
million.
The Company intends to continue to increase significantly its investments in
research and development, sales and marketing and related infrastructure. Such
increases will be dependent on factors including the continued growth of the
Company's revenues and the rate thereof, success in hiring the appropriate
personnel and market acceptance of the Company's products. Due to the
anticipated increases in the Company's operating expenses, the Company's
operating results will be materially and adversely affected if revenue does not
increase. Xylan's limited operating history makes the prediction of future
annual or quarterly operating results difficult or impossible. Although the
Company has experienced revenue growth in all but one quarter since revenue was
first recognized, such growth rates may not be sustainable and are not
indicative of future operating results. There can be no assurance that the
Company will sustain profitability.
Results Of Operations
Revenue
Revenue for the quarter ended June 30, 1998, was $83.7 million compared to
$45.1 million for the quarter ended June 30, 1997, an increase of $38.6 million
or 85%. Revenue for the quarter ended March 31, 1998, was $75.4 million.
Comparing revenue for the quarter ended June 30, 1998, to the quarter ended
March 31, 1998, revenue increased $8.3 million or 11%. Revenue for the six
months ended June 30, 1998, was $159.0 million compared to $93.1 million for the
six months ended June 30, 1997, an increase of $65.9 million or 71%. The
increases in revenue were due to a number of factors, including, the increased
sales of the Company's new OmniStack product family which was introduced in the
first quarter of 1998, substantial growth of the LAN switching market, continued
introduction by the Company of additional features and functions to its
OmniSwitch product family, the continued strategic relationships with IBM and
Alcatel, and the Company's investment in sales and marketing resources. Such
increases offset the lower demand in certain Asian markets. The relative
contribution of the factors that can be quantified are in the tables below. The
Company currently expects sequential revenue growth from its System Integrator
and Direct revenue in the third quarter of 1998 which should more than offset
expected declines in revenue to its two largest OEMs. While the Company
achieved revenue growth of 85% and 71% when comparing the three and six month
periods ended June 30, 1998, to June 30, 1997, respectively, the Company cannot
insure these rates of sequential growth if at all in future periods.
Under an agreement with IBM and the Company, IBM has the right to manufacture
certain Company products after a specified period of time and pay a royalty to
Xylan. As of June 30, 1998, the Company has earned no royalties. Product
revenue could be adversely impacted if IBM elects to manufacture the Company's
products.
11
<PAGE>
The following table sets forth the Company's revenue by sales channel,
geographic region, product line and significant customers in dollars and as a
percentage of total revenue (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
-------------------------------- ---------------------------------
June 30, March 31, June 30, June 30, March 31, June 30,
1998 1998 1997 1998 1998 1997
-------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Channel:
OEM $34.2 $ 31.9 $16.0 41% 42% 35%
System Integrator and Direct $49.5 $ 43.4 $29.1 59% 58% 65%
===== ====== ===== ===== ==== ====
Region(1):
North America (2) $38.8 $ 33.7 $21.0 46% 45% 46%
Europe $28.9 $ 27.1 $13.4 35% 36% 30%
Asia Pacific $11.9 $ 11.9 $ 9.5 14% 16% 21%
Latin America $ 4.0 $ 2.6 $ 1.2 5% 3% 3%
===== ====== ===== ===== ==== ====
Product Line:
OmniSwitch $72.4 $ 67.9 $39.8 86% 90% 88%
OnniStack $ 9.1 $ 4.2 $ 0.0 11% 5% 0%
PizzaSwitch $ 2.2 $ 3.4 $ 5.3 3% 5% 12%
===== ====== ===== ===== ==== ====
Significant Customers:
IBM $17.8 $ 16.8 $ 9.4 21% 22% 21%
Alcatel $15.0 $ 14.7 $ 5.6 18% 19% 12%
===== ====== ===== ===== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
1998 1997 1998 1997
------ ----- ----- -----
<S> <C> <C> <C> <C>
Channel:
OEM $ 66.1 $ 36.6 42% 39%
System Integrator and Direct $ 92.9 $ 56.5 58% 61%
====== ====== ===== ====
Region(1):
North America (2) $ 72.5 $ 42.7 46% 46%
Europe $ 56.0 $ 26.1 35% 28%
Asia Pacific $ 23.8 $ 21.4 15% 23%
Latin America $ 6.6 $ 2.9 4% 3%
====== ====== ==== ====
Product Line:
OmniSwitch $140.3 $ 81.6 88% 88%
OmniStack $ 13.3 $ 0.0 8% 0%
PizzaSwitch $ 5.6 $ 11.6 4% 12%
====== ====== ===== ====
Significant Customers:
IBM $ 34.6 $ 21.8 22% 23%
Alcatel $ 29.7 $ 10.2 19% 11%
====== ====== ===== ====
</TABLE>
(1) IBM and Alcatel revenues are attributed to regions based on "point of
sale" information. All other revenues are attributed to regions based
on the location of the customer.
(2) North America primarily consists of the United States.
12
<PAGE>
Gross Profit
Gross margins were 56.8%, 56.7% and 55.1% for the quarters ended June 30,
1998, March 31, 1998 and June 30, 1997, respectively. For the six months ended
June 30, 1998 and 1997, gross margins were 56.8% and 56.1%, respectively. The
increases in gross margins when comparing the three and six month periods,
resulted from a number of factors, including reductions in component costs,
sales channel mix and manufacturing releases, which were offset by product mix
(the Company's OmniStack products generally have lower gross margins than the
OmniSwitch products), and competitive market pricing and discount levels. After
initial product introduction, the Company's strategy is to seek to reduce
component costs, particularly by integrating newly developed ASICs into such
products. In addition, the timing and execution of new product introductions and
ASICs may impact gross margins and result in excess or obsolete inventories. The
Company expects third quarter of 1998 gross margins to be comparable to second
quarter of 1998 although there is no assurance that gross margins may not
decline.
Research and Development Expenses
Research and development expenses were $9.9 million, $8.8 million and $6.1
million for the quarters ended June 30, 1998, March 31, 1998 and June 30, 1997,
respectively. This represents an increase of 13% from the first quarter of 1998
to the second quarter of 1998 and an increase of 63% from the second quarter of
1997 to the second quarter of 1998. Research and development expenses were
$18.7 million and $11.6 million for the six months ended June 30, 1998 and 1997,
respectively. This represents an increase of 61%. These increases were
primarily due to the hiring of additional engineers and an increase in prototype
material costs for new product development. As a percentage of revenue,
research and development expenses were 12%, 12% and 14% for the quarters ended
June 30, 1998, March 31, 1998 and June 30, 1997, respectively. For the six
months ended June 30, 1998 and 1997, research and development expenses as a
percentage of revenues were 12%.
The market for the Company's products is characterized by frequent new product
introductions and rapidly changing technology and industry standards, any of
which can impact Xylan's existing product offerings. As a result, the Company's
success will depend to a substantial degree upon its ability to develop and
introduce in a timely fashion new products and enhancements to its existing
products that meet changing customer requirements and emerging industry
standards. Accordingly, the Company expects to continue to make substantial
investments in research and development and anticipates that research and
development expenses will continue to increase in 1998 in absolute dollars. To
date, the Company has not capitalized any development costs and does not
anticipate capitalizing any such costs in the foreseeable future.
Sales and Marketing Expenses
Sales and marketing expenses were $21.8 million, $20.1 million and $13.9
million for the quarters ended June 30, 1998, March 31, 1998 and June 30, 1997,
respectively. For the six months ended June 30, 1998 and 1997, sales and
marketing expenses were $41.9 million and $26.5 million, respectively. This
represents an increase of 8% from the first quarter of 1998 to the second
quarter of 1998, an increase of 56% from the second quarter of 1997 to the
second quarter of 1998 and an increase of 58% from the six months ended June 30,
1997 to the six months ended June 30, 1998. These increases were primarily due
to expenses related to the addition of direct sales personnel throughout the
United States, Europe and Asia, advertising and promotional campaigns in support
of the Company's direct sales and system integrator channels and increased
commission expenses on higher revenues. As the Company continues to expand its
direct sales force, adding personnel and offices worldwide, and to introduce new
products and enhancements to its existing products, it expects that sales and
marketing expenses will continue to increase in 1998 in absolute dollars.
As a percentage of revenue, sales and marketing expenses were 26%, 27% and 31%
for the quarters ended June 30, 1998, March 31, 1998 and June 30, 1997,
respectively. For the six months ended June 30, 1998 and 1997, sales and
marketing expenses as a percentage of revenues were 26% and 29%, respectively.
The decrease of sales and marketing expenses as a percent of revenue when
comparing the three and six months ended June 30, 1998 to the same periods in
the prior year is due to the percentage increase in expenditures, as discussed
above, being lower than the percentage increase in revenue. As the Company
continues to add personnel and grow, it expects sales and marketing expenses
will continue to increase in 1998 in absolute dollars.
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General And Administrative Expenses
General and administrative expenses were $2.3 million, $2.2 million and $1.6
million for the quarters ended June, 1998, March 31, 1998 and June 30, 1997,
respectively. For the six months ended June 30, 1998 and 1997, general and
administrative expenses were $4.5 million and $3.2 million, respectively. As a
percentage of revenue, general and administrative expenses were 2.7%, 3.0% and
3.5% for the quarters ended June 30, 1998, March 31, 1998 and June 30, 1997,
respectively. For the six months ended June 30, 1998 and 1997, general and
administrative expenses as a percentage of revenues were 2.8% and 3.4%,
respectively. As the Company continues to add personnel and introduce new
products and enhancements to its existing products, it expects that general and
administrative expenses will continue to increase in 1998 in absolute dollars.
Interest Income
Interest income, net, was $1.4 million, $1.5 million and $1.8 million for the
quarters ended June 30, 1998, March 31, 1998 and June 30, 1997, respectively.
For the six months ended June 30, 1998 and 1997, interest income was $2.9
million and $3.6 million, respectively. The decrease in interest income from
the three and six months ended June 30, 1997, to the respective periods in 1998,
resulted from the Company earning more interest on tax-exempt investments which
have a lower pre-tax yield but higher after-tax yield than taxable investments.
Provision For Income Taxes
The Company's quarterly provision for income taxes is based upon the Company's
estimate of the effective tax rate for the respective fiscal year. For the
three and six months ended June 30, 1998, the Company recorded an effective tax
rate of approximately 36%. For the three and six months ended June 30, 1997,
the Company recorded an effective tax rate of approximately 38% and a $4 million
income tax benefit for the recognition of deferred tax assets. The realization
of the deferred tax assets resulted from the reversal of the valuation allowance
based on management's assessment that it is more likely than not that the net
deferred tax assets will be realized based on carryback potential, existing
temporary differences and expectations of future taxable income levels. For the
remainder of 1998, the Company expects to record a 36% provision for income
taxes, although such percentage may vary depending on several factors, including
the international component of the Company's business.
For the quarters ended June 30, 1998, March 31, 1998 and June 30, 1997 the
Company realized an income tax benefit of $4 million, $1.5 million and $485,000,
respectively, for certain stock option transactions. For the six months ended
June 30, 1998 and 1997 the income tax benefit for certain stock option
transactions was $5.5 million and $1.1 million, respectively. This benefit is
used to reduce taxable income prior to the utilization of net operating loss
carryforwards, and results in a decrease in current income taxes payable and an
increase in additional paid-in capital.
Liquidity and Capital Resources
The Company's principal source of liquidity as of June 30, 1998, consisted of
$32 million in cash and cash equivalents, $22 million in short-term investments
and a $6 million bank credit facility. Additionally, the Company has $79
million in long-term investments. For the six months ended June 30, 1998 and
1997, cash provided by operating activities was $17.9 million and $2.2 million,
respectively. Accounts receivable and inventories increased from December 31,
1997 to June 30, 1998 due to the increases in revenue. Days sales outstanding
at June 30, 1998 was 61 days compared to 64 days at March 31, 1998. Inventory
days on hand improved to 59 days at June 30, 1998 from 65 days at March 31,
1998.
The Company used $8.3 million in cash in its investing activities during the
six month period ended June 30, 1998. Sales of investments provided $1.6
million of cash. Capital expenditures during the six month period were $9.9
million. These capital expenditures were for equipment for research and
development, equipment to support the increased headcount and information
systems hardware and software.
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The Company has entered into a ten year lease for a 129,000 square-foot
building near its current headquarters. The Company intends to occupy the new
building by the end of first quarter of 1999. The lease has annual rental
payments of approximately one million dollars. The Company will also spend
approximately five million dollars for tenant improvements on the new building.
The Company is in the process of subleasing a portion of its current
headquarters.
The Company used $13.6 million in cash for financing activities; $20.7 million
was used to repurchase Xylan common stock, $7.2 million was provided by the sale
of stock under the Company's stock plans and $114,000 was used for capital lease
obligations. The Company believes that existing cash and investment balances
and cash flow expected to be generated from future operations will be sufficient
to meet the Company's requirements for at least the next twelve months.
In January 1998, the Company's Board of Directors authorized the Company to
repurchase up to 2,000,000 shares of the Company's common stock to offset the
dilutive effect of new issuances of common stock under the Company's stock
option and stock purchase plans. During the three months ended June 30, 1998,
the Company repurchased 483,000 shares of its common stock for $11,658,000.
During the six months ended June 30, 1998, the Company repurchased 785,500
shares of common stock for $20,712,500. Additional repurchases, if any, of the
Company's common stock will be funded from the Company's existing cash and
investment balances.
The Company's future capital requirements will depend on many factors,
including the rate of revenue growth, the timing and extent of spending to
support product development efforts and expansion of sales and marketing, the
timing of introductions of new products and enhancements to existing products,
and market acceptance of the Company's products. There can be no assurance that
additional equity or debt financing, if required, will be available on
acceptable terms or at all.
Factors Affecting Future Results
Certain Risk Factors
Fluctuations In Operating Results. The Company's revenue and operating results
may fluctuate from quarter to quarter and from year to year due to a combination
of factors, including (i) the timing and amount of significant orders from the
Company's OEM partners and system integrators, (ii) the Company's success in
developing, introducing and shipping product enhancements, ASICs and new
products, (iii) the Company's ability to support its current and new products,
(iv) the ability to obtain sufficient supplies of sole or limited source
components for the Company's products, (v) the ability to attain and maintain
production volumes and quality levels for its products (including ASICs), (vi)
the mix of distribution channels and products, (vii) new product introductions
by the Company's competitors, (viii) pricing actions by the Company or its
competitors,
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(ix) changes in material costs, (x) mix of products manufactured or
purchased by IBM and Alcatel, and (xi) general economic conditions. See "--
Dependence on OEM Partners and System Integrators; IBM and Alcatel; Customer
Concentration," "--Dependence on Sole and Limited Source Suppliers and
Availability of Components," "--Substantial Increase in Manufacturing
Operations; Dependence on Contract Manufacturing," "--Competition," "--Rapid
Technological Change; New Products and Evolving Markets," "--Uncertain Market
Acceptance of the Company's Products; Product Concentration" and "--Product
Complexity." For example, the Company's revenue in the quarter ended June 30,
1997 declined as compared to the immediately preceding quarter primarily due to
lower than expected orders from a large OEM customer, material availability for
the Company's ATM switch product, and lower than expected shipments of the
Company's new Ethernet/Fast Ethernet products.
The Company's revenue in any period is highly dependent upon the sales efforts
and success of Xylan's OEM partners (including IBM and Alcatel) and system
integrators, which are not within the control of the Company. The Company
generally realizes a higher gross margin on direct sales than on sales through
its OEM partners and system integrators. Accordingly, if the Company's OEM
partners and system integrators were to account for an increased portion of the
Company's revenue, gross margins would decline. In addition, if IBM elects to
manufacture products using technology licensed from the Company, the Company's
product revenue and product gross margin will be adversely affected. New
products may have different gross margins than existing products. A significant
portion of the Company's expenses, such as rent, headcount and lease expenses,
are relatively fixed in advance, based in large part on the Company's forecasts
of future revenue. If revenues are below expectations in any given period, the
adverse effect of a shortfall in revenue on the Company's operating results may
be magnified by the Company's inability to adjust spending to compensate for
such shortfall. The Company's backlog at the beginning of each quarter
typically is not sufficient to achieve expected revenue for that quarter. To
achieve its revenue objectives, the Company is dependent upon obtaining orders
in a quarter for shipment in that quarter. In addition, due in part to the
timing of product release dates, purchase orders and product availability,
significant volume shipments of products have occurred and may continue to occur
at the end of the Company's fiscal quarter. Failure to ship such products by the
end of a quarter may adversely affect the Company's operating results.
Furthermore, the Company's agreements with its customers typically provide that
they may change delivery schedules and cancel orders within specified timeframes
without significant penalty. The Company's industry is characterized by short
product life cycles and declining prices of existing products, which requires
continual improvement of manufacturing efficiencies and introduction of new
products and enhancements to existing products to maintain gross margins.
Moreover, in response to competitive pressures or to pursue new product or
market opportunities, the Company may take certain pricing or marketing actions
that could materially and adversely affect the Company's operating results. For
example, a reduction in prices of the Company's products could result in lower
revenue, an increase in discounts offered to the Company's OEM partners or
system integrators would adversely affect the Company's operating margins, and a
substantial targeted marketing campaign could significantly increase marketing
expense and result in decreased profitability. As a result of all of the
foregoing, there can be no assurance that the Company will be able to achieve or
sustain profitability on a quarterly or annual basis. In addition, the Company's
operating results have and may in the future be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially and adversely affected.
Competition. The market for network switching products is intensely
competitive and subject to frequent product introductions with improved
price/performance characteristics, significant price reductions, rapid
technological change and continued emergence of new industry standards. Many
networking companies, including Bay Networks, Inc., Cabletron Systems, Inc.,
Cisco Systems, Inc., FORE Systems, Inc. and 3Com Corporation, have introduced,
or have announced their intention to develop, network switching products that
are or will be competitive with the Company's products. In addition, many of
the Company's large competitors offer customers a broader product line which
provides a more comprehensive networking solution than the Company currently
offers. Recent consolidations in the industry have resulted in competitors that
may have broader product lines, greater access to capital or greater research
and development resources which could adversely affect the ability of the
Company to compete. Xylan expects that other companies will also enter markets
in which the Company competes. In addition to competition from providers of
network switching products, the Company expects to face competition from other
vendors in the networking market who may incorporate switching functionality
into their products or provide alternative network solutions. Furthermore, the
Company's
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OEM partners may in the future develop competitive products and may then decide
to terminate their relationships with the Company. In addition, certain of the
Company's OEMs may sell competitive products using the Company's technology.
Many of the Company's current and potential competitors have longer operating
histories and substantially greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger installed
customer base, than the Company. As a result, these competitors may be able to
devote greater resources to the development, promotion, sale and support of
their products than the Company. In addition, competitors with a larger
installed customer base may have a competitive advantage over the Company when
selling similar products or alternative networking solutions to such customers.
Increased competition could result in significant price competition, reduced
profit margins or loss of market share, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
successfully against either current or potential competitors in the future. See
"Dependence on Proprietary Technology, Intellectual Property Litigation."
Dependence on OEM Partners and System Integrators; IBM and Alcatel; Customer
Concentration. The Company pursues a sales and marketing strategy focused on
developing two channels of distribution for its products: worldwide OEM partners
and non-OEM sales. The Company has established OEM partnerships with leading
communications and networking companies, including IBM and Alcatel N.V.
("Alcatel").
In the field of campus network switching products, IBM and Xylan are offering
the other company's campus switch products for resale. For the quarter ended
June 30, 1998, sales to IBM comprised 21% of the Company's revenue. There is no
assurance that IBM will continue to purchase the Company's products. In
addition, the Company has limited information as to the sell-through of its
products by IBM. There is no assurance that even if IBM does purchase such
products, that IBM will sell such products to its customers. Both companies have
the right to manufacture and sell certain of each other's campus switching
products in exchange for a royalty. As of June 30, 1998, either company has
earned no royalties. However, sales by IBM of IBM manufactured or other campus
switch products could have a material adverse effect on the Company's product
revenues. In addition, the parties have formed a joint development organization
to develop new products using certain of the other company's LAN technology.
Any reduction or delay in sales of the Company's products by IBM could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Although there is a large number of end-users of Xylan's products, the
Company's customer base is highly concentrated and a relatively small number of
customers have accounted for a significant portion of the Company's revenue to
date. The Company's OEM partners account, and are expected to continue to
account, for a substantial portion of the Company's net revenue. As a
percentage of revenue, aggregate sales to OEM partners accounted for 41% for the
quarter ended June 30, 1998, and 35% for the quarter ended June 30, 1997. Each
of the Company's OEM partners can cease (or reduce purchases for reasons such as
inventory levels) marketing the Company's products with limited notice to Xylan
and with little or no penalty. In addition, the Company's agreements with its
OEM partners do not require minimum purchases. Certain of these agreements
provide manufacturing rights and access to source code upon the occurrence of
specified conditions or defaults. Certain of the Company's OEM agreements
provide for limited exclusivity. Certain of the Company's OEM partners have
developed and may continue to develop competitive products and, if they do so,
they may decide to terminate their relationship with the Company.
In addition, many of the Company's resellers offer competitive products
manufactured either by third parties or by themselves. Furthermore, certain of
the Company's OEM partners and system integrators offer alternative networking
solutions, designed by themselves or third parties, or have pre-existing
relationships with current or potential competitors of the Company. There can
be no assurance that the Company's OEM partners and system integrators will give
a high priority to the marketing of the Company's products as compared to
competitive products or alternative networking solutions or that Xylan's OEM
partners and system integrators will continue to offer the Company's products.
