-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SXWjqam6YrzUUCOG8fp5wcPaDVbcr5l9crV8ckmQOHHVzpHaHdxhKAFFpIhd58YJ MaNLwXgeOGWxlVqj32vT+w== 0000891618-97-002356.txt : 19970520 0000891618-97-002356.hdr.sgml : 19970520 ACCESSION NUMBER: 0000891618-97-002356 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCTEL COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000792723 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 770029449 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16588 FILM NUMBER: 97608596 BUSINESS ADDRESS: STREET 1: 1001 MURPHY RANCH RD CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083212000 MAIL ADDRESS: STREET 1: 1001 MURPHY RANCH RD CITY: MILPITAS STATE: CA ZIP: 95035-7912 10-Q 1 FORM 10-Q FOR PERIOD ENDED 3-31-97 1 ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange Act of 1934 For the quarterly period ended March 31, 1997, or Transition report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number 0-16588 OCTEL COMMUNICATIONS CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 77-0029449 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 1001 MURPHY RANCH ROAD MILPITAS, CALIFORNIA 95035-7912 (Address of principal executive offices) Registrant's telephone number, including area code, is (408) 321-2000 -------------------- 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 [ ] The number of shares outstanding of the registrant's Common Stock on April 30, 1997 was 52,434,381. ================================================================================ This document consists of 21 pages of which this is Page 1. 2 OCTEL COMMUNICATIONS CORPORATION INDEX REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 31, 1997 and June 30, 1996.............................................................. 3 Condensed Consolidated Statements of Operations - three and nine months ended March 31, 1997 and 1996.................................................... 4 Condensed Consolidated Statements of Cash Flows - nine months ended March 31, 1997 and 1996.................................................... 5 Notes to Condensed Consolidated Financial Statements....................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................................... 18 Item 2. Changes in Securities...................................................... 19 Item 6. Exhibits and Reports on Form 8-K........................................... 19 SIGNATURES .................................................................................... 21
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OCTEL COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA - UNAUDITED)
March 31, June 30, 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 42,668 $ 24,492 Short-term investments 47,658 51,257 Accounts receivable net of allowance for doubtful accounts of $4,198 at March 31, 1997 and $3,750 at June 30, 1996 166,634 166,918 Inventories, net 36,325 40,411 Prepaid expenses and other 21,405 18,639 --------- --------- Total current assets 314,690 301,717 Property, plant and equipment, net of accumulated depreciation and amortization of $113,086 at March 31, 1997 and $89,864 at June 30, 1996 146,619 136,916 Deposits and other assets 34,537 30,585 --------- --------- Total $ 495,846 $ 469,218 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade payables $ 16,950 $ 18,399 Accrued compensation and employee benefits 26,935 34,801 Income taxes payable 7,783 9,755 Accrued and other liabilities 44,131 40,897 --------- --------- Total current liabilities 95,799 103,852 Long-term obligations 248 374 Stockholders' equity: Preferred stock, $.001 par value - authorized, 5.0 million shares; none outstanding -- -- Common stock, $.001 par value - March 31, 1997 - authorized, 200.0 million shares; outstanding, 52.1 million shares, June 30, 1996 - authorized, 100.0 million shares; outstanding, 51.4 million shares 259,257 232,250 Notes receivable from employees (10,693) (4,152) Retained earnings 152,676 138,239 Other (1,441) (1,345) --------- --------- Total stockholders' equity 399,799 364,992 --------- --------- Total $ 495,846 $ 469,218 ========= =========
See notes to condensed consolidated financial statements. -3- 4 OCTEL COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
Three Months Ended Nine Months Ended ------------------------- -------------------------- March 31, March 31, March 31, March 31, 1997 1996 1997 1996 ---------- ---------- ----------- ----------- NET REVENUES: Systems $ 98,224 $ 93,752 $ 295,557 $ 259,408 Services and licenses 51,961 46,097 152,623 130,868 --------- ---------- ----------- ----------- Total net revenues 150,185 139,849 448,180 390,276 COSTS AND EXPENSES: Cost of systems 32,470 29,276 96,822 79,761 Cost of services and licenses 31,716 28,953 94,241 82,267 Research and development 21,970 19,208 66,936 56,521 Selling, general and administrative 49,430 43,936 144,960 125,692 ---------- ---------- ----------- ----------- Total costs and expenses 135,586 121,373 402,959 344,241 ---------- ---------- ----------- ----------- Operating income 14,599 18,476 45,221 46,035 Interest and other income, net 1,179 670 3,184 1,742 ---------- ---------- ----------- ----------- Income before income taxes 15,778 19,146 48,405 47,777 Provision for income taxes 5,150 6,900 16,650 17,200 ---------- ---------- ----------- ----------- NET INCOME $ 10,628 $ 12,246 $ 31,755 $ 30,577 ========== ========== =========== =========== NET INCOME PER COMMON AND EQUIVALENT SHARE $ 0.20 $ 0.23 $ 0.58 $ 0.58 ========== ========== =========== =========== Weighted average number of common shares and equivalents used in computation 54,155 53,514 54,821 53,012 ========== ========== ========== ==========
See notes to condensed consolidated financial statements. -4- 5 OCTEL COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS - UNAUDITED)
Nine Months Ended ------------------------ March 31, March 31, 1997 1996 --------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 31,755 $ 30,577 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,425 25,040 Amortization of (discount)/premium on marketable securities (155) 43 Deferred income taxes (205) 5,183 Changes in working capital: Accounts receivable 1,726 (17,014) Inventories 317 (23,390) Prepaid expenses and other (3,045) (5,622) Trade payables (1,362) 552 Accrued compensation and employee benefits (7,840) 504 Accrued and other liabilities 9,705 5,104 --------- -------- Net cash provided by operating activities 60,321 20,977 --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Sales of common stock, net 16,300 20,166 Repurchases of common stock (23,773) (8,903) Proceeds from payment of employees' notes receivable 528 50 Proceeds from sale of financial instruments - put warrants 3,435 1,762 Repayments of long-term obligations (226) (271) --------- -------- Net cash provided by/(used for) financing activities (3,736) 12,804 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (270,385) (24,182) Sales and maturities of short-term investments 274,033 29,595 Property, plant and equipment additions (37,275) (26,445) Changes in deposits and other assets (4,518) (7,977) --------- -------- Net cash used for investing activities (38,145) (29,009) --------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (264) (360) --------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 18,176 4,412 --------- -------- CASH AND CASH EQUIVALENTS: Beginning of period 24,492 24,521 --------- -------- End of period $ 42,668 $ 28,933 ========= ========
See notes to condensed consolidated financial statements. -5- 6 OCTEL COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (MARCH 31, 1997 AND 1996 - UNAUDITED) 1. The condensed consolidated financial statements include the Company and its wholly owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation. The preparation of financial statements in conformity with United States' generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 1997, the results of operations for the three and nine months ended March 31, 1997 and 1996 and cash flows for the nine months ended March 31, 1997 and 1996. The financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company's annual consolidated financial statements and related notes. 2. Short-term investments At March 31, 1997 and June 30, 1996, all cash equivalents and short-term investments were classified as "available-for-sale" and consisted of the following (in thousands):
Unrealized Unrealized Accrued Estimated Cost Gains Losses Interest Fair Value ---- ----- ------ -------- ---------- At March 31, 1997: U.S. Government securities $20,646 $ -- $(207) $ (47) $20,392 Municipal notes/bonds 45,290 -- (72) (436) 44,782 ------- ----- ----- -------- ------- $65,936 $ -- $(279) $ (483) $65,174 ======= ===== ===== ======== ======= At June 30, 1996: U.S. Government securities $ 8,470 $ 3 $(194) $ (87) $ 8,192 Municipal notes/bonds 47,236 38 (20) (352) 46,902 ------- ----- ----- -------- ------- $55,706 $ 41 $(214) $ (439) $55,094 ======= ===== ===== ======== =======
These securities were classified on the balance sheet as follows (in thousands):
March 31, 1997 June 30, 1996 -------------- ------------- Cash equivalents $ 17,999 $ 4,276 Short-term investments 47,658 51,257 ---------- ---------- $ 65,657 $ 55,533 ========== ==========
-6- 7 OCTEL COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (MARCH 31, 1997 AND 1996 - UNAUDITED) The cost and estimated fair value of available-for-sale debt securities by contractual maturity, consisted of the following (in thousands):
March 31, 1997 ------------------------- Estimated Cost Fair Value ---------- --------- Due in less than one year $ 41,180 $ 41,038 Due in one to five years 13,239 13,018 Due in five to ten years 6,559 6,228 Due thereafter 4,958 4,890 ---------- --------- $ 65,936 $ 65,174 ========== =========
For the three and nine months ended March 31, 1997, the Company had $50.9 million and $286.0 million in proceeds from sales of available-for-sale investments, respectively. Gross realized gains and gross realized losses on those sales were not material. For the three and nine months ended March 31, 1996, the Company had $54.0 million and $149.8 million in proceeds from sales of available-for-sale investments, respectively. Gross realized gains and gross realized losses on those sales were not material. 3. Inventories, net of reserves, consist of (in thousands):
March 31, June 30, 1997 1996 -------- ------- Finished goods $ 6,995 $ 7,236 Work-in-process 6,445 11,218 Raw materials 22,885 21,957 -------- ------- Total $ 36,325 $40,411 ======== =======
4. Net income per common and equivalent share is computed using the weighted average number of common and dilutive common equivalent shares from stock options (using the treasury stock method) and shares subscribed under the Employee Stock Purchase Plan. 5. Line of credit and letters of credit Effective June 1996, the Company obtained a $30.0 million bank revolving line of credit which also allows the Company to obtain stand-by letters of credit. Borrowings under the line are unsecured and bear interest at either an adjusted London interbank offering rate ("LIBOR") plus one and one-quarter percent or the greater of the Bank's base rate or the Federal Funds Effective Rate plus one-half of one percent, at the Company's discretion upon borrowing the funds. Borrowings under the line are subject to certain financial covenants and restrictions on indebtedness, equity distributions, financial guarantees, business combinations and other related items. The Company was in compliance with these covenants and had no borrowings under this line as of March 31, 1997. The line expires in June 1998. -7- 8 OCTEL COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (MARCH 31, 1997 AND 1996 - UNAUDITED) At March 31, 1997, the Company had $4.7 million of stand-by letters of credit outstanding. The letters of credit are primarily to guarantee payments for inventory purchases and facility lease payments. The majority of the letters of credit are denominated in Pound Sterling, Japanese Yen, French Francs and U.S. Dollars and expire on various dates through December 25, 1999. 6. Lease commitment On July 6, 1995, the Company entered into a one-year operating lease for a parcel of undeveloped land adjacent to its current campus in Milpitas, California, on which additional offices may be constructed. On February 21, 1997, the Company entered into a second operating lease for a parcel of undeveloped land also adjacent to its current campus. Both leases provides for monthly payments which vary based on the LIBOR and require the Company to maintain certain financial covenants similar to its credit facilities. In addition, both leases provide the Company with the option at the end of the lease term of either renewing the lease, acquiring the property at its original cost or arranging for the property to be acquired. The Company is contingently liable, for each of the two leases, to the lessor under a 97% first-loss clause for up to $9.9 million and $5.1 million for the first and second lease, respectively. In June 1996, the first lease was extended for another one-year period. Both leases are scheduled to be renewed in June 1997 and will be combined to form one lease to cover both parcels of land at that time. 7. Interest and other income, net consists of the following (in thousands):
Three Months Ended Nine Months Ended ---------------------- ------------------------ March 31, March 31, March 31, March 31, 1997 1996 1997 1996 ------- ----- ------- ------- Interest and investment income $ 889 $ 512 $ 2,549 $ 1,781 Gain (losses)on sale of short-term investments, net 8 -- 17 (7) Foreign exchange gains, net 359 262 850 87 Other expense, net (77) (104) (232) (119) ------- ----- ------- ------- Total $ 1,179 $ 670 $ 3,184 $ 1,742 ======= ===== ======= =======
-8- 9 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET REVENUES The Company derives revenues from the sale of voice messaging systems, performance of services and generation of license fees from its two strategic business units: Global Business Solutions ("GBS") and Voice Information Services ("VIS"). GBS consists of system sales, services and maintenance contract sales to corporations and institutions, including universities and governments. VIS consists of system sales, services and maintenance contract sales to telecommunications service providers such as telephone companies and wireless providers. Certain services are provided to the GBS and VIS markets by the Company's Octel Network Services ("ONS") and OcteLink operations. The services provided by ONS include a range of voice processing and network management services. Revenue by business unit was as follows:
Three Months Ended Nine Months Ended ------------------------------------- ---------------------------------------- March 31, March 31, March 31, March 31, Increase/ 1997 1996 Increase 1997 1996 (decrease) --------- --------- -------- ---------- ---------- ---------- (Dollars in millions) Global Business Solutions Systems and services $ 64.2 $ 64.4 --% $ 196.9 $ 194.0 1% ONS/OcteLink 11.2 10.5 7% 31.2 31.4 (1%) --------- --------- ---------- ---------- Total GBS revenues $ 75.4 $ 74.9 1% $ 228.1 $ 225.4 1% ========= ========= ========== ========== Voice Information Services Systems and services $ 62.6 $ 57.9 8% $ 186.5 $ 144.5 29% ONS/OcteLink 12.2 7.0 74% 33.6 20.4 65% --------- --------- ---------- ---------- Total VIS revenues $ 74.8 $ 64.9 15% $ 220.1 $ 164.9 33% ========= ========= ========== ==========
GBS and VIS systems revenues consist of software, hardware, and upgrades and expansions to existing systems. Services revenues, as presented below, include ONS as well as service contracts, applications development, spares sales, installation fees and hardware repair and maintenance.
Three Months Ended Nine Months Ended --------------------------------------- ------------------------------------------- March 31, March 31, Increase/ March 31, March 31, 1997 1996 (decrease) 1997 1996 Increase --------- --------- ---------- ---------- ---------- ---------- (Dollars in millions) Systems $ 98.2 $ 93.7 5% $ 295.6 $ 259.4 14% Services and licenses 52.0 46.1 13% 152.6 130.9 17% --------- --------- ---------- ---------- Total net revenues $ 150.2 $ 139.8 7% $ 448.2 $ 390.3 15% ========= ========= ========== ========== Percentage of Total Net Revenues Systems 65% 67% (2%) 66% 66% -- Services and licenses 35% 33% 2% 34% 34% --
-9- 10 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Systems The increase in systems revenues for the third quarter of fiscal 1997 compared to the same quarter in the prior year was due primarily to an 11% increase in the VIS market. The majority of the VIS increase (24%) occurred in the United States followed by increases in the Asia Pacific and Canada areas which were slightly offset by a decrease in Europe VIS sales compared to the third quarter of fiscal 1996. GBS revenues decreased slightly during the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996. GBS revenue increases in Europe were substantially offset by decreases in the United States and the Asia Pacific area. Despite an overall increase in the number of new systems sold, the average selling price decreased from the third quarter of fiscal 1996 due primarily to a shift from direct sales to distributor sales. The increase in systems revenues for the first nine months of fiscal 1997 was due primarily to higher VIS revenues, the most significant of which were in Europe and the Asia Pacific. These increases were partially offset by a decrease in VIS sales in Canada. GBS systems revenues remained flat for the first nine months of fiscal 1997 compared to the same period in fiscal 1996. An increase in Europe was significantly offset by decreases in the United States, Canada and the Asia Pacific area. Although the volume of new system sales increased on a year to date basis, the average selling price decreased due to a shift in channel mix from direct sales to distributor sales. Services and licenses The increases in services revenues for both the third quarter and first nine months of fiscal 1997 compared to the same periods of fiscal 1996 were due primarily to an increase in ONS revenues of 33% and 25%, respectively. ONS revenues for the quarter benefited from a favorable price structure with a major customer as well as an increase in voice mailboxes. Such benefits from favorable pricing structures will probably not continue in future quarters. Revenues resulting from services provided to the Company's larger installed base (through maintenance contracts and installation) also increased for both the third quarter and first nine months of fiscal 1997 compared to the same periods of fiscal 1996. -10- 11 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COST OF SALES
Three Months Ended Nine Months Ended --------------------------------------- ----------------------------------------- March 31, March 31, Increase/ March 31, March 31, Increase/ 1997 1996 (decrease) 1997 1996 (decrease) --------- --------- ---------- ---------- ---------- ---------- (Dollars in millions) Cost of systems $ 32.5 $ 29.3 11% $ 96.8 $ 79.8 21% Cost of services and licenses 31.7 28.9 10% 94.2 82.2 15% --------- --------- ---------- ---------- Total cost of sales $ 64.2 $ 58.2 10% $ 191.1 $ 162.0 18% ========= ========= ========== ========== Percentage of Net Revenues Cost of systems 33% 31% 2% 33% 31% 2% Cost of services and licenses 61% 63% (2%) 62% 63% (1%) Total cost of sales 43% 42% 1% 43% 42% 1%
Systems The increase in cost of systems as a percentage of revenues for both the third quarter and first nine months of fiscal 1997 was due primarily to a shift in GBS distribution channels to distributors. The increase in cost of systems as a percentage of systems' revenues is because distributor sales generally carry a lower average selling price than direct sales. In addition, during the third quarter of fiscal 1997, the Company incurred increased amortization costs for licensed software and also an increase in its inventory reserves for certain inventory purchases. Cost as a percentage of net revenues may fluctuate in the future depending on product mix. Different systems and like systems with different configurations have varying cost structures and product mix is difficult to predict. Services and licenses The decrease in cost of services and licenses as a percentage of services and licenses revenues for the third quarter and first nine months of fiscal 1997 was due primarily to decreases in bonuses and profit sharing and increased network operations efficiencies in the Company's outsourcing services business. A favorable pricing structure with a major customer in the Company's outsourcing services business was also a cause for the decrease for the first nine months of fiscal 1997. On a quarter-to-quarter basis, the channel, geographic and product mix of sales can fluctuate significantly. Such fluctuations can have a positive or negative impact on operating margins and are difficult to predict. -11- 12 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESEARCH AND DEVELOPMENT
Three Months Ended Nine Months Ended ------------------------------------- -------------------------------------- March 31, March 31, March 31, March 31, 1997 1996 Increase 1997 1996 Increase ------------ ----------- -------- ----------- ----------- -------- (Dollars in millions) Expenses $22.0 $19.2 14% $66.9 $56.5 18% Percentage of revenues 15% 14% 1% 15% 14% 1%
The increase in absolute dollars spent on research and development for both the third quarter and first nine months of fiscal 1997 was due primarily to costs associated with increased development associated with Unified Messaging, Intelligent Messaging Architecture ("IMA") and OcteLink, as well as research activities for additional future products and services. This increase was partially offset by a decrease in profit sharing and bonus expense year-to-date. The Company believes that additional research and development expenses will be required to maintain market position and expects that expenses will increase in absolute terms and could increase as a percentage of total net revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended Nine Months Ended ------------------------------------ ------------------------------------ March 31, March 31, March 31, March 31, 1997 1996 Increase 1997 1996 Increase ------------ ----------- -------- ----------- --------- -------- (Dollars in millions) Expenses $49.4 $43.9 13% $145.0 $125.7 15% Percentage of revenues 33% 31% 2% 32% 32% --
The increase for both the third quarter and first nine months of fiscal 1997 in selling, general and administrative expenses in absolute dollars resulted primarily from increased headcount and costs associated with a new marketing program effective for fiscal 1997. These increases were partially offset by a reduction in profit sharing and bonus expenses for the first nine months of fiscal 1997. The Company believes that additional selling, general and administrative expenses will be required to maintain its competitive position, including the expansion of international sales activities, and expects that these expenses will increase in absolute terms and could increase as a percentage of net revenues. Additionally, the Company is currently involved in legal matters that may cause an increase in legal expenses in the future (See Item 1 "Legal Proceedings" in Part II). -12- 13 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INTEREST AND OTHER INCOME, NET Interest and other income, net for the third quarter and first nine months of fiscal 1997 increased $0.5 million and $1.4 million, respectively, from the same periods of fiscal 1996. Interest and investment income for the third quarter and first nine months of fiscal 1997 increased as compared to the same periods in fiscal 1996 due primarily to higher average cash and cash equivalent and short term investment balances in fiscal 1997 compared to fiscal 1996. Average investment yields were also slightly higher for the third quarter of fiscal 1997 compared to fiscal 1996. However, investment yields were slightly lower for the first nine months of fiscal 1997 compared to the same period of fiscal 1996. Net foreign exchange gains were recognized during the third quarter and first nine months of fiscal 1997 were higher than in the same periods in fiscal 1996. The gains for the third quarter and first nine months of fiscal 1997 were due primarily to the favorable rate change of the Pound Sterling. INCOME TAXES The Company's effective tax rate was 32.6 percent in the third quarter and 34.5 percent in the first nine months of fiscal 1997, as compared to 36.0 percent in the corresponding periods of fiscal 1996. The effective rate was lower in fiscal 1997 due to rising export sales and, as a result, an increase in foreign sales corporation benefits. The Company expects the tax rate for fiscal 1997 to remain at 34.5 percent and projects the fiscal 1998 tax rate to be 35.5 percent. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS Various paragraphs of this Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended including, but not limited to, statements regarding favorable pricing structures with major customers, fluctuations of cost of systems as a percentage of net revenues, product mix, future levels of research and development expenses, future levels of selling, general and administrative expenses, international expansion, possible legal expenses and the Company's future effective tax rate. