-----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, Qtn6eb93ci8bRUhRvLfjOrqN476AaRSa7Cj5Rm53t7hAcdnBJZlbMaixjvnvMq61 ZbwX8vH9RRjXFFwfpVSPiw== 0000891618-97-003915.txt : 19970930 0000891618-97-003915.hdr.sgml : 19970930 ACCESSION NUMBER: 0000891618-97-003915 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUSPEX SYSTEMS INC CENTRAL INDEX KEY: 0000860749 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 930963660 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21432 FILM NUMBER: 97686788 BUSINESS ADDRESS: STREET 1: 5200 GREAT AMERICA PKWY CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4089862000 MAIL ADDRESS: STREET 1: 5200 GREAT AMERICAN PKWY CITY: SANTA CLARA STATE: CA ZIP: 95054 10-K 1 FORM 10-K FOR PERIOD ENDING JUNE 30, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997 [ ] 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: 0-21432 AUSPEX SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 93-0963760 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5200 Great America Parkway, Santa Clara, California 95054 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 986-2000/Web Site (www.Auspex.com) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value Common Share Purchase Rights (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES [ ] NO [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $223,846,788 as of September 10, 1997, based upon the closing sale price on The Nasdaq National Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% of more of the outstanding Common Stock have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes. The number of shares of Registrant's Common Stock outstanding as of September 10, 1997 was 25,067,084. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the definitive proxy statement for the Annual Meeting of Stockholders scheduled to be held on November 20, 1997. - -------------------------------------------------------------------------------- 1 2 TABLE OF CONTENTS
PAGE ---- PART I ....................................................................... 4 ITEM 1. BUSINESS.................................................... 4 The Company................................................. 4 Products.................................................... 5 Markets and Customers....................................... 7 Distribution................................................ 7 Customer Service and Support................................ 8 Manufacturing............................................... 9 Research and Development.................................... 9 Competition................................................. 10 Intellectual Property and Licenses.......................... 11 Employees................................................... 11 Executive Officers of the Company........................... 12 ITEM 2. PROPERTIES.................................................. 13 ITEM 3. LEGAL PROCEEDINGS........................................... 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 14 PART II ...................................................................... 15 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................. 15 ITEM 6. SELECTED FINANCIAL DATA..................................... 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 16 Results of Operations....................................... 16 Revenues.................................................... 17 Gross Margin................................................ 18 Operating Expenses.......................................... 18 Other Income ............................................... 19 Provision for Income Taxes.................................. 19 Quarterly Results of Operations............................. 19 Factors That May Affect Future Results...................... 21 Liquidity and Capital Resources............................. 23
2 3 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 24 PART III ...................................................................... 25 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 25 ITEM 11. EXECUTIVE COMPENSATION..................................... 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 25 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 25 PART IV ...................................................................... 26 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ....... 26 ON FORM 8-K................................................ 26 (A) 1. FINANCIAL STATEMENTS................................... 26 2. FINANCIAL STATEMENT SCHEDULES.......................... 26 3. EXHIBITS............................................... 27 (B) REPORTS ON FORM 8-K........................................ 29 SIGNATURES...................................................................... 30 POWER OF ATTORNEY............................................................... 30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS........................................ F-1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS SUPPLEMENTAL SCHEDULES.......................................................... S-1
3 4 INTRODUCTORY STATEMENT References made in this Annual Report on Form 10-K to "Auspex," the "Company" or the "Registrant" refer to Auspex Systems, Inc. and its wholly owned subsidiaries. AUSPEX, NS 5000, FUNCTIONAL MULTI-PROCESSING, FMP, FMK, FUNCTIONAL MULTI-PROCESSOR, FUNCTIONAL MULTI-PROCESSOR, and the Auspex logo design are registered trademarks of the Company. FUNCTIONAL MULTIPROCESSING KERNEL, FUNCTIONAL MULTIPROCESSING, NETSERVER, NS 7000, NS 6000, NS 5500, NS 3000, DataGuard, ServerGuard, DriveGuard and FastBackup are trademarks of the Company. PART I ITEM 1. BUSINESS THE COMPANY Auspex develops, manufactures, distributes and supports a line of UNIX multi-protocol (NFS(1), FTP(2)) network file/data servers, known as "NetServers," that enhance the performance of large, multivendor client/server networks. As client/server computing has become increasingly widespread, the inherent limitations of data servers based upon general-purpose computer architectures have come to be recognized as a serious impediment to overall network performance and availability. The network performance limitations which the NetServer was designed to overcome are the direct result of applying traditional, general purpose computer servers to the ever increasing challenge of storing, managing and delivering network data. These performance limitations have become more acute as the volume of network data has increased from the downsizing and offloading of mainframe data, the consolidation of local area network data and the emergence of network data-intensive applications such as the Internet. As the amount of data and users on a network increase, data servers based on conventional workstation or minicomputer architectures must support considerably more file/data, network and disk traffic than they were originally designed to handle. The result is a serious deterioration in network performance. The traditional solution has been to subdivide the network into multiple subnetworks, each with its own data server, duplicate data files and associated administrative costs. In contrast to conventional architectures, the Company's proprietary Functional Multi-processing ("FMP") architecture, of which key aspects have been patented by the Company, has been designed specifically to overcome these limitations by optimizing the tasks which a network data server most commonly executes - file/data transfer and disk operation. The performance advantages of Auspex's FMP architecture enable a single NetServer to support large networks at high data throughput rates. The NetServer's scalability permits customers to add workstation clients to multiple data servers. - ---------- (1) NFS denotes the Network File System protocol, first promulgated by Sun Microsystems, Inc. ("Sun Microsystems"), and since widely adopted by the workstation market as a de facto standard for network file transfers. (2) FTP (File Transfer Protocol) is a standard protocol commonly used to retrieve or store files on network file servers. FTP is supported on Unix, Windows, VMS, Macintosh and other popular desktop computers. 4 5 The Company believes that the importance of these benefits to large-scale client/server systems is demonstrated by the fact that over 80% of Auspex's installed base of approximately 2,100 data servers supports networks with 50-400 users. Auspex's FMP design offers an architectural solution to the network performance gap through distribution of all performance-limiting Network File System ("NFS") functions to a specialized input/output ("I/O") subsystem of dedicated file/data, network and disk processors. By isolating the host central processing unit ("CPU") and UNIX operating system from the data server's principal activity, the NetServer bypasses the internal bottleneck which slows the throughput of general-purpose computer architectures performing similar tasks. In addition, the isolation of the UNIX operating system and application software from the data delivery function of the server significantly increases the reliability of the systems. More processors and disk capacity may be added to meet increasing user demand as networks expand. Auspex believes that the benefits of its FMP architecture - high availability, scalability and performance may be applied to industry standard protocols such as Hyper Text Transfer Protocol ("HTTP") and Common Internet File System/Server Message Block ("CIFS/SMB"), opening new market opportunities in the future. In fiscal 1997, the Company extended its business focus beyond the manufacture, sale and support of high-performance, UNIX-based network file servers to offering its customer base a more comprehensive set of solutions for network data management. On June 30, 1997, the Company acquired Alphatronix, Inc. ("Alphatronix") as part of its ongoing strategic initiatives in this area. The Company's strategy is to develop innovative solutions for enterprise data management and, specifically, products that will provide customers with continuous and transparent access to their data. The Alphatronix Inspire(R) suite of object-oriented software and graphical user interface libraries is intent to provide the basic enabling technologies required to implement these new products. Product offerings based on merging the acquired technology are expected to be introduced by the Company on a rolling basis beginning 12-18 months following the acquisition. PRODUCTS The Company develops, markets and supports a line of NFS network data servers known as NetServers. The Company's newest NetServers, the NS 7000 NetServer Family, were introduced in fiscal 1996. In the second quarter of fiscal 1997, the Company introduced a new high-end server, the NS 7000/700, which superseded the model 650. The NS 7000/150 NetServer is designed for small workgroups of up to 40 workstations; the NS 7000/250 NetServer is designed for departments supporting 40 to 150 workstations, while the NS 7000/700 NetServer meets the needs of large enterprise environments with up to 800 workstations. All members of the NS 7000 Family can simultaneously support applications such as high-speed, on-line system backup as well as NFS I/O operations without one activity impairing the performance of the other. NS 5000, NS 5500 and NS 6000 NetServers, predecessors of the NS 7000 Family, can be upgraded on-site to an NS 7000. A significant portion of the Company's revenues is derived from product upgrades, which consist primarily of additional processors (or upgrades of existing processors) and memory and disk and tape drives. The Company's strategy is to introduce new products and offer upgrades to existing products periodically on an ongoing basis. It is possible that some customers could cancel orders for existing products or delay orders in anticipation of new product availability; should this occur, the Company's revenues and operating results could be adversely affected. 5 6 A base NS 7000 NetServer configuration includes one network processor, one storage processor and one host processor (CPU), along with I/O cache memory and a rack for the first seven Small Computer Serial Interface ("SCSI") disk drives, typically of 4.29 or 9.1 gigabyte capacity each. The NetServer can be scaled by the addition of function-specific processors, allowing customers to expand the product to support their future requirements. The basic elements of the architecture's hardware organization are described below: Network processor. The network processor performs three functions. The first is the processing of network protocols up to and including the Open Network Computing/NFS ("ONC/NFS") level. The second is the processing of NFS file requests, using a UNIX file system which has been extracted from the UNIX operating system kernel. In this way, NFS operations bypass the host processor entirely. In addition, a very large disk buffer cache (I/O cache memory) is implemented on the network processor. No processor instructions are stored in or retrieved from this memory; the entire memory and enhanced backplane bandwith of 110 megabytes per second ("MB/s") is devoted to I/O. Cache memory can be added to a maximum of 256 MB per network processor. Each network processor provides up to six 10 BaseT or two 100 BaseT Ethernet connections, up to two Fibre Distributed Data Interface/MLT3 ("FDDI/MLT3") connections or two Asynchronous Transfer Mode ("ATM") (OC-3) connections. Storage processor. The NetServer storage processor operates up to six parallel SCSI I/O channels simultaneously. These are attached to disk arrays, containing up to 42 9.1 gigabyte disks, for a total storage of 382 gigabytes. The storage processor is responsible for virtual partition management on the storage devices, write acceleration, channel management, disk and tape control and data transfers to I/O cache memory. Host processor. The host processor used in the NetServer is based on the Sun SPARC architecture, which is compliant with the SunOS UNIX operating system and its application binary interface. NetServer prices range from approximately $45,000 to more than $500,000, depending on the configuration. While system price varies considerably according to the configuration purchased, the average sales price per system in fiscal year 1997 for North American direct sales was approximately $280,000, and for distributor and international sales, approximately $131,000. Lower average sales prices per system for international distributor sales are attributable to the fact that most servers sold through these channels are sold in smaller configurations and at higher discounts. In 1995, Auspex commenced shipment of its first software product, DataGuard, that allows users to continuously access their data in the event of a disruption associated with the UNIX host operating system. In March 1996, the Company began shipping its second software product, ServerGuard. ServerGuard operates between multiple Auspex servers providing the industry's first local and wide area network-based fail-over and disaster recovery system for uninterrupted service. In fiscal 1997, the Company introduced FastBackup, a software product that enables a customer to achieve DLT-based backup and restore throughput of up to 100 gigabytes per hour cost-effectively. The Company also introduced DriveGuard, an embedded RAID 5 solution for high-availability data protection. DriveGuard provides mission-critical data security, at a significantly lower cost than that of mirrored configurations. Revenues from software licenses represented approximately six percent of Company's revenues in fiscal 1997. 6 7 MARKETS AND CUSTOMERS The majority of the Company's sales are currently made to customers in the scientific, technical and engineering fields, in which UNIX workstation and NFS-based network penetration is the greatest and the need for high-performance data/file servers is the most critical. In addition to this large and expanding multivendor, technical computing market, commercial applications for UNIX-based systems are also increasing (e.g. financial services, and internet service provider and corporate intranets). The Company believes that its NetServer architecture is adaptable to commercial computing environments and intends to pursue opportunities in these markets as they develop. There can be no assurance, however, that the Company will be able to adapt its NetServers to commercial computing market, or that it will be able to penetrate such markets. As of June 30, 1997, approximately 2,100 NetServers have been installed for over 450 customers worldwide. Reflecting the NetServer's particular suitability to the performance requirements of large-scale client/server systems, networks supporting more than 50 users account for more than 80% of Auspex's installed base. NetServers are used most commonly for the following types of applications: software development, electronic computer-aided design ("ECAD") and electronic computer aided engineering ("ECAE"), scientific and academic research, mechanical computer-aided design ("MCAD"), technical publishing and financial services. Other applications are also increasing, such as Internet service providers, on-line content providers, seismic and geophysical modeling, inventory control and multimedia applications. Prior to fiscal 1994, 1995 and 1996, Auspex focused its marketing efforts primarily on North America through its direct sales force and on the Pacific Rim through its relationships with Fuji Xerox Co., Ltd. ("Fuji Xerox") and Nissho Electronics Corporation ("Nissho"). During fiscal 1994, the Company established direct sales and support operations in the United Kingdom, France and Germany, and strengthened its distribution network in selected other European markets. Sales of products and services to the following customers accounted for 10% or more of total revenues in the periods indicated: fiscal year 1995 - Intel Corporation ("Intel") (15%); fiscal year 1996 - Intel (10%) and Fuji Xerox (13%); and fiscal year 1997 - Intel (10%) and America Online ("AOL") (15%). In addition to direct purchases from the Company, Intel or its affiliates have from time to time made significant purchases of the Company's products through indirect channels. Intel, AOL and Fuji Xerox are not obligated to purchase any minimum level of products from the Company. Accordingly, there can be no assurance that sales of products and services to these customers will not decline, either in absolute dollar amounts or as a percentage of total revenues, in future periods and that any such declines will not have a material adverse effect on the Company's results of operations. DISTRIBUTION The Company employs a multi-tiered distribution strategy which in fiscal 1997 has focused on product sales to end users in North America through a direct sales force and to the Pacific Rim (primarily Japan) through a master value added reseller and a non-exclusive master reseller. The Company has a direct sales force in the United Kingdom, France and Germany, and employs distributors in other selected European markets. Because the success of the Company's direct sales efforts in North America is dependent in part upon a sophisticated analysis of the customer's networking requirements, the Company's system engineers work closely with the Company's sales representatives. 7 8 The Company's Pacific Rim distribution strategy includes original equipment manufacturer ("OEM") and distribution agreements with Fuji Xerox and Nissho, respectively, in Japan. In fiscal 1997, the Company realigned its channel distribution strategy in Japan. The Company signed a Master Value Added Distributor Agreement ("MVAD") with Fuji Xerox, and redefined its relationship with Nissho. Under the new MVAD contract, Fuji Xerox, formerly the Company's OEM partner in Japan will act as a non-exclusive supplier of the Company's products to resellers in Japan. The Company's line of network file servers and high-availability software will also be sold under the Auspex name for the first time by Fuji Xerox. The Company's relationship with Nissho, previously the exclusive distributor of Auspex labeled products, will continue on a non-exclusive basis as a master reseller. The purchase prices of products purchased by Fuji Xerox under the agreement are subject to certain discounts. While Fuji Xerox is not subject to any minimum purchase requirements, in the event that it fails to reach the purchase targets mutually agreed upon each year, Auspex has the right to make additional OEM appointments in Japan. Both Nissho and Fuji Xerox have the right to sell products of the Company's competitors. Auspex believes that the large installed base of UNIX systems in Europe represents a significant opportunity for future NetServer sales. To address this opportunity, the Company has direct sales and support facilities in the United Kingdom, France and Germany. The Company has also entered into agreements with distributors covering selected other markets in Europe. The Company has continued to invest in sales and marketing efforts in Europe. The increased export activity in Europe has resulted in profitable European operations in fiscal 1997. CUSTOMER SERVICE AND SUPPORT Auspex's corporate policies are based on a commitment to customer satisfaction and product quality. Revenue on system sales to end users is not recognized until the system has been shipped and installed and the customer has indicated a level of satisfaction with the product's performance that meets or exceeds predefined Company standards. The Company provides customer training and installs, maintains and supports systems sold directly in North America and Europe. End user customers purchasing through indirect channels are generally serviced by the Company's distributors or OEMs. In all cases, however, customers have direct access to Auspex service and support through a toll-free telephone hotline available to customers, distributors and service partners. All customer service call management and software support is handled directly by Auspex through its technical support centers twenty-four (24) hours a day, three hundred sixty-five (365) days a year, by highly trained and experienced technical support engineers. In addition to the technical support center located in Santa Clara, California, the Company has established a second U.S. support center in Cary, North Carolina and European technical support centers in France and the United Kingdom to handle service calls from its European customers. To supplement direct service and support and to ensure the highest quality service while containing costs, Auspex has entered into strategic service agreements with Digital Equipment Corporation and NCR for on-site hardware support. The Company's contracts provide end users with a warranty for parts and labor on its products, generally for ninety (90) days. The Company's warranty policy for product sales other than to end users depends on the requirements of the particular distribution channel. The Company offers its customers service agreements of varying duration. Service revenue is recognized ratably over the contractual period as service is provided. 8 9 MANUFACTURING Auspex's manufacturing operations, located in Santa Clara, California, consist of product assurance, quality control and final product assembly and test. The Company relies principally on Solectron Corporation, a contract manufacturer, for subassembly and testing of certain key NetServer components. Solectron Corporation has continued to operate under the terms of its business relationship on a month-to-month basis. The Company's manufacturing strategy has been to develop close relationships with its suppliers, exchanging critical information and implementing joint quality training programs. This manufacturing strategy minimizes capital investment and overhead expenditures and creates flexibility by providing the capacity for rapid expansion. Although the Company to date has not experienced any production difficulties resulting from its reliance on Solectron, it is possible that production difficulties, including capacity constraints and quality control issues, could arise in the future, which could materially and adversely affect the Company's results of operations. Although the Company generally uses standard parts and components for its products, a number of key components used in the Company's NetServer products are currently available or purchased from sole or single sources. These components include disk and tape drives, microprocessors, connectors, printed circuit boards, cable assemblies, power supplies and ASICs. Some of the suppliers of these components have divisions which compete with the Company. See "Business--Competition." The Company generally has agreements with its sole source suppliers with terms ranging from one to five years and believes that alternative sources of supply and assembly for most of its sole-source components could be obtained within a commercially practicable period. As a precaution, the Company carries extra inventory of some of its sole-source components to provide additional time to develop an alternate supply source or redesign the component. The lack of sufficient quantities of sole or single source components, or the inability to develop alternative sources for these items, could result in delays or reductions in product shipments which would materially and adversely affect the Company's results of operations. RESEARCH AND DEVELOPMENT The market for high-performance network data servers has been characterized by rapid technological advances in both hardware and software development. The Company believes that the speed of technological advancement in its industry requires it to invest significant amounts in research and development, and that in order to maintain its competitive position, the Company must continue to enhance and improve its existing products as well as to develop and successfully introduce new products. During fiscal 1997, the Company introduced the new NetServer NS7000/700, which is an enterprise-class network data server that nearly doubles the number of network connections and increases NFS throughput versus previous models. Additionally, the Company introduced a major new software release, which includes DriveGuard, a new RAID 5 high availability solution for protecting and managing disk-based data, NFS v3 protocol support for enhanced network performance, and the integration of NetBackup and FastBackup software for backup to DLT tape. Also during the year, the Company introduced an additional high-performance networking offering; including full duplex 100BaseT. While continuing to introduce major new product features, the Company believes that it has maintained its leadership position in network data server reliability. However, there can be no assurance that these new products will continue to be successful commercially. Furthermore, there can be no assurance that the Company will be able to develop or introduce other new products in the future in a timely manner, or that such products will be a commercial success. The Company intends to 9 10 continue to invest substantially in product development. Current research and development efforts are directed at additional optional software products and at extending the NetServer architecture, hardware designs and software designs to increase functionality, client protocol support, performance, capacity, scalability and availability. As of June 30, 1997, 144 employees were engaged in research and development activities. The Company's research and development expenses during fiscal years 1995, 1996 and 1997 were approximately $14.6 million, $17.8 million and $24.4 million, respectively. The Company anticipates that research and development expenses will increase in absolute amounts and may increase as a percentage of total revenues from current levels in future periods. COMPETITION The data/file server market is intensely competitive. Within the NFS-compatible, UNIX data server market segment, manufacturers of general purpose multiprocessor servers represent the Company's primary source of competition. These manufacturers include Sun Microsystems, Hewlett-Packard Company, Silicon Graphics, Inc., and IBM. Also, EMC Corporation has recently introduced proprietary products to provide network attached storage. Sun Microsystems represents the Company's principal source of competition. All of these competitors possess substantially greater financial, technical and marketing resources than Auspex, as well as substantially larger product installed bases. In addition to existing competitors, certain manufacturers of PC-based file servers such as Network Appliance, Inc. have introduced products at the low end of the Company's target markets. While the Company believes that the price/performance characteristics of its products are competitive, increased competition could create pricing pressures which could materially and adversely affect the Company's results of operations. The Company derives a significant portion of its revenues from sales of product upgrades to its installed base, including additional processors (or upgrades to existing processors), memory, disk and tape drives, and software. Although the Company has to date experienced limited competition in the sale of upgrades, increased competition against these products may occur in the future which could materially and adversely affect the Company's revenues and operating results. Auspex believes that an important competitive factor is network data server performance, measured in terms of overall system throughput and expressed as a function of NFS input/output operations per second. Other important factors include product reliability, availability, scalability, upgradeability, price, overall cost of ownership and technical service and support. The Company's ability to maintain its competitive position will depend, in addition to these factors, upon its success in anticipating industry trends, investing in product research and development and effectively managing the introduction of new products into targeted markets. 10 11 INTELLECTUAL PROPERTY AND LICENSES The Company relies on a combination of patent, copyright, trademark and trade secret laws, employee and third-party non-disclosure agreements and other intellectual property protection methods to protect its proprietary hardware, software and technological expertise. The Company believes, however, that its continued success will depend principally on continuing innovation, technological expertise, product pricing and distribution strength and to a lesser extent on its ability to protect its proprietary technology. Furthermore, there can be no assurance that the Company's current or future competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Auspex currently holds four United States patents for certain fundamental aspects of FMP data server architecture, and two additional related patents. The Company has also filed additional patent applications for other proprietary Auspex technologies, one of which has been issued by the patent office. The Company's NetServer's host processors and network processors operate in conjunction with software licensed to the Company by Sun Microsystems. These licenses are subject to periodic renewal and are coming up for renewal in September 1998. There can be no assurance that the Company will be able to enter into such license renewals with Sun Microsystems on favorable terms, or at all. EMPLOYEES As of June 30, 1997, the Company employed 619 people, including 170 in sales, 27 in marketing, 144 in research and development, 93 in customer satisfaction, 115 in manufacturing and 70 in finance and administration. The recruitment of experienced, highly skilled individuals is a top priority in an exceptionally competitive recruiting environment. Equally important in this environment is the retention of key talent. The Company has significantly increased its recruiting activities and is reviewing all employee programs to ensure the retention and continued development of its employees. The Company has in the past encountered some difficulties in fulfilling its hiring needs and retaining key employees in the San Francisco Bay Area employment market, and there can be no assurance that the Company will be successful in hiring and retaining qualified employees in the future. None of the Company's employees are represented by a labor union. The Company believes that its relations with its employees are good. 11 12 EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information with respect to the executive officers of the Company as of September 15, 1997:
Name Age Position ---- --- -------- Bruce N. Moore(1) 46 Chief Executive Officer, President and Director Joseph G. Brown 47 Vice President of Worldwide Field Operations Paul R. Gifford 45 Vice President of Product Development Russell M. Lait 35 Vice President of Operations Kent L. Robertson 56 Vice President of Finance and Chief Financial Officer R. Stephen Cheheyl(2) 51 Director W. Frank King(2)(3) 57 Director David F. Marquardt(3) 48 Director
(1) Member of the Stock Option Committee (2) Member of the Audit Committee (3) Member of the Compensation Committee Mr. Bruce N. Moore joined the Company in June 1995 as President, Chief Operating Officer and a member of the Board of Directors. In January 1996, Mr. Moore assumed the additional role of Chief Executive Officer. Mr. Moore joined Auspex from Diasonics Ultrasound, Inc., a provider of diagnostic ultrasound equipment, where he held the position of President and Chief Executive Officer. His eleven-year career at Diasonics included various senior management positions in marketing and business development. Mr. Moore started his career as a sales representative in IBM's Data Processing Division in 1976. Mr. Joseph G. Brown joined the Company in January 1994 as Vice President of Marketing. He assumed the additional responsibility of Vice President of International Sales in September 1994. In November 1995, Mr. Brown was promoted to Vice President of Worldwide Strategic Business Development. Currently, Mr. Borwn is the Vice President of Worldwide Field Operations. Previous to joining the Company, Mr. Brown was Vice President of Marketing for the UNIX Systems Group at Unisys Corporation from February 1992 to January 1994. Prior to Unisys, Mr. Brown was Managing Director of Marketing at Interactive Systems Corporation from September 1989 to December 1991. Mr. Paul R. Gifford joined the Company in October 1996. From March 1996 through September 1996, Mr. Gifford served as Vice President of Engineering for Tencor Instruments. Prior to joining Tencor, Mr. Gifford was employed by Sequent Computer Systems from December 1985 through October 1995 and held several key positions including General Manager, NT Business Unit, Vice President of Product Development, and Vice President and Chief Systems Architect. Mr. Russell M. Lait joined the Company in March 1988 as a member of the Company's first design team. During his nine-year tenure with Auspex, Mr. Lait has held various positions, including Director of Production and Test. He was appointed Vice President of Operations in August 1996. 12 13 Mr. Kent L. Robertson joined the Company in April 1996. From June 1995 through April 1996, he was Executive Vice President, Chief Financial Officer and Secretary for Genus, Inc. Prior to Genus, he spent two different periods as Senior Vice President, Chief Financial Officer and Secretary of Pyramid Technology Corporation. He first joined Pyramid in February 1987 and returned again in January 1994. From March 1992 through December 1993, he was Executive Vice President, Chief Financial Officer and Secretary for RasterOps Corporation. Mr. R. Stephen Cheheyl has served as a Director of the Company since April 1995. From October 1994 until he retired in December 1995, Mr. Cheheyl served as an Executive Vice President of Bay Networks, Inc. which was formed through the merger of Wellfleet Communications, Inc. ("Wellfleet") and Synoptics Communications Inc. From December 1990 to October 1994, Mr. Cheheyl served as Senior Vice President of Finance and Administration at Wellfleet. He also serves as a director of Infinium Software, Inc., ON Technology Corporation and Sapient Corporation Dr. W. Frank King has served as a Director of the Company since October 1994. Dr. King has served as President, Chief Executive Officer and a Director of PSW Technologies, the Software Development and Systems Integration Division of Pencom Systems Incorporated, a software development, systems integration and technical recruiting organization, since October 1, 1996. From 1992 to October 1996, Dr. King served as President of PSW. From 1988 to 1992, Dr. King was Senior Vice President of the Software Business group of Lotus, a software publishing company. He serves on the Board of Directors of Auspex, State of the Art, Inc., Excalibur Technologies Corporation, SystemSoft, and Natural Microsystems, Inc. Mr. David F. Marquardt has served as a Director of the Company since April 1989. Since August 1995, Mr. Marquardt has been a general partner at August Capital which is a private venture capital partnership. Since August 1980, Mr. Marquardt has been a general partner of various Technology Venture Investors entities which are private venture capital limited partnerships. Mr. Marquardt is also a Director of Microsoft Corporation, Farallon Computing, Inc. and Visioneer, Inc. ITEM 2. PROPERTIES The Company is headquartered in Santa Clara, California, where it leases an aggregate of approximately 162,000 square feet of space which houses administrative, finance, sales and marketing, manufacturing, customer service and product development activities. The lease for these facilities expires in March 1998. In January 1997, the Company entered into two lease agreements for four buildings under construction in Santa Clara, California. The buildings represent about 269,000 square feet of space and will be the Company's new headquarters. The leases for these facilities commence in March 1998 and expire in February 2010. In addition, the lease agreements contain three successive options to extend the lease terms for sixty months each. The Company leases additional sales and support offices located in the United States, Canada, the United Kingdom, France, Germany and Japan. The Company believes that its facilities are adequate to meet the Company's current business requirements, and that suitable additional space will be available as needed to accommodate further physical expansion of corporate operations and for additional sales and support offices. See also Note 5 of Notes to Consolidated Financial Statements. 13 14 ITEM 3. LEGAL PROCEEDINGS From time to time, the Compnay is involved in legal proceedings incidental to the conduct of its business. The Company believes that the litigation, individually or in the aggregate, to which it is currently a party, is not likely to have a material adverse effect on the Company's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 14 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been approved for quotation on The Nasdaq National Market under the symbol ASPX since the Company's initial public offering in May 1993. The following table sets forth, for the periods indicated, the range of high and low sales prices on the NASDAQ Composite, as reported in The Wall Street Journal.