For example, in July 1997, IBM announced that it had also
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formed an alliance with 3Com, a competitor of the Company. In addition, Xylan's
OEM partners and system integrators could sell competitive products to the
Company's existing customers, which could have a material adverse effect on the
Company's business, operating results and financial condition. Any reduction or
delay in sales of the Company's products by its OEM partners and system
integrators could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will retain its current OEM partners or system integrators or that it
will be able to recruit additional or replacement OEM partners or system
integrators. The loss of one or more of the Company's OEM partners or system
integrators could have a material adverse effect on the Company's business,
operating results and financial condition. The Company generally realizes a
higher gross margin on non-OEM sales than on sales through its OEM partners.
Accordingly, if the Company's OEM partners were to account for an increased
portion of the Company's revenue, its gross margin would decline.
Substantial Increase in Manufacturing Operations; Dependence on Contract
Manufacturing. As demand for the Company's products grow, the Company will
increase its flow of materials, contract manufacturing capacity and internal
test and quality functions to respond to such customer demand and to reduce its
order lead times. Any inability or delay in product flow would limit the
Company's revenue, could adversely affect the Company's competitive position and
could result in late fees or cancellation of orders under agreements with the
Company's OEM partners. Any interruption or delay in the normal flow of
production, or defaults or financial insolvency of the contract manufacturer
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company also requires additional
manufacturing space and there can be no assurance that such additional space, if
required, will be available in a timely manner or on commercially reasonable
terms, if at all.
Xylan's operational strategy relies on outsourcing of manufacturing. The
Company currently subcontracts component procurement and printed circuit board
assembly to two companies. The Company also subcontracts assembly of chassis to
a number of companies, each of which specializes in the particular services
provided. In connection with its operational strategy, the Company is seeking
to secure additional sources of supply, including additional contract
manufacturers. The Company has experienced in the past, and may in the future
experience, problems with its contract manufacturers, such as inferior quality,
insufficient quantities and late delivery of product. While such problems have
not resulted in any material liabilities from the Company to its customers or
end-users to date, there can be no assurance that such problems will not
generate material liabilities for the Company or adversely impact the Company's
relations with its customers and end-users in the future. During 1996, the
Company agreed to loan up to $10 million to one of its contract manufacturers
that performs circuit board assembly. The loan, which assists the contract
manufacturer to meet the Company's increasing production requirements, is non-
interest bearing, does not have a defined due date and is secured by raw
materials and electronic components purchased by the contract manufacturer. At
June 30, 1998, the note had an outstanding balance of $7.5 million. Also, the
Company has guaranteed up to $5.0 million of such contract manufacturer's debt
for certain raw material and electronic component purchases. Any additional
loans or guaranties to contract manufacturer, or defaults or financial
insolvency of such contract manufacturer, could have an adverse effect upon the
Company's business, operating results and financial condition. In addition, the
Company may in the future experience pricing pressure from its contract
manufacturers. To date, the Company has had only limited experience with the
use of contract manufacturers. There can be no assurance that the Company will
effectively manage its contract manufacturers or that these manufacturers will
meet the Company's future requirements for timely delivery of products of
sufficient quality and quantity. The Company intends to introduce a number of
new products and product enhancements in 1998, which will require that the
Company rapidly achieve volume production by coordinating its efforts with those
of its suppliers and contract manufacturers. Certain of the Company's products
in development will require contract manufacturers to adopt or develop advanced
manufacturing techniques, which could inhibit volume manufacturing of those
products. The inability of Xylan's contract manufacturers to provide it with
adequate supplies of high-quality products on-time or the loss of any of the
Company's contract manufacturers could cause a delay in Xylan's ability to
fulfill orders while the Company identifies a replacement manufacturer and could
have a material adverse effect upon the Company's business, operating results
and financial condition.
Dependence on Sole and Limited Source Suppliers and Availability of
Components. Several key components used in the manufacture of the Company's
products are currently purchased only from single or
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limited sources. At present, single-sourced components include ASICs, certain
processors, selected integrated circuits, programmable integrated circuits,
cables and custom-tooled sheet metal; and limited-sourced components include
flash memories, dynamic random access memories ("DRAMs"), and printed circuit
boards. The Company generally does not have long-term agreements with any of
these single or limited sources of supply. The Company is in the process of
incorporating ASICs in many of its products. As stated above, many of these
ASICs are initially being manufactured by a single source, LSI Logic Corporation
in most cases, and accordingly the risks of relying on sole sources is expected
to increase. Any interruption or delay in the supply of any of these components,
or the inability of the Company to procure these components from alternate
sources at acceptable prices and within a reasonable time, could have a material
adverse effect upon the Company's business, operating results and financial
condition. Qualifying additional suppliers is time consuming and expensive and
the likelihood of errors is greater with new suppliers. The Company uses a
rolling six-month forecast based on anticipated product orders to determine its
general materials and components requirements. Lead times for materials and
components ordered by the Company vary significantly, and depend on factors such
as the specific supplier, contract terms and demand for a component at a given
time. If orders do not match forecasts, the Company may have excess or
inadequate inventory of certain materials and components, which could have a
material adverse effect on the Company's financial condition. From time to time
the Company has experienced shortages and allocations of certain components,
delays in filling orders while waiting to obtain the necessary components and
delays in prototyping of its ASICs. Given current worldwide demand for
integrated circuits and certain other components used by the Company and the
complexity and yield problems in manufacturing such integrated circuits and
components, such shortages allocations and delays are likely to occur in the
future and could have a material adverse effect on the Company's business,
operating results and financial condition.
Rapid Technological Change; New Products and Evolving Markets. The market for
the Company's products is characterized by frequent new product introductions,
rapidly changing technology and continued emergence of new industry standards,
any of which could render Xylan's existing products obsolete. The Company's
success will depend to a substantial degree upon its ability to develop and
introduce in a timely fashion new products and enhancements to its existing
products that meet changing customer requirements and emerging industry
standards. The development or acquisition of new, technologically advanced
products is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. There
can be no assurance that the Company will be able to identify, develop,
manufacture, market, support or acquire new or enhanced products successfully or
on a timely basis, that new Company products will gain market acceptance or that
the Company will be able to respond effectively to product announcements by
competitors, technological changes or emerging industry standards. In addition,
the Company has on occasion experienced delays in the introduction of new
products and product enhancements. Such delays have, and any future delays
could have, a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, from time to time, the Company may
announce new products or product enhancements, capabilities or technologies that
have the potential to replace or shorten the life cycle of the Company's
existing product offerings and that may cause customers to defer purchasing
existing Company products or cause resellers to return products to the Company.
The market for LAN switching products is evolving and the Company believes its
ability to compete successfully in this market is dependent upon the continued
compatibility and interoperability of its products with products and
architectures offered by various vendors, including workstation and personal
computer architectures and computer and network operating systems. There can be
no assurance that the Company will be able to effectively address the
compatibility and interoperability issues raised by technological changes or
evolving industry standards.
A key element of the Company's strategy is the development of multiple ASICs
to increase system performance and reduce costs, thereby enhancing the
price/performance of the Company's products. However, ASICs are generally
complex and may contain undetected errors. Any failure to continue to introduce
new products or product enhancements and develop and incorporate ASICs
effectively and on a timely basis, customer delays in purchasing products in
anticipation of new product introductions or any inability of the Company to
respond effectively to product announcements by competitors, technological
changes or emerging industry standards could have a material adverse effect on
the Company's business, operating results and financial condition.
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Uncertain Market Acceptance of the Company's Products; Product Concentration.
The Company currently derives substantially all of its revenue from its
OmniSwitch and PizzaSwitch products. The Company introduced its OmniStack series
of products in March of 1998. The Company expects that revenue from these
products will account for a substantial portion of the Company's revenue through
1998. Broad market acceptance of these products is, therefore, critical to the
Company's future success. Factors that may affect the market acceptance of the
Company's products include market acceptance of network switching products, the
availability and price of competing products and technologies and the success of
the sales and support efforts of the Company and its OEM partners and system
integrators. Moreover, the Company's operating history in the network switching
market and its resources are limited relative to those of certain of its current
and potential competitors. The Company's future performance will also depend in
part on the successful development, introduction and market acceptance of new
and enhanced products. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
operating results and financial condition.
Product and System Complexity. Products as complex as those offered by the
Company frequently contain undetected software or hardware errors when first
introduced or as new versions are released. As is common among participants in
the Company's industry, the Company has experienced such errors in the past in
connection with product upgrades and new products. Despite testing by the
Company and by current and potential customers, Xylan expects that such errors
will be found from time to time in new or enhanced products after commencement
of commercial shipments. The Company believes it has addressed these errors when
they have occurred through software and hardware revisions. In addition, end
users use the Company's products in complex systems or networks with products
from multiple vendors. As a result, the Company's products must successfully
interoperate with products from other vendors and at times, a system problem (if
one exists) may be difficult to identify the source of the problem. However, the
occurrence of such errors could, and the inability to correct such errors would,
result in the delay or loss of market acceptance of the Company's products,
additional expense, diversion of engineering and other resources from the
Company's product development efforts and the loss of credibility with Xylan's
OEM partners, system integrators and end users, any of which would have a
material adverse effect on the Company's business, operating results and
financial condition.
Limited Operating History; Recent Profitability; Uncertain Future
Profitability. The Company was organized in July 1993 and began shipping its
first LAN switching products in volume in the first quarter of 1995. The
Company's initial products offered limited interfaces and, in September 1995,
the Company began offering LAN switching products. Accordingly, the Company has
only a limited operating history upon which an evaluation of the Company and its
prospects can be based. The Company has generally experienced revenue growth
since January 1995, and first achieved profitability in the fourth quarter of
1995. Due to the Company's limited operating history, there can be no assurance
of revenue growth and profitability on a quarterly or annual basis in the
future. In fiscal 1998, the Company intends to continue to increase
significantly its investments in research and development, sales and marketing
and related infrastructure. Any such increases will be highly dependent on
factors including the continued growth of the Company's revenue and the rate
thereof, success in hiring the appropriate personnel and market acceptance of
the Company's products. Due to the anticipated increases in the Company's
operating expenses, the Company's operating results will be adversely affected
if revenue does not increase. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in rapidly
evolving markets. To address these risks, the Company must, among other things,
successfully increase the scope of its operations, respond to competitive
developments, continue to attract, retain and motivate qualified personnel and
continue to commercialize products incorporating advanced technologies. There
can be no assurance that the Company will be successful in addressing such
risks.
Management of Growth. The Company's growth has resulted in a continuing
increase in the level of responsibility for both existing and new management
personnel. The Company recently has implemented and continues to implement new
and enhanced financial and management information systems and controls and is
training its personnel to operate such systems. Any difficulty in the operation
of such new and enhanced systems or the training of personnel, or any
disruptions in the transition to such new or enhanced systems and controls,
could adversely affect the Company's ability to accurately forecast sales demand
and calibrate manufacturing to such demand, to calibrate purchasing levels, to
accurately record and control inventory levels, and to record and report
financial and management information on a timely and accurate basis. Due to the
Company's rapid growth, the Company experienced each of these problems in the
past. The occurrence or recurrence of any of these events could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Proprietary Technology; Intellectual Property Litigation. The
Company's success and its ability to compete are dependent, in part, upon its
proprietary technology. The Company holds only one issued patent and currently
relies on a combination of contractual rights, trade secrets and copyright laws
to establish and protect its proprietary rights in its products. There can be
no assurance that the steps taken by the Company to protect its intellectual
property will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. In the event
that protective measures are not successful, the Company's business, operating
results and financial condition could be materially and adversely affected. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
The Company is also subject to the risk of adverse claims and litigation
alleging infringement of intellectual property rights of others. On June 8,
1995, a suit alleging misappropriation of trade secrets, infringement of U.S.
Patent No. 5,394,402 and improper hiring of employees was brought against Xylan
by Ascom Timeplex Inc. ("Ascom Timeplex") in the U.S. District Court for the
Central District of California in Los
20
<PAGE>
Angeles, California, seeking injunctive relief and unspecified monetary damages.
The Company and Ascom Timeplex have signed a binding memorandum of understanding
to settle this litigation and dismiss all of Ascom Timeplex's charges against
the Company and against Steve Y. Kim, John Bailey and another employee named in
Ascom Timeplex's complaint, and otherwise release the parties from all claims.
The settlement also involves a royalty-free license to the Company of Ascom
Timeplex's virtual LAN technology covered by the patent and a royalty-free
license to Ascom Timeplex of certain technology embodied in the Company's
currently available products for use in and in connection with Ascom Timeplex's
Synchrony product family. These licenses are not assignable other than to a
successor-in-interest to Ascom Timeplex. The Company also undertakes to transfer
a copy of the licensed technology to Ascom Timeplex and for a specified time not
to hire Ascom Timeplex employees. The release by Ascom Timeplex is conditioned
on transfer of this technology. While the court dismissed Ascom Timeplex's
charges with prejudice in connection with the settlement, there can be no
assurance that future disputes will not arise between the parties with respect
to the settlement or otherwise.
Since patent applications in the United States are not publicly disclosed
until the patent issues, applications may have been filed which, if issued as
patents, would relate to the Company's products. In addition, the Company has
not conducted a comprehensive patent search relating to the technology used in
its products. The Company is subject to the risk of claims and litigation
alleging infringement of the intellectual property rights of others. These
claims may be asserted against the Company directly in a lawsuit naming the
Company as a defendant, or may be asserted against the Company indirectly in a
lawsuit naming as a defendant one or more customers or resellers of the Company
which the Company is contractually obligated to indemnify in the event of a
lawsuit alleging that products purchased from the Company infringe third party
intellectual property rights. In addition to the claims of Ascom Timeplex, Xylan
has, from time to time, received claims from third parties alleging infringement
of such third parties' intellectual property rights. The Company believes that
none of the current claims against the Company would result in material
liability if successful. Although such claims have not resulted in material
litigation to date, there can be no assurances that such claims will not be
successful or generate material litigation in the future.
Furthermore, there can be no assurance that third parties will not assert
infringement claims against the Company in the future based on patents or trade
secrets or that such claims will not be successful. The Company could incur
substantial costs in defending itself and its customers against any such claims,
regardless of the merits of such claims. Parties making such claims may be able
to obtain injunctive or other equitable relief which could effectively block the
Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a successful
claim of infringement, the Company, its customers and end-users may be required
to obtain one or more licenses from third parties. There can be no assurance
that the Company or its customers could obtain necessary licenses from third
parties at a reasonable cost or at all. The defense of any lawsuit could result
in time-consuming and expensive litigation, damages, license fees, royalty
payments and restrictions on the Company's ability to sell its products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Key Personnel and Hiring of Additional Personnel. The Company's
success depends to a significant degree upon the continued contributions of its
key management, engineering, sales and marketing and manufacturing personnel,
many of whom would be difficult to replace. In particular, the Company believes
that its future success is highly dependent on Steve Y. Kim, Chairman, President
and Chief Executive Officer and John Bailey, Vice President of Product
Development. The Company does not have employment contracts with, and does not
currently maintain key man life insurance covering, its key personnel. The
Company believes its future success will also depend in large part upon its
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, finance and manufacturing personnel. Competition for such personnel
is intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of the services of any of the
key personnel, the inability to attract or retain qualified personnel in the
future or delays in hiring required personnel, particularly engineers and sales
personnel, could have a material adverse effect on the Company's business,
operating results or financial condition. In addition, companies in the
networking industry whose employees accept positions with competitive companies
frequently claim that their competitors have engaged in unfair hiring practices.
Xylan has, from time to time, received such claims from other companies and,
although claims to date have not resulted in material litigation other than in
21
<PAGE>
connection with Ascom Timeplex, there can be no assurance that the Company will
not receive additional claims in the future as it seeks to hire qualified
personnel or that such claims will not result in material litigation involving
the Company. The Company could incur substantial costs in defending itself
against any such claims, regardless of the merits of such claims. To date, the
Company has not lost any employees as a result of such claims.
International Operations. Sales to customers outside of North America
accounted for approximately 54% of the Company's revenue for the quarters ended
June 30, 1998 and June 30, 1997. The Company's international sales are conducted
primarily through its OEM partners and independent territory-specific system
integrators. Failure of the Company's OEM partners and system integrators to
effectively market the Company's products internationally or the loss of any of
these resellers could have a material adverse effect on the Company's business,
operating results and financial condition. The Company's international business
is subject to risks customarily encountered in foreign operations, including
changes in a specific country's or region's political or economic conditions,
trade protection measures, import or export licensing requirements, the overlap
of different tax structures, unexpected changes in regulatory requirements and
natural disasters. For example, due to the recent financial turmoil in Asia, the
Company's revenues from Asia declined from 25% of total revenues in the third
quarter of 1997 to 14% in the second quarter of fiscal 1998. The Company's
international sales currently are U.S. dollar-denominated. As a result, an
increase in the value of the U.S. dollar relative to foreign currencies could
make the Company's products less competitive in international markets. The
Company's operating results could also be adversely affected by seasonality of
international sales. These international factors could have a material adverse
effect on future sales of the Company's products to international end-users and,
consequently, the Company's business, operating results and financial condition.
Year 2000. Many computer systems experience problems handling dates beyond
the year 1999. Therefore, some computer hardware and software will need to be
modified prior to the Year 2000 in order to remain functional. The Company is
assessing both the internal readiness of its computer systems and the compliance
of its computer products and software sold to customers for handling the Year
2000. The Company expects to implement successfully the systems and programming
changes necessary to address Year 2000 issues, and does not believe that the
cost of such actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes could have an adverse effect on future results of operations.
The Company is also assessing the possible effects on the Company's operations
of the Year 2000 readiness of key suppliers and subcontractors. The Company's
reliance on suppliers and subcontractors, and, therefore, on the proper
functioning of their information systems and software, means that failure to
address Year 2000 issues could have a material impact on the Company's
operations and financial results; however, the potential impact and related
costs are not known at this time.
Market for Network Switches; General Economic Conditions. Demand for the
Company's products depends in large part on overall demand for network switching
products, which may in the future fluctuate significantly based on numerous
factors, including adoption of alternative technologies, capital spending levels
and general economic conditions. While certain analysts believe that there is a
significant market for network switches, there can be no assurance as to the
rate or extent of the growth of this market. There can be no assurance that the
Company will not experience a decline in demand for its products, which would
have a material adverse effect on the Company's business, operating results and
financial condition.
Need for Additional Capital. The Company requires substantial working capital
to fund its business, particularly to finance inventories and accounts
receivable and for capital expenditures. The Company believes that its existing
cash and investment balances, together with its line of credit and cash flow
expected to be generated from future operations, will be sufficient to meet the
Company's capital requirements through at least the next twelve months, although
the Company could be required, or could elect, to seek to raise additional
capital. The Company's future capital requirements will depend on many factors,
including the rate of revenue growth, the timing and extent of spending to
support product development efforts and expansion of sales and marketing, the
timing of introductions of new products and enhancements to existing products,
and market acceptance of the Company's products. The Company expects that it
may need to raise additional equity or debt
22
<PAGE>
financing in the future. There can be no assurance that additional equity or
debt financing, if required, will be available on acceptable terms or at all.
Regulatory Matters. The Company's products must meet industry standards and
receive certification for connection to certain public telecommunications
networks prior to their sale. In the United States, the Company's products must
comply with various regulations defined by the Federal Communications Commission
and Underwriters Laboratories. Internationally, the Company's products must
comply with standards established by telecommunications authorities in various
countries as well as with recommendations of the International Telecommunication
Union. Although the Company's products have not been denied any regulatory
approvals or certifications to date, any future inability to obtain on a timely
basis or retain domestic or foreign regulatory approvals or certifications or to
comply with existing or evolving industry standards could have a material
adverse effect on the Company's business, operating results and financial
condition.
Anti-Takeover Provisions. Certain provisions of the Company's charter
documents, including provisions eliminating the ability of shareholders to take
action by written consent and limiting the ability of shareholders to raise
matters at a meeting of shareholders without giving advance notice, may have the
effect of delaying or preventing changes in control or management of the
Company, which could have an adverse effect on the market price of the Company's
Common Stock. In addition, the Company's Board of Directors are divided between
two classes, each of which serves for a staggered two-year term, which may make
it more difficult for a third party to gain control of the Company's Board of
Directors. In October of 1997, the Company's Board of Directors approved
acceleration of vesting of stock options held by the Company's Executive
Officers and certain key employees in the event of a change of control, which
could also make a change in control or management of the Company more difficult.
The Board of Directors has authority to issue up to 5,000,000 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 shareholders. In addition, on April 17, 1997, the Company's Board of
Directors declared a dividend of one right (a "Right") to purchase 1/1000th of a
share of Series A Participating Preferred Stock (the "Series A Preferred") on
each share of Common Stock. The Rights will become exercisable only if a person
or group acquires 15.0% or more of the Company's Common Stock (in the case of
Steve Y. Kim, Yuri Pikover, John L. Walecka or Brentwood Associates VI, L.P.,
this threshold only applies to shares acquired after April 17, 1997 and if such
acquisition is not approved by the Board of Directors) or announces a tender or
exchange offer, the consummation of which would result in ownership by a person
or a group of 15.0% or more of the Company's Common Stock. Each Right has an
exercise price of $75.00 for each 1/1000th of a share of Series A Preferred.
The rights of the holders of the Company's Common Stock will be subject to,
and may be adversely affected by, the existence of the Rights and the rights of
the holders of any Preferred Stock that may be issued in the future. The Rights
and any future issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company, thereby
delaying, deferring or preventing a change in control of the Company.
Furthermore, such Preferred Stock may have other rights, including economic
rights, senior to the Common Stock, and as a result, the issuance of such
Preferred Stock could have a material adverse effect on the market value of the
Common Stock.
Possible Volatility of Stock Price. The market price of the shares of Common
Stock has been and is likely to continue to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcement of technological innovations or
new product introductions by the Company or its competitors, changes of
estimates of the Company's future operating results by securities analysts,
developments with respect to copyrights or proprietary rights, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the Common Stocks of technology
companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock.