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth below and elsewhere in this document. The Company believes that in the future its results of operations could be affected by various factors including, but not limited to, the Company's ability to complete new products and product upgrades, market acceptance of new products and upgrades, growth in the worldwide voice processing market, the effect of increased competition, expansion of services by its VIS customers, the outcome of litigation, foreign exchange rates and changes in general economic conditions in any of the countries in which the Company does business. The Company believes that the successful introduction of new and enhanced products and services will be essential for it to maintain or improve its competitive position. In October 1996, the Company announced the delay of a software release for its Sierra platform. The release, which is an upgrade for existing customers, was originally expected to begin shipping late in the first -13- 14 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) quarter of fiscal 1997. In March 1997, the Company began shipping the software and recognized immaterial revenues. While the Company believes that this delay has not put contracts or customer relationships materially at risk, and that this delay is merely a timing issue, there can be no assurance that further delays will not occur, that customer relationships will not be damaged or that expected revenues related to this upgrade will not be permanently lost. In July 1995, the Company introduced OcteLink - a global "messaging post office" that could eventually allow the interconnection of virtually any voice messaging system with networking capability, regardless of protocol, system size or geographic location. OcteLink revenues may be derived from either the sale of hardware to service providers or from OcteLink directly providing services to a customer. Revenues from OcteLink commenced during the second quarter of fiscal 1996 but have not been material to date. The Company has incurred additional research and development and selling, general and administrative expenditures to launch OcteLink and expects to incur additional costs in future quarters. Although the Company believes OcteLink is a viable global messaging network, there is currently no reliable data regarding the demand for such services. Furthermore, demand for a global messaging network may be slow to materialize, may not materialize or competitors may successfully introduce alternative solutions to OcteLink that achieve better market acceptance. The Company is currently evaluating the future direction of OcteLink. The Company is currently engaged in various new projects and product development which are necessary to help maintain market share and Octel's leadership position in the industry. Two of the more significant projects are "unified messaging" products for voice, fax and electronic mail messaging and the Company's next-generation client/server architecture for its Sierra platform, IMA; both of which have experienced product development delays. Unified messaging essentially unites voice, fax and e-mail together in a client/server architecture that uses standard PC and LAN technology. This integration brings together several discrete technologies into a single mailbox that provides user access from a telephone or a PC. In May 1995, Octel announced the first component of its unified messaging technology that will be available on Microsoft Exchange, a LAN-based, enterprise-wide messaging architecture. In the third quarter of fiscal 1997, the Company introduced the Unified Messenger product and expects shipment of this product to commence in the late summer. The timing of shipments will depend on completion of testing and debugging of the initial release of Unified Messaging. IMA was originally scheduled for first-phase release during the end of fiscal 1996; however, the release has been delayed in order to allow for the incorporation of newly available third-party technologies and the release of a more feature-rich product and due to general development delays. The Company is also continuing to update the Sierra platform. The successful introduction of IMA and other new products is dependent on a number of factors, some of which are beyond the Company's control, including product acceptance in the marketplace, introduction of competitive products by existing or new competitors, changes in technology, price competition and other factors. Continued delay in introducing new products or failure of such products to achieve substantial market share could significantly reduce future expected revenues or result in the need for additional expenses to bring the product to market. Furthermore, there can be no assurance that the Company will be successful in completing and introducing new products or that such products will generate significant revenues or profits. -14- 15 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During the latter half of fiscal 1995, the Company adopted a new, capacity-based pricing approach for its largest GBS system, the XC-1000. This pricing approach was also adopted for Overture and Sierra system sales during fiscal 1996. This approach allows customers to purchase systems with only part of the equipment's capacity enabled and then have additional capacity enabled in the future upon payment of additional fees. The Company adopted contract accounting during fiscal 1996 (based upon percentage-of-completion) to recognize revenue in connection with capacity on demand transactions when firm commitments to purchase additional capacity exist. Under this method, revenues are recognized as a function of the capacity provided to the customer and costs are recognized proportionally to revenue recognized. Consequently, certain costs are deferred in the Balance Sheet under the caption "Deposits and other assets." While the Company believes that capacity-based pricing will make it more competitive, difficulties in implementing this approach, delays or adverse results due to renegotiation of sales and distribution agreements to accommodate capacity-based pricing or the failure to generate additional sales could have an adverse effect on the Company's results of operations. The Company's operating results may be adversely affected by continued significant increase in competition from both competitors such as Nortel and Lucent for mid-range and large systems and ActiveVoice Technology for low-end systems in the GBS market. In addition, the GBS market has not experienced significant overall growth in the size of the market, making it significantly more competitive to acquire new customers. As a result of a slowly growing market and intense competition, operating margins in the GBS unit have been and are expected to continue to be negatively affected. The Company introduced Unified Messenger, a new product for this market, in the third quarter of fiscal 1997 with shipment expected in late summer. However, as with any product introduction, customers could choose to defer orders pending availability of the enhanced product, which could adversely affect revenues and operating results. Due to the factors noted above and elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company's future earnings and Common Stock price may be subject to significant volatility, particularly on a quarterly basis due to nonlinear sales. Past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's Common Stock in any given period. Additionally, the Company may not learn of such shortfalls until late in a fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's Common Stock. Finally, the Company participates in a highly dynamic industry which often results in volatility of the Company's Common Stock price. The Company has been and may in the future continue to be required to litigate enforcement of its intellectual property or commercial rights or to defend itself in litigation arising out of claims by third parties. Such litigation, even if the Company is ultimately victorious, can be extremely expensive and may have a material adverse effect on the Company's results of operations in any particular period. Litigation may also occupy management resources that would otherwise be available to address other aspects of the Company's business. -15- 16 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents and short-term investments in the first nine months of fiscal 1997 increased $14.6 million from June 30, 1996. Cash flows from operations resulted in a net increase of cash of $60.3 million in the first nine months of fiscal 1997 compared to $21.0 million in the first nine months of fiscal 1996. The increase from the prior year was due primarily to the reduction of inventory, collection of accounts receivable and the collection of a tax refund of $4.9 million. The primary sources of cash during the first nine months of fiscal 1997 resulted from net income of $31.8 million, which included $29.4 million of non-cash expenses for depreciation and amortization, cash provided by the sale of common stock, resulting primarily from the exercise of stock options, of $16.3 million and a tax refund of $4.9 million. The primary uses of cash during the first nine months of fiscal 1997 were investment in property, plant and equipment of $37.3 million and the repurchase of common stock for $20.3 million, net of put warrant proceeds of $3.4 million. The Company expects to purchase additional equipment and make certain leasehold improvements during the remainder of fiscal 1997. Effective July 6, 1995, the Company entered into a one-year operating lease agreement to lease undeveloped land on which additional offices may be constructed adjacent to the existing corporate offices over the next three years under a similar leasing arrangement. In June, 1996 the operating lease was extended for another one-year period. Under the terms of the operating lease, the Company is contingently liable under a 97% first-loss clause for up to $9.9 million. On February 21, 1997, the Company entered into a second operating lease for an additional parcel of undeveloped land adjacent to its existing corporate offices. The Company is contingently liable, under the second lease, to the lessor under a 97% first-loss clause for up to $5.1 million. Both of the above mentioned operating leases are scheduled to be renewed in June 1997 and will be combined to form one operating lease for both parcels of land at that time. Cash payments under the above operating lease were not significant during the first nine months of fiscal 1997. In July 1994, the Company's Board of Directors approved the repurchase of up to 3.5 million shares of its Common Stock over a period of approximately two years. In June 1996, the Company's Board of Directors approved the repurchase of an additional 3.5 million shares of its Common Stock over an additional two-year period. In October 1996, the Company repurchased an additional 1.5 million shares at an average per share price of $14.78, net of the impact of sales of put warrants. As of March 31, 1997, the Company had repurchased approximately 4.7 million shares of its Common Stock at an average per share price of $11.48, net of the impact of sales of put warrants of $3.4 million. The Company expects to continue to repurchase its Common Stock under this program if warranted by market conditions. There were no stock repurchases during the third quarter of fiscal 1997. The Company anticipates that cash flows from operations, its existing cash and cash equivalents balance, its short-term investment balance and its existing $30 million bank revolving line of credit will be adequate to meet the Company's cash requirements at least through the end of 1997. -16- 17 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require that the Company either recognize in its consolidated financial statements costs related to its employee stock-based compensation plans, such as stock option and stock purchase plans, or make pro forma disclosures of such costs in a footnote to the consolidated financial statements. The Company will continue to use the intrinsic value based method of Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to account for all of its employee stock-based compensation plans. Therefore, in its annual consolidated financial statements for fiscal 1997, the Company will make the required pro forma disclosures in a footnote to the consolidated financial statements. SFAS No. 123 is not expected to have a material effect on the Company's consolidated results of operations or financial position. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." SFAS No. 128 requires the presentation of basic earnings per share ("EPS") and, for companies with complex capital structures (or potentially dilutive securities, such as convertible debt, options and warrants), diluted EPS. SFAS No. 128 is effective for annual and interim periods ending after December 31, 1997. Therefore, in its annual consolidated financial statements for fiscal 1998, the Company will make the required disclosures. The Company expects that basic EPS will be higher than primary earnings per share as presented in the accompanying consolidated financial statements and that diluted EPS will not differ materially from fully diluted earnings per share. -17- 18 OCTEL COMMUNICATIONS CORPORATION PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Theis Research, Inc. In April 1992, the Company filed suit, in the United States District Court in Northern California, against Theis Research, Inc. ("Theis") for a declaratory judgment that the Company's products do not infringe three patents of Theis and that those patents are invalid. In November 1992, Theis filed a counterclaim against the Company alleging infringement of seven of Theis' patents. Subsequently, Theis dismissed with prejudice the claims as to all but four of the patents, and its claims as to one of the remaining four patents were dismissed on summary judgment. During the first quarter of fiscal 1995, the Company engaged in a jury trial regarding infringement of the three remaining patents and the defense of patent invalidity. In October 1994, the jury returned a verdict finding, among other things, that Octel was correct in its claim that the three patents at issue were invalid. The Court entered final judgment in the case in January 1996, declaring Octel a "prevailing party" entitled to recover its substantial costs in connection with the lawsuit. In November 1996, the Court reversed the jury's verdict that Octel infringed one of the patents held invalid. The Court also reversed the jury's verdict that another patent was invalid but affirmed the jury's finding of non-infringement of that patent. Theis filed a notice of appeal in December 1996, and the Company thereafter filed a notice of cross-appeal on certain issues. The parties have now submitted their opening briefs on appeal. Gilbarco Inc. In January 1994, Gilbarco Inc. ("Gilbarco") filed suit in the U.S. District Court for the District of Colorado against the Company and one of the Company's telephone company customers, U.S. West, alleging infringement of a Gilbarco patent and seeking unspecified damages. The Company filed an answer to the complaint denying any infringement of the patent and raising several affirmative defenses, including an assertion that the patent is invalid and unenforceable. In September 1994, the claims asserted against the Company were transferred to the U.S. District Court for the Northern District of California and those claims asserted against U.S. West were stayed and administratively closed pending the outcome of the California action. Both parties filed motions for summary judgment on a variety of issues, including a motion by Octel for summary judgment declaring the Gilbarco patent unenforceable due to inequitable conduct during the procurement of the patent. In February 1996, the Court granted Octel's motion for summary judgment (and denied Gilbarco's counter-motion) and declared the patent unenforceable as a matter of law. The Court subsequently entered judgment in favor of Octel and against Gilbarco and awarded Octel its costs in connection with the lawsuit. Gilbarco's subsequently filed motion for reconsideration of the Court's ruling was denied and Gilbarco thereafter filed a notice of appeal. In April 1997, after hearing oral argument on Gilbarco's appeal, the Federal Circuit Court of Appeal denied Gilbarco's appeal and affirmed the summary judgment in Octel's favor. The Company believes, based on information currently available, that the Company is not infringing any valid patents of Theis or Gilbarco. The Company will vigorously defend the patent infringement claims and any related claims for compensatory damages. While litigation is inherently uncertain, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position. -18- 19 OCTEL COMMUNICATIONS CORPORATION PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES On May 13, 1997, the Company and The First National Bank of Boston, as rights agent, entered into the Second Amended and Restated Rights Agreement (the "Amended Rights Agreement"), which supersedes the First Amended and Restated Common Shares Rights Agreement dated August 29, 1996 (the "Prior Rights Agreement"). The Amended Rights Agreement is substantially the same as the Prior Rights Agreement as originally executed, with the exception that, among other things (i) each right is now exercisable, at the times and under the circumstances specified in the Amended Rights Agreement, for 1/100 of a share of a new series of Preferred Stock designated "Series A Junior Participating Preferred Stock," (ii) the term of the Amended Rights Agreement has been extended from August 29, 2006 to May 13, 2007 and (iii) the ownership threshold that triggers the "flip-in" provision of the rights has been changed from 21% to 20%, and the Company's Board of Directors has been given the power to reduce this threshold to 10%. A number of other technical amendments are also reflected in the Amended Rights Agreement. For a more detailed description of the changes reflected in the Amended Rights Agreement, or for additional information relating to the Amended Rights Agreement, please see the Registration Statement on Form 8-A/A filed by the Company with the Securities Exchange Commission on May 13, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit No. Description ----------- ----------- 10.16 Second Amended and Restated Rights Agreement dated as of May 13, 1997 between the Company and the First National Bankof Boston (1). 10.19 Lease of the Land Agreement dated February 21, 1997 by and between Sumitomo Bank Leasing and Finance, Inc. and the Company. 10.20 Waiver and Release Agreement dated as of February 14, 1997 by and among the Company, Sumitomo Bank Leasing and Finance, Inc. and The Peery Private Investment Company-WP, L.P., The Peery Private Investment Company-WP L.P., as to an undivided 25% interest, The Peery Public Investment Company-WP, L.P., a California limited partnership, as to an undivided 25% interest and John Arrillaga, as Trustee, or Successor Trustee under Trust Agreement dated July 20, 1977 and as amended, as to an undivided 50% interest, and Richard T. Peery, individually, and John Arrillaga, individually. 11.0 Statement re computation of earnings per share 27.0 Financial Data Schedule
(b) Report on Form 8-K No report on Form 8-K was filed by the Company during its fiscal quarter ended March 31, 1997. -19- 20 OCTEL COMMUNICATIONS CORPORATION PART II OTHER INFORMATION (1) Incorporated by reference to the exhibit filed with the Company's Registration Statement on Form 8-A/A filed on May 13, 1997. -20- 21 OCTEL COMMUNICATIONS CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. OCTEL COMMUNICATIONS CORPORATION Dated: May 15, 1997 /s/ ROBERT COHN ------------------------------------------- Robert Cohn, Chief Executive Officer /s/ JODY BISSON ------------------------------------------- Jody Bisson, Vice President and Corporate Controller (Acting Chief Financial Officer) -21- 22 OCTEL COMMUNICATIONS CORPORATION EXHIBIT INDEX REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
Exhibit Page Number Description Number ------- ----------- ------ 10.16 Second Amended and Restated Rights Agreement dated as of May 13, 1997 between the Company and the First National Bank of Boston (1)..................................... - 10.19 Lease of the Land Agreement dated February 21, 1997 by and between Sumitomo Bank Leasing and Finance, Inc. and the Company............................................ 2 10.20 Waiver and Release Agreement dated as of February 14, 1997 by and among the Company, Sumitomo Bank Leasing and Finance, Inc. and The Peery Private Investment Company-WP, L.P., The Peery Private Investment Company-WP L.P., as to an undivided 25% interest, The Peery Public Investment Company-WP, L.P., a California limited partnership, as to an undivided 25% interest and John Arrillaga, as Trustee, or Successor Trustee under Trust Agreement dated July 20, 1977 and as amended, as to an undivided 50% interest, and Richard T. Peery, individually, and John Arrillaga, individually.................................... 62 11.0 Statement re computation of earnings per share.................. 75 27.0 Financial Data Schedule......................................... 77 -------------- (1) Incorporated by reference to the exhibit filed with the Company's Registration Statement on Form 8-A/A filed on May 13, 1997.
EX-10.19 2 LEASE & LAND AGREEMENT DATED 2-21-97 W/SUMITOMO 1 EXHIBIT 10.19 LEASE OF THE LAND By and Between SUMITOMO BANK LEASING AND FINANCE, INC., A DELAWARE CORPORATION as Landlord and OCTEL COMMUNICATIONS CORPORATION, A DELAWARE CORPORATION as Tenant for Premises located in Milpitas, California THIS LEASE IS NOT INTENDED TO CONSTITUTE A TRUE LEASE FOR INCOME TAX PURPOSES. SEE SECTION 18.2 2 TABLE OF CONTENTS
Page ARTICLE 1 BASIC LEASE PROVISIONS 1.1 Date of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.4 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.5 Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.6 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.7 Rent Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.8 Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.9 Addresses for Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.10 Wire Transfer Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 2 DEFINITIONS 2.1 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.3 Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.5 City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.6 Commitment Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.7 Consolidated Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.8 Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.9 Consolidated Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.10 Consolidated Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.11 Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.12 Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.13 ERISA Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.14 Eurocurrency Reserve Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.15 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.16 Governmental Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.17 Governmental Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.18 Guaranteed Residual Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.19 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.20 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.21 Initial Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.22 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.23 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.24 Landlord Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.25 Lease Investment Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.26 Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.27 Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.28 LIBOR Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.29 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.30 Multiemployer Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.31 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.32 Official Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.33 Permitted Title Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.34 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.35 Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.36 Qualified Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
i 3 2.37 Rate Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.38 Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.39 Rent Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.40 Rent Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.41 Required Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.42 SBLF Deed of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.43 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.44 Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.45 Tenant's Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.46 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.47 Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 3 DEMISE 3.1 Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 4 TERM 4.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.2 Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 5 RENT 5.1 Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Proration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.3 No Abatement of Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.4 Delinquent Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.5 Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 6 TAXES 6.1 Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.2 Personal Property Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.3 Right to Contest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.4 Additional Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 7 INSURANCE 7.1 Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.2 Builders' Risk Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.3 All-Risk Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.4 General Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.5 Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.6 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 8 USE 8.1 Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.2 Contest of Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ii 4 ARTICLE 9 UTILITIES AND SERVICES 9.1 Services to the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 10 MAINTENANCE AND REPAIRS; SURRENDER OF THE PREMISES 10.1 Tenant Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 10.2 Surrender of the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 11 ASSIGNMENT BY LANDLORD 11.1 Further Mortgages or Encumbrances by Landlord . . . . . . . . . . . . . . . . . . . . . . . . . 15 11.2 Landlord's Right to Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 11.3 Transfer of Funds and Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 12 ASSIGNMENT AND SUBLEASING 12.1 Right to Assign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 12.2 Right to Sublet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 12.3 Mortgage by Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 13 EMINENT DOMAIN 13.1 Total or Substantial Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 13.2 Partial Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 13.3 Temporary Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 13.4 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 13.5 Notice and Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 14 DAMAGE OR DESTRUCTION 14.1 Casualty Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE 15 QUIET ENJOYMENT 15.1 Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE 16 DEFAULT 16.1 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 16.2 Contest by Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 16.3 Landlord's Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 16.4 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 16.5 Effect of Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16.6 Landlord Cure Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE 17 TENANT'S OPTION TO PURCHASE OR TERMINATE 17.1 Option To Purchase Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 17.2 Termination Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
iii 5 ARTICLE 18 MISCELLANEOUS 18.1 Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 18.2 Form of Transaction: Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 18.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 18.4 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18.5 Entire Agreement: Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18.6 Memorandum of Lease of the Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18.7 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18.8 Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18.9 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 18.12 Time Is of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 18.13 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 18.14 Limitations on Recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 18.15 Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 18.16 As-Is Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 18.17 Net Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 18.18 Landlord's Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 18.19 Tenant's Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 18.20 Tenant's Waiver of Demand for Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 18.21 Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 18.22 Regulation D Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE 19 INDEMNIFICATION 19.1 Tax Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 19.2 Environmental Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 19.3 General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE 20 COVENANTS OF LANDLORD 20.1 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 20.2 Land Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 20.3 Transfer of Property Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
iv 6 LEASE OF THE LAND THIS LEASE OF THE LAND ("Lease") by and between SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation ("Landlord"), and OCTEL COMMUNICATIONS CORPORATION, a Delaware corporation ("Tenant"), is entered into as of the date set forth in Article 1 and shall be effective and binding upon the parties hereto as of such date. Capitalized terms used in this Lease shall have the definitions set forth in Article 2 or in the text of this Lease. In consideration of the Base Rent reserved herein, and the terms, covenants and conditions set forth below, Landlord and Tenant hereby agree as follows: ARTICLE 1 BASIC LEASE PROVISIONS 1.1 DATE OF LEASE: February , 1997. 1.2 LANDLORD: Sumitomo Bank Leasing and Finance, Inc., a Delaware corporation. 1.3 TENANT: Octel Communications Corporation, a Delaware corporation. 1.4 LAND: That certain tract of land located in the City of Milpitas, County of Santa Clara, California, as more particularly described on Exhibit A attached hereto together with all easements, rights of way, appurtenances and other rights and benefits belonging or pertaining to such Land. Landlord makes no representations as to the accuracy of the description of the Land. 1.5 PREMISES: The Land and any improvements which Landlord may construct on the Land for Tenant. 1.6 TERM: The term of this Lease shall commence on the Date of Lease set forth in Section 1.1 above and shall expire on June 20, 1997 ("Expiration Date"). The Term shall cease upon, and shall not refer to any period of time after, termination of this Lease (whether pursuant to the terms of the Lease, by operation of law, or otherwise). 1.7 RENT COMMENCEMENT DATE: The rent commencement date shall be the Date of Lease. 1.8 BASE RENT: As described in Section 2.4.