High Low ---- --- Fourth Quarter of 1997 $13.125 $7.50 Third Quarter of 1997 $14.75 $10.625 Second Quarter of 1997 $15.50 $10.125 First Quarter of 1997 $17.00 $10.00 Fourth Quarter of 1996 $24.625 $14.75 Third Quarter of 1996 $21.00 $14.00 Second Quarter of 1996 $18.25 $13.375 First Quarter of 1996 $18.25 $11.375
The Company believes that a number of factors including, but not limited to, quarterly fluctuations in results of operations may cause the market price of its common stock to fluctuate significantly. See "Management's Discussion and Analysis - Factors That May Affect Future Results." As of September 10, 1997, the approximate number of common stockholders of record was 698. The Company has not, to date, paid cash dividends on its capital stock. The Company currently intends to retain earnings for use within its business and does not anticipate paying cash dividends in the foreseeable future. 15 16 ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended ------------------------------------------------------------------------- (In thousands, except per share amounts) June 30, June 30, June 30, June 30, June 25, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Net revenues.............................. $202,486 $162,640 $115,625 $83,280 $73,508 Income before income taxes................ 24,362 29,597 15,912 9,786 10,046 Net income ............................... 13,420 19,830 12,411 8,318 8,126 Net income per share...................... 0.52 (1) 0.77 0.51 0.34 0.36 Total assets.............................. 157,152 135,844 106,526 85,433 76,728 Long-term obligations..................... - - 159 399 799
(1) Includes the costs associated with the acquisition of Alphatronix, Inc. in the fourth quarter of fiscal 1997. Exclusive of these acquisition costs, earnings per share for fiscal 1997 would have been $0.81. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues for the fiscal year ended June 1997 of $202.5 million increased 24.5% over fiscal year 1996 revenues of $162.6 million. To date, the Company has shipped approximately 2,100 data servers. The following table sets forth for the fiscal years indicated the percentage of total revenues represented by certain line items in the Company's statement of operations:
Years Ended June 30, 1997 1996 1995 ---- ---- ---- Revenues .............................. 100% 100% 100% Costs of Revenues ..................... 46 44 46 --- --- --- Gross margin ................ 54 56 54 --- --- --- Operating Expenses: Sales and marketing ............... 24 23 24 Research and development .......... 12 11 13 General and administrative ........ 4 5 5 In-process research and development 3 - - --- --- --- Income from operations ...... 11 17 12 Other Income .......................... 1 1 2 --- --- --- Income before income taxes .. 12 18 14 Provision for Income Taxes ............ 5 6 3 --- --- --- Net Income ............................ 7% 12% 11% === === ===
16 17 REVENUES Product revenue includes hardware sales of systems and upgrades as well as software license fees. The Company recognizes revenues from sales of data servers to end users only when the product has been shipped, installed, and the customer has indicated a level of satisfaction with the product's performance that meets or exceeds predefined Company standards. Revenues from sales of data servers to distributors, integrators and OEMs, as well as product upgrade revenues, are generally recognized when the product has been shipped. Revenues earned under software license agreements with end users are generally recognized when the software has been shipped and there are no significant obligations remaining. Service revenue includes installation, maintenance and training and is recognized ratably over the contractual period or as the services are provided. Beginning with the first quarter of fiscal 1998, the Company will change its revenue recognition policy such that revenues from systems sales will generally be recognized when the equipment has been shipped. The reason for this change is to better conform its policies with industry practices. The following table sets forth the principal components of the Company's revenues:
Years Ended June 30, 1997 1996 1995 -------- -------- -------- Product revenue ......... $182,533 $146,913 $104,102 Service and other revenue 19,953 15,727 11,523 -------- -------- -------- Total revenues .. $202,486 $162,640 $115,625 ======== ======== ========
Product revenue increased $35.6 million or 24% in fiscal 1997 as compared to fiscal 1996 and $42.8 million, or 41%, in fiscal 1996 as compared to fiscal 1995. These increases were attributable to higher average system prices and increased sales of upgrades to the Company's installed base. Revenue from product upgrades, which primarily consists of additional processors (or upgrades of existing processors), and memory and disk and tape drives, increased from the prior year as a percentage of total revenues to 41% in fiscal 1997 from 39% in fiscal 1996 and decreased to 39% in fiscal 1996 from 44% in fiscal 1995. The increase in product upgrade revenue as a percentage of total revenues compared to fiscal 1996 is primarily due to the expansion of the Company's installed base demand from customers for increased storage capacity and the Company's periodic product enhancements. There can be no assurance, however, that the Company's product revenue will continue to increase in absolute dollar amounts or at the rate at which it has grown in recent fiscal years. The Company provides ongoing support and maintenance to its end user customers, distributors and OEMs generally under annual service agreements. Service revenue as a percentage of total revenues remained constant in fiscal 1997, 1996, and 1995 at 10%. The following table sets forth the Company's revenue by geographic area (in thousands):
Years Ended June 30, 1997 1996 1995 ----------------------- ----------------------- ----------------------- North America .... $142,536 70% $110,163 68% $ 85,251 74% Pacific Rim ...... 31,759 16% 36,229 22% 21,390 18% Europe ........... 28,191 14% 16,248 10% 8,984 8% -------- -------- -------- -------- -------- -------- $202,486 100% $162,640 100% $115,625 100% ======== ======== ======== ======== ======== ========
Revenue from North America increased $32.4 million in fiscal 1997 as compared to fiscal 1996 and $24.9 million in fiscal 1996 as compared to fiscal 1995. Revenue from Pacific Rim decreased $4.5 million in fiscal 1997 as compared to fiscal 1996 and increased $14.8 million in fiscal 1996 as compared to fiscal 1995. The decrease in Pacific Rim revenue as a percentage of total revenue and in absolute dollars in fiscal 1997 as compared to fiscal 1996 was primarily due to the reorganization of a major OEM partner, a delay in the introduction of Auspex's model NS7000/700 NetServer by that partner in Japan and weakness in the Japanese economy. 17 18 Sales of products and services to Intel accounted for 10%, 10% and 15% of total revenues for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. Sales to AOL accounted for 15% of total revenues for the fiscal year ended June 30, 1997. Additionally, sales to Fuji Xerox accounted for 13% of total revenues for the fiscal year ended June 30, 1996. No other customer accounted for 10% or more of total revenues for any of the three years in the period ended June 30, 1997. In addition to direct purchases from the Company, Intel or its affiliates have from time to time made significant purchases of the Company's products through indirect channels. Intel, AOL and Fuji Xerox are not obligated to purchase any minimum level of products from the Company. Accordingly, there can be no assurance that sales of products and services to Intel, AOL, and Fuji Xerox will not decline, either in absolute dollar amounts or as a percentage of total revenues, in future periods and that any such declines will not have a material adverse effect on the Company's results of operations. GROSS MARGIN The Company's gross margin was 54%, 56% and 54% in fiscal 1997, 1996 and 1995, respectively. Costs of revenues include material costs, manufacturing and service overhead costs, installation and warranty expenses, obsolescence, the cost of spare parts and other related costs. The decrease in gross margins in fiscal 1997 as compared to fiscal 1996 was due to pricing on systems sales and lower margins on service. This was partially offset by a significant increase in software revenue. The improvement in margin in fiscal 1996 was attributable to engineering-related cost reductions in successive new product designs, increased production volumes, and improved manufacturing and service-related efficiencies. OPERATING EXPENSES Marketing and sales expenses increased $10.4 million in fiscal 1997 as compared to fiscal 1996 and $9.6 million in fiscal 1996 as compared to fiscal 1995, and were 24%, 23% and 24% of total revenues in fiscal 1997, 1996 and 1995, respectively. The increase in absolute dollars is the result of additional headcount in the North American direct sales operations and the growth of direct sales operations of the Company's international subsidiaries. Research and development expenses, net of capitalized software development costs, increased $6.6 million in fiscal 1997 as compared to fiscal 1996 and $3.2 million in fiscal 1996 as compared to fiscal 1995, and represented 12%, 11% and 13% of total revenues in fiscal 1997, 1996 and 1995, respectively. The increase in net research and development expenses both in absolute dollars and as a percentage of total revenues in fiscal 1997 as compared to fiscal 1996 was due to the addition of employees and related project costs to support the Company's new product development efforts. The decrease in net research and development as a percent of total revenue in fiscal 1996 as compared to fiscal 1995 relates primarily to the increase in revenues. Software development expenses have been accounted for in accordance with Statement of Financial Accounting Standards No. 86, under which the Company is required to capitalize software development costs after "technological feasibility" is established. In the fourth quarter of fiscal 1994, the Company initiated several software development projects which resulted in the capitalization of $0.7 million in fiscal 1995 and $0.3 million in fiscal 1996. No amounts were capitalized in fiscal 1997. The amount of capitalized software development costs in any given period may vary depending on the exact nature of the development performed. The Company believes that in order to remain competitive, it will need to continue to make substantial investments in new and enhanced products, and anticipates that research and development expenses will increase in both absolute amounts and as a percentage of total revenues from current levels. General and administrative expenses increased $0.2 million in fiscal 1997 as compared to fiscal 1996 and $1.9 million in fiscal 1996 as compared to fiscal 1995 and represented 4%, 5% and 5% of total revenues in fiscal 1997, 1996 and 1995, respectively. Although general and administrative expenses remained generally flat in absolute dollars in fiscal 1997 as compared to fiscal 1996, the Company anticipates that the cost of expanding infrastructure including new facilities will increase in fiscal 1998 to support the Company's growth. On June 30, 1997, the Company acquired all of the outstanding shares of Alphatronix, Inc. (Alphatronix), a market leader in the development and marketing of open-systems based storage management solutions for a total purchase price of $7.7 million. The acquisition was accounted for using the purchase method of accounting. A portion of the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair value. The fair value of tangible assets acquired and liabilities assumed was $0.3 million and $0.3 million, respectively. In addition, $7.4 million of the purchase price was allocated to in-process research and development projects that had not reached technological feasibility and had no probable alternative future uses, which the Company expensed at the date of the acquisition as a one-time non-recurring charge. The remainder of the purchase price, $0.3 million, was allocated to goodwill and will be amortized over five years on a straight-line basis. See Note 3 of Notes to the Consolidated Financial Statements. Alphatronix's in-process R&D projects relate primarily to developing significant enhancements to the current product offering as well as introducing advanced new products. The incomplete projects include a new user interface, enterprise management support, a hierarchical storage management function, database journalizing, database insertion, differential dataset recovery, and on-demand restore ability. Given the uniqueness of the tasks and the technologies involved, alternative future uses for these projects, apart from the objectives and economies of the projects for which they are intended, do not exist. The Company believes that the efforts to complete the acquired in-process R&D projects will consist of internally-staffed engineering costs over the next one to two years. These costs are estimated to be approximately $3,000,000 to complete the R&D. There can be no assurance that the Company will succeed in making commercially viable products from the Alphatronix research and development. 18 19 OTHER INCOME Other income and expense resulted in income of $2.4 million, $1.8 million and $2.0 million in fiscal 1997, 1996 and 1995, respectively. Other income and expense includes interest income, interest expense and foreign exchange gains and losses. Interest income was $2.3 million, $1.8 million and $1.7 million in fiscal 1997, 1996 and 1995, respectively. The increase in interest income in fiscal 1997 as compared to fiscal 1996 primarily relates to an increase in the cash and short-term investments balances. PROVISION FOR INCOME TAXES As of June 30, 1997, the Company had gross deferred tax assets of approximately $5.9 million. Management has determined, based on the Company's history of prior operating earnings and its expectations for future years, that the deferred tax asset is realizable. However, no assurances can be given that sufficient taxable income will be generated in future years for the utilization of the deferred tax asset. The provision for income taxes was approximately $10.9 million in fiscal 1997, $9.8 million in fiscal 1996, and $3.5 million in fiscal 1995, representing effective tax rates of approximately 45%, 33% and 22%, respectively. The increase in the effective tax rate in fiscal 1997 as compared to fiscal 1996 is attributable to the fact that the Company will not receive any tax benefits related to the write-off of in-process research and development expenses of approximately $7.4 million resulting from the acquisition of Alphatronix. Excluding the write-off of in-process research and development expenses which accounts for an increase of 10.5% in the effective tax rate in fiscal 1997, the Company's effective tax rate was 34.5%. QUARTERLY RESULTS OF OPERATIONS The following table sets forth selected unaudited quarterly financial information for the Company's last eight quarters. This unaudited information has been prepared on the same basis as the audited information and in management's opinion reflects all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of the information for the periods presented. Based on the Company's operating history and factors that may cause fluctuations in the quarterly results, quarter-to-quarter comparisons should not be relied upon as indicators of future performance. Although the Company's revenues are not generally seasonal in nature, the Company has experienced decreases in first quarter revenue versus the preceding fourth quarter which is believed to result primarily from the capital asset purchase cycle of the Company's customers. The level of the Company's operating expenses is partially based on its expectations of future revenue. The Company's results of operations may be adversely affected if revenue does not materialize in a period as expected. Since expense levels are usually committed in advance of revenues and because only a small portion of expenses vary with revenue, the Company's net income may be impacted significantly by lower revenue. The Company's revenue increased each quarter in fiscal 1997 as compared to the equivalent quarter in the prior year. This increase was due principally to increased sales volume or higher average selling prices of the Company's products. 19 20 1997 SUMMARY BY QUARTER
(In thousands, except per share amounts) First Second Third Fourth Year -------- ------- --------- -------- -------- Net revenues $43,012 $49,082 $55,602 $54,790 $202,486 Gross profit 23,912 26,645 30,458 28,463 109,478 Income before taxes 6,620 7,603 10,057 82 24,362 Net income (loss) 4,270 4,904 6,487 (2,241) 13,420 Net income (loss) per share $ 0.17 $ 0.19 $ 0.25 $ (0.09)(1) $ 0.52(1)
1996 SUMMARY BY QUARTER
(In thousands, except per share amounts) First Second Third Fourth Year ------- -------- -------- -------- -------- Net revenues $33,536 $38,003 $43,333 $47,768 $162,640 Gross profit 18,294 21,166 24,202 27,012 90,674 Income before taxes 5,276 6,996 8,046 9,279 29,597 Net income 3,535 4,687 5,391 6,217 19,830 Net income per share $ 0.14 $ 0.18 $ 0.21 $ 0.24 $ 0.77
(1) Includes the costs associated with the acquisition of Alphatronix, Inc. in the fourth quarter of fiscal 1997. Exclusive of these acquisition costs, earnings per share for fiscal 1997 would have been $0.81. 20 21 FACTORS THAT MAY AFFECT FUTURE RESULTS The last two sentences in the sixth paragraph of the section entitled "The Company" in Part I, the first sentence in the fourth paragraph of the section entitled "Distribution" in Part I, the last sentence in the second paragraph of the section entitled "Operating Expenses" in Part II, the second sentence of the first paragraph of the section entitled "Provision for Income Taxes" in Part II, the third sentence of the second paragraph under the section entitled "Liquidity and Capital Resources" in Part II and the last sentence of the fourth paragraph under the section entitled "Liquidity and Capital Resources" in Part II contain forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. The Company may also make oral and written forward looking statements from time to time. Actual results may differ materially from those projected in any such forward looking statements due to a number of factors, including those set forth below. The Company undertakes no obligation to update such information. POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS The Company's operating results may fluctuate significantly from quarter to quarter due to a combination of factors. These factors include the timing of orders, the timing of new product introductions by the Company or its competitors and the mix of distribution channels through which the Company's products are sold. The Company generally realizes higher gross margins on sales of systems to end users and on single system sales than on systems sold through distributors and OEMs and on multiple system sales. In addition, given the Company's focus on highly configured enterprise class systems, the loss or delay in a given quarter of a relatively limited number of system sales could adversely effect the Company's revenues. Historically, the Company has often recognized a substantial portion of its revenues in the last month of any given quarter. Because the Company's operating expenses are based on anticipated revenue levels and because a high percentage of the Company's expenses are relatively fixed, a small variation in the timing of the recognition of revenues could cause significant variations in operating results from quarter to quarter. INTENSELY COMPETITIVE MARKET The market for the Company's products is intensely competitive. The Company experiences substantial competition, principally from Sun Microsystems, Hewlett-Packard Company and Silicon Graphics, Inc. Also, EMC Corporation has recently introduced proprietary products to provide network attached storage. In addition, smaller companies such as Network Appliance, Inc. have introduced products at the low end of the Company's target markets. Most of the Company's competitors are better known and have substantially greater financial, technological, production and marketing resources than the Company. While the Company believes that the price/performance characteristics of its products are competitive, price competition in the markets for the Company's products is intense. Any material reduction in the price of the Company's products without corresponding decreases in manufacturing costs and increases in unit volume would negatively affect gross margins which could in turn have a material adverse effect on the Company's business, financial condition and results of operations. The Company also derives a significant portion of its revenues from sales of product upgrades to its installed base, including additional processors, and memory and disk and tape drives. Increased competition for the Company's products that result in lower product sales could also adversely impact the Company's upgrade sales. In addition, decisions by customers not to increase capacity to their current systems could adversely impact the Company's revenues and results of operations. The Company's ability to maintain its competitive position will depend, among other factors, upon its success in anticipating industry trends, investing in product research and development, developing new products with improved price/performance characteristics and effectively managing the introduction of new products into targeted markets. DEPENDENCE ON KEY PERSONNEL Competition for employees with highly technical, management and other skills is intense in the computer industry and is particularly intense in the San Francisco Bay Area. The Company has in the past encountered some difficulties in fulfilling its hiring needs and retaining key employees in this employment market, and there can be no 21 22 assurance that the Company will be successful in hiring and retaining qualified employees in the future. The Company's failure to retain the services of key personnel or to attract additional qualified employees could have a material adverse effect on the Company's business, financial condition and results of operations. SOFTWARE PRODUCT RISKS With the release of its DriveGuard(TM) and FastBackup(TM) software products along with current software products ServerGuard(TM) and DataGuard(TM), the Company now markets software products in addition to its line of network file servers. The Company also expects to release enhancements and new features for these products from time to time. Although the Company performs extensive testing prior to releasing software products, such products may contain undetected errors or bugs when first released. These may not be discovered until the product has been used by customers in different application environments. Failure to discover product deficiencies or bugs could delay product introductions, require design modifications to previously shipped products, cause unfavorable publicity or negatively impact system shipments, any of which could result in a material adverse affect on the Company's business, financial condition and results of operations. NEW PRODUCTS New product introductions by the Company or its competitors carry the risk that customers could delay or cancel orders for existing products pending shipment of the new products. The Company's strategy is to continue to introduce new products and upgrades to existing products on an ongoing basis. There can be no assurance that the Company will not experience difficulties that delay or prevent the successful development, introduction or marketing of these products and enhancements or that these new products and enhancements will adequately address market requirements and achieve market acceptance. Any delays in the launch or availability of new products could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON ESTABLISHED STANDARDS The rapid emergence of new or alternate standards such as NT which replace or diminish the market acceptance of UNIX operating systems or NFS, on which the Company's products are currently based, could materially and adversely affect the Company's results of operations unless the Company is able to incorporate any such standards in the Company's products in a timely manner. DEPENDENCE ON CERTAIN CUSTOMERS/DISTRIBUTORS For fiscal year 1997 and 1996, direct sales of products and services to Intel represented approximately 10% and 15%, respectively, of the Company's revenues. In addition to direct purchases from the Company, Intel or its affiliates have from time to time made significant purchases of the Company's products through indirect channels. Also in fiscal year 1997, direct sales of products and services to AOL represented approximately 15% of the Company's revenues. For fiscal year 1996, sales to Fuji Xerox, the Company's non-exclusive master value added distributor in Japan, represented approximately 13% of the Company's revenues. Intel, AOL and Fuji Xerox are not obligated to purchase any minimum level of products from the Company. A significant reduction in product sales to Intel, AOL or Fuji Xerox would materially and adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON CERTAIN SUPPLIERS Certain of the Company's products contain critical components supplied by a single or a limited number of third parties. While the Company has an inventory of these critical components, any significant or prolonged shortage of these components or the failure of the third party suppliers to maintain or enhance these components could materially adversely affect the Company's results of operations. 22 23 RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS During fiscal year 1997 and 1996, approximately 30% and 32%, respectively, of the Company's total revenues were derived from markets outside of North America. The Company expects that sales to the Pacific Rim and Europe will continue to represent a significant portion of its business. There can be no assurance that the Company's Pacific Rim or European operations will continue to be successful. The Company's international business may be affected by changes in demand resulting from localized economic and market conditions. In addition, the Company's international business may be affected by fluctuations in currency exchange rates and currency restrictions as well as by risks such as trade restrictions, increases in tariff and freight rates and difficulties in obtaining necessary export licenses and meeting appropriate local regulatory standards. For example, the Company has had to modify its products in minor respects in Japan to comply with local electromagnetic emissions standards, and must also comply with corresponding European Economic Community standards. In marketing its products to the European Economic Community, the Company also must face the challenges posed by a fragmented market complicated by local distribution channels and local cultural considerations. For international sales, the Company has largely relied on distributors or OEMs, most of who are entitled to carry products of the Company's competitors. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; PENDING LITIGATION The Company currently relies on a combination of patent, copyright, trademark and trade secret laws and contractual provisions to protect its proprietary rights in its hardware and software products. The Company currently holds six United States patents and has filed applications for additional patents. The Company has also filed applications for counterpart patents in foreign countries, including Japan. There can be no assurance that the Company's present or future competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Further, there can be no assurance that the Company's patent applications will result in issued patents, or that the Company's issued patents will be upheld if challenged. Additionally, there can be no assurance that third parties will not assert intellectual property infringement claims against the Company in the future with respect to current or future projects or that any such assertions may not require the Company to refrain from the sale of its products, enter into royalty arrangements or undertake costly litigation. The Company's adherence to industry standards with respect to its products limits the Company's opportunities to provide proprietary features which may be protected. In addition, the laws of various countries in which the Company's products may be sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. The Company is a defendant in various lawsuits and is subject to various claims which arise in the normal course of business. In the opinion of management, the ultimate dispositions of these claims will not have a material adverse effect on the financial position, liquidity or results of operations of the Company. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short-term investments increased $10.4 million as of June 30, 1997, compared to June 30, 1996, and increased $5.9 million as of June 30, 1996, compared to June 30, 1995. The Company generated approximately $28.6 million, $16.9 million and $9.4 million in cash from operating activities in fiscal 1997, 1996 and 1995, respectively. The increase of cash from operating activities in each year was due primarily to an increase in net income in each year. The Company's principal investing activities consisted in the purchase of property and equipment which were $16.4 million, $15.4 million and $8.1 million in fiscal 1997, 1996 and 1995, respectively. These expenditures were primarily for leasehold improvements, equipment for research and development, manufacturing test equipment, office equipment and spare parts to support customer service contracts. The Company currently anticipates capital 23 24 expenditures of approximately $35 to $40 million in fiscal year 1998, primarily for leasehold improvements, engineering, manufacturing and office equipment and spare parts support. The Company also used cash of $7.5 million, $1.3 million and $2.9 million for short-term investments in fiscal 1997, 1996 and 1995, respectively. The Company's primary financing activities included proceeds from the sale of common stock pursuant to employee benefit plans of $4.1 million, $5.0 million and $1.7 million in fiscal 1997, 1996 and 1995, respectively. In addition, the Company made principal payments on capital leases of $0.1 million, $0.4 million and $0.6 million in fiscal 1997, 1996 and 1995, respectively. As of June 30, 1997, working capital was $105.4 million as compared with $90.9 million as of June 30, 1996. The Company anticipates that its current cash and short-term investment balances and expected cash flow from operations will be sufficient to meet its working capital and capital expenditure requirements at least through fiscal 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item are incorporated by reference herein from Part IV Item 14(a)1 and 2. The selected quarterly supplementary data is included as part of Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 24 25 PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K because the Registrant will file a definitive proxy statement within one hundred twenty (120) days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Stockholders currently scheduled for November 20, 1997, and the information included in the Proxy Statement is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the directors of the Company is incorporated by reference to the information under the heading "Election of Directors " in the Registrant's Proxy Statement. Information regarding the executive officers of the Company is incorporated by reference to the section of Part I of this Annual Report on Form 10-K entitled "Item 1 - Business - Executive Officers of the Company". Information regarding compliance with Section 16 of the Securities Exchange Act of 1934, as amended, is incorporated by reference to the information under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Information regarding the compensation of executive officers and directors of the Company is incorporated by reference to the information under the heading "Executive Compensation" and "Certain Transactions with Management" in the Registrant's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the information under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the information under the caption "Certain Transactions with Management" in the Registrant's Proxy Statement. 25 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) The following documents are filed as a part of this Annual Report on Form 10-K. 1. FINANCIAL STATEMENTS The following consolidated financial statements of Auspex Systems, Inc. are filed as part of this Annual Report on Form 10-K.