In October 1996, Steve Kim and Yuri Pikover, executive officers and members of
the Board of Directors of the Company, entered into a program of periodic sales
of shares of their Xylan Common Stock through a blind trust for the purpose of
diversifying their personal holdings. At the beginning of each calendar
quarter, Steve Kim and Yuri Pikover will deliver 125,000 and 55,000 shares,
respectively, to their blind trust for sale within the
23
<PAGE>
quarter, provided, however, the amount of shares to be delivered by Mr. Kim was
reduced to 80,000 shares commencing with the second quarter of 1998.
Furthermore, the trust for Steve Kim's children will sell 25,000 shares and Yuri
Pikover's trusts will sell 20,000 shares within each quarter. In addition,
certain of the venture capital partnerships that invested in the Company have
begun to distribute portions of their holdings to their general and limited
partners, who in turn have begun to resell such shares on the open market. Any
such sales by insiders or distributions by large investors may also have an
adverse effect on the market price of the Company's Common Stock. In addition,
recent changes in the rules regarding resales of restricted securities pursuant
to Rule 144 of the Securities Act of 1933, as amended, may result in a greater
number of shares of the Company's Stock becoming available for resale sooner
than anticipated, and could have an adverse effect on the market price of the
Company's Stock.
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission Of Matters To A Vote Of Security Holders
On May 8, 1998, at the Company's 1998 Annual Meeting of Shareholders, the
following matters were submitted and voted on by securityholders and were
adopted:
A. The approval of an amendment to the 1996 Stock Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
3,000,000 shares.
The results for the vote are as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
20,059,275 6,093,293 214,987 8,892,685
B. The election of three (3) Class II directors to serve until their
successors are elected and qualified.
FOR ALL NOMINEES INSTRUCTED WITHHELD FROM ALL NOMINEES
----------------- ---------- --------------------------
35,187,923 4,480 67,837
FOR WITHHELD
--- --------
Yuri Pikover 35,192,204 68,036
Robert C. Hawk 35,192,403 67,837
Trude C. Taylor 35,187,923 72,317
C. The ratification of KPMG Peat Marwick LLP as the Company's independent
auditors for the fiscal year ending December 31, 1998.
24
<PAGE>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
35,192,948 37,235 30,057 -0-
ITEM 5. Other Information
None.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of Registrant.(1)
3.2 Amended and Restated Bylaws of Registrant.(1)
4.1 Form of Common Stock Certificate.(1)
4.2 Preferred Shares Rights agreement dated as of April 17, 1997 between the
Registrant and the First National Bank of Boston, including Certificate
of Determination of Rights, Preferences and Privileges of Series A
Participating Preferred Stock, the Form of Rights Certificate and Summary
of rights attached thereto as Exhibits A, B and C, respectively.(2)
10.1 Form of Indemnification Agreement.(1)
10.2 1993 Stock Incentive Plan.(1)
10.3 Form of 1996 Employee Stock Purchase Plan and related agreements.(1)
10.4 Form of 1996 Directors' Option Plan and related agreements.(1)
10.5 Form of amended 1996 Stock Plan.(4)
10.6 Fourth Restated Registration Rights Agreement among the Registrant and
certain securityholders of the Registrant, dated as of December 11,
1995.(1)
10.7 Lease Agreement between the Registrant and Malibu Canyon Office Partners,
L.P. dated as of April 14, 1994, as amended November 3, 1994, January 2,
1995, and April 25, 1995.(1)
10.8 Security and Loan Agreement dated September 1, 1995 between the
Registrant and Imperial Bank.(1)
10.9 Master Lease Agreement dated as of May 31, 1994, as amended between the
Registrant and Dominion Ventures, Inc.(1)
10.10 Master Lease Agreement dated as of June 9, 1995 between the Registrant
and Copelco Capital, Inc.(1)
10.11 Value-Added Product Sales Agreement dated as of July 1, 1995 between the
Registrant and Hamilton Hallmark, a division of Avnet, Inc.(1)
10.12 401(k) Plan.(1)
10.13 Series C Preferred Stock Agreement dated as of March 13, 1995 between the
Registrant and Alcatel Data Networks S.A.(1)
10.14 International Distributor Agreement between the Registrant and Alcatel
N.V., dated as of March 13, 1995.(1)
10.15 Product and Technology Agreement between the Registrant and Alcatel N.V.
dated as of March 13, 1995.(1)
10.16 Original Equipment Manufacturer Agreement dated as of June 14, 1995
between the Registrant and Hitachi Computer Products (America), Inc.(1)
10.17 Original Equipment Manufacturer Agreement dated as of April 12, 1995
between the Registrant and Digital Equipment Corporation.(1)
10.18 Manufacturing and Purchase Agreement dated as of March 28, 1996 between
the Registrant and Victron, Inc.(1)
10.19 Amendment to Manufacturing and Purchase Agreement between Xylan and
Victron, Inc. dated as of December 30, 1996.(3)
25
<PAGE>
10.20 Dale Bartos Employment Agreement dated as of January 4, 1997.(3)
10.21 Form of 1998 Employee Stock Option Plan and related Agreements.(4)
10.22 Form of Change of Control Agreement.(4)
10.23 Industrial Real Estate Lease between Cypress Land Company and Registrant
dated as of June 1, 1998.(5)
27.1 Financial Data Schedule (Current) 3 and 6 months ended June 30, 1998.(5)
_________
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits", of the Registrant's Registration
Statement on Form S-1 and Amendments thereto (File No. 333-03623), which
became effective on May 29, 1996.
(2) Incorporated by reference to Exhibit 1 of the Registrant's Registration
Statement on Form 8-A filed with the Commission on August 24, 1997.
(3) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K filed on March 31, 1997.
(4) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K filed on March 31, 1998.
(5) Filed herewith.
(b) Reports on Form 8-K
None.
26
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
XYLAN CORPORATION
By: /s/ Dale J. Bartos
-----------------------------------------
Date: August 12, 1998 Dale J. Bartos
Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Thomas S. Burns
------------------------------------------
Thomas S. Burns
Vice President of Finance
(Chief Accounting Officer)
27
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of Registrant.(1)
3.2 Amended and Restated Bylaws of Registrant.(1)
4.1 Form of Common Stock Certificate.(1)
4.2 Preferred Shares Rights agreement dated as of April 17, 1997 between the
Registrant and the First National Bank of Boston, including Certificate
of Determination of Rights, Preferences and Privileges of Series A
Participating Preferred Stock, the Form of Rights Certificate and
Summary of rights attached thereto as Exhibits A, B and C,
respectively.(2)
10.1 Form of Indemnification Agreement.(1)
10.2 1993 Stock Incentive Plan.(1)
10.3 Form of 1996 Employee Stock Purchase Plan and related agreements.(1)
10.4 Form of 1996 Directors' Option Plan and related agreements.(1)
10.5 Form of amended 1996 Stock Plan.(4)
10.6 Fourth Restated Registration Rights Agreement among the Registrant and
certain securityholders of the Registrant, dated as of December 11,
1995.(1)
10.7 Lease Agreement between the Registrant and Malibu Canyon Office
Partners, L.P. dated as of April 14, 1994, as amended November 3, 1994,
January 2, 1995, and April 25, 1995.(1)
10.8 Security and Loan Agreement dated September 1, 1995 between the
Registrant 1 and Imperial Bank.(1)
10.9 Master Lease Agreement dated as of May 31, 1994, as amended between the
3 Registrant and Dominion Ventures, Inc.(1)
10.10 Master Lease Agreement dated as of June 9, 1995 between the Registrant
and Copelco Capital, Inc.(1)
10.11 Value-Added Product Sales Agreement dated as of July 1, 1995 between the
Registrant and Hamilton Hallmark, a division of Avnet, Inc.(1)
10.12 401(k) Plan.(1)
10.13 Series C Preferred Stock Agreement dated as of March 13, 1995 between
the Registrant and Alcatel Data Networks S.A.(1)
10.14 International Distributor Agreement between the Registrant and Alcatel
N.V., dated as of March 13, 1995.(1)
10.15 Product and Technology Agreement between the Registrant and Alcatel N.V.
dated as of March 13, 1995.(1)
10.16 Original Equipment Manufacturer Agreement dated as of June 14, 1995
between the Registrant and Hitachi Computer Products (America), Inc.(1)
10.17 Original Equipment Manufacturer Agreement dated as of April 12, 1995
between the Registrant and Digital Equipment Corporation.(1)
10.18 Manufacturing and Purchase Agreement dated as of March 28, 1996 between
the Registrant and Victron, Inc.(1)
10.19 Amendment to Manufacturing and Purchase Agreement between Xylan and
Victron, Inc. dated as of December 30, 1996.(3)
10.20 Dale Bartos Employment Agreement dated as of January 4, 1997.(3)
10.21 Form of 1998 Employee Stock Option Plan and related Agreements.(4)
28
<PAGE>
10.22 Form of Change of Control Agreement.(4)
10.23 Industrial Real Estate Lease between Cypress Land Company and Registrant
dated as of June 1, 1998.(5)
27.1 Financial Data Schedule (Current) 3 and 6 months ended June 30, 1998.(5)
_________
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits", of the Registrant's Registration
Statement on Form S-1 and Amendments thereto (File No. 333-03623), which
became effective on May 29, 1996.
(2) Incorporated by reference to Exhibit 1 of the Registrant's Registration
Statement on Form 8-A filed with the Commission on August 24, 1997.
(3) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K filed on March 31, 1997.
(4) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K filed on March 31, 1998.
(5) Filed herewith.
29
<PAGE>
EXHIBIT 10.23
INDUSTRIAL REAL ESTATE LEASE
BETWEEN
CYPRESS LAND COMPANY
AND
XYLAN CORPORATION
for
26801 AGOURA ROAD, CALABASAS, CALIFORNIA
JUNE 1, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE ONE: BASIC TERMS............................................ 1
Section 1.1 Date of Lease....................................... 1
Section 1.2 Landlord............................................ 1
Section 1.3 Tenant.............................................. 1
Section 1.4 Property............................................ 1
Section 1.5 Lease Term.......................................... 1
Section 1.6 Permitted Uses...................................... 1
Section 1.7 Tenant's Guarantor.................................. 1
Section 1.8 Initial Security Deposit............................ 1
Section 1.9 Rent and Other Charges Payable by Tenant............ 2
Section 1.10 Riders.............................................. 2
ARTICLE TWO: LEASE TERM............................................. 2
Section 2.1 Lease of Property for Lease Term.................... 2
Section 2.2 Holding Over........................................ 2
Section 2.3 Option to Extend.................................... 3
ARTICLE THREE: BASE RENT.............................................. 6
Section 3.1 Time and Manner of Payment.......................... 6
Section 3.2 Cost of Living Increases............................ 6
Section 3.3 Security Deposit; Increases......................... 7
Section 3.4 Termination; Advance Payments....................... 7
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT........................ 7
Section 4.1 Additional Rent..................................... 8
Section 4.2 Property Taxes...................................... 8
Section 4.3 Utilities........................................... 10
Section 4.4 Insurance Policies.................................. 10
Section 4.5 Late Charges........................................ 13
Section 4.6 Interest on Past Due Obligations.................... 13
Section 4.7 Impounds for Insurance Premiums and Real Property
Taxes............................................... 13
ARTICLE FIVE: USE OF PROPERTY........................................ 14
Section 5.1 Permitted Uses...................................... 14
Section 5.2 Manner of Use and CC&Rs............................. 14
Section 5.3 Hazardous Materials................................. 15
Section 5.4 Outside Storage..................................... 20
Section 5.5 Signs and Auctions.................................. 20
Section 5.6 Indemnity........................................... 20
Section 5.7 Landlord's Access................................... 20
Section 5.8 Quiet Possession.................................... 21
Section 5.9 Future Easements and Governmental Requirements...... 21
<PAGE>
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND
ALTERATIONS............................................ 21
Section 6.1 Existing Conditions................................. 21
Section 6.2 Exemption of Landlord from Liability................ 22
Section 6.3 Landlord's Obligations.............................. 22
Section 6.4 Tenant's Obligations................................ 23
Section 6.5 Alterations, Additions, and Improvements............ 24
Section 6.6 Condition Upon Termination.......................... 25
Section 6.7 Common Areas and Regulations........................ 26
ARTICLE SEVEN: DAMAGE OR DESTRUCTION.................................. 26
Section 7.1 Partial Damage to Property.......................... 26
Section 7.2 Damage Caused by Tenant............................. 27
Section 7.3 Substantial or Total Destruction.................... 27
Section 7.4 Temporary Reduction of Rent......................... 27
Section 7.5 Waiver.............................................. 28
ARTICLE EIGHT: CONDEMNATION........................................... 28
ARTICLE NINE: ASSIGNMENT AND SUBLETTING.............................. 29
Section 9.1 Landlord's Consent Required......................... 29
Section 9.2 Tenant Affiliate and Merger......................... 29
Section 9.3 No Release of Tenant................................ 30
Section 9.4 Offer to Terminate.................................. 30
Section 9.5 Landlord's Consent.................................. 30
Section 9.6 Landlord's Share of Premium......................... 31
Section 9.7 No Merger........................................... 31
ARTICLE TEN: DEFAULTS; REMEDIES..................................... 32
Section 10.1 Covenants and Conditions............................ 32
Section 10.2 Defaults............................................ 32
Section 10.3 Remedies............................................ 33
Section 10.4 Cumulative Remedies................................. 34
ARTICLE ELEVEN: PROTECTION OF LENDERS.................................. 34
Section 11.1 Subordination....................................... 35
Section 11.2 Attornment.......................................... 35
Section 11.3 Signing of Documents................................ 35
Section 11.4 Estoppel Certificates............................... 36
Section 11.5 Tenant's Financial Condition........................ 36
ARTICLE TWELVE: LEGAL COSTS............................................ 37
Section 12.1 Legal Proceedings................................... 37
Section 12.2 Landlord's Consent.................................. 37
<PAGE>
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS............................... 38
Section 13.1 Non-Discrimination.................................. 38
Section 13.2 Landlord's Liability; Certain Duties................ 38
Section 13.3 Severability........................................ 39
Section 13.4 Interpretation...................................... 39
Section 13.5 Incorporation of Prior Agreements; Modifications.... 39
Section 13.6 Notices............................................. 39
Section 13.7 Waivers............................................. 39
Section 13.8 Recordation......................................... 40
Section 13.9 Binding Effect; Choice of Law....................... 40
Section 13.10 Corporate Authority; Partnership Authority.......... 40
Section 13.11 Joint and Several Liability......................... 40
Section 13.12 Force Majeure....................................... 40
Section 13.13 Execution of Lease.................................. 41
Section 13.14 Survival............................................ 41
ARTICLE FOURTEEN: BROKERS................................................ 41
Section 14.1 No Other Brokers.................................... 41
CONSTRUCTION RIDER
EXHIBIT "A" - Legal Description
EXHIBIT "B" - Shell Plans and Specifications
<PAGE>
INDUSTRIAL REAL ESTATE LEASE
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.1 Date of Lease: June 1, 1998
Section 1.2 Landlord: Cypress Land Company, a California limited
partnership
Address of Landlord: 2203 East Carson Street, Suite A-1, Long Beach, California
90810
Section 1.3 Tenant: Xylan Corporation, a California corporation
Address of Tenant: 26801 Agoura Road, Calabasas, California
Section 1.4 Property: 26801 Agoura Road, Calabasas, California,
consisting of a building ("Building") of approximately one hundred twenty-eight
thousand seven hundred square feet (128,700 s.f.) (which square footage includes
a eleven thousand two hundred square foot (11,200 s.f.) second story mezzanine
area), and all parking areas located on the Property. The actual square feet of
the Building shall be determined under Paragraph 3.2 of the Construction Rider.
The legal description of the land area constituting the Property is set forth on
Exhibit "A" attached hereto and incorporated herein by this reference.
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Section 1.5 Lease Term: Ten (10) years beginning on the Commencement
Date (as defined in the Construction Rider) and ending one hundred twenty (120)
months thereafter. If the Commencement Date falls on a day other than the first
day of a calendar month, then the Lease Term shall be one hundred twenty (120)
months plus the additional period of time between the Commencement Date and the
first day of the next succeeding month.
Section 1.6 Permitted Uses: (See Article Five) General administrative,
office, production, warehouse, distribution and sales (other than retail) of
Tenant's products, customer service, and for other lawful purposes directly
incidental thereto.
Section 1.7 Tenant's Guarantor: None
Section 1.8 Initial Security Deposit: (See Section 3.3)
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Eighty-One Thousand Eighty-One Dollars ($81,081)
Section 1.9 Rent and Other Charges Payable by Tenant:
(a) BASE RENT: Eighty-One Thousand Eighty-One Dollars ($81,081) per month
for the first thirty (30) months (plus a pro rata amount for the first partial
month of the Lease, if applicable) as provided in Section 3.1. The initial Base
Rent shall be adjusted as provided in Paragraph 3.2 of the Construction Rider,
based upon the actual square feet of the Building. The Base Rent shall be
increased on the first day of the thirty-first (31st), sixty-first (61st) and
ninety-first (91) month(s) ("Rental Adjustment Date(s)") after the first day of
the first full month of the Lease Term, as provided in Section 3.2. The
increase in the Base Rent on each Rental Adjustment Date shall be a minimum of
seven and sixty-eight one-hundredths percent (7.68%) and a maximum of fifteen
and seventy-three one-hundredths percent (15.73%) of the Comparison Base Rent.
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.2);
(ii) Utilities (See Section 4.3); (iii) Insurance Premiums (See Section 4.4);
(iv) Impounds for Insurance Premiums and Property Taxes, if any (See Section
4.7); (v) Maintenance, Repairs and Alterations (See Article Six).
Section 1.10 Riders: The Construction Rider is attached to and is hereby
made a part of this Lease.
ARTICLE TWO: LEASE TERM
Section 2.1 Lease of Property for Lease Term. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.5 above and shall
begin and end on the dates specified in Section 1.5 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.5 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
Section 2.2 Holding Over. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of this Lease and Landlord
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be
a "month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by fifty percent (50%).
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Section 2.3 Option to Extend.
(a) Exercise. Landlord hereby grants to Tenant two (2) options (referred
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to herein individually as "Option" and collectively as "Options") to renew and
extend the term of this Lease for a term of five (5) years for each Option (each
such five-year term for an Option is referred to herein as an "Option Term").
Each Option must be exercised by written notice ("Option Notice") received by
Landlord no later than six (6) months prior to the expiration of the then
current Lease Term or Option Term. Furthermore, the Option shall not be deemed
to be properly exercised if Tenant is prohibited from exercising the Option
pursuant to subparagraphs (i) or (ii), below. If the Option is not properly
exercised within the Option Notice period in the manner prescribed herein, it
shall expire and be of no further force and effect. In order for Tenant to be
able to exercise the second Option, the first Option must be properly exercised
by Tenant (or Landlord and Tenant must otherwise have agreed in writing to
extend the Lease Term for the first full Option Term). Time is of the essence.
Tenant may not revoke an election of an Option once Tenant makes an election to
exercise such Option. Provided that Tenant has properly exercised an Option,
the term of the Lease shall be extended for the Option Term, and all terms,
covenants and conditions of the Lease shall remain unmodified and in full force
and effect, except that the Base Rent shall be modified as set forth in
Paragraphs 2.3(b), (c) and (d), below.
(i) If Tenant is then in default under any provision of this Lease
beyond the applicable notice and cure periods for such default, then Tenant may
not exercise the Option. If Tenant's default is due to the fact that Tenant has
failed to pay a monetary amount due under the Lease, then the Option may not be
exercised until such monetary amount is paid before the Option Notice period
expires or, if such non-monetary default is not capable of cure before such
period expires, as long as Tenant has commenced such cure, is diligently
attempting to complete curing such default, and such default is capable of being
cured, then such exercise shall be effective notwithstanding such continuing
default. If such default is the result of Tenant's failure to perform a non-
monetary obligation and Tenant has received written notice of such default, then
Tenant may only exercise the Option if Tenant properly cures such non-monetary
default within the stated cure period before the Option Notice period expires.
The period of time within which the Option may be exercised shall not be
extended or enlarged by reason of Tenant's inability to exercise such Option
because of Tenant's default.
(ii) The Option granted to Tenant in this Lease is personal to Tenant
and may not be exercised or assigned, voluntarily or involuntarily, by or to any
person or entity other
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than Tenant or a Tenant Affiliate (as defined in Section 9.2). The Option herein
granted to Tenant is not assignable to any person separate and apart from this
Lease.
(b) Base Rent. The Base Rent payable for the first thirty (30) months of
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each Option Term shall be the greater of: (i) the Fair Rental Value (as
determined under Paragraph 2.3(c)); or (ii) the Base Rent during the last month
immediately preceding the first month of the applicable Option Term.
(c) Fair Rental Value. For purposes of this Section 2.3, the term "Fair
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Rental Value" shall mean the Fair Rental Value based upon a per square foot
basis and shall be determined as follows: After Landlord's receipt of Tenant's
election to exercise the Option, but no sooner than six (6) months prior to the
expiration of the then current Lease term, Landlord shall determine the Fair
Rental Value in accordance with subparagraph 2.3(c)(ii) below, and provide
written notice of such amount to Tenant. Tenant shall have fifteen (15) days
(the "Tenant Review Period") after receipt of Landlord's notice of the Fair
Rental Value within which to accept such rental or to reasonably object thereto
in writing. In the event that Tenant objects in writing to Landlord within the
Tenant Review Period of Landlord's determination, then Landlord and Tenant shall
attempt to agree upon such Fair Rental Value using their good faith efforts.