7 1.9 ADDRESSES FOR NOTICES: --------------------- LANDLORD: TENANT: Sumitomo Bank Leasing and Finance, Inc. Octel Communications Corporation 277 Park Avenue 1001 Murphy Ranch Road New York, NY 10172 Milpitas, CA 95035 Attention: Chief Credit Officer Attention: William Bascom, Treasury Analyst With a copy to: With a copy to: Graham & James LLP Wilson, Sonsini, Goodrich & Rosati One Maritime Plaza, Suite 300 650 Page Mill Road San Francisco, CA 94111 Palo Alto, CA 94304 Attention: Bruce W. Hyman, Esq. Attention: Bradford C. O'Brien, Esq. 1.10 WIRE TRANSFER INSTRUCTIONS: --------------------------- Morgan Guaranty Trust Company of New York ABA#021000238 For credit to The Sumitomo Bank, Limited A/C #631-28-256 Further credit to Sumitomo Bank Leasing and Finance, Inc. A/C No. 283572
This Article 1 is intended to supplement and/or summarize the provisions set forth in the balance of this Lease. If there is any conflict between any provisions contained in this Article 1 and the balance of this Lease, the balance of this Lease shall control. ARTICLE 2 DEFINITIONS For purposes of this Lease, the following defined terms shall have the meanings set forth in this Article 2. 2.1 ACQUISITIONS. "Acquisitions" shall mean any transaction, or any series of related transactions, by which Tenant or any of its Subsidiaries directly or indirectly (a) acquires any ongoing business or all or substantially all of the assets of any firm, partnership, joint venture, corporation or division thereof, whether through purchase of assets, merger or otherwise, or (b) acquires (in one transaction or as the most recent transaction in a series of transactions) control of at least a majority of the stock of a corporation having ordinary voting power for the election of directors, or (c) acquires control of fifty percent (50%) or more of the ownership interest in any partnership or joint venture. 2.2 ADDITIONAL RENT. "Additional Rent" shall mean any amounts other than Base Rent payable by Tenant to Landlord or to other Entities on Landlord's behalf as required under this Lease, specifically including, but without limitation, payment of the Guaranteed Residual Value and break-funding costs of Landlord related to the Lease Investment Balance (as defined below) arising out of unscheduled payments or exercise of the Purchase Option pursuant to Section 17.1 below other than on a Rent Payment Date. 2 8 2.3 ADVANCE. "Advance" shall mean (i) the items and/or amounts described in Exhibit B; (ii) Real Estate Taxes; and (iii) any other payment paid by Landlord, as landlord under this Lease. 2.4 BASE RENT. "Base Rent" shall mean, as of a Rent Payment Date, that annual amount equal to the product obtained by multiplying the Lease Investment Balance (at the time of the relevant calculation) by the sum of the LIBOR Rate plus 45 basis points, which annual amount is then prorated on the basis of a 360 day year and the actual number of days elapsed. 2.5 CITY. "City" shall mean the City of Milpitas, California. 2.6 COMMITMENT AMOUNT. "Commitment Amount" shall mean FIVE MILLION FIVE HUNDRED THOUSAND and no/100 Dollars ($5,500,000.00). 2.7 CONSOLIDATED CURRENT LIABILITIES. "Consolidated Current Liabilities" shall mean at any date as of which the amount thereof shall be determined, all amounts that should, in accordance with generally accepted accounting principles, be included as current liabilities on the consolidated balance sheet of Tenant and its Subsidiaries as of such date, plus, to the extent not already included therein, all Loans and all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Tenant or any Subsidiary to a date more than one year from the date of determination. 2.8 CONSOLIDATED TANGIBLE NET WORTH. "Consolidated Tangible Net Worth" shall mean at any date as of which the amount thereof shall be determined, the Consolidated Total Assets of Tenant and its Subsidiaries minus (i) the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, (c) all reserves not already deducted from assets, (d) any write-up in the book value of assets resulting from any revaluation thereof subsequent to the date of the financial statements referred to in this Lease and (e) the value of any minority interests in Subsidiaries and minus (ii) Consolidated Total Liabilities. 2.9 CONSOLIDATED TOTAL ASSETS. "Consolidated Total Assets" shall mean at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with generally accepted accounting principles, be classified as assets on the balance sheet of Tenant and its Subsidiaries. 2.10 CONSOLIDATED TOTAL LIABILITIES. "Consolidated Total Liabilities" shall mean at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with generally accepted accounting principles, be classified as liabilities on the consolidated balance sheet of Tenant and its Subsidiaries, including in any event all Indebtedness. 2.11 DEFAULT RATE. "Default Rate" shall mean with respect to the Lease Investment Balance, the one (1) month LIBOR Rate plus 245 basis points. Notwithstanding the foregoing, in the event that the foregoing Default Rate shall be in violation of any usury or similar law, then the Default Rate shall be reduced to the extent necessary to cause the Default Rate to comply with any usury or similar law. 2.12 ENTITY. "Entity" shall mean any person, corporation, partnership (general or limited), joint venture, association, limited liability company, joint stock company, trust or other business entity or organization. 3 9 2.13 ERISA GROUP. "ERISA Group" shall mean Tenant and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which are treated as a single employer under Section 414 of the Code. 2.14 EUROCURRENCY RESERVE REQUIREMENTS. "Eurocurrency Reserve Requirements" shall mean the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System ("Board") or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of the Federal Reserve System. 2.15 EVENT OF DEFAULT. "Event of Default" shall have the meaning set forth in Section 16.1. 2.16 GOVERNMENTAL ACTION: "Governmental Action" shall mean all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, orders, judgments, written interpretations, decrees, licenses, exemptions, publications, filings, notices to and declarations of or with, or required by, any Governmental Authority, or required by any applicable law, and shall include without limitation, all environmental and operating permits and licenses that are required for the full use, occupancy, zoning and operation of the Premises. 2.17 GOVERNMENTAL AUTHORITY: "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. 2.18 GUARANTEED RESIDUAL VALUE: "Guaranteed Residual Value" shall mean ninety-seven percent (97%) of the Lease Investment Balance. 2.19 GUARANTEES. "Guarantees" shall mean as applied to Tenant and its Subsidiaries, all guarantees, arrangements having the economic effect of guarantees, endorsements or other contingent or surety obligations with respect to obligations of others whether or not reflected on the consolidated balance sheet of Tenant and its Subsidiaries, including any obligation to furnish funds directly or indirectly (whether by virtue of partnership arrangements, by agreement to keep-well or otherwise), through the purchase of goods, supplies or services, or by way of stock purchase, capital contribution, advance or loan, termination of leases, or to enter into a contract for any of the foregoing, for the purpose of payment of obligations of any other person or entity. The amount of any Guarantee shall be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof. 2.20 INDEBTEDNESS. "Indebtedness" shall mean as applied to Tenant and its Subsidiaries, (i) all obligations for borrowed money or other extensions of credit whether or not secured or unsecured, absolute or contingent, including, without limitation, unmatured reimbursement obligations with respect to letters of credit and all obligations representing the deferred purchase price of property, other than accounts payable arising in the ordinary course of business, (ii) all obligations evidenced by bonds, notes, debentures or other similar instruments, (iii) all obligations secured by any mortgage, pledge, security interest or other lien on property owned or acquired by Tenant or any of its Subsidiaries whether or not the obligations secured thereby shall have been assumed, (iv) that portion of all obligations arising 4 10 under capital leases that is required to be capitalized on the consolidated balance sheet of Tenant and its Subsidiaries, (v) all Guarantees, (vi) all net obligations with respect to Rate Contracts, (vii) all obligations that are immediately due and payable out of the proceeds of or production from property now or hereafter owned or acquired by Tenant or any of its Subsidiaries, and (viii) all off-balance sheet interest bearing debt, including, without limitation, all scheduled obligations under the Adjacent Property Lease. 2.21 INITIAL ADVANCE. "Initial Advance" shall mean the amounts described in Exhibit B pertaining to execution of this Lease and the acquisition of the Land. 2.22 INVESTMENT. "Investment" shall mean as applied to Tenant and its Subsidiaries, the purchase or acquisition of any share of capital stock, partnership interest, joint venture interest, evidence of indebtedness or other equity security of any other person or entity, any loan, advance or extension of credit to, or contribution to the capital of, any other person or entity, any real estate held for sale or investment, any commodities futures contracts held other than in connection with bona fide hedging transactions, any other investment in any other person or entity, and the making of any commitment or acquisition of any option to make an Investment. 2.23 LAND. "Land" shall have the meaning set forth in the Basic Lease Provisions. 2.24 LANDLORD AFFILIATE. "Landlord Affiliate" shall mean any entity which controls, is controlled by or is under the common control of Landlord. 2.25 LEASE INVESTMENT BALANCE. "Lease Investment Balance" shall mean, at the time in question, the aggregate amount of all Advances made by Landlord reduced by the following: (1) the aggregate of all amounts received by Landlord pursuant to the provisions of Article 13 (Eminent Domain), Article 14 (Damage or Destruction), Section 16.3 (Landlord's Remedies), Section 17.1 (Option to Purchase Premises), and/or Section 17.2 (Termination Option); and (2) the aggregate of all amounts received by Landlord in respect of this Lease or any related agreement that are not otherwise applied to reduce the Lease Investment Balance and which constitute a repayment or reduction of the amounts placed at risk by the Landlord, excluding for purposes of this clause amounts paid as rent hereunder, reimbursement for expenses, fees and similar items incurred by Landlord and payable by Tenant to Landlord under the Lease and the SBLF Deed of Trust. 2.26 LEGAL REQUIREMENTS. "Legal Requirements" shall mean all statutes, codes, laws, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all federal, state, county, municipal and other governments, departments, commissions, boards, courts, authorities, officials and officers, which now or at any time hereafter are applicable to this Lease or applicable to and enforceable against the Premises, any improvements or any part thereof, as applicable. 2.27 LETTER OF CREDIT. "Letter of Credit" shall mean any letter of credit issued pursuant to Section 2.3 of the Credit Agreement dated as of June 30, 1996 executed by Tenant ("Credit Agreement"), and "Letters of Credit" means all such letters of credit, collectively. 2.28 LIBOR RATE. "LIBOR Rate" shall mean, for each Borrowing Period (as defined below) the annualized rate determined by The Sumitomo Bank, Limited (the "Bank") as the rate that would be offered to Bank's San Francisco or New York office for U.S. dollar deposits in the London Interbank Market as quoted for the mid-morning average Libor Rate published by Reuters Monitoring Systems for the applicable Borrowing Period for the entire then outstanding principal balance hereof (rounded upwards to the next higher 1/16th of 1% 5 11 if such quoted rate is not a multiple of 1/16) for deposits by the Bank of immediately available dollars in the London Interbank Market on the day two (2) business days preceding the first day of the term of that Borrowing Period. In the event the Reuters quote is not available, the British Banker's Association's Interest Settlement Rate should be used. "Borrowing Period" shall mean one (1) month, unless an alternate period of three (3), six (6) or nine (9) months is elected by Tenant at least three (3) days prior to the end of the previous Borrowing Period, provided, that (i) Tenant may not elect a Borrowing Period which extends past the last day of the Term, (ii) if Tenant is then in default under this Lease, a Borrowing Period of one (1) month shall be deemed to have been selected by Tenant and (iii) there shall not be more than three (3) LIBOR rates in effect at any time. 2.29 LOAN. "Loan" shall mean a loan made to Tenant by The First National Bank of Boston and each other lender which may execute and deliver an instrument or assignment with respect to the Credit Agreement, pursuant to Section 2.1(a) of the Credit Agreement. 2.30 MULTIEMPLOYER PLAN. "Multiemployer Plan" shall mean at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five (5) plan years made contributions, including for these purposes any person which ceased to be a member of the ERISA Group during such five (5) year period. 2.31 NOTICE. "Notice" shall mean a written advice, request, demand or notification required or permitted by this Lease, as more particularly provided in Section 18.3. 2.32 OFFICIAL RECORDS. "Official Records" shall mean the official records of Santa Clara County, California. 2.33 PERMITTED TITLE EXCEPTIONS. "Permitted Title Exceptions" shall mean the following: (1) the exceptions set forth in Exhibit C; (2) any exceptions created or caused by Tenant or to which Tenant consents in writing; (3) taxes and assessments (excluding Landlord Taxes as defined in Section 6.1 below) not yet due and payable; (4) the SBLF Deed of Trust; (5) all title defects, liens, encumbrances, deeds of trust, mortgages, rights-of-way, and restrictive covenants and conditions affecting the Land unless any of the foregoing arise as a result of Landlord's actions or with Landlord's written consent (unless such actions taken or consent given by Landlord are requested in writing by Tenant); and (6) this Lease. 2.34 PLAN. "Plan" shall mean at any time an employee pension benefit plan (other than a Multiemployer Plan) which either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group, or (ii) has at any time within the preceding five (5) years been maintained, or contributed to, by any person which was at such time a member of the ERISA Group for employees of any person which was at such time a member of the ERISA Group. 2.35 PREMISES. "Premises" shall have the meaning set forth in the Basic Lease Provisions. 2.36 QUALIFIED INVESTMENTS. "Qualified Investments" shall mean the investments as applied to Tenant and its Subsidiaries, in (i) notes, bonds or other obligations of the United States of America or any agency thereof that as to principal and interest constitute direct obligations of or ar guaranteed by the United States of America; (ii) certificates of deposit or other deposit instruments or accounts or commercial paper of First National Bank of Boston; (iii) certificates of deposit or other deposit instruments or accounts of banks or trust companies organized under the laws of the United States or any state thereof that have capital 6 12 and surplus of at least $100,000,000, (iv) commercial paper that is rated not less than prime-one or A-1 or their equivalents by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or their successors, (v) any repurchase agreement secured by any one or more of the foregoing; and (vi) any Investments permitted by Tenant's written and then current investment policy, as amended from time to time, provided that such investment policy (and any such amendments thereto) has been approved in writing by banks then holding at least 70% of the then aggregate unpaid principal amount of the Credit Agreement. 2.37 RATE CONTRACT. "Rate Contract" shall mean interest rate and currency swap agreements, cap, floor and collar agreements, interest rate insurance, currency spot and forward contracts and other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates. 2.38 REAL ESTATE TAXES. "Real Estate Taxes" shall have the meaning set forth in Section 6.1(b). 2.39 RENT COMMENCEMENT DATE. "Rent Commencement Date" shall have the meaning set forth in the Basic Lease Provisions. 2.40 RENT PAYMENT DATE. "Rent Payment Date" shall have the meaning set forth in Section 5.1. 2.41 REQUIRED PERMITS. "Required Permits" shall mean each and every building and development permit including, without limitation, demolition permits, site permits and addenda thereto (including, without limitation, foundation permits and structural permits), temporary and final occupancy permits and any other governmental or quasi-governmental approvals which must be issued by any governmental authority, department, commission, board, official or officer as a condition precedent to construction and occupancy of any improvements. 2.42 SBLF DEED OF TRUST. "SBLF Deed of Trust" shall mean that certain deed of trust executed by Tenant in favor of Landlord of even date herewith. 2.43 SUBSIDIARY. "Subsidiary" shall mean any corporation, association, joint stock company, business trust or other similar organization of which 50% or more of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such entity is held or controlled by Tenant or a Subsidiary of Tenant, or any other such organization the management of which is directly or indirectly controlled by Tenant or a Subsidiary of Tenant through the exercise of voting power or otherwise; or any joint venture, whether incorporated or not, in which Tenant has a 50% ownership interest. 2.44 TAKING. "Taking" shall have the meaning set forth in Section 13.1. 2.45 TENANT'S PROPERTY. "Tenant's Property" shall mean any process equipment, fixtures, furniture, furnishings, personal property or trade fixtures which are purchased or constructed with funds of Tenant and not purchased, paid for, or otherwise financed by Advances made by Landlord, whether or not installed upon the Land. 2.46 TERM. "Term" shall have the meaning set forth in the Basic Lease Provisions. 2.47 TERMINOLOGY. All personal pronouns used in this Lease shall include all other genders. The singular shall include the plural and the plural shall include the singular. Titles of Articles, Sections and Subsections in this Lease are for convenience only and neither limit nor amplify the provisions of this Lease, and all references in this Lease to Articles, Sections 7 13 or Subsections shall refer to the corresponding Article, Section or Subsection of this Lease unless specific reference is made to the articles, sections or other subdivisions of another document or instrument. The word "days" or "business days" as used herein shall mean business days (i.e., excluding holidays when banks in California, New York and London (with respect to payment of Base Rent and the determination of the LIBOR Rate) are generally closed for business and weekends) unless otherwise expressly stated. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the most recent audited consolidated financial statements of the Tenant and its subsidiaries delivered to Landlord. ARTICLE 3 DEMISE 3.1 PREMISES. Subject to the terms, covenants and conditions contained herein, Landlord hereby leases the Premises to Tenant, and Tenant hereby leases from Landlord, the Premises, together with all rights, privileges, easements and appurtenances relating to the Premises. ARTICLE 4 TERM 4.1 TERM. The Term of this Lease is specified in Article 1. 4.2 HOLDING OVER. If Tenant remains in possession of the Premises after the expiration of the Term without executing a new lease, such holding over shall be construed as a tenancy from month-to-month, subject to all terms, covenants and conditions herein contained, and the Base Rent shall be calculated based upon the Default Rate and shall be required to be paid by Tenant during such holding over in the same manner as during the Term. ARTICLE 5 RENT 5.1 BASE RENT. Commencing upon the Rent Commencement Date and continuing thereafter throughout the Term, Tenant shall pay Base Rent to Landlord, or at such other place as Landlord may from time to time instruct. Tenant shall pay Base Rent by wire transfer. Landlord shall supply Tenant with such bank account information as Tenant shall require to enable payment by wire transfer of Federal funds or by ACH transfer (provided that Tenant originates the sending of the ACH transfer) to the account described in Section 1.10. Rental payments shall be payable monthly in arrears on the twentieth (20th) day of each successive month, except that the last installment of Base Rent shall be payable on the last day of the Term (each such date shall be a "Rent Payment Date"). No sooner than thirty (30) days or later than ten (10) days prior to the due date for any installment of Base Rent hereunder, Landlord shall deliver to Tenant a Notice indicating the exact dollar amount of the Base Rent that is due on such due date ("Invoice"). If Landlord fails to send the Invoice, Tenant shall pay the amount shown on the previous month's Invoice. 5.2 PRORATION. If the Term expires or is otherwise terminated on other than the twentieth (20th) day of a calendar month, then Base Rent shall be prorated for the period from the immediately preceding Rent Payment Date until the end of the Term on the basis of actual days elapsed and a three hundred sixty (360) day year. 8 14 5.3 NO ABATEMENT OF RENT. Except as a consequence of a reduction in the Lease Investment Balance or the terms of Section 13.1 (Total or Substantial Taking) and Section 13.2 (Partial Taking) Tenant shall not be entitled to any abatement, diminution, reduction, setoff or postponement of Base Rent as a consequence of any inconvenience to, interruption of, cessation of or loss of Tenant's use or enjoyment of the Premises or as a result of any reason whatsoever. 5.4 DELINQUENT RENT. Any Base Rent not paid on the due date shall accrue interest at the Default Rate from the date such Base Rent was originally due until the date such Base Rent is paid. All interest accrued on past due Base Rent shall be due and payable to Landlord at the time the Base Rent is paid, or upon demand by Landlord, if earlier. 5.5 ADDITIONAL RENT. Tenant agrees to pay all Additional Rent when it becomes due and payable under this Lease. ARTICLE 6 TAXES 6.1 REAL ESTATE TAXES. (a) Tenant shall pay, during the Term of this Lease, directly to the appropriate taxing authority all Real Estate Taxes (as defined below). If the Term expires or otherwise terminates at any time other than the beginning or end of a taxable year, Tenant's obligation to pay Real Estate Taxes shall be prorated on the basis of a 365-day year, so as to include only that portion of the taxable year which is a part of the Term. (b) Except to the extent that Real Estate Tax bills and statements are sent directly to Tenant by the taxing authority, upon receipt by Landlord of the tax bills or statements, Landlord will use reasonable efforts to promptly advise Tenant in writing of all Real Estate Taxes and shall deliver copies of all applicable tax bills or statements to Tenant. Tenant shall pay directly to the taxing authority all Real Estate Taxes prior to the later of (i) thirty (30) days after receipt by Tenant from Landlord of a copy of such bills and statements referred to above, or (ii) five (5) business days prior to delinquency. As used herein, the term "Real Estate Taxes" shall mean any and all taxes, governmental fees and similar charges or assessments levied or assessed against the improvements and/or the Land including, without limitation, ad valorem taxes and special assessments applicable to real property; provided, however, that Real Estate Taxes shall not include any Landlord Taxes (as defined below). Real Estate Taxes shall also include any and all documentary, transfer, sales, mortgage, recording or similar taxes imposed on Landlord or Tenant in connection with any sale of the Premises to a third party in accordance with this Lease following an Event of Default by Tenant or in a transaction to which Tenant is a party. As used herein, the term "Landlord Taxes" shall mean any and all franchise, gains, gift, succession, excess profits, gross receipts, revenue, estate, rental, income or similar taxes or taxes in lieu thereof imposed upon Landlord or any party other than Tenant (or an affiliate thereof) and any withholding tax imposed as a collection device for, in lieu of, or otherwise related to any of the foregoing without regard to whether such tax is required to be collected by Tenant and without regard to whether Tenant would be liable for such withholding tax in the event it failed to so withhold. For purposes of the foregoing, an income tax shall include, without limitation, any tax imposed under the United States Internal Revenue Code, as well as any tax which could qualify as an "income tax" under United States Treasury Regulation Section 1.901-2 (except to the extent any such statute or regulation is subsequently modified to include a tax or other governmental charge of a materially different type and nature from the taxes currently described therein) and any income tax which may be payable under the laws of any 9 15 jurisdiction either now or in the future. Real Estate Taxes for any given tax year shall exclude assessment installments that are not due and payable during such tax year. 6.2 PERSONAL PROPERTY TAXES. Tenant shall pay directly to the appropriate taxing authorities prior to delinquency any and all taxes and assessments levied or assessed during the Term upon or against Tenant's furniture, equipment, trade fixtures and any other personal property in the Premises. 