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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
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 0-25740
ACT NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
_____________________
DELAWARE 77-0152144
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
26707 WEST AGOURA ROAD, CALABASAS, CALIFORNIA 91302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 871-6400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price on Nasdaq National Market on August 31,
1999, the aggregate market value of the voting stock held by non-affiliates of
the registrant was $98,000,633.
As of August 31, 1999, there were 10,236,192 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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ACT NETWORKS, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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ITEM 1. BUSINESS..........................................................................1
ITEM 2. PROPERTIES.......................................................................14
ITEM 3. LEGAL MATTERS....................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS..............................14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............15
ITEM 6. SELECTED FINANCIAL DATA..........................................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................................................................17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................................22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................23
ITEM 11. EXECUTIVE COMPENSATION...........................................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................33
</TABLE>
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ITEM 1. BUSINESS
ACT Networks, Inc., a Delaware corporation ("ACT" or the "Company"), develops,
manufactures and markets multi-service access products that enable the
convergence of voice, video and data onto one managed network. Service providers
and enterprise customers use the Company's products to build converged networks
that are bandwidth efficient, cost-effective and easy to manage. The Company's
award-winning NetPerformer product incorporates advanced voice and data
compression algorithms, enhanced switching and traffic management capabilities,
and state-of-the-art hardware and software integration technologies.
The Company was incorporated in California in May 1987 under the name Advanced
Compression Technology, Inc., changed its name to ACT Networks, Inc. in May
1994, and reincorporated in the state of Delaware on May 2, 1995. The Company's
executive offices are located at 26707 West Agoura Road, Calabasas, California
91302 and its telephone number at that location is (818) 871-6400.
INDUSTRY BACKGROUND
The communications traffic of many organizations has grown steadily during the
past two decades due to increased use of distributed computing, electronic mail,
facsimile, electronic transaction processing, corporate-wide voice
communications systems and, more recently, the Internet. This evolution has led
to the use of wide area networks ("WAN") to provide interoffice information
access and communications, which in turn has produced an increasing need for
cost-effective, reliable and flexible WAN access solutions.
The WAN solutions available to an organization vary substantially depending on
the organization's size and communications needs, and the state of the local
telecommunications infrastructure. Large organizations with large amounts of
data traffic have traditionally relied upon wideband digital transmission
circuits (such as T1 and E1 and above) leased from public carriers to provide
voice, facsimile and data communications between regional offices.
Organizations with less data traffic, including middle market companies and
branch offices of large organizations, have traditionally used a combination of
low speed leased digital circuits (such as DDS 56K) for data and analog lines or
public switched telephone networks for voice and facsimile communications.
In international markets where the public telecommunication infrastructure is
generally less developed, organizations are increasingly relying on satellite
transmission ("VSAT") and other wireless media to build private networks to
transmit voice, facsimile and data between remote locations.
Conventional WANs are typically comprised of leased dedicated circuits, circuit
switching mechanisms and network access equipment based on time division
multiplexing ("TDM"). This approach has inherent limitations which may reduce
its cost-effectiveness in certain applications. The deployment of a leased
circuit to connect two remote sites is often inefficient because the entire
bandwidth capacity is dedicated to the organization 24 hours a day even during
periods of little or no communications traffic. Leased circuits are also
expensive and in many cases can comprise a significant portion of an
organization's total networking budget. In addition, conventional WAN solutions
are inflexible as bandwidth within the network is static between two fixed
points and cannot be dynamically switched among multiple locations on demand. As
a result, conventional WAN solutions are not ideally suited to the multimedia
transmission of data, voice and facsimile traffic.
In response to the need for services that allow the flexible allocation and
efficient utilization of bandwidth among multiple network sites, public carriers
began providing packet-switched services such as X.25. Although these services
generally cost less than dedicated digital circuits and provide reliable
transmission of low-speed asynchronous data, they impose substantial
transmission delays and thus are not well suited for high-speed synchronous
data, voice, facsimile and other delay-sensitive applications.
In the early 1990s two highly performant networking technologies emerged to
address the need for integrated, cost-effective, flexible WAN solutions: Frame
Relay and Asynchronous Transfer Mode ("ATM"). These high-speed packet/cell-based
networks provide significantly reduced network delays while still permitting
bandwidth capacity to be allocated on demand between any two endpoints on a WAN,
thereby improving utilization efficiency and supporting a broader range of
communications applications. More recently, "IP" (Internet Protocol) is
establishing itself as the WAN transmission protocol of choice among Internet
Service Providers ("ISPs") and next generation telephone companies.
The majority of public carriers and service providers in the United States and
around the world have deployed Frame Relay and/or ATM networks to provide
high-speed public services supporting voice and data traffic. They are now
implementing, or planning to implement, IP-based services, such as Virtual
Private Networking ("VPN") to complement their Internet offerings. Enterprises
are using Frame Relay, ATM and IP to integrate voice, data and facsimile traffic
over public and private WANs and are realizing greater efficiencies at an
inherently lower operating cost. Service providers rely on WAN access products
to bring traffic onto their networks and to deliver it to its destination, be it
another Frame Relay, ATM or IP-based network and the traditional telephone voice
network ("PSTN").
THE ACT SOLUTION
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ACT's WAN access products are designed to integrate voice, data and video
applications over Frame Relay, ATM and IP-based WANs. Enterprise customers and
service providers use the Company's products to build multimedia networks that
are bandwidth efficient, cost-effective and easy to manage. The Company's
products incorporate advanced voice and data compression algorithms, enhanced
switching and traffic management capabilities, and state-of-the-art hardware and
software integration technologies.
ACT's products are based on current international standards and are designed to
work with either terrestrial media (such as copper, fiber and coaxial
transmission lines) or wireless media (such as satellite, radio and microwave).
MARKETS AND APPLICATIONS
The following describes the primary markets and applications for the Company's
products:
The Enterprise Market: this market consists of companies that consolidate their
voice, data and facsimile applications over a private, or dedicated, wide area
network. For example, a large bank in Korea has deployed the Company's
integrated Frame Relay access devices to build an integrated private frame relay
network connecting approximately 350 sites. This network provides switched voice
and facsimile connectivity among these locations and concurrently supports both
SNA and LAN data applications. The enterprise market also consists of
organizations whose telecommunications requirements do not justify leasing
dedicated circuits for the purposes of establishing a private network. These
end-users contract with service providers to interconnect their remote offices
via public Frame Relay or ATM services, and more recently over IP, to eliminate
many of the problems and costs associated with managing and supporting a private
network. These customers install the Company's products on their premises to
aggregate their voice and data traffic for transmission via the service provider
of their choice.
The Service Provider Market: traditionally, telephone companies have provided
voice services and value added network service providers have provided data
transmission services. As a result of worldwide deregulation and the
liberalization of telecommunications policies, many new service providers have
emerged to offer competitive voice and data services. These service providers
deploy Frame Relay, ATM and/or IP networks to transport and manage voice and
data traffic over a network infrastructure that is inherently better suited to
transport multimedia traffic than the PSTN. These efficiencies are passed on to
the end-user in the form of higher throughput, increased connectivity and lower
costs. The Company markets its WAN access products to alternate service
providers (such as wholesale long-distance carriers and call-back operators),
value added network services providers, competitive local exchange carriers
("CLECs"), incumbent local exchange carriers ("ILECs"), competitive access
providers ("CAPs"), Internet Service Providers ("ISPs") and Interexchange
Carriers ("IXCs"). These customers deploy the Company's products within their
networks to achieve greater levels of traffic aggregation over their
transmission circuits, or at the premises of their end-user customers to bring
voice and data traffic onto their service networks.
PRODUCTS
The Company is migrating toward two principal product families, NetPerformer and
ServiceXchange, which share a common technology foundation but are targeted at
different market segments. NetPerformer is a family of multi-service access
products targeted at enterprise customers who need to integrate and transport
voice, fax, LAN and SNA data over private or public Frame Relay, IP or ATM
networks. ServiceXchange addresses the needs of service providers who are
especially focused on transporting large volumes of voice traffic cost
effectively over Frame Relay or IP backbones. Within each family, both
chassis-based and stand-alone configurations will be offered to serve specific
customer requirements for price, performance, density and feature set.
The common technology foundation that the two platforms share, the Packet Voice
Technology, has been developed or significantly enhanced over the past year, and
includes
o Voice Processing: New low-cost, high-density, DSP based voice processors,
which helps reduce the cost of the overall solution. The Company supports
more than a dozen voice processing algorithms, including, many of the
popular standards-based algorithms, as well as several higher-quality
proprietary algorithms.
o Signaling: Flexible voice signaling system, which enhances compatibility and
commonality with various public switch infrastructures.
o Networking: Key voice routing and gateway functions that improve network
resiliency and call completion reliability.
o Integration: Efficient, cell-based protocol and prioritization scheme, known
as PowerCell, which helps maintain toll-quality voice transmission, yet
ensures the delivery of mission-critical data.
The Company intends to leverage its Packet Voice Technology in future products.
NetPerformer
Designed to integrate voice, fax, SNA and LAN traffic over Frame Relay and
emerging IP and ATM-based public network services, NetPerformer addresses the
needs for branch, regional and central site internetworking with a low cost of
ownership. ACT offers two products that complement the NetPerformer line:
SkyPerformer (formerly SkyFrame) and MS-8000/9000.
NetPerformer enterprise WAN access products include:
o SDM-9500: modular, chassis-based central-site solution
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o SDM-9400: expandable analog/digital voice/fax/data solution for regional
offices
o SDM-9300/9350: low-cost voice/fax/data solutions for branch office
applications
o SDM-8300: data-only access device for regional offices
o SDM-8200: entry-level data-only solution for branch office applications
The Company intends to add additional variants in fiscal 2000 based on ACT's new
common technology foundation, which will offer a reduced cost basis, while
improving port density and overall system performance.
With NetPerformer enterprise WAN access products, organizations worldwide can
build private networks that are:
o Cost Effective: Integrating LAN, SNA, legacy data, voice and fax traffic
substantially cuts recurring communications costs;
o Bandwidth Efficient: Fast packet networking and advanced compression
capabilities (8:1 voice, 4:1 data) save bandwidth and money;
o Easy to Manage: Integrated traffic is managed via ACT's standards-based GUI
network management system, ACTview 2000.
SkyPerformer
In fiscal 1999, ACT implemented its strategy to focus on non-satellite based
enterprise applications for its NetPerformer and related products by (i)
discontinuing its SkyFrame product line (which was based on its legacy ACTnet
product line) and instead adding software-based satellite support (the
SkyPerformer) into its NetPerformer line; (ii) divesting its Wireless Network
Systems division in Phoenix, Arizona; and (iii) signing an OEM agreement with
Gilat Florida, Inc. ("Gilat"), a VSAT satellite solutions provider. The Gilat
partnership allows ACT to sell its SkyPerformer software through Gilat without
the need to develop satellite modem hardware to deliver VSAT based solutions.
Additionally, the Company is able to migrate networks from the legacy ACTnet
line to its newer NetPerformer line. SkyPerformer adds a satellite (VSAT)
networking dimension to the NetPerformer product line so that, in conjunction
with VSAT modem and solutions providers such as Gilat, ACT can offer end-to-end
voice, fax and data solutions, under one network management system, regardless
of the network topology used: satellite or wireline. SkyPerformer is deployed to
interconnect remote branch offices for small to medium size networks in markets
where geography, or the lack of wireline infrastructure, necessitate the use of
space-based communications facilities.
MS-8000/9000 Frame Relay Switches
ACT has a long-standing OEM partnership with Ascend Communications (now Lucent
Technologies ("Lucent") as a result of its acquisition of Ascend) where ACT
private-labels Ascend/Lucent frame relay switches. ACT bundles its NetPerformer
products with Ascend/Lucent's high-capacity Frame Relay switches to provide
performance, redundancy and scalability, allowing ACT's customers to deploy
large, cost-effective private networks.
ServiceXchange
ServiceXchange is a product line that forms the foundation of ACT's future
service provider offering, and shares the common technology foundation with the
NetPerformer family. The ServiceXchange SX-10, which began shipping in June
1999, is a highly-scalable, H.323-compliant, IP telephony gateway. The
ServiceXchange is designed for high density, packet telephony, fax and data
applications over IP, Frame Relay and the PSTN.
The SX-10, the entry-level system, supports four T1/E1 channels for 96/120
simultaneous calls. Other members of the ServiceXchange family will be
introduced at future dates to satisfy various price and density requirements.
The timing of the introductions will be largely dependent on a variety of
factors including, without limitation, the success of product development and
the evolution of the packet telephony market.
ACTview 2000 NMS
ACT has developed ACTview 2000, a fully-featured SNMP network management tool
that is optimized for the two strategic product families, yet manages the legacy
product lines offered by ACT and installed by its customers in the past. ACT
customers have the ability to manage all aspects of their networks, including
monitoring voice and data traffic, configuring nodes and expansion cards,
downloading new versions of software, and monitoring the health of the network
via an intuitive graphical user interface. Based on HP OpenView, operating on a
Windows NT or Windows 95/98 workstation, ACTView 2000 can be integrated with
other enterprise management applications to support a single, centrally-located
enterprise management system.
Legacy Products
ACT enhanced the ACTnet product line, composed of the SDM-JFP, SDM-FP and
SDM-DX, with features that improve compatibility with the NetPerformer family,
enabling long standing ACTnet customers to migrate to newer platforms. The
Company began discontinuing the SDM-T in fiscal 1999, and will continue
discontinuing the remaining legacy platforms in fiscal 2000 and migrate
customers to the NetPerformer and ServiceXchange platforms.
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CUSTOMERS
End users of the Company's products include financial institutions, government
agencies, retail chains, distribution companies and manufacturing organizations.
The Company's products are also used by public network service providers of all
types. A representative list of end users and service providers is set forth
below:
Domestic End-Users Alternative Service Providers
Bonnecker & Leigh IDT Telecommunications
First Chicago Bank DynaLink
Idaho National Guard Access Line
Intelsat DeTeSat (Germany)
National Semiconductor Teleglobe
Pyrodyne AT&T Alascom
South East Frozen Food Comsat do Brazil
Worldex Department of Telecom, India
Hewlett-Packard Entel-Chile
IMPSAT
International End-Users Infonet Services Corporation
Philippine Long Distance Company
American Express, Argentina Russtel, Russia
China Tax Authority Telefonica de Espana
Apple Computer, Australia Telefonica de Peru
Bank of Brazil Teleport Europe, Germany
Cheietsee, Japan Victori
Duty-Free, Australia
Industrial Bank of Korea
Memorex Telex, Australia
RadioCel/Biper, Mexico
Samsung, Korea
Ssangyong, Korea
TAM, Brazil
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SALES AND MARKETING
The Company markets and sells its enterprise-oriented products primarily
through its OEM partners, which include Lucent and FORE Systems Inc. ("FORE"),
and through a worldwide network of value-added resellers and systems
integrators. Because the WAN access needs of end users vary significantly from
market to market, the Company focuses on contracting with local resellers who
have the technical capability and the market presence to assist enterprises in
developing networking solutions to meet their particular needs. Additionally,
the Company leverages the product, service, and support resources of its OEM
partners to serve large, multi-national enterprise customers. The Company
devotes significant resources to educating its OEM partners and resellers as to
the benefits of the Company's products and to training them in the proper
installation and support of the Company's products. The Company's salespersons
support the Company's OEM partners and resellers in their marketing and sales
efforts, as does the marketing organization through a variety of support
programs.
The Company also sells its products directly to service providers and
large, multi-national enterprises. The Company believes that these customers can
best be served via a direct sales force, and the Company intends to continue to
increase the number of sales personnel focused on these customers.
In addition to Lucent, FORE and Gilat, the Company intends to increase
its direct marketing efforts to other major telecommunications product
manufacturers who offer a broader line of solutions. These manufacturers may
serve as resellers of the Company's products under private label, OEM or other
types of strategic relationships.
The Company's marketing efforts include participating in major
telecommunication trade shows, advertising in major trade journals, conducting
targeted, vertically-segmented marketing campaigns, publishing newsletters and
technical articles, and conducting training and conferences for OEM partners and
resellers. The Company also relies heavily on its web site for information
distribution, lead generation and qualification, and sales support (via sales
and reseller Intranet sites). As of June 30, 1999, the Company's marketing
department consisted of 17 full-time employees.
CUSTOMER SUPPORT AND TRAINING
The Company considers on-going technical support, training, service and
repair of its products an integral part of its business. The Company's standard
product warranty includes one-year factory hardware repair and a 90-day
dead-on-arrival express replacement service. In addition, the Company offers
extended out-of-warranty hardware repair and maintenance programs, software
upgrades, Internet problem resolution access and a 24-hour priority technical
support hot line. Other service programs include network design and analysis,
network optimizing and tuning, network staging and on-site installation and
troubleshooting. The Company's OEM partners, resellers and certain third party
service organizations provide additional customer support.
The Company offers its resellers a variety of training modules covering
product sales, technical matters and new products. The Company also offers
similar training programs to end-users. Classes are conducted regularly at the
Company's facility in Calabasas, California, and can be scheduled at the
customer premises.
PRODUCT DEVELOPMENT
The Company has spent approximately $8.3 million, $16.3 million and
$12.9 million during each of the fiscal years ended June 30, 1997, 1998 and
1999, respectively, on research and development activities. The Company's
current product development efforts are directed toward producing a common
technology foundation which can be leveraged to rapidly deliver new products in
order to meet the changing needs of customers in the enterprise and service
provider market segments. In particular, the Company intends to focus on the
completion of its NetPerformer line, the development of other products in the
NetPerformer family and the development of new capabilities for the
ServiceXchange family. The Company's product development efforts focus on the
following principles:
Develop New Products and Technology. The Company continually assesses
worldwide market trends with the focus of developing new products designed to
meet emerging market demands. In developing new products, the Company attempts
to combine its existing technology base (largely its extensive integrated voice
and data technology) with new technologies (such as IP and ATM, with a variety
of carrier-relevant physical layer interfaces, such as xDSL, on the network
side) to provide a broader range of networking solutions to the end-user.
Improve Existing Technology. The Company has, over time, amassed a set
of voice processing technologies and expertise, all captured as part of its
Packet Voice Technology ("PVT") suite. As voice processing technology becomes
generally available as licensable software or integrated chip sets, the Company
seeks to maintain differentiation by optimizing its PVT suite to maintain toll
quality, while continuing to reduce the bandwidth requirements and expand
industry compatibility and data integration. Additionally, the Company plans to
improve voice processing density by making use of newly-available high-power
digital signal processing technology.
Leverage Software-defined Products. With the Company's focus shifting
toward two strategic product platforms, NetPerformer and ServiceXchange, which
share common software-defined technology components, the Company is able to more
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rapidly enhance the products to meet emerging market needs. This strategy also
allows the Company to reduce hardware design changes and retooling costs, and to
accelerate the certification processes for new products.
The Company believes its future success will depend, in part, upon its
ability to expand and enhance the features of its existing products and to
develop and introduce new products designed to meet changing customer needs on a
cost-effective and timely basis. Failure by the Company to respond on a timely
basis to technological developments, changes in industry standards or customer
requirements, or any significant delay in product development or introduction,
could have a material adverse effect on the Company's business and results of
operations. There can be no assurance that the Company will respond effectively
to technological changes or new product announcements by others or that the
Company will be able to successfully develop and market new products or product
enhancements.
COMPETITION
The market for the Company's products is highly competitive. The Company
competes with a variety of companies offering multi-service access products,
which are split into two categories largely by their size. The larger
competitors, including such companies as Cisco Systems, Inc. ("Cisco"), Northern
Telecom ("Nortel"), Motorola Information Systems Group ("Motorola") and Lucent,
offer total solutions (including backbone products, access products, integration
and support) for large, multi-national customers.
Smaller, more specialized competitors, such as Memotec Communications,
Inc. ("Memotec") and Nuera Communications ("Nuera"), focus primarily on building
private Frame Relay networks for small-to-mid-size companies, or back-hauling
telephony traffic over international leased lines.
The Company plans to compete with its larger competitors by establishing
strategic partnerships with one or more of them. For example, the Company
entered into an OEM relationship with Lucent in August of 1998. The Company
plans to compete directly with the smaller competitors by highlighting product
and technology differentiators, and providing expert integration service and
support.
The Company expects substantial additional competition from existing
competitors and from a number of other companies which may enter the Company's
existing or future markets. Many of the Company's current and potential
competitors have substantially greater name recognition and financial,
marketing, sales, technical and other resources than the Company, as well as a
larger installed customer base. Many of these companies sell directly to
end-users, which the Company believes may provide a competitive edge over the
Company when marketing either similar products or alternative networking
solutions. Consolidations in the industry could enhance the capabilities of the
Company's competitors. Furthermore, the Company's OEM partners may in the future
develop competitive products and may decide to terminate their relationships
with the Company. There can be no assurance that the Company will be able to
successfully compete against either current or potential competitors or that
competition will not have a material adverse effect on the Company's business,
operation results and financial condition.
The principal competitive factors in the markets for the Company's
products are price, quality, product features, performance, reliability, product
reputation and customer support. The Company believes it presently competes
favorably in all of these areas.
MANUFACTURING
The Company's manufacturing operations consist primarily of supplier
management and quality assurance, as well as, some final assembly and
configuration, functional testing, burn in and shipping. The Company has
migrated most of its front end manufacturing to contract manufacturers and plans
to expand this migration to include the back end operations, including order
fulfillment and depot repair. By the end of fiscal 2000, the Company intends for
manufacturing operations to consist of supply chain management and quality
assurance, with emphasis on ensuring contract manufacturer compliance with
quality, cost and shipping schedule requirements. The Company believes that this
approach minimizes both inventory and capital expenditures while providing
support and capacity flexibility. The Company's facilities renewed their ISO9001
certification in fiscal year 2000.
The Company currently procures the bulk of its components from outside
suppliers, primarily through its contract manufacturers. The Company has
generally been able to obtain adequate supplies of all components in a timely
manner from existing sources. In order to minimize the risk of supply
interruption, the Company maintains quantities of selected parts and has
arrangements with various suppliers to maintain shelf stock to support its
near-term requirements. Some of these arrangements with alternative suppliers
and subcontractors obligate the Company to purchase the suppliers' shelf stock.
The Company resells Frame Relay switches purchased from Lucent. Although
the Company believes similar products can be purchased from other sources, the
process of qualifying replacement suppliers, generating the supporting
documentation, performing system level integration, obtaining
standards-compliant approval for its products, and retraining sales and
marketing channels would take a significant amount of time and expense. The
Company's ability to offer an integrated, cost effective networking solution is
based, in part, on its ability to sell such products as part of its present
line. The Company's inability to source these products at satisfactory quality
and quantity levels and with the appropriate lead time would adversely affect
the Company's business and operations.
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Certain components used in the Company's products are available only
from single sources. These include digital signal processors, microprocessors,
programmable gate array devices, power supplies and passive components. Although
the Company generally buys components under purchase orders and does not have
long-term agreements with its suppliers, it expects its suppliers, most of whom
are large companies such as Texas Instruments and Motorola, to be able to
continue to satisfy its requirements. Although the Company believes that
alternative sources are available, if the Company's ability to obtain these
components were impaired or interrupted for any reason, there could be a
substantial disruption in the supply of the Company's products, which could
adversely affect the Company's business operating results and financial
condition.
GOVERNMENTAL REGULATION
The Company's products are subject to regulations promulgated by the
Federal Communications Commission ("FCC") regarding emission of electromagnetic
energy, which may interfere with other equipment. All of the Company's current
products have been tested and comply with the relevant FCC regulations and with
all required Underwriters Laboratories safety specifications.
The Company's products are also subject to extensive governmental
regulation and product certification in certain foreign countries. These
regulations and product certification requirements are often significantly more
stringent and burdensome than the regulations to which the Company's products
are subject in the United States. In addition, the certification process to
which the Company must subject its products before they can be marketed in such
countries is time consuming and expensive.
Resellers in many countries have title to the governmental
authorizations and certifications necessary to market the Company's products in
such country, and there is no assurance that, in the event a reseller ceased
marketing the Company's products, the reseller would transfer such authorization
or certification to the Company or that the expense and delay associated with
obtaining a new authorization or certification would not adversely affect the
Company's business and operations in such country. There can be no assurance
that resellers will continue to market the Company's products or devote the
resources necessary to provide effective sales and marketing support to the
Company.
PROPRIETARY RIGHTS
The Company does not hold any patents and historically has relied on a
combination of contractual rights, trade secrets, copyright and trademark law
and technical measures to establish and protect its proprietary rights in its
products. However, the Company is currently seeking patent protection for
certain of its technologies. Although the Company relies to a great extent on
trade secret protection for much of its technology, and obtains confidentiality
agreements from its employees, consultants and other third parties to whom the
Company reveals confidential information pursuant to their business
relationships, there can be no assurance that third parties will not
independently develop the same or similar technology, obtain unauthorized access
to the Company's proprietary technology or misuse the technology to which the
Company has granted them access. The Company has substantial international
operations and the laws of foreign countries treat the protection of proprietary
rights differently from, and may not protect the Company's proprietary rights to
the same extent as do, laws in the United States.
Certain technology licensed from third parties is incorporated in the
Company's products. For example, the Company licenses certain of its voice
compression algorithms, the right to commercialize its SkyPerformer products,
components of its network management system software and other software and
technology embedded in the hardware incorporated into the Company's products
pursuant to nonexclusive license agreements. The failure of the Company to
retain such licenses or obtain new licenses as improvements in such technology
are developed and new technology is introduced could adversely affect the
Company's business and results of operations.
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 never conducted a comprehensive patent search relating to the
technology used in its products. Accordingly, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future 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. In addition, the Company has
in the past, and may in the future, pay significant sums to obtain licenses from
third parties to avoid the costs and uncertainties associated with defending a
potential claim. 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 and results of operations.
EMPLOYEES
As of August 31, 1999, the Company employed 230 full-time persons,
including 39 in operations, 65 in sales and marketing, 16 in customer service,
81 in engineering and 29 in finance and administration. The Company also employs
a small
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number of temporary and contract employees. None of the Company's employees is
represented by a labor union. The Company is not a party to any collective
bargaining agreement or other similar agreement. The Company has experienced no
work stoppages to date. The Company believes that its relationship with its
employees is good.
RISK FACTORS
This report may contain forward-looking statements that involve a number
of risks and uncertainties. Certain results that could cause actual results to
differ are discussed below. The Company's actual results may differ materially
from any future performance discussed in forward-looking statements. The
following risks should be considered carefully, in addition to the other
information contained in this Report, before trading in the shares of the
Company's Common Stock.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced and may
in the future experience significant fluctuations in net sales and operating
results as a result of a number of factors including, without limitation, the
volume and timing of orders from, and shipments to, major customers,
particularly Lucent; market acceptance of the Company's products; the Company's
ability to support its current and new products; the ability of the Company's
customers, particularly international customers, to obtain financing for the
purchase of the Company's products; economic issues in international markets;
changes in the Company's strategies; changes in pricing policies or price
reductions by the Company or its competitors; variations in the Company's sales
channels or the mix of product sales; the Company's ability to expand and
implement its sales and marketing programs; the timing of new product
announcements and product introductions by the Company or its competitors;
product obsolescence resulting from new product introductions or changes in
customer demand; the availability and cost of supplies; the financial stability
of major customers; expenses associated with the acquisition of technologies or
businesses; changes in regulatory requirements; intellectual property disputes;
the development of public telecommunications infrastructures, particularly in
international markets; currency fluctuations; and general economic conditions.
While the Company regularly engages in price discounting, significant discounts
in a particular quarter could adversely affect the results of operations for
such quarter. In addition, significant and continuing discounts due to
competition or other factors could adversely affect the Company's business,
operating results and financial condition. The Company has generally not
experienced seasonality in its net sales, although the Company has from time to
time experienced decreased net sales to customers in Europe in the third
calendar quarter of each year and has experienced some decreases in net sales in
other international markets during certain periods during the year. Due to all
of the foregoing factors, in certain quarters the Company's operating results
have been, and it is likely that in some future periods the Company's operating
results will be, below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock has been and in the
future could be materially adversely affected. For example, on several occasions
over the last few years, the Company's net sales decreased when compared to the
preceding quarter and, as a result, the Company's results of operations and, in
certain instances, the price of the Company's Common Stock were adversely
affected. Quarterly results are not necessarily indicative of future performance
for any particular period, and there can be no assurance that the Company will
attain growth in net sales or profitability on a quarterly or annual basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's sales are primarily through OEM partners and resellers and
are typically characterized by several large orders and a large number of small
orders. The Company's revenue in any period is highly dependent on the sales
efforts and success of the Company's OEM partners (including Lucent and FORE)
and other resellers, which are not under the Company's control. The Company's
resellers typically do not stock a supply of the Company's products and place
orders with the Company only after they have received orders from their
customers. The Company has limited information as to the sell-through of its
products to OEM partners. There is no assurance that even if an OEM partner does
purchase products in a quarter, that the partner will sell such products to its
customers. Any reduction or delay in sales of the Company's products by its OEM
partners could have a material adverse effect on the Company's business,
operating results and financial condition. The Company generally realizes a
lower gross margin on sales through its OEM partners. Accordingly, if the
Company's OEM partners were to account for an increased portion of the Company's
net sales, gross margins would decline. In addition, the Company's backlog at
the beginning of a quarter is generally insufficient to achieve expected net
sales for the quarter. To achieve its revenue objectives, the Company is
dependent upon obtaining orders in a quarter for shipment in that quarter. While
it is difficult for the Company to accurately forecast the timing and quantity
of orders on a quarter to quarter basis, the Company may increase expenses with
the expectation of future sales. The failure of the Company to accurately
forecast the timing and volume of orders for a quarter would adversely affect
the results of operations for such quarter and, potentially, for future periods.
Fluctuations in quarterly results may result in significant volatility in the
market price of the Company's Common Stock. In addition, sales of networking
products fluctuate from time to time based on numerous factors, including
capital spending levels and general economic and market conditions. Future
declines in networking product sales, as a result of general economic conditions
or for any other reason, could have a material adverse effect on the Company's
business, operating results and financial condition.
LIMITED HISTORY OF PROFITABILITY; UNCERTAIN FUTURE PROFITABILITY. The Company
has incurred losses in recent quarters. There can be no assurance that the
Company will be profitable in future periods. In the past, the Company has
expanded its level of operations, resulting in increased fixed costs and
operating expenses, with the expectation of increased sales and gross profits.
The Company's operating results and net income were
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adversely impacted as net sales and gross profits did not increase sufficiently
to offset such increased expenses. The Company commenced a restructuring program
in July 1998 to decrease expenses. The Company completed its restructuring in
its second fiscal quarter of 1999. Since then, the Company has increased its
investments in sales and marketing and related infrastructures. If the Company
increases its operating expenses, the Company's operating results will be
adversely affected if revenue and gross profits do not also increase. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUBSTANTIAL COMPETITION. The market for the Company's products is highly
competitive and subject to frequent product introductions with improved price or
performance characteristics, significant price reductions, rapid technological
change and continued emergence of new industry standards. The Company competes
directly domestically and internationally with a variety of companies offering
multi-service access products including Cisco, Nortel, Memotec, Motorola, Lucent
and other companies. The Company expects substantial additional competition from
existing competitors and from a number of other companies which may enter the
Company's existing or future markets. Many of the Company's current and
potential competitors have substantially greater name recognition and financial,
marketing, sales, technical and other resources, as well as a larger installed
customer base, than the Company. Many of these companies sell directly to
end-users, which the Company believes may provide a competitive edge over the
Company when marketing either similar products or alternative networking
solutions. In addition, many of these companies offer a more comprehensive
networking solutions to their customers than the Company. Consolidations in the
industry could enhance the capabilities of the Company's competitors.
Furthermore, the Company's OEM partners may in the future develop competitive
products and may then decide to terminate their relationships with the Company.
There can be no assurance that the Company will be able successfully to compete
against either current or potential competitors or that competition will not
have a material adverse effect on the Company's business, operating results and
financial condition.
CUSTOMER CONCENTRATION; DEPENDENCE ON PARTNERS. A small number of customers have
historically accounted for a substantial portion of the Company's net sales.
During the fiscal years ended June 30, 1997, 1998 and 1999, the Company's five
largest customers collectively accounted for 36%, 35% and 44%, respectively, of
net sales. In many instances, the Company's major customers in any given period
have ordered significantly fewer products in future periods. The Company
believes that this has been due, in part, to customers who make large, one-time
purchases to set up their communications infrastructure, after which such
customers do not require further significant purchases. In addition, the Company
believes this may be due to a variety of other factors, including, without
limitation, the economic conditions in various countries, particularly those in
Asia and South America. Therefore, the Company expects that its major customers
will fluctuate from period to period. There can be no assurance that a major
customer will not reduce or delay the amount of products ordered from the
Company or significantly change the terms upon which the Company and such
customer do business. Any such reduction, delay or change could have a material
adverse effect on the Company's business.
The Company's sales and marketing strategy is to focus on developing
distribution channels with major communications companies. The Company has
entered into reseller agreements with Lucent and FORE and is allocating
significant resources to these relationships. The reseller agreements do not
require minimum purchases. There is no assurance that Lucent or FORE will become
or will continue to be significant customers of the Company. For the fiscal year
ended June 30, 1999, sales to Lucent and Impsat accounted for 13% and 10%,
respectively, of the Company's revenue. There is no assurance that Lucent or
Impsat will continue to purchase the Company's products. Any reduction or delay
in sales of the Company's products to significant customers could have a
material adverse effect on the Company's business, operating results and
financial condition. Furthermore, there can be no assurance that the Company
will retain its current OEM partners or that it will be able to establish
relationships with new partners or replace its current partners. The loss of one
or more of the Company's OEM partners could have a material adverse effect on
the Company's business, operating results and financial condition. The Company
generally realizes a lower gross margin on sales to its OEM partners.
Accordingly, if the Company's OEM partners were to account for an increased
portion of the Company's revenue, its gross margins would decline.
DEPENDENCE ON CONTRACT MANUFACTURING. The Company's operational strategy is to
further rely on outsourcing of its manufacturing. The Company also intends to
streamline its manufacturing operations by focusing on a small number of
manufacturing contractors. Accordingly, the risks associated with reliance on
sole sources are expected to increase. Any interruption or delay by the
Company's contract manufacturers could have a material adverse effect upon the
Company's business, operating results and financial condition. The Company may
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 and
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 customers and end-users in the future.
DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT. The Company's success is dependent
in large part on its executive officers, senior management and sales and
technical personnel. Since July 1998, the Company has undergone numerous
personnel changes in all levels of the organization as a result of a
restructuring and other factors. The failure of new management and other
personnel to fully integrate into the Company's operations and to
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execute the Company's strategy, and the failure of the Company to retain such
management and other personnel, could have a material adverse effect on the
Company's business. The Company's success will be dependent on its continued
ability to attract, retain and motivate highly skilled employees, who are in
great demand. There can be no assurance that the Company will be able to do so.
TECHNOLOGICAL CHANGE, CHANGING MARKETS AND NEW PRODUCTS. The market for the
Company's products is characterized by rapid technological advances, evolving
industry standards, frequent new product introductions and enhancements, and
significant price competition. The introduction of products involving superior
or alternative technologies, the emergence of new industry standards,
governmental regulations, changes in a market's pricing structure and other
factors could render the Company's existing products, as well as products under
development, obsolete and unmarketable in one or more markets which could
adversely affect the Company's business, operating results and financial
condition. The Company has experienced instances where one or more of those
factors resulted in a significant decrease in sales of the Company's products in
particular markets or resulted in new products becoming obsolete or
unmarketable. The Company's success will depend, in part, on the viability of
the Company's products in its markets and the ability of the Company to develop
effective distribution channels to address these markets. There can be no
assurance that the Company's products will be widely accepted. Failure of the
Company's products to achieve market acceptance could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company believes its future success will depend, in part, upon its
ability to expand and enhance the features of its existing products and to
develop or acquire and introduce new products designed to meet changing customer
needs on a cost-effective and timely basis. In particular, the completion of the
development and successful commercial release of the ServiceXchange family of
products is critical to the Company's strategies. Failure by the Company to
respond on a timely basis to technological developments, changes in industry
standards or customer requirements, or any significant delay in product
development or introduction (particularly the ServiceXchange products), 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 respond
effectively to technological changes or new product announcements by others or
that the Company will be able to successfully develop and market new products or
product enhancements and that any new product or product enhancement will gain
market acceptance.
Inherent in the product development process is a number of risks. The
development of new, technologically advanced products and product enhancements
is a complex and uncertain process requiring high levels of innovation, as well
as the accurate anticipation of technological and market trends. The Company
allocates research and development expenditures based on planned product
introductions and enhancements; however, actual expenditures may significantly
differ from allocated expenditures. There can be no assurance that the Company
will successfully identify, develop or introduce new products or product
enhancements. Products such as those offered by the Company may contain
undetected or unresolved software errors when they are first introduced or as
new versions are released. There can be no assurance that, despite extensive
testing by the Company, software errors will not be found in new products or
upgrades after commencement of commercial shipments, resulting in delay in or
loss of market acceptance. Future delays in the introduction or shipment of new
or enhanced products, the inability of such products to gain market acceptance
or problems associated with new product transitions could adversely affect the
Company's operating results, particularly on a quarterly basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INTEGRATION OF ACQUISITIONS. The Company has acquired, and may in the future
acquire, complementary technologies and businesses. Acquisitions by the Company
may result in potentially dilutive issuances of equity securities, the
incurrence of additional debt, the creation and amortization of goodwill and the
incurrence of acquisition related expenses, all of which could adversely affect
the Company's results of operations. In addition, acquisitions involve numerous
risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired businesses; the diversion of
management's attention from other business concerns; risks associated with the
Company's entering markets in which it has no or limited direct prior
experience; and the potential loss of key employees of the acquired company. The
Company has engaged in several acquisitions in the past which resulted in
increased expenses without a commensurate increase in net sales. These
acquisitions have also adversely impacted the Company's results of operations
due to in-process research and development expenses, the write down of tangible
and intangible assets and other factors. In the event the Company engages in
additional acquisitions, no assurances can be given as to the effect thereof on
the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANAGEMENT OF GROWTH. The Company has from time to time experienced growth in
its operations, both internally and as a result of acquisitions. The Company's
growth has placed, and will continue to place, strain on the Company's
managerial, operational and financial resources, systems and controls. This is
particularly true with respect to sales in international markets since each
specific international market has its own unique regulatory, financial,
technical, customer and other characteristics which often require the Company to
devote significant resources to sell products in that country. The Company's
future operating results will depend on its ability to attract, hire and retain
skilled employees, and to expand and improve the Company's operational, product
development, management information and financial systems and controls. The
Company continues to upgrade its management information and product development
systems. The Company's failure to manage growth effectively, successfully
upgrade its systems or to hire, retain and integrate necessary qualified
personnel could adversely affect the Company's business, operating results and
financial condition.