The failure of Tenant to so notify Landlord in writing of Tenant's acceptance of
the Fair Rental Value within the Tenant Review Period shall conclusively be
deemed Tenant's rejection of the Fair Rental Value determined by Landlord. If
Landlord and Tenant fail for any reason to reach agreement of the Fair Rental
Value within ten (10) days of the end of Tenant's Review Period, then each party
shall place in a separate sealed envelope its final proposed determination as to
the Fair Rental Value (which determination may be different than such party's
original determination), and such determination shall be submitted to a
Qualified Appraiser for determination. Tenant shall deliver to Landlord within
ten (10) days after the end of Tenant's Review Period a list of three (3)
Qualified Appraisers, and Landlord shall choose one (1) of such Qualified
Appraisers from such list within five (5) days of Landlord's receipt of such
list. If Tenant fails to deliver such list to Landlord within such ten (10) day
period, then Landlord may deliver a list of three (3) Qualified Appraisers to
Tenant, and Tenant shall choose one (1) of such Qualified Appraisers, or if
Tenant so fails to choose a Qualified Appraiser within five (5) days of receipt
of same, then Landlord may choose such Qualified Appraiser from such list. The
Qualified Appraiser's determination shall be limited solely to this issue of
whether Landlord's or Tenant's submitted Fair Rental Value per square foot for
the Property is the closest to the actual prevailing Fair Rental Value per
square foot, using the criteria described herein (in which case Landlord's or
Tenant's determination of the Fair Rental Value
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chosen by the Qualified Appraiser shall be the Fair Rental Value). Such
Qualified Appraiser shall within thirty (30) days of appointment reach a
decision and shall notify Landlord and Tenant of such determination and such
determination shall be final.
(i) The term "Qualified Appraiser" for purposes of this Paragraph
2.3(c) shall mean a professional real estate appraiser who is a Member of the
Appraisal Institute (sometimes known as an "MAI" appraiser) who shall have been
active over the five (5) preceding years ending on the date of such appointment
in the appraisal of similar properties within a ten (10) mile radius of the
subject Property. The cost of the Qualified Appraiser shall be paid equally by
Landlord and Tenant. If at the time of the appointment of a Qualified
Appraiser, the designation "MAI" is no longer utilized, then a qualification for
appraisers most nearly equivalent to an MAI appraiser shall be utilized.
(ii) The criteria by which the Qualified Appraiser, and the Landlord's
and Tenant's determination, of Fair Rental Value per month shall be as follows:
(a) Only available comparable office/warehouse building rentals
closest to the date that such Option term is to commence of equal quality to the
Property within the Lost Hills Business Center shall be used. Comparable
properties shall be compared on a rentable square footage basis.
(b) Only buildings in a planned business park of at least the
same quality as the business park in which the subject Property is located shall
be used.
(c) Fair Rental Value shall not include the rental value for
those Tenant Improvements installed and paid for by the Tenant under the
Construction Rider (except for improvements or upgrades of the Building Shell
which may have been included in such Tenant Improvements).
(d) No credit may be given for comparable property rentals for
tenant improvement allowances or similar rental concessions, if any, given to
tenants of comparable properties. However, credit may be given for any free
rent, if any, then being given to tenants of comparable properties.
(d) Increase. The monthly Base Rent payable for the first (1st) month
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through the thirtieth (30th) month of each Option Term shall be the new monthly
Base Rent for the Option Term as determined under Paragraphs 2.3(b) and (c),
above. Such Base Rent shall be increased on the thirty-first (31st) month of
each Option Term ("Rental Adjustment Date") as provided in Section 3.2;
provided, however, that such rent increase on each Rental Adjustment Date shall
be a minimum of seven and sixty-eight one-
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hundredths percent (7.68%) and a maximum of fifteen and three one-hundredths
percent (15.73%) of the Comparison Base Rent.
ARTICLE THREE: BASE RENT
Section 3.1 Time and Manner of Payment. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.9(a)
above, which amount shall apply to the Base Rent due for the first full month of
the Lease Term. If the Base Rent is modified under Paragraph 3.2 of the
Construction Rider, then Landlord and Tenant on the Commencement Date shall make
an adjustment to the initial Base Rent. In the event that the Commencement Date
does not fall on the first day of the month, then on the Commencement Date the
Tenant shall pay to Landlord the Base Rent due for such partial first month of
the Lease Term. On the first day of the second full month of the Lease Term and
each month thereafter, Tenant shall pay Landlord the Base Rent, in advance,
without offset, deduction or prior demand. The Base Rent shall be payable at
Landlord's address or at such other place as Landlord may designate in writing.
Section 3.2 Cost of Living Increases. The Base Rent shall be increased
on each date (the "Rental Adjustment Date") stated in Paragraphs 1.9(a) and
2.3(d) in accordance with the increase in the United States Department of Labor,
Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (all
items for the geographical Statistical Area in which the Property is located on
the basis of 1982-1984 = 100 which currently is the Los Angeles-Riverside-Orange
County Metropolitan Area) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect immediately before
each Rental Adjustment Date shall be increased by the percentage that the Index
has increased from the date (the "Comparison Date") on which payment of the
Comparison Base Rent began through the month in which the applicable Rental
Adjustment Date occurs. The Base Rent shall not be reduced by reason of such
computation. Landlord shall notify Tenant of each increase by a written
statement which shall include the Index for the applicable Comparison Date, the
Index for the applicable Rental Adjustment Date, the percentage increase between
those two Indices, and the new Base Rent. Any increase in the Base Rent
provided for in this Section 3.2 shall be subject to any minimum or maximum
increase, if provided for in Paragraph 1.9(a).
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be
given after the applicable Rental Adjustment Date of the increase, and Tenant
shall pay Landlord the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of such
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increase within ten (10) days after Landlord's notice. If the format or
components of the Index are materially changed after the Commencement Date,
Landlord shall substitute an index which is published by the Bureau of Labor
Statistics or similar agency and which is most nearly equivalent to the Index in
effect on the Commencement Date. The substitute index shall be used to calculate
the increase in the Base Rent unless Tenant objects to such index in writing
within fifteen (15) days after receipt of Landlord's notice. If Tenant objects,
Landlord and Tenant shall submit the selection of the substitute index for
binding arbitration in accordance with the rules and regulations of the American
Arbitration Association at its office closest to the Property. The costs of
arbitration shall be borne equally by Landlord and Tenant.
Section 3.3 Security Deposit; Increases.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord a
cash Security Deposit in the amount set forth in Section 1.8 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit as permitted herein, Tenant shall restore
the Security Deposit to its full amount within ten (10) days after Landlord's
written request. Tenant's failure to do so shall be a material default under
this Lease. No interest shall be paid on the Security Deposit. Landlord shall
not be required to keep the Security Deposit separate from its other accounts
and no trust relationship is created with respect to the Security Deposit.
(b) If the Base Rent is increased, if at all, under Paragraph 3.2 of the
Construction Rider, Tenant shall deposit additional funds with Landlord
sufficient to increase the Security Deposit to an amount which equals the new
Base Rent calculated under such Paragraph 3.2.
Section 3.4 Termination; Advance Payments. Upon expiration or the
earlier termination of this Lease under Article Seven (Damage or Destruction),
Article Eight (Condemnation) or any other termination not resulting from
Tenant's default, and as promptly as reasonable possible, but not later than
ninety (90) days after Tenant has vacated the Property in the manner required by
this Lease, Landlord shall refund or credit to Tenant (or Tenant's successor)
the unused portion of the Security Deposit and any amounts paid for real
property taxes and other reserves which apply to any time periods after
termination of this Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
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Section 4.1 Additional Rent. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.2 Property Taxes.
(a) Real Property Taxes. Tenant shall pay all real property taxes on the
Property (including any fees, taxes or assessments against, or as a result of,
any tenant improvements installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.2(b) and Section 4.7
below, such payment shall be made at least thirty (30) days prior to the
delinquency date of the taxes. At least thirty (30) days prior to such
delinquency date, Tenant shall furnish Landlord with satisfactory evidence that
the real property taxes have been paid. Landlord shall reimburse Tenant for any
real property taxes paid by Tenant covering any period of time prior to or after
the Lease Term. If Tenant fails to pay the real property taxes when due,
Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount of
such tax payment as Additional Rent.
(b) Landlord May Pay Taxes. Landlord may elect by written notice to
Tenant, at Landlord's sole and absolute discretion, to pay the real property
taxes (due under this Section 4.2) to the appropriate governmental authority,
and have Tenant pay such amount to Landlord, by Landlord delivering evidence of
such tax amount(s) to Tenant. If Tenant does not pay over any such amount(s) to
Landlord within fifteen (15) days of Landlord's delivery of request for payment
to Tenant, then Tenant shall be required to pay such amount(s) to Landlord with
Tenant's next rental installment, together with interest from the date of
Landlord's payment of such taxes, at the maximum interest rate then allowed by
law. If Tenant continues to fail to pay such amount(s) to Landlord, then such
amount(s) shall be treated as a failure of Tenant to pay Landlord a monetary
amount due under the terms of this Lease, and Tenant shall be deemed to be in
default under this Lease.
(c) Definition of "Real Property Tax." "Real property tax" or "real
property taxes" means (i) any fee, license fee, license tax, business license
fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by
any taxing authority against the Property; (ii) any tax on the Landlord's right
to receive, or the receipt of, rent or income from the Property or against
Landlord's business of leasing the Property; (iii) any tax or charge for fire
protection, streets, sidewalks, road maintenance, refuse or other services
provided to the Property by any governmental agency; (iv) any tax imposed upon
this transaction or based upon a reassessment of the Property due to a change in
law,
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a change of ownership, as defined by applicable law, or other transfer of all or
part of Landlord's interest in the Property subject to subparagraph 4.2(f)
below; and (v) change in the property tax laws and any charge or fee replacing
any tax previously included within the definition of real property tax. "Real
property tax" does not, however, include Landlord's federal or state income,
franchise, inheritance or estate taxes. If after the Commencement Date of the
Lease there is an assessment which becomes a lien on the Property which is a
real property tax and such assessment may be elected to be paid either in a lump
sum or in installments by the Landlord, then whether or not the Landlord elects
to pay such assessment in installments, Tenant's liability for such assessment
shall be computed as if such election to pay in installments had been made and
only the installments (and any interest thereon) which would have been due
during the Lease Term shall be included in the Tenant's tax obligations.
(d) Joint Assessment. If the Property is not separately assessed, Landlord
shall reasonably determine Tenant's share of the real property tax payable by
Tenant under Paragraph 4.2(a) from the assessor's worksheets or other reasonably
available information. Tenant shall pay such share to Landlord within fifteen
(15) days after receipt of Landlord's written statement.
(e) Personal Property Taxes.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the Property.
(ii) If any of Tenant's personal property is taxed with the Property,
Tenant shall pay Landlord the taxes for the personal property within fifteen
(15) days after Tenant receives a written statement from Landlord for such
personal property taxes.
(f) Change of Ownership. If Landlord should sell or transfer the Property
during the first sixty (60) months of the Lease Term (where such sale or
transfer closes during such 60-month period), and as a result of such sale or
transfer there is a "change of ownership" of the Property under the provisions
of the California Revenue and Taxation Code which results in an increase in the
assessed value of the Property, then Landlord shall be responsible to pay the
real property taxes pertaining to the increased amount of such new assessed
value (but not as to any other real property taxes, assessments or other
additions to taxes pertaining to the Property). The immediate preceding
sentence shall not apply to any change of ownership resulting from the death of
Brian L. Harvey or any transfer of the Property which occurs in connection with
the death of Brian L. Harvey. Tenant shall be responsible for any tax increase
for a change in
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ownership of the Property (or similar provisions of law) after the first sixty
(60) months of the initial Lease Term.
(g) Application for Reduction in Taxes. The Tenant, at Tenant's sole cost
and expense, may protest the real property tax valuation of the Property or any
real property tax increases for the Property which affects Tenant's obligations
hereunder before the assessment appeals board or by judicial proceedings.
Landlord agrees, at no cost or expense to Landlord, to cooperate with Tenant in
effectuating such protest or legal proceeding. Tenant, however, shall pay all
such taxes or assessments claimed to be due even if Tenant files a protest,
appeal or legal proceeding relating to such taxes, assessments or valuation. The
Tenant shall pay all of the attorneys' fees, appraisal fees and other costs and
expenses relating to such appeal, protest or judicial proceedings and agrees to
defend, indemnify and hold the Landlord harmless regarding same. If a reduction
in the real property taxes and the refund is received relating to such reduction
for a year in which the Tenant has paid such taxes, then Tenant shall be
entitled to receive that portion of the refund attributable to the amount paid
by the Tenant, provided that such refund is received by Landlord on or before
the date which is twelve (12) months after the termination date of the Lease
(and provided that the Tenant is not in default under the terms of the Lease).
Section 4.3 Utilities. Landlord shall cause to be connected to the
Property on the Commencement Date natural gas, water, sewer service and
electricity as part of the construction of the Shell under the Construction
Rider. Such utilities under the immediately preceding sentence shall be
separately metered to the Property. Tenant shall pay, directly to the
appropriate supplier, the cost of (and any deposits for) all natural gas, heat,
light, power, sewer service, telephone, water, refuse disposal, and other
utilities and services supplied to the Property.
Section 4.4 Insurance Policies.
(a) Liability Insurance. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general insurance) insuring Tenant against liability for bodily
injury, property damage (including loss of use of property) and personal injury
arising out of the operation, use or occupancy of the Property. Tenant shall
name Landlord as an additional insured under such policy. The initial amount of
such insurance shall be Two Million Dollars ($2,000,000) per occurrence and
shall be subject to periodic increase based upon inflation, increased liability
awards, and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.4(a) shall: (i) be
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primary and non-contributing; (ii) contain cross-liability endorsements; and
(iii) insure Landlord against Tenant's performance under Section 5.6, if the
matters giving rise to the indemnity under Section 5.6 result from the acts or
negligence of Tenant. The amount and coverage of such insurance shall not limit
Tenant's liability nor relieve Tenant of any other obligation under this Lease.
Landlord may also obtain comprehensive public liability insurance in an amount
and with coverage determined by Landlord insuring Landlord against liability
arising out of the ownership, operation, use or occupancy of the Property. The
policy obtained by Landlord shall not be contributory and shall not provide
primary insurance.
(b) Property and Rental Income Insurance. During the Lease Term, Tenant
shall maintain policies of insurance covering loss of or damage to the Property
in the full amount of its replacement value. The deductible amounts under such
policies shall not exceed Twenty Thousand Dollars ($20,000) per occurrence.
Such policy shall contain an Inflation Guard Endorsement and shall provide
protection against all perils included within the classification of fire,
extended coverage, vandalism, earthquake, malicious mischief, special extended
perils (all risk), sprinkler leakage and any other perils which Landlord deems
reasonably necessary. Landlord shall have the right to require Tenant to obtain
flood and/or earthquake insurance if required by any lender holding a security
interest in the Property. Tenant shall obtain insurance for Tenant's fixtures
or equipment or building improvements installed by Tenant on the Property.
During the Lease Term, Tenant shall also maintain a rental income insurance
policy, with loss payable to Landlord, in an amount equal to twelve (12) months'
Base Rent, plus estimated real property taxes and insurance premiums. Tenant
shall be liable for the payment of any deductible amount under the insurance
policies maintained pursuant to Paragraph 4.4(a) or this Paragraph 4.4(b).
Tenant shall not do or permit anything to be done which invalidates any such
insurance policies. All property insurance and rental income insurance shall
provide for all payments of proceeds to be made to Landlord (and/or lender(s)
designated by Landlord).
(c) Payment of Premiums. Subject to Section 4.7, Tenant shall pay all
premiums for the insurance policies required to be maintained or paid by Tenant
under Paragraphs 4.4(a) and 4.4(b) within fifteen (15) days after Tenant's
receipt of a copy of the premium statement or other evidence of the amount due.
Before the Commencement Date, Tenant shall deliver to Landlord a copy of any
policy of insurance which Tenant is required to maintain under this Section 4.4.
At least thirty (30) days prior to the expiration of any such policy, Tenant
shall deliver to Landlord a renewal of such policy. As an alternative to
providing a policy of insurance, Tenant shall have the right to provide Landlord
a certificate of insurance, executed by an authorized officer of the
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insurance company, showing that the insurance which Tenant is required to
maintain under this Section 4.4 is in full force and effect and containing such
other information which Landlord reasonably requires. Notwithstanding the above
provisions of this subparagraph, Landlord may elect, at Landlord's sole and
absolute discretion, to obtain the insurance policies described under paragraph
4.4(b) and to have Tenant pay or reimburse Landlord the amount of insurance
premiums for such policies. If Tenant does not pay to Landlord any such premium
amount within thirty (30) days of Landlord's delivery to Tenant of Landlord's
request for payment, then same shall be treated as a failure of Tenant to pay
Landlord a monetary amount due under the terms of this Lease, and Tenant shall
be deemed to be in default under this Lease.
(d) General Insurance Provisions.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to give
Landlord not less than thirty (30) days' written notice prior to any
cancellation or modification of such coverage. Such insurance policies
maintained by the Tenant hereunder may be in the form of a blanket policy
provided that such blanket policy meets the criteria required under this Section
4 including but not limited to the deductible amount, insurance company rating
and liability amounts.
(ii) If Tenant fails to deliver any policy, certificate or renewal to
Landlord required under this Lease within the prescribed time period or if any
such policy is canceled or modified during the Lease Term without Landlord's
consent, or if Tenant fails to pay premiums for any insurance policy, Landlord
may obtain such insurance (or pay premiums on an existing insurance policy), in
which case Tenant shall reimburse Landlord for the cost of such insurance and
premiums within fifteen (15) days after receipt of a statement that indicates
the cost of such insurance and premiums.
(iii) Tenant shall maintain all insurance required to be maintained by
Tenant under this Lease with companies holding a "General Policy Rating" of A-10
or better, as set forth in the most current issue of "Best Key Rating Guide."
Tenant acknowledges that the insurance described in this Section 4.4 is for the
primary benefit of Landlord. Landlord makes no representation as to the adequacy
of such insurance to protect Landlord's or Tenant's interests. Therefore, Tenant
shall obtain any such additional property or liability insurance which Tenant
deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of recovery
against the other, or against the officers,
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employees, agents or representatives of the other, for loss of or damage to its
property or the property of others under its control, to the extent such loss or
damage is actually reimbursed from any proceeds from an insurance policy in
force (whether or not described in this Lease) at the time of such loss or
damage. Upon obtaining the required policies of insurance, Landlord and Tenant
shall give notice to the insurance carriers of this mutual waiver of
subrogation.
Section 4.5 Late Charges. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but
are not limited to, processing and accounting charges and late charges which may
be imposed on Landlord by any ground lease, mortgage or trust deed encumbering
the Property. Therefore, if Landlord does not receive any rent payment within
five (5) days after Landlord's written notice to Tenant that such rent payment
is delinquent, Tenant shall immediately pay Landlord a late charge equal to ten
percent (10%) of the overdue amount. At any time during the Lease, if Landlord
provides written notice to Tenant under the immediate preceding sentence that a
rental payment has been delinquent, then if Tenant fails to pay any other rent
payment due within twelve (12) months after such Landlord notice, Landlord shall
not have to provide any other written notice to the Tenant during such twelve
(12) month period, and if the Landlord does not receive any rent payment timely
within such twelve (12) month period within five (5) days after such payment
becomes due, Tenant shall immediately pay to Landlord a late charge equal to ten
percent (10%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment. If such late charge is not paid when due hereunder,
such failure shall be deemed a default by Tenant, and Tenant shall (in addition
to Landlord's other remedies) pay to Landlord interest (at the rate specified in
Section 4.6, but not greater than the maximum rate permitted by law on such late
charge) on such late charge from the date such late charge is to be paid to
Landlord.
Section 4.6 Interest on Past Due Obligations. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of twelve
percent (12%) per annum from the due date of such amount. However, interest
shall not be payable on late charges to be paid by Tenant under this Lease. The
payment of interest on such amounts shall not excuse or cure any default by
Tenant under this Lease. If the interest rate specified in this Lease is higher
than the rate permitted by law, the interest rate is hereby decreased to the
maximum legal interest rate permitted by law.
Section 4.7 Impounds for Insurance Premiums and Real
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Property Taxes. If requested by any ground lessor or lender to whom Landlord has
granted a security interest in the Property (and such requirement is not caused
by Landlord's default under such ground lease or mortgage), or if Tenant is more
than ten (10) days late in the payment of rent more than twice in any
consecutive twelve (12) month period, Tenant shall pay Landlord a sum equal to
one-twelfth (1/12) of the annual real property taxes and insurance premiums
payable by Tenant under this Lease, together with each payment of Base Rent.
Landlord shall hold such payments in a non-interest bearing impound account. If
unknown, Landlord shall reasonably estimate the amount of real property taxes
and insurance premiums when due. Tenant shall pay any deficiency of funds in the
impound account to Landlord upon written request. If Tenant defaults under this
Lease, Landlord may apply any funds in the impound account to any obligation
then due under this Lease. Upon the termination of the Lease, after any
application of funds in the impound account under the immediate preceding
sentence and to the payment of taxes and insurance premiums due for Tenant's
period of tenancy under this Lease, any remaining amounts in the impound account
shall be paid to the Tenant within ninety (90) days following Landlord's receipt
of such remaining monies.
ARTICLE FIVE: USE OF PROPERTY
Section 5.1 Permitted Uses. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.6 above.