6.3 RIGHT TO CONTEST. Tenant shall not be required to pay any Real Estate Taxes or any other taxes for which Tenant is liable hereunder (including, without limitation, any taxes for which Tenant is required to indemnify Landlord under Section 19.1) (including penalties and interest), so long as (i) Tenant shall contest the same or the validity thereof by appropriate legal proceedings in such a manner to prevent the tax sale of any portion of the Premises and (ii) the position to be taken by Tenant pursuant to such contest would have a realistic possibility of success if litigated. For purposes of this Lease, Tenant may conclusively establish that a position to be taken in a contest would have a realistic possibility of success if litigated by providing to Landlord a letter from counsel stating an opinion to such effect. In the event of any such contest, Tenant shall, within thirty (30) days after the final determination thereof, pay and discharge the amounts determined to be due in accordance therewith and with the provisions of this Lease, together with any penalties, fines, interest, costs and expenses that may have accrued thereon or that may have resulted from Tenant's contest. Tenant also shall have a right to contest any taxes for which it is liable hereunder, but with regard to which the position to be taken pursuant to such contest would not have a realistic possibility of success if litigated, provided that Tenant pays such taxes on or prior to the date upon which such taxes are asserted to be due by the relevant governmental authority. Notwithstanding the foregoing provisions of this Section 6.3, Tenant shall have an unconditional right to contest (without prior payment) any taxes imposed by law upon Tenant rather than upon Landlord. Tenant's decision to pay any taxes prior to contesting its or another party's underlying liability therefore shall not be deemed to imply or suggest that the position to be taken in such contest would not have a realistic possibility of success if litigated. Landlord shall cooperate fully with Tenant in connection with the exercise of Tenant's right of contest contained herein, and in the event that applicable law shall require that Landlord, rather than Tenant, pursue legal proceedings for such contest, Landlord will initiate and pursue such contest upon Tenant's request and in accordance with Tenant's instructions (including, without limitation, Tenant's instructions as to the selection of legal counsel and matters of strategy or settlement); provided, however, that Landlord shall not be subject to any liability for the payment of any costs or expenses in connection with any such contest or proceedings, and Tenant will indemnify and save harmless Landlord from any such costs and expenses (including, without limitation, reasonable attorneys' fees, costs of court and appraisal costs), reimbursing Landlord therefor upon demand (or paying such costs and expenses directly when due, all as directed by Landlord). Tenant shall be entitled to any refund of any taxes and penalties or interest from any governmental authority to the extent the refund represents monies paid to the governmental authority by Tenant or paid by Landlord and reimbursed by Tenant. 6.4 ADDITIONAL CHARGES. All payments made by Tenant under this Lease shall be made free and clear of, and without reduction or withholding for or on account of, any present or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed pursuant to any Legal Requirement, excluding, however, any Landlord Taxes (all such nonexcluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Additional Charges"). Tenant shall be responsible for the payment of any such Additional Charges; and if any such Additional Charges are required to be withheld from any amounts payable to Landlord hereunder, then the amounts so payable to Landlord shall be increased by an amount 10 16 ("Additional Amount") necessary to yield to Landlord (after payment of all Additional Charges) the Base Rent and other amounts payable hereunder at the rates or in the amounts specified in this Lease. Whenever any Additional Charges are required to be withheld by Tenant, such Additional Charges shall be deducted or withheld by Tenant, and shall be paid by Tenant to the appropriate governmental authority in accordance with applicable Legal Requirements. As promptly as possible thereafter, Tenant shall send to Landlord for its own account a copy of an original official receipt (or other evidence of payment) received by Tenant showing payment thereof. If Tenant is required to pay Landlord any Additional Amount, Landlord shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change its jurisdiction if the making of such a change would avoid the need for, or reduce to the greatest extent possible the amount of, any such Additional Amount which may thereafter accrue and would not, in the reasonable judgment of Landlord be otherwise disadvantageous to Landlord. If Landlord subsequently receives a refund of any Additional Amounts, or if such Additional Amounts result in a net benefit to Landlord, the amount of such refund or net benefit shall be paid to Tenant within 30 days of the receipt of such refund or net benefit; provided, however, that the payment to Tenant shall not exceed the Additional Amount to which the refund or net benefit relates. The agreements in this Section 6.4 shall survive the termination of this Lease with respect to any Additional Charges that become due during the Term. ARTICLE 7 INSURANCE 7.1 LIABILITY INSURANCE. At all times during the Term, Tenant shall obtain at Tenant's sole cost and expense a policy or policies of comprehensive general liability insurance on an "occurrence" basis against claims for "personal injury" liability, including bodily injury, death or property damage liability. The liability insurance policy shall have a combined single limit of Five Million Dollars ($5,000,000) per occurrence. 7.2 BUILDERS' RISK INSURANCE. With respect to any improvements which may be under construction and not yet covered by insurance under the terms of Section 7.3, Tenant shall maintain or cause to be maintained a policy or policies of builders' risk insurance in an amount equal to the value upon completion of the work (exclusive of land, foundation, excavation, grading, landscaping, architectural and development fees and other items customarily excluded from such coverage), insuring against the risks customarily insured against under such insurance, including fire, vandalism, malicious mischief, sprinkler leakage, lightning, and windstorm. 7.3 ALL-RISK INSURANCE. With respect to any improvement now or hereafter situated on the Land, prior to the termination of the builders' risk insurance required by Section 7.2, and at all times thereafter, Tenant shall, at Tenant's sole cost and expense, obtain and maintain, or cause to be obtained and maintained, (a) a policy or policies of all-risk insurance covering the improvements, providing coverage against loss or damage by fire, vandalism, malicious mischief, sprinkler leakage, lightning, windstorm, and other insurable perils, as, under good insurance practice, from time to time are insured against under all-risk coverage for properties of similar character, age and location in an amount or amounts not less than one hundred percent (100%) of the then actual replacement cost (exclusive of land, foundation, excavations, grading, landscaping, architectural and development fees and other items customarily excluded from such coverage and without any deduction for depreciation); (b) standard earthquake coverage, with a deductible not to exceed ten percent (10%) of the insured amount; and (c) standard flood coverage. Provided, however Tenant may elect not to obtain earthquake insurance, in which case Tenant shall covenant to pay the cost of repairing damage to the improvements caused by an earthquake. 11 17 7.4 GENERAL REQUIREMENTS. The insurance required under this Article 7 may be furnished under a "primary" policy and an "umbrella" policy or policies. Landlord shall be named as an additional insured under Tenant's policy of insurance required under Section 7.1; and such policies shall contain an endorsement for cross-liability coverage. Tenant shall furnish Landlord with certificates from Tenant's insurers with respect to the insurance required to be carried hereunder on or before the date such insurance is required to be carried. The certificates shall state that such insurance is in full force and effect and that coverage will not be reduced below the amounts required under Section 7.1 or otherwise limited or cancelled without thirty (30) days' prior written notice to Landlord. Renewal certificates shall be furnished to Landlord not less than thirty (30) days prior to the expiration of each such policy, provided, however, that Tenant shall not be required to provide Landlord with such renewal certificates prior to the expiration of each such policy so long as (i) Tenant provides Landlord with reasonable assurances within ten (10) days prior to the expiration of each such policy that there will be no lapse in the insurance coverage provided under such policy, and (ii) Tenant provides Landlord with such renewal certificates within ten (10) days following the expiration of each such policy. Any blanket insurance policy or policies that insure Tenant against the risks and for the amounts herein specified shall be deemed to satisfy the obligation of Tenant hereunder, provided that any such policy of blanket insurance shall specify the amount of the total insurance allocated to the risks required to be insured hereunder and such allocated amount meets the requirements of this Article 7. All insurance required by this Article 7 shall be with an insurance company licensed to do business in the State of California with a general policyholder's rating, as rated by the most current available "Bests" Insurance Reports, of no less than A/VIII, and shall be non- contributing. 7.5 WAIVER OF SUBROGATION. Notwithstanding anything to the contrary contained herein, to the extent permitted by law and so long as any insurance coverage maintained by Tenant is not diminished by reason thereof, Tenant hereby (a) releases and waives any rights it may have against Landlord and its officers, agents and employees on account of any loss or damages occasioned to Tenant, its property or the Premises, and arising from any risk covered by any fire and extended coverage insurance maintained by Tenant, whether or not due to the negligence of Landlord, its agents, employees, contractors, licensees, invitees or other persons, and (b) waives on behalf of any insurer providing such insurance to Tenant any right of subrogation that any such insurer may have or acquire against Landlord or such persons by virtue of payment of any loss under such insurance. Tenant shall use its commercially reasonable efforts to cause its insurance policies to contain a waiver of subrogation clause in accordance with the foregoing. 7.6 INDEMNITY. After receiving written notice from Landlord of a claim (failure to give such notice shall not relieve Tenant of its obligations hereunder unless as a direct result of failure to give such notice), Tenant shall protect, defend, indemnify, hold and save Landlord harmless from and against any and all losses, costs, liabilities or damages (including reasonable attorneys' fees and disbursements and court costs) arising by reason of: (i) any and all injury or death of persons or damage to property against which Tenant is obligated to maintain insurance for the benefit of Landlord pursuant to this Article 7; (ii) the failure to obtain the waiver of subrogation clause required by Section 7.5 hereof where such clause could have been obtained through the exercise of Tenant's commercially reasonable efforts; or (iii) the invalidation of such insurance policy required to be obtained by Tenant hereunder by Tenant's insurer; provided this subsection (iii) shall not apply to the extent Landlord actually receives insurance for the aforesaid losses, costs, liabilities or damages (including reasonable attorneys' fees and disbursements and court costs but excluding costs, fees or premiums paid by Landlord in connection with such insurance) or to the extent recovery of insurance proceeds is prevented by Landlord's gross negligence. Tenant's duty to indemnify Landlord under this Section 7.6 shall survive the expiration or earlier termination of this 12 18 Lease with respect to events occurring during the Term. Landlord agrees to cooperate with Tenant in the defense of any claim undertaken by Tenant pursuant to this Section. ARTICLE 8 USE 8.1 USE. (a) PERMITTED. Tenant may use the Premises for any lawful purpose. (b) ENVIRONMENTAL COMPLIANCE. 1) DEFINED TERMS. The term "Applicable Environmental Laws" shall mean any applicable laws, regulations or ordinances pertaining to health or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 or otherwise (as amended, hereinafter called "CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, the Hazardous and Solid Waste Amendments of 1984 or otherwise (as amended, hereinafter called "RCRA"), and the California Health & Safety Code Section 25501(j). The terms "hazardous substance" and "release" as used in this Lease shall have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") shall have the meanings specified in RCRA; provided, in the event either CERCLA or RCRA is amended or superseded by other laws so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment or other laws: and, provided further, to the extent that the laws of the State of California establish a meaning for "hazardous substance", "release", "solid waste", or "disposal" which is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply. 2) TENANT'S COVENANTS. Tenant will not cause or permit the Premises to be in violation of, or do anything or permit anything to be done which subjects Landlord, Tenant or the Premises to any remedial obligations relating to the Premises under or which creates a valid claim or cause of action against Landlord, Tenant (which relates to the Premises) or the Premises under, any Applicable Environmental Laws, including, without limitation, CERCLA, RCRA, and the California Health and Safety Code 25501(j), assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Premises and Tenant will promptly notify Landlord in writing of any existing, pending or threatened investigation, claim or inquiry of which Tenant has knowledge by any governmental authority in connection with any Applicable Environmental Laws. Tenant shall obtain any permits, licenses or similar authorizations to construct, occupy, operate or use any improvements, fixtures and equipment at any time located on the Premises by reason of any Applicable Environmental Laws. Tenant will not use the Premises in a manner which will result in the disposal or other release of any hazardous substance or solid waste on or to the Premises in violation of Applicable Environmental Law and covenants and agrees to keep or cause the Premises to be kept free of any hazardous substance, solid waste or environmental contaminants (including, without limitation, arsenic in soil and friable asbestos and any substance containing asbestos deemed hazardous by any Applicable Environmental Law) to the extent required by Applicable Environmental Law, and to remove the amounts of the same (or if removal is prohibited by law, to take whatever action is required by law) promptly upon discovery at Tenant's sole expense to the extent required by Applicable Environmental Law. Tenant shall promptly notify Landlord in writing of any disposal or other release of any hazardous substance, environmental contaminants or solid wastes on or to the Premises in violation of Applicable 13 19 Environmental Law. In the event Tenant fails to comply with or perform any of the foregoing covenants and obligations, after thirty (30) days' prior written Notice to Tenant, Landlord may, but shall be under no obligation to, cause the Premises to be freed from such hazardous substance, solid waste or environmental contaminants (or if removal is prohibited by law, to take whatever action is required by law) to the extent required by Applicable Environmental Law and the reasonable cost of the removal or such other action shall be a demand obligation owing by Tenant to Landlord pursuant to this Lease. Notwithstanding the foregoing, Landlord shall have no right to cause the removal of such materials and no Event of Default (or default) shall be deemed to have occurred under this Lease so long as Tenant both: (1) is diligently and in good faith proceeding to comply with Tenant's obligation to remove such amounts of such materials; and (2) has the financial ability to so comply. Subject to the foregoing, Tenant grants to Landlord and Landlord's agents and employees access to the Premises, and the license to remove such hazardous substance, solid waste or environmental contaminants (or if removal is prohibited by law, to take whatever action is required by law to the extent required by Applicable Environmental Law); and except for Landlord's willful misconduct or gross negligence, agrees to indemnify and save Landlord harmless from all reasonable costs and expenses involved and from all claims (including consequential damages) asserted or proven against Landlord by any party in connection therewith. Upon Landlord's reasonable request for "good cause" (defined below), at any time and from time to time during the Term, Tenant will provide at Tenant's sole expense an inspection or audit of the Premises from an engineering or consulting firm approved by Landlord, indicating the presence or absence of any hazardous substance, solid waste or environmental contaminants located on the Premises. If Tenant fails to provide same after sixty (60) days' notice, Landlord may order same, and Tenant grants to Landlord and Landlord's employees and agents access to the Premises and a license to undertake any testing reasonably required to obtain such inspection or audit. The reasonable cost of obtaining such inspection or audit and any expenses incurred by Landlord in connection therewith, shall be a demand obligation owing by Tenant to Landlord pursuant to this Lease. For purposes of this Section 8.1(b)(2), "good cause" shall mean that Landlord shall have reasonable grounds to believe that release or disposal of hazardous substances or solid wastes in violation of Applicable Environmental Law has occurred on the Premises. (c) COMPLIANCE WITH LEGAL REQUIREMENTS. Tenant shall at all-times comply with all material Legal Requirements applicable to the Land or any improvements now or hereafter situated on the Land and/or the use thereof. 8.2 CONTEST OF LEGAL REQUIREMENTS. Tenant shall have the right at its sole cost and expense to contest the validity of any Legal Requirements applicable to the Premises by appropriate proceedings diligently conducted in good faith; and upon the request of Tenant and at Tenant's sole cost and expense, Landlord will join and cooperate with Tenant in such proceedings. Subject to Section 6.3, and any other provision of this Lease to the contrary notwithstanding, Tenant's right to contest Legal Requirements must be exercised in such a manner as to avoid any exposure of the Premises or any part thereof to foreclosure or execution sale or exposure of Landlord to civil or criminal penalties arising from Tenant's non-compliance with such Legal Requirements. Tenant shall defend and indemnify Landlord against, and hold Landlord harmless from, any and all liability, loss, cost, damage, injury or expense (including, without limitation, attorneys' fees and costs) which Landlord may sustain or suffer by reason of Tenant's failure or delay in complying with, or Tenant's contest of, any such Legal Requirements (or Landlord's contest, if requested in writing by Tenant), and Tenant's duty to indemnify Landlord under this Section 8.2 shall survive the expiration or earlier termination of this Lease. 14 20 ARTICLE 9 UTILITIES AND SERVICES 9.1 SERVICES TO THE PREMISES. At Tenant's sole cost and expense, Tenant shall make its own arrangements for the provision of all utilities and services to be provided to or consumed on the Premises, including, without limitation, air conditioning and ventilation, service contracts, heating, electric power, telephone, water (both domestic and fire protection), sanitary sewer, storm drain, natural gas and janitorial services, including for the installation, maintenance and repair of service lines and meters to measure Tenant's consumption of such utilities. ARTICLE 10 MAINTENANCE AND REPAIRS; SURRENDER OF THE PREMISES 10.1 TENANT OBLIGATIONS. Landlord shall have no obligation to maintain the Premises. Tenant shall at all times and at Tenants' sole cost and expense maintain the Premises in good repair, normal wear and tear and casualty excepted. 10.2 SURRENDER OF THE PREMISES. Except as provided in Section 17.1 below, upon the expiration or earlier termination of the Term, Tenant shall surrender the Premises to Landlord in its then "AS-IS" condition, including, without limitation, any condition resulting from: (i) wear and tear; (ii) obsolescence and damage by fire or other casualty, act of God or the elements; (iii) damage that is caused by Landlord, its agents, employees or contractors; and (iv) any improvements, in, to or of the Premises or on the Land which are not Tenant's Property which Tenant may elect to remain on the Land or the Premises. Title to all Tenant's Property, shall be and remain in Tenant, and at any time during the Term of this Lease, the same may be removed by Tenant, or, at Tenant's abandonment or written election, surrendered with the Premises, in which event title to such surrendered property shall, if Landlord so elects in Landlord's sole discretion, be deemed transferred to Landlord. Any of such property that is not removed from the Premises on or prior to the expiration or early termination of this Lease shall be considered abandoned and Landlord may deal with it as Landlord elects. ARTICLE 11 ASSIGNMENT BY LANDLORD 11.1 FURTHER MORTGAGES OR ENCUMBRANCES BY LANDLORD. Except for the SBLF Deed of Trust (which is hereby approved by Tenant), Landlord shall not cause or create any mortgages, deeds of trust, encumbrances or exception to exist with respect to the Premises at any time. 11.2 LANDLORD'S RIGHT TO SELL. Landlord may not transfer all or any portion of its right, title and interest in the Premises; provided, however that nothing contained in this Lease shall be deemed in any way to limit, restrict or otherwise affect the right of Landlord at any time and from time to time to sell or transfer all but not less than all of its right, title and estate in the Premises to: (1) a Landlord Affiliate or another financial institution (excluding, however, a non-substantive entity that is formed specifically for purposes of owning the Premises subject to this Lease and has no other substantive operations or which is a special purpose entity under the provisions of EITF 90-15), provided such Landlord Affiliate or other financial institution has a minimum capitalization and surplus in excess of $50,000,000; or (2) if an Event of Default has occurred and is continuing at the time of such sale or transfer, to any Entity. Any sale or transfer by Landlord whatsoever shall by its express terms recognize and confirm the right of possession of Tenant to the Premises and 15 21 Tenant's other rights arising out of this Lease shall not be affected or disturbed in any way by any such sale, transfer, assignment or conveyance (except for any disturbance resulting from a foreclosure sale conducted pursuant to the laws of the State of California at which independent third party bids were permitted pursuant to the SBLF Deed of Trust), and any transferee shall expressly assume in writing all obligations of Landlord to be performed following the date of transfer. Landlord shall have the right to pledge its interest in this Lease, the SBLF Deed of Trust and any other documents as security for a loan to Landlord from a third party Lender which meets the standards set forth in Section 11.2(1) hereof and/or transfer its ownership right in the Base Rent and Additional Rent to such Lender. 