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INTERNATIONAL SALES, TARIFF AND REGULATORY MATTERS. Sales of the Company's
products to customers outside of North America accounted for approximately 75%,
64% and 51% of the Company's net sales for the fiscal years ended June 30, 1997,
1998 and 1999, respectively. The Company expects that international sales will
continue to account for a significant portion of the Company's net sales in
future periods. International sales are subject to certain inherent risks,
including unexpected changes in regulatory requirements and tariffs,
difficulties in staffing and managing foreign operations, potentially adverse
tax consequences and problems in collecting accounts receivable. A significant
number of the Company's products are sold or installed in countries, including
several in South America and Asia, where political or economic issues have
adversely affected, and may in the future adversely affect, the purchasing
decision of customers. The Company believes that recent events in Asia and Latin
America have adversely impacted, and will continue to adversely impact, the
Company's net sales in these regions in the near term. Although the Company's
sales are currently denominated in U.S. dollars, fluctuations in currency
exchange rates have in the past caused, and could in the future cause, the
Company's products to become relatively more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that
country and potentially leading to an extension of payment terms. Furthermore,
future international activity may result in foreign currency denominated sales
and, in such event, gains and losses on the conversion to U.S. dollars of
accounts receivable and accounts payable arising from international operations
may contribute to fluctuations in the Company's results of operations. The
financial stability of foreign markets could also affect the Company's
international sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Rates for telecommunications services are governed by tariffs of
licensed carriers that are subject to regulatory approval. Future changes in
these tariffs could have a material adverse effect on the Company's business.
For example, should tariffs for public switched digital services increase in the
future relative to tariffs for private leased services, the cost-effectiveness
of certain of the Company's products would be reduced, and its business and
results of operations could be adversely affected. In addition, the Company's
products must meet standards and receive certification for connection with the
public telecommunications networks of a country prior to their sale in such
country. In the United States, for example, the Company's products must comply
with certain regulations promulgated by the Federal Communications Commission.
Domestic telecommunications carriers must also certify the Company's products.
In foreign countries, the Company's products are subject to a wide variety of
governmental review and certification requirements. From time to time, foreign
governments have altered certification or regulatory requirements, which has
adversely impacted the Company's ability to sell products in such markets. Any
future inability to obtain on a timely basis or retain domestic certificate or
foreign regulatory approvals could have a material adverse effect on the
Company's business, operating results and financial condition.
RELIANCE ON THIRD PARTY SUPPLIERS. The Company relies on third party suppliers
who supply the components used in the Company's products. The unavailability of
certain components from current suppliers, especially custom designed components
for the Company, could result in delays in the shipment of the Company's
products as well as additional expenses associated with obtaining and qualifying
a new supplier. In addition, certain key components used in the Company's
products are available only from single sources and the Company does not have
long term contracts ensuring the supply of such components. As the Company
typically maintains less than 90 days supply of such components, there can be no
assurance that components will be available to meet the Company's future
requirements at favorable prices, if at all. The Company's inability to obtain
components in a timely manner would materially and adversely affect the
Company's business and financial condition. In addition, any significant
increase in component prices could also adversely affect the Company's results
of operations. The Company resells Frame Relay switches purchased from Ascend
(now Lucent). Although the Company believes similar products can be purchased
from other sources, the process of qualifying replacement suppliers, generating
the supporting documentation, performing system level integration, obtaining
standards-compliant approval for its products and retraining sales and marketing
channels would require a significant amount of time and expense. The Company's
ability to offer an integrated, cost effective networking solution is based, in
part, on its ability to sell such products as part of its present line. The
Company's inability to source these products at satisfactory quality and
quantity levels and with the appropriate lead time would adversely affect the
Company's business, operating results and financial condition.
RELIANCE ON INDIRECT DISTRIBUTION. The Company markets and sells products
domestically and internationally primarily through its OEM partners and
resellers, such as distributors, value-added resellers and system integrators.
The number of qualified resellers in certain countries is limited. Resellers
typically are not effective at selling the Company's products until they have
been trained and have successfully completed several sales. The Company's
performance depends in part on attracting, retaining and motivating such
resellers. Certain of the Company's resellers also act as resellers for
competitors of the Company and could devote greater effort and resources to
marketing competitive products. The Company's OEM partners and resellers are
generally provided discounts and, occasionally, are entitled to special pricing
or distribution arrangements, the effect of which is to decrease the Company's
gross margins. While the Company has contractual relationships with its OEM
partners and many of its resellers, these agreements do not require the OEM
partners or resellers to purchase the Company's products and can generally be
terminated on short notice. Resellers in many countries have title to the
governmental authorizations and certifications necessary to market the Company's
products in such country, and there is no assurance that, in the event a
reseller ceased marketing the Company's products, the reseller would transfer
such authorization or certification to the Company or that the expense and delay
associated with obtaining a new authorization or certification would not
adversely affect the Company's business and operations in such country. There
can be no assurance that the Company's OEM partners or resellers will continue
to market the Company's products or devote the resources necessary to provide
effective sales and marketing support to the
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Company. In addition, the Company is dependent on the continued viability and
financial stability of its resellers, many of which are small organizations with
limited capital. The loss of any key partner or reseller could adversely affect
the Company's business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success will depend
in part on its proprietary technology. In addition, certain technology licensed
from third parties is incorporated in the Company's products. In particular, the
Company licenses certain of its voice compression algorithms, the right to
commercialize its SkyPerformer products, components of its network management
system software and other software and technology embedded in the hardware
incorporated into the Company's products pursuant to nonexclusive license
agreements. The failure of the Company to retain such licenses or obtain new
licenses as improvements in such technology are developed and new technology is
introduced could adversely affect the Company's business. The Company does not
currently hold any patents. The Company relies principally on copyright, trade
secret and contract law to protect its proprietary technology. There can be no
assurance that such measures are adequate to protect the Company's proprietary
technology. The Company has substantial international operations and the laws of
foreign countries treat the protection of proprietary rights differently from,
and may not protect the Company's proprietary rights to the same extent as do,
laws in the United States. Since patent applications in the United States are
not publicly disclosed until the patent is issued, applications may have been
filed which, if issued as patents, would relate to the Company's products. In
addition, the Company has never conducted a comprehensive patent search relating
to the technology used in its products. Accordingly, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future 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. The Company has in the past,
and may in the future, pay significant sums to obtain licenses from third
parties to avoid the costs and uncertainties associated with defending a
potential claim. 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, operating results and financial
condition.
YEAR 2000. The Year 2000 issue is the result of computer programs that were
written using two digits rather than four to define the applicable year;
accordingly, computer programs that have time-sensitive software or firmware may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations including, among other things, an inability to process transactions,
send invoices or engage in similar normal activities.
The Company's primary internal information systems currently operate
with application software and an operating system represented by the respective
suppliers as Year 2000 compliant. Costs incurred by the Company to upgrade to
compliant versions of such software have not been material. The Company has
performed internal testing of each of its products and expects to continue such
testing for developing products. Based on its testing to date, the Company
believes that its current products are substantially Year 2000 compliant. The
Company has not had, and has no present intention to have, its products tested
by an independent lab. The Company does not expect that the costs to continue
the testing program related to the Year 2000 will have a material impact on
operations or financial results. However, the inability of any of the Company's
products to process year 2000 data accurately could result in increased costs
and liabilities which could have a material adverse effect upon the Company's
operations and financial condition. The Company believes that there are two
predominant sources of third party risk for the Company with respect to the Year
2000 issue. The Company depends on turnkey manufacturers of components for its
manufacturing process and disruption of operations at such a supplier, whether
due to Year 2000 non-compliance or not, could negatively impact the Company's
shipment schedule and operations. In the event that the systems of significant
suppliers are not converted or modified in a timely manner to make the Year 2000
compliant, there could be material adverse effect on the Company's business and
financial results. The Company also has a number of large customers which
include end-users, resellers and the Company's OEM partners. The Company's top
five customers generated 44% of net sales in the fiscal year ended June 30,
1999. Year 2000 non-compliance at such customers' sites could negatively impact
sales to such customers by disrupting the networks of such customers or their
customers, in the case of resellers. The Company has surveyed specific major
suppliers to assess the potential impact, if any, of Year 2000 non-compliance on
the part of such suppliers. None of the vendors responding indicate any expected
difficulty in carrying on their business with the Company due to the Year 2000
issue. The Company has not conducted a comprehensive survey of major customers
to assess the potential impact, if any, of Year 2000 non-compliance. Any failure
of the Company's suppliers and customers to resolve their Year 2000 problems in
a timely manner could result in a material disruption of the Company's business.
Any such disruption could have a material adverse effect upon the business and
financial results of the Company. In the event that the Company's internal
system or systems of significant outside vendors are not converted or modified
in a timely manner to make them Year 2000 compliant, there could be a material
adverse effect upon the business and financial results of the Company. The
Company does not have a contingency plan in place to address such an event and
does not presently intend to create one.
VOLATILITY OF STOCK PRICE. The trading price of the Company's Common Stock has
undergone significant fluctuations and is expected to continue to be subject to
significant fluctuations in response to variations in quarterly operating
results, the gain or loss of significant contracts, changes in management,
announcements of technological innovations or new products by the
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Company or its competitors, legislative or regulatory changes, general trends in
the industry and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market price for many high technology companies and which have
often been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company anticipates
that available cash and cash flow from operations will be adequate to satisfy
its capital requirements through at least the next 12 months. The Company's
future capital requirements will depend on many factors including, but not
limited to, the cost of acquisitions of businesses, products and technologies,
the levels at which the Company maintains inventory, the market acceptance of
the Company's products, the levels of promotion and advertising required to
launch such products and attain a competitive position in the marketplace, and
the extent to which the Company invests in new technology and improvements to
its existing technology. To the extent that existing resources and future
earnings are insufficient to fund the Company's activities, the Company may need
to raise additional funds through public or private financing including equity
financing. If additional funds are raised through the issuance of equity
securities, the percentage ownership of then current stockholders of the Company
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. No
assurance can be given that additional financing will be available or that, if
available, it can be obtained on terms favorable to the Company and its
stockholders. The Company's lack of authorized Preferred Stock could hinder the
Company's ability to obtain financing. If adequate funds are not available, the
Company may be required to delay, scale back or eliminate some or all of its
research and development, to curtail its operations significantly or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies or potential
markets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation provides for a Board of Directors with staggered terms, which may
discourage or prevent certain types of transactions involving an actual or
potential change in control of the Company, including transactions in which the
stockholders might otherwise receive a premium for their shares over then
current market prices. Certain provisions of Delaware law applicable to the
Company, including Section 203 of the Delaware General Corporation Law, could
have the effect of delaying, deferring or preventing a change of control of the
Company. It is possible that the staggered board and Section 203 of the Delaware
General Corporation Law may have the effect of delaying, deferring or preventing
a change of control of the Company, may discourage bids for the Company's Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price of the Common Stock.
LACK OF DIVIDENDS. The Company has never paid cash dividends on shares of its
capital stock. The Company currently intends to retain any future earnings in
its business and does not anticipate paying any cash dividends in the future.
13
<PAGE> 16
ITEM 2. PROPERTIES.
The Company's principal administrative, engineering and manufacturing
facilities are located in one 58,979 square foot leased facility in Calabasas,
California, under a lease that expires on June 30, 2006. The base rent is
currently approximately $81,400 a month. In addition to the base rent, the
Company pays its share of the operating expenses, property tax, and insurance
premiums on the building. The Company also leases 15,000 square feet of space in
Montreal, Canada and 14,000 square feet in Manassas, Virginia. ACT maintains
small sales support offices in the United Kingdom, Australia, Mexico, Singapore
and in the State of Texas. The Company believes its facilities are adequate for
its current needs and that suitable additional or substitute space will be
available as needed.
ITEM 3. LEGAL MATTERS.
The Company has no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of security-holders during the quarter
ended June 30, 1999.
14
<PAGE> 17
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the fiscal periods indicated, the range
of high and low closing sale prices of the Common Stock as quoted on The Nasdaq
Stock Market.
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
- ----------- ---- ---
<S> <C> <C>
2000
1st Quarter (through September 15, 1999) $18 1/4 $8 9/16
FISCAL YEAR HIGH LOW
- ----------- ---- ---
1999
4th Quarter 23 7/8 14 7/16
3rd Quarter 19 1/4 11 1/8
2nd Quarter 14 6 1/16
1st Quarter 9 3/16 4 15/16
FISCAL YEAR HIGH LOW
- ----------- ---- ---
1998
4th Quarter 15 8 3/4
3rd Quarter 13 7 7/8
2nd Quarter 12 3/4 7
1st Quarter 15 7/8 11 11/16
</TABLE>
As of September 15, 1999, there were approximately 65 record holders of the
Company's Common Stock. On September 15, 1999, the last reported sale price of
the Common Stock on the Nasdaq National Market was $8.88 per share.
DIVIDEND POLICY
The Company has never paid cash dividends on shares of its capital
stock. The Company currently intends to retain any future earnings for use in
its business and does not anticipate paying any cash dividends in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
15
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data with respect to the Company's
statements of operations for each of the five fiscal years ended June 30, 1995,
1996, 1997, 1998 and 1999 and the balance sheet data at June 30, 1995, 1996,
1997, 1998 and 1999 are derived from the audited financial statements of the
Company. The financial statements and the related report of independent auditors
for the fiscal years ended June 30, 1995 and 1996 are not included in this
Report. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Financial Statements of the Company and the related
notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 20,566 $ 28,404 $ 49,173 $ 54,964 $ 54,322
Cost of goods sold 9,244 13,998 21,431 29,900 24,412
--------------------------------------------------------------------------
Gross profit 11,322 14,406 27,742 25,064 29,910
Operating expenses:
Research and development 3,586 5,027 8,344 16,349 12,887
Sales and marketing 4,785 7,174 11,115 15,984 13,961
General and administrative 1,736 3,257 5,291 8,935 7,925
In-process research and development -- 5,600 3,416 6,750 --
Impairment and restructuring -- -- -- 3,393 607
--------------------------------------------------------------------------
10,107 21,058 28,166 51,411 35,380
--------------------------------------------------------------------------
Income (loss) from operations 1,215 (6,652) (424) (26,347) (5,470)
Gain on sale of investment -- -- -- 4,704 120
Net interest income and other income
(expense) 69 1,220 3,327 2,419 2,260
--------------------------------------------------------------------------
Income (loss) before income taxes 1,284 (5,432) 2,903 (19,224) (3,090)
Provision for income taxes 22 295 1,420 157 36
--------------------------------------------------------------------------
Net income (loss) $ 1,262 $ (5,727) $ 1,483 $(19,381) $ (3,126)
==========================================================================
Earnings (loss) per share
Basic $ 0.72 $ (0.78) $ 0.16 $ (2.11) $ (0.32)
Diluted $ 0.24 $ (0.78) $ 0.15 $ (2.11) $ (0.32)
Shares used in per share calculations
Basic 1,753 7,308 9,184 9,170 9,644
Diluted 5,211 7,308 9,973 9,170 9,644
AS OF JUNE 30,
--------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital $ 38,235 $ 84,747 $ 81,982 $ 66,145 $ 71,245
Total assets 42,847 93,851 100,696 80,838 85,641
Total long-term debt, excluding
current maturities - 147 - - -
Accumulated deficit (2,304) (8,036) (6,652) (25,933) (29,059)
Total stockholders' equity (1) 40,316 90,140 93,538 72,517 76,919
</TABLE>
___________
(1) The Company has never paid cash dividends on shares of its capital stock.
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Financial Statements and related Notes thereto contained elsewhere in this
Report. This Report contains forward-looking statements that involve a number of
risks and uncertainties including, without limitation, those set forth in
"Business--Risk Factors." The Company's actual results may differ materially
from any future performance discussed in the forward-looking statements and in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.
GENERAL
ACT develops, manufactures and markets multi-service access products
that enable the convergence of voice, video and data onto one managed network.
Service providers and enterprise customers use the Company's products to build
converged networks that are bandwidth efficient, cost-effective and easy to
manage. The Company's award-winning NetPerformer product incorporates advanced
voice and data compression algorithms, enhanced switching and traffic management
capabilities, and state-of-the-art hardware and software integration
technologies.
The Company is migrating toward two principal product families,
NetPerformer and ServiceXchange, which share a common technology foundation but
are targeted at different market segments. NetPerformer is a family of
multi-service access products targeted at enterprise customers who need to
integrate and transport voice, fax, LAN and SNA data over private or public
Frame Relay, IP or ATM networks. ServiceXchange addresses the needs of service
providers who are especially focused on transporting large volumes of voice
traffic cost effectively over Frame Relay or IP backbones. Within each family,
both chassis-based and stand-alone configurations will be offered to serve
specific customer requirements for price, performance, density and feature set.
The Company's future results will be dependent upon a variety of factors
including, without limitation, the Company's ability to develop and release new
products in a timely manner and within anticipated budgets. While the Company
anticipates the release of new products in fiscal 2000, there can be no
assurance that such products will be released when anticipated or that such
products will achieve market acceptance.
The Company anticipates that, in general, the average sales price for
its products will decrease over time due to competition and other factors. The
Company is currently focusing on developing existing and new OEM or similar
relationships with third parties, which may result in significant pricing
discounts and lower gross margins. In addition, the Company has from time to
time introduced new products, which are less expensive alternatives to the
Company's older products. In such instances, the Company must sell more units to
maintain the same level of aggregate net sales. Price erosion of existing
products, significant discounting and the Company's introduction of less
expensive networking alternatives could adversely affect the Company's margins
and results of operations.
Sales to customers outside of North America accounted for approximately
51%, 64% and 75% of the Company's net sales for the fiscal years ended June 30,
1999, 1998 and 1997, respectively. The Company expects that international sales
will continue to account for a significant portion of the Company's net sales in
future periods. International sales are subject to certain inherent risks,
including unexpected changes in regulatory requirements and tariffs, problems
and delays in collecting accounts receivable and economic downturns in foreign
markets. A significant number of the Company's products are sold or installed in
countries, including several in South America and Asia, where political or
economic issues have adversely affected, and may in the future adversely affect,
the purchasing decision of the customer. In addition, fluctuations in currency
exchange rates have caused, and may in the future cause, the Company's products
to become relatively more expensive to customers in a particular country,
leading to a reduction in sales or profitability in that country.
A small number of customers have historically accounted for a
substantial portion of the Company's net sales. During the fiscal years ended
June 30, 1999, 1998 and 1997, the Company's five largest customers collectively
accounted for 44%, 35% and 36%, respectively, of net sales. Sales to Lucent and
Impsat accounted for 13% and 10%, respectively, of the Company's revenue in
1999. Any reduction, delay or change in orders from significant customers could
have a material adverse effect on the Company's business.
ACQUISITIONS
In December 1996, the Company acquired all the outstanding shares of
DeltaComm Corporation, a developer of bandwidth efficient modems with expertise
in the satellite communications industry. In March 1997, the Company acquired
the DynaStar family of products from Dynatech Communications, Inc. The DynaStar
product line is a family of compact, flexible, integrated multi-service access
switch connectivity products that support extensive multiprotocol WAN
connections including TCP/IP, PPP, Frame Relay, X.25 and ATM. In August 1997,
the Company acquired out of bankruptcy certain assets of Sourcecom, Inc., a
developer of high performance broadband access devices. In connection with these
acquisitions, the Company expensed a portion of the purchase prices as
in-process research and development. The products and technologies acquired in
the Dynatech Communications, Inc. and DeltaComm Corporation acquisitions are
being either de-emphasized or discontinued.
RESTRUCTURING PROGRAM
17
<PAGE> 20
In July 1998, the Company announced a major restructuring program
designed to streamline operations and focus on key markets. As part of the
restructuring program, the Company concentrated its resources on the
NetPerformer and ServiceXchange product lines. The Company significantly reduced
its workforce, eliminating its business unit matrix structure in favor of a
functional organization and de-emphasizing engineering, sales and marketing
efforts for non-strategic products. As the Company does not intend to actively
promote many of its former products which have, historically, accounted for a
majority of the Company's net sales, the Company's net sales may be adversely
impacted in the near term. The Company has in the past, and may in the future,
encounter decreased sales as a result of product transitions.
Included in the Company's June 30, 1999 net loss were certain
restructuring charges of $0.6 million related to employee terminations. Included
in the Company's June 30, 1998 net loss were certain restructuring and
impairment charges of $3.4 million as a result of the Company's evaluation and
write-down of certain assets, principally the tangible and intangible assets
established in the DeltaComm, DynaStar, and Sourcecom acquisitions. In addition,
the Company recorded charges to cost of goods sold of $3.7 million to write-down
the carrying value of inventory due to the restructuring and related de-emphasis
or discontinuation of certain product lines and other factors.
The impairment write-downs, excluding inventory write-downs, reflected
in the statement of operations for the year ended June 30, 1998 consist of the
following non-cash charges (in thousands):
<TABLE>
<CAPTION>
Asset Impaired Amount
------------------------------------------------------ -----------
<S> <C>
Property, plant and equipment $ 682
Developed technology and other acquisition intangibles 2,444
Other intangible assets 267
===========
$ 3,393
===========
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentage
of net sales represented by each item in the Company's statement of operations.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 44.9 54.4 43.6
-------- -------- --------
Gross profit 55.1 45.6 56.4
Operating expenses:
Research and development 23.7 29.6 17.0
Sales and marketing 25.7 29.1 22.6
General and administrative 14.6 16.3 10.8
Impairment and restructuring 1.1 6.2 --
Acquired in-process research and development -- 12.3 6.9
-------- -------- --------
65.1 93.5 57.3
-------- -------- --------
Loss from operations (10.0) (47.9) (0.9)
Net interest and other income 4.4 12.9 6.8
-------- -------- --------
Income (loss) before taxes (5.6) (35.0) 5.9
Provision for income taxes 0.1 0.3 2.9
======== ======== ========
Net income (loss) (5.7)% (35.3)% 3.0%
======== ======== ========
</TABLE>
Net sales
The Company classifies its sales as either international or domestic.
International sales are, in general, shipments to locations outside the United
States, regardless of the end-user's or the customer's location. Domestic sales
are, in general, shipments to locations within the United States, even if the
end-user or customer is located outside the United States. As the Company sells
primarily through resellers, the Company does not know with certainty the
location of the end-user. The Company believes that a significant portion of
sales that it classifies as domestic is shipped to end users outside the United
States.
18
<PAGE> 21
Net sales for fiscal year 1999 were relatively unchanged in total from
fiscal year 1998, with a decline in average selling prices offset by increased
sales volume. Higher sales volume in North America and Europe was offset by
lower volume in Latin America and the Asia Pacific region.
Net sales for fiscal year 1998 increased 11.8% from fiscal year 1997,
primarily as a result of increased domestic sales of the Company's products and
of sales of products from businesses acquired in fiscal 1997 and 1998. Increases
in sales to Europe and the Asia Pacific region were offset by decreases in sales
to South America. Net sales to the Asia Pacific region decreased substantially,
however, during the latter half of fiscal year 1998.
The following tables set forth the percentages of domestic and international
sales for the three most recent fiscal years.
Fiscal Year ended June 30,
----------------------------------
1999 1998 1997
------ ------ ------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Domestic Sales 48.6% 36.2% 25.3%
International Sales 51.4 63.8 74.7
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
The Company also classifies its sales by customer. In general, the end
users of the Company's products are either enterprise customers, who acquire the
Company's products for use in their own networks, or service providers, who use
the Company's products to provide telecommunications services to third parties.
Service providers include alternate service providers (such as wholesale long
distance carriers and call back operators), value added network services
providers, CLECs, ILECs, CAPs, ISPs and IXCs.
The following table sets forth the percentages of enterprise and service
provider sales for the three most recent fiscal years.
Fiscal Year ended June 30,
------------------------------------
1999 1998 1997
--------- ---------- ---------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Enterprise Sales 58.2% 64.9% 83.8%
Service Provider Sales 41.8 35.1 16.2
--------- ---------- ---------
100.0% 100.0% 100.0%
========= ========== =========
</TABLE>
Gross Profit
Gross profit represents net sales less the cost of goods sold, which
includes costs of materials, manufacturing overhead, direct labor expenses, and
contract manufacturing services. Gross profit percentages for fiscal years 1999,
1998 and 1997 were 55.1%, 45.6% and 56.4 % of net sales, respectively. Gross
profit in 1999 was positively impacted by the sale of certain inventory that was
written down in 1998. The sale of such inventory increased gross profit in 1999
by approximately $1.9 million, or 3.5% of net sales. The lower gross profit for
fiscal year 1998 is due primarily to charges totaling $3.7 million to write-down
the carrying value of inventory for certain product lines being de-emphasized or
discontinued. Without these charges, gross profit for fiscal year 1998 would
have been 52.2 % of net sales. Management anticipates continued downward
pressure on gross profit as a percentage of sales, particularly as the Company
pursues OEM opportunities that typically produce lower gross margins.
Operating Expenses
Research and development. Research and development expense for fiscal
year 1999 decreased approximately 21% compared with fiscal year 1998 due
primarily to a reduced headcount in connection with the restructuring program.
The development of new products and features involves a number of risks and
uncertainties. There can be no assurance that the Company's research and
development expenses will not increase either in actual dollars or as a
percentage of sales in future periods.
Research and development expense for fiscal year 1998 increased approximately
96% compared with fiscal year 1997. Over one-half of this increase was
attributable to the cost of personnel added for the development of new products
and enhancement of existing products. The remaining increase related primarily
to engineering personnel added as a result of the DynaStar and Sourcecom
acquisitions (see Note 2 of Notes to Financial Statements) and to increases in
consultant fees, the cost of materials and depreciation expense.
19
<PAGE> 22
Sales and marketing. Sales and marketing expense for fiscal year 1999
decreased approximately 13% compared with fiscal year 1998 due primarily to a
reduced headcount in connection with the restructuring program.
Sales and marketing expense for fiscal year 1998 increased approximately 44%
compared with fiscal year 1997 due primarily to the addition of personnel and
increased marketing activities associated with new product lines.
General and administrative. General and administrative expense for
fiscal year 1999 declined approximately 11% compared with fiscal year 1998 due
primarily to a reduced headcount in connection with the restructuring program.
General and administrative expense for fiscal year 1998 increased approximately
69% compared with fiscal 1997. The DynaStar and Sourcecom acquisitions
contributed significantly to the increase in general and administrative expense
without a commensurate increase in sales. Other material components of the
increase in general and administrative expense were personnel costs associated
with the expansion of the Company's management team, outside services, and bad
debt expense of approximately $1.2 million.
Amortization expense relating to acquisitions was approximately
$370,000, $880,000 and $427,000 in the fiscal years ended June 30, 1999, 1998
and 1997, respectively. Amortization expense related to previous acquisitions is
expected to be comparable to 1999 for the next four years.
Net Interest and Other Income (Expense)
Net interest income declined approximately 7% for fiscal year 1999
compared with fiscal year 1998 due to lower yields on investments, partially
offset by a slight increase in average invested funds. Net interest income
declined approximately 27% for fiscal year 1998 compared with fiscal year 1997
due primarily to the decrease in invested funds resulting from acquisitions in
late March 1997 and August 1997 and working capital requirements.
Income Taxes
The provision for income taxes for the fiscal years 1999 and 1998 relate
primarily to the foreign income taxes on the Company's foreign subsidiaries. For
those years the difference between the U.S. federal statutory rate and the
effective U.S. tax rate is due primarily to operating losses for which no
benefit has been recognized in the financial statements. At June 30, 1999,
subject to certain limitations, the Company had approximately $19,704,000 and
$7,524,000 in federal and state operating loss carryforwards, respectively, and
research and development credit carryforwards of approximately $1,835,000 and
$1,052,000 for federal and state income tax purposes, respectively. See Note 6
of Notes to Financial Statements.
Inflation
Although management cannot accurately anticipate the effect of inflation
on its operations, to date inflation has not had a material effect on product
sales or results of operations.
Foreign currency transactions
Because of its operations in foreign countries, especially in Canada,
the Company faces exposure to changes in foreign currency exchange rates. The
Company maintains engineering and other technical operations in its office in
Quebec, Canada, which operations are funded from the Unites States. Should the
exchange rate between the United States dollar and the Canadian dollar
fluctuate, the Company's reported expenses would also fluctuate. For example,
based on the total Canadian expenses incurred in 1999, a 10% negative
fluctuation in the average exchange rate would have increased the Company's
reported expenses by approximately $0.4 million. The Company does not currently,
nor does it plan to, engage in any foreign currency hedging activities.
Year 2000
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year; accordingly,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal activities.
The Company's primary internal information systems currently operate
with application software and an operating system represented by the respective
suppliers as Year 2000 compliant. Costs incurred by the Company to upgrade to
compliant versions of such software have not been material.
Based on internal testing of its products, to date, the Company believes
that its products are substantially Year 2000 compliant. The Company has not,
and has no present intention to, have its products tested by an independent lab.
The Company does not expect that the costs to continue the testing program
related to the Year 2000 will have a material impact on operations
20
<PAGE> 23
or financial results. However, the inability of any of the Company's products to
process year 2000 data accurately could result in increased costs and
liabilities which could have a material adverse effect upon the Company's
operations and financial condition.
The Company has surveyed specific major suppliers to assess the
potential impact, if any, of Year 2000 non-compliance on the part of such
suppliers. None of the vendors responding indicate any expected difficulty in
carrying on their business with the Company due to the Year 2000 issue. The
Company has not conducted a comprehensive survey of its major customers
regarding Year 2000 compliance. The Company believes that there are two
predominant sources of third party risk for the Company with respect to the Year
2000 issue. The Company depends on turnkey manufacturers of components for its
manufacturing process and disruption of operations at such a supplier, whether
due to Year 2000 non compliance or not, could negatively impact the Company's
shipment schedule. In the event that the systems of significant suppliers are
not converted or modified in a timely manner to make them Year 2000 compliant,
there could be a material adverse effect on the Company's business and financial
results and the Company's OEM partners. The Company has a number of large
customers which include end-users, resellers. The Company's top five customers
generated 44% of net sales in fiscal 1999. Year 2000 noncompliance at such
customers' sites could negatively impact sales to such customers by disrupting
the networks of such customers or their customers, in the case of OEM partners
and resellers. The Company does not have a contingency plan in place to address
such events and does not presently intend to create one.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from sales of the
Company's products and the sale of stock. For fiscal 1999 and 1998, the
Company's operating activities used cash of approximately $0.5 million and $8.9
million, respectively. At June 30, 1999, the Company had approximately $71
million in working capital, including $51 million in cash and cash equivalents
and short-term investments.
Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, computer software and leasehold improvements amounted
to approximately $2.1 million for the fiscal year ended June 30, 1999. The
Company currently has no material commitments for capital expenditures. However,
the Company anticipates spending between $2 million and $3 million during the
next twelve months to acquire test equipment, computer equipment, office
furniture, tooling and leasehold improvements.
The Company believes that available cash, cash equivalents and
short-term investments together with internally generated cash flow, will be
adequate to satisfy its capital requirements for at least the next twelve
months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company maintains investment portfolio holdings consisting primarily
of short-term commercial paper. At June 30, 1999, the average maturity of the
Company's investments was less than one year. The Company has structured its
investment portfolio in such a manner that various securities mature
periodically, but not less often than quarterly. The Company believes that the
value of the maturing securities will be sufficient to meet any reasonably
foreseeable cash requirements that may arise. As a result, the Company believes
that it is unlikely that any change in interest rates or other market factors
would have a material effect on its financial position, results of operations or
cash flow.
21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation
S-X are included in this Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
22
<PAGE> 25
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the
executive officers and directors of the Company as of August 31, 1999.
NAME AGE POSITION
---- --- --------
Andre de Fusco 41 President, Chief Executive Officer
and Director
Martin A. Woll 49 Chief Financial Officer and Vice
President, Finance
Alain Gravel 40 Vice President, Engineering
Mike T. Zeile 35 Vice President, Marketing
Mario Uribe 51 Vice President, Sales
Brig. Gen. Harold R. Johnson 76 Director
(1)(2)
William Ambrose (1)(2) 42 Director
Archibald J. McGill (1)(2) 68 Director
Frederick W. Gluck 64 Director
___________
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
ANDRE DE FUSCO was appointed President and Chief Executive Officer in
July 1998. Previously Mr. de Fusco held several positions with the Company,
including the position of Vice President and General Manager of the Company's
Broadband Network Services subsidiary from August 1997 to June 1998, Vice
President, Strategic Planning and Business Development from December 1995 to
June 1998 and Vice President of Marketing from December 1994 to December 1995.
Mr. de Fusco was employed as Director of International Accounts and Director of
Business Development for Northern Telecom from 1991 to 1994 and as Vice
President of Marketing and President of MaxCom, a developer of electronic mail
systems, from 1984 to 1991. Mr. de Fusco is presently a member of the Board of
Directors of Isocor.
MARTIN A. WOLL has served as Chief Financial Officer and Vice President
of Finance since December 1998. Prior to joining the Company, Mr. Woll was a
partner with Coopers & Lybrand L.L.C. from 1984 to 1998. Mr. Woll is a certified
public accountant.
ALAIN GRAVEL was appointed Vice President, Engineering in July 1998.
From November 1995 to July 1998, Mr. Gravel served as Vice President of Research
& Development, Data Products, of the Company's Enterprise Network Systems
division. Mr. Gravel served as Vice President of Research & Development of
Presticom until the Company acquired Presticom in November 1995. Mr. Gravel was
a co-founder of Presticom and was responsible for the development of the
NetPerformer product line. He also served on the Board of Directors of
Presticom. Mr. Gravel was employed as the Software Development Manager for
Memotec from 1988 to 1989 and for Datagram, a developer of statistical
multiplexers, from 1984 to 1988.
MIKE T. ZEILE was appointed Vice President, Marketing in July 1998. Mr.
Zeile held the position of Vice President of Marketing at ComCore Semiconductor
from July 1997 to July 1998 where he managed all aspects of the Company's
marketing business as well as product management. Prior to joining ComCore, Mr.
Zeile worked at Sourcecom Corporation, where he led the definition of the
product platform that became the basis for ACT's new ServiceXchange product
family. Mr. Zeile has also held various senior management and marketing
positions at ADC Telecommunications from 1987 to 1997.
MARIO URIBE was appointed Vice President, Sales in March 1999. Mr. Uribe
held the position of Vice President and General Manager of the U.S. Eastern
Region and Israel at Newbridge Networks from 1994 to March 1999 where he was
responsible for sales and support of all Newbridge products in the region. Mr.
Uribe has also held various management and sales positions at Newbridge,
Timeplex Inc. and Xerox Corporation from 1974 to 1994.
BRIG. GEN. (RETIRED) HAROLD R. JOHNSON has served as a member of the
Board of Directors of the Company since 1988. Brig. Gen. Johnson retired as
Senior Vice President of Business Development at The Fairchild Corporation, an
aerospace and communications company, in 1999 where he had served in various
capacities since 1988. From 1980 to 1988, Brig. Gen. Johnson was founder,
President and Chief Executive Officer of Telebit Corporation, a manufacturer of
telecommunications equipment. Gen. Johnson presently serves as a member of the
Board of Directors of several companies, including KLT, Telecoms, ORAMIR Semi
Conductor Equipment Corporation, Celtronix, Radio Connect and Accelerated
Networks.
WILLIAM W. AMBROSE has served as a member of the Board of Directors
since 1993. Mr. Ambrose is currently an independent consultant for several
private companies. Prior to 1998, Mr. Ambrose was the President of Pyramid
Research, Inc.,
23
<PAGE> 26
a telecommunications market research organization that he founded in 1986. Mr.
Ambrose was initially elected as a director of the Company pursuant to a voting
agreement entered into in connection with investment in the Company by a
subsidiary of a former stockholder. Mr. Ambrose is presently a member of the
Board of Directors of CGLA Infrastructure.
ARCHIBALD J. MCGILL has served as a member of the Board of Directors
since 1994. Mr. McGill is the President and Chief Executive Officer of
Chardonnay Inc., an investment management company, and has served in such
position since 1985. Mr. McGill served as President of Rothschild, Inc., a
venture capital investment firm, from 1983 to 1986. Mr. McGill was previously
President of the AIS/American Bell division of AT&T and a Vice President of
Marketing for International Business Machines. Mr. McGill is presently a member
of the Board of Directors of Disc, Inc., Ciber, Inc. and Carlton Corporation.
FREDERICK W. GLUCK has served as a member of the Board of Directors
since March 1997. Mr. Gluck is currently of counsel to McKinsey and Company. Mr.
Gluck was Vice Chairman and a director of the Bechtel Group from 1995 through
July 1998. Previously, Mr. Gluck was at McKinsey and Company for 27 years and
led the firm from 1988 until his retirement in 1995. Mr. Gluck is presently a
member of the Board of Directors of Amgen, Columbia HCA, Thinking Tools, Inc.
and several other private companies.