Section 5.2 Manner of Use and CC&Rs. Tenant shall not cause or permit
the Property to be used in any way which constitutes a violation of any
applicable law, ordinance, or governmental regulation or order, which annoys or
interferes with the rights of any other tenants of Landlord, or which
constitutes a nuisance or waste. Subject to Landlord's duties to obtain certain
permits under the Construction Rider, Tenant shall obtain and pay for all
permits required for Tenant's occupancy of the Property and shall promptly take
all actions necessary to comply with all applicable statutes, ordinances, rules,
covenants, conditions and restrictions, regulations, orders and requirements
regulating the use by Tenant of the Property, including the Occupational Safety
and Health Act. Tenant acknowledges that this Lease and Tenant's leasehold
interest under this Lease are subordinate to any covenants, conditions and
restrictions presently or in the future promulgated or recorded in connection
with the Property and as a requirement of any parcel map, and any amendments or
modifications thereto ("CC&Rs"). Tenant agrees to execute and acknowledge any
document evidencing the subordination described in this paragraph, as requested
by Landlord from time to time. Tenant agrees to comply with all of the
provisions of such CC&Rs and the requirements of any governmental body,
including but not limited to use and maintenance of the Property, provisions for
earth berms, slopes, landscaping, parking, storage and waste
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removal, trucking and load, drainage care, maintenance and repair of signs.
Tenant shall be responsible for all costs of maintenance, and any assessments or
charges for the Property under the CC&Rs.
Section 5.3 Hazardous Materials.
(a) Definitions. As used in this Section 5.3, the following definitions
shall apply:
(i) "Environmental Laws" shall mean all federal, state and local
laws, ordinances, rules and regulations now or hereafter in force, as amended
from time to time, in any way relating to or regulating human health or safety,
or industrial hygiene or environmental conditions, or protection of the
environment, or pollution, or contamination of the air, soil, surface water or
ground water, including but not limited to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Resource Conservation and
Recovery Act, the Clean Water Act, the Hazardous Substance Account Act,
California Health and Safety Code provisions, the California Hazardous Waste
Control Law, the California Medical Waste Management Act, and the California
Porter-Cologne Water Quality Control Act.
(ii) "Hazardous Material" shall mean any substance or material that
is described as a toxic or hazardous substance, waste or material, or a
pollutant or contaminant, or words of similar import, in any of the
Environmental Laws, and includes asbestos, petroleum (including crude oil or any
fraction thereof, natural gas, natural gas liquids, liquified natural gas, or
synthetic gas useable for fuel, or any mixture thereof), petroleum products,
polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter,
medical waste, and chemicals which may cause cancer or reproductive toxicity.
(iii) "Release" shall mean any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing into the environment, including but not limited to the continuing
migration of Hazardous Material into or through soil, surface water, or ground
water.
(iv) For purposes of this Section 5.3, the activities, acts, use,
production, processing, manufacturing, generation, treatment, handling, storage
and Release by "Tenant" shall refer to those of Tenant, Tenant's employees,
contractors, sublessees, customers, licensees, guests, contractors, invitees
and/or agents.
(b) Covenant on Use of Property. Tenant shall not use, produce, process,
manufacture, generate, treat, handle, store or dispose of any Hazardous Material
in, on or under the Property, or use the Property for any such purposes, or
Release any Hazardous
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Material into any air, soil, surface water or ground water at, on or about the
Property, or permit any person using or occupying the Property or any part
thereof to do any of the foregoing, which are in violation of any Environmental
Laws. Tenant assumes the risk that Environmental Laws may change in the future.
Tenant shall comply, and shall cause all persons using the Property or any part
thereof to comply with all Environmental Laws applicable to the Property, or the
use or occupancy thereof, or any operations or activities therein or thereon.
Tenant shall obtain all permits, licenses and approvals required by all
applicable Environmental Laws for the use and occupancy of, and all operations
and activities in the Property, comply fully with all such permits, licenses and
approvals, and keep all such permits, licenses and approvals in full force and
effect. Landlord's consent in allowing Tenant to permit or engage in any
activity relating to Hazardous Material shall not be construed to mean Landlord
in any way approves of the manner in which the Tenant is engaging in such
activities, or that Landlord has determined that such activity or manner of
activity is safe. Tenant shall not be responsible under this subparagraph (b)
for the acts of Landlord, Landlord's employees and Landlord's contractors.
(c) No Storage Tanks. Tenant shall not install or use any storage tanks on
the Property either below or above ground without Landlord's prior written
permission. In no event, however, shall Landlord be required to consent to the
installation or use of any storage tanks on the Property, and Landlord may
refuse to allow the installation thereof for or not for any reason.
(d) Presence of Hazardous Material on Property. In the event that any
Hazardous Material is present or Released, or there is a threatened Release of
Hazardous Material on or under the Property which has violated or which may
violate an Environmental Law (or any nearby property which can migrate into or
onto the Property), or that any violation of any Environmental Laws may have
occurred at the Property, Tenant shall immediately give notice to Landlord
thereof. Additionally, Tenant shall immediately furnish to Landlord copies of
all written communications received by Tenant from any person or given by Tenant
to any person concerning any past or present Release or threatened Release of
Hazardous Material in, on or under the Property (or any nearby property which
could migrate to the Property), or any past or present violation of any
Environmental Laws which may affect the Property. Landlord shall have the
right, but not the obligation, to obtain from Tenant, at any time, any
additional information regarding Hazardous Material generated, produced, brought
onto, used, stored, treated or disposed of by Tenant or any other person on or
above the Property, and/or activities relating thereto, on or about the
Property. Tenant shall immediately comply with Landlord's requests.
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(e) Landlord's Right to Inspect and Audit. Landlord shall have the right,
but not the obligation, to enter the Property to investigate at any time the
presence of Hazardous Material, and the compliance with Environmental Laws, and
to take all actions reasonably necessary to remediate any threat or breach of
any Environmental Laws or from any Release of Hazardous Material on or about the
Property. If Landlord reasonably suspects that Tenant has failed to comply with
Tenant's obligations under this Section 5.3, Landlord may require Tenant, at
Tenant's sole expense, to have an environmental audit (which may, in Landlord's
determination, include a Phase I and/or a Phase II environmental report) or
other appropriate investigation of the Property conducted by a third party
satisfactory to Landlord and approved by Landlord regarding the presence of
Hazardous Material and compliance with Environmental Laws. Tenant acknowledges
that any such inspections or reports undertaken by Tenant and Landlord are
solely for the protection of Landlord, and agrees that Landlord has no duty to
Tenant with respect to Hazardous Material or Environmental Laws as a result of
any such inspections or reports.
(f) Remediation Work. If any Release or threatened Release of Hazardous
Material in, on or under the Property exists or occurs by any person (except as
to Landlord or Landlord's employees or contractors) during the term of this
Lease or by Tenant at any time, Tenant shall immediately give notice of the
condition to Landlord, and Tenant shall promptly clean up and remove all
Hazardous Material and restore the Property to be in compliance with all
Environmental Laws (the "Remediation Work"). Tenant's obligation to perform
Remediation Work shall exclude any responsibilities by the Tenant to remediate
any underground migration of Hazardous Materials which originate outside of the
Property and which Hazardous Materials migrate under the Property through no
fault of the Tenant. In performing such Remediation Work, Tenant shall comply
with the orders and directives of all persons having jurisdiction over the
Property or the Remediation Work. Landlord may review any plans and
specifications for the Remediation Work before such Remediation Work is
performed. Any such plans or specifications shall be prepared by a qualified,
licensed engineer or contractor, which Landlord shall have the right to approve
or reasonably disapprove, and shall comply with all applicable Environmental
Laws, and all other laws, ordinances, rules and regulations. Tenant shall be
responsible at Tenant's sole expense to obtain all permits, licenses and
approvals for the Remediation Work and to complete the Remediation Work
diligently and in a timely manner. Tenant shall pay for all Remediation Work,
including the cost of plans, utilities, permits, fees, taxes and insurance
premiums in connection therewith. Tenant shall furnish to Landlord promptly
upon receipt, copies of all reports, studies, analysis, investigations,
contracts, correspondence, claims, complaints, pleadings and other information
and communications received or prepared by Tenant at any time in
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connection with any Remediation Work.
(g) Right to Participate by Landlord. Landlord shall have the right, but
not the obligation, to participate in any action or proceeding relating to any
past or present Release or threatened Release of any Hazardous Material in, on
or under the Property, or any past or present violation of any Environmental
Laws at the Property, or the necessity for or adequacy of any Remediation Work.
Tenant shall provide immediate notice upon receipt to Landlord and allow
Landlord to participate in any negotiations or discussions with any federal,
state or local governmental agency, including environmental, occupational or
public health and safety agencies with regard to Hazardous Material or any
Environmental Laws, including all settlement or discussions regarding abatement
or Remediation Work.
(h) Burden of Proof. The burden of proof under this Section regarding
establishment of a date upon which a Hazardous Material was or was not placed or
appeared or did not appear in, on or under the Property shall be upon the
Tenant.
(i) Required Insurance. In the event that Tenant shall permit Hazardous
Material upon the Property, or engage in activities relating to Hazardous
Material on, about or above the Property other than the temporary storage of
such materials that are used in the ordinary course of Tenant's business in
compliance with all Environment Laws, Tenant shall, at Tenant's expense, procure
and maintain insurance coverage insuring Tenant and Landlord against any and all
liability arising from such Hazardous Material or activities relating thereto.
Tenant shall duly provide Landlord with a certificate of such insurance
coverage, in such amounts and from such carriers as Landlord shall require.
(j) Indemnification by Tenant. Tenant shall indemnify, reimburse, defend
and hold harmless Landlord (and its employees, partners, agents, affiliates,
successors, lenders and representatives) against all claims, demands,
liabilities, losses, damages, costs and expenses in any way arising from,
relating to, or connected with: (i) the existence, location, nature, use,
generation, manufacture, storage, disposal, handling, or Release or threatened
Release of any Hazardous Material in, on or under the Property by any person
(except any Release by the Landlord or Landlord's employees or contractors)
during the term of this Lease or by Tenant at any time; (ii) any violation of
Environmental Laws at the Property by any person (except as to any such
violation by the Landlord or Landlord's employees or contractors) during the
term of this Lease or by Tenant at any time; (iii) any breach of any duty to
perform Remediation Work required of Tenant under this Section 5.3; and/or (iv)
any breach of any covenant, representation or warranty made by Tenant hereunder,
or any failure of Tenant to perform any of Tenant's covenant's or
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obligation in accordance with this Section. Tenant's indemnification under this
subparagraph (j) shall not apply to any underground migration of Hazardous
Materials which originate outside of the Property and which Hazardous Materials
migrate under the Property through no fault of Tenant. The foregoing
indemnification shall include all expenses of investigation and monitoring,
costs of containment, abatement, removal, repair, clean up, restoration and
remedial work, penalties and fines, attorneys' fees and disbursements and other
response costs. The foregoing indemnification shall also include any lost rental
amounts, lost rents and other damages to Landlord because of Landlord's
inability to lease the Property, and other damages because of the release of
Hazardous Material, violation of Environmental Laws, or because such Hazardous
Material must be remediated from the Property. If Tenant fails to perform any
obligation of Tenant in accordance with this Section, Landlord shall have the
right, but not the obligation, to perform such obligation on behalf of Tenant.
Tenant shall, on demand, pay to Landlord all sums expended by Landlord in the
performance of any such obligations of Tenant, together with interest thereon
after such demand at the maximum rate of interest then provided by law. The term
"attorneys' fees" under this Section shall mean fees charged by the attorneys in
question based upon such attorneys ' then prevailing hourly rates as opposed to
any statutory presumption specified by any statute then in effect in the State
of California.
(k) Survivability. All representations, warranties and indemnifications by
Tenant under this Section shall survive the termination of the Lease. Tenant
waives the right to assert any statute of limitations as a bar to the
enforcement of this Section or to any action brought to enforce the provisions
of this Section.
(l) Remedies Cumulative. This Section shall not affect, impair or waive
any rights or remedies of Landlord or any obligations of Tenant with respect to
Hazardous Materials imposed or created by Environmental Laws (including
Landlord's rights of reimbursement or contribution under Environmental Laws).
The remedies in this Section are cumulative and in addition to all remedies
provided by law.
(m) Landlord's Representations and Warranties Regarding Hazardous
Materials. Landlord hereby represents and warrants to Tenant each of the
following: (i) to the best of Landlord's actual knowledge, as of the date of
this Lease there are no hazardous materials located on the Property which are in
violation of Environmental Laws in existence on the date of this Lease; and (ii)
the Property on the date of this Lease is not in violation of any Environmental
Laws in existence on the date of this Lease. If Landlord breaches the
representations and warranties under this
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subparagraph (m), then Landlord shall promptly correct the condition of the
Property in order that the Property, and any hazardous materials thereon, are in
compliance with Environmental Laws in existence on the date of this Lease. In
the event of Landlord's alleged breach of a representation and warranty under
this subparagraph (m), then Tenant's sole remedy shall be to have Landlord
correct the condition of the Property as specified under the immediate preceding
sentence. In no event shall the Landlord be responsible for consequential
damages because of such alleged breach of a representation or warranty under
this subparagraph (m) (including any damage to persons, property or business).
Section 5.4 Outside Storage. In addition to any other provision
specified in this Lease or as required by any law, rule or regulation, except
for a screened trash area (in compliance with applicable laws and the CC&Rs),
Tenant agrees to not have any outside storage of inventory or materials and to
keep the exterior of the Property free from debris.
Section 5.5 Signs and Auctions. The Tenant shall have the right to place
its signage on the Property, provided, however, all signs shall comply with the
City of Calabasas' sign ordinances and other laws, rules and regulations. Tenant
shall not place any signs on the Property without Landlord's prior written
consent, which consent shall not be unreasonably withheld. Landlord reserves the
right to reasonably approve the size, type and appearance of any sign. Landlord
may require that any sign be installed only be companies approved by Landlord.
Tenant's signage shall be placed on the Property, at Tenant's expense. Tenant
shall not conduct or permit any auctions or sheriff's sales at the Property .
Section 5.6 Indemnity. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims or liability arising from: (a)
Tenant's use of the Property; (b) the conduct of Tenant's business or anything
else done or permitted by Tenant to be done in or about the Property, including
any contamination of the Property or any other property resulting from the
presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or injury to persons in or about the Property
arising from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord. As used in this
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Section, the term "Tenant" shall include Tenant's employees, agents, contractors
and invitees, if applicable.
Section 5.7 Landlord's Access. Subject to reasonable coordination with
the Tenant to minimize the effect of such actions on Tenant's business (except
in the case of an emergency the Landlord shall have immediate access to the
Property), Landlord or its agents may enter the Property at all reasonable times
to show the Property to potential buyers, investors or tenants or other parties;
to do any other act or to inspect and conduct tests in order to monitor Tenant's
compliance with all applicable Environmental Laws and all laws governing the
presence and use of Hazardous Material; or for any other purpose Landlord deems
necessary. Landlord shall give Tenant at least 24 hours prior notice of such
entry, except in the case of an emergency. Landlord may place customary "For
Sale" or "For Lease" signs on the Property. If Landlord enters the Property and
Landlord or its employees during such entry by their negligence during the
period they are on the Property cause damage to Tenant's property, then Landlord
shall be responsible for such damage. Landlord's liability under the immediate
preceding sentence specifically excludes any claims for construction defects or
claims regarding defective construction, repairs or defective materials, and is
solely intended to cover the active negligence of Landlord or its employees
while they are present on the Property. Landlord agrees not to place any "For
Lease" signs on the Property prior to the last six (6) months of the Lease Term.
Section 5.8 Quiet Possession. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease.
Section 5.9 Future Easements and Governmental Requirements. Tenant
agrees that Tenant shall cooperate with Landlord in granting any easements and
executing any covenants, conditions or restrictions which may be required by any
governmental agency or utility for the Property, or which Landlord may otherwise
require, provided that such easement, condition or restriction does not
materially interfere with Tenant's use of the Property or materially increase
the cost of Tenant's occupancy or use of the Property.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.1 Existing Conditions. Subject to the Construction Rider,
Tenant accepts the Property subject to all recorded matters, laws, ordinances,
and governmental regulations and orders. Except as provided herein and in the
Construction Rider, Tenant acknowledges that neither Landlord nor any agent of
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Landlord has made any representation as to the condition of the Property or the
suitability of the Property for Tenant's intended use. Tenant acknowledges that
Tenant has investigated the adequacy and capacity of the design of the
Property's proposed mechanical and electrical systems; use of the Property for
Tenant's proposed purposes; and the laws, rules and regulations of federal,
state and local governmental bodies affecting the Property, including parking
requirements for any of Tenant's present or proposed uses of the Property.
Tenant is relying upon Tenant's own investigation, and neither Landlord nor any
agent of Landlord has made any representations or warranties to Tenant regarding
the items stated in the preceding sentence.
Section 6.2 Exemption of Landlord from Liability. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other person in or about the Property,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions arising in or about the
Property or from other sources or places; or (d) any act or omission of any
other tenant of Landlord. Landlord shall not be liable for any such damage or
injury even though the cause of or the means of repairing such damage or injury
are not accessible to Tenant. Landlord is obligated to repair the Property in
certain circumstances under paragraph 4 of the Construction Rider.
Section 6.3 Landlord's Obligations. Subject to the provisions of
Article Seven (Damage or Destruction), Article Eight (Condemnation), and the
Construction Rider, Landlord has absolutely no responsibility to repair,
maintain or replace any portion of the Property at any time except for the
structural components of the roof and the foundation of the building portion of
the Property. Tenant waives the benefit of any present or future law which
might give Tenant the right to repair the Property at Landlord's expense or to
terminate the Lease due to the condition of the Property. Landlord's obligation
to repair the structural components of the roof and the foundation of the
building portion of the Property under this Section 6.3 is subject to Article
Seven (Damage or Destruction) and Article Eight (Condemnation), and Landlord's
obligation shall solely be to repair the structural components of the roof and
the foundation, and Landlord shall not be obligated for any consequential damage
to any person, property or business. Notwithstanding this Section 6.3, Tenant
shall be responsible for any damage to the structural components of the roof or
the foundation caused by Tenant's acts or negligence.
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Section 6.4 Tenant's Obligations.
(a) Tenant. Except as provided in Article Seven (Damage or Destruction),
Article Eight (Condemnation), the Construction Rider, and Paragraph 6.3, Tenant
shall keep all portions of the Property (including interior, roof and roof
membrane (other than the roof structural components), windows, walls, ceiling,
structural and supports, electrical, plumbing, heating, ventilating and air
conditioning systems and equipment) in good order, condition and repair and
maintain same (including interior and exterior repainting and refinishing, as
needed and any changes or repairs required by changes to governmental laws,
rules or regulations effective after the Commencement Date). As to the roof,
Landlord shall only be responsible for repairing the structural components, and
Tenant shall be responsible to repair all other portions of the roof. If any
portion of the Property or any system or equipment in the Property which Tenant
is obligated to repair cannot be fully repaired or restored, Tenant shall
promptly replace such portion of the Property or system or equipment in the
Property, regardless of whether the benefit of such replacement extends beyond
the Lease Term. Tenant shall maintain a preventive maintenance contract
providing for the regular inspection and maintenance of the heating and air
conditioning system by a licensed heating and air conditioning contractor. If
any part of the Property or the Project is damaged by any act or omission of
Tenant, Tenant shall pay Landlord the cost of repairing or replacing such
damaged property, whether or not Landlord would otherwise be obligated to pay
the cost of maintaining or repairing such property. Landlord shall have the
right, in Landlord's discretion, to require Tenant to utilize maintenance and
landscape companies approved by Landlord to keep in good order, condition and
repair the Property, including, but not limited to, the painting of the exterior
and interior of any improvements on the Property, the repair and maintenance of
the parking areas, and the maintenance of the roof, and landscaping of the
Property all at periodic intervals. Specifically, under the immediate preceding
sentence Landlord may require Tenant to utilize Landlord's chosen landscapers
(provided the cost of same is competitive for the area for the same quality) in
order to keep the landscaping in first-class condition and may have such
landscapers bill Tenant directly or Landlord may bill Tenant for such
landscapers. Any such costs and expenses done or paid for by Landlord shall be
subject to Tenant's right to perform its obligations hereunder in a reasonable
and timely manner and shall be undertaken by the Landlord only after notice to
the Tenant under Paragraph 6.4(b), and if so undertaken by the Landlord shall be
paid and reimbursed by Tenant to Landlord directly or upon billing by the
Landlord, and shall be treated as monetary amounts due under the terms of the
Lease. It is the intention of Landlord and Tenant that at all times Tenant shall
maintain the portions of the Property which Tenant is obligated to maintain in
an
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attractive, first-class, and fully operative condition.
(b) Tenant's Failure. Tenant shall fulfill all of Tenant's obligations
under this Section 6.4 at Tenant's sole expense. If Tenant fails to maintain,
repair or replace the Property as required by this Section 6.4, Landlord may,
upon ten (10) days' prior written notice to Tenant (except that no notice shall
be required in the case of an emergency), enter the Property and perform such
maintenance or repair (including replacement, as needed) on behalf of Tenant.
The Landlord agrees that so long as Tenant is expeditiously, diligently and
properly performing such repairs and maintenance on the Property that Landlord
will not perform such maintenance or repairs (except in the case of an
emergency). Tenant shall reimburse Landlord for all Landlord's costs incurred
in performing such maintenance or repair immediately upon demand.
Section 6.5 Alterations, Additions, and Improvements.
(a) No Alterations Without Landlord's Consent. Subject to Tenant's
obligations set forth in Section 6.4, Tenant shall not make any alterations,
additions, or improvements to the Property not built pursuant to the
Construction Rider without Landlord's prior written consent (which covenant
shall not be unreasonably withheld), except for non-structural alterations which
do not exceed Twenty Thousand Dollars ($20,000) per construction project in any
one calendar year and which are not visible from the outside of any building of
which the Property is part. In no event may Tenant make any alterations,
additions or improvements to the Property under the immediate preceding
sentence, without Landlord's prior written consent, which in the aggregate total
more than Fifty Thousand Dollars ($50,000) during any calendar year. Landlord
may require Tenant to provide demolition and/or lien payment and completion
bonds in forms and amounts reasonably satisfactory to Landlord. Tenant shall
promptly remove any alterations, additions, or improvements constructed in
violation of this Paragraph 6.5(a) upon Landlord's written request. All
alterations, additions, and improvements shall be done in a good and workmanlike
manner, in conformity with all applicable laws and regulations, and by a
contractor approved by Landlord (which approval shall not be unreasonably
withheld, conditioned or delayed). Upon completion of any such work, Tenant
shall provide Landlord with "as built" plans, copies of all construction
contracts, and proof of payment for all labor and materials. Tenant may not
remove any of the Tenant Improvements constructed pursuant to the Construction
Rider without Landlord's prior written consent.