Page ---- Report of Arthur Andersen LLP, Independent F-1 Public Accountants Consolidated Statements of Operations for the years ended June 30, 1997, 1996 and 1995 F-2 Consolidated Balance Sheets as of June 30, 1997 F-3 and 1996 Consolidated Statements of Stockholders' F-4 Equity for the years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 F-5 Notes to Consolidated Financial Statements F-6
2. FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedules for each of the three years in the period ending June 30, 1997, 1996 and 1995 are submitted herewith:
Page ---- Schedule II - Valuation and Qualifying Accounts S-1 and Reserves (All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto.)
26 27 3. EXHIBITS The following exhibits are included in this Annual Report on Form 10-K (numbered in accordance with Item 601 of Regulation S-K):
Exhibit Number Description ------ ----------- 3.1(1) Certificate of Incorporation of Registrant as amended and restated to date. 3.21 By-laws of Registrant as amended to date. 10.1(1.2) 1988 Stock Option Plan and forms of Incentive Stock Option Agreements and Nonstatutory Stock Option Agreements, as amended to date. 10.2(1.2) 1993 Directors' Stock Option Plan and forms of Option Agreements. 10.3(1.2) 1993 Employee Stock Purchase Plan and forms of Agreements. 10.4(1.2) 401(k) Plan, as amended to date. 10.5(1.2) Summary of Executive Bonus Program. 10.6(1.2) Form of Directors' and Officers' Indemnification Agreement. 10.7(1) Registration and Information Rights Agreement dated January 31, 1992. 10.8(1) Lease Agreement between the Registrant and The Prudential Insurance Company of America dated October 20, 1992. 10.9(1.3) OEM Agreement dated March 9, 1993 between the Registrant and Fuji Xerox Company, Ltd. 10.10(1.3) Distributor Agreement dated June 6, 1990 between the Registrant and Nissho Electronics Corporation. 10.11(1.3) Agreement between the Registrant and Solectron Corporation dated May 20, 1991, as amended on November 18, 1992. 10.12(1) U.S. OEM Discount Agreement between the Registrant and Sun Microsystems, Inc. effective as of August 18, 1988, as amended by Addendum dated September 8, 1988 and Addendum dated September 14, 1989. 10.13(1) Source Code License between the Registrant and Sun Microsystems, Inc. dated August 31, 1988, as amended on April 30, 1991, February 11, 1992 and March 18, 1992.
27 28
Exhibit Number Description ------ ----------- 10.14(1) NFS Software Agreement between the Registrant and Sun Microsystems, Inc. dated September 29, 1988. 10.15(4.5) Software Agreement between the Registrant and AT&T Information Systems Inc. dated June 2, 1988, as amended by Supplement Number 1, Supplement Number 2 dated August 5, 1988 and Supplement Number 3 dated August 10, 1990, as amended on June 28, 1993. 10.16(4.5) Sublicensing Agreement between the Registrant and AT&T Information Systems Inc. dated August 30, 1988, as amended on June 28, 1993. 10.17(1) Software Agreement between the Registrant and UNIX System Laboratories, Inc. dated April 29, 1992. 10.18(1) License Agreement with the Regents of the University of California dated June 9, 1988, as amended by Addendum dated October 21, 1988. 10.19(6.7) Intel Corporation Purchase Agreement between Intel Corporation and the Registrant dated March 22, 1994. 10.20(8) Warranty and Service Provider Agreement between the Registrant and AT&T Global Information Systems dated April 15, 1994. 10.21(8) SunSoft Technology License and Distribution Agreement between the Registrant and SunSoft, Inc. dated December 17, 1993. 10.22(9) Preferred Shares Rights Agreement between the Registrant and The First National Bank of Boston as Rights Agent dated April 19, 1995. 10.23 Amendment No. 1 to Lease Agreement between the Registrant and WHC-SIX Real Estate dated June 8, 1995. 10.24 Amendment No. 2 to Lease Agreement between the Registrant and WHC-SIX Real Estate dated February 28, 1996. 10.25 Interactive SPARC Software and Sublicensing Agreement between Auspex Systems, Inc. and Interactive systems Corporation, dated November 15, 1991. 10.26 Lease Agreement by and Between South Bay/San Tomas Associates and Auspex Systems, Inc. dated January 14, 1997.
28 29
Exhibit Number Description ------ ----------- 10.27 Lease Agreement by and Between South Bay/San Tomas Associates and Auspex Systems, Inc. dated January 14, 1997. 11.1 Calculation of earning per share. 21.1 Subsidiaries of Registrant 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants 25.1 Power of Attorney (See Page 30). 27.1 Financial Data Schedule
- ---------- (1) Incorporated by reference to exhibits filed in response to Item 16(a), "Exhibits," of the Registrant's Registration Statement on Form S-1, as amended (File No. 33-60052), which was declared effective on May 11, 1993. (2) Designates management contract or compensatory plan arrangements required to be filed as an exhibit of this Annual Report on Form 10-K pursuant to Item 14(c). (3) Confidential treatment granted by order effective May 11, 1993. (4) Incorporated by reference to identically numbered exhibits filed in connection with Registrant's Form 10-K for the fiscal year ended June 25, 1993 (File No. 33-60052). (5) Confidential treatment granted by order effective January 14, 1994. (6) Incorporated by reference to Exhibit 10.1 filed in connection with Registrant's Form 10-Q for the quarter ended March 31, 1994 (File No. 0-21432), which was filed on May 16, 1994. (7) Confidential treatment granted by order effective July 7, 1994. (8) Incorporated by reference to exhibits filed in connection with the Registrant's Form 10-K for the fiscal year ended June 30, 1994 (File No. 0-21432), which was filed on September 28, 1994 and confidential treatment granted by order effective December 5, 1994. (9) Incorporated by reference to Exhibit 1 filed in connection with the Registrant's Form 8-A which was filed on April 20, 1995. (B) REPORTS ON FORM 8-K: No report on Report Form 8-K was filed during the last quarter of the fiscal year ended June 30, 1997. 29 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. AUSPEX SYSTEMS, INC. Date: September 26 , 1997 By: / s / BRUCE N. MOORE ---------------------- --------------------- Bruce N. Moore, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bruce N. Moore and Kent L. Robertson, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of these attorneys-in-fact, or his or her substitute or substitutes may do, or cause to be done, by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- / s / BRUCE N. MOORE President and Chief Executive Officer and September 26, 1997 - ----------------------------------- Director (Bruce N. Moore) / s / KENT L. ROBERTSON Vice President of Finance and September 26, 1997 - ----------------------------------- Chief Financial Officer (Kent L. Robertson) / s / R. STEPHEN CHEHEYL Director September 26, 1997 - --------------------------- (R. Stephen Cheheyl) / s / W. FRANK KING Director September 26, 1997 - ----------------------------------- (W. Frank King) / s / DAVID F. MARQUARDT Director September 26, 1997 - --------------------------- (David F. Marquardt)
30 31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Auspex Systems, Inc.: We have audited the accompanying consolidated balance sheets of Auspex Systems, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Auspex Systems, Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(A) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements, and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP San Jose, California July 28, 1997 F-1 32 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 ------------ ------------- ------------- (In thousands, except per share amounts) Revenues Product revenue $ 182,533 $ 146,913 $ 104,102 Service revenue 19,953 15,727 11,523 --------- --------- --------- Total revenues 202,486 162,640 115,625 --------- --------- --------- Cost of Revenues Cost of product revenue 79,062 62,126 46,617 Cost of service revenue 13,946 9,840 6,833 --------- --------- --------- Total cost of revenues 93,008 71,966 53,450 --------- --------- --------- Gross profit 109,478 90,674 62,175 --------- --------- --------- Operating Expenses Marketing and sales 48,047 37,647 28,069 Research and development 24,449 17,843 14,621 General and administrative 7,672 7,431 5,567 In-process research and development 7,354 - - --------- --------- --------- Total operating expenses 87,522 62,921 48,257 --------- --------- --------- Income from operations 21,956 27,753 13,918 --------- --------- --------- Other Income Interest income 2,265 1,813 1,746 Interest expense (20) (81) (55) Other income 161 112 303 --------- --------- --------- Total other income 2,406 1,844 1,994 --------- --------- --------- Income before provision for income taxes 24,362 29,597 15,912 Provision for Income Taxes 10,942 9,767 3,501 --------- --------- --------- Net Income $ 13,420 $ 19,830 $ 12,411 ========= ========= ========= Net Income per Share $ 0.52 $ 0.77 $ 0.51 ========= ========= ========= Weighted Average Common Shares and Equivalents 25,658 25,702 24,371 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-2 33 CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- (In thousands, except share and per share amounts) Current Assets: Cash and cash equivalents $ 25,056 $ 22,169 Short-term investments 35,830 28,349 Trade receivables, net of allowances of $1,193 and $1,535, respectively 43,130 37,848 Inventories 18,096 16,130 Prepaid expenses and other 12,158 12,447 --------- --------- Total current assets 134,270 116,943 --------- --------- Property and Equipment: Computer and manufacturing equipment 37,893 27,850 System spares 17,465 13,107 Furniture and fixtures 4,624 3,351 Leasehold improvements 3,006 2,573 --------- --------- 62,988 46,881 Less --- accumulated depreciation and amortization (42,952) (31,304) --------- --------- Total property and equipment, net 20,036 15,577 --------- --------- Other Assets 2,846 3,324 --------- --------- Total assets $ 157,152 $ 135,844 ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Current Liabilities: Current portion of capital lease obligations $ 95 $ 136 Accounts payable 6,906 6,165 Accrued liabilities 12,280 12,712 Income tax payable 64 440 Deferred revenue 9,491 6,578 --------- --------- Total current liabilities 28,836 26,031 Stockholders' Equity: Common stock, $.001 par value --- 50,000,000 shares authorized; 25,004,965 and 24,527,188 shares issued, respectively; 25,004,965 and 24,360,507 shares outstanding, respectively 25 24 Additional paid-in capital 78,435 73,169 Notes receivable from sale of common stock - (49) Retained earnings 50,261 36,841 Unrealized loss from available for sale securities (5) - Cumulative translation adjustment (400) (172) --------- --------- Total stockholders' equity 128,316 109,813 --------- --------- Total liabilities and stockholders' equity $ 157,152 $ 135,844 ========= =========
The accompanying notes are an integral part of these financial statements. F-3 34 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL FOR THE THREE YEARS ENDED ----------------------------- PAID-IN NOTES RETAINED JUNE 30,1997 SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS - ------------ ------ ------ ------- ---------- -------- (In thousands, except share amounts) BALANCE, JUNE 30,1994 22,897,816 $ 23 $ 62,332 ($334) $ 4,600 Issuance of common stock to employees 418,883 - 1,601 - - Repayment of notes receivable - - - 67 - Repurchase of previously exercised stock options (15,573) - (4) - - Translation adjustment - - - - - Net income - - - - 12,411 ----------- ----------- ----------- ----------- ----------- BALANCE, JUNE 30,1995 23,301,126 23 63,929 (267) 17,011 Issuance of common stock to employees 1,065,632 1 4,829 - - Repayment of notes receivable - - - 218 - Repurchase of previously exercised stock options (6,251) - (4) - - Tax benefits related to exercise of stock options - - 4,415 - - Translation adjustment - - - - - Net income - - - - 19,830 ----------- ----------- ----------- ----------- ----------- BALANCE, JUNE 30,1996 24,360,507 24 73,169 (49) 36,841 Issuance of common stock to employees 652,859 1 4,097 - - Repayment of notes receivable - - - 49 - Repurchase of previously exercised stock options (8,401) - (10) - - Tax benefits related to exercise of stock options - - 1,179 - - Unrealized loss on available for sale securities - - - - - Translation adjustment - - - - - Net income - - - - 13,420 ----------- ----------- ----------- ----------- ----------- BALANCE, JUNE 30,1997 25,004,965 $ 25 $ 78,435 - $ 50,261 =========== =========== =========== =========== =========== UNREALIZED LOSS ON AVAILABLE CUMULATIVE FOR THE THREE YEARS ENDED FOR SALE TRANSLATION JUNE 30,1997 SECURITIES ADJUSTMENT TOTAL - ------------ ---------- ---------- ----- (In thousands, except share amounts) BALANCE, JUNE 30,1994 - $ 9 $ 66,630 Issuance of common stock to employees - - 1,601 Repayment of notes receivable - - 67 Repurchase of previously exercised stock options - - (4) Translation adjustment - (6) (6) Net income - - 12,411 ----------- ----------- ----------- BALANCE, JUNE 30,1995 - 3 80,699 Issuance of common stock to employees - - 4,830 Repayment of notes receivable - - 218 Repurchase of previously exercised stock options - - (4) Tax benefits related to exercise of stock options - - 4,415 Translation adjustment - (175) (175) Net income - - 19,830 ----------- ----------- ----------- BALANCE, JUNE 30,1996 $ - (172) 109,813 Issuance of common stock to employees - - 4,098 Repayment of notes receivable - - 49 Repurchase of previously exercised stock options - - (10) Tax benefits related to exercise of stock options - - 1,179 Unrealized loss on available for sale securities (5) - (5) Translation adjustment (228) (228) Net income - - 13,420 ----------- ----------- ----------- BALANCE, JUNE 30,1997 ($5) ($400) $ 128,316 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 35 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 ------------- ------------- ------------- (In thousands) Cash Flows from Operating Activities: Net income $ 13,420 $ 19,830 $ 12,411 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,435 8,885 8,030 In-process research and development 7,354 - - Changes in assets and liabilities: Increase in trade receivables (5,282) (10,295) (10,628) (Increase) decrease in inventories (1,966) 1,014 (4,513) (Increase) decrease in prepaid expenses and other 289 (8,174) (161) (Increase) decrease in other assets (1,687) 579 (3,225) Increase (decrease) in accounts payable 741 (1,248) (874) Increase (decrease) in accrued liabilities (432) 5,343 1,576 Increase (decrease) in income tax payable 803 (354) 5,185 Increase in deferred revenue 2,913 1,285 1,647 -------- -------- -------- Net cash provided by operating activities 28,588 16,865 9,448 -------- -------- -------- Cash Flows from Investing Activities: Purchases of held-to-maturity short-term investments - (37,818) (44,228) Purchases of available-for-sale short-erm investments (38,220) - - Proceeds from maturities of held-to-maturity short-term investments - 30,858 41,348 Proceeds from sales of held-to-maturity short-term investments - 4,591 - Proceeds from sales/maturities of available-for-sales short-term investments 30,734 1,048 - Payment for Alphatronix, Inc. acquisition, net of cash acquired (5,600) - - Purchases of property and equipment (16,385) (15,405) (8,052) -------- -------- -------- Net cash used in investing activities (29,471) (16,726) (10,932) -------- -------- -------- Cash Flows from Financing Activities: Principal payments on capital lease obligations (139) (407) (571) Proceeds from sale of common stock, net 4,147 5,048 1,668 Repurchases of common stock (10) (4) (4) -------- -------- -------- Net cash provided by financing activities 3,998 4,637 1,093 -------- -------- -------- Effect of Exchange Rate Changes on Cash (228) (175) (6) -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 2,887 4,601 (397) Cash and Cash Equivalents, Beginning of Year 22,169 17,568 17,965 -------- -------- -------- Cash and Cash Equivalents, End of Year $ 25,056 $ 22,169 $ 17,568 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-5 36 AUSPEX SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION: Auspex Systems, Inc. (the "Company") was incorporated in 1987 in California and reincorporated in Delaware in 1991 to develop, manufacture, market, sell and support a line of high-performance UNIX multi-protocol network file/data servers for the technical workstation market. The Company's markets are principally in North America, Pacific Rim and Europe and include customers in the technical and commercial computing market. See Note 9 for information on revenues by geographic area. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany accounts and transactions. ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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. FOREIGN CURRENCY TRANSLATIONS The functional currency of the Company's foreign subsidiaries is the local currency. Accordingly, gains and losses resulting from the translation of the subsidiaries' financial statements are reported as a separate component of stockholders' equity. REVENUE RECOGNITION Product revenue includes hardware sales and software license fees. Revenues from system sales to end users are generally recognized when the equipment has been shipped, installed and accepted by the end user. Revenues from system sales to distributors, integrators and OEMs, as well as product upgrades, are generally recognized when the equipment has been shipped. Revenues earned under software license agreements with end users are generally recognized when the software has been shipped and there are no significant obligations remaining. Service revenue includes installation, maintenance, and training and is recognized ratably over the contractual period or as the services are provided. Beginning with the first quarter of fiscal 1998, the Company will change its revenue recognition policy such that revenues from systems sales will generally be recognized when the equipment has been shipped. The reason for this change is to better conform its policies with industry practices. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Substantially all cash equivalents consist of investments in certificates of deposits, money market deposits, and municipal bonds with original maturities of three months or less. Substantially all short-term investments consist of municipal bonds which the Company intends to hold between three and twelve months. The Company classifies its investments in debt and equity securities as available-for-sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Securities classified as available-for-sale are reported at fair market value with the related unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary are included in other income. F-6 37 At June 30, 1997, the Company's available-for-sale securities had contractual maturities that expire at various dates through August 1998. The fair value of available-for-sale securities was determined based on quoted market prices at the reporting date for those securities. At June 30, 1997 and 1996, the amortized cost basis, aggregate fair value and gross unrealized holding gains (losses) by major security type are as follows (in thousands):
AMORTIZED AGGREGATE UNREALIZED JUNE 30, 1997 COST FAIR VALUE GAINS (LOSSES) - ------------- --------- ---------- -------------- Available-for-Sale Securities: Municipal bonds....................... $ 48,653 $48,648 $ (5) ======== ======= ===== June 30, 1996 Available-for-Sale Securities: Municipal bonds....................... $ 35,137 $35,098 $ (39) Certificate of deposit................ 61 61 -- -------- ------- ----- Total investments in securities $ 35,198 $35,159 $(39) ======== ======= ====
In fiscal year 1997, there were no significant gains or losses realized on the Company's cash equivalents or short-term investments. One available-for-sale security was sold in fiscal year 1996 with proceeds of $1,048,000, providing a realized gain of $1,000 (the realized gain was calculated using the `specific identification' method). In the fourth quarter of fiscal 1996, upon the Company's re-evaluation of its investment portfolio, all of the Company's securities were re-classified from held-to-maturity to available-for-sale for SFAS No. 115 purposes. During fiscal 1996, the Company sold, prior to maturity, securities previously classified as held-to-maturity with an amortized cost aggregating $4,362,000. Total proceeds from these sales were $4,591,000, with total interest and realized gain of $229,000. SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURES The Company acquired certain equipment under capital lease obligations at a cost of approximately $61,000 in fiscal 1995. No equipment was acquired during fiscal 1997 and 1996 under capital lease obligations. Cash paid for interest during fiscal 1997, 1996 and 1995 was approximately $20,000, $81,000 and $55,000, respectively. Cash paid for income taxes during fiscal 1997, 1996 and 1995 was approximately $6,052,000, $15,256,000 and $1,073,000, respectively. In fiscal 1997 and 1996, non-cash activity consisted of $1,179,000 and $4,415,000, respectively from tax benefits related to exercise of stock options. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash investments and accounts receivables. The Company's cash investment policy limits the amount of credit exposure to any one issuer and restricts purchase of these investments to issuers evaluated as creditworthy. Concentrations of credit risk in trade receivables is limited as a result of the large number of customers comprising the Company's customer base and their dispersion across many different industries and geographies. F-7 38 INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market, and include material, labor and manufacturing overhead. Inventories consisted of the following (in thousands):
JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Purchased materials........... $ 6,382 $ 4,366 Systems in process............ 7,885 7,082 Finished goods................ 3,829 4,682 ------- ------- $18,096 $16,130 ======= =======
Inventories contained components and assemblies in excess of the Company's current estimated requirements and were fully reserved at June 30, 1997 and 1996. Due to competitive pressures, it is reasonably possible that these estimates could change in the near term. Certain of the Company's products contain critical components supplied by a single or a limited number of third parties. The Company has an inventory of these critical components so as to ensure an available supply of products for its customers. Any significant shortage of these components or the failure of the third party suppliers to maintain or enhance these components could materially adversely affect the Company's results of operations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: Computer and manufacturing equipment 1.5 to 2 years System spares 2 to 3 years Furniture and fixtures 3 years Leasehold improvements Shorter of the lease term or estimated useful life SOFTWARE DEVELOPMENT COSTS The Company capitalizes software development costs in compliance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Capitalization of software development costs begins upon the determination of technological feasibility. The determination of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors including anticipated future gross product revenues, estimated economic life and changes in hardware and software technology. Software development costs capitalized during fiscal 1996 and 1995 amounted to $274,000 and $729,000, respectively. No amounts were capitalized in fiscal 1997. Amortization of capitalized software development costs begins when the products are available for general release to customers and is computed on an individual product basis and is the greater of the amount computed on a units-sold basis or straight-line basis over the estimated economic life of the product. Amortization of software development costs amounted to $411,000, $220,000, and $28,000 for the years ended June 30, 1997, 1996 and 1995, respectively. ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands):
JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Payroll, bonus and vacation ....... $ 5,439 $ 6,066 Other.......................................... 6,841 6,646 -------- -------- $ 12,280 $ 12,712 ======== ========
F-8 39 NET INCOME PER SHARE Net income per share is computed using the weighted average number of shares of common stock, and dilutive common equivalent shares from stock options using the treasury stock method. Fully diluted net income per share is substantially the same as primary net income per share. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," which is required to be adopted by the Company in its second quarter of fiscal 1998. At that time, the Company will be required to change the method currently used to compute net income per share and to restate all prior periods presented. Under the new requirements for calculating net income per share, primary net income per share will be replaced with basic net income per share and fully diluted net income per share will be replaced with diluted net income per share. Under basic net income per share, the dilutive effect of stock options will be excluded. The calculation of basic net income per share for the years ended June 30, 1997, 1996, and 1995 results in $0.54, $0.84, and $0.54 per share, respectively. Diluted net income per share is substantially the same as the reported primary net income per share. EMPLOYEE STOCK PLANS Effective, July, 1, 1996, the Company adopted Statement of SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion No. 25 and related interpretations to account for its employee stock option and stock purchase plans, and accordingly, does not recognize compensation expense. Note 7 of the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income and earnings per share for 1997 and 1996 as if the Company had elected to recognize compensation expense based on the fair value of the options granted at grant date as prescribed by SFAS No. 123. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for disclosure and financial statement display for reporting total comprehensive income and its individual components. Comprehensive income as defined, includes all changes in equity during a period from nonowner sources. The Company is required to adopt SFAS No. 130 in its first quarter of fiscal 1999. At that time, reclassification of financial statements for earlier periods for comparative purposes is required. The Company does not expect the adoption of SFAS No. 130 to have a material effect on the consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas, and major customers. The Company is required to adopt SFAS No. 131 in fiscal 1999 and does not expect such adoption to have a material effect on the consolidated financial statements. 3. ACQUISITION: On June 30, 1997, the Company acquired all of the outstanding shares of Alphatronix, Inc. (Alphatronix), a market leader in the development and marketing of open-systems based storage management solutions for a total purchase price of $7.7 million. The acquisition was accounted for using the purchase method of accounting. A portion of the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair value. The fair value of tangible assets acquired and liabilities assumed was $0.3 million and $0.3 million, respectively. In addition, $7.4 million of the purchase price was allocated to in-process research and development projects that had not reached technological feasibility and had no probable alternative future uses, which the Company expensed at the date of the acquisition as a one-time non-recurring charge. The remainder of the purchase price, $0.3 million, was allocated to goodwill and will be amortized over five years on a straight-line basis. Comparative proforma information has not been presented, as the results of operations for Alphatronix are not material to the Company's financial statements. F-9 40 4. LINE OF CREDIT: In November 1996, the Company entered into a revolving line of credit agreement with a bank under which it can borrow up to $15,000,000. The line of credit bears interest at LIBOR plus 1.5% (7.3% at June 30, 1997) for increments in excess of $250,000 and at the bank's reference rate on all other borrowings (8.5% at June 30, 1997) and expires on October 31, 1997. At June 30, 1997 there were no borrowings outstanding under the line of credit agreement. The line of credit agreement contains certain financial covenants determined on a quarterly basis. 5. COMMITMENTS AND CONTIGENCIES: Facilities and equipment are leased under various capital and operating leases. Rent expense was approximately $3,197,000, $2,564,000 and $1,823,000, for fiscal 1997, 1996 and 1995, respectively. The Company did not enter into any new capital leases in fiscal 1997 and 1996. Also during 1997, the Company entered into lease agreements for four buildings under construction in Santa Clara, California. The leases for these facilities commence in March 1998 and expire in February 2010. In addition, the lease agreements contain three successive options to extend the lease terms for sixty months each. As of June 30, 1997, future minimum lease payments under non-cancelable leases were as follows (in thousands):
CAPITAL OPERATING YEARS ENDING JUNE 30, LEASES LEASES ------ ------ 1998 ...................................................... $ 50 $ 4,091 1999 ...................................................... 46 5,431 2000....................................................... -- 5,263 2001....................................................... -- 5,119 2002....................................................... -- 4,941 Thereafter................................................. -- 40,959 --- -------- Total minimum lease payments............................................ 96 $ 65,804 ======== Less: Amount representing interest (8%)................................ (1) ---- Present value of lease payments......................................... $ 95 ====
As of both June 30, 1997 and 1996, the cost of leased equipment was approximately $1,401,000 with accumulated amortization of $1,401,000 and $1,391,000, respectively. The Company is a defendant in various lawsuits and is subject to various claims which arise in the normal course of business. In the opinion of management, the ultimate dispositions of these claims will not have a material adverse effect on the financial position, liquidity or results of operations of the Company. 6. CAPITAL STOCK: During 1994, the Company repurchased approximately 600,000 shares of common stock for approximately $3.8 million. As of June 30, 1997, the Company has reserved the following shares of authorized but unissued common stock: Stock option plan............................. 5,830,352 Directors' stock option plan.................. 159,000 Employee stock purchase plan.................. 147,997 --------- 6,137,349 =========
F-10 41 7. STOCK OPTION AND STOCK PURCHASE PLANS: The Company has two stock option plans, the 1988 Employee Stock Option Plan (1988 Plan) and the Directors' Stock Option Plan (Directors' Plan), and an employee stock purchase plan (The 1993 Employee Stock Purchase Plan). The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data):
1997 1996 ------------ ----------- Net income: As Reported $13,420 $19,830 Pro Forma $6,165 $16,904 Earnings per share: As Reported $0.52 $0.77 Pro Forma $0.24 $0.66