The Board of Directors of the Company is divided into three classes,
designated "Class I," "Class II" and "Class III," respectively. Each director
serves for a term ending on the date of the third annual meeting of stockholders
following the annual meeting at which such director was elected. However, each
director in Class I (Mr. de Fusco and Mr. Gluck) serves for a term ending on the
date of the annual meeting of stockholders held in 2001; each director in Class
II (Mr. Ambrose and Mr. McGill) serves for a term ending on the date of the
annual meeting of stockholders held in 2000 and each director in Class III
(Brig. Gen. Johnson) serves for a term ending on the date of the annual meeting
of stockholders held in 1999.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such person.
Based solely on the Company's review of such forms furnished to the
Company and written representations from certain reporting persons, the Company
believes that for the fiscal year ended June 30, 1999, there was compliance with
all filing requirements applicable to the Company's executive officers,
directors and more than 10% stockholders.
24
<PAGE> 27
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation earned, by the
Chief Executive Officer and each of the four additional most highly compensated
executive officers for the fiscal year ended June 30, 1999 (the "Named Executive
Officers"), for services rendered in all capacities to the Company for the
fiscal years ended June 30, 1997, 1998 and 1999. Except as indicated below,
during fiscal years 1997, 1998 and 1999, no Named Executive Officer received
other compensation in excess of the lesser of $50,000 or 10% of such
individual's base salary and bonus for the applicable fiscal year, nor did any
such individual receive any restricted stock award, stock appreciation right or
payment under any long term incentive plan for the applicable fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- -----------------
OTHER ANNUAL SECURITIES
FISCAL COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITIONS YEAR SALARY($)(1) BONUS($)(2) ($) OPTIONS (#)(10)
- ----------------------------- ---- ----------- ----------- --- ---------------
<S> <C> <C> <C> <C> <C>
Andre de Fusco.............. 1999 $270,000 19,035 674,286(5)
President and CEO 1998 140,000 27,740 20,000(6)
1997 140,000 - --
Martin A. Woll.............. 1999 90,000 3,038 120,000
CFO and Vice President, 1998 -- - -
Finance 1997 -- - --
Alain Gravel................ 1999 134,756 9,870 44,600(4) 87,000(7)
Vice President, Engineering 1998 76,230 - 45,000(8)
1997 65,782 366
Mike T. Zeile .............. 1999 135,782 9,870 180,000(9)
Vice President, Marketing 1998 -- - --
1997 -- -
Mario Uribe................. 1999 57,283 12,832(3) 150,000
Vice President, Sales 1998 -- -
1997 -- -
</TABLE>
- ----------
(1) Includes amounts deferred under the Company's 401(k) Plan.
(2) Includes bonuses earned in the indicated year and paid in the subsequent
year. Excludes bonuses paid in the indicated year but earned in the
preceding year.
(3) Represents amounts paid in commissions.
(4) Amounts paid by the Company as reimbursement for relocation, immigration
and tax planning expenses.
(5) Mr. de Fusco was granted (i) options for 2,286 shares on August 1, 1995,
(ii) options for 52,000 shares on September 19, 1995, (iii) options for
20,000 shares on December 3, 1997 and (iv) options for 300,000 shares on
July 1, 1998 at exercise prices of $16.50, $13.00, $7.69 and $8.38,
respectively. In connection with the Company's cancellation/regrant
program on August 3, 1998, all such options were cancelled and regranted
with an exercise price of $6.75 per share, the closing price of the
Company's Common Stock. Accordingly, the net number of shares for which
Mr. de Fusco was granted options during the 1999 fiscal year was
374,286 shares.
(6) As indicated in footnote (5) of this table, these options were
originally granted on December 3, 1997 with an exercise price of $7.69
per share and were cancelled and regranted on August 3, 1998 with an
exercise price of $6.75 per share, the closing price of the Company's
Common Stock.
(7) Mr. Gravel was granted (i) options for 30,000 shares on December 5, 1995
and (ii) options for 15,000 shares on December 3, 1997 at exercise
prices of $10.38 and $7.69, respectively. In connection with the
Company's cancellation/regrant program on August 3, 1998, his pre-1998
options covering a total of 42,000 shares were cancelled and regranted
with an exercise price of $6.75 per share, the closing price of the
Company's common stock.
(8) As indicated in footnote (7) of this table, these options were
originally granted on December 3, 1997 with an exercise price of $7.69
per share and were cancelled and regranted on August 3, 1998 with an
exercise price of $6.75 per share, the closing price of the Company's
Common Stock.
(9) Mr. Zeile was granted options for 90,000 shares on July 13, 1998 with an
exercise price of $8.75. In connection with the Company's
cancellation/regrant program on August 3, 1998, such options were
cancelled and regranted with an exercise price of $6.75 per share, the
closing price of the Company's common stock. Accordingly, the net number
of shares for which Mr. Zeile was granted options during fiscal year
1999 was 90,000 shares.
(10) The options are immediately exercisable (except Mr. Uribe's options,
which are installment options) with any unvested shares acquired under
such option to be subject to repurchase by the Company, at the exercise
price paid per share, upon
25
<PAGE> 28
termination of the optionee's service with the Company prior to vesting
in those shares. The shares will vest according to the following
schedule ("Standard Vesting Schedule"): twenty-four percent (24%) of the
shares vest upon completion of one year following the vesting
commencement date and the balance will vest at a rate of two percent
(2%) per full month of employment thereafter. Mr. Uribe's options will
become exercisable in installments in accordance with the Standard
Vesting Schedule.
26
<PAGE> 29
REPRICING OF OPTIONS
In order to reincentivize the Company's employees, the Board of
Directors, upon recommendation of the Compensation Committee, in August 1998
approved an option cancellation/regrant program pursuant to which employees
could surrender for cancellation options granted by the Company having exercise
prices greater than $6.75 per share and receive in the place of such surrendered
options new options having an exercise price of $6.75 per share, the fair market
value of the Company's Common Stock on the date of Board approval and date of
grant. The new options issued pursuant to this cancellation/regrant program were
subject to the same vesting provisions as the surrendered options, except each
employee participating in the cancellation/regrant program had to remain in the
Company's employ for a period of six (6) months following August 3, 1998 to be
entitled to any vesting which may have occurred. The following table sets forth
certain information as of June 30, 1999 with respect to the repricing of certain
stock options held by the Company's Named Executive Officers since the Company's
initial public offering.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET ORIGINAL
SECURITIES PRICE OF EXERCISE OPTION TERM
UNDERLYING STOCK AT PRICE AT NEW REMAINING AT
DATE OF OPTIONS TIME OF TIME OF EXERCISE DATE OF
NAME REPRICING(1) REPRICED(#) REPRICING($) REPRICING($) PRICE ($) REPRICING
---- ----------- ----------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Andre de Fusco 8/3/98 2,286 6.75 16.50 6.75 7 yrs. 0 mos.
President and CEO 8/3/98 52,000 6.75 13.00 6.75 7 yrs. 2 mos.
8/3/98 20,000 6.75 7.69 6.75 9 yrs. 4 mos.
8/3/98 300,000 6.75 8.38 6.75 9 yrs. 11 mos.
Alain Gravel 8/3/98 27,000 6.75 10.38 6.75 7 yrs. 4 mos.
Vice President, 8/3/98 15,000 6.75 7.69 6.75 9 yrs. 4 mos.
Engineering
Mike T. Zeile 8/3/98 90,000 6.75 8.75 6.75 9 yrs. 11 mos.
Vice President,
Marketing
</TABLE>
- --------------
(1) The Company implemented an option cancellation/regrant program for
directors, executive officers and other employees holding stock options
with an exercise price per share in excess of the market price of the
Company's Common Stock at the time the cancellation/regrant occurred.
The cancellation/regrant was effected on August 3, 1998, and 1,733,278
outstanding options with an exercise price in excess of $ 6.75 per share
were cancelled and new options for the same aggregate number of shares
were granted with an exercise price of $ 6.75 per share. Andre de Fusco,
Frederick W. Gluck (an outside director of the Company), Alain Gravel
and Mike T. Zeile received lower priced options for 374,286, 21,000,
42,000 and 90,000 shares, respectively, in cancellation of their higher
priced options for the same number of shares.
27
<PAGE> 30
OPTION GRANTS
The following table sets forth, for the fiscal year ended June 30, 1999,
information concerning the grant of options to purchase shares of Common Stock
under the Company's 1995 Plan or 1997 Incentive Plan to the Named Executive
Officers. No stock appreciation rights were granted to any of the Named
Executive Officers during fiscal year 1999.
OPTION GRANTS IN YEAR ENDED JUNE 30, 1999
INDIVIDUAL GRANTS
-----------------
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS EXERCISE ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO OF BASE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE EXPIRATION OPTION TERM(7)
NAME GRANTED(#)(1) FISCAL 1999(5) ($/SH)(6) DATE 5%($) 10%($)
- ---- ------------- -------------- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Andre de Fusco 2,286(2) 0.06% 6.75 8/1/05 9,705 24,594
52,000(2) 1.38% 6.75 9/18/05 220,742 559,404
20,000(2) 0.53% 6.75 12/3/07 84,901 215,155
300,000(2) 7.99% 8.38 7/1/08 1,581,041 4,006,669(8)
300,000(2) 7.99% 6.75 7/1/08 1,273,512 3,227,328
Mario Uribe 150,000 3.99% 11.13 2/23/09 1,049,940 2,660,753
Martin A. Woll 120,000 3.20% 12.95 12/28/08 977,302 2,476,676
Mike T. Zeile 90,000(3) 2.40% 8.75 7/13/08 495,255 1,255,072(8)
90,000(3) 2.40% 6.75 7/13/08 382,053 968,199
Alain Gravel 27,000(4) 0.72% 6.75 12/4/05 114,616 290,460
15,000(4) 0.40% 6.75 12/3/07 63,676 161,366
45,000 1.20% 5.38 9/10/08 152,255 385,845
</TABLE>
- --------------
(1) The options granted to the Named Executive Officers have a maximum term
of 10 years measured from the option grant or, for any option granted in
cancellation of a higher-priced option, measured from the original grant
date of the cancelled higher-priced option, subject to earlier
termination in the event of the optionee's cessation of service with the
Company. The options are immediately exercisable (except for Mr. Uribe's
options, which are installment options) with any unvested shares
acquired under such option to be subject to repurchase by the Company,
at the exercise price paid per share, upon termination of the optionee's
service with the Company prior to vesting in those shares. The shares
will vest according to the following schedule ("Standard Vesting
Schedule"): twenty-four percent (24%) of the shares vest upon completion
of one year following the vesting commencement date and the balance will
vest at a rate of two percent (2%) per full month of employment
thereafter. Mr. Uribe's options will become exercisable in installments
in accordance with the Standard Vesting Schedule. All of the option
shares will immediately vest in the event the Company is acquired by a
merger or asset sale, unless the options are assumed by the acquiring
entity.
(2) Mr. de Fusco was granted (i) options for 2,286 shares on August 1, 1995,
(ii) options for 52,000 shares on September 19, 1995, (iii) options for
20,000 shares on December 3, 1997 and (iv) options for 300,000 shares on
July 1, 1998 at exercise prices of $16.50, $13.00, $7.69 and $8.38,
respectively. In connection with the Company's cancellation/regrant
program on August 3, 1998, all such options were cancelled and regranted
with an exercise price of $6.75 per share, the closing price of the
Company's Common Stock. Accordingly, the net number of shares for which
Mr. de Fusco was granted options during the 1999 fiscal year was
374,286 shares.
(3) Mr. Zeile was granted options for 90,000 shares on July 13, 1998 with at
an exercise price of $8.75. In connection with the Company's
cancellation/regrant program on August 3, 1998, such options were
cancelled and regranted with an exercise price of $6.75 per share, the
closing price of the Company's Common Stock. Accordingly, the net number
of shares for which Mr. Zeile was granted options during fiscal year
1999 was 90,000 shares.
(4) Mr. Gravel was granted (i) options for 30,000 shares on December 5, 1995
and (ii) options for 15,000 shares on December 3, 1997 and (iii) options
for 45,000 shares on September 10, 1998 at exercise prices of $10.38 and
$7.69 and $5.38, respectively. In connection with the Company's
cancellation/regrant program on August 3, 1998, his pre-1998 options
covering a total of 42,000 shares were cancelled and regranted with an
exercise price of $6.75 per share, the closing price of the Company's
Common Stock.
28
<PAGE> 31
(5) The Company granted new stock options for 2,021,858 shares and options
for 1,733,278 shares were cancelled and regranted in connection with the
cancellation/regrant program, for a total of 3,755,136 stock option
grants in fiscal 1999. The percentages in the table above are based on
3,755,136 stock options granted in fiscal 1999.
(6) The exercise price may be paid in cash, in shares of Common Stock valued
at fair market value on the exercise date or pursuant to a cashless
exercise procedure. The Company may also finance the option exercise in
loaning the optionee sufficient funds to pay the exercise price for the
purchased shares.
(7) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the 10-year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of the
Common Stock does in fact appreciate over the option term, no value will
be realized from the option grants.
(8) This option was cancelled in connection with the August 3, 1998
cancellation/regrant program and is no longer outstanding.
OPTION EXERCISES AND HOLDINGS
No Named Executive Officers exercised options during the fiscal year
ended June 30, 1999 and no stock appreciation rights were exercised during
fiscal year 1999 or outstanding as of June 30, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has a Compensation Committee, which administers
the Company's stock option plans. The members of the Compensation Committee are
Mr. William Ambrose, Brig. Gen. (ret.) Harold R. Johnson and Mr. Archibald J.
McGill. None of these individuals were at any time during the fiscal year ended
June 30, 1999 an officer or employee of the Company.
The Board of Directors has an Audit Committee which supervises and makes
recommendations and decisions with respect to the periodic audits of the
Company's financial results. The members of the Audit Committee are Mr.
Archibald J. McGill, Mr. William Ambrose and Brig. Gen. (ret.) Harold R.
Johnson.
DIRECTOR COMPENSATION
Each non-employee director (which does not include any director who
serves as representative of a stockholder who owns more than 5% of the Company's
voting securities) receives $6,000 annually for services as a member of the
Board of Directors. Non-employee directors are reimbursed for their
out-of-pocket expenses in serving on the Board of Directors. There are no family
relationships among any of the current executive officers or directors of the
Company.
During the 1999 fiscal year, non-employee directors were eligible to
receive option grants under the Automatic Option Grant Program in effect under
the Company's 1997 Stock Incentive Plan. Accordingly, at the 1998 Annual
Stockholders Meeting held on November 30, 1998, each of the following
non-employee directors received an option grant under the Automatic Option Grant
Program for 7,000 shares of Common Stock with an exercise price of $10.25 per
share: Messrs. Ambrose, McGill, Gluck and Brig. Gen. (ret.) Johnson. In
addition, on October 19, 1998, the above named directors also received an option
grant under the Discretionary Option Grant Program under the Company's 1997
Stock Incentive Plan for 3,000 shares with an exercise price of $7.56 per share.
The exercise price in effect for each option is equal to the fair market value
per share of Common Stock on the grant date. Each option has a maximum term of
ten (10) years measured from the grant date, subject to earlier termination
following the optionee's cessation of Board service. Each option is immediately
exercisable for all of the option shares; however, any shares purchased under
the option will be subject to repurchase by the Company, at the option exercise
price paid per share, upon the optionee's cessation of Board service prior to
vesting in those shares. The shares subject to each 7,000 and 3,000 share grant
will vest on the day immediately preceding the date of the 1999 Annual Meeting,
provided the optionee continues in Board service through that date.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Company
can indemnify its directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). The Company's Bylaws provide that the Company
will indemnify its directors and officers to the fullest extent permitted by law
and require the Company to advance litigation expenses upon receipt by the
Company of an undertaking by the director or officer to repay such advances if
it is ultimately determined that the director or officer is not entitled to
indemnification. The Bylaws further provide that rights conferred under such
Bylaws do not exclude any other right such persons may have or acquire under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
The Company's Certificate of Incorporation provides that, pursuant to
Delaware Law, its directors shall not be liable for monetary damages for breach
of the directors' fiduciary duty of care to the Company and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the duty
of care, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware Law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper
29
<PAGE> 32
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Company has entered into agreements to indemnify its directors and
certain of its officers in addition to the indemnification provided for in the
Certificate of Incorporation and Bylaws. These agreements, among other things,
indemnify the Company's directors and certain of its officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by such person in any action or proceeding, including any action by or
in the right of the Company, on account of services as a director or officer of
the Company, or as a director or officer of any other company or enterprise to
which the person provides services at the request of the Company.
30
<PAGE> 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 31, 1999 by (i)
each person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers and (iv) all directors and executive
officers of the Company as a group:
<TABLE>
<CAPTION>
DIRECTORS, FIVE PERCENT STOCKHOLDERS, NAMED EXECUTIVE SHARES BENEFICIALLY
OFFICERS AND DIRECTORS AND OFFICERS AS A GROUP OWNED (1)
- -------------------------------------------------------- ------------------------------
NUMBER PERCENT
--------- -------
<S> <C> <C>
Gilder Gagnon Howe & Co. LLC (2)(3)..................... 1,104,275 10.8%
1775 Broadway, 26th Floor, New York, NY 10019
Paul Tudor Jones, II (2)(4)............................. 729,400 7.1
600 Steamboat Road, Greenwich, CT 06830
Dimensional Fund Advisors Inc. (2)(5)................... 579,600 5.7
1299 Ocean Avenue, 11th Floor, Santa Monica,
CA 90401
Andre de Fusco (6)...................................... 407,504 4.0
Martin A. Woll (7)...................................... 120,736 1.2
Alain Gravel (8)........................................ 76,321 *
Mario Uribe (9)......................................... 20,000 *
Mike T. Zeile (10)...................................... 91,792 *
Brig. Gen. H. R. Johnson (11)........................... 17,000 *
William W. Ambrose (12)................................. 59,155 *
Archibald J. McGill (13)................................ 66,857 *
Frederick W. Gluck (14)................................. 92,000 *
All directors and executive officers as a
group (9 persons) (15)(16)........................... 951,365 9.3%
</TABLE>
- -----------
* Less than 1%.
(1) Unless otherwise indicated, the persons named in the table have sole
voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable and except as
indicated in the other footnotes to this table. Beneficial ownership is
determined in accordance with the rules of the Commission. In computing
the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or
exercisable within 60 days after August 31, 1999 are deemed outstanding.
Such shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person..
(2) Based upon information obtained from Forms 13G supplied to the Company
by Gilder as of June 30, 1999, Dimensional as of February 11, 1999 and
Tudor as of July 29, 1999.
(3) Gilder Gagnon Howe & Co. LLC have shared dispositive power over the
shares.
(4) Paul Tudor Jones, II refers to the following persons with shared voting
and dispositive power: The shares of Common Stock reported herein as
beneficially owned are owned directly by Tudor BVI (182,500 shares), TPT
(41,800 shares), Raptor L.P. (83,000 shares), Raptor Ltd. (382,200
shares) and Upper Mill (39,900 shares). Because TIC is the sole general
partner of Raptor L.P. and provides investment advisory services to
Raptor Ltd., Raptor L.P., Tudor BVI and Upper Mill, TIC may be deemed to
beneficially own the shares of Common Stock owned by each of such
Reporting Persons. TIC expressly disclaims such beneficial ownership. In
addition, because Mr. Jones is the controlling shareholder of TIC and
the indirect controlling equity holder of TPT, Mr. Jones may be deemed
to beneficially own the shares of Common Stock deemed beneficially owned
by TIC and TPT. Mr. Jones expressly disclaims such beneficial ownership.
(5) Dimensional Fund Advisors Inc.("Dimensional"), an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940,
furnishes investment advice to four investment companies registered
under the Investment Company Act of 1940, and serves as investment
manager to certain other investment vehicles, including commingled group
trusts. (These investment companies and investment vehicles are the
"Portfolios"). In its role as investment advisor and investment manager,
Dimensional possesses both voting and investment power over the
31
<PAGE> 34
securities of the Issuer described in this schedule that are owned by
the Portfolios. All securities reported in this schedule are owned by
the Portfolios, and Dimensional disclaims beneficial ownership of such
securities.
(6) Includes 401,000 shares issuable upon exercise of immediately
exercisable options, of which 178,760 shares will be vested within 60
days from August 31, 1999.
(7) Includes 120,000 shares issuable upon exercise of immediately
exercisable options, of which no shares will be vested within 60 days
from August 31, 1999.
(8) Includes 76,200 shares issuable upon exercise of immediately exercisable
options, of which 42,900 shares will be vested within 60 days from
August 31, 1999.
(9) Mr. Uribe owns 20,000 shares which were acquired by him prior to his
employment with the Company. No shares will be vested within 60 days
from August 31, 1999.
(10) Includes 90,000 shares issuable upon exercise of immediately exercisable
options, of which 27,000 shares will be vested within 60 days from
August 31, 1999.
(11) Includes 17,000 shares issuable upon exercise of immediately exercisable
options, of which 10,000 shares will be vested within 60 days from
August 31, 1999.
(12) Includes 25,155 shares beneficially owned by Stone Silo Investments. Mr.
Ambrose, as sole owner of Stone Silo Investments, may be deemed to have
beneficial ownership of these shares. Also includes 34,000 shares
issuable upon exercise of immediately exercisable options, of which
27,000 shares will be vested within 60 days from August 31, 1999.
(13) Includes 66,857 shares issuable upon exercise of immediately exercisable
options, of which 59,857 shares will be vested within 60 days from
August 31, 1999.
(14) Includes 92,000 shares issuable upon exercise of immediately exercisable
options of which 46,840 shares will be vested within 60 days from August
31, 1999.
(15) Includes 25,155 shares owned by Stone Silo Investments and 20,000 owned
by Mr. Uribe. Also includes an aggregate of 897,057 shares issuable to
the Company's directors and executive officers upon the exercise of
immediately exercisable options held by such directors and executive
officers of which 392,357 shares will be vested within 60 days from
August 31, 1999.
(16) The business address for the Company's directors and executive officers
is as follows: c/o ACT Networks, Inc., 26707 West Agoura Road,
Calabasas, California 91302.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
32
<PAGE> 35
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS:
The Company's financial statements appear in a separate section
of this Annual Report on Form 10-K commencing on the pages referenced below:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended
June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
(2) FINANCIAL STATEMENT SCHEDULES:
</TABLE>
The financial statement schedules of the Company are included in
a separate section of this Annual Report on Form 10-K commencing on the pages
referenced below. All other schedules have been omitted because they are not
applicable, not required, or the information is included in the financial
statements or notes thereto.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS S-2
</TABLE>
33
<PAGE> 36
(3) EXHIBITS:
EXHIBIT
NO.
3.1 Certificate of Incorporation of the Company. Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394
4.1 Specimen certificate representing shares of Common Stock of the Company.
Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
4.2 Form of Warrant of the Company. Incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.1 Master Lease Agreement dated January 11, 1994 by and between the Company
and Leasetec Corporation, as amended and supplemented. Incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-90394.
10.2 Form of Indemnification Agreement. Incorporated by reference to Exhibit
10.6 to the Company's Registration Statement on Form S-1, Registration
No. 33-90394.
10.3 1987 Stock Option Plan (the "1987 Plan"). Incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.4 Form of Amended Notice of Grant of Stock Option with respect to holders
of installment incentive stock options granted under the 1987 Plan.
Incorporated by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
10.5 Form of 1987 Installment Incentive Stock Option Agreement, Immediately
Exercisable Stock Option Agreement and Immediately Exercisable
Non-Qualified Stock Option Agreement generally used in connection with
the 1987 Plan. Incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.6 Form of 1987 Stock Purchase Agreement generally used in connection with
the 1987 Plan. Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.7 1993 Stock Option Plan as amended (the "1993 Plan"). Incorporated by
reference to Exhibit 10.11 to the Company's Registration Statement on
Form S-1, Registration No. 33-90394.
10.8 Form of Notice of Grant of Stock Option generally used in connection
with the 1993 Plan. Incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.9 Form of 1993 Stock Option Agreement generally used in connection with
the 1993 Plan. Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.10 Form of 1993 Stock Purchase Agreement generally used in connection with
the 1993 Plan. Incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.11* Cooperation and Supply Agreement dated as of November 19, 1993 by and
between StrataCom, Inc. and the Company. Incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.12 Technical Information Escrow Agreement dated July 18, 1994 by and
between StrataCom, Inc., the Indianapolis Vault Company and the Company.
Incorporated by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
10.13 1995 Stock Option/Stock Issuance Plan (the "1995 Plan"). Incorporated by
reference to Exhibit 99.1 to the Company's Registration Statement on
Form S-8, Registration No. 33-80007.
10.14 Form of Stock Option Agreement generally used in connection with the
Discretionary Option Grant Program of the 1995 Plan. Incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on
Form S-8, Registration No. 33-80007.
34
<PAGE> 37
10.15 Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
Right). Incorporated by reference to Exhibit 99.4 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
10.16 Form of Addendum to Stock Option Agreement (Involuntary Termination
Following Change of Control). Incorporated by reference to Exhibit 99.5
to the Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.17 Form of Addendum to Stock Option Agreement (Special Tax Elections).
Incorporated by reference to Exhibit 99.6 to the Company's Registration
Statement on Form S-8, Registration No. 33-80007.
10.18 Form of Automatic Stock Option Agreement. Incorporated by reference to
Exhibit 99.9 to the Company's Registration Statement on Form S-8,
Registration No. 33-80007.
10.19 Form of Stock Issuance Agreement generally used in connection with the
Discretionary Option Grant Program of the 1995 Plan. Incorporated by
reference to Exhibit 99.10 to the Company's Registration Statement on
Form S-8, Registration No. 33-80007.
10.20 Form of Addendum to Stock Issuance Agreement (Involuntary Termination
Following Change of Control). Incorporated by reference to Exhibit 99.11
to the Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.21 Form of Addendum to Stock Issuance Agreement (Special Tax Elections).
Incorporated by reference to Exhibit 99.12 to the Company's Registration
Statement on Form S-8, Registration No. 33-80007.
10.22 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.13
to the Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.23 The Share Purchase Agreement By and Among the Company, Canada Inc. and
Certain Presticom Stockholders, dated as of November 24, 1995.
Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K, dated November 30, 1995.
10.24 1997 Non-Executive Officer Stock Option/Stock Issuance Plan as amended
July 15, 1997. Incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8, Registration No.
333-85845.
10.25 Form of Notice of Grant of Stock Option generally used in connection
with 1997 Plan. Incorporated by reference to Exhibit 10.29 to the
Company's Quarterly Report for the period ended March 31, 1997.
10.26 Form of Stock Option Agreement generally used in connection with 1997
Plan Incorporated by reference to Exhibit 10.30 to the Company's
Quarterly Report for the period ended March 31, 1997.
10.27 Form of Addendum to Stock Option Agreement. Incorporated by reference to
Exhibit 10.31 to the Company's Quarterly Report for the period ended
March 31, 1997.
10.28 The Asset Purchase Agreement by and between the Company and Sourcecom,
Inc. dated as of July 16, 1997. Incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K dated August 11, 1997.
10.29 1997 Stock Incentive Plan. Incorporated by reference to Exhibit 99.1 to
the Company's Registration Statement on Form S-8, Registration No.
333-85845.
10.30 Form of Notice of Grant of Stock Option - Installment Option.
Incorporated by reference to Exhibit 99.2 to the Company's Registration
Statement on Form S-8, Registration No. 333-44087.
10.31 Form of Stock Option Agreement - Installment Option. Incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on
Form S-8, Registration No. 333-44087.
10.32 Notice of Grant of Stock Option - Immediately Exercisable Option.
Incorporated by reference to Exhibit 99.4 to the Company's Registration
Statement on Form S-8, Registration No. 333-44087.
10.33 Stock Option Agreement - Immediately Exercisable Option. Incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement on
Form S-8, Registration No. 333-44087.
10.34 Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
Rights). Incorporated by reference to Exhibit 99.6 to the Company's
Registration Statement on Form S-8, Registration No. 333-44087.
35
<PAGE> 38
10.35 Form of Addendum to Stock Option Agreement (Involuntary Termination
following Change in Control). Incorporated by reference to Exhibit 99.7
to the Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.36 Stock Purchase Agreement. Incorporated by reference to Exhibit 99.8 to
the Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.37 Addendum to Stock Purchase Agreement (Involuntary Termination following
Change in Control). Incorporated by reference to Exhibit 99.9 to the
Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.38 Automatic Notice of Initial Grant. Incorporated by reference to Exhibit
99.10 to the Company's Registration Statement on Form S-8, Registration
No. 333-44087.
10.39 Automatic Notice of Annual Grant. Incorporated by reference to Exhibit
99.11 to the Company's Registration Statement on Form S-8, Registration
No. 333-44087.
10.40 Automatic Stock Option Agreement. Incorporated by reference to Exhibit
99.12 to the Company's Registration Statement on Form S-8, Registration
No. 333-44087.
10.41 Office Lease dated April 15, 1999 by and between the Company and Malibu
Canyon Office Partners, LLC.
10.42 Form of Notice of Grant of Stock Option - Option Grant to Mr. Uribe.
Incorporated by reference to Exhibit 99.17 to the Company's Registration
Statement on Form S-8, Registration No. 33-85845.
10.43 Form of Stock Option Agreement - Option Grant to Mr. Uribe. Incorporated
by reference to Exhibit 99.18 to the Company's Registration Statement on
Form S-8, Registration No. 333-85845.
21.1 List of Subsidiaries of the Company.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on page 36).
27.1 Financial Data Schedule.
* The Company has received confidential treatment for portions of this document
previously filed with the Commission.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
36
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Calabasas,
State of California, on September 19, 1999.
ACT NETWORKS, INC.
BY: /s/ ANDRE DE FUSCO
-------------------------------------
ANDRE DE FUSCO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
We, the undersigned officers and directors of ACT Networks, Inc., do hereby
constitute and appoint Andre de Fusco and Martin A. Woll, and each of them, our
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on the
dates indicated:
Signature Title Date
- --------- ----- ----
/s/ ANDRE DE FUSCO President and Chief Executive September 19, 1999
- ----------------------- Officer
Andre de Fusco
/s/ MARTIN A. WOLL Vice President, Finance and Chief September 19, 1999
- ----------------------- Financial Officer (principal
Martin A. Woll financial officer)
/s/ ROBERT FAULK Principal Accounting Officer September 19, 1999
- -----------------------
Robert Faulk
/s/ WILLIAM W. AMBROSE Director September 19, 1999
- -----------------------
William W. Ambrose
/s/ HAROLD R. JOHNSON Director September 19, 1999
- -----------------------
Harold R. Johnson
/s/ ARCHIBALD J. MCGILL Director September 19, 1999
- -----------------------
Archibald J. McGill
/s/ FREDERICK W. GLUCK Director September 19, 1999
- -----------------------
Frederick W. Gluck
37
<PAGE> 40
Report of Independent Auditors
Board of Directors
ACT Networks, Inc.
We have audited the accompanying consolidated balance sheets of ACT Networks,
Inc. as of June 30, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ACT Networks, Inc.
at June 30, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Woodland Hills, California
July 26, 1999
F-1
<PAGE> 41
ACT Networks, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $33,850 $35,018
Marketable securities 17,613 11,607
Accounts receivable, less allowances of
$2,440 in 1999 and $2,030 in 1998 18,309 17,226
Inventory 9,613 8,829
Prepaids and other current assets 582 1,786
------- -------
Total current assets 79,967 74,466
------- -------
Plant, equipment and other improvements:
Machinery and equipment 7,696 6,288
Furniture and fixtures 1,318 992
Computer software 2,145 1,822
Leasehold improvements 787 672
------- -------
11,946 9,774
Accumulated depreciation and amortization 8,310 6,031
------- -------
3,636 3,743
Goodwill and other intangibles 1,769 2,574
Other assets 269 55
------- -------
Total assets $85,641 $80,838
======= =======
</TABLE>
F-2
<PAGE> 42
ACT Networks, Inc.
Consolidated Balance Sheets (continued)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30
1999 1998
------ ------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,898 $4,538
Accrued payroll and related benefits 1,192 1,743
Restructuring cost -- 750
Other accrued liabilities 567 1,225
Deferred income taxes 65 65
------- -------
Total current liabilities 8,722 8,321
Commitments and contingencies -- --
Stockholders' equity:
Common stock and additional paid-in capital;
$.001 par value:
Authorized -- 40,000
Issued -- 10,397 at June 30, 1999 and
9,402 at June 30, 1998 108,680 101,067
Treasury stock, at cost 214 shares at
June 30, 1999 and 1998 (2,402) (2,402)
Accumulated deficit (29,059) (25,933)
Accumulated other comprehensive loss (300) (215)
------- -------
Total stockholders' equity 76,919 72,517
------- -------
Total liabilities and stockholders' equity $85,641 $80,838
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 43
ACT Networks, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended June 30
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net sales $54,322 $54,964 $49,173
Cost of goods sold 24,412 29,900 21,431
------- ------- -------
Gross profit 29,910 25,064 27,742
------- ------- -------
Operating expenses:
Research and development 12,887 16,349 8,344
Sales and marketing 13,961 15,984 11,115
General and administrative 7,925 8,935 5,291
In process research and development -- 6,750 3,416
Impairment and restructuring 607 3,393 --
------- ------- -------
Total operating expenses 35,380 51,411 28,166
------- ------- -------
Loss from operations (5,470) (26,347) (424)
Other:
Gain on sale of investment 120 4,704 --
Interest and other income, net 2,260 2,426 3,346
Interest expense -- (7) (19)
------- ------- -------
2,380 7,123 3,327
------- ------- -------
Income (loss) before income taxes (3,090) (19,224) 2,903
Provision for income taxes 36 157 1,420
------- ------- -------
Net income (loss) $(3,126) $(19,381) $1,483
======= ======= =======
Earnings (loss) per share:
Basic $(0.32) $(2.11) $0.16
Diluted $(0.32) $(2.11) $0.15
======= ======= =======
Shares used in computation of earnings
(loss) per share:
Basic 9,644 9,170 9,184
Diluted 9,644 9,170 9,973
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 44
ACT Networks, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Paid-In Capital Other
Common Stock in Excess of Treasury Accumulated Comprehensive
Shares Amount Par Value Stock Deficit Income (Loss) Total
------ ------ --------------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 9,117 $ 9 $ 98,166 $ -- $ (8,035) $ -- $ 90,140
--------
Comprehensive income
Net income -- -- -- -- 1,483 -- 1,483
Other comprehensive income,
net of tax,
Foreign currency translation
adjustment -- -- -- -- -- 2 2
--------
Comprehensive income -- -- -- -- -- -- 1,485
--------
Exercise of options to purchase
common stock and employee stock
purchases 131 -- 1,273 -- -- -- 1,273
Shares issued in connection with
acquisition 23 -- 640 -- -- -- 640
----- ----- ------- ----- -------- ------ --------
Balance at June 30, 1997 9,271 9 100,079 -- (6,552) 2 93,538
--------
Comprehensive loss
Net loss -- -- -- -- (19,381) -- (19,381)
Other comprehensive loss, net of tax,
Foreign currency translation
adjustment -- -- -- -- -- (312) (312)
Unrealized gains on marketable
securities -- -- -- -- -- 95 95
--------
Total other comprehensive loss -- -- -- -- -- -- (217)
--------
Comprehensive loss -- -- -- -- -- -- (19,598)
Exercise of options to purchase
common stock and employee stock
purchases 108 -- 613 -- -- -- 613
Exercise of Warrants 23 -- 235 -- -- -- 235
Stock option compensation -- -- 131 -- -- -- 131
Treasury stock purchased (214) -- -- (2,402) -- -- (2,402)
----- ----- ------- ----- -------- ------ --------
Balance at June 30, 1998 9,188 9 101,058 (2,402) (25,933) (215) 72,517
===== ===== ======= ====== ======== ====== ========
</TABLE>
F-5
<PAGE> 45
ACT Networks, Inc.
Consolidated Statements of Stockholders' Equity (continued)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Paid-In Capital Other
Common Stock in Excess of Treasury Accumulated Comprehensive
Shares Amount Par Value Stock Deficit Income Total
------ ------ --------------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 9,188 9 101,058 (2,402) (25,933) (215) 72,517
-------
Comprehensive loss
Net loss -- -- -- -- (3,126) -- (3,126)
Other comprehensive loss,
net of tax,
Foreign currency translation
adjustment -- -- -- -- -- 10 10
Unrealized gains on marketable
securities -- -- -- -- -- (95) (95)
-------
Total other comprehensive
loss -- -- -- -- -- -- (85)
-------
Comprehensive loss -- -- -- -- -- -- (3,211)
Exercise of options to purchase
common stock and employee
stock purchases 995 1 7,612 -- -- -- 7,613
------ ----- -------- ------- -------- ----- -------
Balance at June 30, 1999 10,183 $ 10 $108,670 $(2,402) $(29,059) $(300) $76,919
====== ===== ======== ======= ======== ===== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 46
ACT Networks, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years ended June 30
1999 1998 1997
------- -------- ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(3,126) $(19,381) $1,483
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 2,299 2,436 1,571
Amortization of intangible assets 700 1,210 756
Non-cash charges for warrants and stock options -- 366 --
Gain on sale of investment (120) (4,704) --
Provision for bad debt 1,406 1,712 6
Provision for deferred taxes -- (22) 9
Impairment and restructuring charges -- 3,393 --
Write-off of in-process research and development -- 6,750 3,416
Changes in operating assets and liabilities:
Accounts receivable (2,489) (4,146) (4,723)
Inventory (784) 3,734 (3,285)
Prepaids and other current assets 1,204 (1,241) 196
Accounts payable, accrued expenses, other current
liabilities and income taxes payable 401 989 3,303
------- -------- ------
Net cash provided by (used in) operations (509) (8,904) 2,732
INVESTING ACTIVITIES
Purchase of marketable securities (23,537) (18,727) (13,744)
Sales at maturity of marketable securities 17,436 17,807 3,153
Sale (purchase) of long-term investment 120 6,699 (1,995)
Purchase of plant, equipment and other fixed assets (2,081) (2,434) (3,163)
Acquisition of DeltaComm Corp., net of cash acquired -- -- (262)
Acquisition of Dynastar product line -- -- (6,794)
Acquisition of certain assets of SourceCom -- (8,390) --
Increase in other assets (220) (142) (329)
------- -------- ------
Net cash used in investing activities (8,282) (5,187) (23,134)
FINANCING ACTIVITIES
Exercise of stock warrants and options 7,613 613 1,273
Repurchase of treasury shares -- (2,402) --
Repayment of notes payable -- -- (297)
------- -------- ------
Net cash provided by (used in) financing activities 7,613 (1,789) 976
Net impact of foreign exchange rate changes on cash 10 (50) --
------- -------- ------
Net (decrease) increase in cash (1,168) (15,930) (19,426)
Cash and cash equivalents at beginning of year 35,018 50,948 70,374
------- -------- ------
Cash and cash equivalents at end of year $33,850 $35,018 $50,948
======= ======== =======
</TABLE>
F-7
<PAGE> 47
ACT Networks, Inc.