(b) Payment Required. Tenant shall pay when due all claims for labor and
material furnished to the Property. Tenant shall give Landlord at least twenty
(20) days' prior written notice of
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the commencement of any work on the Property, regardless of whether Landlord's
consent to such work is required. Landlord may elect to record and post notices
of non-responsibility on the Property.
Section 6.6 Condition Upon Termination. Upon the termination of this
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, except for the
Tenant Improvements constructed pursuant to the Construction Rider, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent, and whether or not within the dollar
limitations under paragraph 6.5(a)) prior to the expiration of this Lease and to
restore the Property to its prior condition, all at Tenant's expense. If
Landlord does not provide Tenant with written notice at least ninety (90) days
prior to the termination date of the Lease to remove such alterations, additions
or improvements, then the fact that the Tenant has failed to timely remove such
alterations, additions or improvements required under this Section 6.6 shall not
by itself make the Tenant a "hold over" tenant under Section 2.2, except if the
Tenant fails to remove such alterations, additions and improvements within
ninety (90) days of Landlord's written notice. All alterations, additions and
improvements which Landlord has not required Tenant to remove shall become
Landlord's property and shall be surrendered to Landlord upon the expiration or
earlier termination of this Lease, except that Tenant may remove any of Tenant's
trade fixtures, including without limitation Tenant's furnishings, inventory,
machinery or equipment which can be removed without material damage to the
Property. Additionally, Tenant may on the termination date remove the
specialized air conditioning compressor unit installed as part of the Tenant
Improvements which services the specialized computer room in the Building
(provided that Tenant gives Landlord at least thirty (30) days prior written
notice and that Tenant repairs and patches all damage to the Property, including
but not limited to fully repairing the roof regarding such removal). Tenant
shall repair, at Tenant's expense, any damage to the Property caused by the
removal of any such property of Tenant. In no event, however, shall Tenant
remove any of the following materials or equipment (which shall be deemed
Landlord's property) without Landlord's prior written consent: any power wiring
or power panels; the Tenant Improvements (defined in the Construction Rider) and
additions thereto, lighting or lighting fixtures attached to the Property; wall
coverings; drapes, blinds or other window coverings; carpets or other floor
coverings; heaters, air conditioners or any other heating or air conditioning
equipment (except as described above);
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fencing or security gates; or other similar building operating equipment and
decorative components.
Section 6.7 Common Areas and Regulations. Tenant shall pay any common
area maintenance, assessments and repair costs under the CC&Rs for the Property.
Tenant acknowledges that CC&Rs are currently recorded against the Property.
Tenant agrees not to violate the CC&Rs, to comply with the CC&Rs, and to pay any
assessments or dues as to the Property required under the CC&Rs.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.1 Partial Damage to Property.
(a) Notice By Tenant. Tenant shall notify Landlord in writing immediately
upon the occurrence of any damage to the Property. Subject to Section 7.2, if
the Property is only partially damaged (i.e., less than fifty percent (50%) of
the Property is untenantable as a result of such damage) and if substantially
all of the repairs can be made within twelve (12) months from the date of
Tenant's written notice to Landlord of such damage, and if the proceeds received
by Landlord from the insurance policies described in Paragraph 4.4(b) are
sufficient to pay for the necessary repairs, this Lease shall remain in effect
and Landlord shall repair the damage as soon as reasonably possible, and Tenant
shall pay to Landlord any deductible amounts under any insurance policy.
Subject to Section 7.2, if the Property is only partially damaged under the
immediate preceding sentence (i.e., less than fifty percent (50%) of the
Property is untenantable as a result of such damage) and if substantially all of
the repairs cannot be made to the Property within the twelve (12) month period,
then as to the portion of the Property which is not useable because such repairs
cannot be made within such twelve (12) month period, the rent shall abate as to
such unusable portion of the Property after twelve (12) months from the date
such portion of the Property becomes unusable until such portion becomes
useable.
(b) Insurance Proceeds Not Sufficient. Subject to Section 7.2, if the
insurance proceeds received by Landlord are not sufficient to pay the entire
cost of repair, or if the cause of the damage is not covered by the insurance
policies which are maintained under Paragraph 4.4(b), Landlord may elect either
to: (i) repair the damage as soon as reasonably possible, in which case this
Lease shall remain in full force and effect, or (ii) terminate this Lease as of
the date the damage occurred. Landlord shall notify Tenant within thirty (30)
days after receipt of notice of the occurrence of the damage whether Landlord
elects to repair the damage or terminate the Lease. If Landlord elects to
repair the damage, Tenant shall pay Landlord the "deductible amount" (if any)
under any insurance policies and, if the damage
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was due to an act, omission or negligence of Tenant, or Tenant's customers,
licensees, visitors, employees, agents, contractors or invitees, the difference
between the actual cost of repair and any insurance proceeds received by
Landlord. If Landlord elects to terminate this Lease, Tenant may elect to
continue this Lease in full force and effect, in which case Tenant shall repair
any damage to the Property and any building in which the Property is located.
Tenant shall pay the cost of such repairs, except that upon satisfactory
completion of such repairs, Landlord shall deliver to Tenant any insurance
proceeds received by Landlord for the damage repaired by Tenant. Tenant shall
give Landlord written notice of such election within ten (10) days after
receiving Landlord's termination notice.
(c) Damage During Last Six Months. If the damage to the Property occurs
during the last six (6) months of the Lease Term (including any options to
extend the Lease Term which have then been exercised prior to the expiration of
the Lease Term) and such damage will require more than thirty (30) days to
repair, Landlord may elect to terminate this Lease as of the date the damage
occurred. Landlord shall give written notification to Tenant of such election
within thirty (30) days after Landlord's actual knowledge of the occurrence of
the damage.
Section 7.2 Damage Caused by Tenant. Notwithstanding paragraphs 7.1 and
7.3, if such damage (whether partial or complete) was caused by an act, omission
or negligence by Tenant or Tenant's employees, customers, licensees, visitors,
contractors, invitees or agents, then this Lease shall remain in effect and: (i)
Tenant shall pay the cost (including any insurance deductible amounts) of the
repairs or reconstruction not covered by insurance, and (ii) if the damage to
the Property is more than partial damage, Landlord may by written notice to
Tenant elect for this Lease to terminate.
Section 7.3 Substantial or Total Destruction. Subject to Section 7.2,
if the Property is substantially or totally destroyed by any cause whatsoever
(i.e., the damage to the Property is greater than partial damage as described in
Section 7.1), and regardless of whether Landlord receives any insurance
proceeds, this Lease shall terminate as of the date the destruction occurred.
Notwithstanding the preceding sentence, if the Property can be rebuilt within
twelve (12) months after the date of destruction, Landlord may elect to rebuild
the Property, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of such destruction.
Section 7.4 Temporary Reduction of Rent. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any
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rent payable during the period of such damage, repair and/or restoration shall
be reduced according to the degree, if any, to which Landlord receives the
proceeds of rental continuation insurance covering such period of time. However,
the reduction shall not exceed the sum of one year's payment of Base Rent,
insurance premiums and real property taxes. Except for such possible reduction
in Base Rent, insurance premiums and real property taxes, Tenant shall not be
entitled to any compensation, reduction, or reimbursement from Landlord as a
result of any damage, destruction, repair, or restoration of or to the Property.
Section 7.5 Waiver. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Sections 7.2, 7.3 and 7.4 above shall govern the
rights and obligations of Landlord and Tenant in the event of any substantial or
total destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the building portion of the Property (but not the
land) is taken under the power of eminent domain or sold under the threat of
that power (all of which are called "Condemnation"), this Lease shall terminate
as to the part taken or sold on the date the condemning authority takes title or
possession, whichever occurs first. If more than fifty percent (50%) of the
floor area of the building which is located on the Property or more than fifty
percent (50%) of the number of parking spaces, is permanently taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
takes title or possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. If parking spaces
are taken by a governmental agency so that because of such taking the number of
parking spaces is reduced to less than three hundred fifty-two (352)
automobiles, then the Tenant's rent shall be reimbursed by the number of parking
spaces less than 352 automobiles. The determination of the rental amount to be
reimbursed to the Tenant under the immediate preceding sentence for such lost
parking spaces shall be based upon the then fair rental value of such spaces in
the business park in which the Property is located. In lieu of reimbursing
Tenant for such lost spaces under this paragraph, Landlord may provide Tenant
with alternative parking spaces within a reasonable distance from the Property.
Any Condemnation award
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or payment shall be distributed to Landlord for compensation for reduction
in the value of the leasehold, the taking of the fee or the Property, or
otherwise; provided, however, that Landlord shall have no interest in any award
specifically made payable by the applicable governmental agency to the Tenant
for the Tenant's relocation costs or the Tenant's loss of business or goodwill
or for the taking of the Tenant's trade fixtures and personal property which are
not a part of the Property (including not part of the Tenant Improvements). If
this Lease is not terminated, Landlord shall repair any damage to the Property
caused by the Condemnation, except that Landlord shall not be obligated to
repair any damage for which Tenant has been reimbursed by the condemning
authority. If the severance damages received by Landlord are not sufficient to
pay for such repair, Landlord shall have the right to either terminate this
Lease or make such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.1 Landlord's Consent Required. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.2 below which consent shall not be unreasonably withheld,
conditioned or delayed. Landlord has the right to grant or withhold its consent
as provided in Section 9.5 below. Any attempted transfer without consent shall
be void and shall constitute a non-curable breach of this Lease. If Tenant is a
corporation, any change in the ownership of a controlling interest of the voting
stock of the corporation shall require Landlord's consent.
Section 9.2 Tenant Affiliate and Merger. Tenant may assign this Lease
or sublease the Property, without Landlord's consent, to any corporation which
controls, is controlled by, or is under common control with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all
of Tenant's obligations under this Lease. If Tenant merges into another
corporation so that all of Tenant's assets and liabilities are transferred to
such other corporation, or if substantially all of the assets of Tenant are
transferred to another corporation, then Landlord agrees that this Lease may be
assigned in such merger or transfer provided that (as Landlord shall approve):
such acquiring corporation uses the Property for the same use that Tenant is
utilizing the Property upon the Commencement Date of this Lease and that such
acquiring corporation has at least the same net worth that Tenant has on the
date of this Lease. In order to verify the acquiring corporation's criteria
under the immediate preceding sentence, Tenant agrees to provide to Landlord
evidence of such use and worth at the time that Tenant requests
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Landlord's approval. Landlord's approval under this Section 9.2 shall
not be unreasonably withheld. Landlord shall respond to a Tenant request for
Landlord's approval under this Section 9.2 within fifteen (15) days of
Landlord's receipt of Tenant's request for approval and the delivery to Landlord
of the necessary information in order that Landlord can review Tenant's request
for approval. If Landlord fails to respond to Tenant's request for approval
under this Section 9.2 within fifteen (15) days of the delivery to Landlord of
Tenant's request and the information regarding such use and worth, then
Landlord's non-response shall be considered an approval of such merger or
transfer of assets under this Section 9.2.
Section 9.3 No Release of Tenant. No transfer permitted by this Article
Nine, whether with or without Landlord's consent and whether or not to a Tenant
Affiliate or by a merger or transfer of assets under Section 9.2, shall release
Tenant or change Tenant's primary liability to pay the rent and to perform all
other obligations of Tenant under this Lease. Landlord's acceptance of rent
from any other person is not a waiver of any provision of this Article Nine.
Consent to one transfer is not a consent to any subsequent transfer. If
Tenant's transferee defaults under this Lease, Landlord may proceed directly
against Tenant without pursuing remedies against the transferee. Landlord may
consent to subsequent assignments or modifications of this Lease by Tenant's
transferee, without notifying Tenant or obtaining its consent. Such action
shall not relieve Tenant's liability under this Lease.
Section 9.4 Offer to Terminate. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect in writing, the Lease shall continue in effect until otherwise
terminated under this Lease and the provisions of Section 9.5 with respect to
any proposed transfer shall continue to apply.
Section 9.5 Landlord's Consent. Tenant's request for consent to any
transfer described in Section 9.1 shall set forth in writing the details of the
proposed transfer, including the name, business and financial condition of the
prospective transferee, type of the prospective transferee including, but not
limited to, the use of Hazardous Material financial details of the proposed
transfer (e.g., the term of and the rent and security deposit payable under any
proposed assignment or sublease), and any other information Landlord reasonably
deems relevant. Landlord shall have the right to withhold consent, if
reasonable,
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or to grant consent, based on the following factors: (i) the business of the
proposed assignee or subtenant and the proposed use of the Property including,
but not limited to, the use of any Hazardous Material; (ii) the net worth and
financial reputation of the proposed assignee or subtenant; and (iii) Tenant's
compliance with all of its obligations under the Lease. Landlord shall consent
or reasonably withhold its consent by written notice to the Tenant within thirty
(30) days after the Tenant's delivery of the written request for consent and the
information required above to the Landlord.
Section 9.6 Landlord's Share of Premium. If Tenant assigns or subleases
the Property or any portion thereof, the following shall apply:
(i) Tenant shall pay to Landlord as additional rent under the Lease
the Applicable Percentage of the Profit (defined below) on such transaction as
and when received by Tenant (or to Landlord directly if Landlord gives written
notice that Landlord's share of such Profit shall be paid by the assignee or
subtenant to Landlord directly). The "Profit" means all amounts paid to Tenant
for such assignment or sublease, including "key" money, monthly rent in excess
of the monthly rent payable under the Lease, and all fees and other
consideration paid for the assignment or sublease, including fees under any
collateral agreements, after deducting: (i) brokerage commissions paid to
independent third party licensed real estate brokers for such assignment or
sublease of this Lease; (ii) Tenant's out-of-pocket attorneys' fees for such
assignment or sublease which deductible attorneys' fees shall not exceed Three
Thousand Dollars ($3,000.00); and (iii) the cost which Tenant actually pays for
the construction of any demising walls and doors to divide the Property for any
sublease of a portion of the Property which creates such Profit. The Profit in
the case of a sublease of less than all the Property is the rent allocable to
the subleased space as a percentage on a square footage basis. The "Applicable
Percentage" of Profits paid for the first sixty (60) months of the Lease Term
shall be twenty percent (20%), and for any period of the Lease thereafter
(including option terms) shall be forty percent (40%). If the Profit is in the
form of increased rent, then the amount of the Applicable Percentage for each
portion of the Profit shall be based upon when each such portion of the Profit
is to be paid under the sublease or assignment; with the exception that if a
lump sum amount or "key" money is paid covering a period more than one month,
such amount shall be spread pro rata (without interest) over the term of the
sublease or remaining term of the assigned Lease, as the case may be, to
determine when each portion of the Profit is to be received for purposes of
determining the Applicable Percentage.
(ii) Tenant shall provide Landlord a written statement certifying all
amounts to be paid from any assignment or sublease of the Property within thirty
(30) days after the transaction documentation is signed, and Landlord may
inspect from time to time Tenant's books and records to verify the accuracy of
such statement. On written request, Tenant shall promptly furnish to Landlord
copies of all the transaction documentation, all of which shall be certified by
Tenant to be complete, true and correct. Landlord's receipt of landlord's share
of the Profit shall not be a consent to any further assignment or subletting.
The breach of Tenant's obligation under this paragraph 9.6 shall be a material
default of the Lease.
Section 9.7 No Merger. No merger shall result from
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Tenant's sublease of the Property under this Article Nine, Tenant's surrender
of this Lease, or the termination of this Lease in any other manner. In any such
event, Landlord may terminate any or all subtenancies or succeed to the interest
of Tenant as sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.1 Covenants and Conditions. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.2 Defaults. Tenant shall be in material default under this
Lease:
(a) Abandonment. If Tenant abandons the Property or if Tenant's vacation
of the Property results in the cancellation of any insurance described in
Section 4.4;
(b) Failure to Pay. If Tenant fails to pay rent or any other charge or
amount when due;
(c) Nonperformance. If Tenant fails to perform any of Tenant's non-
monetary obligations under this Lease for a period of thirty (30) days after
written notice from Landlord; provided that if more than thirty (30) days are
required to complete such performance, Tenant shall not be in default if Tenant
commences such performance within the thirty (30) day period and thereafter
diligently pursues its completion. However, Landlord shall not be required to
give such notice if Tenant's failure to perform constitutes a non-curable breach
of this Lease. The notices required by this Section 10.2 are intended to
satisfy any and all notice requirements imposed by law on Landlord and are not
in addition to any such requirement.
(d) General Assignment and Bankruptcy. (i) If Tenant makes a general
assignment or general arrangement for the benefit of creditors; (ii) if a
petition for adjudication of bankruptcy or for reorganization or rearrangement
is filed by or against Tenant and is not dismissed within thirty (30) days;
(iii) if a trustee or receiver is appointed to take possession of substantially
all of Tenant's assets located at the Property or of Tenant's interest in this
Lease and possession is not restored to Tenant within thirty (30) days; or (iv)
if substantially all of Tenant's assets located at the Property or of Tenant's
interest in this Lease is subjected to attachment, execution or other judicial
seizure which is not discharged within thirty (30) days. If a court of competent
jurisdiction determines that any of the acts described in this subparagraph (d)
is not a default under this Lease, and a
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trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the rent
(or any other consideration) paid in connection with such assignment or sublease
over the rent payable by Tenant under this Lease.
(e) Guaranty Not Revocable. If any guarantor of the Lease revokes or
otherwise terminates, or purports to revoke or otherwise terminate, any guaranty
of all or any portion of Tenant's obligations under the Lease. Unless otherwise
expressly provided, no guaranty of the Lease is revocable.
Section 10.3 Remedies. On the occurrence of any default by Tenant,
Landlord may, at any time thereafter, with or without notice or demand and
without limiting Landlord in the exercise of any right or remedy which Landlord
may have:
(a) Types of Remedies. Terminate Tenant's right to possession of the
Property by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Property to Landlord. In
such event, Landlord shall be entitled to recover from Tenant all damages
incurred by Landlord by reason of Tenant's default, including: (i) the worth at
the time of the award of the unpaid Base Rent, Additional Rent and other charges
which Landlord had earned at the time of the termination; (ii) the worth at the
time of the award of the amount by which the unpaid Base Rent, Additional Rent
and other charges which Landlord would have earned after termination until the
time of the award exceeds the amount of such rental loss that Tenant proves
Landlord could have reasonably avoided; (iii) the worth at the time of the award
of the amount by which the unpaid Base Rent, Additional Rent and other charges
which Tenant would have paid for the balance of the Lease Term after the time of
the award exceeds the amount of such rental loss that Tenant proves Landlord
could have reasonably avoided; and (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
its obligations under the Lease or which in the ordinary course of things would
be likely to result therefrom, including, but not limited to, any costs or
expenses Landlord incurs in maintaining or preserving the Property after such
default, the cost of recovering possession of the Property, expenses of
reletting, including necessary renovation or alteration of the Property,
reasonably required to restore the Property to the condition required by Section
6.6 of this Lease, Landlord's reasonable attorneys' fees incurred in connection
therewith, and any real estate commission paid or payable. As used in subparts
(i) and (ii) above, the "worth at the time of the award" is computed by allowing
interest on unpaid amounts at the rate of fifteen percent (15%) per annum, or
such lesser amount as may then be the maximum lawful rate. As used in subpart
(iii) above, the "worth at the time of the award" is computed by
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discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of the award, plus one percent (1%). If Tenant has
abandoned the Property, Landlord shall have the option of (i) retaking
possession of the Property and recovering from Tenant the amount specified in
this Paragraph 10.3(a), or (ii) proceeding under Paragraph 10.3(b).
(b) Maintain Tenant's Right of Possession. Maintain Tenant's right to
possession (in California under California Civil Code Section 1951.4, as
amended, or its successor provision), in which case this Lease shall continue in
effect whether or not Tenant has abandoned the Property. In such event,
Landlord shall be entitled to enforce all of Landlord's rights and remedies
under this Lease, including the right to recover the rent as it becomes due.
Landlord and Tenant agree that the limitations on assignment and subletting
contained in Article Nine of this Lease are reasonable. Landlord and Tenant
specifically agree that Landlord's acts, if any, of maintenance or preservation,
and Landlord's efforts to relet the Property, or the appointment of a receiver
to protect Landlord's interest under this Lease, shall not constitute a
termination of Tenant's right to possession.
(c) Other Remedies. Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the state in which the Property
is located.
Section 10.4 Cumulative Remedies. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
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Section 11.1 Subordination. Landlord shall have the right to subordinate
this Lease to any ground lease, deed of trust or mortgage encumbering the
Property (provided that Landlord obtains a nondisturbance agreement in favor of
the Tenant in a form acceptable to Landlord's lender), any advances made on the
security thereof and any renewals, modifications, consolidations, replacements
or extensions thereof, whenever made or recorded. Tenant shall reasonably
cooperate with Landlord and any lender which is acquiring a security interest in
the Property or the Lease. Tenant shall execute such further documents and
assurances as such lender may reasonably require, provided that Tenant's
obligations under this Lease shall not be increased in any material way (the
performance of ministerial acts shall not be deemed material). Tenant's right
to quiet possession of the Property during the Lease Term shall not be disturbed
if Tenant pays the rent and performs all of Tenant's obligations under this
Lease and is not otherwise in default beyond the expiration of all applicable
cure periods. If any ground lessor, beneficiary or mortgagee elects to have this
Lease prior to the lien of its ground lease, deed of trust or mortgage and gives
written notice thereof to Tenant, this Lease shall be deemed prior to such
ground lease, deed of trust or mortgage whether this Lease is dated prior or
subsequent to the date of said ground Lease, deed of trust or mortgage or the
date of recording thereof.