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997 and 1996, respectively: risk-free interest rates of 6.0 and 5.8; expected volatility of 69 and 66 percent; no expected dividends, and an expected life of 0.4 years beyond the vest date for each year's vesting increment of an option. Since the SFAS No. 123 method of accounting has not been applied to options granted prior to July 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. In fiscal 1997, the Company offered its employees the option of exchanging and canceling stock options acquired from June 1995 through October 1996 for new options priced as of November 1, 1996. As a result, the Company canceled 1,933,592 options at prices ranging from $10.75 to $23.125 per share and reissued the same number of options at the then current fair market value of $10.25 per share. Employees who submitted their option grants for repricing had their vesting schedules amended by moving their vesting back three months or restarting the vesting as of the new grant date, depending on the date of the grant. The Company may sell up to 800,000 shares of stock to its full-time employees under the 1993 Employee Stock Purchase Plan. The Company has sold 218,684, 146,175, and 222,646 shares in 1997, 1996 and 1995, respectively, and has sold 652,003 shares through June 30, 1997. The Company sells shares at 85% of the lower of the stock's closing market price on the first or last day of the six month offering period. The weighted average fair value of shares sold in 1997 and 1996, respectively, was $9.00 and $11.70. The Company may grant up to 10,000,000 shares under the 1988 Plan. The Company has granted options on 8,178,225 shares (net of lapsed and terminated options) through June 30, 1997. The option exercise price is not less than 100% of the fair value of the shares on the date of grant, except that non-statutory options may be granted at 85% of such fair value. The 1988 Plan options are fully vested after five years and expire after ten years. The Company may grant options for up to 175,000 shares under the Directors' Plan. The Company granted options on 152,000 shares through June 30, 1997. The options' exercise price equals the closing price of the stock on the day of the grant. The options are fully vested after four years and expire after ten years. A summary of the status of the Company's two stock option plans at June 30, 1997, 1996 and 1995 incorporating changes during the years then ended is presented in the table and narrative below (share amounts in thousands): F-11 42
YEAR ENDED JUNE 30, --------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG. SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ -------------- ------ -------------- ------ -------------- Outstanding at beginning of year 4,088 $10.56 3,914 $ 5.86 3,011 $ 4.11 Granted 3,574 $10.86 1,679 $16.83 1,572 $ 8.63 Exercised (434) $ 4.85 (918) $ 3.28 (196) $ 2.35 Cancelled (3,148) $13.66 (587) $ 8.47 (473) $ 5.26 ------- ------ ----- Outstanding at end of year 4,080 $ 9.07 4,088 $10.56 3,914 $ 5.86 ===== ===== ===== Exercisable end of year 1,145 $ 7.21 1,101 $ 5.31 1,531 $ 2.80 ===== ===== ===== Weighted fair value per option granted $ 3.50 $ 8.46 ====== ======
JUNE 30, 1997 ------------------------------------------------------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE PRICES NUMBER YEARS EXERCISE PRICE NUMBER EXERCISE PRICE - --------------- ------ ----- -------------- ------ -------------- $.25 - $7.06 817 6.30 $ 4.85 576 $ 4.35 $7.13 - $9.88 561 8.49 $ 8.19 119 $ 8.58 $10.25 - $10.25 1,844 9.35 $10.25 254 $10.25 $10.38- $12.75 830 8.66 $11.00 193 $10.77 $12.93 - $20.38 28 8.90 $14.66 3 $15.05 -------- -------- $.25 - $20.38 4,080 8.48 $ 9.07 1,145 $ 7.21
NOTES RECEIVABLE FROM EMPLOYEES The Company had received as consideration from certain officers of the Company promissory notes in connection with the exercise of stock options. These notes bore interest at rates between 5.57% and 6.69% and matured at various dates through April 1998. As of June 30, 1997, all outstanding notes were repaid. STOCKHOLDER RIGHTS PLAN During 1995, the Company established a stock purchase rights plan (the Rights Plan), under which stockholders may be entitled to purchase stock in the Company, or in an acquirer of the Company at a discounted price in the event of certain efforts to acquire control of the Company. The rights expire on the earliest of (a) April 19, 2005, (b) exchange or redemption of the rights pursuant to the Rights Plan, or (c) consummation of a merger or consolidation. F-12 43 8. INCOME TAXES: The provision for income taxes consisted of the following (in thousands):
Years Ended June 30, 1997 1996 1995 -------- -------- ------- Current: Federal $8,371 $10,319 $4,972 State 1,297 1,739 1,365 ------- ------ ------ 9,668 12,058 6,337 ----- ------ ----- Deferred (Prepaid): Federal 1,083 (2,039) (2,281) State 191 (252) (555) ------- ------ ------ 1,274 (2,291) (2,836) ------- ----- ------ Net tax provision $ 10,942 $9,767 $3,501 ======= ===== =====
The provision for income taxes is reconciled with the Federal statutory rate as follows (in thousands):
Years Ended June 30, 1997 1996 1995 -------- -------- -------- Provision computed at federal statutory rate $ 8,526 $ 10,359 $ 5,569 State taxes, net of federal tax benefit ..... 1,078 1,487 1,059 Change in valuation allowance ............... -- -- (2,261) Research and development and other credits .. (650) (700) (655) In-process research and development write-off 2,180 -- -- FSC commission .............................. (746) (871) (381) Foreign taxes and other ..................... 554 (508) 170 -------- -------- -------- Net tax provision ........................... $ 10,942 $ 9,767 $ 3,501 ======== ======== ======== Net effective tax rate ...................... 45% 33% 22% ======== ======== ========
The components of the net deferred income tax asset are as follows (in thousands):
JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Depreciation and asset basis differences ...................... $ 1,739 $ 2,030 Accrued vacation .............................................. 728 629 Inventory reserve ............................................. 1,806 2,041 Other reserves and accruals, not currently deductible for tax purposes ................................................. 1,559 2,092 State taxes, not currently deductible for Federal tax purposes 409 386 Other ......................................................... (337) 7 ------- ------- Net deferred income tax asset ................................. $ 5,904 $ 7,185 ======= =======
F-13 44 9. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION: The Company operates in a single industry segment, the design and manufacture of high-performance UNIX multi-protocol network file/data servers for the technical workstation market. Export revenues consisted of the following (in thousands):
Years Ended June 30, 1997 1996 1995 ------- ------- ------- Pacific Rim ........................ $31,759 $36,229 $21,390 Europe ............................. 28,191 16,248 8,984 Canada ............................. 6,790 5,986 3,201 ------- ------- ------- Total export revenues ...... $66,740 $58,463 $33,575 ======= ======= ======= Percentage of total revenues 33% 36% 29% ======= ======= =======
One customer accounted for 10%, 10% and 15% of total revenues in fiscal 1997, 1996 and 1995, respectively. One other customer accounted for 15% of total revenues in fiscal 1997. Another customer accounted for 13% of total revenues in fiscal 1996. No other customers accounted for 10% or more of total revenues in these years. F-14 45 SCHEDULE II AUSPEX SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS ADDITIONS BALANCE AT CHARGED CHARGED BALANCE AT BEGINNING TO AGAINST END DESCRIPTION OF PERIOD EXPENSE REVENUES DEDUCTIONS OF PERIOD ----------- --------- ------- -------- ---------- --------- Accounts Receivable Allowances: Year ended June 30, 1995 $ 438 $ 30 $ 318 $ -- $ 786 Year ended June 30, 1996 786 89 1,300 (640) 1,535 Year ended June 30, 1997 1,535 109 582 (1,033) 1,193
S-1 46
EXHIBIT INDEX ------------- Exhibit Number Description ------ ----------- 3.1(1) Certificate of Incorporation of Registrant as amended and restated to date. 3.21 By-laws of Registrant as amended to date. 10.1(1.2) 1988 Stock Option Plan and forms of Incentive Stock Option Agreements and Nonstatutory Stock Option Agreements, as amended to date. 10.2(1.2) 1993 Directors' Stock Option Plan and forms of Option Agreements. 10.3(1.2) 1993 Employee Stock Purchase Plan and forms of Agreements. 10.4(1.2) 401(k) Plan, as amended to date. 10.5(1.2) Summary of Executive Bonus Program. 10.6(1.2) Form of Directors' and Officers' Indemnification Agreement. 10.7(1) Registration and Information Rights Agreement dated January 31, 1992. 10.8(1) Lease Agreement between the Registrant and The Prudential Insurance Company of America dated October 20, 1992. 10.9(1.3) OEM Agreement dated March 9, 1993 between the Registrant and Fuji Xerox Company, Ltd. 10.10(1.3) Distributor Agreement dated June 6, 1990 between the Registrant and Nissho Electronics Corporation. 10.11(1.3) Agreement between the Registrant and Solectron Corporation dated May 20, 1991, as amended on November 18, 1992. 10.12(1) U.S. OEM Discount Agreement between the Registrant and Sun Microsystems, Inc. effective as of August 18, 1988, as amended by Addendum dated September 8, 1988 and Addendum dated September 14, 1989. 10.13(1) Source Code License between the Registrant and Sun Microsystems, Inc. dated August 31, 1988, as amended on April 30, 1991, February 11, 1992 and March 18, 1992.
27 47
Exhibit Number Description ------ ----------- 10.14(1) NFS Software Agreement between the Registrant and Sun Microsystems, Inc. dated September 29, 1988. 10.15(4.5) Software Agreement between the Registrant and AT&T Information Systems Inc. dated June 2, 1988, as amended by Supplement Number 1, Supplement Number 2 dated August 5, 1988 and Supplement Number 3 dated August 10, 1990, as amended on June 28, 1993. 10.16(4.5) Sublicensing Agreement between the Registrant and AT&T Information Systems Inc. dated August 30, 1988, as amended on June 28, 1993. 10.17(1) Software Agreement between the Registrant and UNIX System Laboratories, Inc. dated April 29, 1992. 10.18(1) License Agreement with the Regents of the University of California dated June 9, 1988, as amended by Addendum dated October 21, 1988. 10.19(6.7) Intel Corporation Purchase Agreement between Intel Corporation and the Registrant dated March 22, 1994. 10.20(8) Warranty and Service Provider Agreement between the Registrant and AT&T Global Information Systems dated April 15, 1994. 10.21(8) SunSoft Technology License and Distribution Agreement between the Registrant and SunSoft, Inc. dated December 17, 1993. 10.22(9) Preferred Shares Rights Agreement between the Registrant and The First National Bank of Boston as Rights Agent dated April 19, 1995. 10.23(8) Amendment No. 1 to Lease Agreement between the Registrant and WHC-SIX Real Estate dated June 8, 1995. 10.24(8) Amendment No. 2 to Lease Agreement between the Registrant and WHC-SIX Real Estate dated February 28, 1996. 10.25(8) Interactive SPARC Software and Sublicensing Agreement between Auspex Systems, Inc. and Interactive systems Corporation, dated November 15, 1991. 10.26 Lease Agreement by and Between South Bay/San Tomas Associates and Auspex Systems, Inc. dated January 14, 1997.
28 48
Exhibit Number Description ------ ----------- 10.27 Lease Agreement by and Between South Bay/San Tomas Associates and Auspex Systems, Inc. dated January 14, 1997. 11.1 Calculation of earning per share. 21.1 Subsidiaries of Registrant 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants 25.1 Power of Attorney (See Page 30). 27.1 Financial Data Schedule
- ---------- (1) Incorporated by reference to exhibits filed in response to Item 16(a), "Exhibits," of the Registrant's Registration Statement on Form S-1, as amended (File No. 33-60052), which was declared effective on May 11, 1993. (2) Designates management contract or compensatory plan arrangements required to be filed as an exhibit of this Annual Report on Form 10-K pursuant to Item 14(c). (3) Confidential treatment granted by order effective May 11, 1993. (4) Incorporated by reference to identically numbered exhibits filed in connection with Registrant's Form 10-K for the fiscal year ended June 25, 1993 (File No. 33-60052). (5) Confidential treatment granted by order effective January 14, 1994. (6) Incorporated by reference to Exhibit 10.1 filed in connection with Registrant's Form 10-Q for the quarter ended March 31, 1994 (File No. 0-21432), which was filed on May 16, 1994. (7) Confidential treatment granted by order effective July 7, 1994. (8) Incorporated by reference to exhibits filed in connection with the Registrant's Form 10-K for the fiscal year ended June 30, 1994 (File No. 0-21432), which was filed on September 28, 1994 and confidential treatment granted by order effective December 5, 1994. (9) Incorporated by reference to Exhibit 1 filed in connection with the Registrant's Form 8-A which was filed on April 20, 1995. 29 EX-10.26 2 LEASE AGREEMENT DATED 1/14/97 1 LEASE AGREEMENT BY AND BETWEEN SOUTH BAY/SAN TOMAS ASSOCIATES AND AUSPEX SYSTEMS, INC. DATED AS OF JANUARY , 1997 2 TABLE OF CONTENTS
Page ---- 1. Parties................................................................. 1 2. Demise of Premises...................................................... 1 3. Lease Term.............................................................. 1 A. Lease Term..................................................... 1 B. Commencement Date.............................................. 1 C. Commencement Date Memorandum................................... 2 D. Delay in Completion of Buildings............................... 2 E. Options to Extend.............................................. 2 F. Early Entry.................................................... 3 4. Rent.................................................................... 3 A. Time of Payment................................................ 3 B. Monthly Installment............................................ 4 C. Tenant Improvement Allowance................................... 6 D. Late Charge.................................................... 6 E. Additional Rent................................................ 7 F. Place of Payment............................................... 7 G. Advance Payment................................................ 7 5. Security Deposit........................................................ 7 6. Use of Premises......................................................... 8 A. Restrictions on Use............................................ 8 B. Initial Occupancy.............................................. 8 7. Taxes and Assessments................................................... 8 A. Tenant's Property.............................................. 8 B. Property Taxes................................................. 8 C. Property Taxes Defined......................................... 9 D. Other Taxes.................................................... 9 E. Tenant's Right to Contest...................................... 9 8. Insurance............................................................... 10 A. Indemnity...................................................... 10 B. Liability Insurance............................................ 10 C. Property Insurance............................................. 11 D. Tenant's Property Insurance.................................... 11 E. Mutual Waiver of Subrogation................................... 11
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Page ---- 9. Utilities............................................................... 12 10. Repairs and Maintenance................................................. 12 A. Landlord's Repairs............................................. 12 B. Tenant's Repairs............................................... 13 11. Alterations............................................................. 15 A. Limitations.................................................... 15 B. Tenant's Rights................................................ 15 C. Alterations Required by Law.................................... 16 12. Acceptance of the Premises.............................................. 16 13. Default................................................................. 16 A. Events of Default.............................................. 16 B. Remedies....................................................... 17 C. Waivers........................................................ 19 14. Destruction............................................................. 19 A. Landlord's Duty to Restore..................................... 19 B. Landlord's Right to Terminate.................................. 20 C. Tenant's Right to Terminate.................................... 21 D. Abatement of Rent.............................................. 21 15. Condemnation............................................................ 22 A. Definition of Terms............................................ 22 B. Rights......................................................... 22 C. Total Taking................................................... 22 D. Partial Taking................................................. 22 16. Mechanics' Lien......................................................... 23 17. Inspection of the Premises.............................................. 23 18. Compliance with Laws.................................................... 23 19. Subordination........................................................... 23 A. Priority....................................................... 24 B. Subsequent Security Instruments................................ 24 C. Documents...................................................... 24 D. Tenant's Attornment............................................ 24 20. Holding Over............................................................ 24
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Page ---- 21. Notices................................................................. 25 22. Attorneys' Fees......................................................... 25 23. Subleasing and Assignment............................................... 26 A. Landlord's Consent Required.................................... 26 B. Transferee Information Required................................ 26 C. Landlord's Rights.............................................. 26 D. Permitted Transfers............................................ 27 24. Successors.............................................................. 28 25. Mortgagee Protection.................................................... 28 26. Estoppel Certificate.................................................... 28 27. Surrender of Lease Not Merger........................................... 29 28. Waiver.................................................................. 29 29. General................................................................. 29 A. Captions....................................................... 29 B. Definition of Landlord......................................... 29 C. Time of Essence................................................ 29 D. Severability................................................... 29 E. Quiet Enjoyment................................................ 30 F. Law............................................................ 30 G. Agent.......................................................... 30 H. Lender......................................................... 30 I. Force Majeure.................................................. 30 30. Sign.................................................................... 30 31. Interest on Past Due Obligations........................................ 31 32. Surrender of the Premises............................................... 31 33. Authority............................................................... 31 34. CC&Rs................................................................... 31 35. Brokers................................................................. 32
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Page ---- 36. Limitation on Landlord's Liability...................................... 32 37. Hazardous Material...................................................... 33 A. Definitions.................................................... 33 B. Landlord's Obligation.......................................... 33 C. Permitted Use.................................................. 33 D. Hazardous Materials Management Plan............................ 34 E. Use Restriction................................................ 35 F. Tenant Indemnity............................................... 35 G. Compliance..................................................... 35 H. Assignment and Subletting...................................... 36 I. Surrender...................................................... 36 J. Right to Appoint Consultant.................................... 36 K. Holding Over................................................... 37 L. Existing Environmental Reports................................. 37 M. Provisions Survive Termination................................. 37 N. Controlling Provisions......................................... 37 38. Landlord's Default...................................................... 37 39. Condition to Effectiveness.............................................. 38
iv 6 LIST OF EXHIBITS Exhibit "A" - Legal Description of Parcel...........................................39 Exhibit "B" - Site Plan.............................................................40 Exhibit "C" - Improvement Agreement.................................................41 Exhibit "D" - Commencement Date Memorandum..........................................57 Exhibit "E" - List of Hazardous Materials Tenant Will Use on The Premises...........58 Exhibit "F" - Description of Existing Environmental Reports.........................59 Exhibit "G" - Preliminary Title Report..............................................63 Exhibit "H" - CCR's and Excluded Obligations........................................64
v 7 LEASE AGREEMENT 1. Parties. This Lease, dated for reference purposes as of January , 1997, is made by and between South Bay/San Tomas Associates, a California general partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware corporation ("TENANT"). 2. Demise of Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, upon the terms and conditions hereinafter set forth, those certain premises (the "PREMISES") situated in the City of Santa Clara, County of Santa Clara, State of California, described as follows: A. That Parcel of real property more particularly described in Exhibit "A" attached hereto (the "PARCEL"); B. Three (3) buildings two (2) stories high to be constructed by Landlord and located on the Parcel as shown on the site plan attached hereto as Exhibit "B" containing approximately one hundred seventy one thousand three hundred eighty two (171,382) square feet (collectively, the "BUILDINGS" and individually, "BUILDING"). C. The shells and the associated site improvements for all Buildings (the "BUILDING SHELLS") to be constructed by Landlord in accordance with the provisions of the Improvement Agreement attached hereto as Exhibit "C" (the "IMPROVEMENT AGREEMENT"). D. The improvements (the "TENANT IMPROVEMENTS") to be constructed by Landlord in and about the Buildings in accordance with the provisions of the Improvement Agreement. The Building Shells and the Tenant Improvements are collectively referred to in this Lease as the "IMPROVEMENTS". 3. Lease Term A. Lease Term. The term of this Lease (the "INITIAL LEASE TERM") shall be for twelve (12) years commencing on the Commencement Date (as defined below) and ending twelve (12) years thereafter unless sooner terminated pursuant to any provision hereof. B. Commencement Date. As used in this Lease, the term "COMMENCEMENT DATE" shall mean the later of March 1, 1998, or the date when all of the following have occurred with respect to the Improvements: (i) The construction of all of the Improvements has been substantially completed in accordance with the provisions of the Improvement Agreement attached hereto and the Final Plans therefor (except for minor punchlist items which do not substantially interfere with Tenant's use of the Premises), and all utilities are connected and available for Tenant's use; (ii) A certificate of occupancy or its equivalent (including a final 1 8 building inspection) with respect to the Improvements has been issued by the City of Santa Clara; and (iii) Landlord has given Tenant written notice that the events described in (i) and (ii) above have occurred. C. Commencement Date Memorandum. Within thirty (30) days following the Commencement Date, Tenant shall execute and deliver to Landlord a Commencement Date Memorandum in the form attached hereto as Exhibit "D" acknowledging the actual Commencement Date, the Expiration Date and the initial Monthly Installment (as defined in Subparagraph 4.A. hereof) of rent. D. Delay in Completion of Buildings. Notwithstanding the Commencement Date set forth in Subparagraph 3.B. above, if the construction of the Improvements to the Buildings have not been substantially completed in accordance with the provisions of the Improvement Agreement attached hereto and the Final Plans therefor (except for minor punchlist items which do not substantially interfere with Tenant's use of the Premises) by the later of (i) January 31, 1998, or (ii) eleven (11) months following the issuance of all required building permits for the construction of the Improvements to the Building (provided such time periods in (i) and (ii) shall be extended by force majeure delays and Tenant Delays as defined in Exhibit "C" hereto) (the "BUILDING COMPLETION DATE"), Tenant shall have the option to terminate this Lease (which shall be Tenant's sole remedy for such an event), which option may be exercised only by delivery to Landlord of a written notice of election to terminate within fifteen (15) days after the Building Completion Date and prior to substantial completion of the Improvements to the Buildings. E. Options to Extend (i) Tenant shall have three (3) successive options (the "OPTIONS") to extend the Initial Lease Term for successive terms of sixty (60) months each (collectively, the "EXTENDED TERMS" and individually, the "FIRST EXTENDED TERM", the "SECOND EXTENDED TERM" and the "THIRD EXTENDED TERM"). The Initial Term as may be extended by Tenant shall be referred to herein as the "LEASE TERM." (ii) Tenant shall exercise each Option, if at all, by giving Landlord notice of Tenant's intention to do so at least two hundred seventy (270) days prior to the expiration of the then existing Lease Term. In no event shall any purported exercise of the Option by Tenant be effective if (a) an Event of Default (as defined in Subparagraph 13.A. hereof) exists at the time of such exercise or at the time such Extended Term would otherwise have commenced, or (b) Tenant had not timely exercised each previous Option(s) to extend the Lease. The Extended Terms shall be upon all of the terms and conditions hereof, except that the Monthly Installment and method of rental adjustment for each Extended Term shall be determined as set forth in Subparagraph 4.B.(iii) hereof. Unless expressly mentioned and approved in the written consent of Landlord referred to in Paragraph 23 hereof, the option rights 2 9 of Tenant under this paragraph are granted for Tenant's personal benefit and may not be assigned or transferred by Tenant. F. Early Entry. Tenant may enter the Premises prior to the Commencement Date to install fixtures and equipment therein, provided Tenant first obtains the prior written approval of Landlord for such entry, which approval shall not be unreasonably withheld but which Landlord may withhold if Landlord determines in its reasonable discretion that such entry will delay completion of construction of the Improvements which Landlord is required to construct pursuant to Exhibit "C". If Landlord permits Tenant to so enter upon the Premises, such entry shall be subject to all of the terms and conditions of this Lease, excepting only the obligation to pay the Monthly Installment of rent or Additional Rent (as defined in Subparagraph 4.E. below), and the duty to pay utility consumption costs and insurance. Tenant shall coordinate its entry onto the Premises with Landlord and the contractors and other personnel employed by Landlord. At all times during Tenant's right of entry, Landlord and Tenant shall reasonably cooperate to refrain from interfering with the construction activities of the other party's personnel; provided, Landlord shall not be required to cooperate with Tenant if such cooperation results in a delay in completing the Improvements. In any case, Tenant shall repair any damage to the Improvements constructed by Landlord resulting from the entry upon the Premises by Tenant or Tenant's Agents (as that term is defined in Subparagraph 29.G.) prior to the Commencement Date or caused by the installation of fixtures and equipment by Tenant or Tenant's Agents. If the entry by Tenant or Tenant's Agents upon the Premises prior to the Commencement Date interferes with Landlord's construction activities, then Landlord shall give Tenant written notice requesting that Tenant cease such interference. If Tenant does not immediately comply with such notice from Landlord requesting that Tenant cease interference with Landlord's construction activities, and if such failure to comply causes a delay in completing the construction of the Improvements, then the Commencement Date shall be deemed to have occurred on the date the Improvements would have been completed had there been no such delay caused by Tenant or its Agents. 4. Rent. A. Time of PaymentA. Time of Payment. Tenant shall pay to Landlord as rent for the Premises the respective sums specified in Subparagraph 4.B. below (the "MONTHLY INSTALLMENT") each month in advance on the first day of each calendar month, without deduction or offset, prior notice or demand, commencing on the Commencement Date and continuing through the Lease Term, together with such additional rents as are payable by Tenant to Landlord under the terms of this Lease. The Monthly Installment for any period during the Lease Term which is less than one (1) full month shall be a pro rata portion of the Monthly Installment based upon a thirty (30) day month. B. Monthly Installment (i) The Monthly Installment of rent for the first thirty (30) months following the Commencement Date shall be Two Hundred Sixty Five Thousand Six Hundred 3 10 Forty Two and 10/100 Dollars ($265,642.10). (ii) Rental Adjustment. The Monthly Installment shall be adjusted at the beginning of the thirty-first (31st) month following the Commencement Date and every thirty (30) months thereafter during the Initial Lease Term (the "RENTAL ADJUSTMENT DATES"), to reflect any increase in the cost of living. The adjustment or adjustments, if any, shall be calculated upon the basis of the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All-Urban Consumers, for San Francisco-Oakland-San Jose (1982 - 1984 = 100), hereafter referred to as the "INDEX." The last published Index in effect on the Commencement Date shall be considered the "BASE". On each Rental Adjustment Date, the Monthly Installment then in effect shall be increased to an amount equal to the Monthly Installment in effect as of the first full month of the Lease Term multiplied by a fraction, the numerator of which is the Index as of such Rental Adjustment Date, and the denominator of which is the "Base"; provided, the Monthly Installment shall not increase by less than three percent (3%) per annum compounded annually or greater than seven percent (7%) per annum compounded annually on each Rental Adjustment Date. When the adjusted Monthly Installment is determined upon each Rental Adjustment Date, Landlord shall give Tenant written notice to that effect indicating how the new Monthly Installment figure was computed in accordance with this Subparagraph 4.B.(ii). If the Index does not exist on any Rental Adjustment Date in the same format as referred to in this paragraph, Landlord shall substitute (using conversion factors, as appropriate) in lieu thereof the index most nearly comparable to the Index then published by the Bureau of Labor Statistics, or successor or similar governmental agency, or if no governmental agency then publishes an index, Landlord shall substitute therefor the most nearly comparable index then published by a reputable private organization. (iii) Extended Term Rent. (a) As of the commencement of each Extended Term, the Monthly Installment and the method of rental adjustment (including the timing of adjustments and the basis for calculating the adjustments) for each Extended Term shall be the fair market rental, as of the commencement date of the Extended Term, for the Premises, as improved, and a method and timing of rental adjustments consistent with rental adjustment practices then prevailing in the marketplace for comparably sized projects designed for similar uses within a three (3) mile radius of the Premises. In the event the parties fail to agree upon the amount of the Monthly Installment and the method of rental adjustment for any of the Extended Terms within thirty (30) days after Landlord's receipt of Tenant's notice exercising the Option for such Extended Term, the Monthly Installment and the method of rental adjustment for such Extended Term shall be determined by appraisal in the manner hereafter set forth. (b) In the event it becomes necessary under this Subparagraph 4.B.