Consolidated Statements of Cash Flows (continued)
(in thousands)
<TABLE>
<CAPTION>
Years ended June 30
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Supplemental cash flow information:
Interest and income taxes paid during the year:
Interest $ -- $7 $19
Income taxes $36 $2,103 $173
Non-cash investing and financing activities:
Acquisition of certain assets of
SourceCom:
Fair market value of assets (including goodwill)
acquired $ $1,640 $ --
Estimated value of in-process research &
development 6,750 --
------ ------ ------
8,390 --
Acquisition of DeltaComm Corporation:
Fair market value of assets (including
goodwill) acquired -- -- 374
Estimated value of in-process research and
development -- -- 701
Fair market value of liabilities assumed -- -- (158)
Issuance of stock -- -- (640)
Cash acquired -- -- (15)
------ ------ ------
-- -- 262
Acquisition of Dynastar product line:
Fair market value of assets (including
intangibles) acquired -- -- 4,353
Estimated value of in-process research
and development -- -- 2,715
Liabilities assumed -- -- (274)
------ ------ ------
-- -- 6,794
$ -- $8,390 $7,056
====== ====== ======
</TABLE>
See accompanying notes.
F-8
<PAGE> 48
ACT Networks, Inc.
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
ACT Networks, Inc. (the Company) was incorporated in California on May 15, 1987
and reincorporated in Delaware in March 1995. The Company develops, manufactures
and markets integrated wide-area network (WAN) access products which support a
broad range of integrated voice and data network applications. The Company's
products utilize advanced voice and data compression algorithms, enhanced
switching and traffic management capabilities, and proprietary integration
technologies to build cost-effective, bandwidth efficient WANs.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. Results of operations include
operations of subsidiaries from the date of acquisition.
CASH EQUIVALENTS
The Company considers cash equivalents to be only those investments which are
highly liquid, readily convertible to cash and which mature within three months
from date of purchase. Cash equivalents are carried at cost which approximates
fair market value and are considered available-for-sale as defined in Statement
of Financial Accounting Standards ("SFAS") No. 115.
MARKETABLE SECURITIES
The Company classifies its investments in marketable securities as
available-for-sale and, accordingly, records them at fair value. These
investments, consist primarily of corporate investment-grade bonds and
commercial paper. The contractual maturities of all the Company's marketable
securities are less than one year at June 30, 1999. The cost of securities sold
is based on the specific identification method.
F-9
<PAGE> 49
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISKS AND SIGNIFICANT CUSTOMERS
Accounts receivable consist primarily of amounts due from various original
equipment manufacturers, end users and distributors. Although, the Company does
not require collateral, it performs periodic credit evaluations and analysis of
amounts due from its customers. In addition, the Company carries credit
insurance on certain foreign receivables, subject to certain limits.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or market.
PLANT, EQUIPMENT AND OTHER IMPROVEMENTS
Plant, equipment and other improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets or, if shorter for leasehold improvements, the
remaining lease term, which vary from three to seven years.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles of $1,769,000 and $2,574,000 at June 30, 1999 and
1998 are net of accumulated amortization of $2,346,000 and $1,646,000,
respectively, and consist primarily of goodwill and developed technology
acquired in the Company's acquisitions. Goodwill represents the excess of the
purchase price over the estimated fair market value of net assets acquired in
business combinations and is being amortized over 7 years. Acquisition
intangibles represent the fair market valuation of intangibles acquired in
business combinations and are being amortized over 5 to 7 years. Other
intangible assets include software licensing agreements which are being
amortized over 3 to 5 years. Intangible assets were significantly written down
in 1998 as a part of the Company's restructuring (see Note 10).
LONG-LIVED ASSETS
Long-lived assets, such as plant, equipment and intangibles, are reviewed for
impairment whenever events or changes in circumstances indicate that the net
book value of these assets may not be recoverable (See Note 12).
F-10
<PAGE> 50
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
REVENUE RECOGNITION
The Company recognizes revenues from product sales upon shipment. The Company's
products are generally under warranty against defects and are sold with
provisions for certain levels of continuing customer support. The amounts of any
potential warranty costs or other customer support costs are estimated and
provided for in the period of sale.
CREDITS
The Company receives foreign credits from Canada and the Province of Quebec
related to research and development expenditures made by its Canadian
subsidiary. These amounts are reflected as a reduction of research and
development expense in the Company's statement of operations. Amounts receivable
as of June 30, 1999 and 1998 of such credits and grants amounted to $163,000 and
$63,000, respectively. For the years ended June 30, 1999, 1998 and 1997,
$184,000, $159,000 and $77,000, respectively, of these credits and grants were
reflected as a reduction of research and development expense in the accompanying
statement of operations.
EFFECT OF FOREIGN CURRENCY
The Company translates the assets and liabilities of its foreign subsidiaries at
the rate of exchange in effect at the period end. Revenues and expenses are
translated using an average of exchange rates in effect during the period.
Translation adjustments are recorded as a component of stockholders' equity in
the consolidated balance sheet.
F-11
<PAGE> 51
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
"Basic earnings (loss) per share" is based upon the weighted average number of
common shares outstanding. "Diluted earnings (loss) per share" is based upon the
weighted average number of common shares and dilutive potential common shares
outstanding. Potential common shares are outstanding stock options under the
Company's stock option plans which are included under the treasury stock method.
STOCK OPTION AND PURCHASE PLANS
The Company's stock option and purchase plans are accounted for under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" (see Note 8).
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers, presented in
Notes 4 and 10. Based on the provisions of SFAS 131 and the manner in which
management analyzes the business, the Company has determined that it does not
have separately reportable operating segments. 1.
F-12
<PAGE> 52
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Software for Internal Use" (SOP 98-1), which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 is not
expected to have a material impact on the Company's financial condition or
results of operations. To date the Company has not incurred significant costs
developing internal-use software which would be capitalizable.
In June 1998 and June 1999, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133,"respectively. These Statements require companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 137 is effective for fiscal years beginning
after June 15, 1999. The adoption of SFAS 137 is not expected to have a material
impact on the Company's financial condition or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
F-13
<PAGE> 53
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
2. BUSINESS AND ASSET ACQUISITIONS
On August 10, 1997, the Company acquired, out of bankruptcy court, certain
assets of SourceCom, a Massachusetts corporation ("SourceCom"). SourceCom is a
developer of high performance broadband access devices. The cash purchase price
paid by the Company was approximately $8,000,000. The Company also recorded
transaction costs of approximately $390,000.The acquired assets were recorded at
their estimated fair market values at the date of acquisition. Of the total
purchase price for the assets acquired, $6,750,000 represented the value of
in-process research and development that had not yet reached technological
feasibility and was charged to the Company's operations and $1,090,000
represented other intangibles being amortized over 5 years (see Note 12). The
fair market value of the in-process research and development and other
intangibles was determined by an independent appraiser. Pro forma financial
information is not presented because the transaction was only an acquisition of
certain assets, primarily technology, with no relative historical operating
results and, therefore, pro forma financial information would not be meaningful.
On March 11, 1997, the Company acquired the DynaStar family of products from
Dynatech Communications, Inc. The DynaStar product line is a family of compact,
flexible, integrated multi-service access switch connectivity products that
support extensive multi protocol WAN connections including TCP/IP, PPP, Frame
Relay, X.25 and ATM. The cash purchase price paid by the Company was $6,444,000.
The Company assumed approximately $274,000 of debt and recorded transaction
expenses of approximately $350,000.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair market values at the date of acquisition. DynaStar's operating
results have been included in the Company's consolidated financial statements
since the acquisition date of March 11, 1997. The purchase price plus costs
directly attributable to the completion of the acquisition have been allocated
to the assets and liabilities acquired. Of the total purchase price, $2,715,000
represented the value of in-process research and development that had not yet
reached technological feasibility and was charged to the Company's operations
and $2,221,000 represented other intangibles being amortized over 5 years (see
Note 12). The fair market value of the in-process research and development and
other intangibles was determined by an independent appraiser. Pro forma
financial information is not presented because the pro forma effect of the
transaction is not considered material to the Consolidated Statements of
Operations.
F-14
<PAGE> 54
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
2. BUSINESS AND ASSET ACQUISITIONS (CONTINUED)
On December 16, 1996, the Company acquired all the issued and outstanding shares
of DeltaComm Corporation, an Arizona corporation ("DeltaComm"). DeltaComm is a
developer of bandwidth-efficient modems with expertise in the satellite
communication industry. The Company paid $158,000 in cash and issued 23,000
shares of common stock of the Company with an estimated fair market value of
$640,000. The Company assumed $158,000 of liabilities. Transaction costs were
approximately $104,000.
The acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair market values at
the date of acquisition. DeltaComm's operating results have been included in the
Company's consolidated financial statements since the acquisition date of
December 16, 1996. The purchase price plus costs directly attributable to the
completion of the acquisition have been allocated to the assets and liabilities
acquired. Approximately $701,000 of the total purchase price represented the
value of in-process research and development that had not yet reached
technological feasibility and was charged to the Company's operations. Pro forma
financial information is not presented because the pro forma effect of the
transaction is not considered material to the Consolidated Statements of
Operations.
3. MARKETABLE SECURITIES
Marketable securities had a cost basis of $17,613,000 and $11,512,000,
unrealized gain of $0 and $95,000, and a fair value of $17,613,000 and
$11,607,000 as of June 30, 1999 and 1998, respectively.
In March 1999, the Company sold its interest in a joint venture investment,
previously written off, for proceeds and gain of $120,000. In March 1998, the
Company sold its investment in common stock of Netspeak with a cost basis of
$1,995,000 for gross proceeds of $6,699,000, realizing a gain of $4,704,000.
There were no other material realized gains or losses relating to marketable
securities during the years ended June 30, 1999 and 1998.
4. ACCOUNTS RECEIVABLE AND SALES TO MAJOR CUSTOMERS
Included in accounts receivable at June 30, 1999 and 1998 are $11,827,000 and
$11,019,000, respectively, of amounts due from foreign customers.
The three largest accounts receivable from individual customers represented
22.3%, 8.0% and 8.0% at June 30, 1999 and 19.6%, 4.7% and 4.2% at June 30, 1998
of total accounts receivable, respectively.
F-15
<PAGE> 55
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
4. ACCOUNTS RECEIVABLE AND SALES TO MAJOR CUSTOMERS (CONTINUED)
Sales to two customers represented 12.9% and 10.0%, respectively, of total sales
for 1999, sales to one customer represented 12.3% of total sales for 1998, and
sales to one customer represented 11.5% of total sales for 1997.
5. INVENTORY
Inventory consisted of the following components (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Purchased parts $ 2,076 $ 3,643
Sub-assemblies and finished goods 7,537 5,186
------- -------
$ 9,613 $ 8,829
======= =======
</TABLE>
6. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ 60
State -- 10 20
Foreign 36 169 1,331
---- ----- -------
36 179 1,411
Deferred:
Federal -- -- --
State -- -- --
Foreign -- (22) 9
---- ----- -------
-- (22) 9
$ 36 $ 157 $ 1,420
==== ===== =======
</TABLE>
The Company's foreign and domestic operations had income (loss) before income
taxes and eliminations of $(316,000) and $(2,570,000) for the year ended June
30, 1999, $491,000 and $(19,623,000) for the year ended June 30, 1998 and
$3,987,000 and $(1,134,000) for the year ended June 30, 1997.
F-16
<PAGE> 56
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective tax
rate, as a percentage of income before tax, is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax (benefit)
rate (34)% (34)% 34%
Amortization of goodwill 5 1 4
Change in valuation allowance 29 33 8
Foreign income taxes 1 1 --
Other -- -- 3
---- ---- ----
1% 1% 49%
---- ---- ----
</TABLE>
The tax provision for the year ended June 30, 1997 included the application of
net operating loss carryforwards which generated tax benefits of approximately
$848,000.
F-17
<PAGE> 57
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
June 30
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for losses on receivables $ 781 $ 778
Vacation accruals 104 245
Depreciation 904 320
Inventory 720 1,905
Intangibles 4,210 4,448
Net operating loss carryforwards 7,032 2,852
Research and development credit carryforwards 2,888 1,601
Other accruals 294 503
-------- --------
Total deferred tax assets $ 16,933 $ 12,652
-------- --------
Deferred tax liabilities:
Unicap adjustment -- (57)
Software development costs (27) (27)
License fee (39) (70)
Prepaid insurance (24) (81)
Federal benefit from State (739) (525)
-------- --------
Total deferred tax liabilities (829) (760)
-------- --------
Net deferred tax assets 16,104 11,892
Valuation allowance (16,104) (11,892)
Foreign deferred tax liabilities (65) (65)
-------- --------
$ (65) $ (65)
======== ========
</TABLE>
The net change in the valuation allowance for net deferred tax assets during the
year ended June 30, 1999 was approximately $4,212,000.
F-18
<PAGE> 58
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
At June 30, 1999, the Company has net operating loss carryforwards for federal
and state tax purposes of approximately $19,704,000 and $7,524,000,
respectively, which expire in 2014 for federal and 2004 for state. The Company
has research and development credit carryforwards of $1,835,000 and $1,052,000
for federal and state tax purposes, respectively that expire through 2013 for
federal and state.
Included in the valuation allowance balance is $4,776,000 related to the
exercise of stock options which are not reflected as an expense for financial
reporting purposes. Accordingly, any future reduction in the valuation allowance
relating to this amount will be credited directly to equity and not reflected as
an income tax benefit in the statement of operations.
The Company intends to reinvest the foreign subsidiary's net earnings in the
subsidiary's local operations. Accordingly, U.S. taxes have not been provided
for such earnings.
7. COMMITMENTS & CONTINGENCIES
The Company leases its offices, manufacturing facility and certain equipment
under noncancelable operating lease agreements. The office and manufacturing
facility leases are subject to annual increases based on the Consumer Price
Index. Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
- ---------------------------
<S> <C>
2000 $ 1,376
2001 1,282
2002 1,203
2003 1,151
2004 1,104
-------
$ 6,116
=======
</TABLE>
Rental expense under operating leases was $1,966,000, $1,429,000 and $668,000
for the years ended June 30, 1999, 1998 and 1997, respectively.
The Company is involved in certain claims and legal proceedings which arise in
the normal course of business. Management does not believe that the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
F-19
<PAGE> 59
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY
STOCK OPTION AND PURCHASE PLANS
The Company's stock option plans provide for option grants designated as either
nonqualified or incentive stock options. Options granted under all stock option
plans generally carry an exercise price of not less than the fair market value
of the underlying shares as of the date of the option grant and expire after ten
years. The Company executes individual option agreements under the stock option
plans and the shares underlying the options generally become vested at 24% of
the total grant after the completion of the first 12 full months of employment
and 2% per month thereafter. Certain terms of options held by the Company's
then-Chairman of the Board and Chief Executive Officer were modified giving rise
to a non-cash compensation charge of $131,000 for the year ended June 30, 1998.
At June 30, 1999, the Company has authorized a total of 2,779,000 shares of
common stock for issuance under the 1995 stock option/stock issuance plan (the
1995 Plan), 950,000 shares under the 1997 Non-Executive Officer Stock
Option/Stock Issuance Plan (the 1997 Plan), 660,000 shares under the 1997 Stock
Incentive Plan (the "1997 Incentive Plan"), and 150,000 shares under the option
grant for Mario Uribe. At June 30, 1999, 7,000 shares remain available for grant
and 1,383,000 are reserved for issuance upon the exercise of outstanding options
and options available for grant under the 1995 Plan, 12,000 shares remain
available for grant and 885,000 shares are reserved for issuance upon the
exercise of outstanding options under the 1997 Plan, 22,000 shares remain
available for grant and 502,000 shares are reserved for issuance upon the
exercise of outstanding options under the 1997 Incentive Plan, and no shares
remain available for grant and 150,000 shares are reserved for issuance upon the
exercise of outstanding options under the option grant for Mario Uribe.
On August 3, 1998, the Company implemented an option cancellation/regrant
program for directors, executive officers and other employees holding stock
options with an exercise price per share in excess of the market price of the
Company's Common Stock at the time the cancellation/regrant occurred. Stock
options of 1,724,798 with an exercise price in excess of $ 6.75 per share were
canceled and new options for the same aggregate number of shares were granted
with an exercise price of $ 6.75 per share.
F-20
<PAGE> 60
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
On June 10, 1997, the Company's Board of Directors implemented a
cancellation/regrant program for options issued under the 1995 plan, whereby
holders of certain stock options were offered the opportunity to cancel certain
existing options and receive a grant of a new option to purchase the same number
of unexercised shares with an exercise price equal to the then market price of
ACT common stock.
The following is a summary of all stock option activity for the three years
ended June 30, 1999:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
NUMBER OF PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
--------- ------------ --------------
<S> <C> <C> <C>
Outstanding at June 30, 1996 1,422,000 $ .70-$23.88 $ 0.67
Granted 1,745,000 11.00-35.00 21.97
Canceled (936,000) .70-35.00 26.00
Exercised (110,000) .70-17.25 8.10
--------- ------------ --------
Outstanding at June 30, 1997 2,121,000 .70-35.00 13.33
Granted 1,256,000 7.06-14.56 10.31
Canceled (665,000) 1.75-35.00 15.91
Exercised (51,000) .70-12.13 2.43
--------- ------------ --------
Outstanding at June 30, 1998 2,661,000 .70-27.50 11.47
Granted 3,756,000 5.38-23.88 8.72
Canceled (2,621,000) .70-25.50 11.41
Exercised (916,000) .70-16.63 7.57
--------- ------------ --------
Outstanding at June 30, 1999 2,880,000 $ .70-$27.50 $ 9.17
========= ============ ========
</TABLE>
At June 30, 1999, stock options to purchase 1,246,000 shares were exercisable at
a weighted average price of $7.73. Information regarding stock options
outstanding as of June 30, 1999 is as follows:
F-21
<PAGE> 61
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Exercise Contractual Exercise
Price Range Shares Price Life Shares Price
- ------------ --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Under $10.00 1,856,000 6.43 8.4 1,039,000 6.36
Over $10.00 1,024,000 14.15 9.5 207,000 14.64
</TABLE>
Fair Value Disclosures
Stock option grants are set at the closing price of the Company's common stock
on the date of grant and the related number of shares granted are fixed at that
point in time. Therefore under the principles of APB Opinion No. 25, the Company
does not recognize compensation expense associated with the grant of stock
options. SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
use of option valuation models to provide supplemental information regarding
options granted after fiscal 1996. Pro forma information regarding net income
(loss) and earnings (loss) per share shown below was determined as if the
Company had accounted for its employee stock options and shares sold under its
stock purchase plan under the fair value method of that statement.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of
6.0%, 6.22% and 6.61%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 85% for 1999, and 65% for 1998 and
1997, and expected life of the options of 4.17, 4.16 and 4 years, respectively.
These assumptions resulted in weighted-average fair values of $5.76, $5.73 and
$9.62 per share for stock options granted in 1999, 1998 and 1997, respectively.
F-22
<PAGE> 62
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting periods. The pro forma effect on net
income (loss) for 1999, 1998 and 1997 is not representative of the pro forma
effect on net income (loss) in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1997. Pro forma information in future years will reflect the amortization of a
larger number of stock options granted in several succeeding years. The
Company's pro forma information is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Years ended June 30, 1999 1998 1997
- -------------------- ------- -------- --------
<S> <C> <C> <C>
Pro forma net loss $(9,747) $(24,184) $ (2,412)
Pro forma loss per share:
Basic $ (1.01) $ (2.64) $ (0.26)
Diluted $ (1.01) $ (2.64) $ (0.26)
==================================================================================
</TABLE>
The Company has an employee stock purchase plan whereby, in accordance with
Section 423 of the Internal Revenue Code, eligible employees may authorize
payroll deductions of up to 10% of their salary to purchase shares of the
Company's common stock at the lower of 85% of the fair market value of common
stock on the first or last day of the offering period. 87,000 shares were issued
under this plan for the year ended June 30, 1999. There are 136,000 shares
authorized and available for future issuance under this plan.
OTHER COMPREHENSIVE INCOME/(LOSS)
As of July 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains and
losses on the Company's available-for-sale securities and foreign currency
translation adjustments to be included in other comprehensive income/(loss).
F-23
<PAGE> 63
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Information regarding the components of accumulated other comprehensive
income/(loss) are as follows (in thousands):
<TABLE>
<CAPTION>
ACCUMULATED
UNREALIZED FOREIGN OTHER
GAINS/(LOSSES)ON CURRENCY COMPREHENSIVE
SECURITIES TRANSLATION INCOME/(LOSS)
---------------- ----------- -------------
<S> <C> <C> <C>
Balance at June 30, 1997 $ -- $ 2 $ 2
Comprehensive other income,
For the year ended June 30, 1998 95 (312) (217)
----- ------ -------
Balance at June 30, 1998 95 (310) (215)
Comprehensive other income,
For the year ended June 30, 1999 (95) 10 (85)
----- ------ -------
Balance at June 30, 1999 $ -- $ (300) $ (300)
===== ====== =======
</TABLE>
9. EMPLOYEES' RETIREMENT PLAN
In 1994, the Company established a 401(k) Plan (the Plan) covering substantially
all of its full-time employees. Employees may make voluntary contributions to
the Plan. The Company may voluntarily contribute a percentage of the employee's
contribution, at its discretion, subject to certain limitations. The Company
contributed $75,000, $66,000 and $30,000 to the Plan during the years ended
1999, 1998 and 1997, respectively.
F-24
<PAGE> 64
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
10. GEOGRAPHIC INFORMATION
The Company's sales by geographic area of the customer are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
North America (primarily US) $26,408 $19,913 $12,422
Latin America 9,476 14,194 18,936
Europe 8,342 6,203 5,375
Asia Pacific 10,096 14,654 12,440
------- ------- -------
$54,322 $54,964 $49,173
======= ======= =======
</TABLE>
Information about the Company's long-lived assets in each geographic area is as
follows (in thousands):
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998
------ ------
<S> <C> <C>
Long-lived assets:
United States $2,968 $3,106
Canada 634 637
Asia Pacific 34 --
------ ------
Total assets $3,636 $3,743
====== ======
</TABLE>
Long-lived assets are those assets of the Company that are identified with the
operations in each geographic area.
F-25
<PAGE> 65
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
11. QUARTERLY OPERATING DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter
------------------------------------------------
First(1) Second Third Fourth
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Year ended June 30, 1999:
Net sales $ 13,936 $ 12,074 $ 15,103 $ 13,209
Gross profit 7,931 7,204 8,809 5,966
Net (loss) income (966) 225 612 (2,997)
-------- -------- -------- --------
(Loss) earnings per share
Basic $ (0.10) $ .02 $ 0.06 $ (.30)
======== ======== ======== ========
Diluted $ (0.10) $ .02 $ 0.06 $ (.30)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Quarter
------------------------------------------------
First(1) Second Third(3) Fourth(1)
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Year ended June 30, 1998:
Net sales $ 13,021 $ 15,310 $ 13,007 $ 13,626
Gross profit 7,322 8,572 7,287 1,884
Net(loss) income (8,946) (483) 3,148 (13,099)
--------- -------- -------- --------
(Loss) earnings per share
Basic $ (0.97) $ (0.05) $ 0.34 $ (1.43)
======== ======== ======== ========
Diluted $ (0.97) $ (0.05) $ 0.33 $ (1.43)
======== ======== ======== ========
</TABLE>
- ----------
(1) The first quarter of 1999 includes a restructuring charge of $607,000, and
the fourth quarter of 1998 includes impairment and restructuring charges of
$3,393,000 and related inventory write-downs of $3,651,000, additional
inventory write-downs of $522,000 and $1,200,000 of charges for reserves
against receivables due to unexpectedly slow collections (see Note 12).
(2) Included in the Company's net loss for the first quarter of 1998, is a
charge of $6,750,000 due to the write-off of in-process research and
development purchased in connection with acquisitions (see Note 2).
(3) Included in the Company's net income for the third quarter of 1998 is a
gain of $4,704,000 from the sale of Netspeak Corporation Common Stock.
F-26
<PAGE> 66
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
12. IMPAIRMENT AND RESTRUCTURING CHARGES
In July 1998, the Company announced a major restructuring program designed to
streamline operations and focus on key markets. As part of the restructuring
program, the Company concentrated its resources on the Netperformer and
ServiceXchange product lines. Additionally, the Company significantly reduced
its workforce, eliminated its business unit matrix structure in favor of a
functional organization, consolidated its facilities, and de-emphasized
engineering, sales and marketing efforts for non-strategic products.
As a result of the restructuring plan, in fiscal 1999, the Company incurred
approximately $607,000 of charges related primarily to employee terminations. At
June 30, 1998, the Company accrued approximately $750,000 for certain
non-cancelable purchase orders for non-strategic inventory that became impaired.
In connection with the restructuring, in 1998 the Company evaluated its
long-lived assets, principally the tangible and intangible assets established in
the DeltaComm, Dynastar, and SourceCom acquisitions, for impairment under SFAS
No. 121. The carrying amount of these assets exceeded the projected undiscounted
future cash flows and, accordingly, the carrying amount was written-down to fair
value. Fair value was determined based on an analysis of the projected future
discounted cash flows of the underlying operation, including cash generated from
the disposal of underlying assets. In addition, in 1998, the Company recorded
charges to cost of goods sold of $3,651,000 to write-down the carrying value of
inventory due to the restructuring and related de-emphasis or discontinuation of
certain product lines and other factors.
The impairment write-downs, excluding inventory write-downs, reflected in the
1998 statement of operations consisted of the following non-cash charges (in
thousands):
<TABLE>
<CAPTION>
Asset Impaired Amount
- -------------- -------
<S> <C>
Property, plant and equipment $ 682
Developed technology and other acquisition intangibles 2,444
Other intangible assets 267
-------
$ 3,393
=======
</TABLE>
During 1999, the Company sold certain assets, and the buyer assumed certain
liabilities, originally acquired in the DeltaComm acquisition. The Company
recognized a loss of $120,000 on the sale of those assets, which loss is
included in Interest and other income in the Statement of Operations.
F-27
<PAGE> 67
ACT Networks, Inc.
Notes to Consolidated Financial Statements (continued)
13. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation for basic and diluted earnings
(loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998 1997
------- -------- ------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share -- net
income (loss)............................................... $(3,126) $(19,381) $1,483
======= ======== ======
Denominator:
Denominator for basic earnings (loss) per share --
weighted-average shares.................................. 9,644 9,170 9,184
Effect of dilutive securities -- employee stock options. -- -- 789
------- -------- ------
Denominator for diluted earnings (loss) per share --
adjusted weighted-average shares............................ 9,644 9,170 9,973
====== ====== ======
Basic earnings (loss) per share................................ $(0.32) $(2.11) $ 0.16
====== ====== ======
Diluted earnings (loss) per share.............................. $(0.32) $(2.11) $ 0.15
====== ====== ======
</TABLE>
Options to purchase 2,880,000 and 2,661,000 shares outstanding during the years
ended June 30, 1999 and 1998 respectively, were excluded from the respective
computations of diluted loss per share because their effect would be
anti-dilutive. Options to purchase 360,000 shares with exercise prices greater
than the average market prices of common stock outstanding during the year ended
June 30, 1997 were also excluded from the computations of diluted earnings per
share because of their anti-dilutive effect.
F-28
<PAGE> 68
EXHIBITS INDEX
EXHIBIT
NO.
3.1 Certificate of Incorporation of the Company. Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394
4.1 Specimen certificate representing shares of Common Stock of the Company.
Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
4.2 Form of Warrant of the Company. Incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-1, Registration No.
33-90394.
10.1 Master Lease Agreement dated January 11, 1994 by and between the Company
and Leasetec Corporation, as amended and supplemented. Incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-90394.
10.2 Form of Indemnification Agreement. Incorporated by reference to Exhibit
10.6 to the Company's Registration Statement on Form S-1, Registration
No. 33-90394.
10.3 1987 Stock Option Plan (the "1987 Plan"). Incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.4 Form of Amended Notice of Grant of Stock Option with respect to holders
of installment incentive stock options granted under the 1987 Plan.
Incorporated by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
10.5 Form of 1987 Installment Incentive Stock Option Agreement, Immediately
Exercisable Stock Option Agreement and Immediately Exercisable
Non-Qualified Stock Option Agreement generally used in connection with
the 1987 Plan. Incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.6 Form of 1987 Stock Purchase Agreement generally used in connection with
the 1987 Plan. Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.7 1993 Stock Option Plan as amended (the "1993 Plan"). Incorporated by
reference to Exhibit 10.11 to the Company's Registration Statement on
Form S-1, Registration No. 33-90394.
10.8 Form of Notice of Grant of Stock Option generally used in connection
with the 1993 Plan. Incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.9 Form of 1993 Stock Option Agreement generally used in connection with
the 1993 Plan. Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.10 Form of 1993 Stock Purchase Agreement generally used in connection with
the 1993 Plan. Incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1, Registration No. 33-90394.
10.11* Cooperation and Supply Agreement dated as of November 19, 1993 by and
between StrataCom, Inc. and the Company. Incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on Form S-1,
Registration No. 33-90394.
10.12 Technical Information Escrow Agreement dated July 18, 1994 by and
between StrataCom, Inc., the Indianapolis Vault Company and the Company.
Incorporated by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1, Registration No. 33-90394.
10.13 1995 Stock Option/Stock Issuance Plan (the "1995 Plan"). Incorporated by
reference to Exhibit 99.1 to the Company's Registration Statement on
Form S-8, Registration No. 33-80007.
10.14 Form of Stock Option Agreement generally used in connection with the
Discretionary Option Grant Program of the 1995 Plan. Incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on
Form S-8, Registration No. 33-80007.
<PAGE> 69
10.15 Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
Right). Incorporated by reference to Exhibit 99.4 to the Company's
Registration Statement on Form S-8, Registration No. 33-80007.
10.16 Form of Addendum to Stock Option Agreement (Involuntary Termination
Following Change of Control). Incorporated by reference to Exhibit 99.5
to the Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.17 Form of Addendum to Stock Option Agreement (Special Tax Elections).
Incorporated by reference to Exhibit 99.6 to the Company's Registration
Statement on Form S-8, Registration No. 33-80007.
10.18 Form of Automatic Stock Option Agreement. Incorporated by reference to
Exhibit 99.9 to the Company's Registration Statement on Form S-8,
Registration No. 33-80007.
10.19 Form of Stock Issuance Agreement generally used in connection with the
Discretionary Option Grant Program of the 1995 Plan. Incorporated by
reference to Exhibit 99.10 to the Company's Registration Statement on
Form S-8, Registration No. 33-80007.
10.20 Form of Addendum to Stock Issuance Agreement (Involuntary Termination
Following Change of Control). Incorporated by reference to Exhibit 99.11
to the Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.21 Form of Addendum to Stock Issuance Agreement (Special Tax Elections).
Incorporated by reference to Exhibit 99.12 to the Company's Registration
Statement on Form S-8, Registration No. 33-80007.
10.22 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.13
to the Company's Registration Statement on Form S-8, Registration No.
33-80007.
10.23 The Share Purchase Agreement By and Among the Company, Canada Inc. and
Certain Presticom Stockholders, dated as of November 24, 1995.
Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K, dated November 30, 1995.
10.24 1997 Non-Executive Officer Stock Option/Stock Issuance Plan as amended
July 15, 1997. Incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8, Registration No.
333-85845.
10.25 Form of Notice of Grant of Stock Option generally used in connection
with 1997 Plan. Incorporated by reference to Exhibit 10.29 to the
Company's Quarterly Report for the period ended March 31, 1997.
10.26 Form of Stock Option Agreement generally used in connection with 1997
Plan Incorporated by reference to Exhibit 10.30 to the Company's
Quarterly Report for the period ended March 31, 1997.
10.27 Form of Addendum to Stock Option Agreement. Incorporated by reference to
Exhibit 10.31 to the Company's Quarterly Report for the period ended
March 31, 1997.
10.28 The Asset Purchase Agreement by and between the Company and Sourcecom,
Inc. dated as of July 16, 1997. Incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K dated August 11, 1997.
10.29 1997 Stock Incentive Plan. Incorporated by reference to Exhibit 99.1 to
the Company's Registration Statement on Form S-8, Registration No.
333-85845.
10.30 Form of Notice of Grant of Stock Option - Installment Option.
Incorporated by reference to Exhibit 99.2 to the Company's Registration
Statement on Form S-8, Registration No. 333-44087.
10.31 Form of Stock Option Agreement - Installment Option. Incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on
Form S-8, Registration No. 333-44087.
10.32 Notice of Grant of Stock Option - Immediately Exercisable Option.
Incorporated by reference to Exhibit 99.4 to the Company's Registration
Statement on Form S-8, Registration No. 333-44087.
10.33 Stock Option Agreement - Immediately Exercisable Option. Incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement on
Form S-8, Registration No. 333-44087.
10.34 Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
Rights). Incorporated by reference to Exhibit 99.6 to the Company's
Registration Statement on Form S-8, Registration No. 333-44087.
<PAGE> 70
10.35 Form of Addendum to Stock Option Agreement (Involuntary Termination
following Change in Control). Incorporated by reference to Exhibit 99.7
to the Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.36 Stock Purchase Agreement. Incorporated by reference to Exhibit 99.8 to
the Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.37 Addendum to Stock Purchase Agreement (Involuntary Termination following
Change in Control). Incorporated by reference to Exhibit 99.9 to the
Company's Registration Statement on Form S-8, Registration No.
333-44087.
10.38 Automatic Notice of Initial Grant. Incorporated by reference to Exhibit
99.10 to the Company's Registration Statement on Form S-8, Registration
No. 333-44087.
10.39 Automatic Notice of Annual Grant. Incorporated by reference to Exhibit
99.11 to the Company's Registration Statement on Form S-8, Registration
No. 333-44087.
10.40 Automatic Stock Option Agreement. Incorporated by reference to Exhibit
99.12 to the Company's Registration Statement on Form S-8, Registration
No. 333-44087.
10.41 Office Lease dated April 15, 1999 by and between the Company and Malibu
Canyon Office Partners, LLC.
10.42 Form of Notice of Grant of Stock Option - Option Grant to Mr. Uribe.
Incorporated by reference to Exhibit 99.17 to the Company's Registration
Statement on Form S-8, Registration No. 33-85845.
10.43 Form of Stock Option Agreement - Option Grant to Mr. Uribe. Incorporated
by reference to Exhibit 99.18 to the Company's Registration Statement on
Form S-8, Registration No. 333-85845.
21.1 List of Subsidiaries of the Company.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on page 37).
27.1 Financial Data Schedule.
* The Company has received confidential treatment for portions of this document
previously filed with the Commission.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
<PAGE> 1
EXHIBIT 10.41
OFFICE LEASE
BASIC LEASE INFORMATION
Date: April 15, 1999
Landlord: Malibu Canyon Office Partners, LLC, a California
limited liability company.
Tenant: ACT Networks, Inc., a Delaware corporation.
Section l(a) - Buildings: (i) Building A, commonly known as 26701 W. Agoura
Road, Calabasas, CA 91302 and (ii) Building B, commonly known as 26707
W. Agoura Road, Calabasas, CA 91302.
Section l(b) - Premises: (i) Building A, Suite 100, containing twenty-one
thousand five hundred and three (21,503) square feet of Rentable Area
located on the first (1st) floor of said Building, (ii) Building B,
Suite 100, containing thirty-four thousand three hundred fifty-six
(34,356) square feet of Rentable Area located on the first (1st) floor
of said Building, and (iii) Building B, Suite 203, containing three
thousand one hundred twenty (3,120) square feet of Rentable Area located
on the second (2nd) floor of said Building.
Section l(c) - Intentionally Omitted.
Section l(j) - Tenant's Percentage Share: (i) One hundred percent (100%), as to
Building A and (ii) forty-nine and sixty-eight hundredths percent
(49.68%) as to Building B; provided, however, that Tenant's Percentage
Share as to Building B shall be increased to fifty-four and nineteen
hundredths percent (54.19%) once the Premises are increased to include
the second floor space in Building B described in Section 1(b) above.
Section 2 - Term: Seven (7) years.
Section 2(a) - Estimated Commencement Date: June 1, 1999.
Section 3 - Base Rent: One and thirty-eight hundredths dollars ($1.38) per month
per square foot of Rentable Area contained in the premises (triple net).
Section 3(g) - Escalations to Base Rent: Three percent (3%) increase on each
twelve (12) month anniversary of the Commencement Date during the Term
and any extension and/or renewal thereof.
Section 29 - Security Deposit: An amount equal to one (1) month's Base Rent.
Section 31 - Landlord's and Tenant's Address for Notices:
Landlord: Tenant:
c/o The Johnston Group ACT Networks, Inc.