Section 11.2 Attornment. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.3 Signing of Documents. Tenant shall not unreasonably refuse
to sign and deliver any instrument or documents necessary or appropriate to
evidence any such attornment or subordination or agreement to do so. If Tenant
unreasonably fails to do so within ten (10) days after written request, Tenant
hereby makes, constitutes and irrevocably appoints Landlord, or any transferee
or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver
any such instrument or document.
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Section 11.4 Estoppel Certificates.
(a) Tenant's Estoppel Certificate. Upon Landlord's written request, Tenant
shall execute, acknowledge and deliver to Landlord a written statement
certifying: (i) that none of the terms or provisions of this Lease have been
changed (or if they have been changed, stating how they have been changed); (ii)
that this Lease has not been canceled or terminated; (iii) the last date of
payment of the Base Rent and other charges and the time period covered by such
payment; (iv) that Landlord is not in default under this Lease (or, if Landlord
is claimed to be in default, stating why); and (v) such other representations or
information with respect to Tenant or the Lease as Landlord may reasonably
request or which any prospective purchaser or encumbrancer of the Property may
reasonably require. Tenant shall deliver such statement to Landlord within ten
(10) days after Landlord's request. Landlord may give any such statement by
Tenant to any prospective purchaser or encumbrancer of the Property. Such
purchaser or encumbrancer may rely conclusively upon such statement as true and
correct.
(b) Tenant's Nondelivery. If Tenant does not deliver such statement under
subparagraph (a) above, to Landlord within such ten (10) day period, Landlord,
and any prospective purchaser or encumbrancer, may conclusively presume and rely
upon the following facts: (i) that the terms and provisions of this Lease have
not been changed except as otherwise represented by Landlord; (ii) that this
Lease has not been canceled or terminated except as otherwise represented by
Landlord; (iii) that not more than one month's Base Rent or other charges have
been paid in advance; and (iv) that Landlord is not in default under the Lease.
In such event, Tenant shall be estopped from denying the truth of such facts.
(c) Landlord's Estoppel Certificate. Upon the Tenant's written request,
the Landlord shall execute, acknowledge and deliver to the Tenant a written
statement certifying: (i) that none of the terms or provisions of this Lease
have been changed (or if they have been changed, stating how they have been
changed); (ii) that this Lease has not been cancelled or terminated; (iii) the
last date of payment of the Base Rent and other charges and the time period
covered by such payment; and (iv) to the best of Landlord's actual knowledge
(without any investigation by the Landlord) that the Landlord has no actual
knowledge of any default under this Lease (or, if the Tenant is claimed to be in
default, stating why).
Section 11.5 Tenant's Financial Condition. Within ten (10) days after
written request from Landlord but not more than twice in any twelve (12)
consecutive month period, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any
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assignee, subtenant, or guarantor of Tenant. In addition, Landlord may deliver
to any lender any financial statements to facilitate the financing or
refinancing of the Property. Tenant represents and warrants to Landlord that
each such financial statement shall be true and accurate statement as of the
date of such statement. All financial statements shall be confidential if such
financial information is not available to the public ("Non-Public Financial
Information"), and for Non-Public Financial Information the Landlord shall
obtain from such lenders a written agreement to maintain such Non-Public
Financial Information in confidence. Non-Public Financial Information shall only
be used for the purposes set forth in this Section 11.5.
ARTICLE TWELVE: LEGAL COSTS
Section 12.1 Legal Proceedings. If Tenant or Landlord shall be in breach
or default under this Lease or the Construction Rider, such party (the
"Defaulting Party") shall reimburse the other party (the "Nondefaulting Party")
upon demand for any legal fees and costs that the Nondefaulting Party incurs in
connection with any breach or default of the Defaulting Party under this Lease
or Construction Rider, whether or not suit is commenced or judgment entered.
Such legal fees and costs shall include legal fees and costs incurred for any
lawsuit or arbitration or for the negotiation of a settlement, enforcement of
rights or otherwise. Furthermore, if any action or arbitration for breach of or
to enforce the provisions of this Lease or Construction Rider is commenced, the
court or arbitration in such action shall award to the party in whose favor a
judgment is entered, a reasonable sum as attorneys' fees and costs. The losing
party in such action shall pay such attorneys' fees and costs. Tenant shall also
indemnify Landlord against and hold Landlord harmless from all costs, expenses,
demands and liability Landlord may incur if Landlord becomes or is made a party
to any claim or action (a) instituted by Tenant against any third party, or by
any third party against Tenant, or by or against any person holding any interest
under or using the Property by license of or agreement with Tenant; (b) for
foreclosure of any lien for labor or material furnished to or for Tenant or such
other person; (c) otherwise arising out of or resulting from any act or
transaction of Tenant or such other person; or (d) necessary to protect
Landlord's interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Tenant shall
defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any such
claim or action. Neither the Landlord nor the Tenant is waiving any rights to
reimbursement for attorneys' fees or costs as they may otherwise be entitled to
under applicable laws.
Section 12.2 Landlord's Consent. Tenant shall pay
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Landlord's reasonable attorneys' fees incurred in connection with Tenant's
request for Landlord's consent under Article Nine (Assignment and Subletting),
or in connection with any other act which Tenant proposes to do and which
requires Landlord's consent, provided, however, that such legal fees shall not
exceed the amount of Two Thousand Dollars ($2,000.00) for each request. Such
$2,000.00 amount under the immediate preceding sentence shall be increased on
January 1 of each year (which date shall be deemed a "Rental Adjustment Date"
under Section 3.2 for purposes of such calculation) in accordance with the
increase in the Index (as defined in Section 3.2) from the last date which such
amount increased (as determined under Section 3.2).
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.1 Non-Discrimination. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.2 Landlord's Liability; Certain Duties.
(a) "Landlord". As used in this Lease, the term "Landlord" means only the
current owner or owners of the fee title to the Property or the leasehold estate
under a ground lease of the Property at the time in question. Each Landlord is
obligated to perform the obligations of Landlord under this Lease only during
the time such Landlord owns such interest or title. Any Landlord who transfers
its title or interest is relieved of all liability with respect to the
obligations of Landlord under this Lease to be performed on or after the date of
transfer. However, each Landlord shall deliver to its transferee all funds that
Tenant previously paid if such funds have not yet been applied under the terms
of this Lease.
(b) Notice. Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice. However, if such non-
performance reasonably requires more than thirty (30) days to cure, Landlord
shall not be in default if such cure is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
(c) Liability. Notwithstanding any term or provision herein to the
contrary, the liability of Landlord for the
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performance of its duties and obligations under this Lease is limited to
Landlord's interest in the Property and the Project, and neither the Landlord
nor its partners, shareholders, officers or other principals shall have any
personal liability under this Lease.
Section 13.3 Severability. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.4 Interpretation. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.5 Incorporation of Prior Agreements; Modifications. This
Lease (including without limitation the Construction Rider) is the only
agreement between the parties pertaining to the lease of the Property and no
other agreements are effective. All amendments to this Lease shall be in writing
and signed by all parties. Any other attempted amendment shall be void.
Section 13.6 Notices. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered, sent by United States
mail, postage prepaid, sent by national overnight courier (such as Federal
Express, DHL and similar services) or sent by facsimile with a copy sent by
United States mail or overnight courier. Notices to Tenant shall be delivered
to the address specified in Section 1.3 above, except that upon Tenant's taking
possession of the Property, the Property shall be Tenant's address for notice
purposes. Notices to Landlord shall be delivered to the address specified in
Section 1.2 above. All notices shall be effective when delivered. A notice
shall be presumed delivered by United States mail on the date delivered as
evidenced by a postal receipt, and if by overnight courier, on the date of the
courier's receipt of delivery, and if by facsimile, when the facsimile as
delivered as acknowledged by an electronic receipt from the sending facsimile
machine provided that a copy was sent by United States mail or overnight
courier. Either party may change its notice address upon written notice to the
other party.
Section 13.7 Waivers. All waivers must be in writing and
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signed by the waiving party. Landlord's failure to enforce any provision of this
Lease or its acceptance of rent shall not be a waiver and shall not prevent
Landlord from enforcing that provision or any other provision of this Lease in
the future. No statement on a payment check from Tenant or in a letter
accompanying a payment check shall be binding on Landlord. Landlord may, with or
without notice to Tenant, negotiate such check without being bound to the
conditions of such statement.
Section 13.8 Recordation. Tenant shall not record this Lease without
prior written consent from Landlord. Landlord may require that a "Short Form"
memorandum of this Lease executed by both parties be recorded.
Section 13.9 Binding Effect; Choice of Law. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10 Corporate Authority; Partnership Authority. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. On the date this Lease is signed, Tenant shall deliver to Landlord
a certified copy of a resolution of Tenant's Board of Directors authorizing the
execution of this Lease or other evidence of such authority reasonably
acceptable to Landlord. If Tenant is a partnership, each person or entity
signing this Lease for Tenant represents and warrants that he or it is a general
partner of the partnership, that he or it has full authority to sign for the
partnership and that this Lease binds the partnership and all general partners
of the partnership. Tenant shall give written notice to Landlord of any general
partner's withdrawal or addition. On the date this Lease is signed, Tenant shall
deliver to Landlord a copy of Tenant's recorded statement of partnership or
certificate of limited partnership.
Section 13.11 Joint and Several Liability. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12 Force Majeure. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
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Section 13.13 Execution of Lease. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed an offer to lease and shall not be binding upon
either party until executed and delivered by both parties.
Section 13.14 Survival. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.1 No Other Brokers. Tenant represents and warrants to
Landlord that the only agents, brokers, finders or other parties with whom
Tenant has dealt or who are or may be entitled to any commission or fee with
respect to this Lease due to the actions of the Tenant are CB Commercial and The
Seeley Company. Landlord represents and warrants to the Tenant that the only
agents, brokers, finders or other parties with whom Landlord has dealt or who
are or may be entitled to any commission or fee with respect to this Lease due
to the actions of the Landlord are CB Commercial and The Seeley Company. This
paragraph is intended to benefit solely Landlord and Tenant and no other person.
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"Landlord"
Signed on ___________, 1998 Cypress Land Company,
a California limited partnership
at ________________________
By: Harvico, Inc., a California
corporation, General Partner
By:___________________________
Brian L. Harvey, President
"Tenant"
Signed on ____________, 1998 Xylan Corporation,
a California corporation
at ________________________
By:_________________________________
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Steve Kim, President
By:_________________________________
Susan Cayley, Secretary
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CONSTRUCTION RIDER
TO INDUSTRIAL REAL ESTATE LEASE
DATED JUNE 1, 1998 BY AND BETWEEN
CYPRESS LAND COMPANY, A CALIFORNIA LIMITED PARTNERSHIP,
AND
XYLAN CORPORATION, A CALIFORNIA CORPORATION
- --------------------------------------------------------------------------------
1. DESIGN AND CONSTRUCTION OF THE BUILDING SHELL: Landlord shall construct
---------------------------------------------
upon the land constituting the Property a building ("Building") of
approximately one hundred twenty-eight thousand seven hundred square feet
(128,700 s.f.), of which approximately eleven thousand two hundred square
feet (11,200 s.f.) shall be a second-story mezzanine area. Landlord shall
design and construct the Building shell ("Shell") based upon the
specifications stated on Exhibit "B", attached hereto and incorporated
-----------
herein by this reference. The term "Tenant Improvements" is defined in
Paragraph 2, below.
1.1 Plans and Specifications of Shell. Landlord and Tenant have agreed to
---------------------------------
the plans and specifications for the construction of the Shell ("Shell
Plans and Specifications"), as stated on Exhibit "B". Landlord shall
-----------
design plans for the Shell to the Shell Plans and Specifications and to
Landlord's other normal specifications and quality. The Landlord may make
changes to the Shell Plans and Specifications in Landlord's discretion,
provided that same does not materially change the design of the Shell or
materially interfere with Tenant's proposed use of the Property. If such
changes do materially change the design of the Shell or Tenant's proposed
use of the Property, then Landlord shall submit such changes to the Shell
Plans and Specifications for Tenant's consent, which consent shall not be
unreasonably withheld. Landlord shall submit the Shell Plans and
Specifications to the City of Calabasas, California, for the issuance of a
building permit for the Building Shell by the City of Calabasas. If the
City of Calabasas requires changes in the Shell Plans and Specifications,
then Landlord and Tenant agree that Landlord's architect may make the
changes required by the City of Calabasas.
1.2 Construction of the Shell. Upon obtaining the necessary permits,
-------------------------
Landlord shall construct the Shell substantially in accordance with the
Shell Plans and Specifications.
(a) Landlord Pays Permit Fees for Construction of
---------------------------------------------
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Shell. Subject to subparagraph 2.5(i) below, Landlord shall pay the permit
-----
fees for construction of the Shell (but not for the Tenant Improvements)
which are required to be paid to the City of Calabasas prior to the City of
Calabasas issuing a building permit for the construction of the Shell.
(b) Landlord Shall Pay Cost of Construction Period Insurance on the
---------------------------------------------------------------
Property. From the commencement of construction of the Shell until the
--------
Completion of the Shell and Tenant Improvements, the Landlord shall be
responsible for obtaining the following insurance coverages for the
Property:
(i) Commercial and liability insurance insuring against bodily
injury and property damage in such amounts and forms as shall be determined
by the Landlord;
(ii) "All risk" builder's risk insurance, to cover against loss
or damage by fire and other casualties as determined by the Landlord in an
amount equal to one hundred percent (100%) of the full replacement value
thereof. Such insurance shall name the Landlord as the loss payee.
All the policies of insurance required under this Paragraph 1.2(b)
shall be written by companies authorized to do business in California and
rated "A- VIII" or better in Best's Insurance Guide. The cost such
insurance attributable to the Building Shell shall be paid by the Landlord,
and the cost of such insurance attributable to the Tenant Improvements
shall be part of the Tenant Improvement costs to be paid by Tenant (or
reimbursed to Landlord). Landlord shall use its reasonable efforts to
allocate the amount of such insurance costs between the Building Shell and
the Tenant Improvements.
1.3 Completion Defined. The term "Completion" is defined as the date that
------------------
the City of Calabasas shall have approved that the Shell is substantially
complete (such as by the city issuing the final inspection approval for the
Shell) or otherwise gives permission for the occupancy of the Shell portion
of the Building. If the City of Calabasas will not certify that the Shell
is substantially complete or fails to issue a final inspection approval for
the Shell because either: (i) the non-completeness of the Tenant
Improvements due to a Tenant Delay, or (ii) the non-completeness of the
Shell due to the non-completeness of the Tenant Improvements caused by a
Tenant Delay (such as if there is a hole in the Building's roof for the
installation of the Tenant Improvements and there has been a Tenant Delay),
then it
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shall be deemed that there has in fact been "Completion" of the Shell for
purposes of the Lease. The date of Completion of the Shell is referred to
herein as the "Completion Date." The term "Tenant Delay" is defined in
subparagraph 1.3(a), below.
(a) Tenant Delay. Landlord shall use its best efforts to have the
------------
Completion of the Shell occur on or before November 1, 1998, subject to any
delays caused by a Tenant Delay (defined below) or by Force Majeure events
(defined in Section 13.12 of the Lease). A "Tenant Delay" shall mean any
delays in the construction of the Tenant Improvements or the Shell caused
in whole or in part by any of the following: (i) any dispute between
Landlord and Tenant under Paragraph 2.1 or 2.2 which is unresolved after
the expiration of the applicable five (5) day period; (ii) the Tenant fails
to timely comply with the time limitations or dates under Paragraph 2.1 or
2.2, or those items and dates described in Paragraph 2.3; (iii) the Tenant
requests a change order under Paragraph 2.4; (iv) there is an installation
of any Special Improvements under Paragraph 2.7; or (v) the Tenant fails to
timely perform or deliver information under Paragraph 2.1 or 2.2.
(b) Tenant's Right to Terminate Lease. If on August 1, 1999
---------------------------------
("Outside Date") there is not Completion of construction of the Shell
(which Outside Date shall be extended by any Tenant Delays or events of
Force Majeure delays), then Tenant on such Outside Date or within thirty
(30) days thereafter, may elect by written notice to Landlord to terminate
the Lease. If Tenant fails to make such election under the immediate
preceding sentence within such thirty (30) day period, then Tenant's right
to make such election shall terminate and be of no further force or effect.
Tenant may only elect to terminate the Lease under this subparagraph (b) if
Tenant has fully paid for all Tenant Improvements, if any, then
constructed. Upon Landlord's verification that all the Tenant Improvements
then being constructed have been fully paid for, then on Tenant's election
Landlord shall return to Tenant the unused portion of the Letter of Credit
described in paragraph 2.6(a) below.
2. DESIGN AND CONSTRUCTION OF TENANT IMPROVEMENTS: Tenant shall pay all of
----------------------------------------------
the costs for the design and construction of the tenant improvements
("Tenant Improvements") as described below, including but not limited to
the office areas, air conditioning of the warehouse areas, restrooms,
screening of all air conditioning units (roof and ground mounted),
equipment screens and signage. The Tenant Improvements shall
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be constructed by the Landlord, at Tenant's cost, pursuant to the plans and
specifications, as described below. The Landlord shall not be entitled to a
management or similar fee for the construction of the Tenant Improvements,
although the general contractor may receive a fee hereunder.
2.1 Schematic Tenant Improvement Plans and Specifications.
-----------------------------------------------------
(i) Tenant has or shall retain Hendy and Associates as its space
planner to prepare at Tenant's expense (subject to paragraph 2.3(iii)) all
architectural, electrical, plumbing, heating, ventilating and air
conditioning plans for construction of the Tenant Improvements. Tenant
shall be responsible for the timely performance of Hendy and Associates and
of the preparation of the Tenant Improvement Plans and Specifications
hereunder. Tenant shall have prepared the schematic plans and
specifications showing the basic floor plans of the Tenant Improvements
("Schematic Tenant Improvements Plans and Specifications") to construct
upon the Property. Tenant shall immediately deliver to Landlord and the
space planner all information that may be required by Landlord and the
space planner to complete the Schematic Tenant Improvements Plans and
Specifications.
(ii) Tenant shall have such Schematic Tenant Improvements Plans and
Specifications prepared by June 15, 1998, and if same does not occur by
such date, then same shall be deemed a Tenant Delay hereunder. On or
before June 15, 1998, Tenant shall have such Schematic Tenant Improvements
Plans and Specifications delivered to Landlord for Landlord's approval.
Landlord shall promptly approve of same (or if Landlord disapproves of
same, such disapproval must be reasonable). Landlord shall have five (5)
business days from the receipt of such Schematic Tenant Improvements Plans
and Specifications to approve or disapprove. If Landlord does not
disapprove of such plans in the manner specified in this subparagraph (iii)
by written notice to Tenant within such five (5) business day period, then
Landlord shall be deemed to have approved of same. If Landlord disapproves
of such plans and specifications, then Landlord and Tenant shall, within
five (5) days from the expiration of the five (5) business day period, use
their best efforts to resolve such dispute. Landlord and Tenant agree to
negotiate in good faith with each other regarding any of Landlord's
disapproved items described above.
(iii) The Final Plans and Specifications for the Tenant Improvements
(as such term is defined in Paragraph 2.2 below) shall be based upon the
Schematic Tenant Improvements
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Plans and Specifications.
2.2 Final Plans and Specifications for Tenant Improvements.
------------------------------------------------------
(i) Tenant, by July 15, 1998, shall have prepared, at Tenant's
expense, and deliver to Landlord final plans and specifications for the
Tenant Improvements ("Final Plans and Specifications"), which Final Plans
and Specifications shall be based upon the Schematic Tenant Improvements
Plans and Specifications and shall show the final design and specifications
(including, but not limited to, architectural, electrical, plumbing,
ventilating, heating and air conditioning) of the Tenant Improvements.
(ii) Landlord, upon receipt of such Final Plans and Specifications,
shall promptly approve of same (or if Landlord disapproves of same, such
disapproval must be reasonable). Landlord shall have five (5) business
days from receipt of the Final Plans and Specifications to approve or
disapprove same based upon the foregoing. If Landlord does not disapprove
of such Final Plans and Specifications in the manner specified herein, by
written notice to Tenant within such five (5) business day period, then
Landlord shall have been deemed to have approved of same. If Landlord
disapproves of the Final Plans and Specifications, then Landlord and Tenant
shall use their best efforts to resolve such dispute in order to conform
such Final Plans and Specifications to the Schematic Tenant Improvements
Plans and Specifications. Landlord and Tenant agree to negotiate in good
faith with each other regarding any of Landlord's disapproved items,
described above. The Final Plans and Specifications shall supersede any
prior agreements concerning the construction of the Tenant Improvements,
including but not limited to, any inconsistencies with the Schematic Tenant
Improvements Plans and Specifications.
(iii) Regardless of whether Landlord approves or disapproves of any
plans or specifications, Tenant shall remain solely responsible for the
design of the Tenant Improvements and any specifications thereof.
Specifically, Tenant shall be solely responsible that the Tenant
Improvements conform to Tenant's required use of the Property.