11.3 TRANSFER OF FUNDS AND PROPERTY. At each time Landlord sells, assigns, transfers or conveys the entire right, title and estate of Landlord in the Premises and in this Lease, Landlord shall turn over to the transferee any funds or other property then held by Landlord under this Lease and thereupon all the liabilities and obligations on the part of the Landlord under this Lease arising after the effective date of such sale, assignment, transfer or conveyance shall terminate as to the transferor and be binding upon the transferee. ARTICLE 12 ASSIGNMENT AND SUBLEASING 12.1 RIGHT TO ASSIGN. (a) TENANT'S RIGHT. Provided that there is not an Event of Default under this Lease which is continuing and uncured or if there is such an Event of Default, provided that Tenant cures the Default in connection with the assignment, Tenant shall have the right, at any time and from time to time during the Term, to assign all or any portion of its right, title and estate in the Premises and in this Lease without approval by Landlord. Any such assignee, immediate or remote, shall have the same right of assignment. Any such assignment shall be evidenced by a written instrument, properly executed and acknowledged by all parties thereto and, at Tenant's election, duly recorded in the Official Records, wherein and whereby the assignee assumes all of the obligations of Tenant under this Lease. Notwithstanding any such assignment and assumption or any sublease permitted under Section 12.2 hereof, Tenant shall remain primarily liable for all obligations and liabilities on the part of Tenant theretofore or thereafter arising under this Lease. (b) NOTICE. Tenant shall, promptly after execution of each assignment, notify Landlord of the name and mailing address of the assignee and shall, on demand, permit Landlord to examine and copy the assignment agreement. 12.2 RIGHT TO SUBLET. (a) TENANT'S RIGHT. Tenant shall have the right, at any time and from time to time during the Term, to sublet all or any portion of the Premises and to extend, modify or renew any sublease without the approval of Landlord. (b) NOTICE. Tenant shall, promptly after execution of each sublease, notify Landlord of the name and mailing address of the subtenant and shall, on demand, permit Landlord to examine and copy the sublease. 12.3 MORTGAGE BY TENANT. Tenant shall not have the right to mortgage, pledge or otherwise encumber all or any portion of the right, title and estate of Tenant in the Premises or in this Lease, without the consent of Landlord. 16 22 ARTICLE 13 EMINENT DOMAIN 13.1 TOTAL OR SUBSTANTIAL TAKING. If title or access is taken for any public or quasi-public use, or under any statute or by right of condemnation or eminent domain, or by sale in lieu thereof (a "Taking") with respect to all of the Premises, or if title to so much of the Premises or access thereto is Taken, or if the Premises or access thereto is damaged, blocked or impaired by the Taking, so that, in Tenant's reasonable discretion, the Premises or access thereto, even after a reasonable amount of reconstruction thereof, will no longer be suitable for the conduct of Tenant's (and/or Tenant's subtenants') business, then in any such event, this Lease shall terminate on the date of such Taking. 13.2 PARTIAL TAKING. If any part of the Premises, or access thereto, shall be Taken, and the Premises or the remaining part thereof and access thereto will be, in Tenant's reasonable discretion, suitable for the conduct of Tenant's (and/or Tenant's subtenants') business in a manner consistent with the conduct of such business prior to such Taking, all of the terms, covenants and conditions of this Lease shall continue, except that Base Rent shall be adjusted to reflect the decreased Lease Investment Balance remaining after application thereto of the award made to Landlord for such Taking. 13.3 TEMPORARY TAKING. If the whole or any part of the Premises is Taken for temporary use or occupancy, this Lease shall not terminate by reason thereof and Tenant shall continue to pay, in the manner and at the times herein specified, the full amount of the Base Rent payable by Tenant hereunder, and, except only to the extent that Tenant may be prevented from so doing by reason of such Taking, Tenant shall continue to perform and observe all of the other terms, covenants and conditions hereof on the part of Tenant to be performed and observed, as though the Taking had not occurred. In the event of any such temporary Taking, Tenant shall be entitled to receive the entire amount of the award made for the Taking, whether paid by way of damages, rent or otherwise. If the temporary Taking is for a term in excess of thirty (30) days, then the Taking shall be treated as a permanent Taking and be governed by Sections 13.1 or 13.2, as applicable. 13.4 DAMAGES. The compensation attributable to the Premises (in each case the compensation or value shall be determined as of the date of the Taking) awarded or paid upon any Taking (other than a temporary Taking, which shall be governed by Section 13.3), whether awarded to Landlord, Tenant, or both of them, shall be held by Landlord to be applied against the Lease Investment Balance, including all accrued and unpaid Base Rent and Additional Rent. Any compensation in excess of the Lease Investment Balance plus all accrued and unpaid Base Rent and Additional Rent shall be paid to Tenant. 13.5 NOTICE AND EXECUTION. Immediately upon service of process upon Landlord or Tenant in connection with any Taking relating to the Premises or any portion thereof or access thereto, each party shall give the other Notice thereof. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions of this Article 13. Tenant reserves the right to appear in and to contest any proceedings in connection with any such Taking. Tenant shall immediately reimburse Landlord on demand for all reasonable out-of-pocket costs and expenses incurred by Landlord in complying with Landlord's obligations under this Section 13.5. 17 23 ARTICLE 14 DAMAGE OR DESTRUCTION 14.1 CASUALTY INSURANCE PROCEEDS. In the event of any casualty, the proceeds of any insurance policies maintained by Tenant pursuant to Section 7.2 or 7.3 shall be held, applied and dealt with as follows: (a) Any proceeds (per occurrence) of such policies attributable to the Premises shall be paid as follows: (1) to Landlord (but only to the extent of the then-existing Lease Investment Balance); and (2) with any remaining excess to be paid to Tenant. (b) Any insurance proceeds paid to Landlord under this Article 14 shall reduce the Lease Investment Balance by a like amount. ARTICLE 15 QUIET ENJOYMENT 15.1 QUIET ENJOYMENT. Landlord covenants to secure to Tenant the quiet possession of the Premises for the full Term against all persons claiming the same, by, through or in the right of Landlord, subject to Landlord's rights and remedies under Article 16 upon an Event of Default by Tenant. The existence of any Permitted Title Exceptions shall not be deemed to constitute a breach of Landlord's obligations hereunder. Tenant shall, immediately upon demand, reimburse Landlord for all reasonable costs, expenses and damages incurred or paid by Landlord in the performance of Landlord's obligations under this Article 15 (except for any costs, expenses or damages arising from any Landlord liens or Landlord's willful breach of this Lease). ARTICLE 16 DEFAULT 16.1 DEFAULT. Each of the following events shall constitute an event of default ("Event of Default") by Tenant: (a) FAILURE TO PAY BASE RENT. Tenant's failure to pay any Base Rent within five (5) days after the due date. (b) FAILURE TO PAY ADDITIONAL RENT. Tenant's failure to pay any Additional Rent which is due to Landlord within five (5) days after the due date under this Lease (which due date shall be the date of Tenant's receipt of Notice from Landlord that such Additional Rent is due). (c) FAILURE TO CARRY INSURANCE. Tenant's failure to carry any policy of insurance required by Article 7, and Tenant shall not cure such failure prior to ten (10) days after written notice thereof is sent to Tenant. If such failure is susceptible of cure but cannot with reasonable diligence be cured within such ten day period, and if Tenant shall promptly have commenced to cure the same and shall thereafter prosecute the curing thereof with reasonable diligence, the period within which such failure may be cured shall be extended for such further period (not to exceed an additional ten days beyond the initial ten days cure period) as shall be reasonably necessary for the curing thereof. 18 24 (d) INSOLVENCY. Subject to Section 16.2, the occurrence of: (i) an assignment by Tenant for the benefit of creditors generally; or (ii) the filing of a voluntary or involuntary petition by or against Tenant under any present or future applicable federal, state or other statute or law having for its purpose the adjudication of Tenant as a bankrupt; (iii) the appointment of a receiver, liquidator or trustee for all or a substantial portion of the Premises by reason of the insolvency or alleged insolvency of Tenant; or (iv) the taking of possession by any department of city, county, state or federal government, or any officer thereof duly authorized, of all or a substantial portion of the Premises by reason of the insolvency or alleged insolvency of Tenant; and Tenant's failure to timely give any Notice it is permitted to give pursuant to Section 16.2 (or, in the event Tenant gives timely Notice and pursues a contest under Section 16.2, Tenant's failure to finally prevail in the contest). (e) DEFAULT IN PAYMENT FOR OTHER CREDIT FACILITY. Tenant's failure to make any payment required of Tenant in connection with any other credit facility of Tenant, which payment default is not cured within any applicable notice and cure period provided by such credit facility. (f) DEFAULT IN PAYMENT OF LEASE INVESTMENT BALANCE. Failure of Tenant to pay to Landlord the Lease Investment Balance at the end of the Term or upon an Event of Default, unless Tenant has elected its option to purchase or terminate under Article 17 obligations thereunder. (g) DEFAULT IN COMPLETION OF PURCHASE OPTION OR PAYMENT OF GUARANTEED RESIDUAL VALUE. Failure of Tenant to complete the Purchase Option after election (or deemed election) to do so, or failure of Tenant to perform all of its obligations pursuant to the Termination Option if Tenant has elected to exercise the Termination Option (and has not rescinded its election to exercise such option) set forth in Section 17.2, including, without limitation, the obligations to make the payments required pursuant to Sections 17.2(b), (d) and (e). (h) FINANCIAL COVENANTS. Tenant's failure at any time during the Term of the Lease, subject to quarterly compliance (as measured on the last day of each fiscal quarter of Tenant) to comply with the following Financial Covenants: (i) Quick Ratio. Tenant shall maintain a ratio of (i) the sum of cash, short term Qualified Investments and accounts receivable on a consolidated basis to (ii) Consolidated Current Liabilities plus, to the extent not already included as Consolidated Current Liabilities, the principal amount of Loans and the principal amount undrawn under Letters of Credit then outstanding of at least 1.00:1.00. (ii) Profitability. (1) Tenant shall not in any fiscal quarter have an operating and/or net loss on a consolidated basis greater than ten percent (10%) of Tenant's Consolidated Tangible Net Worth as of the end of such fiscal quarter; (2) Tenant shall not have an operating and/or net loss on a consolidated basis over any two (2) consecutive fiscal quarter period including any fiscal quarter and the immediately preceding fiscal quarter greater than ten percent (10%) of Tenant's Consolidated Tangible Net Worth (as defined in Section 16.1(h)(iii)) as of the end of such fiscal year; 19 25 (3) Tenant shall not have an operating and/or net loss on a consolidated basis in any three (3) consecutive fiscal quarters as measured quarterly for that fiscal quarter and each of the immediately preceding two (2) fiscal quarters; and (4) Tenant shall not have an operating and/or net loss on a consolidated basis in any four (4) consecutive fiscal quarter period including any fiscal quarter and the immediately preceding three (3) fiscal quarters. For the purpose of calculating operating and net losses under this Section 16.1(h) up to $25,000,000.00 of expenses attributable to non-cash charges taken in connection with Acquisitions otherwise permitted hereunder shall be excluded. (iii) Consolidated Tangible Net Worth. Tenant shall maintain Consolidated Tangible Net Worth of at least $291,000,000.00 plus (i) a minimum of 75% of quarterly net income (after taxes) for each fiscal quarter after March 31, 1996 in which net income shall be positive, plus (ii) 100% of any new equity raised after March 31, 1996, minus (iii) 100% of the cost of repurchases by Tenant of its capital stock after March 31, 1996 in an aggregate amount of up to $25,000,000.00, and minus (iv) up to $25,000,000.00 of expenses attributable to non-cash charges taken in connection with Acquisitions otherwise permitted hereunder. (iv) Leverage Ratio. Tenant shall maintain a ratio of Consolidated Total Liabilities (including the undrawn amount of all outstanding Letters of Credit) to Consolidated Tangible Net Worth not to exceed 0.75:1.00. (i) DEFAULT UNDER ADJACENT PROPERTY LEASE. The occurrence of an "Event of Default" as defined and set forth under the Lease of the Land by and between Landlord and Tenant dated as of July 6, 1995, as amended by that certain First Amendment to Lease dated June 17, 1996 (the "Adjacent Property Lease"). 16.2 CONTEST BY TENANT. If upon the filing of any involuntary petition of the type described in Section 16.1(d) or upon the appointment of a receiver, other than a receiver appointed in any voluntary proceeding referred to in Section 16.1(d), or the taking of possession of all or a substantial portion of the Premises by any department of the city, county, state or federal government, or any officer thereof duly authorized, by reason of the alleged insolvency of Tenant without the consent or over the objection of Tenant, should Tenant desire to contest the same in good faith, Tenant shall, within ninety (90) days after the filing of the petition or after the appointment or taking of possession, give Notice to Landlord that Tenant proposes to make the contest, and the same shall not constitute an Event of Default so long as Tenant shall prosecute the proceedings with due diligence and no part of the Premises shall be exposed to sale by reason of the continuance of the contest. 16.3 LANDLORD'S REMEDIES. Landlord shall have the remedies specified below: (a) CONTINUE LEASE. In connection with an Event of Default, Landlord shall have the right to enforce, by suit or otherwise, all other covenants and conditions hereof to be performed or complied with by Tenant and to exercise all other remedies permitted by Section 1951.2 or 1951.4 of the California Civil Code whichever is applicable, or any amendments thereof. Landlord has the remedy described in California Civil Code Section 1951.2 or 1951.4. Upon application by Landlord, a receiver may be appointed to take possession of the Premises and exercise all rights granted to Landlord as set forth in this Section 16.3. 20 26 (b) TERMINATE LEASE. In connection with an Event of Default, Landlord may terminate this Lease, by giving Tenant Notice thereof, at any time after the occurrence of such Event of Default and whether or not Landlord has also exercised any right under Section 16.3(a). In such event Tenant shall be obligated to purchase the Premises for an amount equal to the Purchase Price described in the Purchase Option contained in Section 17.1 below (that is, all accrued Base Rent, Additional Rent and the Lease Investment Balance). Landlord shall also have its other remedies at law (including its rights under the SBLF Deed of Trust), provided, however, that Tenant's obligation to purchase the Premises pursuant to Section 17.2 shall survive any termination of this Lease up through the date of foreclosure sale under the SBLF Deed of Trust. (c) LANDLORD'S CONTINUING OBLIGATION TO SELL. Except in the case of a foreclosure under the SBLF Deed of Trust, in the event Landlord obtains possession of the Premises pursuant to the terms of this Lease (because of Tenant's default, Lease expiration, or otherwise), Landlord shall be under a continuing obligation to use its commercially reasonable efforts to sell the Premises to one or more unrelated third parties; provided, however, that Landlord shall not be required to sell or attempt to sell any portion of the Premises (i) in a manner, or under circumstances, that could materially impair Landlord's ability to enforce any of its rights or remedies under this Lease (as determined in Landlord's sole discretion exercised in good faith) or (ii) at a time when market conditions render it inadvisable to sell or attempt to sell the Premises (as determined in Landlord's sole discretion exercised in good faith). Upon the occurrence of any such sale Landlord shall be obligated to pay to Tenant any excess of the amount realized by Landlord in connection with such sale over the Purchase Price (defined below). For purposes of the preceding sentence, the amount realized by Landlord upon a sale of the Premises shall be net of Landlord's reasonable sale expenses and other expenses reasonably incurred by Landlord to consummate such sale. Landlord's obligation to pay such excess to Tenant shall survive any termination of this Lease. Tenant agrees that the Landlord will be deemed to be acting in good faith if it refuses to sell its interest for less than the excess of the Lease Investment Balance over the Guaranteed Residual Value. In the event there is a foreclosure sale under the SBLF Deed of Trust, then the party acquiring the property sold at such foreclosure sale (the "Purchaser") shall have the option to purchase the fee simple interest in all, but not less than all, of the then-existing Premises owned by Landlord on the following terms: (i) such option to purchase must be exercised by written notice delivered to Landlord no later than thirty (30) days following the date of completion of the foreclosure sale, as evidenced by the recordation of a deed conveying such property so sold at foreclosure by the trustee under the SBLF Deed of Trust; (ii) the purchase price for the fee simple interest in the then-existing Premises shall be the Purchase Price set forth in Section 17.1(a) of the Lease (as adjusted to take into account all reductions in the Lease Investment Balance resulting from payments received by Landlord, including proceeds received by Landlord as a result of the foreclosure sale); and (iii) the purchase and sale of the then-existing Premises shall be consummated in the manner described in Section 17.1(c) of the Lease. In the event such Purchaser fails to timely exercise the foregoing purchase option, the purchase option shall expire and Landlord shall thereafter have no further obligation to sell the then-existing Premises. 16.4 NO WAIVER. No failure by Landlord or Tenant to insist upon the strict performance of any term, covenant or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof and no acceptance of full or partial Base Rent or Additional Rent during the continuance of any breach shall constitute a waiver of any such breach or of the term, covenant, or condition. No term, covenant or condition of this Lease to be performed or complied with by Tenant or Landlord, and no breach thereof, shall be waived, terminated, altered or modified except by a written instrument executed by Landlord 21 27 and Tenant. No waiver of any breach shall affect or alter this Lease, but each and every term, covenant, and condition of this Lease shall continue in full force and effect with respect to any other then existing subsequent breach thereof. 16.5 EFFECT OF ASSIGNMENT. Notwithstanding an Entity's prior assignment or transfer of its interest as Tenant under this Lease, so long as Landlord has been given Notice of such assignment pursuant to Sections 12.1 and 18.3, Landlord shall give such Entity copies of all Notices required by this Article 16 in connection with any Event of Default, and such Entity shall have the period granted hereunder to Tenant to cure such Event of Default, unless such Entity shall have been released from all obligations arising under this Lease. Landlord may not assert any rights against such Entity in the absence of such Notice and opportunity to cure, so long as Landlord has been given Notice of such assignment pursuant to Sections 12.1 and 18.3. 16.6 LANDLORD CURE RIGHT. If Tenant fails to perform any covenant or agreement to be performed by Tenant under this Lease, and if the failure or default continues for thirty (30) days after Notice to Tenant (except for emergencies and except for payment of any lien or encumbrance threatening the imminent sale of the Premises or any portion thereof, in which case payment or cure may be made as soon as necessary to minimize the damage to person or property caused by such emergency or to prevent any such sale), Landlord may, but shall have no obligation to, pay the same and cure such default on behalf of and at the expense of Tenant and do all reasonably necessary work and make all reasonably necessary payments in connection therewith including, but not limited to, the payment of reasonable attorneys' fees and disbursements incurred by Landlord. Notwithstanding the foregoing, Landlord shall have no right to cure any such failure to perform by Tenant so long as Tenant: (1) is diligently and in good faith attempting to cure such matter and prosecuting such cure to completion; (2) has the financial ability to so comply; and (3) commenced cure of such matter within thirty (30) days after Tenant's receipt of Notice thereof from Landlord. Failure by Tenant to comply with the above shall allow Landlord to commence in a reasonable and customary manner and in good faith to attempt to cure such matter. Upon demand, Tenant shall reimburse Landlord for the reasonable amount so paid, together with interest at the Default Rate from the date incurred until the date repaid. ARTICLE 17 TENANT'S OPTION TO PURCHASE OR TERMINATE 17.1 OPTION TO PURCHASE PREMISES. (a) PURCHASE OPTION. On any Rent Payment Date during the Term Tenant shall have the option ("Purchase Option") to purchase all of the then-existing Premises. The purchase price ("Purchase Price") for the Premises shall be the sum of accrued and unpaid Base Rent, any accrued and unpaid Additional Rent, plus the Lease Investment Balance. (b) PURCHASE OPTION EXERCISE NOTICE. If Tenant desires to exercise the Purchase Option, Tenant shall deliver to Landlord thirty (30) days prior written notice ("Purchase Option Exercise Notice") of Tenant's election. If Tenant does not exercise the Termination Option as provided in Section 17.2 below it shall be deemed to have exercised the Purchase Option. (c) TRANSFER. If Tenant exercises the Purchase Option, the purchase and sale of the Premises shall be consummated as follows: (i) Landlord shall grant and convey the Premises to Tenant, its authorized agent or assignee, pursuant to a duly executed and acknowledged assignment and 22 28 assumption of leasehold interest (as to the Land) and a grant deed as to the Premises (collectively herein the "Deed"), free and clear of all title defects, liens, encumbrances, deeds of trust, mortgages, rights-of-way and restrictive covenants or conditions, of record, placed against the Premises by Landlord except for the Permitted Title Exceptions (excluding the SBLF Deed of Trust), and any UCC-1 filed or recorded which evidence security interests encumbering the Premises or any part thereof in favor of SBLF, which security interests SBLF shall cause to be released so that they no longer affect the Premises). (ii) The Purchase Price shall be paid upon delivery of the Deed and any other documents reasonably requested by Tenant to evidence the transfer of the Premises subject to the Permitted Title Exceptions (excluding the SBLF Deed of Trust, and any UCC-1 filed or recorded which evidence security interests encumbering the Premises or any part thereof in favor of Landlord, which security interests Landlord shall cause to be released so that they no longer affect the Premises) ("Additional Documents"). In the event that Tenant elects to assign the Purchase Option pursuant to Section 17.1(d) below, and Tenant's assignee pays an amount less than the Purchase Price for the Premises, Tenant shall pay to Landlord any excess of the Purchase Price over the amount paid by such assignee. Landlord shall deliver the Deed and the Additional Documents to Tenant on the date for closing specified by Tenant in the Purchase Option Exercise Notice. The closing shall take place at the location and in the manner reasonably set forth by Tenant in the Purchase Option Exercise Notice; provided that the date of closing shall occur no later than the last day of the Term of the Lease. (iii) If Landlord shall fail to cause title to be in the condition required in Section 17.1(c)(i) above within the time herein prescribed for the delivery of the Deed, then Tenant shall have the right (in addition to all other rights provided by law) by a written notice to Landlord: (1) to extend the time in which Landlord shall clear title and deliver the Deed and Additional Documents, during which extension this Lease shall remain in full force and effect, except Tenant shall be released from its obligation to pay Base Rent during the extension; (2) to accept delivery of the Deed and Additional Documents subject to such title defects, liens, encumbrances, deeds of trust, mortgages, rights-of-way and restrictive covenants or conditions specified and set forth in the Deed and not cleared by Landlord; (3) to rescind, by notice to Landlord and without any penalty or liability therefor, any and all obligations Tenant may have under and by virtue of the Purchase Option or the exercise thereof, whereupon this Lease shall remain in full force and effect; (4) if the title exception is curable by the payment of money, Tenant may make such payment and such payment shall be a credit against the Purchase Price in favor of Tenant. (iv) Base Rent shall be prorated and paid and all Additional Rent which is then due and payable shall be paid as of the date title to the Premises is vested of record in Tenant. Tenant shall pay the escrow fees; the recorder's fee for recording the Deed; the premium for the title insurance policy; all documentary transfer taxes; Tenant's attorneys' fees; Landlord's reasonable attorneys' fees; all other costs and expenses incurred by Tenant in consummating the transfer of the Premises; and all reasonable expenses (except as specified in the next sentence) incurred by Landlord in consummating the transfer of the Premises pursuant to this Section 17.1. Landlord shall pay the costs and expenses of clearing title as required by Section 17.1(c)(i). (d) ASSIGNMENT. Tenant shall have the right, without Landlord's consent, to assign this Purchase Option, in whole, to any Entity at any time, whether or not Tenant also assigns its interest in the Lease. 