(iii)(b) to determine the fair market rent to be used as the Monthly Installment and the method and timing of rental adjustments of the Premises by appraisal, Landlord and Tenant each shall appoint a real estate appraiser who shall be a member of The Appraisal Institute ("TAI") and who shall have a minimum of five (5) years of commercial appraisal experience in Santa 4 11 Clara County and such appraisers shall each determine the fair market rent for the Premises, and the method and timing of rental adjustments taking into account the value of the Premises (excluding Tenant's Property (as defined below) which Tenant shall be allowed to remove upon the expiration of this Lease), the amenities provided and prevailing comparable rentals and rental adjustment practices then prevailing in the marketplace for comparably sized projects designed for similar uses within a three (3) mile radius of the Premises. Such appraisers shall, within twenty (20) business days after their appointment, complete their appraisals and submit their appraisal reports to Landlord and Tenant. If the fair market rent of the Premises established in the two (2) appraisals varies by five percent (5%) or less of the higher rental, the average of the two shall be controlling. If said fair market rent varies by more than five percent (5%) of the higher rental, said appraisers, within ten (10) days after submission of the last appraisal, shall appoint a third appraiser who shall be a member of TAI and who shall have a minimum of five (5) years of commercial appraisal experience in Santa Clara County. Such third appraiser shall, within twenty (20) business days after his appointment, determine by appraisal the fair market rent of the Premises, taking into account the same factors referred to above, and submit his appraisal report to Landlord and Tenant. The fair market rent determined by the third appraiser for the Premises shall be averaged with the fair market rent determined by the one of the initial two appraisers that is closest to that of the third appraiser, unless the third appraiser's determination of the rent is less than that set forth in the lower appraisal previously obtained, in which case the value set forth in said lower appraisal shall be controlling, or unless it is greater than that set forth in the higher appraisal previously obtained, in which case the rental set forth in said higher appraisal shall be controlling. The method of adjusting rental periodically, including the manner and timing of such adjustments, shall be as determined by the initial two appraisers, if they agree on a single method; otherwise, it shall be as determined by the third appraiser. If either Landlord or Tenant fails to appoint an appraiser, or if an appraiser appointed by either of them fails, after his appointment, to submit his appraisal within the required period in accordance with the foregoing, the appraisal submitted by the appraiser properly appointed and timely submitting his appraisal shall be controlling. If the two appraisers appointed by Landlord and Tenant are unable to agree upon a third appraiser within the required period in accordance with the foregoing, application shall be made within twenty (20) days thereafter by either Landlord or Tenant to TAI, which shall appoint a member of said institute willing to serve as appraiser. Each party shall bear the cost of their own appraiser and the cost of the third appraiser under this Subparagraph shall be borne equally by Landlord and Tenant. C. Tenant Improvement Allowance (i) Landlord shall make available for the payment of all TI Costs (as defined in the Improvement Agreement) an amount equal to Four Million Two Hundred Eighty Four Thousand Five Hundred Fifty Dollars ($4,284,550) (the "TI ALLOWANCE"). To the extent that TI Costs exceed the total TI Allowance, Tenant shall pay the amount of such excess (with such excess referred to herein as "TENANT'S TI CONTRIBUTION"). After Landlord has expended the total TI Allowance, Tenant's TI Contribution shall be paid by Tenant to Landlord in installments as and when needed by Landlord to pay TI Costs that have been incurred by Landlord for the Buildings, with each installment to be paid within five (5) days after Landlord 5 12 notifies Tenant that a progress payment toward TI Costs is to be made and supplies to Tenant an appropriate accounting of all TI Costs incurred by Landlord and such other documentation as a construction lender might reasonably request. Such progress payments shall not be requested any more frequently than every thirty (30) days. (ii) Prior to the commencement of construction of the Tenant Improvements, Tenant shall, if requested to do so by Landlord, provide reasonable assurances to Landlord's Lender (as that term is defined in Subparagraph 29.H.) that the funds necessary to pay Tenant's TI Contribution will be immediately available to Landlord as and when needed to pay all TI Costs after Landlord has expended the TI Allowance, which assurances shall be reasonably satisfactory to Landlord and Landlord's Lender. D. Late Charge. Tenant acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or deed of trust covering the Premises. Accordingly, if any Monthly Installment, Additional Rent or any other sum due from Tenant shall not be received by Landlord within ten (10) days after Landlord's delivery to Tenant of written notice stating that such amount has not been paid when due, then Tenant shall pay to Landlord, as additional rent, a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord without payment of the overdue amount shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of its other rights and remedies granted hereunder. E. Additional RentE. Additional Rent. All taxes, insurance premiums, late charges, costs, expenses and other sums which Tenant is required to pay under this Lease, together with all interest and penalties that may accrue thereon in the event of Tenant's failure to pay such amounts, and all reasonable damages, costs, and attorneys' fees and expenses which Landlord may incur by reason of any default of Tenant or failure on Tenant's part to comply with the terms of this Lease, shall be deemed to be additional rent ("ADDITIONAL RENT") and shall be paid in addition to the Monthly Installment of rent, and, in the event of nonpayment by Tenant, Landlord shall have all of the rights and remedies with respect thereto as Landlord has for the nonpayment of the Monthly Installment of rent. All items of Additional Rent, but excluding such taxes and assessment, utilities and insurance costs which are to be paid directly by Tenant or reimbursed by Tenant to Landlord, shall include an additional two percent (2%) of the actual expenditure or amount due in order to compensate Landlord for accounting, management and processing services. F. Place of Payment. Rent shall be payable in lawful money of the United States of America to Landlord at 511 Division Street, Campbell, California 95008 or to such other person(s) or at such other place(s) as Landlord may designate in writing. 6 13 G. Advance Payment. Concurrently with the execution of this Lease, Tenant shall pay to Landlord the sum of Two Hundred Sixty Five Thousand Six Hundred Forty Two and 10/100 Dollars ($265,642.10) to be applied to the Monthly Installment of rent first accruing under this Lease. 5. Security Deposit. Concurrently with the execution of this Lease, Tenant shall pay to Landlord the sum of Two Hundred Sixty Five Thousand Six Hundred Forty Two and 10/100 Dollars ($265,642.10) (the "SECURITY DEPOSIT") to secure the faithful performance by Tenant of each term, covenant and condition of this Lease. If Tenant shall at any time fail to make any payment or fail to keep or perform any term, covenant or condition on its part to be made or performed or kept under this Lease, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligation under this Lease, use, apply or retain the whole or any part of the Security Deposit (A) to the extent of any sum due to Landlord; (B) to make any required payment on Tenant's behalf; or (C) to compensate Landlord for any loss, damages, attorneys' fees or expense sustained by Landlord due to Tenant's default. In such event, Tenant shall, within five (5) days of written demand by Landlord, remit to Landlord sufficient funds to restore the Security Deposit to its original sum. No interest shall accrue on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its general funds. The Security Deposit, less any sums owing to Landlord or which Landlord is otherwise entitled to retain, shall be returned to Tenant within thirty (30) days after the termination of this Lease and vacancy of the Premises by Tenant. 6. Use of Premises. A. Restrictions on Use. Tenant shall use the Premises only in conformance with applicable governmental laws, for general office, engineering, research and development, light assembly, testing, warehousing and related lawful uses, and for no other purpose without the consent of Landlord. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorneys' fees or liabilities to the extent the foregoing arises out of the failure of Tenant to comply with any Law (as defined in Subparagraph 29.F.) applicable to Tenant's use and occupancy of the Premises. Tenant shall not commit or suffer to be committed, any waste upon the Premises, or any nuisance, or other acts or things which may disturb the quiet enjoyment of any other occupant of buildings adjacent to the Premises, or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful purpose, or place any loads upon the floor, walls or ceiling which would endanger the structure, or place any harmful liquids in the drainage system of the Premises. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the Buildings, except in trash containers placed inside exterior enclosures designated for that purpose by Landlord and except in compliance with all applicable Law. No materials, supplies, equipment, finished products or semifinished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the Parcel outside of the Buildings. Tenant shall strictly comply with the provisions of Paragraph 37 below. 7 14 B. Initial Occupancy. Tenant shall be obligated to take possession and enter into occupancy of two (2) of the three (3) Buildings of the Premises within thirty (30) days following the Commencement Date. 7. Taxes and Assessments A. Tenant's Property. Tenant shall pay before delinquency any and all taxes and assessments, license fees and public charges levied, assessed or imposed upon or against Tenant's fixtures, equipment, furnishings, furniture, appliances and personal property installed or located on or within the Premises ("Tenant's Property"). Tenant shall use its best efforts to cause all Tenant's Property to be assessed and billed separately from the real property of Landlord. If any of Tenant's Property shall be assessed with the Premises, Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days after receipt of a written statement from Landlord setting forth the taxes applicable to Tenant's Property. B. Property Taxes. Tenant shall pay, as Additional Rent, one hundred percent (100%) of all property taxes (as defined in Subparagraph 7.C. below) levied or assessed with respect to the Premises which are attributable to the Lease Term. Tenant shall pay such Property Taxes to Landlord not later than (i) ten (10) days prior to the delinquency date of such Property Taxes, or (ii) twenty (20) days after receipt of billing, whichever is later. If Tenant fails to do so, Tenant shall reimburse Landlord, on demand, for all interest, late fees and penalties that the taxing authority charges Landlord. In the event Landlord's Lender requires an impound for Property Taxes, then on the first day of each month during the Lease Term, Tenant shall pay Landlord one twelfth (1/12) of the annual Property Taxes. Tenant's liability hereunder shall be prorated to reflect the commencement and termination dates of this Lease. C. Property Taxes Defined. For the purpose of this Lease, "PROPERTY TAXES" means and includes all taxes, assessments (including, but not limited to, assessments for public improvements or benefits), taxes based on vehicles utilizing parking areas, taxes based or measured by the rent paid, payable or received under this Lease, taxes on the value, use, or occupancy of the Premises, the Buildings and/or the Parcel, and all other governmental impositions and charges of every kind and nature whatsoever, whether or not customary or within the contemplation of the parties hereto and regardless of whether the same shall be extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing which, at any time during the Lease Term, shall be applicable to the Premises, the Buildings and/or the Parcel or assessed, levied or imposed upon the Premises, the Buildings and/or the Parcel, or become due and payable and a lien or charge upon the Premises, the Buildings and/or the Parcel, or any part thereof, under or by virtue of any present or future laws, statutes, ordinances, regulations or other requirements of any govern mental authority whatsoever. The term "Property Taxes" shall not include any federal, state or local net income, documentary transfer (unrelated to any transfer made of Tenant's interest under this Lease), franchise (unrelated to Tenant's operations), estate, gift or inheritance tax imposed on Landlord (the "PROPERTY TAX EXCLUSIONS"). 8 15 D. Other Taxes. Tenant shall, as Additional Rent, pay or reimburse Landlord for any tax based upon, allocable to, or measured by the area of the Premises or the Buildings or the Parcel; or by the rent paid, payable or received under this Lease; any tax upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Premises or any portion thereof; any privilege tax, excise tax, business and occupation tax, gross receipts tax, sales and/or use tax, water tax, sewer tax, employee tax, occupational license tax imposed upon Landlord or Tenant with respect to the Premises; any tax upon this transaction or any document to which Tenant is a party creating or transferring any of Tenant's interest or estate in the Premises; provided, however that nothing in this Subparagraph shall require Tenant to pay any Property Tax Exclusions. E. Tenant's Right to Contest. Tenant shall have the right, by appropriate proceedings, to protest or contest any assessment, reassessment or allocation of Property Taxes or any change therein. In the contest or proceedings, Tenant may act in its own name and/or the name of Landlord and Landlord will, at Tenant's request and expense, cooperate with Tenant in any way Tenant may reasonably require in connection with such contest. Tenant must pay all Property Taxes as and when required by Subparagraph 7.B., even those which are the subject of such protest or contest, but Tenant may sue to recover overpayments or Property Taxes as part of any such contest. With respect to any contest of Property Taxes, Tenant shall indemnify and hold Landlord and the Premises harmless from any liens or damage arising out of such protest or contest and shall pay any judgment that may be rendered for which Tenant would otherwise be liable under this Lease without such contest or protest. Any contest conducted by Tenant under this paragraph shall be at Tenant's expense and if interest or late charges become payable as a result of such contest or protest, Tenant shall pay the same. Any tax assessments reimbursed to Landlord as a consequence of such contest shall be reimbursed to Tenant, to the extent originally paid by Tenant under the terms of this Lease. 8. Insurance. A. Indemnity. Tenant agrees to indemnify, protect and defend Landlord against and hold Landlord harmless from any and all claims, causes of action, judgments, obligations or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees), to the extent they arise out of, the opera tion, maintenance, use or occupancy of the Premises by Tenant and/or its Agents (except to the extent they arise from the negligence or willful misconduct of Landlord or its Agents). This Lease is made on the express understanding that Landlord shall not be liable for, or suffer loss by reason of, injury to person or property, from whatever cause (except to the extent it arises from the negligence or willful misconduct of Landlord or its Agents), which in any way may be connected with the operation, maintenance, use or occupancy of the Premises by Tenant and/or its Agents specifically including, without limitation, any liability for injury to the person or property of Tenant or its Agents. B. Liability Insurance. Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy of commercial general liability insurance insuring 9 16 Landlord and Tenant against claims and liabilities arising out of the operation, maintenance, use, or occupancy of the Premises. Such insurance shall provide combined single limit coverage of not less than Five Million Dollars ($5,000,000.00) per occurrence. Landlord shall have the right to require Tenant to increase the amount of coverage of such public liability insurance to the extent reasonably necessary to bring such insurance coverage into conformity with the level of coverage commonly carried by similar businesses in California leasing comparable buildings in the vicinity of the Premises, which right Landlord may exercise no more frequently than once every two (2) years during the Lease Term. The insurance shall be provided by companies (i) admitted to issue insurance in California and (ii) having a general policyholders' rating of at least "A" and a financial rating of at least "VIII" as set forth in the most current issue of Best's Insurance Guide. Tenant shall deliver to Landlord, prior to possession, and at least thirty (30) days prior to the expiration of any insurance policy required hereby, a certificate of insurance evidencing the existence of such policy and the certificate shall certify that the policy (1) names Landlord as an additional insured, (2) shall not be canceled or altered without thirty (30) days prior written notice to Landlord, (3) insures performance of the indemnity set forth in Subparagraph 8.A. above, (4) the coverage is primary and any coverage by Landlord is in excess thereto and (5) contains a cross-liability endorsement. Landlord may maintain a policy or policies of commercial general liability insurance insuring Landlord (and such others as are designated by Landlord), against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Premises, with such limits of coverage as Landlord may from time to time determine are reasonably necessary for its protection. Tenant shall, as Additional Rent, reimburse Landlord for the cost of any such insurance policy within ten (10) days after receipt of billing. C. Property Insurance. Landlord shall, at Tenant's expense, obtain and keep in force during the Lease Term a policy of insurance covering loss or damage to the Improvements, in the amount of the full replacement value thereof with an Agreed Amount Endorsement, providing protection against those perils included within the classification of "special form" insurance, plus a policy of rental income insurance in the amount of one hundred percent (100%) of twelve (12) months' rent (including, without limitation, sums payable as Additional Rent), together with such additional coverages (such as earthquake and/or flood insurance) which Landlord may elect to maintain from time to time or which may be required from time to time by Landlord's Lender or by Tenant. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord on the Buildings and Tenant Improvements. Tenant shall pay to Landlord, as Additional Rent, the cost of such insurance procured and maintained by Landlord on an annual basis within ten (10) days after receipt of demand therefore from Landlord. Tenant's liability for the cost of such insurance shall be prorated as of the commencement and termination of the Lease Term. Tenant acknowledges that such insurance procured by Landlord shall contain a deductible which reduces Tenant's cost for such insurance and, in the event of loss or damage, Tenant shall be required to pay to Landlord the amount of such deductible; provided, Tenant's liability for such deductible shall not exceed Twenty Five Thousand Dollars ($25,000), except Tenant's liability for the deductible on 10 17 Landlord's earthquake insurance shall not exceed ten percent (10%) of the policy amount. D. Tenant's Property Insurance. Tenant acknowledges that the insurance to be maintained Landlord on the Premises pursuant to Paragraph 8.C. above will not insure any of Tenant's Property. Accordingly, Tenant, at Tenant's own expense, shall maintain in full force and effect on all of Tenant's Property in the Premises, a policy of "special form" coverage insurance to the extent of at least ninety percent (90%) of insurable value of such property. E. Mutual Waiver of Subrogation. Notwithstanding anything to the contrary contained in this Lease, Tenant and Landlord hereby mutually waive their respective rights of recovery against each other of any loss of or damage to the property of either party, to the extent such loss or damage is insured by either party at the time of such loss or damage or required to be insured pursuant to this Lease by the party having the right of recovery against the other party for such loss or damage. Each party shall obtain any special endorsements, if required by the insurer, whereby the insurer waives its right of subrogation against the other party hereto. The provisions of this Subparagraph 8.E. shall not apply in those instances in which the waiver of subrogation would cause either party's insurance coverage to be voided or otherwise made uncollectible; provided, such party has afforded the other party at least thirty (30) days prior written notice of such fact and a period of at least thirty (30) days has elapsed after delivery of such notice without identification of alternative, reasonably equivalent insurance that can be obtained without a voiding provision based on this waiver of subrogation. 9. Utilities. Tenant shall pay for all water, gas, light, heat, power, electricity, telephone, trash pick-up, sewer charges, and all other services supplied to or consumed on the Premises, and all taxes and surcharges thereon. 11 18 10. Repairs and Maintenance. A. Landlord's Repairs. Subject to the provisions of Paragraphs 14 and 15 and the Improvement Agreement, Landlord, at its expense, shall keep and maintain the exterior walls and the structural elements of the Buildings in good order and repair. Landlord shall not, however, be required to maintain, repair or replace the interior surface of exterior walls, nor shall Landlord be required to maintain, repair or replace windows, doors, skylights or plate glass. Landlord shall not be in default because it fails to make repairs under this Subparagraph 10.A. until a reasonable time after receipt of written notice from Tenant of the need for such repairs. Notwithstanding the foregoing but subject to Subparagraph 8.E., Tenant shall reimburse Landlord, as Additional Rent, within fifteen (15) days after receipt of billing, for the cost of maintenance and repairs of the exterior walls and structural elements of the Buildings to the extent such maintenance or repair is required because of the negligence or willful misconduct of Tenant or its Agents, except as otherwise provided in Subparagraph 8.E. As used herein, the term "STRUCTURAL ELEMENTS OF THE BUILDINGS" shall mean and be limited to the foundations, footings, floor slab (but not flooring), roof structure (but not roofing or roof membrane), load bearing walls and structural portion of any second floor. If (a) repairs are required to be made by Landlord pursuant to this Subparagraph 10.A., (b) the failure to immediately make such repairs poses a threat of imminent danger to people or property, and (c) after Landlord's receipt of notice from Tenant for the need to make such repairs, Landlord does not immediately make such repairs, then Tenant shall be allowed to make such repairs and Landlord shall reimburse Tenant for the reasonable third party costs incurred by Tenant upon receipt of written invoices for such repairs, lien releases from the third party making such repairs and inspection of the repairs made by Tenant. 12 19 B. Tenant's Repairs. (i) Except as expressly provided in Subparagraphs 8.E. and 10.A. above, Paragraphs 14 and 15 below and the Improvement Agreement, Tenant shall, at its sole cost, keep and maintain the entire Premises and every part thereof, including without limitation, the windows, window frames, plate glass, glazing, skylights, truck doors, doors and all door hardware, the interior walls and partitions, interior surfaces of exterior walls, carpets, flooring, roofing, roof membrane, gutters, down spouts, the electrical, plumbing, lighting, heating, ventilating and air conditioning systems and equipment, and all areas outside the Buildings (including all landscaping, irrigation systems, paving, driveways, parking areas, sidewalks, fences, signs and exterior lighting) in good order, condition and repair. The term "repair" shall include replacements, restorations and/or renewals when necessary as well as painting. Except as expressly provided in Subparagraphs 8.E. and 10.A. above, Paragraphs 14 and 15 below and the Improvement Agreement, Tenant's obligation shall extend to all alterations, additions and improvements to the Premises, and all fixtures and appurtenances therein and thereto. Tenant shall, at all times during the Lease Term, have in effect a service contract for the maintenance of the heating, ventilating and air conditioning ("HVAC") equipment with an HVAC repair and maintenance contractor reasonably approved by Landlord. The HVAC service contract shall provide for periodic inspection and servicing at least once every three (3) months during the Lease Term, and Tenant shall provide Landlord with a copy of such contract and all periodic service reports. Landlord shall assign to Tenant for the Lease Term the benefit of all warranties available to Landlord which would reduce the cost of performing the obligations of Tenant to make repairs under this Subparagraph 10.B. Landlord shall cooperate with Tenant in the enforcement of such warranties. Notwithstanding anything to the contrary in this Lease, Tenant shall have no responsibility to perform or construct, any repair, maintenance or improvement that Landlord is required to perform pursuant to any other term of this Lease or the Improvement Agreement. (ii) Should Tenant fail to commence to make repairs required of Tenant hereunder within ten (10) days after written notice from Landlord or should Tenant fail thereafter to diligently complete the repairs, Landlord, in addition to all other remedies available hereunder or by Law and without waiving any alternative remedies, may make the same, and in that event, Tenant shall reimburse Landlord as Additional Rent for the cost of such maintenance or repairs within ten (10) days of written demand by Landlord. (iii) Notwithstanding anything to the contrary in this Lease, any capital replacements to the Premises which are otherwise found to be the obligation of Tenant under this Lease, whether or not required by law, which are required by generally accepted accounting principles ("GAAP") to be capitalized ("CAPITAL REPLACEMENTS") shall be made by and paid for by the parties in accordance with the following: (a) Tenant shall promptly undertake and diligently complete, and Tenant shall be solely responsible for the cost of, all Capital Replacements that have a cost 13 20 less than Three Hundred Thousand Dollars ($300,000). (b) Upon Tenant's written notice to Landlord for the need of any Capital Replacement which Landlord is required to make pursuant to this Subparagraph 10.B.(iii)(b), Landlord shall promptly undertake and diligently complete all Capital Replacements having a cost in excess of Three Hundred Thousand Dollars ($300,000) ("LANDLORD'S CAPITAL REPLACEMENTS"). The cost of Landlord's Capital Replacements shall be borne by the parties as follows: (1) Tenant shall reimburse Landlord for Tenant's Share of the Cost of Landlord's Capital Replacement within ten (10) days following delivery to Tenant of reasonable documentation of the amount owing by Tenant for completed work, which payments may be demanded by Landlord of Tenant on a monthly basis as the work progresses. The "TENANT'S SHARE OF THE COST OF LANDLORD'S CAPITAL REPLACEMENT," shall be equal to the total cost reasonably incurred by Landlord to construct, permit and/or plan a Landlord's Capital Replacement (the "CAPITAL COST") times a fraction, the numerator of which is equal to the number of unexpired months in the then existing Lease Term (without any consideration of Extended Terms that have not commenced), and the denominator of which is equal to the useful life (expressed in months) of such Landlord's Capital Replacement. The remainder of such cost shall be borne by Landlord, subject to Subparagraphs 10.B.(iii)(b)(2) and 10.B.(iii)(b)(3), below. (2) If the Lease Term is extended by Tenant as herein permitted, then as a condition to each such extension and within ten (10) days following Landlord's written demand therefor, Tenant shall make an additional reimbursement of the Capital Cost of Landlord's Capital Replacement in an amount equal to the Capital Cost times a fraction, the numerator of which is equal to the lesser of (A) the useful life (expressed in months) of such Landlord's Capital Replacement not subject to reimbursement under Subparagraph 10.B.(iii)(b)(1) above and not subject to reimbursement under this Subparagraph 10.B.(iii)(b)(2) with respect to a prior extension of the Lease Term, or (B) the number of months in the extension period, and the denominator of which is equal to the total useful life (expressed in months) of such Landlord's Capital Replacement. (3) If Landlord terminates this Lease on account of an Event of Default by Tenant, as permitted by Section 13.B.(ii) below, then in addition to Landlord's other remedies, Tenant shall pay to Landlord upon demand so much of the Capital Cost of Landlord's Capital Replacement, which has not been theretofore reimbursed by Tenant to Landlord. (iv) Landlord shall have no maintenance or repair obligations whatsoever with respect to the Premises except as expressly provided in this Lease and the Improvement Agreement. Tenant hereby expressly waives the provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Landlord as provided in Section 1942 of said Civil Code; provided, Tenant shall have the right to cure Landlord's defaults pursuant to the terms and conditions of 14 21 Paragraph 38 hereof. 11. Alterations. A. Limitations. Tenant shall not make, or suffer to be made, any alterations, improvements or additions in, on, about or to the Premises or any part thereof, without the prior written consent of Landlord (which consent shall not be unreasonably withheld) and without a valid building permit issued by the appropriate governmental authority; provided, however, Landlord's consent shall not be required for interior non-structural alterations which (i) cost less than Twenty Thousand Dollars ($20,000.00) per work of improvement and (ii) cost less than Seventy Five Thousand Dollars ($75,000.00) for all alterations made in any twelve (12) month period. As a condition to, and concurrently with, the giving of such consent Landlord may require that Tenant agree to remove any such alterations, improvements or additions at the termination of this Lease, and to restore the Premises to their prior condition. Unless Landlord requires that Tenant remove any such alteration, improvement or addition at the time that Landlord provides its consent thereto, any alteration, addition or improvement to the Premises, except movable furniture and trade fixtures not affixed to the Premises, shall become the property of Landlord upon termination of the Lease and shall remain upon and be surrendered with the Premises at the termination of this Lease. Without limiting the generality of the foregoing, all heating, lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts, main and subpanels), air conditioning, partitioning, drapery, and carpet installations made by Tenant regardless of how affixed to the Premises, together with all other additions, alterations and improvements that have become an integral part of any of the Buildings, shall be and become the property of the Landlord upon termination of the Lease, and shall not be deemed trade fixtures, and shall remain upon and be surrendered with the Premises at the termination of this Lease. B. Tenant's Rights. All trade fixtures, movable furniture and personal property installed in the Premises at Tenant's expense (collectively, "TENANT'S PROPERTY") shall at all times remain Tenant's property and Tenant shall be entitled to all depreciation, amortization and other tax benefits with respect thereto, except for Tenant's Property which cannot be removed without structural injury to the Premises. At any time during the Lease Term, Tenant may remove Tenant's Property from the Premises, provided Tenant repairs all damage caused by such removal. Landlord shall have no lien or other interest whatsoever in any item of Tenant's Property or any portion thereof or interest therein, located in the Premises or elsewhere, and Landlord hereby waives all such liens and interests. Within ten (10) days following Tenant's written request, Landlord shall execute documents in form reasonably acceptable to Tenant and Landlord to evidence Landlord's waiver of any right, title, lien or interest in Tenant's Property located in the Premises. C. Alterations Required by Law. If, during the Lease Term, any alteration, addition or change of any sort to all or any portion of the Premises is required by Law, Tenant shall promptly make the same at its sole cost and expense; provided, Tenant shall only be obligated to make alterations, additions or changes required by Law to the "structural elements of 15 22 the Buildings" (as defined in Subparagraph 10.A. above), if such requirement is triggered by (i) Tenant's particular use of the Premises, or (ii) Tenant's alterations, improvements or additions in, on, about or to the Premises or any part thereof; and if Landlord has performed its obligations under this Lease with respect to the structural elements of the Buildings. 