(iv) Landlord, on the first to occur of July 15, 1998 or upon the
preparation of the Final Plans and Specifications, may in Landlord's
discretion submit same (or have the space planner submit same) to the City
of Calabasas
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for the issuance of a building permit by the City of Calabasas. Landlord
may, in Landlord's discretion, submit the Final Plans and Specifications to
the City of Calabasas for the issuance of a building permit by the City of
Calabasas, prior to the final preparation of the Final Plans and
Specifications, in order to expedite the issuance of a building permit for
the Tenant Improvements. If the City of Calabasas requires changes in the
Final Plans and Specifications, then Landlord and Tenant agree that
Landlord's architect or the space planner may make the changes. It is
understood that neither Landlord nor Landlord's representatives or
consultants have any ability to influence the actions or timeliness of
performance of the City of Calabasas, public utilities or other
governmental bodies involved with the construction of the Tenant
Improvements or the issuance of permits regarding same. Tenant recognizes
that the Final Plans and Specifications must be prepared and be submitted
to the City of Calabasas by July 1, 1998 in order to meet the construction
time tables described herein. Accordingly, the Tenant specifically
authorizes the Landlord to submit such plans for the issuance of a building
permit under the terms of this Paragraph 2.2 even prior to Tenant's
approval of such plans in order expedite the City of Calabasas issuing the
permits for the Tenant Improvements.
2.3 Tenant's Cooperation and Mailing of Plans.
-----------------------------------------
(i) Landlord shall have the right, from time to time, to review and
provide comments to the plans and specifications for the Tenant
Improvements as they are being prepared by the space planner. Landlord may
communicate with the space planner at any time and shall have the right to
have a representative attend meetings with such space planner and Tenant
regarding the preparation of such plans and specifications.
Tenant has designated John Yi, a Vice President of Tenant, as a
person who has the actual authority to make any changes to any plans and
specifications on behalf of Tenant and to give any approvals or waivers on
behalf of the Tenant regarding any plans or specifications, and to make all
decisions in connection with the construction of the Tenant Improvements
and the Lease and Construction Rider on behalf of the Tenant.
(ii) (a) In order to timely prepare the plans and specifications
for the Tenant Improvements stated in Paragraphs 2.1 and 2.2 above, and to
construct the Tenant
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Improvements in a timely manner, Tenant agrees to timely and promptly
respond to the space planner's request for information. Tenant agrees to
promptly deliver all required information to the space planner necessary to
prepare the Tenant Improvements' plans and specifications.
(b) In addition to the specific approval dates of Tenant outlined
in Paragraphs 2.1 and 2.2 above, architects, designers and engineers will
be requesting Tenant's review and approval of plans, specifications and
other items at periodic intervals. Tenant agrees to promptly respond to
all of these requests.
(iii) In order to design the Tenant Improvements, Tenant is
employing the space planner for the Tenant Improvements, and consultants
for the architectural and engineering work relating to the Tenant
Improvements, which amounts shall be paid by Tenant over the space planner
allowance to be paid by Landlord under the following sentence. Landlord
shall pay for Tenant's preliminary space planner to assist in preparing the
Schematic Tenant Improvements Plans and Specifications in an amount not to
exceed Twenty Cents ($0.20) per square foot of office and Tenant
Improvements' area.
(iv) Landlord and Tenant, upon approval of the Schematic Tenant
Improvements Plans and Specifications or the Final Plans and
Specifications, agree to initial each page of such approved plans or
specifications (whether such approval was by non-action or otherwise).
2.4 Change Orders. For purposes of this Lease, references to Tenant's
-------------
"change order(s)" shall mean: (a) any requested Tenant changes, additions
or alterations of the Final Plans and Specifications after such Final Plans
and Specifications are approved (or after approval by arbitration or
Tenant's failure to disapprove same) whether such changes, additions or
alterations occur on, before or after the commencement of the construction
of the Building or Tenant Improvements; or (b) any changes to items, plans
or specifications previously approved by Tenant.
(i) Tenant shall pay for all costs including but not limited to any
architectural, engineering, design, contractor or material costs caused by
such Tenant change orders (whether to the Tenant Improvements or the Shell)
which are approved by Tenant under subparagraph 2.4(ii).
(ii) If Tenant desires a change order, then Tenant
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shall deliver a written request for such change order to Landlord, which
Landlord may accept or reject, depending on such factors as costs, delays
to construction, and scope of such requested change orders. Tenant's
request of such charge order shall mean Tenant's approval of such change
order.
(iii) If Tenant executes a written document approving a change
order, then Tenant shall be deemed to have approved such change order
whether or not Tenant has requested or Landlord has delivered to Tenant a
calculation of the additional costs and time delays caused by such change
order. Tenant shall pay all design and construction costs of any Tenant
requested change order.
(iv) Any change order approved by Tenant which causes a delay in
construction or design shall be deemed a Tenant Delay.
2.5 Construction of Tenant Improvements. The Tenant Improvements shall be
-----------------------------------
constructed by Landlord at Tenant's cost in conformance with the Final
Plans and Specifications.
(i) Tenant shall pay all of the permit fees, costs, fees, charges and
assessments for the construction of the Tenant Improvements which are
required to be paid to any governmental body for the construction of the
Tenant Improvements (subject to Landlord's obligation to pay the Bridge Fee
described in the following sentence). Landlord shall pay for the bridge
and thoroughfare fees related to the Property ("Bridge Fee"), which is
based upon office areas of the Building not constituting more than twenty
percent (20%) of the total square footage of the Building, which Bridge Fee
is currently calculated to be Two Dollars ($2.00) per square foot of
Building area ("Current Bridge Fee"). If the Tenant Improvements requested
by Tenant cause the Bridge Fee relating to the Property to exceed the
Current Bridge Fee, then Tenant shall be responsible for paying for the
amount of such increased Bridge Fee for the entire Property. Tenant shall
pay for the increase in the Bridge Fee under the immediate preceding
sentence by payment of such amount to Landlord at the time that the
building permits for the Tenant Improvements are obtained from the City of
Calabasas (even if the City of Calabasas allows Landlord to defer the
payment of such Bridge Fee by the City of Calabasas recording a covenant or
encumbrance against the Property or the city receiving from the Landlord
other contractual promises or covenants to pay such Bridge Fee). Landlord
shall assist Tenant in minimizing the amount of the Bridge Fee to be
charged by the
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<PAGE>
City of Calabasas; however, Tenant understands that Landlord does not have
the ability to reduce or to minimize such Bridge Fee, and the failure of
such Bridge Fee to be reduced or minimized to Tenant's satisfaction shall
not entitle Tenant to have any claim against Landlord or any set off
hereunder, and Tenant shall remain responsible for paying for the amount of
such increased Bridge Fee for the Property under this subparagraph 2.5(i).
(ii) Tenant shall pay all the costs of any space planners,
designers, architectural costs, engineering costs and construction costs of
the Tenant Improvements (except as to the amount of the preliminary space
planner which Landlord has agreed to pay for as specified in subparagraph
2.3(iii), above).
(iii) All of the Tenant Improvements shall become part of the
Property, shall be maintained and repaired by Tenant as part of the
Property under the Lease, and may not be removed by Tenant upon the
termination of the Lease. Although Landlord may be contracting with
contractors for the construction of the Tenant Improvements, Tenant shall
be responsible for paying for same pursuant to Paragraph 2.6 below.
Landlord shall consult the Tenant before Landlord enters into such
contracts for the design and construction of the Tenant Improvements, but
the Landlord may enter into such contracts without the Tenant's consent.
(iv) In order to expedite the construction of the Tenant
Improvements, the same general contractor that constructs the Shell portion
of the Building shall construct the Tenant Improvements. Landlord agrees
to use Landlord's reasonable efforts to have the general contractor request
bids from at least three (3) subcontractors for each trade. Tenant shall
be consulted regarding each of the subcontractor's bids; however, Landlord
shall make the final decision as to which subcontractor to utilize based
upon price, quality of services and reputation of such subcontractor, in
Landlord's commercially reasonable discretion.
2.6 Payment for Tenant Improvements. Tenant shall pay all expenses, fees
-------------------------------
and costs relating to the design and construction of the Tenant
Improvements (except for the amount paid by Landlord under subparagraph
2.3(iii)). Landlord shall invoice Tenant for such expenses, fees and
costs, and Tenant shall pay Landlord within ten (10) days of Landlord's
invoicing of Tenant (even if Landlord invoices Tenant prior to Landlord's
payment of such expenses, fees and
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<PAGE>
costs to third parties). Each invoice by Landlord to Tenant shall be
substantiated by a written invoices or bills from the person or entity
requesting the payment from the Landlord. If Tenant shall fail to timely
pay Landlord under the immediate preceding sentence, then same shall be
deemed a monetary default under the Lease; and in addition to all other
amounts to be paid by Tenant under this paragraph 2.6, Tenant shall
immediately pay to Landlord a late charge equal to ten percent (10%) of the
overdue amount.
(a) Letter of Credit. Because of the large amount of Tenant
----------------
Improvements being installed in the Building, Tenant, prior to commencement
of construction of the Tenant Improvements, agrees to obtain a "Letter of
Credit" at Tenant's cost (as described below) in favor of the Landlord in
the aggregate amount of the cost of the construction of the Tenant
Improvements (including any permits or other fees) which Tenant is required
to pay under this Lease. Such Letter of Credit amount shall be based upon
Landlord's estimate of the cost of construction and design of the Tenant
Improvements, plus all fees. The Letter of Credit shall be an irrevocable
unconditional Letter of Credit for a term of at least one (1) year in favor
of the Landlord as the designated beneficiary, drawn on a major Los Angeles
bank approved by Landlord and in a form reasonably approved by Landlord.
Tenant shall deliver such original Letter of Credit to Landlord prior to
the commencement of construction of the Tenant Improvements and shall
maintain same until the last to occur of the following: (i) Tenant's
payment of all amounts due Landlord for construction of the Tenant
Improvements; (ii) completion of construction of the Tenant Improvements
and the expiration of the requisite time periods to record mechanics liens
under California law; or (iii) release of such Letter of Credit under the
terms of paragraph 1.3(b) above. Upon the last to occur of subparagraphs
(i) to (iii) under the immediate preceding sentence, Landlord shall return
to Tenant any original Letter of Credit which Landlord may have in
Landlord's possession. Landlord shall be able to draw upon the entire
Letter of Credit if Tenant fails to timely make any of the required
payments for such Tenant Improvements hereunder.
Tenant shall have the right to inspect and audit the Landlord's
records and supporting documentation relating to the construction and
billings for the Tenant Improvements, and statements relating to the Tenant
Improvement Costs. Any such inspection or audit shall be made by the
Tenant during normal business hours after giving the Landlord at least
three (3) business days' prior written notice. Any such
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<PAGE>
audit must be conducted, if at all, no later than ninety (90) days after
the Landlord delivers an invoice to the Tenant regarding payment of such
Tenant Improvement Costs.
(b) If the Landlord May Make Partial Draws on the Letter of Credit.
--------------------------------------------------------------
If the Letter of Credit described in subparagraph 2.6(a) may be issued by
the applicable bank in such a form (as approved by Landlord) that the
Landlord may make partial draws on such Letter of Credit for the defaulted
amount while the remainder of such Letter of Credit remains in effect, then
the Landlord agrees to accept such form of Letter of Credit. If the Tenant
fails to timely make more than two (2) payments to Landlord required under
this paragraph 2.6, then, notwithstanding the immediate preceding sentence,
the Landlord may draw upon the entire Letter of Credit. The determination
of whether a "partial draw Letter of Credit" as described herein may be
issued shall be made by the Landlord at the time such Letter of Credit is
originally issued and shall be made by the Landlord in its discretion.
(c) Separate Account. If Landlord should be paid the entire amount
----------------
under the Letter of Credit under either subparagraphs 2.6(a) or (b), above,
that amount of the Letter of Credit which Landlord draws upon and which
Landlord does not utilize to cure any Tenant's defaulted payments under
this Section 2.6 shall be held by Landlord in a separate account in
Landlord's sole name. Landlord may draw upon such amount in such separate
account to make payments that Tenant otherwise owes under this Section 2.6
to pay the Tenant Improvement costs. After all of the expenses, fees and
costs relating to the design and construction of the Tenant Improvements
have been paid, Landlord shall return to Tenant any of the unused amounts
in such separate account.
2.7 Special Improvements. Prior to the Commencement Date of the Lease,
--------------------
Tenant may, provided that same does not delay or in any way unreasonably
interfere with Landlord's construction of the Building or the Tenant
Improvements, install (at Tenant's sole cost and expense) telephones,
computer systems, cable and special electrical work, with the prior written
approval of Landlord ("Special Improvements"). Any work on such Special
Improvements shall be solely the responsibility of Tenant and shall be
installed at Tenant's sole cost and expense. Tenant shall indemnify and
hold Landlord harmless for any damage to person or property as a result of
any installation and work on the Special Improvements and such work shall
be governed by the provisions of Section 6.5 of the Lease. Tenant shall
submit to Landlord, for Landlord's review and approval, any plans
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<PAGE>
and drawings of the Special Improvements which Landlord agrees to review
within fifteen (15) days after receipt of same from Tenant. Landlord shall
not unreasonably withhold its approval. Landlord's approval of such plans
and drawings of the Special Improvements shall in no way relieve Tenant
from the sole responsibility of installing same at Tenant's sole cost and
expense, and in compliance with this Lease and all codes, laws, rules and
regulations. Tenant's right to make any alterations or additions to the
Building after the Commencement Date of the Lease shall be subject to
Section 6.5 of the Lease.
3. ESTABLISHMENT OF INITIAL LEASE TERM AND INITIAL BASE RENT:
---------------------------------------------------------
3.1 Commencement Date. The term of the Lease under Section 1.5 of the
-----------------
Lease shall commence on the Completion Date (as the Completion Date is
defined in Paragraph 1.3 of this Construction Rider). Such date is herein
referred to as the "Commencement Date" of the Lease. If Tenant does not
have a temporary or permanent certificate of occupancy for the Tenant
Improvements on the Completion Date and Tenant has not received permission
from the City of Calabasas to occupy the Property on the Completion Date,
then the Commencement Date shall commence sixty (60) days after the
Completion Date. The initial Lease Term shall terminate one hundred twenty
(120) months after the Commencement Date. If the Commencement Date of the
initial Lease Term is on a day other than the first day of a month, then
such first fractional month shall be added to the initial one hundred
twenty (120) month Lease Term.
3.2 Adjustment to Initial Base Rent Based Upon Square Footage of the
----------------------------------------------------------------
Building. On the Commencement Date, the initial Base Rent shall be
--------
adjusted to equal the product of the following: Square Feet of the Building
multiplied times Sixty-Three Cents ($0.63) per square foot. "Square Feet
of the Building" shall mean the square feet of the Building (including the
square footage of any mezzanine area) measured from the outside of each
outside wall to the outside of each outside wall, as calculated by
Landlord's architect.
3.3 Amendment to Lease. On the Commencement Date, Landlord and Tenant
------------------
shall promptly execute an amendment to the Lease confirming: (a) the
Commencement Date and termination date of the initial Lease Term; (b) the
Square Feet of the Building; (c) the initial Base Rent as calculated under
Paragraph 3.2 above; and (d) an acknowledgment that Landlord has complied
with all of the terms of Paragraph 1 of this Construction Rider.
Regardless of the execution of such
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<PAGE>
amendment, the Lease shall remain in full force and effect with the
Commencement Date and termination date described in Paragraph 3.1 above,
and the initial Base Rent and square feet of the Building calculated under
Paragraph 3.2 above.
4. LANDLORD'S WARRANTY REGARDING BUILDING SHELL AND TENANT IMPROVEMENTS:
--------------------------------------------------------------------
4.1 Warranty. Landlord warrants for a period of twelve (12) months from
--------
the Completion Date ("Warranty Period") that the Shell portion of the
Building and the Tenant Improvements are not defective under commercially
accepted standards and have been constructed in a good and workmanlike
manner. Tenant, however, shall be solely responsible for any defects in
the design of any Tenant Improvements.
4.2 Landlord's Warranty. LANDLORD'S WARRANTY OR OTHER SPECIFIED
-------------------
RESPONSIBILITY FOR ANY ITEMS HEREUNDER SHALL ONLY OBLIGATE LANDLORD TO
REPAIR OR REPLACE IF NECESSARY IN A TIMELY MANNER SUCH DEFECTIVE BUILDING
SHELL OR TENANT IMPROVEMENTS ITEM, IF LANDLORD RECEIVES TIMELY WRITTEN
NOTICE FROM TENANT DURING THE WARRANTY PERIOD OF SUCH DEFECTIVE ITEM. SUCH
WARRANTY OR RESPONSIBILITY OF LANDLORD SHALL NOT BE FOR ANY CONSEQUENTIAL
DAMAGES (WHETHER TO ANY PERSON, PROPERTY OR TENANT'S BUSINESS). LANDLORD'S
WARRANTY UNDER THIS PARAGRAPH 4 IS LANDLORD'S SOLE WARRANTY (EXPRESSED OR
IMPLIED) REGARDING THE CONSTRUCTION OF THE BUILDING AND TENANT
IMPROVEMENTS, AND ANY ALLEGED CONSTRUCTION DEFECTS (EVEN IF LATENT), AND
THIS WARRANTY SHALL CONSTITUTE TENANT'S (OR ANY SUCCESSOR-IN-INTEREST'S)
SOLE AND EXCLUSIVE REMEDY AGAINST LANDLORD REGARDING ANY CLAIMED DEFECTS IN
THE BUILDING AND TENANT IMPROVEMENTS. LANDLORD'S WARRANTY HEREUNDER AND
LANDLORD'S RESPONSIBILITY TO REPAIR OR MAINTAIN ANY ITEM UNDER THIS LEASE
SHALL NOT APPLY TO ANY DAMAGE OR DESTRUCTION CAUSED BY AN ACT OR NEGLIGENCE
OF TENANT OR ANY OF TENANT'S EMPLOYEES, CUSTOMERS, LICENSEES, INVITEES,
CONTRACTORS OR AGENTS.
4.3 Punchlist. As soon as the Tenant Improvements are completed, the
---------
Landlord and the Tenant shall together walk through the Property and
inspect the Shell and the Tenant Improvements so completed, using
reasonable efforts to discover all uncompleted or defective construction.
The purpose of such walk-through is to list those items which are
uncompleted or defective, and the same shall not affect the "Completion" or
the "Commencement Date" of the Lease. Landlord shall use its reasonable
efforts to have the contractors complete and/or repair all "punchlist"
items promptly after receiving the completed punchlist from the
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<PAGE>
Tenant.
4.4 Cooperation Regarding Material Supplier or Contractor Warranties.
----------------------------------------------------------------
After the Warranty Period, Landlord agrees to cooperate with the Tenant at
no cost or expense to Landlord, to enforce any material supplier or
contractor's warranties as to the Shell and the Tenant Improvements.
5. DISPUTES AND ARBITRATION: Tenant may not offset rent regarding any alleged
------------------------
Landlord breach of the warranty under Paragraph 4. If Landlord and Tenant
have a dispute as to whether any construction item is defective or
constructed in a good and workmanlike manner, or whether Landlord is
responsible to repair same under Paragraph 4, or if there is a dispute as
to any items under Paragraph 2, then such dispute shall be resolved as
follows: Either Landlord or Tenant, by written notice to the other, may
request arbitration. The arbitration shall be conducted by Landlord's
licensed architect (except the space planner of the Tenant Improvements may
not be designated as an arbitrator), Tenant's designated licensed
architect, and a third licensed architect mutually appointed by Landlord's
architect and Tenant's architect. If Tenant fails to designate an
architect on behalf of Tenant as an arbitrator within five (5) days of
either Landlord's or Tenant's request for arbitration, then Landlord's
architect shall serve as the sole arbitrator. The arbitration shall
take place in Los Angeles County, California. Such arbitration shall
commence within thirty (30) days of the date that either party requests
arbitration to resolve such dispute. Landlord and Tenant shall equally pay
the costs of such arbitration and of the arbitrators. No transcript or
discovery shall be part of such arbitration. The decision of the majority
of the three architects (or the one architect arbitrator if Tenant fails to
appoints its architect arbitrator) shall be binding (and not appealable)
upon Tenant and Landlord. The decision of the arbitration may be entered
in any court of competent jurisdiction.
Landlord and Tenant have executed this Construction Rider to Lease on the date
of the Lease.
"Landlord"
Cypress Land Company,
a California limited partnership
By: Harvico, Inc., a California
corporation, General Partner
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<PAGE>
By:_____________________________
Brian L. Harvey, President
"Tenant"
Xylan Corporation,
a California corporation
By:_______________________________
Steve Kim, President
By:_______________________________
Susan Cayley, Secretary
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<PAGE>
EXHIBIT "A"
-----------
LEGAL DESCRIPTION OF PROPERTY
Lot 4 of Tract Number 32952, in the County of Los Angeles, State of California,
recorded in Book 1081, pages 30 through 34.
INITIALS ____________
____________
<PAGE>
EXHIBIT "B"
-----------
SHELL PLANS AND SPECIFICATIONS
1. A mezzanine deck of approximately 11,200 square feet.
2. 400-watt metal halide warehouse fixtures which provide 20-foot candles at
36 inches above floor level.
3. Warehouse walls to be painted flat white.
4. Warehouse floors to be sealed.
5. Electrical service to be 2000 amps, 277/480 volt, 3-phase, 4-wire.
6. Parking to accommodate at least 352 automobiles.
7. Landlord, as to the Shell portion of the Property, shall comply with the
Americans With Disabilities Act. Tenant shall be responsible for complying with
the Americans With Disabilities Act as to all of the Tenant Improvements and the
areas associated therewith. Specifically, Landlord shall not be required to
provide an elevator.
8. The following plans prepared by Nadel Architects Inc. dated April 3, 1998:
architectural pages 1.0 through 8.1; structural pages S1.1 through S5.8;
plumbing pages P1.0 through P2.3; electrical pages E1.0 through E4.3;
landscaping pages L1.1 through L3.3. Additionally, specifications prepared by
Nadel Architects Inc. dated December 1997.
9. Unless otherwise specified above, all materials and construction of the
Shell shall be to Landlord's normal quality and construction materials and
design.
INITIALS ____________
____________
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<PAGE>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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<SECURITIES> 22,070
<RECEIVABLES> 65,051
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