23 29 17.2 TERMINATION OPTION. (a) NOTICE. Provided that no Event of Default has occurred and is continuing, unless Tenant has notified Landlord prior to such date that it elects the Purchase Option, Tenant may, on the date which is four (4) months prior to the expiration of the Term, exercise an option ("Termination Option") to sell the Premises; provided, however that at any time Tenant can rescind its election to exercise its Termination Option if it then exercises its Purchase Option pursuant to Section 17.1 above. The four (4) month period is referred to herein as the "Sales Period". (b) TERMINATION OPTION. After giving the notice set forth in section (a) above Tenant shall then use its best efforts to sell the Premises for cash to a third party purchaser (who is not an affiliate of Tenant within the meaning of Rule 405 under the Securities Act of 1933) and, if the Premises are not conveyed to such purchaser prior to the expiration of the Term, Tenant shall have no further right to sell the Premises and Landlord may, at its option either allow the Tenant to holdover pursuant to Section 4.2 above, or terminate the Lease in which case Tenant shall immediately vacate the Premises, and quitclaim all interest of Tenant, if any, therein to Landlord, and pay to Landlord the Guaranteed Residual Value as provided in Section 17.2(d) below. (c) TERMINATION OPTION PROCEDURES. In the event that Tenant elects the Termination Option, Tenant shall use its best efforts throughout the Sales Period to obtain a purchaser (who is not an affiliate of Tenant as described above) for the Premises. Tenant shall have the exclusive right to market the Premises during the first three (3) months of the Sales Period (the "Exclusive Period"). Landlord may direct Tenant to hire and pay for no more than one (1) commission sales agent after the expiration of the Exclusive Period. Except as otherwise provided below, any sale by Tenant shall be for the highest cash bid submitted to Tenant, including any cash bid submitted by Landlord. The determination of the highest bid shall be made by Landlord prior to the end of the Sales Period. After the end of the Exclusive Period, Landlord may accept any bid solicited by Landlord, Tenant or its agent, in which case Tenant's sales effort may be suspended until the earlier of the closing of such sale on the last day of the Term or revocation or rejection of such cash bid. Notwithstanding the above provisions, Tenant may (i) accept during the Exclusive Period any cash bid (net of expenses of sale) which exceeds the Lease Investment Balance, and (ii) rescind the Termination Option at any time so long as it is exercising its Purchase Option, which shall be prior and superior to an accepted offer from a third party. If Landlord undertakes any sales efforts, Tenant shall promptly reimburse Landlord for any reasonable charges, costs and expenses incurred in such effort, including any commissions, allocated time charges, costs and expenses of internal counsel, external counsel or other attorneys' fees. (d) PAYMENTS UNDER TERMINATION OPTION. If Tenant elects the Termination Option, Tenant shall pay to Landlord on the last day of the Term in immediately available funds any Base Rent or Additional Rent due and owing under the Lease. Except as provided in Section 17.2(e), the proceeds (the "Proceeds") of any sale of the Premises pursuant to the Termination Option shall be paid to Landlord upon any such sale without deductions, and not later than the expiration of the Lease Term. If the Premises are not sold and conveyed to a purchaser in exchange for Proceeds on or before the expiration of the Lease Term, then on the expiration of the Lease Term, Tenant shall pay to Landlord in immediately available funds an amount equal to the then Guaranteed Residual Value. (e) PROCEDURES UPON SALE UNDER THE TERMINATION OPTION. Any sale pursuant to the Termination Option shall be consummated on the last day of the Term. To the extent the Proceeds exceed the Lease Investment Balance, such excess shall be paid out of escrow to Tenant. Upon payment to Landlord of all amounts due it under this Lease, Landlord shall 24 30 execute and deliver to the purchaser of the Premises a grant deed in the same manner and subject to the same conditions and obligations as are set forth in Section 17.1(c) above and have the same obligation to deliver title and remove exceptions as set forth in said Section. Except as provided in the second sentence of this subparagraph, the Proceeds shall be applied first to the Lease Investment Balance; and Tenant shall reimburse Landlord for the difference between the Lease Investment Balance (calculated immediately prior to receipt of the Proceeds) and the Proceeds, up to the amount of the Guaranteed Residual Value. ARTICLE 18 MISCELLANEOUS 18.1 RELATIONSHIP. Neither this Lease nor any agreements or transactions contemplated hereby shall in any respect be interpreted, deemed or construed as constituting Landlord and Tenant as partners or joint venturers, one with the other, or as creating any partnership, joint venture, association or, except as set forth in Section 18.2 below, any other relationship other than that of landlord and tenant: and, except as set forth in Section 18.2 below, both Landlord and Tenant agree not to make any contrary assertion, contention, claim or counterclaim in any action, suit or other legal proceeding involving either Landlord or Tenant or the subject matter of this Lease. 18.2 FORM OF TRANSACTION: CERTAIN TAX MATTERS. (a) Landlord and Tenant hereby agree and declare that the transactions contemplated by this Lease are intended to constitute, both as to matters of form and substance: (i) an operating lease for financial accounting purposes, and (ii) a financing arrangement (and not a "true lease") for purposes of Federal, state and local income, property or other forms of tax. Accordingly, and notwithstanding any other provision of this Lease to the contrary, Landlord and Tenant agree and declare that (A) the transactions contemplated hereby are intended to have a dual, rather than single, form and (B) all references in this Lease to the "Lease" of the Premises which fail to reference such dual form do so as a matter of convenience only and do not reflect the intent of Landlord and Tenant as to the true form of such arrangements. (b) Landlord and Tenant agree that, in accordance with their intentions and the substance of the transactions contemplated hereby, Tenant (and not Landlord) shall be treated as the owner of the Premises for Federal, state, local income and property tax purposes and this Lease shall be treated as a financing arrangement. Tenant shall be entitled to take any deduction, credit allowance or other reporting, filing or other tax position consistent with such characterizations. Landlord shall not file any Federal, state or local income tax returns, reports or other statements in a manner which is inconsistent with the foregoing provisions of this Section 18.2. (c) Tenant acknowledges that it has retained accounting, tax and legal advisors to assist it in structuring this Lease and Tenant is not relying on any representations of Landlord regarding the proper treatment of this transaction for accounting, income tax or any other purpose. 18.3 NOTICES. Each Notice shall be in writing and shall be sent by personal delivery, overnight courier (charges prepaid or billed to the sender) or by the deposit of such with the United States Postal Service, or any official successor thereto, designated as registered or 25 31 certified mail, return receipt requested, bearing adequate postage and in each case addressed as provided in the Basic Lease Provisions. Each Notice shall be effective upon being personally delivered or actually received. The time period in which a response to any such Notice must be given or any action taken with respect thereto shall commence to run from the date of personal delivery or receipt of the Notice by the addressee thereof, as reflected on the return receipt of the Notice. Rejection or other refusal to accept shall be deemed to be receipt of the Notice sent. By giving to the other party at least thirty (30) days' prior Notice thereof, either party to this Lease shall have the right from time to time during the Term of this Lease to change the address(es) thereof and to specify as the address(es) thereof any other address(es) within the continental United States of America. 18.4 SEVERABILITY OF PROVISIONS. If any term, covenant or condition of this Lease shall be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to Entities or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby. 18.5 ENTIRE AGREEMENT: AMENDMENT. This Lease constitutes the entire agreement of Landlord and Tenant with respect to the subject matter hereof. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 18.6 MEMORANDUM OF LEASE OF THE LAND. Neither party shall record this Lease. However, concurrently with the execution of this Lease, Landlord and Tenant have executed a Memorandum of Lease of the Land ("Memorandum of Lease") in the form attached hereto as Exhibit D and by this reference made a part hereof, which Memorandum of Lease shall be promptly recorded in the Official Records. 18.7 SUCCESSORS AND ASSIGNS. Subject to Articles 11 and 12, this Lease shall inure to the benefit of and be binding upon Landlord and Tenant and their respective heirs, executors, legal representatives, successors and assigns. Whenever in this Lease a reference to any Entity is made, such reference shall be deemed to include a reference to the heirs, executors, legal representatives, successors and assigns of such Entity. 18.8 COMMISSIONS. Landlord and Tenant each represent and warrant that neither has dealt with any broker in connection with this transaction and that no real estate broker, salesperson or finder has the right to claim a real estate brokerage, salesperson's commission or finder's fee by reason of contact between the parties brought about by such broker, salesperson or finder. Each party shall hold and save the other harmless of and from any and all loss, cost, damage, injury or expense arising out of or in any way related to claims for real estate broker's or salesperson's commissions or fees based upon allegations made by the claimant that it is entitled to such a fee from the indemnified party arising out of contact with the indemnifying party or alleged introductions of the indemnifying party to the indemnified party. 18.9 ATTORNEYS' FEES. In the event any action is brought by Landlord or Tenant against the other to enforce or for the breach of any of the terms, covenants or conditions contained in this Lease, the prevailing party shall be entitled to recover reasonable attorneys' fees to be fixed by the court, together with costs of suit therein incurred. Tenant shall pay the reasonable attorneys' fees incurred by Landlord for the review and negotiation of this Lease. 26 32 18.10 GOVERNING LAW. This Lease and the obligations of the parties hereunder shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of California. 18.11 COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. 18.12 TIME IS OF THE ESSENCE. Time is of the essence of this Lease, and of each provision hereof. 18.13 NO THIRD PARTY BENEFICIARIES. This Lease is entered into by Landlord and Tenant for the sole benefit of Landlord and Tenant. There are no third party beneficiaries to this Lease. 18.14 LIMITATIONS ON RECOURSE. Except for the gross negligence or willful misconduct of Landlord, the obligations of Tenant and Landlord under this Lease shall be without recourse to any partner, officer, trustee, beneficiary, shareholder, director or employee of Tenant or Landlord. Landlord's liability to Tenant for any default by Landlord under this Lease: (1) shall be limited to Landlord's equity in the Premises; and (2) shall extend to any actual damages of Tenant, but shall not extend to any foreseeable and unforeseeable consequential damages. 18.15 ESTOPPEL CERTIFICATES. Within thirty (30) days after request therefor by either party, the non-requesting party shall deliver, in recordable form, a certificate to any proposed mortgagee, purchaser, sublessee or assignee and to the requesting party, certifying (if such be the case) that this Lease is in full force and effect, the date of Tenant's most recent payment of Base Rent, that, to the best of its knowledge, the non-requesting party has no defenses or offsets outstanding, or stating those claimed, and any other information reasonably requested. Failure to deliver said statement in time shall be conclusive upon the non-requesting party that: (a) this Lease is in full force and effect, without modification except as may be represented by the requesting party; (b) there are no uncured defaults in the requesting party's performance and the non-requesting party has no right of offset, counterclaim or deduction against the non-requesting party's obligations hereunder; (c) no more than one month's Base Rent has been paid in advance; and (d) any other matters reasonably requested in such certificate. 18.16 AS-IS LEASE. Landlord makes no representations or warranties concerning the condition, suitability or any other matters relating to the Premises, and Tenant hereby acknowledges that Tenant leases the Premises from Landlord on an "as is" basis. 18.17 NET LEASE. Except for Landlord's Taxes or as otherwise provided in this Lease, Tenant agrees that this Lease is an absolute net Lease, and the Base Rent called for hereunder shall be paid as required net of all expenses associated with the Premises, including without limitation, Real Estate Taxes and insurance premiums for the insurance required to be carried hereunder, and all other reasonable and customary costs and expenses incurred by Landlord and owed to independent third parties, in connection with the Premises or this Lease, all of which shall be paid or reimbursed by Tenant unless otherwise specifically provided herein. Tenant agrees to reimburse Landlord, within five (5) business days following receipt of any written demand therefor, for all reasonable and customary fees, late charges, title endorsement and other costs and expenses charged to Landlord which accrue during any period. 27 33 18.18 LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord hereby represents and warrants that: (a) Landlord has the full right and authority to enter into this Lease, consummate the sale, transfers and assignments contemplated herein and otherwise perform its obligations under this Lease; (b) the person or persons signatory to this Lease and any document executed pursuant hereto on behalf of such party have full power and authority to bind such party; and (c) the execution and delivery of this Lease and the performance of such party's obligations hereunder do not and shall not result in the violation of its organizational documents or any material contract or agreement to which such party may be a party. 18.19 TENANT'S REPRESENTATIONS AND WARRANTIES. Tenant hereby represents and warrants to Landlord that: (a) CORPORATE STATUS. Tenant (i) is a duly organized and validly existing corporation in good standing under the laws of the State of Delaware, and (ii) has duly qualified and is authorized to do business and is in good standing in all jurisdictions where the failure to do so might have a material adverse effect on it or its properties. (b) CORPORATE POWER AND AUTHORITY. Tenant has the corporate power and authority to execute, deliver and carry out the terms and provisions of the Lease and the SBLF Deed of Trust ("Operative Documents") to which it is or will be a party and has taken all necessary corporate action to authorize the execution, delivery and performance of the Operative Documents to which it is a party and has duly executed and delivered each Operative Document required to be executed and delivered by it and, assuming the due authorization, execution and delivery thereof on the part of each other party thereto, each such Operative Document constitutes a legal, valid and binding obligation, enforceable in accordance with their respective terms except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, and except as the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought and except as otherwise stated in the opinion of Tenant's counsel delivered to Landlord in connection with the execution and delivery of this Lease. (c) NO VIOLATION. Neither the execution, delivery and performance by Tenant of the Operative Documents to which it is or will be a party nor compliance with the terms and provisions thereof, nor the consummation by the Tenant of the transactions contemplated therein (i) will result in a violation by the Tenant of any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality having jurisdiction over the Tenant or the Premises that would materially adversely affect (x) the validity or enforceability of the Operative Documents to which the Tenant is a party, or the title to, or value or condition of, the Premises, or (y) to the best of the Tenant's knowledge, the consolidated financial position, business or consolidated results of operations of the Tenant or the ability of the Tenant to perform its obligations under the Operative Documents, (ii) will conflict with or result in any breach which would constitute a default under, or (other than pursuant to the Operative Documents) result in the creation or imposition of (or the obligation to create or impose) any lien upon any of the property or assets of the Tenant pursuant to the terms of any indenture, loan agreement or other agreement for borrowed money to which the Tenant is a party or by which it or any of its property or assets is bound or to which it may be subject (other than Permitted Exceptions), or (iii) will violate any provision of the certificate of incorporation or by-laws of the Tenant. 28 34 (d) LITIGATION. Except as disclosed in Exhibit E, there are no actions, suits or proceedings pending or, to the knowledge of the Tenant, threatened (i) that are reasonably likely to have a material adverse effect on the Premises or on the businesses, operations, financial condition or material assets of the Tenant, or (ii) that question the validity of the Operative Documents or the rights or remedies of the Landlord with respect to the Tenant or the Premises under the Operative Documents. (e) GOVERNMENTAL APPROVALS. Except as disclosed in Exhibit F, no Governmental Action by any Governmental Authority having jurisdiction over the Tenant, or the Premises is required to authorize or is required in connection with (i) the execution, delivery and performance by the Tenant of any Operative Document to which it is a party, or (ii) the legality, validity, binding-effect or enforceability against the Tenant of any Operative Document to which it is a party. (f) INVESTMENT COMPANY ACT. Tenant is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940 as amended. (g) PUBLIC UTILITY HOLDING COMPANY ACT. Tenant is not a "holding company" or a "subsidiary company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (h) PROVIDED INFORMATION. The information and materials which were provided by Tenant to the Landlord prior to the Date of Lease are true and accurate in all material respects on the date as of which such information and materials are dated or certified and are not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. (i) TAXES. All United States Federal income tax returns and all other tax returns which are required to have been filed have been or will be filed by or on behalf of the Tenant by the respective due dates, including extensions, and all taxes due with respect to the Tenant pursuant to such returns or pursuant to any assessment received by the Tenant have been or will be paid. The charges, accruals and reserves on the books of the Tenant in respect of taxes or other governmental charges are, in the opinion of the Tenant adequate. (j) COMPLIANCE WITH ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of the Employee Retirement Income Security Act of 1974, as amended from time to time ("ERISA") and the Internal Revenue Code of 1986, as amended from time to time (the "Code") with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan, or made any amendment to any Plan, which has resulted or could result in the imposition of a lien or the posting of a bond or other security under ERISA or the Code, or (iii) incurred any liability under Title IV of ERISA other than a liability to the Pension Benefit Guaranty Corporation (the "PBGC") for premiums under Section 4007 of ERISA. No "Plan Termination Event" has occurred with respect to any Plan. No member of the ERISA Group has any knowledge of any event that could result in a liability of any such member to the PBGC, whether under a Plan, a Multiemployer Plan, or otherwise. There have not been any nor are there now existing any events or conditions that would permit any Plan to be terminated under 29 35 circumstances that would cause the lien provided under Section 4068 of ERISA to attach to the material assets of the Tenant or the ERISA Group. The value of the Plans' benefits guaranteed under Title IV of ERISA on the date hereof does not exceed the value of such Plans' assets allocable to such benefits as of the date of this Lease. No member of the ERISA Group has incurred any "withdrawal liability" within the meaning of Title IV of ERISA with respect to a Multiemployer Plan. No "Prohibited Transaction" within the meaning of Section 406 of ERISA exists or will exist with respect to any Plan upon the execution and delivery of this Lease or any Operative Document. (k) ENVIRONMENTAL LAWS. To the best of Tenant's knowledge, except as disclosed in Exhibit G, the Tenant is in compliance with all Environmental Laws relating to pollution and environmental control in all domestic jurisdictions in which all real property of the Tenant, including the Land, are located, other than those the non-compliance with which would not have a material adverse effect on such real property including the Land, or the consolidated results of operations, business, or consolidated financial position of the Tenant. (l) OFFER OF SECURITIES, ETC. Neither the Tenant nor any person authorized to act on the Tenant's behalf has, directly or indirectly, offered any interest in the Premises or any other interest similar thereto (the sale or offer of which would be integrated with the sale or offer of such interest in the Premises), for sale to, or solicited any offer to acquire any of the same from, any person other than the Landlord and other "accredited investors" (as defined in Regulation D of the Securities and Exchange Commission). (m) FINANCIAL STATEMENTS. (i) The submitted financial statements, copies of which have been delivered to the Landlord, present fairly in all material respects, in conformity with generally accepted accounting principles, the financial position of the Tenant as of such date and its results of operations and cash flows for such fiscal year. (ii) The unaudited consolidated statement of financial position of the Tenant as of March 31, 1996 and the related unaudited consolidated statements of income, and cash flows for the year to date, copies of which have been delivered to Landlord, present fairly in all material respects, in conformity with generally accepted accounting principles applied on a basis substantially consistent with the financial statements referred to in clause (i) of this subsection (m), the consolidated financial position of the Tenant as of such date and its consolidated results of operations and cash flows for such year-to-date period (subject to normal year-end adjustments). (n) PREMISES. To the best of Tenant's knowledge, the Premises will comply in all material respects with all material requirements of law (including, without limitation, all zoning and land use laws and environmental laws) and insurance requirements. (o) TITLE. The Grant Deed will be in form and substance sufficient to convey good and marketable title to the Premises in fee simple, subject only to Permitted Exceptions. (p) FLOOD HAZARD AREAS. To the best of Tenant's knowledge, except as otherwise identified on the survey delivered to Landlord, no portion of the Premises are located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency. If the Premises are located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for the Premises in accordance with Article 7 and in accordance with the National Flood Insurance Act of 1968, as amended. 