12. Acceptance of the Premises. By entry and taking possession of the Premises pursuant to this Lease, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the Premises in their condition existing as of the date of such entry and Tenant further accepts the Tenant Improvements to be constructed by Landlord, if any, as being completed in accordance with the plans and specifications for such Tenant Improvements, except for punch list items, and any express warranties by and obligations of Landlord set forth in this Lease. Tenant acknowledges that neither the Landlord nor Landlord's agents has made any representation or warranty as to the suitability of the Premises to the conduct of Tenant's business. Any agreements, warranties or representations not expressly contained herein shall in no way bind either Landlord or Tenant, and Landlord and Tenant expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement not contained in this Lease. This Lease constitutes the entire understanding between the parties hereto and no addition to, or modification of, any term or provision of this Lease shall be effective until set forth in a writing signed by both Landlord and Tenant. 13. Default. A. Events of Default. A breach of this Lease by Tenant shall exist if any of the following events (hereinafter referred to as "EVENT OF DEFAULT") shall occur: (i) Default in the payment when due of any installment of rent or other payment required to be made by Tenant hereunder, where such default shall not have been cured within five (5) days after written notice of such default is given to Tenant; (ii) Tenant's failure to perform any other term, covenant or condition contained in this Lease where such failure shall have continued for twenty (20) days after written notice of such failure is given to Tenant; provided, however, Tenant shall not be deemed in default if Tenant commences to cure such failure within said twenty (20) day period and thereafter diligently prosecutes such cure to completion; (iii) Tenant vacates the Premises for sixty (60) consecutive days and upon the expiration of such sixty (60) day period, Tenant has failed to perform any term, covenant or condition contained in this Lease (under such circumstances Tenant shall have no right to cure the default and Landlord shall have no requirement to notify Tenant of the default except as required by law); (iv) Tenant's assignment of its assets for the benefit of its creditors; 16 23 (v) The sequestration of, attachment of, or execution on, any substantial part of the property of Tenant or on any property essential to the conduct of Tenant's business, shall have occurred and Tenant shall have failed to obtain a return or release of such property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attach ment or levy, whichever is earlier; (vi) Tenant or any guarantor of Tenant's obligations hereunder shall commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any Law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seek appointment of a receiver, trustee, custodian, or other similar official for it or for all or any substantial part of its property; or (vii) Any case, proceeding or other action against Tenant or any guarantor of Tenant's obligations hereunder shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any Law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof or (ii) remains undismissed for a period of sixty (60) days. Any notice given by Landlord in order to satisfy the requirements of this Subparagraph 13.B. shall also satisfy the notice requirements of California Code of Civil Procedure Section 1161 and all similar statutes regarding unlawful detainer proceedings. B. Remedies. Upon any Event of Default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law, to which Landlord may resort cumulatively, or in the alternative: (i) Recovery of Rent. Landlord shall be entitled to keep this Lease in full force and effect (whether or not Tenant shall have abandoned the Premises) and to enforce all of its rights and remedies under this Lease, including the right to recover rent and other sums as they become due, plus interest at the Permitted Rate (as defined in Paragraph 31 below) as therein provided. (ii) Termination. Landlord may terminate this Lease by giving Tenant written notice of termination in accordance with applicable law. On the giving of the notice all of Tenant's rights in the Premises shall terminate. Upon the giving of the notice of termination, Tenant shall surrender and vacate the Premises in the condition required by Paragraph 32, and Landlord may re-enter and take possession of the Premises and all the remaining improvements or property and eject Tenant or any of Tenant's subtenants, assignees or other person or persons claiming any right under or through Tenant or eject some and not others or eject none. This Lease may also be terminated by a judgment specifically providing for termination. Any 17 24 termination under this paragraph shall not release Tenant from the payment of any sum then due Landlord or from any claim for damages or rent previously accrued or then accruing against Tenant. In no event shall any one or more of the following actions by Landlord constitute a termination of this Lease: (a) maintenance and preservation of the Premises; (b) efforts to relet the Premises; (c) appointment of a receiver in order to protect Landlord's interest hereunder; (d) consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to provisions hereof concerning subletting and assignment or otherwise; or (e) any other action by Landlord or Landlord's agents intended to mitigate the adverse effects from any breach of this Lease by Tenant. (iii) Damages. In the event this Lease is terminated pursuant to Subparagraph 13.B.(ii) above, or otherwise, Landlord shall be entitled to damages in the following sums: (a) the worth at the time of award of the unpaid rent which has been earned at the time of termination; plus (b) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (d) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom including, without limitation, the following: (i) reasonable expenses for cleaning, repairing or restoring the Premises to surrender condition; (ii) real estate broker's fees, advertising costs and other expenses of reletting the Premises which are reasonably incurred by Landlord and applicable to the period after termination of this Lease; (iii) reasonable costs of carrying the Premises such as taxes and insurance premiums thereon, utilities and security precautions not otherwise included in Additional Rent; (iv) expenses in retaking possession of the Premises; and (v) reasonable attorneys' fees and court costs. 18 25 (e) The "worth at the time of award" of the amounts referred to in Subparagraphs (a) and (b) of this Subparagraph 13.B.(iii), is computed by allowing interest at the Permitted Rate. The "worth at the time of award" of the amounts referred to in Subparagraph (c) of this Subparagraph 13.B.(iii) is computed by discounting such amount at the discount rate of the Federal Reserve Board of San Francisco at the time of award plus one percent (1%). The term "rent" as used in this Paragraph 13 shall include all sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. C. Waivers. Tenant hereby waives any right of redemption or relief from forfeiture under the laws of the State of California, or under any other present or future law, including the provisions of Sections 1174 and 1179 of the California Code of Civil Procedure. 14. Destruction. A. Landlord's Duty to Restore. If the Improvements are damaged by any peril after the Commencement Date of this Lease, Landlord shall restore the Premises unless the Lease is terminated by Landlord pursuant to Subparagraph 14.B. or by Tenant pursuant to Subparagraph 14.C. All insurance proceeds available from the property damage insurance carried by Landlord pursuant to Subparagraph 8.C. shall be paid to and become the property of Landlord and shall be used for the restoration of the Premises, unless this Lease is terminated pursuant to Subparagraphs 14.B. or 14.C. or as otherwise required by Landlord's Lender. If this Lease is terminated pursuant to either Subparagraphs 14.B. or 14.C., then all insurance proceeds available from the insurance required to be carried by Tenant which covers loss to property that is Landlord's property or would become Landlord's property on the termination of this Lease shall be paid to and become the property of Landlord. If this Lease is not so terminated, then Landlord shall be entitled to all such insurance proceeds and upon receipt of such insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Premises, to the extent then allowed by Law, to substantially the same condition in which the Premises were immediately prior to such damage. Landlord's obligation to restore shall be limited to the Buildings and Tenant Improvements constructed by Landlord as they existed as of the Commencement Date and to the extent Landlord receives insurance proceeds, any Tenant Improvements as they existed as of the Commencement Date which were paid for by Tenant, excluding any Tenant's Property or Tenant Improvements paid for by Tenant to the extent Landlord does not receive insurance proceeds for such Tenant Improvements. B. Landlord's Right to Terminate. Landlord shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Tenant of a written notice of election to termi nate within thirty (30) days after the date of such damage: (i) The Improvements are damaged by any peril either (i) covered by the type of insurance Landlord is required to carry pursuant to Subparagraph 8.C. or (ii) covered 19 26 by valid and collectible insurance actually carried by Landlord and in force at the time of such damage or destruction, to such an extent that the estimated restoration cost exceeds fifty percent (50%) of the then actual replacement cost thereof. (ii) The Improvements are damaged by any peril both (i) not covered by the type of insurance Landlord is required to carry pursuant to Subparagraph 8.C. and (ii) not covered by valid and collectible insurance actually carried by Landlord and in force at the time of such damage or destruction, to such an extent that the estimated restoration cost exceeds five percent (5%) of the then actual replacement cost of the Improvements; provided, however, that Landlord may not terminate this Lease pursuant to this Subparagraph 14.B.(ii) if Tenant agrees in writing to pay the amount by which the restoration cost exceed five percent (5%) of the replacement cost of the Improvements and deposits with Landlord or provides other reasonable assurances of payment (which assurances must be approved by Landlord's Lender) of an amount equal to the estimated amount of such excess within thirty (30) days after Landlord has notified Tenant with its election to terminate this Lease pursuant to this Subparagraph 14.B.(ii). (iii) The Improvements are damaged by any peril during the last twelve (12) months of the Lease Term to such an extent that the estimated cost to restore equals or exceeds an amount equal to six (6) times the Monthly Installment of rent then due; provided, however, that Landlord may not terminate this Lease pursuant to this Subparagraph 14.B.(iii) if Tenant, at the time of such damage, has an express written option to further extend the term of this Lease and Tenant exercises such option to so further extend the Lease Term within fifteen (15) days following notice of Landlord's termination of this Lease. (iv) The Improvements are damaged by any peril and, because of the Laws then in force, may not be restored at a cost less than or equal to the available insurance proceeds and any amounts Tenant is required by this Lease to pay or Tenant otherwise elects to pay, to substantially the same condition in which it was prior to such damage. C. Tenant's Right to Terminate. If the Improvements are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to Subparagraph 14.B., then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the restoration work required of Tenant may be completed and the permits required for such work can be obtained. Tenant shall have the option to terminate this Lease in whole or in part as specified below in the event any of the following occurs, which option may be exercised only by delivery to Landlord of a written notice of election to terminate within fifteen (15) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: (i) If any Building is damaged by any peril and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of such Building cannot be substantially completed within two hundred seventy (270) days after the date of the damage, then Tenant may terminate the Lease as to such damaged Building only. 20 27 (ii) If any Building is damaged by any peril and all permits required for the commencement of restoration are not obtained within sixty (60) days beyond the time estimated by Landlord's architect or construction consultant, or if following receipt of such permits the restoration is not completed within sixty (60) days beyond the time estimated by Landlord's architect or construction consultant as the required restoration time (provided such time periods shall be extended by force majeure delays), then Tenant may terminate this Lease with respect only to such damaged Building for which permits are not timely obtained or which are not timely restored. (iii) If any Building is damaged by any peril within twelve (12) months of the last day of the Lease Term, and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Premises cannot be substantially completed within ninety (90) days after the date of such damage, then Tenant may terminate this Lease with respect only to such damaged Building. (iv) If two (2) of the three (3) Buildings are damaged by any peril and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of all Buildings cannot be substantially completed within two hundred seventy (270) days after the date of the damage, Tenant may terminate the entire Lease. D. Abatement of Rent. In the event of damage to the Premises which does not result in the termination of this Lease, the Monthly Installment of rent and Additional Rent shall be temporarily abated from the date of inception of the loss until the damaged Building(s) are restored, in proportion to the degree to which Tenant's use of the Premises is impaired by such damage. Tenant shall not be entitled to any compensation from Landlord for loss of Tenant's property or loss to Tenant's business caused by such damage or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law, hereinafter enacted. 15. Condemnation. A. Definition of Terms. For the purposes of this Lease, the term (1) "TAKING" means a taking of the Premises or damage to the Premises related to the exercise of the power of eminent domain and includes a voluntary conveyance, in lieu of court proceedings, to any agency, authority, public utility, person or corporate entity empowered to condemn property; (2) "TOTAL TAKING" means the taking of the entire Premises or so much of the Premises as to prevent or substantially impair the use thereof by Tenant for the uses herein specified; (3) "PARTIAL TAKING" means a Taking which does not constitute a Total Taking; (4) "DATE OF TAKING" means the date upon which the title to the Premises, or a portion thereof, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor; and (5) "AWARD" means the amount of any award made, consideration paid, or damages ordered as a result of a Taking. B. Rights. The parties agree that in the event of a Taking all rights (as 21 28 between them) in and to an Award shall be as set forth herein and Tenant shall have no right to any Award except as set forth herein; provided, however, that Tenant shall be entitled to any award for the taking of Tenant's Property. C. Total Taking. In the event of a Total Taking during the Lease Term (1) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the Premises shall cease and terminate as of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent and any unapplied security deposit; (3) Tenant shall pay Landlord any unpaid rent or charges due Landlord under the Lease, each prorated as of the Date of Taking; (4) Tenant shall receive from the Award those portions of the Award attributable to Tenant's Property and for moving expenses of Tenant; and (5) the remainder of the Award shall be paid to and be the property of Landlord. D. Partial Taking. In the event of a Partial Taking during the Lease Term (1) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the portion of the Premises taken shall cease and terminate as of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent and any unapplied security deposit relating to the portion of the Premises taken based on a square footage basis; (3) Tenant shall pay Landlord any unpaid rent or charges due Landlord under the Lease for the portion of the Premises taken, each prorated as of the Date of Taking; (4) from and after the Date of Taking the Monthly Installment of rent shall be an amount equal to the product obtained by multiplying the Monthly Installment of rent immediately prior to the Taking by a fraction, the numerator of which is the number of square feet contained in the Building after the Taking and the denominator of which is the number of square feet contained in the Building prior to the Taking; (5) Tenant shall receive from the Award those portions of the Award attributable to Tenant's Property and for moving expenses of Tenant; and (6) the remainder of the Award shall be paid to and be the property of Landlord. 16. Mechanics' Lien. Tenant shall (A) pay for all labor and services performed for, materials used by or furnished to, Tenant or any contractor employed by Tenant with respect to the Premises; (B) indemnify, defend, protect and hold Landlord and the Premises harmless and free from any liens, claims, liabilities, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for, materials used by or furnished to, Tenant or any contractor employed by Tenant with respect to the Premises; (C) give notice to Landlord in writing five (5) days prior to employing any laborer or contractor to perform services related to, or receiving materials for use upon the Premises; and (D) permit Landlord to post a notice of nonresponsibility in accordance with the statutory requirements of California Civil Code Section 3094 or any amendment thereof. In the event Tenant is required to post an improvement bond with a public agency in connection with the above, Tenant agrees to include Landlord as an additional obligee. 17. Inspection of the Premises. Tenant shall permit Landlord and its agents to enter the Premises at any reasonable time for the purpose of inspecting the same, performing Landlord's maintenance and repair responsibilities (upon 24 hour prior notice except in an emergency), posting a notice of non-responsibility for alterations, additions or repairs and at any 22 29 time within two hundred seventy (270) days prior to expiration of this Lease, to place upon the Premises, ordinary "For Lease" or "For Sale" signs. 18. Compliance with Laws. Tenant shall, at its own cost, comply with all of the requirements of all municipal, county, state and federal authorities now in force, or which may hereafter be in force, pertaining to Tenant's use and occupancy of the Premises, and shall faithfully observe all municipal, county, state and federal law, statutes or ordinances now in force or which may hereafter be in force pertaining to Tenant's use and occupancy of the Premises. The judgment of any court of competent jurisdiction or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use and occupancy of the Premises shall be conclusive of the fact that such violation by Tenant has occurred. Tenant shall indemnify, protect, defend, and hold Landlord harmless against any loss, expense, damage, attorneys' fees or liability to the extent arising out of the failure of Tenant to comply with any applicable law, except to the extent such failure of Tenant to comply with any applicable law is caused by the negligence or willful misconduct of Landlord or its Agents. 19. Subordination. The following provisions shall govern the relationship of this Lease to any underlying lease, mortgage or deed of trust which now or hereafter affects the Premises or Landlord's interest or estate therein and any renewal, modification, consolidation, replacement, or extension thereof (a "SECURITY INSTRUMENT"). A. Priority. This Lease is subject and subordinate to all Security Instruments existing as of the Commencement Date. However, if any Lender so requires, this Lease shall become prior and superior to any such Security Instrument. Landlord, as a condition to Tenant's obligations under this Lease, shall obtain a recognition and non-disturbance agreement from all existing lienholders in form reasonably acceptable to Tenant and Landlord's Lender. B. Subsequent Security Instruments. At Landlord's election, this Lease shall become subject and subordinate to any Security Instrument created after the Commencement Date, provided that the Lender holding such Security Agreement agrees that in the event of foreclosure of the Security Instrument in question, such Lender shall recognize the tenancy of Tenant on the terms and conditions contained in this Lease so long as no Event of Default (as defined in Paragraph 13.A. hereof) exists on the date such person acquires the Premises. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed so long as no Event of Default exists on the date such person acquires the Premises, unless this Lease is otherwise terminated pursuant to its terms. C. Documents. Tenant shall execute any reasonable document or instrument required by Landlord or any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily and reasonably requires in connection with such agreements, including provisions that the Lender not be liable for (1) the return of the Security Deposit unless the Lender receives it from Landlord, and (2) any defaults on the part of Landlord occurring prior to the time that the Lender takes possession of 23 30 the Premises in connection with the enforcement of its Security Instrument. Tenant's failure to execute any such document or instrument within ten (10) days after written demand therefor shall constitute a default by Tenant. Tenant's obligation to execute and deliver any subordination agreement to any future Lender shall be conditioned upon such Lender agreeing that in the event of foreclosure of the mortgage or termination of the ground lease in question, such Lender shall recognize the tenancy of Tenant on the terms and conditions contained in this Lease as long as no Event of Default exists on the date such person acquires the Premises. D. Tenant's Attornment. Subject to the recognition obligations under Subparagraphs 19.B. and 19.C. above, Tenant shall attorn (1) to any purchaser of the Premises at any foreclosure sale or private sale conducted pursuant to any Security Instrument encumbering the Premises; (2) to any grantee or transferee designated in any deed given in lieu of foreclosure; or (3) to the lessor under any underlying ground lease should such ground lease be terminated. 20. Holding Over. This Lease shall terminate without further notice at the expiration of the Lease Term. Any holding over by Tenant after expiration shall not constitute a renewal or extension or give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after the expiration without the consent of Landlord shall be construed to be a tenancy from month to month, at one hundred fifty percent (150%) of the monthly rent for the last month of the Lease Term, and shall otherwise be on the terms and conditions herein specified insofar as applicable. 21. Notices. Any notice required or desired to be given under this Lease shall be in writing with copies directed as indicated below and shall be personally served or given by facsimile (with receipt confirmed by telephone), personal delivery, mail or by prepaid next-business day courier. Personal delivery, mail and facsimile transmittal shall be effective when received or delivery is refused by the party. Any notice given by courier shall be deemed to have been given on the next business day after the time such notice was sent, addressed to the party to be served with a copy as indicated herein at the last address given by that party to the other party under the provisions of this paragraph. At the date of execution of this Lease, the address of Landlord is: South Bay Development Company, Inc. 511 Division Street Campbell, California 95008 Attn: Mr. Scott Trobbe With a copy to: South Bay/San Tomas Associates c/o AEW Real Estate Advisors, Inc. 399 Boylston Street Boston, Massachusetts 02116 Attn: Mr. Christopher Kazantis 24 31 and the address of Tenant is: Auspex Systems, Inc. 5200 Great America Parkway Santa Clara, California 95054 Attn: General Counsel After the Commencement Date, the address of Tenant will be at the Premises. 22. Attorneys' Fees. In the event either party shall bring any action or legal proceeding for damages for any alleged breach of any provision of this Lease, to recover rent or possession of the Premises, to terminate this Lease, or to enforce, protect or establish any term or covenant of this Lease or right or remedy of either party, the prevailing party shall be entitled to recover as a part of such action or proceeding, reasonable attorneys' fees and court costs, including attorneys' fees and costs for appeal, as may be fixed by the court or jury. The term "prevailing party" shall mean the party who received substantially the relief requested, whether by settlement, dismissal, summary judgment, judgment, or otherwise. 23. Subleasing and Assignment. A. Landlord's Consent Required. Tenant's interest in this Lease is not assignable, by operation of Law or otherwise, nor shall Tenant have the right to sublet the Premises, transfer any interest of Tenant therein or permit any use of the Premises by another party, without the prior written consent of Landlord to each such assignment, subletting, transfer or use, which consent Landlord agrees not to withhold unreasonably subject to the provisions of Subparagraph 23.C. below. A consent to one assign ment, subletting, occupancy or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupancy or use by another party. Any assignment or subletting without such consent shall be void and shall, at the option of Landlord, terminate this Lease. Landlord's waiver or consent to any assignment or subletting hereunder shall not relieve Tenant from any obligation under this Lease unless the consent shall so provide. B. Transferee Information Required. If Tenant desires to assign its interest in this Lease or sublet the Premises, or transfer any interest of Tenant therein, or permit the use of the Premises by another party (hereinafter collectively referred to as a "TRANSFER"), Tenant shall give Landlord at least twenty (20) business days prior written notice of the proposed Transfer and of the terms of such proposed Transfer, including, but not limited to, the name and legal composition of the proposed transferee, a financial statement of the proposed transferee, the nature of the proposed transferee's business to be carried on in the Premises (including a list of the type and quantities of all Hazardous Materials to be used by the transferee on the Premises), the payment to be made or other consideration to be given to Tenant on account of the Transfer, and such other pertinent information as may be reasonably requested by Landlord, all in sufficient detail to enable Landlord to evaluate the proposed Transfer and the prospective 25 32 transferee. C. Landlord's Rights. It is the intent of the parties hereto that this Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. The parties agree that this Lease is not intended to have a bonus value nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this Lease or the right to use or occupy the Premises as a result of any favorable terms contained herein, or future changes in the market for leased space. It is the intent of the parties that any such bonus value that may attach to this Lease shall be and remain the exclusive property of Landlord, except as provided in Subparagraph 23.C.(ii) below. In the event Tenant seeks to Transfer its interest in this Lease or the Premises, Landlord shall have the following options, which shall be exercised by Landlord, within twenty (20) business days of Landlord receiving all of the information regarding the Transfer that is required under Subparagraph 23.B., at Landlord's sole choice without limiting Landlord in the exercise of any other right or remedy which Landlord may have by reason of such proposed Transfer: (i) In the event of a Transfer constituting either an assignment of the entire Lease or a sublease of substantially all of the Premises for all or substantially all of the balance of the Lease Term, Landlord may elect to terminate this Lease effective as of the proposed effective date of the proposed Transfer and release Tenant from any further liability hereunder accruing after such termination date by giving Tenant written notice of such termination within fifteen (15) days after receipt by Landlord of Tenant's notice of intent to Transfer as provided above. If Landlord makes such election to terminate this Lease, Tenant shall surrender the Premises, in accordance with Paragraph 32, on or before the effective termination date; or (ii) Landlord may consent to the proposed Transfer on the condition that Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%) of any and all rents or other consideration (including key money) received by Tenant from the transferee by reason of such Transfer in excess of the rent payable by Tenant to Landlord under this Lease (after reimbursement to Tenant of any brokerage commissions, attorneys' fees and advertising expenses incurred by Tenant in connection with the Transfer, and any tenant improvement costs related to such Transfer that are incurred by Tenant). Tenant expressly agrees that the foregoing is a reasonable condition for obtaining Landlord's consent to any Transfer; (iii) Landlord may consent to the proposed Transfer on the condition that if such Transfer is an assignment that Landlord in its sole and absolute discretion shall determine whether such Transfer shall include the right to exercise the Options to extend the Lease Term; (iv) Landlord may withhold its consent in its sole and absolute discretion to the proposed Transfer if the Transfer is a sublease and the term of the such sublease extends beyond the then existing Lease Term (the "then existing Lease Term" shall not include any unexercised options to extend the Lease Term); or 26 33 (v) Landlord may reasonably withhold its consent to the proposed Transfer. If Landlord agrees to consent to the proposed Transfer pursuant to Subparagraphs 23.C.(ii) or 23.C.(iii), Landlord shall provide such consent on Landlord's form within ten (10) business days of Landlord electing such option and receiving the final version of the document evidencing the Transfer. D. Permitted Transfers. Notwithstanding the foregoing, Tenant may, without Landlord's prior written consent and without providing to Landlord the option described in Subparagraph 23.C.