26635 W. Agoura Road, Suite 105 26701 W. Agoura Road, Ste 100
Calabasas, CA 91302 Calabasas, CA 91302
Attn: Mr. Jeff Johnston, President Attn: General Counsel
With a copy to: With a copy to:
Kenneth S. Fields, Esq. Xylan Corporation
Fields & Pearl 26801 W. Agoura Road
1875 Century Park East, 14th Floor Calabasas, CA 91302
Los Angeles, CA 90067 Attn: Mr. John Yi
Section 34 - Brokers: Richard Abbitt, of Lee & Associates, for Tenant, and The
Johnston Group, for Landlord.
Section 35 - Parking: Three point eight (3.8) non-exclusive surface parking
spaces per each one thousand square feet of Usable Area contained in the
Premises (prorated and rounded to the nearest whole number to the extent
Usable Area is not evenly divisible by 1,000).
Section 38 - Guarantor: Xylan Corporation, a California corporation.
Exhibit(s) and Addendum:
Exhibit "A" - Site Plan of Project
i
<PAGE> 2
Exhibit "B" - Floor Plan of Premises
Exhibit "C" - Improvement of the Premises
Exhibit "D" - Rules and Regulations
Exhibit "E" - Guaranty
This Basic Lease Information shall be a part of this Lease, provided that in the
event of any conflict between any Basic Lease Information and the provisions
contained in the body of this Lease, the latter shall control.
ii
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Definitions..........................................................................1
2. Term; Condition of Premises..........................................................4
3. Base Rent............................................................................4
4. Escalation Rent......................................................................5
5. Use..................................................................................8
6. Services.............................................................................9
7. Impositions Payable by Tenant.......................................................11
8. Alterations.........................................................................11
9. Liens...............................................................................12
10. Repairs.............................................................................12
11. Destruction or Damage...............................................................13
12. Insurance...........................................................................13
13. Indemnification.....................................................................15
14. Compliance with Legal Requirements..................................................15
15. Assignment and Subletting...........................................................15
16. Rules...............................................................................17
17. Entry by Landlord...................................................................17
18. Tenant's Default....................................................................17
19. Landlord's Remedies.................................................................18
20. Landlord's Default and Tenant's Remedies............................................19
21. Attorneys' Fees.....................................................................19
22. Eminent Domain......................................................................20
23. Subordination.......................................................................20
24. Sale................................................................................21
25. Estoppel Certificate................................................................21
26. Intentionally Omitted...............................................................21
27. No Light, Air, or View Easement.....................................................21
28. Holding Over........................................................................21
29. Security Deposit....................................................................21
30. Waiver..............................................................................22
31. Notices and Consents. .............................................................22
32. Complete Agreement..................................................................22
33. Authority...........................................................................23
34. Brokers.............................................................................23
35. Parking.............................................................................23
36. Force Majeure.......................................................................23
37. Waiver of Trial by Jury.............................................................23
38. Guaranty of Lease...................................................................23
39. Recapture...........................................................................24
40. Expansion Space.....................................................................24
41. Signage; Roof Rights................................................................24
42. Surrender by Existing Tenants.......................................................25
43. Miscellaneous.......................................................................25
</TABLE>
iii
<PAGE> 4
OFFICE LEASE
THIS OFFICE LEASE (this "Lease"), dated April 14, 1999 for purposes of
reference only, is made and entered into by and between Malibu Canyon Office
Partners, LLC, a California limited liability company ("Landlord") and ACT
Networks, Inc., a Delaware corporation ("Tenant").
WITNESSETH:
Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord
the "Premises" described in Section l(b) below for the "Term" and subject to the
terms, covenants, agreements and conditions hereinafter set forth, to each and
all of which Landlord and Tenant hereby mutually agree.
1. Definitions. Unless the context otherwise specifies or requires.
The following terms shall have the meanings herein specified:
(a) The term "Building" shall mean the building specified in the
Basic Lease Information located in an unincorporated area within the County of
Los Angeles, and having a postal address within Calabasas, California.
References in this Lease to the Building shall be deemed to mean the Building or
any portion thereof, if the context so requires. The term "Project" shall mean
that certain commercial project generally depicted on Exhibit "A" attached
hereto, including, without limitation, the Building and other buildings, "Common
Areas" (as hereinafter defined), the land upon which the Building, such other
buildings and the Common Areas are located, and, at Landlord's discretion, such
additional real property, areas, land, buildings or other improvements as may
from time to time be hereafter added to the Project. References in this Lease to
the Project shall be deemed to mean the Project or any portion thereof, as the
same exists from time to time, if the context so requires. The depiction of the
Project on Exhibit "A" does not constitute a representation, covenant or
warranty of any kind by Landlord, and Landlord and/or any owner of all or any
part of the Project reserve the right from time to time to change the size,
layout and dimensions of the Project or any of the buildings therein, the
parking areas, and/or identity and type of use of other tenants; provided,
however, that (i) no such change(s) shall substantially reduce Tenant's ability
to use the Premises on a permanent basis, (ii) Landlord shall use commercially
reasonable efforts to ensure that the number of parking stalls in Corporate
Center (as depicted on Exhibit "A") is not substantially reduced on a permanent
basis, and provided further that if any such change(s) to the size, layout and
dimensions of the Project substantially reduces Tenant's use of the Premises for
more than five (5) consecutive business days, Tenant shall be entitled to an
abatement of Base Rent and Escalation Rent to the extent the Premises is
actually not used by Tenant. Tenant hereby waives any claim for damages for any
inconvenience to or interference with Tenant's business or any loss of occupancy
or quiet enjoyment of the Premises by reason of the foregoing. Landlord and/or
any owner of all or any portion of the Project shall have the right to convey
its ownership of all or any part of the Project to one or more third parties,
and thereafter the third party shall have the right to remove such conveyed
portion from the definition of "Project" set forth in this Lease.
(b) The term "Premises" shall mean the suite(s) within the
Building, containing the square footage, and located on the floor(s), specified
in the Basic Lease Information, which is shown as cross-hatched on the floor
plan(s) attached hereto as Exhibit "B". References in this Lease to the Premises
shall be deemed to mean the Premises or any portion thereof, if the context so
requires.
(c) Intentionally Omitted.
(d) The term "Operating Expenses" shall mean all costs of
ownership, management, operation, maintenance, repair and replacement of the
Project, including, without limitation: wages, salaries and other compensation
and benefits of all persons engaged in the operation, maintenance and security
of the Project; property management, legal, accounting and consulting fees in
the maintenance, management, operation and/or repair of the Project; janitorial,
alarm, security and other services; roof repair and re-roofing; Project
management office rent or rental value; rent or rental value for Project space
occupied by Common Area facilities, such as restaurants/cafeterias, fitness
centers and other amenities; cost of power, water, waste disposal, telephone,
elevator, sprinkler and other utilities usage and facilities maintenance and
service; materials and supplies; costs of maintenance and repairs including with
respect to systems and equipment; costs of permits, licenses, certificates and
1
<PAGE> 5
inspections; insurance premiums for all insurance carried by Landlord in
connection with the Project as reasonably determined by Landlord and the
deductible portion of any insured loss thereunder; depreciation on personal
property; the cost of landscaping, relamping and all supplies, tools, equipment
and materials used in the operation, repair, restoration and maintenance of the
Project; and the cost of capital repairs, replacements or other improvements or
other costs incurred in connection with the Project, including, without
limitation, those (i) which are intended to effect economies in the operation or
maintenance of the Project, (ii) that are required to comply with present or
anticipated conservation programs, (iii) which are replacements or modifications
of nonstructural items located in the Common Areas required to keep the Common
Areas in good order and condition, (iii) that are required under any applicable
"Laws" (as hereinafter defined) enacted following the construction of the
applicable portion of the Project; provided, however, that any capital
expenditure shall be amortized over its useful life as Landlord shall reasonably
determine, and the unamortized cost thereof shall bear interest at the rate of
ten percent (10%) per annum or such higher rate as was paid by Landlord on funds
borrowed for the purposes of purchasing, installing and/or constructing such
capital improvements. Operating Expenses shall not include: Tax Expenses;
depreciation (except as provided above); cost of tenants' improvements; real
estate brokers' commissions; legal fees in connection with the leasing of the
Project; costs reimbursed by policies of insurance, the premiums of which are
included in Operating Expenses; interest on or amortization of any Mortgage, as
defined in Section 23 below; financing costs (except for interest on
amortization of any items included within Operating Expenses on an amortized
basis); franchise taxes and net income taxes of Landlord; the cost of any item
or items for which Landlord is reimbursed by other tenants of the Project (other
than by payment of such tenant's share of Operating Expenses or Tax Expenses),
by third parties or which are paid directly by third parties; rent under any
ground lease and/or underlying leases; direct compensation of any kind paid to
officers and executives of Landlord above the level of project manager; any
costs stated in Operating Expenses representing an amount paid to a corporation
or entity which is controlled by or under common control with Landlord to the
extent in excess of the amount which would be paid in the absence of such
relationship (provided that Tenant acknowledges that construction supervision
and management fee of ten percent (10%) and five percent (5%), respectively, are
reasonable, and that such fees do not constitute such an excess amount);
advertising and promotional expenses incurred in the leasing of the Building or
any portion of the Project; any bad debt loss, rent loss or reserves for bad
debts or rent loss; any and all costs associated with the operation of the
business of Landlord, including operation of Landlord as a limited liability
company or other legal entity, as the same are distinguished from costs of
operation, maintenance, repair, restoration and/or management of the Building
and/or Project; all charges for complying with laws, codes, regulations or
ordinances relating to Hazardous Materials caused to be located upon the Project
by Landlord and/or its employees; costs of special services (which shall not
cover normal variations in repairs or the need for repairs) for tenants, but
only to the extent that such services are not offered to Tenant; tenant
concessions and any other costs associated with the leasing or sale of the
Project or any portion thereof; costs incurred in removing and storing the
property of former tenants or occupants of the Project; penalties or fines
incurred by Landlord as a direct and sole result of Landlord's gross negligence
or willful misconduct in operating the Project; costs and expenses attributable
to a restaurant and/or fitness center (including, without limitation, rental
value for the space occupied by each such facility(ies)), except to the extent
that such costs and expenses exceed the net income actually received by Landlord
from the operation of each such facility(ies); legal or accounting fees, costs
and disbursements for negotiating leases or enforcing the lease obligations of
other tenants in the Building; Landlord's expenses relating to any parking
facilities on or about the Project, except to the extent that such expenses
exceed the revenues received by Landlord as a result of such facilities; costs
for acquisition of sculpture, paintings, other objects of art with a cost
exceeding $1,000.00 per item; any costs, fees, dues, contributions or similar
expenses for political, charitable, industry associations or similar
organizations; capital expenditures for initial building construction or
architectural additions to the Building that result in a larger building; the
costs of correcting latent defects in the construction of the base, core or
shell of the Building (provided that the foregoing shall not exclude the costs
of normal repair, maintenance and replacement). Actual Operating Expenses for
each calendar year shall be adjusted to equal Landlord's reasonable estimate of
Operating Expenses had the total Rentable Area of the Project been occupied. If
Landlord is not furnishing any particular work or service (the cost of which, if
performed by Landlord, would be included in Operating Expenses) to a tenant who
has undertaken to perform such work or service in lieu of the performance
thereof
2
<PAGE> 6
by Landlord, Operating Expenses shall be deemed to be increased by an amount
equal to the additional Operating Expenses which would reasonably have been
incurred during such period by Landlord if Landlord had at its own expense
furnished such work or service. Notwithstanding the foregoing, Landlord shall
not recover through Operating Expenses any item of cost more than once.
(e) The term "Tax Expenses" shall mean all federal, state,
county, municipal or local governmental taxes, fees, charges or other
impositions of every kind and nature, whether general, special, ordinary or
extraordinary, including, without limitation, real estate taxes, general and
special taxes and/or assessments (including, without limitation, any assessment,
tax, fee, levy or charge by any school, agricultural, lighting, drainage,
transportation, community facilities, improvement or other district), transit
taxes, personal property taxes imposed upon the fixtures, machinery, equipment,
apparatus, systems and equipment, appurtenances, furniture and other personal
property used in connection with the Project, which shall be paid during any
calendar year (without regard to any different fiscal year used by such
governmental authority) because of or in connection with the ownership, leasing
and/or operation of the Project. Tax Expenses shall include any assessment, tax,
fee, levy or charge in addition to, or in substitution, partially or totally, of
any assessment, tax, fee, levy or charge previously included within the
definition of Tax Expenses, and all consultants' and attorneys' fees and
expenses incurred for the purpose of maintaining an equitable assessed valuation
of the Building and/or attempting to protest, reduce or minimize Tax Expenses;
provided, however, that attorneys' fees and expenses incurred for the purposes
of maintaining an equitable assessed valuation of the Building and/or attempting
to protest, reduce or minimize Tax Expenses shall be amortized over sixty (60)
months (with interest at the rate of six percent (6%) per annum).
Notwithstanding the foregoing, Tax Expenses shall not include franchise taxes,
gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes,
federal and state income taxes, and other taxes to the extent applicable to
Landlord's general or net income (as opposed to rents or receipts). If any Tax
Expenses can be paid by Landlord in installments, then, for the purpose of
calculating Tenant's obligation to pay Tax Expenses, any such Tax Expense shall
be deemed to be paid by Landlord in the maximum allowable number of
installments, regardless of the manner in which Landlord actually pays such Tax
Expenses.
(f) The term "Building Operating Expenses" shall mean the portion
of Operating Expenses allocated to the Building pursuant hereto. The term
"Building Tax Expenses" shall mean the portion of Tax Expenses allocated to the
Building pursuant hereto. The parties acknowledge that the Building is a part of
a multi-building project and that the costs and expenses incurred in connection
with the Project should be shared between the tenants of the Building and the
tenants of the other buildings of the Project. Accordingly, Operating Expenses
and Tax Expenses are determined annually for the Project as a whole, and a
portion of the Operating Expenses and Tax Expenses, respectively, which portion
shall be determined by Landlord on an equitable basis, shall be allocated to the
tenants of the Building (as opposed to the tenants of any other buildings of the
Project) and such portion shall be the Building Operating Expenses and Building
Tax Expenses, respectively, for purposes of this Lease. Such portion of
Operating Expenses and Tax Expenses allocated to the tenants of the Building
shall include all Operating Expenses and Tax Expenses, respectively,
attributable solely to the Building, and an equitable portion of the Operating
Expenses and Tax Expenses, respectively, attributable to the Project as a whole.
In addition, Landlord shall have the right, from time to time, to equitably
allocate some or all of the Operating Expenses and/or Tax Expenses for the
Project among different portions or occupants of the Project, in Landlord's
discretion.
(g) The term "Rentable Area" shall mean the area or areas of
space within any building in the Project determined as follows: (i) the amount
of Rentable Area on a single tenancy floor is determined by measuring from the
inside surface of the outer glass and extensions of the plane thereof in
nonglass areas and shall include all areas within the outside walls, excluding
vertical penetrations such as building stairs, elevators shafts, flues, vents,
stacks, pipe shafts and vertical ducts, provided, however, that vertical
penetrations which are for the specific use of the tenant, such as special
stairs or elevators, shall be included within Rentable Area; (ii) the amount of
Rentable Area for a partial floor shall include all space within the demising
walls (measured from the mid-point of demising walls, and in the case of
exterior walls, measured as defined in clause (i) above), plus the tenant's
share of any Common Areas on such floor (such share being equal to the
percentage which the amount of Rentable Area within the Premises bears to the
total amount of Rentable Area on the floor); and (iii) the amount of Rentable
Area for either a single
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tenancy floor or a partial floor shall include Tenant's Percentage of Common
Areas devoted to or serving more than one floor of the applicable building or
such building as a whole. No deductions shall be made in calculating the amount
of Rentable Area for columns or projections necessary to the Building.
Notwithstanding the foregoing or anything elsewhere contained in this Lease, the
parties hereby agree that for all purposes of this Lease, the Premises shall be
deemed to contain the amount of Rentable Area, and Tenant's Base Rent,
Percentage Share, Security Deposit, and all other matters determined by the
amount of Rentable Area contained in the Premises, shall be the amount set forth
in the Basic Lease Information, notwithstanding any deviation therefrom.
(h) The term "Usable Area" shall mean all floor area in a tenant
space, measured from the inside surface of the outer glass and extensions of the
plane thereof in non-glass areas and shall include all areas within the outside
walls, excluding vertical penetrations such as building stairs, elevators
shafts, flues, vents stacks, pipe shafts and vertical ducts, provided, however,
that vertical penetrations which are for the specific use of the tenant, such as
special stairs or elevators, shall be included within Usable Area. In
calculating Usable Area, deductions shall not be made for columns or projections
necessary to the Building. Notwithstanding the foregoing, Landlord shall use a
load factor of thirteen point seven percent (13.7%) in calculating Rentable Area
and Usable Area.
(i) The term "Common Areas" shall mean those portions of the
Project which are provided, from time to time, for use in common by Landlord,
Tenant and any other tenants of the Project, which may include, without
limitation, public entrances, lobbies and rest rooms, fitness centers,
restaurants and cafeterias, elevators, stairways and access ways, loading docks,
ramps, drives and platforms and any passageways and service ways thereto, common
pipes, conduits, wires and appurtenant equipment serving the Project or any
portion thereof, loading and unloading areas, trash areas, parking areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
(j) The term "Tenant's Percentage Share" shall mean the product
obtained by multiplying (i) 100 by (ii) the quotient obtained by dividing the
Rentable Area of the Premises by the total Rentable Area of the Building.
Tenant's Percentage Share shall initially be as specified in the Basic Lease
Information and shall be subject to adjustment in the event of a subsequent
change in the Rentable Area of the Premises and/or the Building (with Tenant's
Percentage Share as to the calendar year in which any such change occurs being
determined on a pro rata basis based on the number of days during such calendar
year at each such percentage share). Notwithstanding the foregoing or anything
contained in this Lease to the contrary, Tenant's Percentage Share of Operating
Expenses attributable to a restaurant, fitness center and/or similar
facility(ies) located at the Project shall be (i) separately determined with
respect to each such facility and (ii) obtained by multiplying (i) 100 by (ii)
the quotient obtained by dividing the Rentable Area of the Premises by the total
Rentable Area occupied by tenants of the Project who also pay their respective
share of such Operating Expenses (ie space occupied by tenants who do not
participate in such costs shall be excluded).
(k) The term "Laws" shall mean, collectively, any applicable
federal, state, local and/or municipal laws, statutes, ordinances, codes, rules,
regulations and/or other governmental requirements.
2. Term; Condition of Premises. (a) The "Term" of this Lease shall
commence on the "Commencement Date" (as defined in Exhibit "C" attached hereto)
and, unless sooner terminated as hereinafter provided, shall be for the period
specified in the Basic Lease Information. If without fault of Tenant the
Commencement Date of this Lease has not occurred by the date which is one
hundred twenty (120) days following the Estimated Commencement Date set forth
above (subject to Force Majeure), this Lease shall terminate without further
action by the parties, and neither party shall have any further liability or
obligation hereunder. Except to the extent specifically otherwise provided in
this Lease, Landlord shall deliver the Premises to Tenant on the Commencement
Date in an "as is" condition with no alterations or improvements being made by
Landlord. Following the Commencement Date, Landlord may deliver to Tenant a
notice confirming the actual Commencement Date and the date of the expiration of
the Term specified in the Basic Lease Information, which notice shall be
executed by Tenant and returned to Landlord within five (5) days following
Tenant's receipt thereof.
(b) Provided Tenant is not in default under this Lease (which
shall
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include any matter which would constitute a default either with the passage of
time or the giving of notice) at any time prior to the time the "Extension
Notice" (as hereinafter defined) is received by Landlord or thereafter until the
commencement of the "Option Term" (as hereinafter defined) (subject to
applicable cure periods, if any), Tenant shall have the option to extend the
Term of this Lease for one (1) additional term (an "Option Term") of five (5)
years following the expiration of the initial Term, exercisable by delivering
written notice (the "Extension Notice") to Landlord of Tenant's desire to so
extend the Term by the Option Term, no later than nine (9) months, and no
earlier than twelve (12) months (except as permitted under Section 40 below),
prior to the expiration of the initial Term. Tenant's occupancy of the Premises
during the Option Term shall be subject to all of the terms and conditions of
this Lease, except that (i) the monthly Base Rent payable by Tenant shall be
adjusted as of the commencement date of the Option Term be adjusted to equal
ninety-five percent (95%) of Landlord's then published Base Rental rate for
comparable space, as reasonably determined by Landlord, in the Project, but in
no event will the Base Rent payable by Tenant during the Option Term be less
then the Base Rent payable by Tenant immediately prior to the commencement of
the Option Term, and (ii) Landlord shall have no obligation to improve or alter
the Premises for the benefit of Tenant. Wherever in this Lease the phrase the
"initial Term" appears, the provision to which such phrase pertains shall apply
only to the initial Term and not to the Option Term. The Base Rent payable by
Tenant during the Option Term shall be increased at the time and in the manner
set forth in Section 3(g) below.
3. Base Rent.
(a) Tenant shall pay to Landlord from and after the Commencement
Date during the Term of this Lease as "Base Rent" for the Premises, the monthly
amount specified in the Basic Lease Information.
(b) Base Rent shall be paid to Landlord, in advance, on or before
the first day of each calendar month during the Term, except that Base Rent for
the initial full month during the Term for which Base Rent is due shall be paid
upon the execution of this Lease (provided that such payment shall be subject to
adjustment payment or reimbursement, as applicable, in the event the actual
Rentable Area of the Premises is determined to be other than as set forth in the
Basic Lease Information). In the event the Term commences on a day other than
the first day of a calendar month or ends on a day other than the last day of a
calendar month, the monthly Base Rent for the first and last fractional months
of the Term shall be appropriately prorated.
(c) All sums of money due to Landlord under this Lease not
specifically characterized as rental shall constitute additional rent, and if
any such sum is not paid when due it shall nonetheless be collectible as
additional rent with the next installment of Base Rent thereafter falling due,
but nothing contained herein shall be deemed to suspend or delay the payment of
any sum of money at the time it becomes due and payable hereunder, or to limit
any other remedy of Landlord
(d) Tenant hereby acknowledges that late payment by Tenant to
Landlord of rent and other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be difficult to
ascertain. Such costs include, but are not limited to, processing and accounting
charges, and late charges which may be imposed on Landlord by the terms of any
trust deed covering the Premises. Accordingly, if any installment of rent or any
other sums due from Tenant shall not be received by Landlord within ten (10)
days following written notice from Landlord that the same is due, Tenant shall
pay to Landlord a late charge equal to the greater of (i) 6% of such overdue
amount or (ii) $100.00. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant. Acceptance of such late charge by Landlord
shall in no event constitute a waiver of Tenant's default with respect to such
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder. If a late charge becomes payable for three (3)
payments of any element of rent within any twelve (12) month period, all
subsequent payments of rent shall immediately and automatically become payable
by Tenant quarterly, in advance, instead of monthly. Tenant acknowledges that
its payment of Base Rent and additional rent is a condition to Landlord's
obligation to perform any of its covenants under this Lease.
(e) Any amount due to Landlord pursuant to this Lease, if not
paid when due, shall bear interest from the date due until paid at a rate (the
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"Interest Rate") equal to the lesser of (i) 2% over the "prime" or "reference"
rate then most recently published by Bank of America N.T. & S.A. (or a
substitute prime rate of a comparable lending institution reasonably selected by
Landlord if Bank of America N.T. & S.A. no longer publishes a "prime" or
"reference" rate), or (ii) the maximum rate permitted by applicable Laws.
Payment of interest shall not excuse or cure any default hereunder by Tenant.
(f) All payments of Base Rent, Escalation Rent and other monetary
obligations due from Tenant to Landlord pursuant to this Lease shall be paid to
Landlord, without deduction, abatement, counterclaim or offset, in lawful money
of the United States of America at Landlord's address for notices hereunder, or
to such other person or at such other place as Landlord may from time to time
designate by notice to Tenant.
(g) On each twelve (12) month anniversary of the Commencement
Date during the Term, including, without limitation, any extension(s) and/or
renewal(s) thereof (each such day hereinafter referred to as an "Adjustment
Date"), the Base Rent payable by Tenant on the date immediately preceding the
applicable Adjustment Date shall be increased by three percent (3%) and such
increased amount shall constitute the Base Rent until the next Adjustment Date.
Landlord's failure to request payment of an estimated or actual rent adjustment
shall not constitute a waiver of the right to any adjustment provided for in
this Lease.
4. Escalation Rent.
(a) Tenant shall pay to Landlord as "Escalation Rent" for the
Premises, during each full or partial calendar year during the Term, (i)
Tenant's Percentage Share of all Building Operating Expenses for such year, plus
(ii) Tenant's Percentage Share of all Building Tax Expenses for such year.
Escalation Rent shall be paid monthly on an estimated basis, with subsequent
annual reconciliation, in accordance with the procedures set forth in this
Section 4. Tenant acknowledges that this Lease is what is commonly referred to
as a "triple net" lease, and that Tenant will be responsible for its Percentage
Share of all Building Operating Expenses and Building Tax Expenses, without
reference to any Base Year concept.
(b) During December each calendar year, or as soon thereafter as
practicable, Landlord shall give Tenant notice of its estimate of any Escalation
Rent due for the ensuing calendar year. On or before the first day of each month
during the ensuing calendar year, Tenant shall pay to Landlord 1/12th of such
estimated Escalation Rent, provided that if such notice is not given in
December, Tenant shall continue to pay on the basis of the prior year's estimate
until such revised estimate is delivered, from and after which time (commencing
with the first day of the next calendar month after such notice is given; or if
such first day is less than fifteen (15) days after the date of Landlord's
notice, then on
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the first day of the second calendar month after such notice is given) Tenant
shall pay such amount as is necessary to bring Tenant current with respect to
such revised estimate for such calendar year, as if such revised estimate had
been delivered in December, and thereafter monthly payments shall be based on
such revised estimate, unless and until further revised in accordance herewith.
If at any time or times it appears to Landlord that the Escalation Rent for the
current calendar year will vary from its estimate, Landlord may, by notice to
Tenant, revise its estimate for such year, and subsequent payments by Tenant for
such year shall be based upon such revised estimate.
(c) Within 90 days after the close of each calendar year or as
soon after such 90-day period as practicable, Landlord shall deliver to Tenant a
statement of the actual Escalation Rent for such calendar year, accompanied by a
statement showing the Building Operating Expenses and Building Tax Expenses on
the basis of which the actual Escalation Rent was determined. Except as
expressly provided to the contrary in Section 4(c)(i) below, such statement
shall be final and binding upon Landlord and Tenant as to the amount of the
Building Operating Expenses and Building Tax Expenses. If Landlord's statement
discloses that Tenant owes an amount that is less than the estimated payments
for such calendar year previously made by Tenant, Landlord shall credit such
excess first against any sums then owed by Tenant to Landlord and then against
the next payments of rental due hereunder; provided, however, that if the amount
of credit exceeds the rent due for the balance of the term of this Lease,
Landlord shall pay any excess to Tenant within thirty (30) days after the
expiration of the term of this Lease; provided, further, that Landlord shall
have the right to retain any such excess and apply the same against any sums
which Landlord would otherwise be entitled to receive under this Lease as a
result of any default by Tenant. If Landlord's statement discloses that Tenant
owes an amount that is more than the estimated payments for such calendar year
previously made by Tenant, Tenant shall pay the deficiency to Landlord within
thirty (30) days after delivery of the statement. The failure of Landlord to
timely furnish the statement for any calendar year shall not prejudice Landlord
from enforcing its rights hereunder.
(i) Provided that Tenant is not in default in its obligations
under this Lease (including any matter which would constitute a default with
either the passage of time or the giving of notice)(subject to applicable cure
periods, if any), Tenant may, within ninety (90) days following the delivery by
Landlord to Tenant of the statement of Escalation Rent described above, request
in writing an audit of the Building Operating Expenses and Building Tax Expenses
which form the basis upon which Landlord determines the actual Escalation Rent.
As a condition to Tenant's audit rights hereunder, such notice must be
accompanied by Tenant's payment in full to Landlord of all amounts due from
Tenant to Landlord as specified in the Landlord's statement. Tenant shall have
no right to withhold, deduct, or offset any monetary obligation of Tenant to
Landlord under the Lease (including, without limitation, Tenant's obligation to
make all rental payments owing under this Lease, including, without limitation,
all Escalation Rent) pending the completion of and regardless of the results of
any audit of records under this Section. The right of Tenant under this Section
4(c)(i) may only be exercised once for each Landlord's statement of Escalation
Rent, and if Tenant fails to meet any of the above conditions as a prerequisite
to the exercise of such right, the right of Tenant under this Section as to a
particular Landlord's statement of Escalation Rent shall be deemed waived.
Tenant may cause any audit requested by it under this Section 4(c)(i) to be
performed by either its own staff or otherwise by an independent firm of
certified public accountants. Tenant must complete its audit within ninety (90)
days of the date of Tenant's audit request.
(ii) Tenant acknowledges that Landlord maintains its records
for Building Operating Expenses and Building Tax Expenses at its offices (as the
same may be located from time to time) and Tenant therefore agrees that any
review of records under Section 4(c)(i) above shall occur at such location and,
except as provided in Section 4(c)(vii) below, be at the sole expense of Tenant.
If Tenant discovers a discrepancy, then, at Landlord's option, a further review
shall be conducted in accordance with the provisions of Section 4(c)(iv) below.
(iii) Tenant acknowledges and agrees that any records
reviewed under Section 4(c)(i) constitute confidential information of Landlord,
which shall not be disclosed to anyone other than the accountants performing the
review and the principals of Tenant who receive the results of the review;
except in the event of any litigation concerning the same, in which case, Tenant
will use its best efforts to keep such information confidential. Except as set
forth in this Section 4(c)(iii), Tenant's disclosure of such information to any
other person
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shall constitute a material breach of this Lease.
(iv) Any errors disclosed by the review of records under
Section 4(c)(i) shall be promptly corrected, provided that Landlord shall have
the right to cause another review of the records to be made by an independent
firm of certified public accountants selected by Landlord. In the event of a
disagreement between Landlord's accounting firm and Tenant's accounting firm or
Tenant's staff, as applicable, a third review by an independent firm of
certified public accountants of national standing jointly chosen by Landlord and
Tenant shall be made and the determination of such accounting firm shall be
deemed to be correct. The costs of the third accounting firm shall be shared
equally between Landlord and Tenant, and Tenant's failure to pay its share of
such costs shall be a default under this Lease.
(v) In the event that the results of the review of records
(taking into account, if applicable, the results of any additional review caused
by Landlord), reveal that Tenant has overpaid obligations for a preceding
period, the amount of such overpayment shall be credited by Landlord against
subsequent installment obligations to pay its share of estimated Building
Operating Expenses and Building Tax Expenses; provided, however, that if the
amount of credit exceeds the rent due for the balance of the term of this Lease,
Landlord shall pay any excess to Tenant within thirty (30) days after the
expiration of the term of this Lease; provided, further, that Landlord shall
have the right to retain any such excess and apply the same against any sums
which Landlord would otherwise be entitled to receive under this Lease as a
result of any default by Tenant. In the event that such results show that Tenant
has underpaid its obligations for a preceding period, the amount of such
underpayment shall be paid by Tenant to Landlord with the next succeeding
installment obligation of estimated Building Operating Expenses and Building Tax
Expenses.
(vi) If the results of the audit procedures described in this
Section 4 disclose that Landlord has overstated the aggregate amount of Building
Operating Expenses and Building Tax Expenses by more than five percent (5%) and
the parties do not reach agreement on some amount prior to retaining the third
accounting firm described in Section 4(c)(iv) above, Landlord shall pay Tenant's
reasonable and hourly third party audit costs (as shown on invoices or other
reasonable evidence submitted to Landlord) not to exceed two thousand five
hundred dollars ($2,500.00). If the results of the audit procedures described in
this Section 4 above disclose that Landlord has understated the aggregate amount
of Building Operating Expenses and Building Tax Expenses by less than five
percent (5%) and the parties do not reach agreement on some amount prior to
retaining the third accounting firm described in Section 4(c)(iv) above, then
Landlord's reasonable and hourly audit costs (not to exceed two thousand five
hundred dollars ($2,500.00)) shall be included in Operating Expenses and Tenant
shall pay its Percentage Share thereof.
(vii) In the event that Tenant becomes in default of its
obligations under this Lease at any time during the pendency of a review of
records under this Section (subject to applicable cure periods, if any), said
right to review shall immediately cease and the matters originally set forth in
the Landlord's Statement shall be deemed to be correct.
(d) The amount of Escalation Rent for any partial calendar year
in the Term shall be appropriately prorated. The termination of this Lease shall
not affect the obligations of Landlord and Tenant pursuant to Section 4(c) above
to be performed after such termination.
5. Use.
(a) The Premises shall be used for general office and, with
respect to Tenant's computer business only, warehousing, light manufacturing and
assembly purposes, purposes and no other use or purpose. Tenant shall not do or
permit to be done in or about the Premises, nor bring to keep or permit to be
brought or kept therein, anything which is prohibited by or will in any way
conflict with any Laws now in force or which may hereafter be enacted or
promulgated, or which is prohibited by the standard form of fire insurance
policy, or will in any way increase the existing rate of or affect any fire or
other insurance upon the Building or any of its contents, or cause a
cancellation of any insurance policy covering the Project, the Building or any
of its contents. Tenant shall not do or permit anything to be done in or about
the Premises which will in any way obstruct or interfere with the rights of
other tenants of the Building, or injure or annoy them, or use or allow the
Premises to be used for any improper, immoral, unlawful or objectionable
purpose, nor shall Tenant cause, maintain or permit any
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nuisance or waste in, on or about the Premises.
(b) Except general office supplies typically used in an office
area in the ordinary course of business, such as copier toner, liquid paper,
glue, ink, and cleaning solvents, for use in the manner for which they were
designed, in such amounts as may be normal for the office business operations
conducted by Tenant in the Premises, neither Tenant nor its agents, employees,
contractors, licensees, subtenants, assignees, concessionaires or invitees shall
use, handle, store or dispose of any "Hazardous Materials" (as hereinafter
defined) in, on, under or about the Premises, the Building or the Project. In
the event of a breach of the foregoing covenant, in addition to and without
limitation upon any other rights or remedies of Landlord under this Lease,
Tenant or, at Landlord's election, Landlord, in each case at Tenant's sole cost,
shall promptly take all actions as are necessary to return the Premises,
Building and/or Project to the condition existing prior to the introduction of
any such Hazardous Materials, provided Landlord's approval of such actions shall
first be obtained and Tenant shall fully cooperate in connection with any such
clean-up, restoration or other work. Furthermore, Tenant shall immediately
notify Landlord of any inquiry, test, investigation or enforcement proceeding by
or against Tenant or the Premises concerning the presence of any Hazardous
Materials. Tenant acknowledges that Landlord, at Landlord's election, shall have
the sole right, at Tenant's expense, to negotiate, defend, approve and appeal
any action taken or order issued by any governmental authority with regard to
any Hazardous Materials contamination which Tenant is obligated hereunder to
remediate. As used herein, "Hazardous Materials" shall mean asbestos, and
petroleum fuel, and any hazardous or toxic substance, material or waste (or
subparts thereof) which is or become regulated by any local governmental
authority, the State of California or the United States Government, including,
but not limited to, any material or substance defined as a "hazardous waste,"
"extremely hazardous waste," "restricted hazardous waste," "hazardous
substance," "hazardous material" or "toxic pollutant" under the California
Health and Safety Code and/or under the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. 9601, et seq. Landlord has no current
actual knowledge (without inquiry or investigation) that Hazardous Materials
exist on the land on which the Project is located, and Tenant shall not be
responsible for any cost or expense, either as an Operating Expense or
otherwise, for remediating any Hazardous Materials which are brought onto the
Project by Landlord or any third parties, except to the extent caused by or
contributed to by Tenant, its officers, directors, principals, employees or
agents, in which case Tenant shall be responsible therefor.
6. Services.
(a) Landlord shall maintain the Common Areas of the Project, the
exterior facing windows in the Building, the mechanical, plumbing and electrical
equipment serving the Building, and the Building structure itself in good order
and condition except for damage occasioned by the act of Tenant and/or any of
Tenant's employees, agents, representatives, contractors and/or invitees, which
damage shall be repaired by Landlord at Tenant's expense.
(b) Landlord shall cause to be furnished (1) elevator service,
(2) lighting replacement (for building standard lights located in any Common
Areas), (3) Common Area rest room supplies, and (4) security measures and/or
services and janitor service during the times and in the manner that such
services are customarily furnished in comparable office buildings in the area;
provided that janitor service shall be provided five (5) days a week. The
Premises shall be separately metered for electricity use (including, without
limitation, electricity to provide HVAC service to the Premises) and other
utilities at Tenant's cost, and Tenant shall pay the fees charged for such
utility costs, as additional rent, either (1) prior to delinquency directly to
the utility provider, or (2) if Landlord is billed for such usage by the utility
provider, Tenant shall make such payments to Landlord within ten (10) days
following Landlord's billing of Tenant therefor. Tenant shall also be
responsible for the costs of any and all services, including, without
limitation, maintenance, repair, or replacement, provided to the Premises.