30 36 (q) LEASE. Upon the execution and delivery of this Lease, (i) the Tenant will have unconditionally accepted the Premises (provided that nothing contained herein shall be deemed a waiver by the Tenant of any right of action against persons with respect to title to and condition of the Premises on the Date of Lease other than the Landlord) and will have good and marketable title to a valid and subsisting leasehold interest in the Premises, subject only to Permitted Exceptions, (ii) no right of offset will exist with respect to any Rent or other sums payable under this Lease, and (iii) no Rent under this Lease will have been prepaid. (r) TITLE TO PROPERTIES. The Tenant has good and marketable title to all of its material assets reflected on the balance sheets in the submitted financial statements, except for such material assets as has been disposed of in the ordinary course of business, and all such material assets are free and clear of any lien, except as reflected in said submitted financial statements and/or notes thereto or as otherwise permitted by the provisions hereof or under the Operative Documents, and except for Permitted Exceptions. The Tenant has such trademarks, trademark rights, trade names, trade name rights, franchises, copyrights, patents, patent rights and licenses as to allow it to conduct its business as now operated, without known conflict with the rights of others. (s) DEFAULTS. To the best of Tenant's knowledge, the Tenant is not in material default under (and no event has occurred which with the lapse of time or notice or action by a third party could result in a default under), nor has Tenant received written notice of any event of default which has not been cured, under any instrument evidencing any debt or under any agreement relating thereto or any indenture, mortgage, deed of trust, security agreement, lease, franchise or other agreement or other instrument to which any such person is a party or by which any such person or any of its material assets is subject to or bound. (t) USE OF ADVANCE. No part of any Advance will be used directly or indirectly for the purpose of purchasing or carrying, or for payment in full or in part of debt that was incurred for the purposes of purchasing or carrying, any margin security as such term is defined in Section 207.2 of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R., Chapter II, Part 207). 18.20 TENANT'S WAIVER OF DEMAND FOR POSSESSION. Tenant waives any demand for possession of the Premises and any demand for payment of Base Rent and notice of intent to re-enter the Premises, or of intent to terminate this Lease, and waives any and every other notice or demand prescribed by any applicable statutes or laws. 18.21 FINANCIAL REPORTING. Tenant shall provide to Landlord: (1) annually, within ninety (90) days after the end of each of Tenant's fiscal years during the Term, annual audited financial statements (including balance sheet, income statements, and cash flow statements) of Tenant, (2) quarterly, within forty-five (45) days after the end of each of Tenant's fiscal quarters during the Term, quarterly unaudited financial statements (including balance sheet, income statements, and cash flow statements) of Tenant, and (3) as well as an officer's certificate delivered every reporting period stating that no Event of Default has occurred under the Lease in the form attached as Exhibit H. 18.22 REGULATION D COMPENSATION. For so long as the Landlord is required to maintain reserves against Eurocurrency Liabilities (or any other category of liabilities which include deposits by reference to which the LIBOR Rate is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of the Landlord to United States residents), and, as a result, the cost to the Landlord (or its funding office) of making or maintaining its Advances is increased, then the Landlord may require the Tenant to pay, contemporaneously with each payment of Base Rent, an additional amount at a rate per annum up to but not exceeding the excess of (i) (A) the applicable LIBOR Rate 31 37 divided by (B) one minus the Eurocurrency Reserve Requirements, over (ii) the applicable LIBOR Rate. In the event that the Landlord wishes to require payment of such additional amount, the Landlord (x) shall so notify the Tenant, in which case such additional Base Rent shall be payable to the Landlord at the place indicated in such notice with respect to each Borrowing Period commencing at least three Business Days after the giving of such notice and (y) shall furnish to the Tenant at least five Business Days prior to each date on which Base Rent is payable a certificate setting forth the amount to which it is then entitled under this Section 18.22 (which shall be consistent with it's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Tenant may reasonably request as to the computation set forth therein. ARTICLE 19 INDEMNIFICATION 19.1 TAX INDEMNITY. Notwithstanding anything in Article 6 to the contrary, Tenant shall protect and defend Landlord from and against all criminal prosecution regarding and shall indemnify and hold Landlord harmless from and against any and all losses, costs, liabilities or damages (including reasonable attorneys' fees and disbursements and court costs) arising by reason of: (a) Any and all U.S. Federal, state or local income taxes imposed upon Landlord in consequence of Landlord being treated as the owner or lessor of the Premises (or any part thereof) for such tax purposes; provided Landlord has fully complied with Section 18.2; (b) Any and all taxes imposed upon Tenant (except to the extent of Landlord's Taxes or to the extent that such taxes are imposed upon Tenant as a result of Landlord's failure to comply with its obligations under this Lease); (c) Any and all taxes required to be withheld from payments made by Tenant to a third party not related to or affiliated with Landlord; (d) Any and all Real Estate Taxes; (e) Any and all taxes owed by Landlord (other than Landlord Taxes) as a result of payment made by Tenant to Landlord pursuant to Tenant's indemnity obligations under this Section 19.1; and (f) Any and all costs, liabilities or damages (including reasonable attorneys' fees) incurred by Landlord in obtaining indemnification payments from Tenant under the provisions of this Section 19.1. Tenant's obligation to reimburse or indemnify Landlord for any taxes, governmental fees, penalties, interest or other supplemental tax charges under this Lease shall be reduced by the value of any related or offsetting tax benefits derived or realized by Landlord. Tenant's duty to indemnify Landlord under this Section 19.1 shall apply only to taxes arising during the Term (whether or not due and payable at the conclusion of the Term), but shall otherwise survive the expiration or earlier termination of this Lease. 19.2 ENVIRONMENTAL INDEMNITY. Tenant agrees to indemnify and hold Landlord harmless from and against, and to reimburse Landlord with respect to, any and all claims, demands, causes of action, losses, damages, liabilities, costs and expenses (including attorneys' fees and court costs), fines and/or penalties of any and every kind or character, known or unknown, fixed or contingent, asserted or potentially asserted against or incurred 32 38 by Landlord at any time and from time to time by reason of, in connection with or arising out of (A) the failure of Tenant to perform any obligation herein required to be performed by Tenant regarding Applicable Environmental Laws, (B) any violation of any Applicable Environmental Law by Tenant or with respect to the Premises or any disposal or other release by Tenant or with respect to the Premises of any hazardous substance, environmental contaminants or solid waste on or to the Premises, whether or not resulting in a violation of any Applicable Environmental Law, (C) any act, omission, event or circumstance by Tenant or with respect to the Premises which constitutes or has constituted violation of any Applicable Environmental Law with respect to the Premises, regardless of whether the act, omission, event or circumstance constituted a violation of any Applicable Environmental Law at the time of its existence or occurrence, and (D) except to the extent of Landlord's gross negligence or willful misconduct, any and all claims or proceedings (whether brought by private party or governmental agencies) for bodily injury, property damage, abatement or remediation, environmental damage or impairment or any other injury or damage resulting from or relating to any hazardous or toxic substance or contaminated material located upon or migrating into, from or through the Premises (whether or not the release of such materials was caused by Tenant, a subtenant, a prior owner of the Premises or any other Entity) which Landlord may incur. Tenant's duty to indemnify Landlord under this Section 19.2 shall survive the expiration or earlier termination of the Lease with respect to events occurring during or prior to the expiration of the Term or after the Term while Landlord has record title to and Tenant is occupying the Premises, but shall terminate as to events occurring wholly after Tenant is in default under the Lease and is no longer in possession of the Premises. 19.3 GENERAL INDEMNITY. Except to the extent of Landlord's gross negligence or willful misconduct, Tenant shall defend, indemnify, and hold Landlord harmless from and against any and all losses, costs, expenses, liabilities, claims, causes of action and damages of all kinds that may result to Landlord, including reasonable attorneys' fees and disbursements incurred by Landlord, arising because of any failure by Tenant to perform any of its obligations under this Lease or any of the documents executed by Tenant in connection with this Lease. Tenant's duty to indemnify Landlord under this Lease shall survive the expiration or earlier termination of this Lease. ARTICLE 20 COVENANTS OF LANDLORD 20.1 TITLE. In the event Tenant so requests in writing (and so long as either Tenant agrees to indemnify Landlord to Landlord's satisfaction from any liabilities or obligations in connection therewith, or Landlord does not incur any liabilities or obligations in connection therewith), Landlord shall execute all documents, instruments and agreements reasonably requested by Tenant in order to accomplish any of the following in the manner reasonably requested by Tenant and within the time parameters reasonably requested by Tenant: (1) remove exceptions to title to or affecting the Premises; (2) create exceptions to title (including, without limitation, easements and rights of way) to or affecting the Premises; or (3) modify any then-existing exception to title. Tenant shall promptly reimburse Landlord for, or at Landlord's request, pay directly in advance, all reasonable costs, expenses and other amounts incurred or required to be expended by Landlord in order to comply with Tenant's requests made in accordance with the preceding sentence, and the failure of Tenant to reimburse or pay any such amounts shall result in the suspension of Landlord's obligations under such sentence with respect to that particular request until the amounts required to be paid by Tenant under this sentence have been paid. 20.2 LAND USE. Except where requested by Tenant pursuant to this Section 20.2, Landlord shall not cause or give its written consent to any land use or zoning change affecting 33 39 the Premises or any changes of street grade. In the event Tenant so requests in writing (and so long as either Tenant agrees to indemnify Landlord to Landlord's satisfaction, from any liabilities or obligations in connection therewith, or Landlord does not incur any liabilities or obligations in connection therewith), Landlord shall execute all documents, instruments and agreements reasonably requested by Tenant in order to accomplish any of the following in the manner reasonably requested by Tenant and within the time parameters reasonably requested by Tenant: (1) cause a change in any land use restriction or law affecting the Premises; (2) cause a change in the zoning affecting the Premises; or (3) cause a change in the street grade with respect to any street in the vicinity of the Premises. Tenant shall promptly reimburse Landlord for, or at Landlord's request, pay directly in advance, all reasonable costs, expenses and other amounts incurred or required to be expended by Landlord in order to comply with Tenant's requests made in accordance with the preceding sentence, and the failure of Tenant to reimburse or pay any such amounts shall result in the suspension of Landlord's obligations under such sentence with respect to that particular request until the amounts required to be paid by Tenant under this sentence have been paid. 20.3 TRANSFER OF PROPERTY INTERESTS. Except as requested by Tenant pursuant to this Lease, Landlord shall not transfer to any third party any rights inuring to or benefits associated with the Premises (including, without limitation, zoning rights, development rights, air space rights, mineral, oil, gas or water rights). Nothing in this Section 20.3 shall limit Landlord's right to transfer Landlord's interest in this Lease to a third party or its rights to transfer the Premises, pursuant to Section 11.2; provided that as to a transfer under Section 11.2 any purchaser of Landlord's interest in the Premises shall be bound by the terms of this Lease, including without limitation the terms of this Section 20.3). 34 40 IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of the day and year first above written. TENANT: OCTEL COMMUNICATIONS CORPORATION, a Delaware Corporation By ______________________________ Name ______________________________ Its ______________________________ (Signatures continued on next page) 35 41 IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of the day and year first above written. TENANT: OCTEL COMMUNICATIONS CORPORATION, a Delaware Corporation By /s/ W. MICHAEL WEST ------------------------------ Name W. Michael West ------------------------------ Its President/CEO ------------------------------ (Signatures continued on next page) 36 42 LANDLORD: SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation By /s/ DAVID A. WARD -------------------------------- Name David W. Ward -------------------------------- Its Senior Vice President -------------------------------- Dated: ________________________, 1997 43 Exhibit A All that certain Real Property in the City of Milpitas, County of Santa Clara, State of California, described as follows: Being a portion of Parcel 1 as shown on that certain Parcel Map filed in Book 584 of maps at Pages 13 and 14, described as follows: Beginning at a point on the Southwesterly right-of-way line of Murphy Ranch Road and the Northeasterly corner of said Parcel 1; Thence along said right-of-way line and the Northeasterly line of said Parcel 1 the following two courses: South 24 degrees 05' 11" East 153.18 feet to the beginning of a curve to the left; Along said curve having a radius of 830.00 feet through a central angle of 15 degrees 39' 34" an arc distance of 226.84 feet; Thence South 52 degrees 22' 26" West 678.21 feet to the Southwesterly line of said Parcel 1; Thence along the Southwesterly and Northwesterly lines of said Parcel 1 the following five courses: North 41 degrees 07' 49" West 406.52 feet to the beginning of a curve to the right; Along said curve having a radius of 620.00 feet through a central angle of 9 degrees 13' 15" an arc distance of 99.78 feet; North 65 degrees 54' 49" East 90.00 feet; North 24 degrees 05' 11" West 50.00 feet; and North 65 degrees 54' 49" East 679.17 feet to the Point of Beginning. 44 Exhibit B CLOSING COSTS AND FEES TO BE INCLUDED IN INITIAL ADVANCE The following items shall be included in the definition of the Initial Advance under Section 2.10 of the Lease: See Title Company Closing Statement attached hereto. 45 [LOGO] CHICAGO TITLE COMPANY ESTIMATED BUYER'S/BORROWER'S SETTLEMENT STATEMENT ESCROW NUMBER: 02970-000748780-001 ORDER NUMBER: 02970-000748780 CLOSING DATE: / / CLOSER: Sharman McKenna BUYER: Octel Communications SELLER: Peery Private Investment Company-WP, LLP Peery Public Investment Compnay-WP, LLP John Arrillaga, Trustee PROPERTY: Undeveloped Land, Milpitas, California CHARGE BUYER CREDIT BUYER Sales Price $5,019,492.00 $ Loan Charges To Attorney fees to Graham & James 19,850.00 Costs to Graham & James 1,010.80 Appraisal Fee To Cushman & Wakefield 4,500.00 Alta Lender title insurance 100.00 Alta Leasehold Owners 4,620.00 Endorsements 103.7,110.1,100.9 225.00 Endorsement 116.7 557.50 Recharacterization endorsement 1,155.00 Endorsement 115 Mod 577.50 Settlement or Closing Fee 1,350.00 Alta Owners policy 5,775.00 Document prep 50.00 Preliminary Change of Ownership 20.00 Recording Fees 150.00 City/County Tax/Stamps 5,522.00 Octel Acquisition costs 222,772.20 Funds Due From Buyer At Closing 5,287,747.00 ------------- ------------- TOTALS $5,287,747.00 $5,287,747.00 - -------------------------------------- ------------------------------------- Octel Communications 46 Exhibit C PERMITTED TITLE EXCEPTIONS 1. Taxes for the fiscal year 1997-98, a lien not yet payable. 2. General and Special Taxes and Assessments, if any, for the fiscal year 1996-97. Assessment No.: 086-01-041 Code No.: 12-012 First Installment: $523,060.13 Paid (Includes public improvement of $51,879.37) (PI 85K) Second Installment: $523,060.13 Due and payable (Includes public improvement of $51,879.37) (PI 85K) Assessed Valuation of Personal Property: NONE Homeowners Exemption: NONE 3. Diagram Assessment collected with County Taxes under Act of 1915 as follows: Designation: Assessment No.: 8A-2A Assessment Code 85K Assessment District: Milpitas Business Park Local Imp. Dist. #12 Remaining Balance of Principal: $289,132.66 Remaining Balance of Interest: $118,799.99 The above amount of Principal and Interest to be collected with taxes for the tax year. Said matter affects this and other property. 4. The Lien of Supplemental Taxes, if any, assessed pursuant to the provisions of Chapter 3.5, (commencing with Section 75) of the Revenue and Taxation Code of the State of California. 5. An easement affecting the portion of said land and for the purposes stated herein, and incidental purposes. In Favor Of: Pacific Gas and Electric Company, a California corporation For: Installation and maintenance of underground gas and pipe lines, and for incidental purposes 47 Recorded: June 23, 1944 in Book 1200 at Page 477 Official Records H An Agreement, affecting said land, for the purposes, stated herein, upon the terms, covenants and conditions referred to therein, between the parties named herein For: Relocation Agreement of non-exclusive easement Dated: None Shown Executed By: John Arrillaga et al Recorded: September 4, 1986 in Book J832 at Page 1353 of Official Records Affects: As follows: I A strip of land of the uniform width of 15 feet extending from the Northwesterly boundary line of said lands Southwesterly to the general Northeasterly boundary line of the parcel of land conveyed by said Deed dated September 4, 1985 and lying 7.5 feet on each side of the line which begins at a point outside the boundary lines of said lands and runs thence, 1) South 24 deg 06' East 394.1 feet; thence 2) South 25 deg 57 1/2' West 844.1 feet to a point within said lands; thence parallel with the Northwesterly boundary line of said lands 3) South 65 deg 55' West 319.9 feet; thence 4) South 67 deg 41' West 322.5 feet to a point distant 47.5 feet Southeasterly from (measured at a right angle to) said Northwesterly boundary line; thence parallel with said Northwesterly boundary line 5) South 65 deg 55' West 1,784.3 feet; thence 6) South 60 deg 22' West 140.0 feet to a point distant 61.0 feet Southeasterly from (measured at a right angle to) said Northwesterly boundary line; thence parallel with said Northwesterly boundary line 7) South 65 deg 55' West approximately 120 feet to a point in the Northeasterly boundary line of the parcel of land conveyed by said Deed dated September 4, 1985; said point of beginning bears North 66 deg 08' East 4.3 feet distant from the found 1 1/2 inch iron pipe with a combination tag stamped RCE 14705 and RCE 14900 accepted as marking the point of intersection of the Southeasterly boundary line of State Route 237 as shown upon the Parcel Map filed for Record in Book 291 of Maps at Page 37, Santa Clara County Records, with the Westerly line of Parcel 2 as shown 48 upon said Parcel Map. X An Agreement, affecting said land, for the purposes, stated herein, upon the terms, covenants and conditions referred to therein, between the parties named herein For: Relocation Dated: September 1, 1994 Executed by: John Arrillaga, as trustee of the trust created July 20, 1977 (John Arrillaga Separate Trust), as amended, and Richard T. Peery, as trustee of the trust created July 20, 1977 (Richard T. Peery Separate Property Trust), as amended Recorded: December 22, 1994 in Book N709 at Page 1840 of Official Records Affects: As follows: AA A portion of Parcel 1 as shown on the Parcel Map filed for record in Book 584 of Maps at page 13, Santa Clara County Records, as follows: A strip of land of the uniform width of 15 feet, extending from the easterly boundary line of said Parcel 1, westerly to the westerly boundary line of said Parcel 1, and lying 7.5 feet on each side of the line described as follows: Commencing at the found 2" brass disc accepted as marking the northwesterly terminus of a course which has a bearing of North 24[degrees] 05' 11" West and a length of 153.18 feet in the centerline of Magnolia Drive (now know as Murphy Ranch Road) as shown on said parcel map, and running thence (A) south 8[degrees]03'38" west 65.80 feet; to a point in the easterly boundary line of said Parcel 1, being the True Point of Beginning of said line; thence leaving said easterly boundary line (1) south 65[degrees]48'00" west 428.47 feet; thence (2) south 59[degrees]16'43" west 336.63 feet to a point in the westerly boundary line of said Parcel 1. 6. An Agreement, affecting said land, for the purposes, stated herein, upon the terms, covenants and conditions referred to therein, between the parties named herein For: Subdivision Improvement Agreement Dated: July 19, 1983 Executed by: City of Milpitas, a Municipal Corporation, The Redevelopment Agency of the City of Milpitas, and John Arrillaga, Trustee, or his successor trustee UTA dated July 20, 1977 (John Arrillaga Separate Property Trust) as amended and Richard T. Peery, Trustee, or his successor trustee UTA dated July 20, 1977 (Richard T. Peery, Trustee, or his successor trustee UTA dated 49 July 20, 1977 (Richard T. Peary Separate Property Trust) as amended Recorded: October 14, 1983 in Book H985 at Page 214 of Official Records Y 7. The terms, covenants and provisions of Redevelopment Project No. 1, as amended Milpitas Redevelopment Agency executed by the City of Milpitas, recorded November 16, 1984 in Book J043 Page 665, Official Records. F 8. An easement affecting the portion of said land and for the purposes stated herein, and incidental purposes, In Favor Of: City of Milpitas, A Municipal Corporation For: Public Service facilities, including poles, underground wires, conduits, storm sewers, sanitary sewers, water mains, public utilities and appurtenances Recorded: September 30, 1986 in Book J863 at Page 867 Official Records Affects: The Northeasterly 10 feet of Said Land J 9. An easement affecting the portion of said land and for the purposes stated herein, and incidental purposes, In Favor Of: The City of Milpitas For: Ingress and Egress purposes Recorded: March 18, 1987 in Book K075 at Page 430 Official Records. Affects: A portion of Said Land AF 10. An easement affecting the portion of said land and for the purposes stated herein, and incidental purposes, In Favor Of: City of San Jose, a municipal corporation For: underground public utilities and public services Recorded: July 26, 1996 in Book P435 at Page 0738 Official Records Affects: as follows: Being a portion of Parcel 1, as shown on that certain Parcel Map filed for record in the Office of the Recorder of the County of Santa Clara, State of California on February 26, 1995, in Book 584 of Maps, pages 13 and 14 and as approved by Resolution No. 6445 Lot Line Adjustment recorded June 28, 1995, in Book N898 Official Records at page 1926 and being more 50 particularly described as follows: beginning at the most northerly corner of Parcel 1 as shown on said Parcel Map, said corner being on the southwesterly line of Murphy Ranch Road (formerly Magnolia Drive) and from which the intersection of said Murphy Ranch Road and Bellew Drive as shown on said Parcel Map bears N 65 deg. 54' 49" E, 9.144 meters; thence proceeding S 65 deg. 54' 49" W along the northwesterly line of said parcel 207.011 meters to the Lands of the City of Milpitas; thence along the boundary of the Lands of the City of Milpitas and said parcel S 24 deg. 05' 11" E, 7.50 meters; thence leaving said boundaries N 65 deg. 54' 49" E, 207.011 meters to the southwesterly line of Murphy Ranch Road; thence along said southwesterly line N 24 deg. 05' 11" W, 7.50 meters to the Point of Beginning. The bearing N 65 deg. 54' 49" E of the northwesterly line of Parcel 1 as shown on the Parcel Map filed for record in the office of the Recorder of Santa Clara County in Book 584 of Maps, pages 13 and 14, was taken as the basis of bearings for this description. AG Covenants, Conditions and Restrictions in the above recorded instrument. AB 11. Any Rights, Interests or Claims which may exist or arise by reason of the following facts shown by a survey made by Kier & Wright Civil Engineers & Surveyors, Inc., dated August 8, 1996, Job No. 95050-1 and inspections of said land: None 51 Exhibit D (MEMORANDUM OF LEASE OF THE LAND) RECORDING REQUESTED BY, AND WHEN RECORDED, RETURN TO: GRAHAM & JAMES LLP One Maritime Plaza, Suite 300 San Francisco, California 94111 Attention: Bruce W. Hyman, Esq. MEMORANDUM OF LEASE OF THE LAND THIS MEMORANDUM OF LEASE OF THE LAND ("Memorandum of Lease") is executed as of February , 1997, by and between SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation ("Landlord"), and OCTEL COMMUNICATIONS CORPORATION, a Delaware corporation ("Tenant"). RECITALS WHEREAS, Landlord and Tenant have executed that certain lease ("Lease") dated as of February , 1997, covering a leasehold interest in certain land located on the real property located in the City of Milpitas, Santa Clara County, California as more particularly described in Schedule 1 attached hereto and incorporated herein by this reference ("Land") and the improvements which may come to be located on said Land (the Land and improvements are referred to herein as the "Premises"); and WHEREAS, Landlord and Tenant desire to record notice of the Lease in the real estate records of Santa Clara County, California: NOW, THEREFORE, in consideration of the foregoing, Landlord and Tenant hereby declare as follows: 1. Demise. Landlord hereby leases the Premises to Tenant and Tenant hereby leases the Premises from Landlord, subject to the terms, covenants and conditions contained in the Lease. 