(i) above, assign its interest in the Lease or sublet the Premises or a portion thereof to (i) a subsidiary, affiliate, division or corporation controlled by or under common control with Tenant; (ii) a successor corporation related to Tenant by merger, consolidation, non-bankruptcy reorganization or government action; or (iii) a purchaser of substantially all of the Tenant's assets; provided that, in each instance described above, (a) each assignee assumes the obligations of Tenant under this Lease and each sublessee agrees to abide by this Lease in a written instrument delivered to Landlord; (b) Tenant as transferor remains liable as a primary obligor for the obligations of the tenant under this Lease; and (c) the financial strength of the transferee tenant is no less than Tenant's financial strength as of the Commencement Date or the date of such Transfer, whichever is greater. Additionally, Tenant may, without Landlord's prior written consent, sublease one (1) of the Buildings prior to taking occupancy thereof, provided that (x) the sublessee agrees to abide by the obligations of Tenant under this Lease in a written instrument delivered to Landlord; (y) Tenant as transferor remains liable as a primary obligor for the obligations of the tenant under this Lease; and (z) the term of the sublease does not exceed thirty-six (36) months from the Commencement Date. 24. Successors. The covenants and agreements contained in this Lease shall be binding on and inure to the benefit of the parties hereto and on their respective heirs, successors and assigns (to the extent the Lease is assignable). 25. Mortgagee Protection. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage encumbering the Premises, whose address shall have been previously furnished to Tenant in writing by Landlord. Such beneficiary or mortgagee shall have the right to cure Landlord's default and so long as such beneficiary or mortgagee is making reasonable efforts to cure Landlord's default, including, but not limited to, obtaining possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effect a cure, Tenant shall not have the right to terminate this Lease. 26. Estoppel Certificate. Tenant and Landlord agree within ten (10) days following request by the other party to (A) execute and deliver to other party any documents, including estoppel certificates presented to a party by the other party, (1) certifying that this Lease is unmodified, or if modified, indicating the modifications, and in full force and effect and the date 27 34 to which the rent and other charges are paid in advance, if any, and (2) acknowledging that there are not, to such party's knowledge, any uncured defaults on the part of other party hereunder, or specifying the defaults, if any, and (3) evidencing the status of the Lease as may be reasonably required either by a lender making a loan to Landlord or to Tenant to be secured by a deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord, and (B) Tenant agrees to deliver to Landlord the financial statement of Tenant with an opinion of a certified public accountant, including a balance sheet and profit and loss statement, for the last completed fiscal year all prepared in accordance with generally accepted accounting principles consistently applied. Tenant's failure to deliver an estoppel certificate within ten (10) days following a request by Landlord shall be an Event of Default under this Lease. Landlord's failure to deliver an estoppel certificate within ten (10) days following a request by Tenant shall be an event of default under this Lease. 27. Surrender of Lease Not Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or any existing subleases or subtenants, or operate as an assignment to Landlord of any or all such subleases or subtenants. 28. Waiver. The waiver by Landlord or Tenant of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. Any waiver shall be in writing and signed by both Landlord and Tenant. 29. General. A. Captions. The captions and paragraph headings used in this Lease are for the purposes of convenience only. They shall not be construed to limit or extend the meaning of any part of this Lease, or be used to interpret specific sections. The word(s) enclosed in quotation marks shall be construed as defined terms for purposes of this Lease. As used in this Lease, the masculine, feminine and neuter and the singular or plural number shall each be deemed to include the other whenever the context so requires. B. Definition of Landlord. The term Landlord as used in this Lease, so far as the covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner at the time in question of the fee title of the Premises, and in the event of any transfer or transfers of the title of such fee, the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved of all liability with respect to performance of any covenants or obligations on the part of Landlord contained in this Lease to be performed after the date of such transfer or conveyance which are assumed in writing by the transferee; provided that any funds in the hands of Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject as aforesaid, be binding upon each Landlord, its heirs, personal representatives, successors and assigns only with respect to the obligations of Landlord arising 28 35 during its respective period of ownership. C. Time of Essence. Time is of the essence for the performance of each term, covenant and condition of this Lease. D. Severability. In case any one or more of the provisions contained herein, except for the payment of rent, shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. This Lease shall be construed and enforced in accordance with the laws of the State of California. E. Quiet Enjoyment. Upon Tenant paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. F. Law. As used in this Lease, the term "LAW" or "LAWS" shall mean any judicial decision, statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any government agency or authority having jurisdiction over the parties to this Lease or the Premises or both, in effect at the Commencement Date of this Lease or any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g., board of fire examiners, public utility or special district). G. Agent. As used in this Lease, the term "AGENT" shall mean, with respect to either Landlord or Tenant, its respective agents, employees, contractors (and their subcontractors), and invitees (and in the case of Tenant, its subtenants). H. Lender. As used in this Lease, the term "LENDER" shall mean any beneficiary, mortgagee, secured party or other holder of any deed of trust, mortgage or other written security device or agreement affecting Landlord's interest in the Premises. I. Force Majeure. Any prevention, delay or stoppage due to strikes, lock-outs, inclement weather, labor disputes, inability to obtain labor, materials, fuels or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other acts of God, and other causes beyond the reasonable control of the party obligated to perform (except financial inability) shall excuse the performance, for a period equal to the period of any said prevention, delay or stoppage, or any obligation hereunder except the obligation of Tenant to pay rent or any other sums due hereunder. 30. Sign. Tenant shall not place or permit to be placed any sign or decoration on the Parcel or the exterior of any of the Buildings without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Tenant, upon written notice by 29 36 Landlord, shall immediately remove any sign or decoration that Tenant has placed or permitted to be placed on the Parcel or the exterior of any of the Buildings without the prior written consent of Landlord, and if Tenant fails to so remove such sign or decoration within five (5) days after Landlord's written notice, Landlord may enter upon the Premises and remove said sign or decoration and Tenant agrees to pay Landlord, as additional rent upon demand, the cost of such removal. At the termination of this Lease, Tenant shall remove any sign which it has placed on the Parcel or any of the Buildings and shall repair any damage caused by the installation or removal of such sign. 31. Interest on Past Due Obligations. Any Monthly Installment of rent due from Tenant, or any other sum due under this Lease from Tenant, which is received by Landlord after the date ten (10) days following the date written notice is given by Landlord to Tenant that such sum has not been paid when due, shall bear interest from said due date until paid, at an annual rate equal to the lower of (the "PERMITTED RATE"): (1) twelve percent (12%); or (2) five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month immediately preceding the due date, on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended. Payment of such interest shall not excuse or cure any default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees reasonably incurred by Landlord in collection of such amounts. 32. Surrender of the Premises. On the last day of the term hereof, or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord in their condition existing as of the Commencement Date of this Lease, except for (A) ordinary wear and tear; (B) acts of God; (C) condemnation; (D) Hazardous Materials which Tenant is not responsible for pursuant to this Lease; and (E) all alterations, improvements or additions which Tenant is not required to remove pursuant to this Lease. Tenant shall surrender the Premises with all originally painted interior walls washed, and other interior walls cleaned, and repaired or replaced, the air conditioning and heating equipment serviced and repaired by a reputable and licensed service firm as required by Paragraph 10.B. hereof, all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove all of Tenant's Property from the Premises, and all property not so removed shall be deemed abandoned by Tenant. Tenant, at its sole cost, shall repair any damage to the Premises caused by the removal of Tenant's Property, which repair shall include, without limitation, the patching and filling of holes and repair of structural damage. If the Premises are not so surrendered at the termination of this Lease, Tenant shall indemnify, defend, protect and hold Landlord harmless from and against loss or liability resulting from delay by Tenant in so surrendering the Premises including without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. 33. Authority. The undersigned parties hereby warrant that they have proper authority and are empowered to execute this Lease on behalf of Landlord and Tenant, respectively. 34. CC&Rs. This Lease is made subject to all matters of public record affecting title to the property of which the Premises are a part as described in the Preliminary Title Report 30 37 dated October 2, 1996, prepared by Santa Clara Land Title Company, Order No. 00121233, a copy of which is attached hereto as Exhibit "G" (the "TITLE REPORT"). Tenant shall abide by and comply with all private conditions, covenants and restrictions of public record now or hereafter affecting the Premises as described on Exhibit "H" with reference to the Title Report ("CC&RS"), except as may be otherwise provided in Exhibit "H". Landlord represents and warrants that to its actual knowledge no violation of the CC&Rs exists as of the date of this Lease. During the Lease Term, Landlord shall promptly notify Tenant of any modification to the CC&Rs. 35. Brokers. The parties represent and warrant to each other that they have not dealt with any broker respecting this transaction other than Cooper/Brady Corporate Real Estate Services (the "BROKER") and hereby agree to indemnify and hold each other harmless from and against any brokerage commission or fee, obligation, claim or damage (including attorneys' fees) paid or incurred respecting any broker claiming through the other party or with which/whom the other party has dealt. Landlord shall pay commission owing to the Broker pursuant to a separate agreement between Landlord and the Broker. 36. Limitation on Landlord's Liability36. Limitation on Landlord's Liability. Tenant, for itself and its successors and assigns (to the extent this Lease is assignable), hereby agrees that in the event of any actual, or alleged, breach or default by Landlord under this Lease that: A. Tenant's sole and exclusive remedy and recourse against Landlord shall be as against Landlord's interest in the Premises and this Lease; B. No partner of Landlord shall be sued or named as a party in a suit or action (except as may be necessary to secure jurisdiction of the partnership) for the breach of any obligation of Landlord or the act or omission of Landlord or its Agents; C. No service of process shall be made against any partner of Landlord with respect to any claim arising under or out of this Lease (except as may be necessary to secure jurisdiction of the partnership); D. No partner of Landlord shall be required to answer or otherwise plead to any service of process with respect to any claim arising under or out of this Lease (except as may be necessary to secure jurisdiction of the partnership); E. No judgment will be taken against any partner of Landlord for the breach of any obligation of Landlord or the act or omission of Landlord or its Agents; F. Any such judgment taken against any partner of Landlord may be vacated and set aside at any time nunc pro tunc; G. No writ of execution will ever be levied against the assets of any partner of Landlord for a judgment based on any breach of a Landlord's obligations under this Lease or any 31 38 act or omission of Landlord; and H. The covenants and agreements of Tenant set forth in this Paragraph 36 shall be enforceable by Landlord and any partner of Landlord. 37. Hazardous Material. A. Definitions. As used herein, the term "HAZARDOUS MATERIAL" shall mean any substance: (i) the presence of which requires investigation or remediation under any federal, state or local statute, regulation, ordinance, order, action, policy or common law; (ii) which is or becomes defined as a "hazardous waste," "hazardous substance," pollutant or contaminant under any federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, the State of California or any political subdivision thereof; (iv) the presence of which on the Premises causes or threatens to cause a nuisance upon the Premises or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about the Premises; (v) the presence of which on adjacent properties could constitute a trespass by Landlord or Tenant; (vi) without limitation which contains gasoline, diesel fuel or other petroleum hydrocarbons; (vii) without limitation which contains polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde foam insulation; or (viii) without limitation radon gas. B. Landlord's Obligation. Except for the Existing Environmental Condition (as defined in Subparagraph 37.L. hereof), Landlord has no actual knowledge, without any duty to make investigation, of any Hazardous Materials present in the soil or groundwater of the Parcel. Landlord, at its sole cost, shall comply with all Laws which impose liability or responsibility upon either Landlord or Tenant to investigate, remediate or otherwise take any action with respect to the Existing Environmental Condition; provided, however, that this covenant shall not require Landlord to perform any obligation Tenant has under this Paragraph 37. Subject to Subparagraph 8.E., Landlord shall indemnify, defend, protect and hold Tenant harmless from and against all liabilities, claims, penalties, fines, response costs and other expenses (including reasonable attorneys' fees) which result from Landlord's failure to timely perform the obligation stated in the immediate preceding sentence. C. Permitted Use. Subject to the compliance by Tenant with the provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall be permitted to use and store on the Premises those Hazardous Materials listed in Exhibit "E" attached hereto, in the quantities set forth in Exhibit "E" and such other Hazardous Materials approved by Landlord in writing. 32 39 D. Hazardous Materials Management Plan. (i) Prior to Tenant or its subtenant using, handling, transporting or storing any Hazardous Material at or about the Premises (including, without limitation, those listed in Exhibit "E" other than customary quantities of janitorial and office supplies), Tenant shall submit to Landlord a Hazardous Materials Management Plan ("HMMP") for Landlord's review and approval, which approval shall not be unreasonably withheld. The HMMP shall describe: (aa) the quantities of each material to be used, (bb) the purpose for which each material is to be used, (cc) the method of storage of each material, (dd) the method of transporting each material to and from the Premises and within the Premises, (ee) the methods Tenant will employ to monitor the use of the material and to detect any leaks or potential hazards, and (ff) any other information any department of any governmental entity (city, state or federal) requires prior to the issuance of any required permit for the Premises or during Tenant's occupancy of the Premises. Landlord may, but shall have no obligation to review and approve the foregoing information and HMMP, and such review and approval or failure to review and approve shall not act as an estoppel or otherwise waive Landlord's rights under this Lease or relieve Tenant of its obligations under this Lease; provided that a failure to review and approve within a reasonable time shall not be deemed a disapproval. If Landlord determines in good faith by inspection of the Premises or review of the HMMP that the methods in use or described by Tenant are not adequate in Landlord's good faith judgment to prevent or eliminate the existence of environmental hazards, then Tenant shall not use, handle, transport, or store such Hazardous Materials at or about the Premises unless and until such methods are approved by Landlord in good faith and added to an approved HMMP. Once approved by Landlord, Tenant shall strictly comply with the HMMP and shall not change its use, operations or procedures with respect to Hazardous Materials without submitting an amended HMMP for Landlord's review and approval as provided above. (ii) Tenant shall pay to Landlord when Tenant submits an HMMP (or amended HMMP) the amount reasonably determined by Landlord to cover all Landlord's costs and expenses reasonably incurred in connection with Landlord's review of the HMMP which costs and expenses shall include, among other things, all reasonable out-of-pocket fees of attorneys, architects, or other consultants incurred by Landlord in connection with Landlord's review of the HMMP. Landlord shall have no obligation to consider a request for consent to a proposed HMMP unless and until Tenant has paid to Landlord its reasonable estimate of all such costs and expenses to Landlord, and Tenant shall pay all such costs and expenses to Landlord irrespective of whether Landlord consents to such proposed HMMP. Tenant shall pay to Landlord on demand the excess, if any, of such costs and expenses actually incurred by Landlord over the amount of such costs and expenses actually paid by Tenant, and Landlord shall promptly refund to Tenant the excess, if any, of such costs and expenses actually paid by Tenant over the amount of such costs and expenses actually incurred by Landlord. E. Use Restriction. Except as specifically allowed in Subparagraph C above, Tenant shall not cause or permit any Hazardous Material to be used, stored, generated, discharged, transported to or from, or disposed of in or about the Premises, or any other land or 33 40 improvements in the vicinity of the Premises. Without limiting the generality of the foregoing, Tenant, at its sole cost, shall comply with all Laws relating to the storage, use, generation, transport, discharge and disposal by Tenant or its Agents of any Hazardous Material. If the presence of any Hazardous Material on the Premises (other than an Existing Environmental Condition) caused or permitted by Tenant or its Agents results in contamination of the Premises or any soil, air, ground or surface waters under, through, over, on, in or about the Premises, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and/or the surrounding real property to the condition existing prior to the appearance of such Hazardous Material to the extent feasible and in all events, to a condition which complies with applicable Environmental Law. In the event there is a release, discharge or disposal of or contamination of the Premises by a Hazardous Material which is of the type that has been stored, handled, transported or otherwise used or permitted by Tenant or its Agents on or about the Premises (other than an Existing Environmental Condition), Tenant shall have the burden of proving that such release, discharge, disposal or contamination is not the result of the acts or omissions of Tenant or its Agents. F. Tenant Indemnity. Tenant shall defend, protect, hold harmless and indemnify Landlord and its Agents and Lenders with respect to all actions, claims, losses (including, diminution in value of the Premises), fines, penalties, fees (including, but not limited to, attorneys' and consultants' fees) costs, damages, liabilities, remediation costs, investigation costs, response costs and other expenses arising out of, resulting from, or caused by (i) any Hazardous Material used, generated, discharged, transported to or from, stored, or disposed of by Tenant or its Agents in, on, under, over, through or about the Premises and/or the surrounding real property or (ii) any disposal or release of any Hazardous Material on the surface of the Premises occurring after the Commencement Date and prior to the termination of this Lease that is not the result of the negligent acts or wilful misconduct of Landlord or its Agents; provided that in no event shall the foregoing create any liability in Tenant for an Existing Environmental Condition. Tenant shall not suffer any lien to be recorded against the Premises as a consequence of the disposal of any Hazardous Material on the Premises by Tenant or its Agents, including any so called state, federal or local "super fund" lien related to the "clean up" of any such Hazardous Material in, over, on, under, through, or about the Premises. G. Compliance. Tenant shall immediately notify Landlord, and Landlord shall notify Tenant, of any inquiry, test, investigation, enforcement proceeding by or against Tenant or the Premises concerning contamination of the Premises caused by any Hazardous Material. Any remediation plan prepared by or on behalf of Tenant must be submitted to Landlord prior to conducting any work pursuant to such plan and prior to submittal to any applicable government authority and shall be subject to Landlord's consent which consent shall not be unreasonably withheld or delayed. Tenant acknowledges that Landlord, as the owner of the Property, at its election, shall have the sole right to negotiate, defend, approve and appeal any action taken or order issued with regard to any Hazardous Material by any applicable governmental authority. H. Assignment and Subletting. It shall not be unreasonable for Landlord to 34 41 withhold its consent to any proposed assignment or subletting if (i) the proposed assignee's or subtenant's anticipated use of the Premises involves the storage, generation, discharge, transport, use or disposal of any Hazardous Material (other than reasonable quantities of office supplies, warehouse supplies and janitorial supplies that may contain Hazardous Materials) in a manner which represents a risk to the health and safety of persons on or about the Premises, and in Landlord's opinion, that risk is a material risk; (ii) if the proposed assignee or subtenant has been required by any prior landlord, lender or governmental authority to "clean up" or remediate any Hazardous Material resulting from the negligence or affirmative actions of the proposed assignee or subtenant within the last five (5) years; (iii) if the proposed assignee or subtenant is subject to investigation or enforcement order or proceeding by any governmental authority in connection with the use, generation, discharge, transport, disposal or storage of any Hazardous Material resulting from the negligence or affirmative actions of the proposed assignee or subtenant within the last five (5) years. I. Surrender. Upon the expiration or earlier termination of the Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from the Premises that Tenant or its Agents introduced to the Premises. If Tenant fails to so surrender the Premises, Tenant shall indemnify, protect, defend and hold Landlord harmless from and against all damages to the extent resulting from Tenant's failure to surrender the Premises as required by this Paragraph, including, without limitation, any actions, claims, losses, liabilities, fees (including, but not limited to, attorneys' and consultants' fees), fines, costs, penalties, or damages in connection with the condition of the Premises including, without limitation, damages occasioned by the inability to relet the Premises or a reduction in the fair market and/or rental value of the Premises by reason of the existence of any Hazardous Material that Tenant or its Agents introduced in, on, over, under, through or around the Premises. J. Right to Appoint Consultant. If Tenant or its Agents have used Hazardous Materials (other than customary quantities of janitorial or office supplies), Landlord shall have the right to appoint a consultant, at Tenant's expense, to conduct an investigation to determine whether any Hazardous Material is being used, generated, discharged, transported to or from, stored or disposed of in, on, over, through, or about the Premises, in an inappropriate or unlawful manner. If Tenant has violated any Law or covenant in this Lease regarding the use, storage or disposal of Hazardous Materials on or about the Premises, Tenant shall reimburse Landlord for the cost of such investigation. Tenant, at its expense, shall comply with all reasonable recommendations of the consultant or take other steps approved by Landlord required to conform Tenant's use, storage or disposal of Hazardous Materials to the requirements of applicable Law or to fulfill the obligations of Tenant hereunder. K. Holding Over. If during the Lease Term, Tenant or any of its Agents is required to take any action of any kind required or requested to be taken by any governmental authority to clean-up, remove, remediate or monitor any Hazardous Material (the presence of which is the result of the acts or omissions of Tenant or its Agents and other than an Existing Environmental Condition) and such action is not completed prior to the expiration or earlier termination of the Lease, Tenant shall be deemed to have impermissibly held over until such time 35 42 as such required action is completed, and Landlord shall be entitled to all damages directly or indirectly incurred in connection with such holding over, including without limitation, damages occasioned by the inability to re-let the Premises or a reduction of the fair market and/or rental value of the Premises. L. Existing Environmental Reports. Tenant hereby acknowledges that it has received, read and reviewed the reports and test results described in Exhibit "F" attached hereto and made a part hereof (the "EXISTING ENVIRONMENTAL REPORTS"). The Hazardous Materials currently present in, on or under the Premises or the soil, groundwater, surface water or air thereof, or in, on, or under any property in the vicinity of the Premises, or the soil, groundwater, surface water or air thereof, as described in the Existing Environmental Reports are referred to herein as the "EXISTING ENVIRONMENTAL CONDITION". Tenant shall keep the Existing Environmental Reports and all information contained therein confidential, except Tenant shall be allowed to disclose such information to Tenant's consultants and attorneys provided such parties agree to keep the information confidential. M. Provisions Survive Termination. The provisions of this Paragraph 37 shall survive the expiration or termination of this Lease. N. Controlling Provisions. The provisions of this Paragraph 37 are intended to govern the rights and liabilities of the Landlord and Tenant under this Lease respecting Hazardous Materials to the exclusion of any other provisions in this Lease that might otherwise be deemed applicable. The provisions of this Paragraph 37 shall be controlling with respect to any provisions in this Lease that are inconsistent with this Paragraph 37. 38. Landlord's Default. A. If Tenant believes Landlord has failed to perform or provide any service or pay any sum which Tenant in good faith believes Landlord is obligated to provide, perform or pay under this Lease, Tenant shall provide Landlord with written notice thereof. If Landlord does not perform or provide the required service or make such required payment within thirty (30) days after receipt of Tenant's notice (or if such failure cannot be cured within such thirty (30) day period, if Landlord does not promptly commence to provide or cure the same and diligently pursue the same to completion), Tenant shall have the right to provide, perform or pay the same. If Tenant, after such notice, provides and performs such service or makes such payment and sends to Landlord a written statement reflecting the reasonable costs for providing the same or the amount paid and Landlord fails to pay the same within twenty (20) days after receipt of such notice, Tenant shall have the right to seek and obtain damages from Landlord. B. In the event of any default by Landlord, Tenant's exclusive remedies shall be an action for specific performance or an action for damages. Tenant hereby waives the benefit of any laws granting it the right to terminate this Lease or withhold rent on account of any Landlord default. Tenant waives the provisions of Sections 1932(l), 1941 and 1942 of the California Civil Code and any similar or successor law regarding Tenant's right to terminate this 36 43 Lease or to make repairs and deduct the expenses of such repairs from the rent due under this Lease. 39. Condition to Effectiveness. The effectiveness of this Lease is conditioned upon Landlord obtaining architectural approval by April 1, 1997 from the City of Santa Clara for the construction of the ninety eight thousand four hundred thirty (98,430) square foot building described in the Lease Agreement between Landlord and Tenant dated concurrently with this Lease. This condition is for the benefit of Tenant and Tenant may waive this condition by written notice to Landlord on or before April 1, 1997. If on or before April 1, 1997 this condition is neither fulfilled nor waived by Tenant, then this Lease shall automatically terminate, Landlord shall return the Security Deposit to Tenant and the parties shall have no further rights or obligations hereunder. If this condition is fulfilled or waived by Tenant on or before April 1, 1997, then this Lease shall continue in full force and effect. Landlord shall use good faith and all reasonable efforts to obtain the architectural approval by April 1, 1997. 37 44 IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below. LANDLORD TENANT South Bay/San Tomas Associates, Auspex Systems, Inc., a California general partnership a Delaware corporation By: CIIF Associates II Limited partnership, a Delaware limited By: partnership, its general partner -------------------------------- Its: By: AEW Advisors, Inc., ------------------------------- a Massachusetts corporation, its managing general partner By: ------------------------- Its: ------------------------ 38-b 45 EXHIBIT "A" Legal Description of Parcel 39 46 EXHIBIT "B" Site Plan 40 47 EXHIBIT "C" Improvement Agreement THIS IMPROVEMENT AGREEMENT by and between SOUTH BAY/SAN TOMAS ASSOCIATES ("Landlord") and AUSPEX SYSTEMS, INC. ("Tenant"), dated January , 1997, is made part of that Lease (the "Lease"), between Landlord and Tenant, dated concurrently herewith. Landlord and Tenant agree that the following terms are part of the lease: 1. Definitions: Except as defined below, capitalized terms in this Improvement Agreement shall have the meanings given those terms in the Lease. (a) Architect shall collectively mean all architects, structural engineers, mechanical engineers, and other design professionals retained by Landlord and needed to design the Tenant Improvements. (b) Applicable Laws and Restrictions shall mean all laws (including without limitation the Americans With Disabilities Act), building codes, ordinances, regulations, title covenants, conditions and restrictions. (c) Approved Plans shall mean the Final Tenant Improvement Plans, as the same may be modified by a Change Order issued in accordance with this Improvement Agreement. (d) Building shall mean each Building Shell and the Tenant Improvements therein. (e) Buildings shall mean all of the Building Shells and all of the Tenant Improvements. (f) Building Shell shall mean each (concrete or two story tilt-up R&D building), having the general specifications described on attached Exhibit 1, which shall be constructed by Landlord for Tenant generally in the location and configuration shown on Exhibit B to the Lease. (g) Construction Documents shall mean the Final Tenant Improvement Plans, and any and all bid packages, contracts with Contractors and agreement with the Architect. (h) Contractor(s) shall mean South Bay Construction and Development Company and all other contractors, design-build contractors, subcontractors, and material supplies who provide labor and material for construction of the Tenant Improvements. To the extent required by Applicable Laws and Restrictions, each Contractor shall be duly licensed by the State of California. 