Landlord may establish reasonable measures to conserve energy, including, but
not limited to, automatic switching of lights after hours and more efficient
forms of lighting, so long as such measures do not unreasonably interfere with
Tenant's use of the Premises. Landlord shall not be in default hereunder or be
liable for any damages directly or indirectly resulting from, nor shall the
rental herein reserved be abated by reason of (i) the installation, use or
interruption of use of any equipment in connection with the furnishing of any of
the foregoing services, (ii) failure to furnish or delay in furnishing any such
services when such failure or delay is
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caused by accident or any condition beyond the reasonable control of Landlord or
by the making of necessary repairs or improvements to the Premises, Building or
Project, or (iii) the limitation, curtailment, rationing or restrictions on use
of water, electricity, gas or any other form of energy or utility serving the
Premises, Building or Project. Landlord shall use reasonable efforts diligently
to remedy any interruption in the furnishing of such services. Notwithstanding
the foregoing, if failure to provide any service or utility required of Landlord
under this Lease is due to the gross negligence or wilful misconduct of Landlord
and such failure shall continue for five (5) consecutive business days or more,
and provided such failure to provide the required service precludes Tenant from
occupying all or any portion of the Premises, then Base Rent shall be abated
hereunder at the rate of one day's Base Rent for each day following the fifth
(5th) business day of such interruption; provided, that in the event Tenant
occupies some, but not all of the Premises during such interruption in services,
the abatement afforded Tenant shall be a proportion of daily Base Rent equal to
a fraction, the denominator of which is the Rentable Area of the Premises and
the numerator of which is the Rentable Area of the portion of the Premises that
is not occupied by Tenant during such interruption.
To Landlord's current actual knowledge, all "Computer Controlled
Facility Components" (as hereinafter defined) existing at the Project as of the
date of this Lease and necessary for the operation of mechanical and life safety
systems at the Project are "Year 2000 Compliant" (as hereinafter defined).
Landlord's knowledge is based solely upon an ongoing investigation of some or
all such Computer Controlled Facility Components being undertaken by a computer
consultant retained by Landlord and/or Landlord's management company. Tenant
acknowledges that said investigation is still continuing, and that Landlord
cannot ensure that the consultant will not hereafter discover or otherwise
inform Landlord that some Computer Controlled Facility Components are in fact
not Year 2000 Compliant. Tenant further acknowledges that (i) the foregoing is
provided for informational purposes only, (ii) Landlord shall have no liability
to Tenant by reason thereof, and (iii) the foregoing shall not apply to (x)
modifications to Computer Controlled Facility Components, (y) Computer
Controlled Facility Components hereafter placed at the Project after the date of
this Lease, or (z) any Computer Controlled Facility Components installed or
placed at the Project by or on behalf of Tenant. Tenant shall ensure that any
and all Computer Controlled Facility Components placed at the Project by or on
behalf of Tenant or its affiliates shall be Year 2000 Compliant. Landlord shall
permit Tenant to review the final written report generated by Landlord's
consultant solely with respect to Computer Controlled Facility Components which
affect mechanical and life safety systems serving the Premises and/or Common
Areas of the Project; provided, however, that (i) Tenant must give Landlord two
(2) business days' written notice of its desire o review the report, (ii) such
investigation shall occur in Landlord's office during Landlord's regular
business hours, (iii) Tenant shall not be permitted to make copies of said
report, (iv) Landlord may have a representative present throughout Tenant's
review process, and (v) Tenant's representatives (who shall not exceed two (2)
in number) shall, upon request by Landlord and as a condition to reviewing said
report, execute and deliver to Landlord a confidentiality and non-disclosure
agreement in a form and manner reasonably acceptable to Landlord.
The term "Computer Controlled Facility Components" refers to
software driven technology and embedded microchip technology, and shall include,
without limitation, programmable thermostats, HVAC controllers, auxiliary
elevator controllers, utility monitoring and control systems, fire detection and
suppression systems, alarms, security systems, and any other facilities control
systems utilizing microcomputer, minicomputer, or programmable logic
controllers. "Year 2000 Compliant" means Computer Controlled Facility Components
that accurately process date/time data (including, without limitation,
calculating, comparing, and sequencing) from, into, and between the twentieth
and twenty-first centuries, and the years 1999 and 2000 and leap year
calculations.
(c) If heat-generating equipment or lighting other than building
standard lights are installed or used in the Premises and such equipment or
lighting affects the temperature otherwise maintained by the air conditioning
system, or if equipment is installed in the Premises which requires separate
temperature-controlled room, at Landlord's election after notice to Tenant,
Landlord shall install supplementary air conditioning facilities in the Premises
or otherwise modify the ventilating and air conditioning system serving the
Premises, and the capital and maintenance costs of such facilities and
modifications shall be borne by Tenant.
(d) Tenant shall reimburse Landlord, upon billing thereof, for
the
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cost of (i) all electricity, power and cooling energy for heat or air
conditioning provided to the Premises. Tenant shall also pay the cost of any
transformers, additional risers, panel boards and other facilities if and to the
extent required to furnish power for supplementary air conditioning facilities
in or serving the Premises or power for lighting and office equipment.
(e) In the event that Landlord, at Tenant's request, provides
services to Tenant that are not otherwise provided for in this Lease, Tenant
shall pay Landlord's reasonable charges for such services upon billing thereof.
(f) As of the Commencement Date, the Building has in place a key
card access system which, subject to Landlord's rights and other provisions of
this Lease, will permit Tenant to control which employees have access to the
Building after normal Building hours. Landlord shall maintain such key card
system in good operating condition and repair; provided, however, that Landlord
may in its sole and absolute discretion remove any such key card access system
from the Building.
(g) As of the date of this Lease, contemplates (i) incorporating
a restaurant and fitness center into the Project and (ii) that said restaurant
and fitness center shall be operated as an amenity Landlord's tenants and not as
profit making centers. Although Landlord has no reason to believe at this time
that it will be unable to move forward with its plans for a restaurant and
fitness center, it cannot guaranty that it will be able to do so, or even if it
does, that it will be able to maintain said facilities in operation throughout
the Term of this Lease. Furthermore, Landlord may determine in the future that
it is necessary or reasonable to convert one or both of said facilities into
"for profit" operations or to otherwise arrange for third party operators to do
so; provided, however, that in such event, Landlord shall at that time
discontinue including the costs and expenses associated with the applicable
facility in Operating Expenses.
(h) Tenant acknowledges that this Lease is what is commonly known
as a "triple net" lease, and that Tenant shall be responsible for the payment of
any and all costs and expenses of any and all services provided to the Premises
by Landlord or others, regardless of whether or not this Lease states that such
costs shall be paid by Tenant.
7. Impositions Payable by Tenant. In addition to the monthly rental
and other charges to be paid by Tenant hereunder, Tenant shall pay or reimburse
Landlord for any and all of the following items (hereinafter collectively
referred to as "Impositions"), whether or not now customary or in the
contemplation of the parties hereto: taxes (other than local, state and federal
personal or corporate income taxes measured by the net income of Landlord from
all sources), assessments (including, without limitation, all assessments for
public improvements, services or benefits, irrespective of when commenced or
completed), excises, levies, business taxes, license, permit, inspection and
other authorization fees, transit development fees, assessments or charges for
housing funds, service payments in lieu of taxes and any other fees or charges
of any kind, which are levied, assessed, confirmed or imposed by any public
authority, but only to the extent the Impositions are (a) upon, measured by or
reasonably attributable to the cost or value of Tenant's equipment, furniture,
fixtures and other personal property located in the Premises, or the cost or
value of any leasehold improvements made in or to the Premises by or for Tenant,
regardless of whether title to such improvements shall be in Tenant or Landlord
(b) upon or measured by the monthly rental or other charges payable hereunder,
including, without limitation, any gross receipts tax levied with respect to the
receipt of such rental (c) upon, with respect to or by reason of the
development, possession, leasing, operation, management, maintenance,
alteration, repair, use or occupancy by Tenant of the Premises or any portion
thereof or (d) upon this transaction or any document to which Tenant is a party
creating or transferring an interest or an estate in the Premises. In the event
that it shall not be lawful for Tenant to reimburse Landlord for the Impositions
but it is lawful to increase the monthly rental to take into account Landlord's
payment of the Impositions, the monthly rental payable to Landlord shall be
revised to net Landlord the same net return without reimbursement of the
Impositions as would have been received by Landlord with reimbursement of the
Impositions. If any Imposition can be paid by Landlord in installments, then,
for the purpose of calculating Tenant's obligation to pay Impositions, any such
Imposition shall be deemed to be paid by Landlord in monthly installments over
the remaining Term of this Lease, regardless of the manner in which Landlord
actually pays such Imposition.
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8. Alterations.
(a) Tenant shall not make or suffer to be made any alterations,
additions or improvements to the Premises (collectively, "Alterations"), without
Landlord's prior consent, which consent shall not be unreasonably withheld
(except that such consent may be granted or withheld in Landlord's sole and
absolute discretion as to any proposed Alterations which would affect the
Building exterior, structural components or utility or life-safety systems). For
purposes hereof, "Alterations" shall include, without limitation, air lines,
power panels, electrical distribution, security, fire protection systems,
communications (including, without limitation, telephone lines), lighting
fixtures, heating, ventilating and air conditioning equipment, plumbing, and
fencing, in, on or about the Premises. Notwithstanding the foregoing, Tenant may
make cosmetic alterations to the Premises, the individual cost of which does not
exceed twenty-five thousand dollars ($25,000.00)(but in no event more than an
aggregate cost of fifty thousand dollars ($50,000.00) during any twelve (12)
month period), without Landlord's consent as long as (i) Tenant provides
Landlord with at least thirty (30) days' notice thereof and (ii) such changes
are not visible from outside the Building and do not affect in any way the
Building exterior, structural components or utility or life-safety systems of
the Building (in each case a "Permitted Alteration"; the term "Alterations"
shall include "Permitted Alterations"). All Alterations shall be made by
Landlord for Tenant's account in accordance with the procedures set forth in
this Section. All Alterations shall immediately become Landlord's property and,
at the end of the Term hereof, shall remain on the Premises without compensation
to Tenant unless Landlord elects by notice to Tenant to require the removal of
any such Alterations, in which event Tenant shall be responsible for the cost of
Landlord's removal of such Alterations and restoration of the Premises to its
condition prior to the installation of such Alterations. Notwithstanding the
foregoing, Tenant may include the following notice (in bold, all capitalized
twelve point type) in its request for consent to an Alteration: "LANDLORD'S
RESPONSE TO THIS REQUEST FOR CONSENT MUST INCLUDE LANDLORD'S ELECTION TO REQUIRE
TENANT TO REMOVE THE SUBJECT ALTERATION AT THE EXPIRATION OF THE LEASE TERM OR
LANDLORD WILL BE DEEMED TO HAVE WAIVED ITS RIGHT TO REQUIRE TENANT TO REMOVE
SAID ALTERATION". Tenant shall not be required to remove the Alteration at the
expiration of the Term if the foregoing language was included in Tenant's
request for consent and Landlord failed to make such election in its response
thereto; provided, however, that Landlord's waiver, if any, shall automatically
(and retroactively) be void if this Lease terminates as a result of Tenant's
default.
(b) Plans and specifications for the Alterations shall be
prepared at Tenant's expense by either its architect or Landlord's architect if
Tenant so elects, and by engineers approved by Landlord where mechanical or
electrical engineering services are required by the nature of the Alterations.
Tenant shall cause any architect retained by it to follow the standard
construction administration procedures and to utilize the standard
specifications and details promulgated by Landlord for the Building. The plans
and specifications shall be subject to approval by Landlord and Tenant, which
approval shall not be unreasonably withheld by either party, and following such
approval Landlord shall obtain quotations of the cost of the Alterations as
reflected by the approved plans and specifications from one or more general
contractors approved by Landlord for construction in the Building. Landlord
shall submit the quotations to Tenant, shall accept the quotations approved by
Tenant, and shall proceed to enter into a contract for the construction or
installation of the Alterations with the contractor whose quotation was approved
by Tenant. Landlord itself does not warrant the cost of the Alterations or the
timeliness of performance or the quality of the contractor's work, but Landlord
shall use reasonable efforts to secure performance of the construction contract
for Tenant's benefit.
(c) In the event Landlord or the contractor is instructed by
Tenant to proceed with any changes to the alterations without a prior
determination of any increased costs resulting from such changes and without
approval of such increases by Tenant, or in the event Tenant is responsible for
increased costs attributable to a delay or acceleration in the time for
construction, the amount of any increased costs shall be as reasonably
determined by Landlord upon completion of the Alterations, subject only to
Landlord's reasonable efforts in causing the contractor to furnish Tenant
appropriate back-up information concerning increased costs, if any.
(d) The cost of the Alterations to be paid by Tenant, excluding
the Tenant Improvements (as defined in Exhibit "C", which shall governed by
Exhibit "C") shall include a reasonable charge for the administration by
Landlord or its agent of the construction or installation of the Alterations,
which Landlord and
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Tenant agree shall be ten percent (10%) of the total costs of design and
construction; provided, however, that Tenant shall not be required to pay said
administration charge in connection with Permitted Alterations if Tenant (i)
selects its contractor from Landlord's then current list of approved licensed
contractors or (ii) uses a licensed contractor approved by Landlord in advance,
and such approval expressly provides that Landlord waives its right to said
administration charge.
(e) Tenant shall pay to Landlord all amounts payable by Tenant
pursuant to this Section within fifteen (15) days after billing by Landlord.
Bills may be rendered in advance of or during the progress of the Alterations so
as to enable Landlord to pay the contractor, architect or engineer without
advancing Landlord's own funds. At Landlord's election, Tenant shall deposit
with Landlord prior to the commencement of the Alterations the estimated cost
thereof or such lesser portion as Landlord shall specify, to be held and applied
to the cost as incurred. Any surplus funds shall be returned to Tenant when the
Alterations have been paid for in full.
(f) Landlord may delegate some or all of its authority and
responsibilities under this Section 8 to its managing agent, which may be an
affiliate of Landlord.
9. Liens. Tenant shall keep the Premises, Building and Project free
from any liens arising out of any work performed, materials furnished or
obligations incurred by or on behalf of Tenant. Landlord shall have the right to
post and keep posted on the Premises any notices that may be provided by law or
which Landlord may deem to be proper for the protection of Landlord, the
Premises, Building and/or Project from such liens. Tenant shall remove any such
lien by bond or otherwise within ten (10) days after notice from Landlord, and
if Tenant shall fail to do so, Landlord may, but shall not be obligated to, pay
the amount necessary to remove such lien without being responsible for
investigating the validity thereof. Any amount so paid by Landlord shall be
deemed additional rent under this Lease payable upon demand, without limitation
as to other remedies available to Landlord under this Lease. Nothing contained
in this Lease shall authorize Tenant to do any act which shall subject
Landlord's title to the Premises, Building or Project to any liens whether
claimed by operation of law or express or implied contract.
10. Repairs. By entry hereunder Tenant accepts the Premises as being
in the condition in which Landlord is obligated to deliver the Premises, subject
to any applicable provisions of Exhibit "C"; except for any defects which Tenant
describes in any "punch-list" described in Exhibit "C" and latent Building
defects. Tenant shall deliver written notice of any latent Building defect to
Landlord within ten (10) business days following Tenant's discovery thereof, and
Tenant's failure to deliver such notice shall be deemed an admission by Tenant
that the subject defect was not a latent defect. Landlord shall promptly
investigate and repair any defects identified in the Latent Building Defect
Notice which exist and shall diligently pursue such repair to completion. Tenant
shall, at all times during the Term and at Tenant's sole cost and expense, keep
the Premises (including, without limitation, any Tenant Improvements,
Alterations (including the antennae described in Section 42 below) and Tenant's
furniture, fixtures, equipment and personal property in the Premises) in good
condition and repair (regardless of the cost therefor and/or the time remaining
on the Term), ordinary wear and tear, damage thereto by fire (unless caused by
or contributed to by Tenant), earthquake, act of God or the elements excepted.
Tenant hereby waives all rights to make repairs at the expense of Landlord or in
lieu thereof to vacate the Premises and all rights under Sections 1932(1), 1941
and 1942 of the California Civil Code or any successor statute. Tenant shall at
the end of the Term surrender to Landlord the Premises and all Alterations
thereto that are to remain in the Premises in the same condition as when
received, ordinary wear and tear and damage by fire (unless the same is caused
by or contributed to by Tenant), earthquake, act of God or the elements
excepted. Tenant shall remove all of its personal property and equipment from
the Premises prior to the expiration of the Term or earlier termination of this
Lease, and if Tenant fails to remove the same, Landlord may do so and store or
dispose of the same at Tenant's sole cost. Landlord has no obligation and has
made no promise to alter, remodel, improve, repair, decorate or paint the
Premises, except as specifically otherwise provided in this Lease. No
representations respecting the condition of the Premises, the Building or the
Project have been made by Landlord to Tenant, except as specifically provided in
this Lease.
11. Destruction or Damage.
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(a) In the event the Premises or the portion of the Building
necessary for Tenant's occupancy are damaged by fire, earthquake, act of God,
the elements or other casualty, within sixty (60) days after such event,
Landlord shall notify Tenant of the estimated time, in Landlord's reasonable
judgment, required for repair or restoration. If such estimated time for repair
or restoration is less than one hundred eighty (180) days after the date of
casualty and the cost of repair is covered by insurance maintained by Landlord,
Landlord shall forthwith repair or restore the Premises or the portion of the
Building necessary for Tenant's occupancy, to the extent of insurance proceeds
received on account of such casualty. If the time for repair or restoration is
in excess of one hundred eighty (180) days after the date of casualty or the
cost of repair is not covered by Landlord's insurance, Landlord shall elect, in
the same notice Tenant, either (i) to repair or restore the Premises or the
portion of the building necessary for Tenant's occupancy, in which event this
Lease shall continue in full force and effect (unless Tenant exercises its right
to terminate this Lease as provided below), or (ii) to terminate this Lease, in
which event this Lease shall terminate as of the date of such fire or other
casualty. In the event Landlord is obligated or elects to repair the Premises
pursuant to this Section 11 (unless Tenant exercises its right to terminate this
Lease as provided below), this Lease shall remain in full force and effect
except that, if such damage is not the result of the act or omission of Tenant
or Tenant's employees, agents, representatives, contractors or invitees, an
abatement of rental shall be allowed Tenant for such part of the Premises as
shall be rendered unusable by Tenant (but only to the extent actually not used
by Tenant) in the conduct of its business during the time such part is so
unusable. Notwithstanding the foregoing, if (i) Landlord's estimate states that
the repair or restoration of the subject casualty damage will take longer than
twelve (12) calender months to substantially complete and (ii) no default by
Tenant has occurred (including any matter which would constitute a default
either with the passage of time or the giving of notice, then Tenant shall have
the right to terminate this Lease by written notice delivered to Landlord within
five (5) days following the date of Landlord's estimate, and Tenant's failure to
deliver such termination notice shall be deemed an election by Tenant not to
terminate the Lease.
(b) Notwithstanding anything to the contrary contained in this
Section 11, in the event of casualty to the Premises or the portion of the
Building necessary for Tenant's occupancy during the final 12 months of the Term
which is estimated by Landlord in good faith to require in excess of thirty (30)
days to repair or restore (with respect to Landlord's termination right) or
ninety (90) days to repair or restore (with respect to Tenant's termination
right), then either Landlord or Tenant may elect to terminate this Lease by
written notice to Tenant delivered within five (5) days of the date of
Landlord's estimate.
(c) If the Premises or the Building are to be repaired or
restored under this Section 11, Landlord shall repair or restore the Building
and all improvements in the Premises other than any of Tenant's furniture,
fixtures, equipment, personal property, and any Tenant Improvements and
Alterations made by or for Tenant. Tenant shall be responsible for the repair or
restoration of any such Tenant's furniture, fixtures, equipment, personal
property, and any Tenant Improvements and Alterations made by or for Tenant,
provided that any repair of such Tenant Improvements or Alterations shall be
performed by Landlord, at Tenant's cost.
(d) Landlord and Tenant acknowledge that their respective rights
and obligations in the event of any damage to or destruction of the Premises or
the Building are to be governed exclusively by this Lease and waive their
respective rights under Sections 1932(2) and 1933(4) of the California Civil
Code or any successor statute.
12. Insurance.
(a) Tenant shall, during the Term hereof and any other period of
occupancy, at its sole cost and expense, keep in full force and effect the
following insurance:
(1) All Risk insurance (including, without limitation,
sprinkler leakage and earthquake sprinkler leakage endorsements) upon property
of every description and kind owned by Tenant and located in the Building or for
which Tenant is legally liable or installed by or on behalf of Tenant,
including, without limitation, furniture, fixtures, personal property, any
Tenant Improvements (pursuant to Exhibit "C") and Alterations, in an amount not
less than ninety-five percent (95%) of the full replacement cost thereof, and
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providing business interruption coverage for a period of one year. All such
insurance policies shall name Tenant as named insured thereunder, shall name
Landlord, and, at Landlord's request, Landlord's "Mortgagees" (as defined in
Section 23 below), as loss payees thereunder, all as their respective interests
may appear. Not less frequently than once every three (3) years, Landlord shall
have the right to notify Tenant that it elects to have the replacement value
redetermined by an insurance company or insurance consultant. The
redetermination shall be made promptly and in accordance with the rules and
practices of the Board of Fire Underwriters, or a like board recognized and
generally accepted by the insurance company, and each party shall be promptly
notified of the results by the company. The insurance required under this Lease
shall be adjusted according to the redetermination. All vendors, movers and
contractors engaged by or on behalf of Tenant to perform work in or about the
Premises shall deliver proof of insurance to Landlord before said person or
entity will be permitted to commence work, which insurance must be reasonably
acceptable to Landlord.
(2) Commercial general liability insurance coverage,
including personal injury, bodily injury, broad form property damage and
contractual liability (covering the indemnity contained in Section 13), in
amount not less than $1,000,000.00 per occurrence, $2,000,000.00 aggregate. All
such insurance policies shall name Tenant as named insured thereunder and shall
name Landlord and Landlord's managing agent and Mortgagees as additional
insureds thereunder. Such insurance shall be written as primary coverage and
non-contributing with respect to any insurance maintained by Landlord.
(3) Workers' Compensation and Employer's Liability Insurance
in form and amounts not less than that required by applicable law, but in no
event will the coverage provided under Tenant's Employer's Liability Insurance
be less than five hundred thousand dollars ($500,000.00) or such other amount as
Landlord may be reasonably require.
(4) Any other form or forms of insurance as Landlord may
reasonably require from time to time in form, in amounts, and for insurance
risks against which a prudent tenant of a comparable size and in a comparable
business would protect itself.
(b) All policies shall be written in a form reasonably
satisfactory to Landlord and shall be taken out with insurance companies
admitted in the State of California holding a General Policyholders Rating of
"A-" and a Financial Rating of VII or better, as set forth in the most current
issue of Best's Insurance Reports. Prior to the date Tenant takes possession of
any part of the Premises, Tenant shall deliver to Landlord copies of policies or
certificates evidencing the existence of the amounts and forms of coverage
required hereunder, and said certificates shall provide that no such policy
shall be cancelable or reducible in coverage except after thirty (30) days'
prior written notice to Landlord and any additional insureds or loss payees
thereunder. Tenant shall, within ten (10) days prior to the expiration of such
policies, furnish Landlord with renewals or binders thereof, or if Tenant fails
to do so, Landlord may order such insurance and charge the cost thereof shall be
due from Tenant to Landlord upon demand as additional rent.
(c) During the Term, Landlord shall insure the Project
(excluding, at Landlord's option, any property which Tenant is obligated to
insure under Sections 12(a) above) against damage with All Risk insurance and
commercial general liability insurance, in such amounts and with such
deductibles as would be carried by prudent landlords of comparable properties
(Tenant acknowledges that a deductible of ten thousand dollars ($10,000.00) is
reasonable). Landlord may, but shall not be obligated to, obtain and carry any
other form or forms of insurance as it deems advisable. Notwithstanding any
contribution by Tenant to the cost of insurance premiums as provided herein,
Tenant acknowledges that it has no right to receive any proceeds from any
insurance policies carried by Landlord.
(d) If Tenant's occupancy or business in or upon the Premises,
whether or not Landlord has consented to the same, results in any increase in
premiums for the insurance periodically carried by Landlord with respect to the
Building or the Project, Tenant shall pay as additional rent any such increase
in premiums within ten (10) days after being billed therefor by Landlord.
(e) All policies of insurance required hereunder, including,
without limitation, Workers' Compensation and Employer's Liability insurance,
shall include a clause or endorsement denying the insurer any rights of
subrogation
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against the other party to the extent rights have been waived by the insured
before the occurrence of injury or loss. Landlord and Tenant waive any rights of
recovery against the other for injury or loss due to hazards covered by policies
of insurance, including, without limitation, Workers' Compensation and
Employers' Liability insurance, to the extent insurance proceeds cover the
injury or loss.
13. Indemnification. Tenant hereby waives all claims against Landlord
for damage to any property or injury or death of any person in, upon or about
the Premises or Project arising at any time and from any cause other than by
reason of gross negligence or wilful misconduct of Landlord, its employees,
agents or representatives. Tenant shall indemnify, defend and hold harmless
Landlord from and against any and all claims, demands, losses, liabilities,
damages, costs and/or expenses (including, without limitation, reasonable
attorneys' fees and expenses) arising out of (a) any injury to or death of any
person or damage to or destruction of property attributable to or resulting from
the use of the Premises by Tenant, except such as is caused by gross negligence
or willful misconduct of Landlord, its employees, agents or representatives, (b)
the acts or omissions of Tenant or any of Tenant's employees, agents,
representatives or invitees (including, without limitation, acts or omissions
with respect to Hazardous Materials), and/or (c) any breach of this Lease by
Tenant. The provisions of this Section shall survive the expiration of the Term
or earlier termination of this Lease.
14. Compliance with Legal Requirements. Tenant, at its sole cost and
expense (regardless of the cost therefor or the time remaining on the term),
shall promptly comply with all Laws (including, without limitation, Laws
respecting accessibility or use of the Premises by disabled persons) now in
force or which may hereafter be in force, with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted, with any
directive or occupancy certificate issued pursuant to any Law by any public
officer or officers, as well as the provisions of all recorded documents
affecting the Premises, insofar as any thereof relate to or affect the
condition, use or occupancy of the Premises, excluding structural changes to the
Premises or Building required to comply therewith, which structural changes
shall be performed by Landlord as an item of Operating Expenses in accordance
with Section l(d) above (except that Tenant shall be solely responsible for the
cost of such structural changes as additional rent within ten (10) days
following Landlord's demand, to the extent such structural changes are required
as a result of Tenant's acts, specific use of the Premises, or improvements or
Alterations made by or for Tenant). Notwithstanding the foregoing, Tenant shall
not be required to pay any cost or expense for causing the Premises, or any
portion thereof, as the same exist on the Commencement Date, to comply with the
Americans with Disabilities Act, as in effect on the Commencement Date;
provided, however, that Tenant will be responsible for any such compliance costs
which result from Tenant's specific use of the Premises and/or from the
existence of any improvements and/or Alterations constructed by or on behalf of
Tenant.
15. Assignment and Subletting.
(a) Tenant shall not, without the prior consent of Landlord,
which consent shall not be unreasonably withheld, assign or hypothecate this
Lease or any interest herein, sublet the Premises or any part thereof, or permit
the use of the Premises by any party other than Tenant. This Lease shall not,
nor shall any interest herein, be assignable as to the interest of Tenant by
operation of law without the consent of Landlord, which consent shall not be
unreasonably withheld. Any of the foregoing acts without such consent shall be
void and shall, at the option of Landlord, terminate this Lease. For purposes
hereof, in the event Tenant is a partnership, a withdrawal or change of the
managing partner, or partners owning more than a controlling interest in the
partnership in one or more transfers, or if Tenant is a corporation, any
transfer of a majority of its stock in one or more transfers, or the transfer by
the controlling shareholder of so much of its stock that it is no longer the
controlling shareholder, shall constitute a voluntary assignment and shall be
subject to the provisions of this Section 15; provided, however, that if
Tenant's stock is publicly traded on either the American, New York or NASDAQ
stock exchanges, then in the case of a transfer of a majority (or other amount
sufficient to cause a change in control) of the Tenant's stock to another
company (whose net worth is equal to or greater than Tenant's then current net
worth), Landlord's consent to such voluntary assignment shall not be required.
In connection with each consent requested by Tenant, Tenant shall submit to
Landlord not less than twenty (20) days prior to the effective date of the
proposed transaction, the terms of the proposed transaction, the
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identity of the parties to the transaction, the proposed documentation for the
transaction and all other information reasonably requested by Landlord
concerning the proposed transaction and the parties involved therein. Within
sixty (60) days of receipt of such request for consent and other required
information, Landlord shall elect either to: (i) consent to such proposed
transaction (ii) refuse such consent, which refusal shall be on reasonable
grounds or (iii) elect to terminate this Lease effective as of the date Tenant
proposes to assign this Lease or sublet all of the Premises, or in the case of
sublease or subleases which, in the aggregate, affect twenty-five percent (25%)
or more of the Rentable Area of the Premises for the time remaining of the then
current Term, terminate this Lease as to the portion of the Premises proposed to
be sublet as of the date of such proposed partial sublease. Nothing contained in
this Section 15 shall be deemed a waiver of Landlord's right to elect to
terminate this Lease in accordance with clause (iii) of the foregoing sentence
including, but not limited to, Landlord's failure to exercise its right to
terminate this Lease with respect to any previous assignment or subletting.
Further, Tenant understands and acknowledges that Landlord's option to terminate
this Lease rather than approve the assignment thereof or the subletting of all
or any portion of the Premises, is a material inducement for Landlord's agreeing
to lease the Premises to Tenant upon the terms and conditions herein set forth.
(b) Without limiting the other instances in which it may be
reasonable for Landlord to withhold its consent to an assignment or subletting,
Landlord and Tenant acknowledge that it shall be reasonable for Landlord to
withhold its consent in the following instances: (1) if at the time consent is
requested or at any time prior to the granting of consent, Tenant is in default
under this lease or would be in default under this Lease but for the pendency of
any grace or cure period under Section 18 below (2) if the proposed assignee or
subtenant is a governmental agency (3) if the proposed assignee or subtenant is
an existing tenants in the Project or Landlord is then or within the prior 6
months has been negotiating with such assignee or subtenant for the lease of
space within the Project (4) if, in Landlord's reasonable judgment, the use of
the Premises by the proposed assignee or subtenant would not be comparable to
the types of office use by other tenants in the Project, would entail any
alterations which would lessen the value of the leasehold improvements in the
Premises, would result in more than a reasonable number of occupants per floor,
or would require increased services by Landlord or (5) if, in Landlord's
reasonable judgment, the financial worth of the proposed assignee or subtenant
does not meet the credit standards applied by Landlord for other tenants under
leases with comparable terms, or the character, reputation, or business of the
proposed assignee or subtenant is not consistent with the quality of the other
tenancies in the Building.
(c) In the case of an assignment, one-half of any sums or other
economic consideration received by Tenant as a result of such assignment shall
be paid to Landlord after first deducting the unamortized cost of leasehold
improvements paid for by Tenant, and the cost of any real estate commissions and
other generally recognized and available concessions incurred by Tenant in
connection with such assignment. In the case of a subletting, one-half of any
sums or economic consideration received by Tenant as a result of such subletting
shall be paid to Landlord after first deducting (1) the rental due hereunder,
prorated to reflect only rental allocable to the sublet portion of the Premises,
(2) the cost of leasehold improvements made to the sublet portion of the
Premises at Tenant's cost, amortized over the term of the applicable sublease
except for leasehold improvements made for the specific benefit of the
subtenant, which shall be amortized over the term of the sublease, and (3) the
cost of any real estate commissions and other generally recognized and available
concessions incurred by Tenant in connection with such subletting, amortized
over the term of the sublease.
(d) Regardless of Landlord's consent, no subletting or assignment
shall release Tenant of Tenant's obligation or alter the primary liability of
Tenant to pay the rental and to perform all other obligations to be performed by
Tenant hereunder. The acceptance of rental by Landlord from any other person
shall not be deemed to be a waiver by Landlord of any provision hereof. Consent
to one assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting or a waiver of any of the terms of this Lease. No
assignee or subtenant shall have a right further to assign or sublet without
Landlord's prior consent in accordance with this Section 15. No sublease, once
consented to by Landlord, shall be modified or terminated by Tenant without
Landlord's prior consent, which consent shall not be unreasonably withheld. In
the event of default by any assignee of Tenant or any successor of Tenant in the
performance of any of the terms hereof, Landlord may proceed directly against
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Tenant without the necessity of exhausting remedies against such assignee or
successor. Landlord may consent to subsequent assignments or subletting of this
Lease or amendments or modifications to this Lease with assignees of Tenant,
without notifying Tenant, or any successor of Tenant, and without obtaining its
or their consent thereto, and such action shall not relieve Tenant of liability
under this Lease.
(e) A condition to Landlord's consent to any assignment or other
transfer of this Lease shall be the delivery to Landlord of a true copy of the
fully executed instrument of assignment or transfer, and the delivery to
Landlord of an agreement executed by the assignee or transferee in form and
substance satisfactory to Landlord and expressly enforceable by Landlord,
whereby the assignee or transferee assumes and agrees to be bound by all of the
provisions of this Lease and to perform all of the obligations of Tenant
hereunder. As a condition to Landlord's consent to any sublease, Landlord may
require that such sublease include among other items, provisions stating (i)
that it is subject and subordinate to this Lease and to all Mortgages and ground
leases affecting the Project, (ii) Landlord shall be a third party beneficiary
of the obligations of Tenant's subtenant and may enforce the terms of said
sublease against said subtenant, and (iii) that in the event of a termination of
this Lease for any reason, including without limitation, a voluntary surrender
by Tenant or mutual cancellation by Landlord and Tenant, or in the event of any
re-entry or repossession of the Premises by Landlord, such sublease shall
terminate, except that Landlord, at its option, may elect to continue such
sublease in effect and require that such subtenant attorn to and recognize
Landlord as its landlord under such sublease.
(f) In the event Tenant shall assign this Lease or sublet the
Premises or request the consent of Landlord to any assignment, subletting,
hypothecation or other action requiring Landlord's consent hereunder, then
Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection
therewith.
(g) Notwithstanding subsection (a) above, the original Tenant
hereunder may without Landlord's consent assign its interest in this Lease or
sublet all or a portion of the Premises to any affiliate of Tenant provided that
(i) Tenant gives Landlord thirty (30) days prior written notice and delivers to
Landlord concurrently with such notice all of the information which would
otherwise be required in connection with a request for consent, (ii) the
transaction complies with the provisions of Section 15(e) above and (iii) the
assignee or subtenant has a financial worth sufficient, in Landlord's reasonable
good faith determination, to fulfil the obligations of Tenant under this Lease.
For purposes of this Section 15(g), an "affiliate" means any person or entity
that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, Tenant. The original Tenant
hereunder shall also have the right without Landlord's consent to assign its
interest in this Lease to a corporation (or other business entity) into which it
may merge or which may otherwise succeed to all or substantially all of said
original Tenant's assets, provided that (i) the assignment complies with the
conditions stated above with respect to assignments or sublettings to an
affiliate and (ii) the assignee, after giving effect to said merger, has a
financial worth sufficient, in Landlord's reasonable good faith determination,
to fulfil the obligations of Tenant under this Lease. An affiliate of the
original Tenant hereunder shall have all rights of the original Tenant under
this Lease.
16. Rules. Tenant shall faithfully observe and comply with the rules
and regulations attached hereto as Exhibit "D", and after notice thereof, all
reasonable modifications thereof and additions thereto from time to time
promulgated in writing by Landlord, which may include parking regulations
designed to ensure more orderly and efficient parking at the Project. Landlord
shall not be responsible to Tenant for the nonperformance by any other tenant or
occupant of the Building or the Project of any such rules and regulations.
Landlord shall endeavor to apply and enforce its rules and regulations in a
non-discriminatory manner; provided, however, that Tenant is aware that the
rules and regulations under this Lease and other Project leases are not
identical.
17. Entry by Landlord. Landlord may enter the Premises at reasonable
hours and, except in the case of a perceived emergency, after reasonable notice
(but in no event shall more than one (1) day's notice be required), to (a)
inspect the same (b) exhibit the same to prospective purchasers, lenders or,
during the last nine (9) months of the Term, tenants (c) determine whether
Tenant is complying with its obligations under this Lease (d) supply janitor
service and any other service to be provided by Landlord to Tenant hereunder (e)
post notices
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on non-responsibility (f) make repairs or perform maintenance required of
Landlord under the terms hereof, make repairs to any adjoining space or utility
services, or make repairs, alterations or improvements to any other portion of
the Building or (g) cure any default in the performance of Tenant's obligations
under this Lease pursuant to Section 19 (c) below provided, however, that all
such work shall be done as promptly as reasonably possible and so as to minimize
unreasonable interference with the operation of Tenant's business from the
Premises to the extent reasonably practicable. Tenant hereby waives any claim
for damages for any inconvenience to or interference with Tenant's business or
any loss of occupancy or quiet enjoyment of the Premises occasioned by such
entry, except to the extent caused by Landlord's gross negligence or wilful
misconduct. Landlord shall at all times have and retain a key with which to
unlock all of the doors in, on or about the Premises (excluding Tenant's vaults,
safes and similar areas designated in writing by Tenant in advance) and Landlord
shall have the right to use any and all means which Landlord may deem proper to
open Tenant's doors in an emergency in order to obtain entry to the Premises,
and any entry to the Premises obtained by Landlord in an emergency shall not be
construed or deemed to be a forcible or unlawful entry into or a detainer of the
Premises or an eviction, actual or constructive, of Tenant from the Premises or
any portion thereof.