2. Expiration Date. The term of the Lease ("Term") shall commence with respect to the Premises on the date hereof and shall expire on June 20, 1997. 3. Option to Purchase. Tenant has an option to purchase the Premises, as more particularly described in the Lease, at any time during the Term (including any extension thereof). 4. Restrictions on Encumbrances. Landlord is prohibited from recording against the Premises liens (including, without limitation, deeds of trust), encumbrances, and other matters that would constitute exceptions to title, and from amending or modifying any of the foregoing that may exist now or during the Term, as more particularly described in the Lease. 1 52 5. Restrictions on Transfers by Landlord. Subject to certain exceptions, Landlord may transfer its interest in the Premises to a third party subject to the restrictions which are set forth with more particularity in the Lease. 6. Counterparts. This Memorandum of Lease may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. IN WITNESS WHEREOF, Landlord and Tenant have executed this Memorandum of Lease as of the date and year first written above. TENANT: OCTEL COMMUNICATIONS CORPORATION, a Delaware Corporation By ______________________________ Name ______________________________ Its ______________________________ (Signatures continued on next page) 2 53 LANDLORD: SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation By ________________________________ Name ________________________________ Its ________________________________ 3 54 Schedule 1 to Exhibit D [to follow] 55 Exhibit E LIST OF LITIGATION Theis Research, Inc. In April 1992, Tenant filed suit in the United States District Court in Northern California, against Theis Research, Inc. ("Theis") for declaratory judgment that Tenant's products do not infringe three patents of Theis and that those patents are invalid. In November 1992, Theis filed a counterclaim against Tenant alleging infringement of seven of Theis' patents. Subsequently, Theis dismissed with prejudice the claims as to all but four of the patents, and its claims as to one of the remaining four patents were dismissed on summary judgment. During the first quarter of fiscal 1995, the Tenant engaged in a jury trial regarding infringement of the three remaining patents and the defense of patent invalidity. In October 1994, the jury returned a verdict finding, among other things, that Tenant was correct in its claim that the three patents at issue were invalid. In August 1995, the Court issued its decision holding that the patents are unenforceable. The Court entered final judgment in the case in January 1996, declaring Tenant a "prevailing party" entitled to recover its substantial costs in connection with the lawsuit. In November 1996 the Court overturned the jury's verdict that Tenant infringed one of the patents held invalid by the jury and that a fourth patent that the Court had found Tenant not to have infringed was also invalid. Theis filed a notice of appeal in December 1996 and Tenant thereafter filed a notice of cross-appeal on certain issues. Gilbarco, Inc. In January 1994, Gilbarco, Inc. ("Gilbarco") filed suit in the U.S. District Court for the District of Colorado against Tenant and one of Tenant's telephone company customers, U.S. West, alleging infringement of a Gilbarco patent and seeking unspecified damages. Tenant filed an answer to the complaint denying any infringement of the patent and raising several affirmative defenses, including an assertion that the patent is invalid and unenforceable. In September 1994, the claims asserted against Tenant were transferred to the U.S. District Court for the Northern District of California and those claims asserted against U.S. West were stayed and administratively closed pending the outcome of the California action. Both parties filed motions for summary judgment on a variety of issues, including a motion by Tenant for summary judgment declaring the Gilbarco patent unenforceable due to inequitable conduct during the procurement of the patent. On February 12, 1996, the Court granted Tenant's motion for summary judgment (and denied Gilbarco's counter-motion) and declared the patent unenforceable as a matter of law. The Court subsequently entered judgment in favor of Tenant and against Gilbarco and awarded Tenant its costs in connection with the lawsuit. Gilbarco's subsequently filed motion for reconsideration of the Court's ruling was denied and Gilbarco thereafter filed a notice of appeal. Briefing of the appeal has been completed and oral argument was held on February 5, 1997. Tenant believes, based upon information currently available, including consultations with patent counsel, that Tenant is not infringing any valid patents of Theis or Gilbarco. Tenant will vigorously defend the patent infringement claims and any related claims for compensatory damages. While litigation is inherently uncertain, Tenant believes that the ultimate resolution of these matters will not have a material adverse effect on Tenant's financial position. 1 56 Tenant is currently evaluating several additional claims of third parties. Based in part on industry practice and in part on discussion with certain of such third parties, Tenant believes that in most cases any necessary licenses or rights could be obtained on commercially reasonable terms. However, no assurance can be given that future licenses will be obtained on acceptable terms, that costly litigation will not occur or that Tenant will receive a favorable decision in any litigation that may ensue. The failure to obtain necessary licenses or other rights, or litigation arising out of such claims, could have a material adverse affect on Tenant's operations. 2 57 Exhibit F LIST OF GOVERNMENTAL APPROVALS None 58 Exhibit G LIST OF ENVIRONMENTAL LAWS None. 59 Exhibit H FORM OF OFFICERS' CERTIFICATE The undersigned, ____________________ of OCTEL COMMUNICATIONS CORPORATION, a Delaware corporation hereby certifies that as of the date hereof the lease dated February , 1997 by and between SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation, as Landlord and OCTEL COMMUNICATIONS CORPORATION, a Delaware corporation, as Tenant is in full force and effect, and Tenant is not in default thereunder. Date: ____________________ _________________________ EX-10.20 3 WAIVER & RELEASE AGREEMENT DATED 2-14-97 1 EXHIBIT 10.20 WHEN RECORDED, RETURN TO: Peery/Arrillaga 2560 Mission College Blvd., Suite 101 Santa Clara, CA 95054 WAIVER AND RELEASE AGREEMENT THIS WAIVER AND RELEASE AGREEMENT ("Agreement") dated as of February 14, 1997 is made and entered into this ____ day of February, 1997, by and among (i) Octel Communications Corporation, a Delaware corporation (hereinafter referred to as "Octel"), (ii) Sumitomo Bank Leasing and Finance, Inc., a Delaware corporation ("SBLF" or "Buyer"), (iii) The Peery Private Investment Company-WP, L.P., a California limited partnership, as to an undivided 25% interest, The Peery Public Investment Company-WP, L.P., a California limited partnership, as to an undivided 25% interest and John Arrillaga, as Trustee, or Successor Trustee under Trust Agreement dated July 20, 1977 (the Arrillaga Family Trust) and as amended, as to an undivided 50% interest (hereinafter collectively referred to as "Peery/Arrillaga"), and (iv) Richard T. Peery, individually, and John Arrillaga, individually. 2 R E C I T A L S This Agreement is made with reference to the following facts and intentions of the parties: A. A Purchase and Sale Agreement dated February 14, 1997 has been entered into on February ____, 1997, by and between Octel and Peery/Arrillaga for the purchase of certain property located in the City of Milpitas, County of Santa Clara, State of California known as a portion of APN# 086-01-041 and shown on the legal description attached hereto as Exhibit I (hereinafter referred to as the "Property"), the terms and conditions of which are more particularly set forth in the Purchase and Sale Agreement. B. As a condition to Buyer's obligations under the Purchase and Sale Agreement, Buyer has agreed to and is obligated to execute and record this Agreement at the close of escrow directly following the recording of the grant deed from Peery/Arrillaga to Buyer and prior to the recording of any other matters or liens that would effect title in order to set forth the agreement of the parties herein. C. Octel has assigned to SBLF its right to buy and acquire title to the Property pursuant to a written assignment and pursuant to the terms and conditions of the Purchase and Sale Agreement, and Octel has entered into an agreement with SBLF giving Octel the right to occupy the Property following close of escrow (i.e. the date title to the Property is conveyed to SBLF and this Agreement is recorded). One of the provisions of such assignment is that 2 3 SBLF is to be bound by the terms and conditions of the Purchase and Sale Agreement and by this Waiver and Release Agreement which concerns Hazardous Materials, but excludes SBLF from the indemnification agreement concerning Hazardous Materials as stated in Paragraph 3 herein. D. This Agreement is intended to provide a waiver and release and indemnity (subject to certain restrictions) for the benefit of Peery/Arrillaga, Richard T. Peery, individually, and John Arrillaga, individually, and the other Waiver Parties (defined below) concerning Hazardous Materials, etc. A G R E E M E N T NOW, THEREFORE, as a material part of the consideration for the executing of the Purchase and Sale Agreement set forth in Paragraph A above and for other valuable consideration receipt of which is hereby acknowledged, the parties agree to the following provisions hereinafter set forth as follows: 14. Waiver and Release. As of the close of escrow, except for the breach of any express representation in the Purchase and Sale Agreement, each of Octel and SBLF, on behalf of itself, its employees, agents, contractors, consultants, representatives, assigns and successors in interest (individually, a "Waiving Person", and collectively "Waiving Persons") hereby waives any right to sue the Waiver Party or the Waiver Parties (hereinafter defined) and waives and releases any and all rights or claims (by 3 4 way of contribution, indemnity or otherwise) related to or incurred in connection with any release of Hazardous Materials prior to or after the close of escrow, or the investigation, clean-up, removal or treatment of Hazardous Materials in, on or under any and/or all of the parcels of the Property described in Exhibit I attached hereto, and/or in groundwater which is now or hereafter present (or which now or hereafter passes) thereunder, which any of the above named parties may otherwise have against any of the following with respect to their interest in the Property described Exhibit I: (i) Peery/Arrillaga, and Peery/Arrillaga's heirs, employees, agents or any other person acting on or in behalf of Peery/Arrillaga, or Richard T. Peery and/or John Arrillaga individually; (ii) Roger Fields, as Trustee of the Peery Charitable Remainder Trust-WP for Private Charities dated December 27, 1996 and the Peery Charitable Remainder Trust-WP for Private Charities; (iii) Roger Fields, as Trustee of the Peery Charitable Remainder Trust-WP for Public Charities dated December 27, 1996 and the Peery Charitable Remainder Trust-WP for Public Charities; (iv) Richard T. Peery, as Trustee of the Richard T. Peery Separate Property Trust dated July 20, 1977, as amended and the Richard T. Peery Separate Property Trust; or (v) any mortgagee, or deed of trust beneficiary of Peery/Arrillaga in title to or ownership or possession of the Property or any part thereof (each individually, a "Waiver Party"; collectively, "Waiver Parties"); provided, however, that nothing set forth in this Waiver or any other agreement executed in 4 5 connection with the sale of the Property to SBLF shall waive any claim any Waiving Person may now or hereafter have against any other person (other than the Waiver Parties). This waiver and release extends to all claims, whether or not known or suspected by Octel or SBLF to exist at the time of execution of this Agreement, which if known by Octel or SBLF would materially affect the giving of this waiver and release, and is an express waiver of the provisions of California Civil Code Section 1542 by Octel and SBLF. Such waiver and release shall apply to all costs, whether such costs are incurred in connection with any action required to be undertaken by a governmental entity, nongovernmental entity or by any agreement to which Octel or SBLF is a party, or by any law or regulation, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, Hazardous Materials Transportation Act, Resource Conservation and Recovery Act and California Health and Safety Code, or whether such costs are incurred in any other manner. As a material part of the consideration for the Waiver Party selling the Property to SBLF, Octel and SBLF hereby agree not to sue or file or assert any claims against any or all Waiver Parties for recovery of any costs for which Octel or SBLF has waived its right of recovery under the preceding paragraph. Within ten (10) business days following any written request by Peery/Arrillaga or its successors in interest, Octel and/or SBLF shall execute and deliver to any and all Waiver Party(ies) 5 6 designated by Peery/Arrillaga or its successors in interest written confirmation of this waiver and release. It is the intent of the parties that this Agreement be binding on and enforceable against each and every one of the assigns or successors in interest of Octel and SBLF, except as otherwise specifically provided in Paragraph 3 hereof. 15. Buyer's Covenant Not to Sue. The parties hereby acknowledge and agree that, in consideration of the Purchase and Sale Agreement, Octel and SBLF each intends and agrees not to involve the Waiver Party or the Waiver Parties in any legal, arbitration, administrative or other proceedings arising out of or in connection with Hazardous Materials on, in or under the Property, prior to, or as of the close of escrow, or thereafter, except for the breach of any express representation by Peery/Arrillaga in the Purchase and Sale Agreement. Therefore, subject to the terms and conditions of this Agreement, upon consummation of the transaction contemplated by the Purchase and Sale Agreement, Octel and SBLF, on behalf of itself and its assigns and successors in interest, hereby covenant and agree, with respect to any claim, duty, obligation or cause of action of any kind, whether presently known or unknown, suspected or unsuspected, arising out of or incurred in connection with any investigation, clean-up, removal or treatment of Hazardous Materials in, on or under any and/or all of the Property ("Claim") not to bring any legal, arbitration, administrative or other proceeding with respect 6 7 to, or any grievance or complaint before any administrative or governmental body with jurisdiction over any Claim, except for the breach of any express representation by Peery/Arrillaga in the Purchase and Sale Agreement against (A) the Waiver Party or the Waiver Parties, their employees, agents, contractors, consultants, representatives, directors, officers, employees, assigns and successors in interest (but not including any other person or other entity who was a tenant, subtenant or owner in fee prior to the close of escrow or any other third party or other entity that may have indirectly or directly caused contamination of, or on, in or under, the Property soil or groundwater); and (B) any mortgagee or deed of trust beneficiary of any of the foregoing persons with respect to the Property. The foregoing obligations of Octel and SBLF shall be applicable upon the close of escrow. 3. Indemnity Agreement. Any owner of record of fee title to the Property, by acquiring title to the Property, hereby agrees, and is bound, to indemnify, hold harmless, defend (with counsel reasonably acceptable to the Waiver Party and/or the Waiver Parties) from and against any and all claims, demands, losses, damages, liabilities, fines, penalties, charges, administrative and judicial proceedings, judgments and all costs, related to any Hazardous Materials related claims, liabilities, demands or requests of any type whatsoever, related to or associated with the Property from third parties or governmental agencies that may arise now or at any time in the future. Notwithstanding the foregoing or 7 8 anything else contained in this Waiver and Release Agreement or in the Purchase and Sale Agreement, the following shall restrict and limit the obligations stated in the first sentence of this Paragraph 3 (which obligations are referred to herein as the "Indemnity Agreement"): A. The Indemnity Agreement shall not be binding upon, or create any liability on the part of, any of the following persons or entities, who shall not in any way whatsoever be liable for any of the obligations created by the Indemnity Agreement as stated in Paragraph 3 (the "Exempt Entities"). Notwithstanding anything to the contrary above in Paragraph 3 ("Indemnity Agreement"), the only parties exempt from indemnifying the Waiver Parties as stated in said Paragraph 3 are: (i) SBLF, its shareholders (including The Sumitomo Bank, Limited) and its successors in interest; (ii) any owner of record title to the Property who concurrently leases the Property to Octel on a basis that results in substantially the same federal tax and financial accounting treatment as the relationship between SBLF and Octel immediately following close of escrow; (iii) any lender who acquires a security interest in the Property by means of a mortgage or deed of trust; and (iv) any party (and any successor in interest to such party by purchase or otherwise), excluding Octel or its successors in interest, who acquires title to the Property as a result of the foreclosure of a security interest held by any of the parties described in clause (i), (ii) or (iii) above. 8 9 B. Each of the Waiver Parties, on behalf of itself, its heirs, successors, and assigns, hereby agrees not to sue or file or serve any claims against any Exempt Party with respect to any existing or potential Claim concerning Hazardous Materials on the Property (as the term "Claim" is defined in Paragraph 2 hereof); provided, however, that in any action brought by an Exempt Party against a Waiving Party, a Waiving Party may assert as an affirmative defense any breach or violation of this Agreement by any Exempt Party. 4. Attorneys' Fees. In the event any suit or action is brought to enforce this Agreement, the prevailing party or parties will be entitled to receive from the losing party or parties all costs of proceedings and reasonable attorneys' fees in an amount fixed by the court. 5. Notices. Any notices to be given shall be addressed to the individuals at the address given below, shall be personally 9 10 delivered or mailed by certified mail, return receipt requested and shall be deemed given to said parties upon personal delivery or upon the date for receipt or refusal set forth in the return receipt. Octel Communications Corporation Attn: John Igoe 1001 Murphy Ranch Road Milpitas, CA 95035 Sumitomo Bank Leasing and Finance, Inc. Attn: Chief Credit Officer 277 Park Avenue New York, NY 10172 Richard T. Peery John Arrillaga 2560 Mission College Blvd., Suite 101 Santa Clara, CA 95054 With copy to: Richard T. Peery 2200 Cowper Street Palo Alto, CA 94301 Any change in address shall not be effective until the other party is notified in writing of such change pursuant to the terms of this Paragraph 5. 6. The provisions of this Agreement shall run with the land described in Exhibit I attached hereto and shall inure to the benefit of and be binding upon the respective heirs, successors in interest and assigns of the parties hereto. 10 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Buyer Peery/Arrillaga SUMITOMO BANK LEASING AND FINANCE, INC. THE ARRILLAGA FAMILY TRUST a Delaware corporation By___________________________ By__________________________________ John Arrillaga, Trustee Its__________________________ of the Arrillaga Family Trust dated 7/20/77, as amended Octel PEERY PRIVATE INVESTMENT COMPANY-WP, L.P., a California OCTEL COMMUNICATIONS limited partnership CORPORATION, a Delaware corporation By__________________________________ Richard T. Peery, Trustee By___________________________ of the Richard T. Peery Separate Property Trust Its__________________________ dated 7/20/77, as amended, as its General Partner PEERY PUBLIC INVESTMENT COMPANY-WP, L.P., a California limited partnership By__________________________________ Richard T. Peery, Trustee of the Richard T. Peery Separate Property Trust dated 7/20/77, as amended, as its General Partner *ALL SIGNATURES TO BE NOTARIZED. 11 12 EXHIBIT I TO WAIVER AND RELEASE AGREEMENT LEGAL DESCRIPTION [To be determined; approximately 7.58 acres] 12 EX-11.0 4 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 OCTEL COMMUNICATIONS CORPORATION STATEMENT RE COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
Three Months Ended Nine Months Ended --------------------- ---------------------- March 31, March 31, March 31, March 31, 1997 1996 1997 1996 -------- ---------- --------- --------- PRIMARY NET INCOME PER SHARE Net income ......................... $ 10,628 $ 12,246 $ 31,755 $ 30,577 ======== ======== ======== ======== Weighted average shares outstanding ...................... 51,920 49,565 51,835 48,994 Dilutive effect of outstanding stock options (as determined by the application of the treasury stock method) .......................... 2,059 3,963 3,136 4,036 Other .............................. 176 (14) (150) (18) -------- -------- -------- -------- 54,155 53,514 54,821 53,012 ======== ======== ======== ======== Primary net income per share ....... $ 0.20 $ 0.23 $ 0.58 $ 0.58 ======== ======== ======== ======== FULLY DILUTED NET INCOME PER SHARE* Net income ......................... $ 10,628 $ 12,246 $ 31,755 $ 30,577 ======== ======== ======== ======== Weighted average shares outstanding ...................... 51,920 49,565 51,835 48,994 Dilutive effect of outstanding stock options (as determined by the application of the treasury stock method) .......................... 2,059 5,199 3,100 5,519 Other .............................. 176 75 (150) 66 -------- -------- -------- -------- 54,155 54,839 54,785 54,579 ======== ======== ======== ======== Fully diluted net income per share ............................ $ 0.20 $ 0.22 $ 0.58 $ 0.56 ======== ======== ======== ========
* This computation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although not required for all periods under APB Opinion No. 15 because it results in dilution of less than three percent. 2 EX-27.0 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-1997 JAN-01-1997 MAR-31-1997 42,668 47,658 170,832 4,198 36,325 314,690 259,705 113,086 495,846 95,799 0 248,564 0 0 151,235 495,846 98,224 150,185 32,470 64,186 71,400 0 (889) 15,778 5,150 10,628 0 0 0 10,628 0.20 0.20
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