18. Tenant's Default. The following events shall constitute events of
default under this Lease:
(a) a failure by Tenant to pay when due any rent or other sum
payable hereunder and the continuation of such default for a period of three (3)
days after written notice that the same is due;
(b) a failure by Tenant to perform any of the other terms,
covenants, agreements or conditions contained herein, and, if the failure is
curable, the continuation of such failure for a period of thirty (30) days after
notice by Landlord; provided, however, that if the nature of Tenant's obligation
is such that more than thirty (30) days are required for performance, then
Tenant shall not be in default if Tenant commences performance within such
thirty (30) day period and thereafter diligently prosecutes the same to
completion; provided, Tenant's cure period shall automatically be shortened to a
reasonable time (ie less than thirty (30) days) in the case of an emergency;
(c) the bankruptcy or insolvency of Tenant, transfer by Tenant in
fraud of creditors, an assignment by Tenant for the benefit of creditors, or the
commencement of any proceedings of any kind by or against Tenant under any
provision of the Federal Bankruptcy Act or under any other insolvency,
bankruptcy or reorganization act unless, in the event any such proceedings are
involuntary, Tenant is discharged from the same within sixty (60) days
thereafter;
(d) the appointment of a receiver for a substantial part of the
assets of Tenant;
(e) the abandonment of the Premises for a period of twenty (20)
consecutive days or more (or an aggregate of forty (40) days during any three
(3) calendar months) and a concurrent failure to pay rent;
(f) the levy upon this Lease or any estate of Tenant hereunder by
any attachment or execution and the failure to have such attachment or execution
vacated within thirty (30) days thereafter; or
(g) the breach or default by Tenant or an affiliate of Tenant
under any other lease or other agreement under which Tenant or such affiliate
occupies or previously occupied other space at the Project.
Any notice of default to be given pursuant to this Section 18 shall be
in lieu of, and not in addition to, any notice required under California Code of
Civil Procedure Section 1161 or any similar or successor statute.
19. Landlord's Remedies.
(a) In the event of any default by Tenant pursuant to Section 18
above, in addition to any other remedies available to Landlord at law or in
equity, Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder. In the event that Landlord shall elect to so
terminate this Lease, then Landlord may recover from Tenant: (i) the worth at
the time of award of any unpaid rent which had been earned at the time of such
termination plus (ii) the worth at the time of award of the amount by which the
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unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided plus (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the Term after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided plus (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom.
As used in clauses (i) and (ii) of this Section 19(a) above, the
"worth at the time of award" is computed by allowing interest at the Interest
Rate. As used in clause (iii) of this Section 19(a) above, the "worth at the
time of award" is computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of award plus 1%.
(b) In the event of any such default by Tenant, Landlord shall
also have the right to reenter the Premises and remove all persons and property
therefrom by summary proceedings or otherwise such property may be removed and
stored in a public warehouse or elsewhere at the cost of and for the account of
Tenant or disposed of in a reasonable manner by Landlord. In the event Landlord
shall elect to reenter as provided above, or shall take possession of the
Premises pursuant to legal proceedings or pursuant to any notice provided by
law, and if Landlord does not elect to terminate this Lease as provided by law,
then Landlord may from time to time, without terminating this Lease, either
recover all rental as it becomes due or relet the Premises or any part thereof
for such term and at such rental or rentals and upon such other terms and
conditions as Landlord in its sole discretion may deem advisable, with the right
to make alterations and repairs to the Premises. It is the intention of the
parties that in addition to, and without limitation upon, all other rights and
remedies set forth in this Lease, Landlord shall have the remedy described in
California Civil Code Section 1951.4 (lessor may continue lease in effect after
lessee's breach and abandonment and recover rent as it becomes due). In the
event that Landlord shall elect to relet, then rentals received by Landlord from
such reletting shall be applied first, to the payment of any indebtedness, other
than Base Rent due hereunder, owed by Tenant to Landlord second, to the payment
of any cost of such reletting third, to the payment of the cost of any
alterations and repairs to the Premises fourth, to the payment of Base Rent due
and unpaid hereunder and the residue, if any, shall be held by Landlord and
applied in payment of future rent as the same may become due and payable
hereunder. Should that portion of such rentals received from such reletting
during any month, which is applied to the payment of rent hereunder, be less
than the rent payable during that month by Tenant hereunder, then Tenant shall
pay such deficiency to Landlord. Such deficiency shall be calculated and paid
monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs
and expenses incurred by Landlord in such reletting, including but not limited
to brokerage commissions, or in making alterations and repairs not covered by
the rentals received from such reletting. No reentry or taking possession of the
Premises by Landlord pursuant to this Section 19, shall be construed as an
election to terminate this Lease unless a written notice of such intention be
given by Landlord to Tenant or unless the termination thereof be decreed by a
court of competent jurisdiction. Landlord may at any time after such reletting
elect to terminate this Lease for any such default by Tenant.
(c) If Tenant fails to perform any covenant or condition to be
performed by Tenant, Landlord may, but without obligation to do so, perform such
covenant or condition at its option, after notice to Tenant. All costs incurred
by Landlord in so performing shall immediately be reimbursed to Landlord by
Tenant, together with interest at the Interest Rate computed from the due date.
Any performance by Landlord of Tenant's obligations shall not waive or cure such
default. Landlord may perform Tenant's defaulted obligations at Tenant's sole
cost and expense without notice in the case of any emergency. All costs and
expenses incurred by Landlord, including reasonable attorneys' fees (whether or
not legal proceedings are instituted), in collecting rent or enforcing the
obligations of Tenant under the Lease shall be paid by Tenant to Landlord upon
demand. Tenant's obligations pursuant to this Section 19 (c) shall survive the
expiration or earlier termination of this Lease.
(d) Tenant hereby waives, for itself and all persons claiming by
and under Tenant, all rights and privileges which it might have under any
present or future Laws to redeem the Premises or reinstate or to continue the
Lease after being dispossessed or ejected from the Premises. All rights, options
and remedies of Landlord contained in this Lease shall be construed and held to
be
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cumulative, and no one of them shall be exclusive of the other, and Landlord
shall have the right to pursue any one or all of such remedies or any other
remedy or relief which may be provided by law, whether or not stated in this
Lease.
(e) In addition to the remedies described in Sections 19(a)-(d)
above, Landlord shall be entitled to recover from Tenant under this Lease all
amounts necessary to compensate Landlord for all the detriment proximately
caused by any breach or default described in Section 18(g) above. The remedy
provided for in this Section 19(e) shall be in addition to any and all remedies
available in the other lease or agreement to which such breach or default
pertains.
20. Landlord's Default and Tenant's Remedies. Landlord shall not be
in default hereunder unless Landlord fails to perform the obligations required
of Landlord within a reasonable time, but in no event later than thirty (30)
days after written notice by Tenant to Landlord specifying wherein Landlord has
failed to perform such obligation provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required for
performance, then Landlord shall not be in default if Landlord commences
performance within such 30 day period and thereafter diligently prosecutes the
same to completion. In no event shall Tenant have the right to terminate this
Lease or withhold rent as a result of Landlord's default and Tenant's remedies
shall be limited to an action for damages, injunction or specific performance of
this Lease. Notwithstanding anything contained in this Lease to the contrary,
Tenant and all successors and assigns covenant and agree that, in the event of
any actual or alleged failure, breach or default hereunder by Landlord, their
sole and exclusive remedy shall be against Landlord's interest in the Project.
Tenant and all such successors and assigns agree that the obligations of
Landlord under this Lease do not constitute personal obligations of the
individual partners, whether general or limited, members, directors, officers or
shareholders of Landlord, and Tenant shall not seek recourse against the
individual partners, directors, officers or shareholders of Landlord or any of
their personal assets for satisfaction of any liability with respect to this
Lease.
21. Attorneys' Fees. In the event of any dispute between Landlord or
Tenant, whether or not suit is filed, or if either Landlord or Tenant shall
institute any action or proceeding against the other party relating to this
Lease, the non-prevailing party in such action or proceeding shall reimburse the
prevailing party for its disbursements incurred in connection therewith and for
its reasonable attorneys' fees, whether or not such action or proceeding is
pursued to judgment. In addition to the foregoing award of attorneys' fees to
the prevailing party, the prevailing party in any action or proceeding on this
Lease shall be entitled to its reasonable attorneys' fees incurred in any post-
judgment proceedings to collect or enforce any such judgment. This provision is
separate and several and shall survive (i) the expiration or earlier termination
of this Lease and (ii) the merger of this Lease into any judgment on this Lease.
22. Eminent Domain. If all or any part of the Premises shall be
taken as a result of the exercise of the power of eminent domain or sale in lieu
of such taking (collectively, any "Taking"), this Lease shall terminate as to
the part so taken as of the date of Taking, and, in the case of a partial
Taking, either Landlord or Tenant shall have the right to terminate this Lease
as to the balance of the Premises by notice to the other within thirty (30) days
after such date, provided, however, that a condition to the exercise by Tenant
of such right to terminate shall be that the portion of the Premises taken shall
be of such extent and nature as substantially to handicap, impede or impair
Tenant's use of the balance of the Premises. In the event of the Taking of a
material portion of the Project (whether or not the Premises is affected
thereby), Landlord shall have the right to terminate this Lease by notice to
Tenant within 30 days following such Taking. In the event of any Taking,
Landlord shall be entitled to any and all compensation, damages, income, rent,
awards, or any interest therein whatsoever which may be paid or made in
connection therewith, and Tenant shall have no claim against Landlord for the
value of any unexpired Term of this Lease or otherwise. Notwithstanding the
foregoing, Tenant may apply to the condemning party for a separate award for
Tenant's relocation costs, loss of good will and the unamortized cost of any
Alterations paid for by Tenant which Tenant would otherwise be entitled to
remove at the expiration or earlier termination of the Term, unless such award
diminishes the award otherwise payable to Landlord, in which case Tenant shall
be precluded from making such an application. In the event of a partial Taking
of the Premises which does not result in a termination of this Lease, the
monthly rental thereafter to be paid shall be equitably reduced. The parties
agree that their respective rights and obligations in the event of any Taking
shall be governed by the terms of this
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Lease and hereby waive any and all rights under Section 1265.130 of the
California Code of Civil Procedure.
23. Subordination.
(a) This Lease and Tenant's rights hereunder shall be subject and
subordinate to any ground lease, mortgage, deed of trust, or other hypothecation
or security device (collectively, any "Mortgage"), now or hereafter placed by
Landlord upon the Project, Building or other real property of which the Premises
is a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Tenant agrees that the ground lessors, mortgagees, trust deed beneficiaries and
other lienholders under any such Mortgages (collectively, "Mortgagees") shall
have no duty, liability or obligation to perform any of the obligations of
Landlord under this Lease, but that in the event of Landlord's default with
respect to any such obligation, Tenant will give any Mortgagee whose name and
address have been furnished Tenant in writing for such purpose notice of
Landlord's default and allow such Mortgagee thirty (30) days (or if more than
thirty (30) days is required to effect such cure, such additional time as may be
necessary) following receipt of such notice for the cure of said default before
invoking any remedies Tenant may have by reason thereof. If any Mortgagee shall
elect to have this Lease and/or Tenant's rights hereunder superior to the lien
of its Mortgage and shall give written notice thereof to Tenant, this Lease and
such rights shall be deemed prior to such Mortgage, notwithstanding the relative
dates of the documentation or recordation thereof
(b) Notwithstanding any such subordination, and at the election
of a Mortgagee or any other party who acquires ownership of the Premises by
reason of the exercise of rights under a Mortgage or through a deed in lieu of
foreclosure, Tenant agrees to attorn to such Mortgagee or other party, and in
the event of such exercise of remedies and such election, such new owner shall
not: (i) be liable for any act or omission of any prior landlord or with respect
to events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Tenant might have against any prior landlord, (iii) be
bound by prepayment of more than one month's rent, or (iv) be required to
perform any obligations of any prior landlord under the Lease.
(c) The agreements contained in this Section 23 shall be
effective without the execution of any further documents and shall survive the
exercise of remedies under a Mortgage provided, however, that, upon written
request from Landlord or a Mortgagee, Tenant and Landlord shall execute such
further writings as may be reasonably required to separately document any of the
matters provided for herein.
(d) Notwithstanding Sections 23(a) and (b) above, Tenant's
obligation to subordinate this Lease to any Mortgage(s) entered into after the
date of this Lease shall be subject to Tenant's receiving assurance (a
"Non-Disturbance Agreement") from the Mortgagee that Tenant's possession and
this Lease shall not be disturbed as long as (i) no default by Tenant (or event
which would constitute a default with the passage of time or the giving of
notice) has occurred and (ii) Tenant attorns to said Mortgagee as provided
above. Landlord shall also use its best efforts to obtain a Non-Disturbance
Agreement from the Mortgagee, if any, holding a Mortgage against the Project as
of the date of this Lease; provided, however, that Tenant shall pay all costs
and expenses, including, without limitation, attorneys' fees, incurred by
Landlord in connection with such efforts. The form and content of any
Non-Disturbance Agreement required under this Section 23(d) shall be determined
by the Mortgagee.
24. Sale. In the event the original Landlord hereunder, or any
successor owner of the Project, shall sell or convey the Project, all
liabilities and obligations on the part of the original Landlord, or such
successor owner, under this Lease accruing thereafter shall terminate, and
thereupon all such liabilities and obligations shall be binding upon the new
owner. Tenant agrees to attorn to such new owner.
25. Estoppel Certificate. At any time and from time to time, but in
no event later than ten (10) business days after request by Landlord, Tenant
shall execute, acknowledge, and deliver to Landlord, promptly upon request, a
certificate certifying (a) that this Lease is unmodified and in full force and
effect (or, if there have been modifications, that this Lease is in full force
and effect, as modified, and stating the date and nature of the modification),
(b) the amount of the Base Rent and most recent Escalation Rent, if any, and the
date to which such rental has been paid, (c) that no notice has been received by
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Tenant of any default which has not been cured, except as to defaults specified
in the certificate, (d) that no default of Landlord is claimed by Tenant, except
as to defaults specified in the certificate, and (e) such other matters as may
be reasonably requested by Landlord. Any such certificate may be relied upon by
any prospective purchaser or existing or prospective Mortgagee under any
Mortgage on the project or Building. Tenant's failure to deliver such statement
within such time shall constitute a default by Tenant under this Lease and shall
be conclusive upon Tenant (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that not
more than one (1) monthly installment of Base Rent and Escalation Rent in the
amount specified by Landlord has been paid in advance, and (iii) that there are
no uncured defaults in Landlord's performance. Within ten (10) days following
Landlord's request from time to time during the Term, Tenant shall deliver to
Landlord Tenant's current financial statement and financial statements for the
two (2) years prior to the current financial statement year, prepared in
accordance with generally accepted accounting principles, consistently applied.
Notwithstanding the foregoing, during such time that Tenant stock is publicly
traded, Tenant need only endeavor to deliver a copy of the financial reports
most recently published with the SEC. Landlord shall use reasonable efforts not
to divulge any confidential financial information of Tenant contained in an
estoppel certificate to any third parties (other than Landlord's officers,
directors, employees, accountants, attorneys and others as reasonably required
in the conduct of Landlord's business, or as otherwise required by applicable
securities Laws); except in the case of any litigation concerning this Lease, in
which event Landlord shall use reasonable efforts to keep such financial terms
confidential.
26. Intentionally Omitted.
27. No Light, Air, or View Easement. Any diminution or shutting off
of light, air or view by any structure which may be erected on lands adjacent to
the Building shall in no way affect this Lease or impose any liability on
Landlord.
28. Holding Over. If Tenant holds possession of the Premises after
expiration of the Term of this Lease or any termination of this Lease, Tenant
shall become a tenant at sufferance only, at a monthly rental equivalent to 150%
of the then prevailing monthly rental paid by Tenant at the expiration of the
Term or termination of this Lease, payable in advance on or before the first day
of each month, and otherwise subject to the terms, covenants and conditions
herein specified, so far as applicable. Acceptance by Landlord of rent after
such expiration or earlier termination shall not result in a renewal or
extension of this Lease. If Tenant fails to surrender the Premises within thirty
(30) days following the expiration of this Lease despite demand to do so by
Landlord, Tenant shall indemnify, defend and hold harmless Landlord from and
against any and all claims, demands, losses, liabilities, damages, costs and/or
expenses (including, without limitation, reasonable attorneys, fees and
expenses) arising out of such failure to surrender including, without
limitation, any claim made by any succeeding tenant.
29. Security Deposit. Concurrently with its execution of this Lease,
Tenant shall deposit with Landlord the sum specified in the Basic Lease
Information (the "Security Deposit"). The Security Deposit shall be held by
Landlord as security for the faithful performance by Tenant of all the
provisions of this Lease to be performed or observed by Tenant. If Tenant fails
to pay rent or other sums due hereunder, or otherwise defaults with respect to
any provision of this Lease, Landlord may use, apply or retain all or any
portion of the Security Deposit for the payment of any rent or other sum in
default or for the payment of any other sum to which Landlord may become
obligated by reason of Tenant's default, or to compensate Landlord for any loss
or damage which Landlord may suffer thereby. If Landlord so uses or applies all
or any portion of the Security Deposit, Tenant shall within ten (10) days after
demand therefor deposit cash with Landlord in an amount sufficient to restore
the Security Deposit to the full amount thereof and Tenant's failure to do so
shall be a material breach of this Lease. Landlord shall not be required to keep
the Security Deposit separate from its general accounts. If Tenant performs all
of Tenant's obligations hereunder, the Security Deposit, or so much thereof as
has not theretofore been applied by Landlord, shall be returned, without
interest (except as provided below), to Tenant (or, at Landlord's option, to the
last assignee, if any, of Tenant's interest hereunder) at the expiration of the
Term hereof, and after Tenant has vacated the Premises. No trust relationship is
created herein between Landlord and Tenant with respect to the Security Deposit.
If this Lease provides for periodic increases in Base Rent, Lessee shall, within
ten (10) days after demand by Landlord, increase the amount of the Security
Deposit to equal the Base Rent then in effect.
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Notwithstanding the foregoing, provided that no default by Tenant has
occurred by Tenant under the Lease (including any matter which would constitute
a default either with the giving of notice or the passage of time), Landlord
shall refund a portion of Tenant's Security Deposit to Tenant as follows:
(i) If Tenant's business generates three million dollars ($3,000,000.00)
in gross sales during any calendar year during the Term, Landlord shall refund
thirty thousand dollars ($30,000.00) of Tenant's Security Deposit to Tenant,
plus interest on said portion of the Security Deposit at the rate of five and
one-half percent (5 1/2%) per annum; and
(ii) If Tenant's business generates three million dollars
($3,000,000.00) in net profits during any calendar year during the Term,
Landlord shall refund an additional forty thousand dollars ($40,000.00) of
Tenant's Security Deposit to Tenant, plus interest on said portion of the
Security Deposit at the rate of five and one-half percent (5 1/2%) per annum;
provided, however, that in no event will Landlord be required at any
time before the expiration of the Term to refund or otherwise release to Tenant
any portion of the Security Deposit if such refund or release would result in
the remaining Security Deposit held by Landlord being less than thirty thousand
dollars ($30,000.00), and no interest shall at any time be payable by Landlord
with respect to said remaining Security Deposit. Tenant shall demonstrate that
it has meet the gross revenue and/or net profit thresholds set forth above by
delivering to Landlord either (i) audited financial statements in a form and
manner reasonably acceptable to Landlord or (ii) copies of Tenant's federal
income tax returns, certified by Tenant's President and Secretary as true and
accurate copies of the tax returns filed by Tenant with the Internal Revenue
Service. Landlord shall refund the applicable portion of the Security Deposit,
together with interest thereon as provided above, within thirty (30) days
following Landlord's receipt from Tenant of the aforementioned evidence that the
applicable financial threshold has been met.
30. Waiver. The waiver by Landlord of any agreement, condition or
provision herein contained shall not be deemed to be a waiver of any subsequent
breach of the same or any other agreement, condition or provision herein
contained, nor shall any custom or practice which may grow up between the
parties in the administration of the terms hereof be construed to waive or to
lessen the right of Landlord to insist upon the performance by Tenant in strict
accordance with such terms. The subsequent acceptance of rental hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of
any agreement, condition or provision of this Lease, other than the failure of
Tenant to pay the particular rental so accepted, regardless of Landlord's
knowledge of the preceding breach at the time of acceptance of the rental.
31. Notices and Consents. All notices, consents, demands and other
communications from one party to the other that are given pursuant to the terms
of this Lease shall be in writing and shall be deemed to have been fully given
two (2) full business days following deposit in the United States mail,
certified or registered, postage prepaid, or one (1) business day following
transmittal by reputable overnight courier (such as Federal Express), or when
hand delivered, to the respective addresses for delivery of notices specified in
the Basic Lease Information, or to such other place as either party may from
time to time designate in a notice to the other party. Notwithstanding the
foregoing, Tenant hereby appoints as its agent to receive the service of all
dispossessory or distraint proceedings and notices thereunder the person in
charge of or occupying the Premises at the time, and, if no person shall be in
charge of or occupying the same, then such service may be made by attaching the
same on the main entrance of the Premises. Failure to deliver a copy of any
notice as provided in the Basic Lease Information shall not invalidate any
notice or extend the time for performance if the notice is given to the primary
recipient listed in the Basic Lease Information.
32. Complete Agreement. There are no oral agreements between Landlord
and Tenant affecting this Lease, and this Lease supersedes and cancels any and
all previous negotiations, arrangements, brochures, agreements, and
understandings if any, between Landlord and Tenant or displayed by Landlord to
Tenant with respect to the subject matter of this Lease or the Project. There
are no representations between Landlord and Tenant other than those contained in
this Lease. All implied warranties, including implied warranties of
merchantability and fitness, are excluded.
33. Authority. If either party signs as a corporation, each of the
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persons executing this Lease on behalf of said party warrants that it is a duly
authorized and existing corporation, that said party has and is qualified to do
business in California, that the corporation has the full right and authority to
enter into this Lease, and that each and both of the persons signing on behalf
of the corporation were authorized to do so. If either party signs as a
partnership, each of the persons executing this Lease on behalf of said party
warrants that said party is a partnership, that the partnership has the full
right and authority to enter into this Lease, and that each person signing on
behalf of the partnership is authorized to do so. If either party signs as a
limited liability company, trust, or some other entity, each of the persons
executing this Lease on behalf of said party warrants that said party is the
type of entity stated, that the entity has the full right and authority to enter
into this Lease, and that each person signing on behalf of said entity is
authorized to do so.
34. Brokers. Landlord shall be responsible for the payment of any
commissions owing in connection with this Lease to the brokers specified in the
Basic Lease Information, if any (collectively, "Broker"), pursuant to separate
agreement. Landlord and Tenant each represent and warrant that it has had no
dealings with any real estate broker or agent in connection with the negotiation
of this Lease, other than the Broker, and that it knows of no other real estate
broker, agent or finder who is or might be entitled to a commission or fee in
connection with this Lease. If either party has dealt with any other person or
real estate broker with respect to leasing or renting space in the Project other
than Broker, such party shall be solely responsible for the payment of any fees
due said person or firm, and shall indemnify, defend and hold harmless the other
party from and against any liabilities, damages or claims with respect thereto,
including attorneys' fees and costs.
35. Parking. Tenant shall be entitled, without charge therefor, to
the use of the number of nonexclusive surface parking spaces indicated in the
Basic Lease Information in such portion of the Common Areas as may be provided
by Landlord from time to time for the purpose of parking motor vehicles. Monthly
parking fees payable for any additional parking spaces requested by Tenant shall
be the prevailing rates within the Project for such spaces, if any, and shall be
payable one month in advance prior to the first day of each calendar month.
Tenant acknowledges, however, that Landlord may provide or not provide any
additional parking spaces requested by Tenant in Landlord's sole and absolute
discretion. Landlord may assign any unreserved and unassigned parking spaces
and/or make all or a portion of such spaces preferred and/or reserved, if it
determines in its sole discretion that it is necessary for orderly and efficient
parking. Tenant shall not use any spaces which have been specifically assigned
by Landlord including, without limitation, spaces assigned for uses such as
visitor parking or which have been designated by governmental entities with
competent jurisdiction as being restricted to certain uses. The use by Tenant
and its employees, visitors and invitees of the parking facilities of the
Project shall be on the terms and conditions set forth herein as well as on the
parking rules and regulations as established and modified by Landlord from time
to time. Landlord shall not be responsible to Tenant for the violation or
non-performance by any other tenant or occupant of the Project of any of such
parking rules and regulations. Tenant shall not permit or allow any vehicles
that belong to or are controlled by Tenant or Tenant's employees, suppliers,
shippers, customers or invitees to be loaded, unloaded or parked in areas other
than those designated by Landlord for such activities. Notwithstanding the
foregoing, Landlord shall have the right to designate specific parking areas or
parking stalls within the Project and in reasonable proximity to the Building
for guest parking and for Tenant's parking spaces in excess of 3 parking spaces
per one thousand (1,000) square feet of Useable Area.
36. Force Majeure. The time for performance by either party of any
obligation under this Lease (other than the payment of rent or other monetary
obligations) shall be extended for the period of delay resulting from fire,
earthquake, explosion, flood, the elements, acts of God or the public enemy,
strike, other labor trouble, interference of governmental authorities or agents,
or shortages of fuel, supplies or labor resulting therefrom or any other cause,
whether similar or dissimilar to the above, beyond the reasonable control of the
party obligated for such performance, financial inability excepted
(collectively, any "Force Majeure Event").
37. Waiver of Trial by Jury. Landlord and Tenant hereby waive trial
by jury in any action, proceeding or counterclaim brought by either of the
parties hereto against the other or any matter whatsoever arising out of or in
any way connected with this Lease, the relationship of Landlord and Tenant,
Tenant's use
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or occupancy of the Premises, or any claim of injury or damage, or the
enforcement of any remedy under any statute, or otherwise.
38. Guaranty of Lease. It shall be a condition precedent to the
effectiveness of this Lease that the Guarantor(s) referenced in the Basic Lease
Information, execute a guaranty of Tenant's Obligations under this Lease in the
form attached hereto as Exhibit "E" and incorporated herein by this reference.
39. Recapture. Any agreement by Landlord contained herein for free or
abated rent or other charges applicable to the Premises, or for the giving or
paying by Landlord to or for Tenant of any cash or other bonus, inducement or
consideration for Tenant's entering into the Lease, all of which concessions are
hereinafter referred to as "Inducement Provisions," shall be deemed conditioned
upon Tenant's full and faithful performance of all of the terms, covenants and
conditions to be performed by Tenant under this Lease. Upon the occurrence of a
breach or default of this Lease by Tenant, or upon the filing by or against
Tenant of any petition under the United States Bankruptcy Code (Title 11 U.S.C.)
or any similar statute or law for the reorganization or liquidation of debt, or
upon any voluntary or involuntary assignment by Tenant for the benefit of its
creditors, (i) any such Inducement Provision shall automatically be deemed
deleted and of no further force or effect, and any rent, other charge, bonus,
inducement or consideration theretofore abated, given or paid by Landlord under
such Inducement Provision shall be immediately due and payable by Tenant to
Landlord, and shall be recoverable as additional rent due under the Lease,
notwithstanding any subsequent cure of said default or breach by Tenant. The
acceptance by Landlord of rent or the cure of the default or breach which
initiated the operation of this paragraph shall not be deemed a waiver by
Landlord of the provisions of this paragraph unless specifically so stated in
writing by Landlord at the time of such acceptance.
40. Expansion Space. Provided that Tenant is not in default under
this Lease (which shall include any mater which would constitute a default
either with the passage of time or the giving of notice) at any time prior to
the time the "Expansion Space Notice" (as such term is defined below) is
received by Landlord or thereafter until the date on which the "Tenant's
Exercise Notice" (as such term is defined below) is received by Landlord, Tenant
shall have the ongoing option for the lease of any leaseable space in the
Building (the "Expansion Space") to the extent the same becomes available for
lease to Tenant (which for purposes hereof shall mean that such space is not
then occupied or subject to lease or option or right for lease extension or
premises expansion by any other tenant or person) during the Term, exercisable
as follows: If Tenant desires to expand the Premises to include any Expansion
Space, Tenant shall during the initial Term deliver at least ninety (90) days'
written notice of such desire to Landlord (the "Expansion Space Notice").
Promptly following receipt of the Expansion Space Notice, Landlord shall deliver
to Tenant written notice of any configurations of then available of Expansion
Space and Expansion Space which will become available during the twelve (12)
month period following the date of Tenant's Expansion Space Notice, and Tenant
shall have ten (10) days following the date of such notice from Landlord to
elect by written notice to Landlord ("Tenant's Exercise Notice") to notify
Landlord, in writing, of which configuration of Expansion Space, if any, Tenant
desires to lease (commencing immediately upon availability) from Landlord, which
lease shall be for a term co-terminus with the Lease Term and otherwise subject
to all applicable terms and conditions of this Lease; provided, however, that
Landlord shall have no obligation to improve the Expansion Space for Tenant. If
(i) Tenant does not deliver an Expansion Space Notice, or (ii) after delivery of
Tenant's Expansion Space Notice and receipt of notice of any available space
from Landlord, Tenant does not deliver Tenant's Exercise Notice within such ten
(10) day period electing to lease such Expansion Space, Landlord may proceed to
lease such Expansion Space to any party upon any terms and conditions as
Landlord desires. If Tenant delivers the Expansion Space Notice and actually
leases the Expansion Space, then (i) the "Premises" shall thereafter be deemed
for all purposes to include the Expansion Space and (ii) Tenant's Base Rent,
Percentage Share of Building Operating Expenses, and Building Tax Expenses,
Security Deposit, and other matters in this Lease pertaining to the amount of
Rentable Area contained within the Premises shall be adjusted accordingly, as
reasonably determined by Landlord. Landlord and Tenant shall within thirty (30)
days following Landlord's receipt of the Tenant's Exercise Notice execute an
amendment to this Lease prepared by Landlord to reflect the addition to the
Premises of the Expansion Space, and Landlord may, but without obligation to do
so, declare the Tenant's Exercise Notice to be null and void if Tenant fails to
execute such amendment. Notwithstanding anything to the contrary contained in
this paragraph, Tenant may not exercise its rights under this Section 40 after
the last day of the sixtieth
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(60th) month of the initial Term unless it concurrently exercises its option to
extend the Term by the Option Term as provided in Section 2 above.
41. Signage; Roof Rights. (a) Tenant, at its cost and expense, may
place signage identifying Tenant's business name on (i) the freeway facing side
of the Building and (ii) on a monument sign to be constructed by Tenant (or, at
Landlord's option, by Landlord at Tenant's cost) which is to be located in front
of the Building adjacent to its main entry area. With the exception of the
freeway facing building signage, the signage rights granted in this Section 41
are non-exclusive, and each signage right (including freeway facing signage)
granted hereunder shall automatically terminate if such signage is not placed
within one (1) year of the Commencement Date. All signage, including, without
limitation, the design, size, color, and type, shall be subject to (i)
Landlord's prior written consent, which shall not be unreasonably withheld, (ii)
Building signage standards, if any, and (iii) all applicable Laws. Subject to
the foregoing, Tenant's freeway facing signage may be illuminated. The location
of Tenant's freeway facing signage (as opposed to the other characteristics
thereof) shall be mutually acceptable to Landlord and Tenant, and Landlord shall
not permit other tenants at the Project to utilize said location (as opposed to
other locations on the exterior of the Buildings) unless Tenant's right to the
same has terminated as provided above.
(b) Landlord shall permit Tenant to install up to three (3)
VHF/UHF microwave antennae on the roof of the Building; provided, however, that
said antennae and the installation thereof shall be subject to Landlord's prior
written consent, which shall not be unreasonably withheld, as to the size,
weight, type, and placement of said antennae, the impact the same have on the
Building and Building Systems, and visibility from outside of the Building. Such
antennae and Tenant's use thereof shall comply in all respects with all
applicable Laws. Provided that Tenant is not in default under this Lease
(including any matter which would constitute a default either with the passage
of time or the giving of notice), Tenant may upon the expiration of the Term
remove all of said antennae from the Building; provided that Tenant restores the
Building to the condition in which it existed prior to the placement of the
same. If instructed by Landlord, Tenant shall also remove said antennae from the
Building no later than the expiration or earlier termination of the Term.
Tenant's use and occupancy use thereof shall be subject to all of the terms and
conditions of this Lease, including without limitation, Section 8, and Section
11.
42. Surrender by Existing Tenants. Tenant is aware that the Premises
which is the subject of this Lease is currently leased to other tenant(s) of
Landlord (the "Existing Tenants"). Tenant acknowledges and agrees that
Landlord's obligation to deliver possession of the Premises to Tenant, and to
otherwise complete the transaction contemplated under this Lease, shall be
subject to Landlord's ability to cause the Existing Tenants of the Premises to
surrender the same to Landlord, on such terms and conditions as are acceptable
to Landlord in its sole and absolute discretion. If Landlord is able to
effectuate surrender of the portion of the Premises located on the first floor
of the Building before the portion located on the second floor, Tenant shall
first accept such Premises from Landlord and shall accept when available that
portion of the Premises located on the second floor of the Building, but Tenant
shall not be required to pay Base Rent or Escalation Rent with respect to the
second floor space until such time that Landlord makes the same available for
use by Tenant. If Landlord is unable to make the second floor space available
for use by Tenant concurrently with availability of the portion of the Premises
located in the first floor of the Building, Landlord shall use reasonable
efforts to make alternate premises available for use by Tenant, and Tenant shall
not be required to pay Base Rent for its use of the alternate premises. However,
if Landlord determines that it will be unable to make the originally designated
second floor space available for use by Tenant within ninety (90) days following
Landlord's delivery of the alternate premises, Landlord shall deliver written
notice thereof to Tenant within sixty (60) days following its delivery of the
alternate premises, and Tenant shall have thirty (30) days from its receipt of
such notice to elect by written notice to Landlord to lease the alternate
premises in place of the originally designated second floor space. If Tenant
elects to lease the alternate premises as provided above, then (i) the
"Premises" shall thereafter be deemed for all purposes to include the alternate
premises (as opposed to the originally designated second floor space) and (ii)
Tenant's Base Rent, Percentage Share of Building Operating Expenses, and
Building Tax Expenses, Security Deposit, and other matters in this Lease
pertaining to the amount of Rentable Area contained within the Premises shall be
adjusted accordingly, as reasonably determined by Landlord. Landlord and Tenant
shall within thirty (30)
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days following Landlord's receipt of Tenant's election to lease the alternate
premises execute an amendment to this Lease prepared by Landlord to reflect the
addition to the Premises of the alternate premises, and Landlord may, but
without obligation to do so, declare the Tenant's election to be null and void
if Tenant fails to execute such amendment. If Tenant does not elect to lease the
alternate premises as provided above, Tenant shall vacate and surrender the same
to Landlord within thirty (30) days following the date on which delivery of
Tenant's election notice was required, and Landlord shall have no further
obligation to lease the originally designated second floor premises to Tenant
(except as provided in Section 40 above). This Lease shall automatically and
without further action by Landlord or Tenant terminate if Landlord does not
deliver written notice to Tenant on or before April 23, 1999 stating that
Landlord has entered into an agreement by which the Existing Tenant(s) agree to
surrender possession of that portion of the Premises located on the first floor
of the Building.
43. Miscellaneous. The words "Landlord" and "Tenant" as used herein
shall include the plural as well as the singular. If there be more than one
Tenant, the obligations hereunder imposed upon Tenant shall be joint and
several. Time is of the essence of this Lease and each and all of its
provisions. Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or option for lease, and it is not
effective as a lease or otherwise until execution and delivery by both Landlord
and Tenant. The agreements, conditions and provisions herein contained shall,
subject to the provisions as to assignment, apply to and bind the heirs,
executors, administrators, successors and assigns of the parties hereto.
Notwithstanding the fact that certain references in this Lease to acts required
to be performed by Tenant hereunder, or to breaches or defaults of this Lease by
Tenant, omit to state that such acts shall be performed at Tenant's sole cost
and expense, or omit to state that such breaches or defaults by Tenant are
material, unless the context clearly implies to the contrary, each and every act
to be performed or obligations to be fulfilled by Tenant shall be performed at
Tenant's sole cost and expense, and all breaches or defaults by Tenant hereunder
shall be deemed material. Upon request by Landlord, Tenant agrees to modify this
Lease to meet the requirements of any or all lenders or ground lessors selected
by Landlord who request such modification as a condition precedent to providing
any loan or financing or to entering into any ground lease affecting or
encumbering the Project or any portion thereof, provided that such modification
does not (i) increase Base Rent, (ii) alter the Term, or (iii) materially and
adversely affect Tenants' rights hereunder. Tenant shall not, without the
consent of Landlord, use the name of the Building or Project for any purpose
other than as the address of the business to be conducted by Tenant in the
Premises. Any option, right or first refusal, right of first negotiation/offer,
or other similar right granted to Tenant in this Lease (collectively, an
"Option") is personal to the original Tenant executing this Lease and cannot be
voluntarily or involuntarily assigned or exercised by any person or entity other
than said Tenant (or Tenant's affiliate under Section 15(g) above), and even
then only when Tenant (or such affiliate) is in full possession of the Premises
and has no intention of thereafter assigning or subletting. Except for
affiliates (as defined in Section 15 above) of the original Tenant hereunder,
the Options, if any, herein granted to Tenant are not assignable, either as part
of an assignment of this Lease or separately or apart therefrom, and no Option
may be separated from this Lease in any manner, by reservation or otherwise. If
any provision of this Lease shall be determined to be illegal or unenforceable,
such determination shall not affect any other provision of this Lease and all
such other provisions shall remain in full force and effect. This Lease shall be
governed by and construed pursuant to the laws of the State of California.
Tenant shall not record this Lease nor a short form memorandum hereof. Prior
drafts of this Lease shall not be used in interpreting the meaning of provisions
contained in this Lease. The exhibits and addendum, if any, specified in the
Basic Lease Information are attached to this Lease and by this reference made a
part hereof. This Lease may be executed in any number of counterparts, each of
which shall be deemed to be an original, but any number of which, taken
together, shall constitute one and the same instrument. Tenant acknowledges that
this Lease is subject to Landlord's receiving from its Mortgagee(s) approval of
all of the terms contained herein.
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IN WITNESS WHEREOF, the parties have executed this Lease on the
respective dates indicated below:
LANDLORD:
MALIBU CANYON OFFICE PARTNERS, LLC, By: MB REAL ESTATE, INC., a
a California limited liability company California corporation
By: TENANT:
--------------------------------
Calvin H. Johnston, President
ACT NETWORKS, INC., a
Delaware corporation
By: /s/ SUSAN N. CAYLEY
-------------------------------
Print Name: Susan N. Cayley
Its: Vice President Legal Affairs
and Secretary
By: /s/ MARTIN A. WOLL
-------------------------------
Print Name: Martin A. Woll
Its: Chief Financial Officer
If Tenant is a corporation, this
instrument must be executed by the
chairman of the board, the
president or any vice president and
the secretary, any assistant
secretary, the chief financial
officer or any assistant financial
officer or any assistant treasurer
of such corporation, unless the
bylaws or a resolution of the board
of directors shall otherwise
provide, in which case the bylaws
or a certified copy of the
resolution, as the case may be,
must be attached to this
instrument. If Tenant is a limited
liability company, this instrument
must be executed by Tenant's
manager, unless another person or
entity is authorized pursuant to
Tenant's Operating Agreement or a
member's resolution, in which case
a certified copy of the Operating
Agreement or resolution, as the
case may be, must be attached to
this instrument.
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EXHIBIT "C"
IMPROVEMENT OF THE PREMISES
1. Plans. Landlord and Tenant hereby approve the space plans and
Building standard specifications (collectively, the "Space Plans") for the
construction of certain improvements, which shall not include Tenant's
telephone, computer, and data systems, furniture, or other personal improvements
desired by Tenant (the "Tenant Improvements") to be permanently affixed to the
Premises, which Space Plans are described on Schedule 1 attached hereto and
incorporated herein by this reference. Promptly following the execution of this
Lease, Landlord shall cause Landlord's architect to prepare final plans and
specifications (the "Final Plans") for the Tenant Improvements, in accordance
with the Space Plans. Such Final Plans shall be submitted by Landlord's
architect to Landlord and Tenant for approval, which approval shall not be
unreasonably withheld and shall be granted so long as such Final Plans are in
accordance with the approved Space Plans; provided, however, that any deviation
from the Space Plans requested by Tenant as a part of the Final Plans shall be
subject to the provisions of Section 3 of this Exhibit "C" respecting "Change
Orders" (as hereinafter defined). Upon written approval of the Final Plans by
the parties, Landlord shall be authorized to proceed with the construction of
the Tenant Improvements in accordance with the Final Plans.
2. Construction of the Tenant Improvements. Subject to the provisions
of Section 3 below, Landlord shall construct, or cause the construction of, the
Tenant Improvements in accordance with the approved Final Plans, at Landlord's
sole cost and expense. In addition, Landlord shall pay to The Johnston Group, a
affiliate of Landlord, a construction administration fee in an amount equal to
ten percent (10%) of the total costs of construction.
3. Deviations from the Final Plans. Tenant shall be liable for the
increased cost of the design and construction of the Tenant Improvements
resulting from any Change Orders in accordance with the provisions of this
Section 3, plus a construction administration fee to The Johnston Group, an
affiliate of Landlord, in an amount equal to ten percent (10%) of such cost. In
the event of any deviation from the Space Plans requested by Tenant as a part of
the Final Plans pursuant to Section 1 above, and/or any change to any item of
Final Plans following the approval thereof by Landlord pursuant to Section 1
above, Tenant shall submit to Landlord a written request for a change order (the
"Change Order Request"), detailing the desired change. If Landlord approves
Tenant's Change Order Request, Landlord shall promptly thereafter issue to
Tenant a statement (the "Change Order Statement") indicating the net increase in
the cost of design and construction of the Tenant Improvements resulting from
the implementation of such Change Order Request (including, without limitation,
reasonable contractor's fees for profit, overhead and general conditions in
connection with such Change Order Request). Within 3 days following receipt of
such Change Order Statement from Landlord, Tenant shall notify Landlord in
writing whether Tenant elects to incorporate the Change Order Request into the
Final Plans, provided that it shall be a condition to the effectiveness of such
an election to so incorporate the Change Order Request that Tenant pay to
Landlord the amount specified on the Change Order Statement. If Tenant so elects
to incorporate the Change Order Request into the Final Plans, the Change Order
Request shall become a "Change Order" and Landlord may retain the amount
delivered by Tenant pursuant to the Change Order Statement therefor as Tenant's
contribution to the cost of such Change Order. If the adoption of a Change Order
causes a delay in the Commencement Date that would have otherwise been
established in the absence of such Change Order, such delay shall be a "Tenant
Delay" (as defined in Section 4(b) below). In addition, in the event that the
net cost of construction of the Tenant Improvements increases due to changes
requested by any applicable governmental authority in the Tenant Improvements as
set forth in the Final Plans approved by Landlord and Tenant pursuant to Section
1 above, Tenant shall be pay to Landlord the amount of such increased costs
within 10 days after Tenant's receipt from Landlord of written notice thereof.
4. Commencement Date.
(a) The "Commencement Date" shall mean the earlier of (i) the date on
which Tenant takes possession of any portion of the Premises for any purpose
other than those permitted under Section 5(a) below, and (ii) the date of
"Substantial Completion" of the Tenant Improvements, which for purposes hereof
shall be the date upon which the Tenant Improvements have been substantially
completed pursuant to the Final Plans (as determined by Landlord's architect or
space planner), with the exception of any punch list items and Tenant's
controlled improvements, if any (e.g., Tenant's fixtures, telephones, data
lines, computers, furniture, etc.) to be installed by Tenant and/or under the
supervision of Landlord's contractor).
EXHIBIT "C" -- PAGE 1
<PAGE> 34
(b) If there shall be a delay or there are delays in the occurrence of
the Commencement Date as a direct, indirect, partial, or total result of any of
the following (in any such case, a "Tenant Delay"): (i) Tenant's failure to
timely perform its obligations under this Exhibit "C" or the other provisions of
this Lease requiring Tenant's approval, (ii) Tenant's request for any Change
Orders and/or the implementation thereof, (iii) Tenant's requirement for
materials, components, finishes or improvements which are not available in a
commercially reasonable time given the anticipated date of substantial
completion of the Premises, or which are different from Building standards, or
(iv) any other acts or omissions of Tenant, or its agents, employees and/or
contractors, then, notwithstanding anything to the contrary set forth in this
Lease (including, without limitation, this Exhibit "C") and regardless of the
actual date of the Commencement Date, the Commencement Date shall be the date on
which the Commencement Date would have occurred if no Tenant Delay or Tenant
Delays, as set forth above, had occurred. If Tenant Delays exist, then upon the
substantial completion of the Premises, Landlord shall notify Tenant of (1) the
aggregate period of the Tenant Delays and (2) the Commencement Date as
determined pursuant hereto. Tenant shall, within five (5) days following receipt
of such notice, perform or cause to be performed all obligations under this
Lease (including, without limitation, the payment of rent) that have accrued
from the Commencement Date as determined pursuant hereto, to the date on which
Tenant received Landlord's notice, and the Commencement Date shall, for all
purposes under this Lease, be the Commencement Date as determined pursuant
hereto. Nothing contained herein shall be deemed to relieve Landlord of its
obligation to use diligent efforts to complete the Tenant Improvements in a
timely manner subject to Tenant Delays and delays due to the occurrence of any
Force Majeure Events.
5. Miscellaneous.
(a) Provided that Tenant and its agents do not interfere with the
construction of the Tenant Improvements, upon reasonable prior written notice to
Landlord, Tenant shall be permitted access to the Premises thirty (30) days
before the date of substantial completion of the Tenant Improvements for the
purpose of installing over-standard equipment or fixtures (including Tenant's
data and telephone equipment) in the Premises. Prior to any such entry upon the
Premises, Tenant shall deliver to Landlord evidence of the satisfaction of
Tenant's insurance obligations set forth in this Lease. Any such occupancy of
the Premises by Tenant prior to the Commencement Date shall be subject to all
applicable provisions of the Lease (including, without limitation, the indemnity
and insurance provisions of Lease Sections 12 and 13) other than the obligation
for the payment of Base Rent and Escalation Rent. Prior to any such entry upon
the Premises, Tenant shall deliver to Landlord evidence of the satisfaction of
Tenant's insurance obligations set forth in Lease Section 12.
(b) Tenant has designated Steven Watts as its sole representative with
respect to the matters set forth in this Exhibit "C", who, until further notice
to Landlord, shall have full authority and responsibility to act on behalf of
the Tenant as required in this Exhibit "C".
(c) Landlord has designated Jeff Johnston as its sole representative
with respect to the matters set forth in this Exhibit "C", who, until further
notice to Tenant, shall have full authority and responsibility to act on behalf
of the Landlord as required in this Exhibit "C".
(d) At Landlord's option, all subcontractors, laborers, materialmen,
and suppliers retained directly by Tenant shall be union labor in compliance
with the master labor agreements existing between trade unions and the Southern
California Chapter of the Associated General Contractors of America.
(e) All references herein to a number of days shall mean and refer to
calendar days. In all instances where Tenant is required to approve or deliver
an item, if no written notice of approval is given or the item is not delivered
within the stated time period, at Landlord's sole option, at the end of such
period the item shall automatically be deemed approved or delivered by Tenant
and the next succeeding time period shall commence.
EXHIBIT "C" -- PAGE 2
<PAGE> 35
SCHEDULE 1
Space Plans by Bena Design Partnership dated 4/1/99 for Buildings A & B, with
revisions dated 4/8/99 (first floor), with the plan for the space on the second
floor dated 4/13/99. Notwithstanding the foregoing, Landlord shall have no
responsibility regarding any of the systems furniture, or any other furniture
located, or to be located at the Premises. Tenant shall also be responsible to
purchase the projection screen at its own cost. Landlord will install the screen
at its cost.
<PAGE> 36
EXHIBIT "D"
RULES AND REGULATIONS
1. The sidewalks, halls, passages, exits, entrances, shopping malls,
elevators, escalators and stairways of the Building shall not be obstructed by
Tenant or used by Tenant for any purpose other than for ingress to and egress
from the Premises. The halls, passages, exits, entrances, shopping malls,
elevators, escalators and stairways are not for the general public, and Landlord
shall in all cases retain the right to control and prevent access thereto of all
persons whose presence in the judgment of Landlord would be prejudicial to the
safety, character, reputation and interests of the Project and its tenants,
provided that nothing herein contained shall be construed to prevent such access
to persons with whom Tenant normally deals in the ordinary course of its
business, unless such persons are engaged in illegal activities. Neither Tenant
nor any employee or invitee of Tenant shall go upon the roof of the Building.
2. No sign, placard, picture, name, advertisement or notice visible
from the exterior of Tenant's Premises shall be inscribed, painted, affixed or
otherwise displayed by Tenant on any part of the Building without the prior
written consent of Landlord in its sole and absolute discretion. Landlord will
adopt and furnish to tenants general guidelines relating to signs inside the
Building on the office floors. All approved signs or lettering on doors shall be
printed, painted, affixed or inscribed at the expense of Tenant by Landlord.
Material visible from outside the Building will not be permitted.
3. The Premises shall not be used for the storage of merchandise held
for sale to the general public or for lodging. No cooking shall be done or
permitted by Tenant on the Premises, except that use by Tenant of food and
beverage vending machines and Underwriters' Laboratory approved microwave ovens
and equipment for brewing coffee, tea, hot chocolate and similar beverages shall
be permitted, provided that such use is in accordance with all applicable Laws.
No food or drink shall be permitted in the common areas of the Project without
the express approval of Landlord. Food or drink shall never be permitted in the
common areas of any building. Tenant shall be responsible for any damage to the
improvements in any building due to food or drink spillage. If the Premises or
any portion of the Project shall become infected with vermin as a result of
Tenant's violation of the foregoing, Tenant, at its sole cost and expense, shall
cause the same to be exterminated as may be required by contractors approved by
Landlord.
4. Tenant shall not employ any person or persons other than Landlord's
janitorial service for the purpose of cleaning the Premises, unless otherwise
specifically approved by Landlord. No person or persons other than those
approved by Landlord shall be permitted to enter the Building for the purpose of
cleaning the same. Tenant shall not cause any unnecessary labor by reason of
carelessness or indifference in the preservation of good order and cleanliness.
Janitor service will not be furnished on nights when rooms are occupied after
9:30 P.M. unless, by prior arrangement with Landlord, service is extended to a
later hour for specifically designated rooms.
5. Landlord will furnish Tenant free of charge two keys to each door
lock in its Premises. Landlord may make a reasonable charge for any additional
keys. Tenant shall not have any keys made. Tenant shall not alter any lock or
install a new or additional lock or any bolt on any door of its Premises without
the prior consent of Landlord. Tenant shall in each case furnish Landlord with a
key for any such lock. Tenant, upon the termination of its tenancy, shall
deliver to Landlord all keys to doors in the Building which shall have been
furnished to Tenant.
6. The freight elevator shall be available for use by all tenants in
the Building, subject to such reasonable scheduling as Landlord in its
discretion shall deem appropriate. The persons employed to move such equipment
in or out of the Building must be acceptable to Landlord. Landlord shall have
the right to prescribe the weight, size and position of all equipment,
materials, furniture or other properly brought into the Building. Heavy objects
shall, if considered necessary by Landlord, stand on wood strips of such
thickness as is necessary to properly distribute the weight. Landlord will not
be responsible for loss of or damage to any such property from any cause, and
all damage done to the Building by moving or maintaining such property shall be
repaired at the expense of
EXHIBIT "D" -- PAGE 1
<PAGE> 37
Tenant.
7. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline or inflammable or combustible fluid or material other than
limited quantities thereof reasonably necessary for the operation or maintenance
of office equipment, or use any method of heating or air conditioning other than
that supplied by Landlord. Tenant shall not use or keep or permit to be used or
kept any foul, noxious or hazardous gas or substance in the Premises, or permit
or suffer the Premises to be occupied or used in a manner offensive or
objectionable to Landlord or other occupants of the Building by reason of noise,
odors, or vibrations, or interfere in any way with other tenants or those having
business therein. No pets shall be kept in the Premises.
8. Landlord shall have the right, exercisable without notice and
without liability to any tenant, to change the name and street address of the
Building and/or Project.
9. Landlord reserves the right to exclude from the Building and/or
Project between the hours of 6 P.M. and 7 A.M. and at all hours on Saturdays,
Sundays and legal holidays any person who does not present a proper access card
or other identification as a tenant or an employee of a tenant, or who does not
otherwise present proper authorization by a tenant for access to its premises.
Tenant shall be responsible for all persons for whom it authorizes access and
shall be liable to Landlord for all acts of such persons. Landlord shall in no
case be liable for damages for any error with regard to the admission to or
exclusion from the Building and/or Project of any person. In the case of
invasion, mob, riot, public excitement or other circumstances rendering such
action advisable in Landlord's opinion, Landlord reserves the right to prevent
access to the Building and/or Project during the continuance of the same by such
action as Landlord may deem appropriate.
10. The directory of the Building will be provided for the display of
the name and location of Tenant, and Landlord reserves the right to exclude any
other names therefrom. Any additional name which Tenant desires to have added to
the directory shall be subject to Landlord's approval and may be subject to a
charge therefor
11. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, hangings or decorations shall be attached to, hung or placed in, or
used in connection with any exterior window in the Building other than Building
standard window coverings.
12. Messenger services and suppliers of bottled water, food, beverages,
and other products or services shall be subject to such reasonable regulations
as may be adopted by Landlord. Landlord may establish a central receiving
station in the Building for delivery and pick-up by all messenger services, and
may limit delivery and pick-up at Tenant's Premises to Building personnel.
13. Tenant shall see that the doors of its Premises are closed and
locked and that all water faucets or apparatus, cooking facilities and office
equipment (excluding office equipment required to be operative at all times) are
shut off before Tenant or its employees leave the Premises at night, so as to
prevent waste or damage, and for any default or carelessness in this regard,
Tenant shall be responsible for any damage sustained by other tenants or
occupants of the Building or Landlord. If the Premises is located in whole or
part on a multipletenancy floor, Tenant shall keep the doors to its Premises and
Building corridors closed at all times except for ingress and egress.
14. The toilets, urinals, wash bowls and other restroom facilities
shall not be used for any purpose other than that for which they were
constructed, no foreign substance of any kind whatsoever shall be thrown therein
and the expense of any breakage, stoppage or damage resulting from the violation
of this rule shall be borne by the tenant who, or whose employees or invitees,
shall have caused it.
15. Tenant shall not sell, or permit the retail sale of newspapers,
magazines, periodicals, theater tickets or any other goods or merchandise to the
general public in or on the Premises, nor shall Tenant carry on, or permit or
allow any employee or other person to carry on, the business of stenography,
EXHIBIT "D" -- PAGE 2
<PAGE> 38
typewriting or any similar business in or from the Premises for the service or
accommodation of occupants of any other portion of the Building, nor shall the
Premises be used for manufacturing of any kind, or any business or activity
other than that specifically provided for in the Lease.
16. Tenant shall not install any antenna, loudspeaker, or other device
on the roof or exterior walls of the Building except as provided for in Section
41(b) of the Lease.
17. In order to ensure more orderly and efficient parking at the
Project, Tenant shall within ten (10) days after request by Landlord deliver to
Landlord a written list of all of Tenant's full and part-time employees and
independent contractors, which list shall include the make, model, year, color
and license plate number of each such person's vehicle(s). In addition, if
Landlord determines that Tenant and its officers, directors, employees, and
agents are using more parking spaces than are allotted to Tenant under the Basic
Lease Information, Landlord may require Tenant, at Tenant's expense, to locate
off-site parking for such persons (to the extent they exceed Tenant's
allotment), and to implement an off-site parking plan reasonably acceptable to
Tenant, which plan shall if necessary include a shuttle service. No motorcycles
or motor scooters shall be parked or stored anywhere in the Project other than
in the designated areas therefor in the Common Areas of the Project, and no
bicycles may be parked or stored anywhere in the Building other than in
facilities provided therefor in the Common Areas of the Project.
18. Neither Tenant nor its invitees shall use in any portion of the
Building, any hand trucks or other material handling equipment except those
equipped with rubber tires and side guards.
19. Tenant shall store its refuse within its Premises. No material
shall be placed in the refuse boxes or receptacles if such material is of such
nature that it may not be disposed of in the ordinary and customary manner of
removing and disposing of refuse in the municipality having jurisdiction over
the Premises without being in violation of any law or ordinance governing such
disposal. All refuse disposal shall be made only through entryways and elevators
provided for such purposes and at such times as Landlord shall designate.
20. Canvassing, peddling, soliciting, and distribution of handbills or
any other written materials in the Building are prohibited, and Tenant shall
cooperate to prevent the same.
21. The requirements of Tenant will be attended to only upon
application by telephone or in person at the office of the Project. Employees of
Landlord shall not perform any work or do anything outside of their regular
duties unless under special instructions from Landlord.
22. Smoking shall be prohibited within the building and shall be
permitted within the exterior areas of the Project only in locations designated
by Landlord.
23. Landlord may waive any one or more of these Rules and Regulations
for the benefit of any particular tenant or tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in favor
of any other tenant or tenants, nor prevent Landlord from thereafter enforcing
any such Rules and Regulations against any or all of the tenants of the Project.
24. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of the Lease.
25. Landlord reserves the right to make such other and reasonable rules
and regulations as in its judgment may from time to time be needed for the
safety, care and cleanliness of the Project and/or Building, and for the
preservation of good order therein.
EXHIBIT "D" -- PAGE 3
<PAGE> 39
EXHIBIT "E"
GUARANTY OF LEASE
THIS GUARANTY OF LEASE ("Guaranty") is made by Xylan Corporation, a California
corporation ("Guarantor"), in favor of Malibu Canyon Office Partners, LLC, a
California limited liability company ("Landlord"), in connection with that
certain lease dated on or about the date hereof (the "Lease"), pursuant to which
Landlord leases to ACT Networks, Inc., a Delaware corporation ("Tenant"), among
other things, those premises generally referred to as 26701 W. Agoura Road,
Suite 100, Calabasas, California and 26707 W. Agoura Road, Suite 100, Calabasas,
CA (collectively, the "Premises"). Landlord has previously delivered an
unexecuted draft of the Lease to Guarantor, and shall deliver an executed copy
of said Lease to Guarantor promptly after Landlord and ACT execute the same. As
a material inducement to and in consideration of Landlord's (i) entering into
the Lease and (ii) releasing Guarantor (which release must be evidenced by
separate written agreement) from its obligations with respect to the Building
A/B Contraction Space and the Building A Contraction Space (as such terms are
defined below), Landlord having indicated that it would not enter into the Lease
or agree to such release without the execution of this Guaranty, Guarantor does
hereby agree with Landlord as follows:
1. Guarantor does hereby unconditionally and irrevocably guarantee, as
a primary obligor and not as a surety, and promise to perform and be liable for
Tenant's obligation to make the monthly payments of Base Rent and Escalation
Rent as and when due under the terms of the Lease (without regard to any
acceleration provisions contained therein), subject only to the limitation
stated in this Guaranty. Notwithstanding the foregoing, the obligations and
liabilities of Tenant guaranteed by Guarantor (as opposed to Guarantor's
obligation for costs and expenses, including, without limitation, attorneys'
fees, for which Guarantor shall be responsible as provided in paragraph 13
below) shall (i) only include Base Rent and Escalation Rent which accrues under
the Lease through and including the "Outside Accrual Date" (as defined below)
and (ii) at no time exceed fifty percent (50%) of the combined projected income
which Landlord would have realized with respect to (x) the "Building A/B
Contraction Space", as defined in the Third Amendment to Lease dated April 15,
1999 by and between Landlord and Guarantor, as tenant, and (y) the "Building A
Contraction Space" as defined in the Fifth Amendment to Lease dated April 15,
1999 by and between Landlord and Guarantor, as tenant. For purposes hereof,
projected income with respect to the Building A/B Contraction Space and the
Building A Contraction Space shall mean the combined Base Rent and Escalation
Rent for said space, and shall be calculated from the date of the default by
Tenant which gives rise to applicable obligation of Guarantor hereunder through
and including the "Outside Accrual Date". For example, if (i) Tenant's remaining
obligations and liabilities under the Lease at the time of its default are one
hundred thousand dollars ($100,000.00)(after application of Tenant's security
deposit, if any, as provided below) and (ii) Landlord would have realized fifty
thousand dollars ($50,000.00) in income from Guarantor, as tenant, for both the
Building A/B Contraction Space and the Building A Contraction Space from the
date of Tenant's default through the Outside Accrual Date, then Guarantor's
guaranty obligations hereunder (as opposed to its obligation to pay costs and
expenses as provided in paragraph 13 below) would be limited to twenty-five
thousand dollars ($25,000.00). The foregoing example is intended to be
illustrative but not exhaustive. The term "Outside Accrual Date" shall mean the
earlier of (i) August 31, 2002 (notwithstanding the fact that Guarantor's term
with respect to the Building A/B Contraction Space or the Building A Contraction
Space may or could have terminated or expired before such date, other than as
described in subparagraph (ii) immediately following) or (ii) the date on which
the term of Guarantor's lease, as tenant, of the Building A/B Contraction Space
or the Building A Contraction Space, as applicable, would have terminated for
any reason, other than the voluntary exercise of a termination right by
Guarantor as tenant under the September 20, 1996 Office Lease or the April 14,
1994 Office Lease under which Tenant occupied said space. Landlord shall apply
any then remaining security deposit held under the ACT Lease before calculating
Guarantor's obligations under this Guaranty and before proceeding against
Guarantor as provided in paragraph 19 below.
If Guarantor makes any monthly payment of Base Rent or Escalation Rent
required by Tenant under the Lease as required under this Guaranty and (i)
Landlord subsequently collects such monthly payment from Tenant and (ii) such
payment by Tenant exceeds the then current and outstanding obligations owing by
Tenant under the Lease (including, without limitation, any obligation to
replenish Tenant's security deposit), then Landlord shall promptly refund such
monthly payment to Guarantor to the extent of such excess, less Landlord's
reasonable collection costs. Guarantor shall also be relieved of its obligations
under this Guaranty to the extent (but not to exceed) the amount by which
Landlord actually mitigates its damages under the Lease.
If a court of competent jurisdiction orders Landlord to refund or
otherwise disgorge any payment of Base Rent or Escalation Rent made by Tenant
under the Lease, such payment obligation under the Lease shall be deemed to be
reinstated as of the date refunded or disgorged by Landlord.
2. Subject to the last sentence of this paragraph 2, Guarantor does
hereby agree that, without the consent of or notice to Guarantor and without
affecting any of the obligations of Guarantor hereunder: (a) any term, covenant
or condition of the Lease may be amended, compromised, released or otherwise
altered by Landlord and Tenant, and Guarantor does guarantee and promise to
perform as
EXHIBIT "E" -- PAGE 1
<PAGE> 40
provided herein all the obligations of Tenant to pay Base Rent and Escalation
Rent under the Lease as so amended, compromised, released or altered; (b) any
guarantor of or party to the Lease may be released, substituted or added; (c)
any right or remedy under the Lease may be exercised, not exercised, impaired,
modified, limited, destroyed or suspended; (d) Landlord or any other person
acting on Landlord's behalf may deal in any manner with Tenant, any guarantor,
any party to the Lease or any other person; and (e) all or any part of the
Premises or of Tenant's rights or liabilities under the Lease may be sublet,
assigned or assumed. This is a continuing guaranty. The exercise by Landlord of
any of its rights under clauses (a)-(e) above shall not, however, increase or
adversely affect the nature or extent of Guarantor's obligations beyond those
which would have existed in the absence of such exercise.
3. Except as expressly provided to the contrary in paragraph 18 below,
Guarantor hereby waives and agrees not to assert or take advantage of: (a) any
right to require Landlord to proceed against Tenant or any other person or to
pursue any other remedy before proceeding against Guarantor; (b) any right or
defense that may arise by reason of the incapacity, lack of authority, death or
disability of Tenant or any other person; and (c) any right or defense arising
by reason of the absence, impairment, modification, limitation, destruction or
cessation (in bankruptcy, by an election of remedies, or otherwise) of the
liability of Tenant, of the subrogation rights of Guarantor or of the right of
Guarantor to proceed against Tenant for reimbursement; provided, however, that
Guarantor may proceed against Tenant for reimbursement until such time that
Landlord commences collection efforts against Tenant, at which time Tenant shall
cease its collection efforts and dismiss or otherwise stay any action or
proceeding pending against Tenant until Landlord's collection efforts are
concluded. Landlord shall pursue its collection efforts against Tenant in a
reasonably diligent manner and without regard to this Guaranty; provided,
however, that Guarantor may not allege Landlord's failure to do so as a defense
to its obligations hereunder unless Guarantor can establish that such failure
constitutes gross negligence or wilful misconduct on the part of Landlord.
Without in any manner limiting the generality of the foregoing, Guarantor hereby
waives the benefits of the provisions of Sections 2809 (to the extent provided
in this paragraph 3), 2810, 2819 (except as provided in the last sentence of
paragraph 2 above), 2845, 2849 (except to the extent that Landlord is obligated
to apply Tenant's security deposit as provided above), 2850, 2899 and 3433 of
the California Civil Code and any similar or analogous statutes of California or
any other jurisdiction.
4. Except as otherwise provided in paragraph 18 below, Guarantor hereby
waives and agrees not to assert or take advantage of any right or defense based
on the absence of any or all presentments, demands (including demands for
performance), notices (including notices of adverse change in the financial
status of Tenant or other facts which increase the risk to Guarantor, notices of
non-performance and notices of acceptance of this Guaranty) and protests of each
and every kind.
5. Until all Tenant's obligations under the Lease are fully performed,
Guarantor: (a) shall have no right of subrogation against the Tenant by reason
of any payments or acts of performance by Guarantor under this Guaranty; and (b)
subordinates any liability or indebtedness of the Tenant now or hereafter held
by Guarantor to the obligations of Tenant under, arising out of or related to
the Lease or Tenant's use or occupancy of the Premises.
6. The liability of Guarantor and all rights, powers and remedies of
Landlord hereunder and under any other agreement now or at any time hereafter in
force between Landlord and Guarantor relating to the Lease shall be cumulative
and not alternative and such rights, powers and remedies shall be in addition to
all rights, powers and remedies given to Landlord by law.
7. This Guaranty applies to, inures to the benefit of and binds all
parties hereto, their heirs, devisees, legatees, executors, administrators,
representatives, successors and assigns (including any purchaser at a judicial
foreclosure or trustee's sale or a holder of a deed in lieu thereof). This
Guaranty may be assigned by Landlord voluntarily or by operation of law.
8. Guarantor shall not, without the prior written consent of Landlord,
which shall not be unreasonably withheld, commence, or join with any other
person in commencing, any bankruptcy, reorganization or insolvency proceeding
against Tenant. The obligations of Guarantor under this Guaranty shall not be
altered, limited or affected by any proceeding, voluntary or involuntary,
involving the bankruptcy, insolvency, receivership, reorganization, liquidation
or arrangement of Tenant, or by and defense which Tenant may have by reason of
any order, decree or decision of any court or administrative body resulting from
any such proceeding. Guarantor shall file in any bankruptcy or other proceeding
in which the filing of claims is required or permitted by law all claims which
Guarantor may have against Tenant relating to any indebtedness of Tenant to
Guarantor and will assign to Landlord all rights of Guarantor thereunder to the
extent of Tenant's outstanding obligations to pay Base Rent and Escalation Rent
to Landlord under the Lease. Landlord shall have the sole right to accept or
reject any plan proposed in such proceeding and to take any other action which a
party filing a claim is entitled to do. In all such cases, whether in
administration, bankruptcy or otherwise, the person or persons authorized to pay
such claim shall pay to Landlord the amount payable on such claim and, to the
full extent necessary for that purpose, Guarantor hereby assigns to Landlord all
of Guarantor's rights to any such payments or distributions to which Guarantor
would otherwise be
EXHIBIT "E" -- PAGE 2
<PAGE> 41
entitled; provided, however, that Guarantor's obligations hereunder shall not be
satisfied except to the extent that Landlord receives cash by reason of any such
payment or distribution. If Landlord receives anything hereunder other than
cash, the same shall be held as collateral for amounts due under this Guaranty.
Landlord shall pay to Guarantor any sums which Landlord receives under this
paragraph 8 which exceeds the amount of Base Rent and Escalation Rent owing to
Landlord by Tenant under the Lease, less Landlord's reasonable collection costs.
9. This Guaranty shall constitute the entire agreement between
Guarantor and the Landlord with respect to the subject matter hereof. No
provision of this Guaranty or right of Landlord hereunder may be waived nor may
any Guarantor be released from any obligation hereunder except by a writing duly
executed by an authorized officer or director of Landlord.
10. If more than one person signs this Guaranty, each such person shall
be deemed a Guarantor and the obligation of all such Guarantors shall be joint
and several. When the context and construction so requires, all words used in
the singular herein shall be deemed to have been used in the plural. The word
"person" as used herein shall include an individual, company, firm, association,
partnership, corporation, trust or other legal entity of any kind whatsoever.
11. Should any one or more provisions of this Guaranty be determined to
be illegal or unenforceable, all other provisions shall nevertheless be
effective.
12. The waiver or failure to enforce any provision of this Guaranty
shall not operate as a waiver of any other breach of such provision or any other
provisions hereof.
13. In the event of any dispute between Guarantor and Landlord arising
out of or in connection with this Guaranty, the prevailing party in any
litigation, arbitration or other proceeding shall be entitled to have and
recover from the other party its reasonable attorneys' fees, collection costs
and other costs and expenses incurred.
14. Time is strictly of the essence under this Guaranty and any
amendment, modification or revision hereof.
15. If Guarantor is a corporation, each individual executing this
Guaranty on behalf of said corporation represents and warrants that he is duly
authorized to execute and deliver this Guaranty on behalf of said corporation,
in accordance with a duly adopted resolution of the board of directors of said
corporation or in accordance with the bylaws of said corporation, and that this
Guaranty is binding upon said corporation in accordance with its terms. If
Guarantor is a corporation, Landlord, at its option, may require Guarantor to
concurrently, with the execution of this Guaranty, deliver to Landlord a
certified copy of a resolution of the board of directors of said corporation
authorizing or ratifying the execution of this Guaranty.
16. The term "Landlord" whenever hereinabove used refers to and means
the Landlord in the foregoing Lease specifically named and also any assignee of
said Landlord, whether by outright assignment or by assignment for security, and
also any successor to the interest of said Landlord or of any assignee of such
Lease or any part thereof, whether by assignment or otherwise. The term "Tenant"
whenever hereinabove used refers to and means the Tenant in the foregoing Lease
specifically named and also any assignee or subtenant of said Lease and also any
successor to the interests of said Tenant, assignee or sublessee of such Lease
or any part thereof, whether by assignment, sublease or otherwise.
17. All notices, consents, demands and other communications from one
party to the other that are given pursuant to the terms hereof shall be in
writing and shall be deemed to have been fully given two (2) full business days
following deposit in the United States mail, certified or registered, postage
prepaid, or one (1) business day following transmittal by reputable overnight
courier (such as Federal Express), or when hand delivered, to the respective
addresses for delivery of notices specified below, or to such other place as
either party may from time to time designate in a notice to the other party:
Landlord: Guarantor
c/o The Johnston Group Xylan Corporation
26635 W. Agoura Rd., Ste 105 26801 W. Agoura Road
Calabasas, CA 91302 Calabasas, CA 91302
Attn: Mr. Jeff Johnston Attn: Mr. John Yi
With a copy to: With a copy to:
Kenneth S. Fields Xylan Corporation
Fields & Pearl 26801 W. Agoura Road
1875 Century Park East Calabasas, CA 91302
Suite 1400 Attn: General Counsel
Los Angeles, CA 90067
Failure to deliver a copy of any notice as provided above shall not
invalidate any notice or extend the time for performance if the notice is given
to the primary recipient listed above.
18. Landlord shall endeavor to promptly deliver to Guarantor notice
EXHIBIT "E" -- PAGE 3
<PAGE> 42
(written or telephonic) of Tenant's failure to pay any installment of Base Rent
and/or Escalation Rent when due. In any event, Landlord's failure to deliver
written notice to Guarantor of Tenant's failure to pay Base Rent or Escalation
Rent within thirty (30) days following the date due under the Lease shall
relieve Guarantor of the obligation to pay Base Rent and/or Escalation Rent for
the period (without giving effect to acceleration rights under the Lease)
accruing from and after Tenant's failure to pay until the date on which Landlord
delivers written notice of Tenant's default to Guarantor. Landlord shall have no
obligation to deliver notices of default to Guarantor which do not pertain to
the failure to pay Base Rent or Escalation Rent.
19. Landlord shall only proceed against Guarantor hereunder five (5)
business days following the occurrence of (i) Landlord's service (or good faith
attempted service) on Tenant of such written notice as is necessary to commence
unlawful detainer proceedings against Tenant (including, without limitation,
service of a Three Day Notice to Pay Rent or Quit) and (ii) Landlord's written
demand on Guarantor hereunder, which may only be given after the notice
described in clause (i) is given. Notwithstanding the foregoing, if Landlord is
precluded from commencing unlawful detainer or other proceedings against Tenant
(eg due to vacation of the Premises or the filing by or against Tenant of
bankruptcy or insolvency proceedings), then Landlord need not give the notice
described in clause (i) above. The notice provided for in this Section 19
pertains only to when Landlord may proceed against Guarantor hereunder, as
opposed to when Guarantor's obligations hereunder shall commence to accrue,
which shall be governed under Section 18 above.
20. As a further material part of the consideration to Landlord to
enter into the Lease with Tenant, Guarantor further agrees:
(a) the law of the state in which the Premises is located shall govern
all questions with respect to this Guaranty;
(b) that any suit, action or proceeding arising directly or indirectly
from this Guaranty, the Lease or the subject matter thereof shall be litigated
only within courts located within the county and state in which the Premises is
located;
(c) Guarantor hereby irrevocably consents to the jurisdiction of any
local, state or federal court located within the county and state in which the
Premises is located;
(d) Each party hereby waives personal service of any and all process
upon it and consents to all such service in the manner and at the address set
forth in Paragraph 17 above; and
(e) Without limiting the generality of the foregoing, Guarantor hereby
waives and agrees not to assert by way of motion, defense or otherwise in any
suit, action or proceeding, any claim that Guarantor is not personally subject
to the jurisdiction of the above-named courts, that such suits, actions or
proceeding is brought in an inconvenient forum or that the venue of such action,
suit or proceeding is improper.
Executed as of April 15, 1999.
"GUARANTOR" "LANDLORD"
XYLAN CORPORATION, a California MALIBU CANYON OFFICE PARTNERS, LLC.,
corporation a California limited liability company
By: _______________________________ By: MB REAL ESTATE, INC., a
California corporation,
Name Printed: _____________________ Manager
Title: ____________________________ By: ____________________________
Calvin H. Johnston
By: _______________________________
Name Printed: _____________________
Title: ____________________________
EXHIBIT "E" -- PAGE 4
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF ACT NETWORKS, INC.
ACT Networks (BNS), Inc., a Delaware corporation
ACT Networks, Inc. - Wireless Networks Systems, a Delaware corporation
ACT Networks (Canada), Inc., a Canadian corporation
ACT Networks do Brasil, LTD, a Brazil limited company
ACT Networks (Asia) LTD, a limited company incorporated in China
ACT Networks (1997), FSC, a foreign sales corporation incorporated in Barbados
ACT Networks (Europe) LTD, a limited company incorporated in the United Kingdom
ACT Networks PTY LTD, an Australian limited company
3174697 Canada Inc., a Canadian corporation
38
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-80007, 333-21341, 333-29517, 33-56525, 333-44087 and 333-85845) on Form
S-8 of ACT Networks, Inc. of our report dated July 26, 1999 with respect to the
consolidated financial statements and schedule of ACT Networks, Inc. included in
the Annual Report (Form 10-K) for the year ended June 30, 1999.
Woodland Hills, California
September 24, 1999
39
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