41 48 (i) Construction Schedule shall mean the schedule for the commencement, prosecution and Substantial Completion of the Tenant Improvements, which shall be in substantially the form of attached Exhibit 2, and which shall be approved by the parties pursuant to this Improvement Agreement and, when agreed upon attached hereto in replacement of Exhibit 2 and incorporated herein by this reference. (j) Final Tenant Improvement Plans shall mean those plans, specifications and working drawings for the Tenant Improvements, which shall be prepared, approved and identified in Exhibit 3 when approved in writing by Landlord and Tenant, and thereafter incorporated herein by this reference. (k) Force Majeure shall mean any prevention, delay or stoppage due to strikes, lock-outs, inclement weather, labor disputes, inability to obtain labor, materials, fuels or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other acts of God, and other causes beyond the reasonable control of the party obligated to perform (except financial inability) shall excuse the performance, for a period equal to the period of any said prevention, delay or stoppage, or any obligation hereunder except the obligation of Tenant to pay any sums due hereunder. (l) Landlord's Representative shall mean Scott Trobbe, whose telephone number is (408) 379-0400, whose facsimile number is (408) 379-3229, and whose address for delivered notice is South Bay Development Company, Inc., 511 Division Street, Campbell, California 95008, or such other person as Landlord shall designate in writing to Tenant as its authorized representative for the proposes of administering this Improvement Agreement. Landlord's Representative may change its numbers and address by deliver of three (3) business days notice to Tenant's Representative. (m) Planning Schedule shall mean the schedule for the preparation, approval and permitting of the Approved Plans for the Tenant Improvements attached hereto as Exhibit 4, and incorporated herein by this reference. (n) Permits shall mean all of the permits, inspections, approvals and consents of governmental authorities. (o) Substantial Completion shall mean that (i) the Tenant Improvements have been completed in accordance with the provisions of this Improvement Agreement and the Final Tenant Improvement Plans therefor (except for minor punchlist items which do not substantially interfere with Tenant's use of the Premises), (ii) all utilities are connected and available for Tenant's use, and (iii) all necessary governmental approvals for occupancy of the Buildings have been obtained (including, if applicable, a certificate of occupancy); provided, however that, to the extent that Substantial Completion of the Buildings is delayed because of a Tenant Delay, the Substantial Completion Date shall be deemed to be the date the Buildings would have otherwise been Substantially Completed, absent the Tenant Delay. 42 49 (p) Tenant Delay shall mean any delay in the Substantial Completion of the Tenant Improvements as a consequence of (i) Tenant's failure to promptly review and approve or properly disapprove plans for the Tenant Improvements in accordance with this Improvement Agreement and within the time permitted by the Planning Schedule; (ii) Tenant's request for special materials, finishes, or installations which are not readily available, provided the length of Tenant Delay due to such unavailability shall not exceed the amount of delay approved by Tenant when such materials, components, finish, or improvements were requested by Tenant; (iii) Change Orders requested by Tenant and approved by Landlord, provided that the amount of Tenant Delay as a consequence of any Change Order may not exceed the amount of delay specified in the Change Order; (iv) Tenant's failure to complete any of its own improvement work identified in the Construction Schedule as being necessary for the Substantial Completion of the Tenant Improvements by the date specified in the Construction Schedule for completion of such work; (v) interference with Landlord's work caused by Tenant or Tenant's contractors or subcontractors. (q) Tenant Improvements shall mean those improvements that Landlord is obligated to construct in the Premises pursuant to Final Tenant Improvement Plans. (r) TI Allowance shall mean an amount equal to Four Million Two Hundred Eighty Four Thousand Five Hundred Fifty Dollars ($4,284,550), which allowance is already reflected in the Monthly Installment amount set forth in Subparagraph 4.B. of the Lease. (s) TI Costs shall mean all sums (i) paid to Contractors for labor and materials furnished in connection with construction of the Tenant Improvements; (ii) all costs, expenses, payments, fees, and charges whatsoever paid or incurred by Landlord to or at the direction of any city, county, or other governmental authority or agency which are required to be paid by Landlord in order to obtain all necessary governmental permits, licenses, inspections and approvals relating to the construction of the Tenant Improvements and the use and occupancy of the Premises, including without limitation all in lieu fees and utility fees; (iii) engineering and architectural fees for services required in connection with the design and construction of the Tenant Improvements; and (iv) premiums, if any, for course of construction insurance and for payment and completion bonds relating only to construction of the Tenant Improvements. In no event shall TI Costs include any of the following, all of which shall be the sole obligation of Landlord: (a) any cost attributable to the Building Shell, including without limitation the cost to design, permit, or construct the Building Shell improvements described on Exhibit 1 to this Exhibit "C", (b) charges and expenses for changes to the Construction Documents which have not been approved in writing by Tenant, except for those changes to the Construction Documents required by governmental authority, (c) wages, labor and overhead for overtime and premium time, unless approved in writing by Tenant; (d) additional costs and expenses incurred by Landlord on account of any Contractors' or Architects' default or construction defects in the Improvements; (e) interest and fees for construction financing; (f) labor and overhead costs for Landlord's employees and office; and (g) bond premiums. (t) TI Cost Estimate shall mean the total estimated cost of constructing the 43 50 Tenant Improvements prepared and approved by Landlord and Tenant in accordance with this Improvement Agreement, as modified by change orders issued in accordance with this Improvement Agreement. 2. Designation of Representative. Landlord and Tenant hereby respectively appoint Landlord's Representative and Tenant's Representative as its sole representative for the purposes of this Improvement Agreement. Until replaced by written notice, Landlord's Representative and Tenant's Representative shall have the full authority and responsibility to act on behalf of Landlord and Tenant, respectively, as required in this Improvement Agreement. 3. Preparation and Approval of Plans. (a) Retention of Architect(s). Tenant shall retain the Architect(s) to prepare the plans and specifications for the Tenant Improvements, subject to Landlord's reasonable approval. (b) Tenant Improvement Plans. (i) To facilitate timely commencement and Substantial Completion of the Tenant Improvements, within the time specified in the Planning Schedule, Tenant shall prepare and submit to Landlord for Landlord's approval the Tenant's design requirements for the Tenant Improvements. At such time as Landlord has approved the Tenant's design requirements and within the time provided in the Planning Schedule, Landlord shall cause the Architect to proceed with the preparation of preliminary plans and specifications, and a preliminary cost estimate for the Tenant Improvements and shall notify Tenant of any revisions that may need to be made to the previously approved construction schedule. Tenant shall review and approve or disapprove of such items and any changes in the Construction Schedule within the time permitted by the Planning Schedule. If Tenant does not approve any preliminary plan or specification, the preliminary cost estimate, or a construction schedule change, Tenant and Landlord shall work with the Architect and negotiate in good faith to reach agreement on all such items within the time permitted by the Planning Schedule. (ii) When the preliminary space plans, elevations, preliminary cost estimate and any Construction Schedule changes have been approved by Tenant, Landlord shall cause the Architect to prepare and deliver to Tenant by the date specified in the Planning Schedule (i) proposed final plans, specifications and working drawings for the Tenant Improvements, (ii) a proposed final TI Cost Estimate, and (iii) a proposed final Construction Schedule for the Improvements substantially in the form of attached Exhibit 2, all of which shall be consistent with, and logical evolutions of the preliminary plans and elevations approved by Tenant pursuant to the foregoing, the terms of this Improvement Agreement and the Construction Schedule and the changes thereto previously approved by the parties. Tenant shall review and approve the proposed final plans, specifications, and working drawings for the Tenant Improvements, the proposed TI Cost Estimate, or the proposed final Construction Schedule within the time permitted by the Planning Schedule. If Tenant reasonably disapproves of the 44 51 plans, specifications or working drawings for the Tenant Improvements (which disapproval can only be based upon whether such plans, specification or working drawings are consistent with the preliminary plans), the proposed TI Cost Estimate, and/or the proposed final Construction Schedule, then Landlord and Tenant shall negotiate in good faith, using all reasonable efforts to reach agreement on such items within the time specified in the Planning Schedule; provided, however, that Landlord shall not unreasonably withhold its approval of such change requested by Tenant to the Tenant Improvements which does not materially delay the Scheduled Completion Date for the Tenant Improvements nor materially increase the cost that will be incurred by Landlord in constructing the Tenant Improvements. If Tenant believes that the cost estimate is incorrect, it may require that all or any portion of the work be submitted for competitive bids, in which case the amount for the rebid work included in the TI Cost Estimate shall not exceed the lowest responsible bid(s) from responsible Contractor(s) and Supplier(s) for such work. The plans, specifications, and working drawings for the Tenant Improvements, the final TI Cost Estimate, and the Construction Schedule approved by Tenant and Landlord pursuant to this Section, shall be the "Final Tenant Improvement Plans," "TI Cost Estimate" and "Construction Schedule" for the purposes of this Improvement Agreement. (c) Disapprovals and Failures to Respond. Any disapproval by Tenant of a preliminary plan, space plan, elevation final plan, specification, cost estimate, or construction schedule item submitted for its approval shall be communicated only by a writing, which is delivered to Landlord within the time permitted by the Planning Schedule and which specifies the disapproved item(s), the reason(s) for the disapproval, and the changes required to make the item acceptable to Tenant. If Tenant's disapproval of any item requiring its approval under this Construction Agreement is not delivered in accordance with the procedures and time limits specified in this Improvement Agreement, then Tenant shall be deemed to have given its approval to such item. (d) Changes to Plans, Cost Estimate and Construction Schedule. When the Final Tenant Improvement Plans, the TI Cost Estimate and Construction Schedule have been approved by Landlord and Tenant as provided above, the description of said plans and the Construction Schedule shall be initialed by the parties and attached to this Agreement as Exhibits 2 and 3, respectively. Once the Final Tenant Improvement Plans, the TI Cost Estimate, and the Construction Schedule (including, without limitation, the Scheduled Completion Date specified therein) are approved by Landlord and Tenant as provided above, neither party shall thereafter have the right to order extra work or change orders, nor will the Construction Schedule or the TI Cost Estimate be modified, except by a written "Change Order" approved by Landlord and Tenant, which approval shall not be unreasonably withheld, except as expressly stated to the contrary below. The Change Order shall clearly describe (i) the change, (ii) the party required to perform the change, (iii) any modification of the Approved Plans, (iv) the amount of delay or the time saved resulting therefrom and any revision of the Construction Schedule and Scheduled Completion Date occasioned by the change, (v) any added or reduced TI Cost resulting from the Change, (vi) any other cost, and the manner of payment of such costs which Tenant may be required to pay with respect to a Change requested by Tenant, or Landlord may be required to reimburse to Tenant as a consequence of a change requested by Landlord. 45 52 (e) Application for Permits. As soon as the Final Tenant Improvement Plans are approved by Landlord and Tenant, Landlord shall submit said plans to all appropriate governmental agencies and private parties from whom Permits are required for the construction and use of the Tenant Improvements. Landlord shall notify Tenant of any changes required by any governmental agencies, and Tenant shall have seven (7) days thereafter to indicate its approval thereof. All such changes required by governmental agencies shall be deemed acceptable to Tenant unless Tenant's use of the Premises is materially impaired thereby. The final plans, specifications and working drawings as approved, and all change orders specifically permitted pursuant to Subparagraph (c) below, shall be referred to herein as the "Approved Plans." 4. Construction. (a) General Contractor. South Bay Development and Construction Company shall serve as the general Contractor. Contractor's fee as general Contractor for the Tenant Improvements shall be calculated as follows and shall be included in the TI Cost Estimate: five percent (5%) of the TI Costs not including such Contractor's fee. (b) Subcontracts and Materials. Prior to issuance of any subcontract relating to Tenant Improvements, Landlord shall submit for Tenant's approval (which approval shall not be unreasonably withheld) a list of the Contractors and Suppliers for the Tenant Improvement work. At Tenant's request, all labor and materials for the Tenant Improvements shall be competitively bid by at least two (2) Contractors or Suppliers. Landlord may also bid on such work. If Tenant so desires, Tenant may also select a Contractor or Supplier, reasonably acceptable to Landlord, to bid the work. All bids shall be opened simultaneously. Landlord shall have the right to select the Contractor or Supplier to perform the work. Notwithstanding Tenant's right to approve the Contractors and Suppliers, the Contractors and Suppliers are a contractor only for Landlord, and Tenant shall have no liability to any Contractor or Supplier under any Construction Document or otherwise with respect to the Tenant Improvements; provided, Tenant shall be required to reimburse Landlord for its portion of the TI Costs pursuant to this Improvement Agreement. (c) Commencement and Completion of Improvements. As soon as (i) the Approved Plans have been developed as provided above, and (ii) all necessary Permits for commencement of construction of the Tenant Improvements have been obtained, Landlord shall cause its Contractor(s) to commence and to thereafter diligently prosecute to completion the construction of the Tenant Improvements in accordance with the Approved Plans by the Scheduled Completion Dates therefor contained in the Construction Schedule; provided, however, Landlord shall not be liable for delay in the Substantial Completion Date for any Building to the extent reasonably attributable to a Force Majeure Delay, except as specifically provided in this Lease. (d) Standard of Construction. Landlord shall cause all work to be constructed 46 53 in a good and workmanlike manner, free from material design and workmanship defects in accordance with the Approved Plans, the other Construction Documents, the Permits, and Applicable Law and Restrictions. Notwithstanding anything to the contrary in the Lease or this Improvement Agreement, Tenant's acceptance of the Landlord's Work shall not waive the foregoing warranty and Landlord shall promptly remedy all violations of the warranty at its sole cost and expense which occur during the first twelve (12) months of the Lease Term. Such warranty shall expire and be of no further force or effect on the date which is twelve (12) months after the Commencement Date. Tenant shall promptly notify Landlord in writing during the warranty period of any defect in construction or in the operation of equipment discovered during such period, and promptly thereafter Landlord shall commence the cure of such defect and complete such cure with diligence at Landlord's sole cost. After said twelve (12) month period, Tenant shall conclusively be deemed to have approved the construction of the Tenant Improvements and accepted them "as is", subject only to defects claimed as provided above. With respect to defects discovered after the expiration of said one (1) year period, the parties hereto acknowledge that it is their intention that Tenant have the benefit of any construction or equipment warranties existing in favor of Landlord that would assist Tenant in correcting such construction defects and in discharging its obligations regarding the repair and maintenance of the Premises. Upon request by Tenant following the expiration of such twelve (12) month period, Landlord shall inform Tenant of all written construction and equipment warranties existing in favor of Landlord which affect the Tenant Improvements. Landlord shall assign such warranties to Tenant upon request in order that Tenant may enforce the same. (e) Tenant Fixturing. Landlord shall use all reasonable efforts to complete construction of Tenant Improvements of each Building to a point permitting Tenant's entry for installation of its fixtures and equipment on or before the date specified in the Construction Schedule. When the construction of each Building has proceeded to the point where Tenant's installation of its fixtures and equipment in the Building can be commenced in accordance with good construction practice, the Landlord shall notify Tenant to that effect and shall permit Tenant and its authorized representatives and contractors to have access to the Building for a period of not less than thirty (30) days for the purpose of installing Tenant's trade fixtures, equipment and other Tenant's Property in the Building. Landlord and Tenant shall cooperate in good faith to schedule and coordinate Tenant's fixturing with the Landlord's construction in a manner which will assure Substantial Completion of the Improvements by the Scheduled Completion Dates, will reduce each party's cost, and ensure labor harmony. While performing fixturing, Tenant shall comply, and shall cause its employees, contractors and suppliers to comply, with the reasonable work rules observed by Landlord's Contractors and Suppliers. (f) Inspection & Punchlist. Tenant's Representative and Tenant's architect, designers and consultants shall have the right to enter on the Premises at all reasonable times and upon notice to Landlord's Representative for the purpose of inspecting the progress of the work. Tenant's Representative, Landlord's Representative and the Architect(s), and such advisers as they shall desire, shall inspect each Building upon its Substantial Completion using their best efforts to discover all uncompleted or defective construction. After such inspection has been completed, a list of "punchlist" items shall be prepared by Landlord which the parties agree are to 47 54 be corrected by Landlord. Landlord shall use its best efforts to complete and/or repair such "punchlist" items within thirty (30) days. Tenant's taking possession of the Premises shall be deemed to be an acceptance by Tenant of the Premises as complete and in accordance with the terms of this Lease, subject to completion of the punchlist items within said period. 5. Payment of Construction Costs. Landlord and Tenant shall each bear their own cost for performance of their respective obligations under this Improvement Agreement, except that Tenant shall reimburse Landlord for the amount, if any, by which the TI Cost exceeds the TI Allowance in the following manner: Landlord shall submit receipted bills and/or lien releases evidencing Landlord's payment of TI Costs in such amounts and at such times as bills are submitted to Landlord for the TI Costs by Contractors and Suppliers for Tenant Improvement work in place prior to the date of the bill (a "TI Progress Cost"). On or before the twenty-fifth (25th) day following receipt of the request, Tenant shall pay to Landlord a sum equal to (i) the TI Progress Cost times a fraction, the numerator of which shall be equal to the TI Cost Estimate minus the TI Allowance and the denominator of which shall be equal to the TI Cost Estimate, minus (ii) the sums previously reimbursed by Tenant to Landlord; provided, however that in no event shall Tenant be required to reimburse Landlord (1) for more than 90% of the difference between the TI Cost Estimate and the TI Allowance prior to the Substantial Completion Date, (2) so long as Landlord has failed to use the reimbursements previously paid by Tenant to discharge the obligation of the Landlord to the Contractors and Suppliers, or (3) so long as Landlord is in default of its obligations under this Improvement Agreement in any material respect. 6. Delay In Completion Caused By Tenant. The parties hereto acknowledge that the date on which Tenant's obligation to pay the Monthly Installment would otherwise commence could be delayed because of Tenant Delays. It is the intent of the parties hereto that Tenant's obligation to pay the Monthly Installments of rent not be delayed by any of such causes or by any other act of Tenant, and in the event it is so delayed, then Tenant's obligation to pay the Monthly Installments shall commence as of the date it would otherwise have commenced absent said Tenant Delay. Tenant Delays in excess of thirty (30) days for any of the above-mentioned reasons may affect Landlord's financing of construction of the Premises, and Tenant agrees to pay any reasonable additional financing costs, including loan fees, incurred by Landlord as a result thereof. 7. Notices. The notices to be delivered to the parties pursuant to this Improvement Agreement shall be given by personal delivery or by facsimile (with receipt confirmed) to the Tenant's Representative and the Landlord's Representative at the following address and facsimile number. 48 55 Tenant's Representative: [FOLLOWING EXECUTION OF THIS LEASE, TENANT SHALL PROMPTLY PROVIDE LANDLORD WITH THE NAME, ADDRESS AND FACSIMILE NUMBER FOR TENANT'S REPRESENTATIVE.] Address: --------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- Facsimile: ------------------------------------------------------------- Landlord's Representative: Address: South Bay Development Company, Inc. 511 Division Street Campbell, California 95008 Attn: Mr. Scott Trobbe Facsimile: (408) 379-3229 8. Miscellaneous. Except as otherwise expressly provided in this Improvement Agreement, whenever either party's consent, approval, designation, or advice is required by the other party, such consent, approval, designation, or advice shall not be unreasonably withheld or delayed. This Improvement Agreement and the Lease contain the entire agreement between the parties with respect to the construction of the Tenant Improvements and, in the event of any conflict between the terms of this Improvement Agreement and the Lease, this Improvement Agreement shall prevail. This Improvement Agreement may be amended and the provisions hereof may be waived only by a writing signed by Landlord and Tenant and the provisions hereof shall be binding upon the successors and assigns of the parties to the Lease. If any legal action, arbitration or other proceeding is commenced to interpret or enforce this Improvement Agreement, the prevailing party in such action, arbitration or proceeding shall be entitled to recover its reasonable attorneys' fees and costs. 49 56 IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below. LANDLORD TENANT South Bay/San Tomas Associates, Auspex Systems, Inc., a California general partnership a Delaware corporation By: CIIF Associates II Limited partnership, a Delaware limited By: partnership, its general partner ------------------------------ Its: By: AEW Advisors, Inc., ------------------------------ a Massachusetts corporation, its managing general partner By: --------------------------- Its: -------------------------- 50 57 EXHIBIT 1 TO EXHIBIT C DEFINITION OF BUILDING SHELLS The components and systems below shall be included in the design of the new buildings. All code requirements should be considered minimum beginning requirements and not the highest level of design. Landlord's cost shall include all "hard and soft" costs related to the construction of the site and shell, including architectural and engineering services, permits, utility fees for connections and meters, etc. 1. BUILDINGS STRUCTURE (a) All foundations to include footings, piers, caissons, pilings, grade beams, foundation walls or other building foundation components required to support the entire building structure. (b) Columns shall be steel box or pipe columns. (c) All columns, beams, joists, purlins, headers, or other framing members to support the roof and roofing membrane. (d) Five inch (5") thick concrete slab on grade with welded wire mesh and any other reinforcing or structural connections that may be necessary or required. (e) Exterior walls that enclose the perimeter of the building with steel reinforcing and structural connections that may be necessary or required. (f) All exterior glass and glazing with anodized aluminum frames. Glass to be tinted as appropriate to the aesthetic design of the building. All exterior doors, door closer and locking devices necessary for proper functioning. (g) Wood panel roof system to support roofing membrane. (h) Three (3) ply built up roofing with cap sheet and all flashings by Owens-Corning, John Manville, or equal. (i) Exterior painting of all concrete with Tex-Coat or Kel-Tex textural paint. All caulking of exterior concrete joints in preparation for painting. (j) The multi-story buildings are to be designed for a minimum of one 51 58 elevator per building, the elevator shafts to be a part of Landlord's shell costs. (k) The foundation and structural framing should be designed to support a minimum live load of 100 psf in all areas. (l) The floor-to-floor height of the buildings shall allow a minimum of 10'- 0" interior drop ceiling height. 2. PLUMBING (a) Underground sanitary sewer laterals connected to the city sewer main in the street and piped into each building and under the concrete slab on grade for the length of the buildings. Main waste lines under the slabs will be in as close proximity as possible to the building rest room locations. (b) Domestic water mains connected to the city water main in the street and stubbed to the buildings. Water mains to each building shall not be less than 2.5" in size. (c) Roof drain leaders piped and connected to the site storm drainage systems. (d) Gas lines connected to the city public utility mains and gas meters adjacent to, and in close proximity to each building. Meters supplied by utility company. 3. ELECTRICAL (a) All primary electrical service to each building that is complete including underground conduit and wire feeders from transformer pads into the building's main switchgear electrical room. The electrical characteristics of the secondary side of transformers shall be 277/480 Volt. 3 Phase and the rated capacity of the transformers shall be 2,000 amps for each building. All electrical panels and breakers will have isolated grounds and surge protectors. (b) Underground pull section, meter, and panel(s), for site lighting and landscaping. (c) Underground conduit from the street to the building for telephone trunk line service by Pacific Telephone. Conduit to each building shall not be less than 4". 52 59 (d) An electrically operated landscape irrigation controller that is a complete and functioning system. (e) Underground conduit from the building to the main fire protection system, shut off valve (PIV) for installation of security alarm wiring. (f) All parking lot and landscaping lighting to include fixtures, underground conduit, wire, distribution panel and controller. All exterior lighting shall be a complete and functioning system. 4. FIRE PROTECTION (SPRINKLERS) (a) A complete and fully functional overhead system distributed throughout the building. The systems shall be classified ordinary hazard group II and be distributed throughout the building. (b) System shall include all sprinkler heads that may be required by building codes above the ceiling, when ceilings are installed. (c) Site sprinkler main to be sized adequately to support Tenant's uses within each building. 5. SITEWORK (a) All work outside the building perimeter walls shall be considered site work for the building shell and shall include grading, asphalt concrete, paving, landscaping (hard and soft), landscape irrigation, storm drainage, utility service laterals, including conduit for voice and data connecting the buildings, curbs, gutters, sidewalks, specialty paving (if required), retaining walls, fencing and gates, trash enclosures, planters, sign monuments, parking lot and landscape lighting and other exterior lighting per code. (b) Paving sections for automobile and truck access shall be according to the Geological Soils Report. (c) All parking lot striping to include handicap signage and spaces (parking ratio: no less than 1 space per 295 gross square feet). (d) Underground site storm drainage system shall be connected to the city storm system main. 53 60 EXHIBIT 2 TO EXHIBIT C CONSTRUCTION SCHEDULE [TO BE DETERMINED] 54 61 EXHIBIT 3 TO EXHIBIT C FINAL TENANT IMPROVEMENT PLANS [TO BE DETERMINED] 55 62 EXHIBIT 4 TO EXHIBIT C PLANNING SCHEDULE [TO BE DETERMINED]
Required Action Last Date for Completion - --------------------------------------------------------------------------------------------------------- Tenant Improvements Plans and Specifications - --------------------------------------------------------------------------------------------------------- 1. Tenant delivers its design , 199 ---------------------------- requirements to . ---------------------------- 2. Landlord causes the Architect to days after Task 1 is satisfied -------------- deliver preliminary plans, and a preliminary cost estimate for the Tenant Improvements and a list of any expected construction schedule changes to Tenant for its review. 3. Tenant approves or disapproves the days after Task 2 is completed -------------- items delivered pursuant to Task 8. 4. Landlord and Tenant agree upon , 199 ---------------------------- preliminary plans, a cost estimate and any construction schedule changes for Tenant Improvements. 5. Landlord delivers proposed plans, days after Task 4 is completed -------------- specifications and working drawings, a proposed final TI Cost Estimate for the Tenant Improvements, and a final Construction Schedule to Tenant for its review. 6. Tenant approves or disapproves the days after Task 5 is completed -------------- items delivered pursuant to Task 1. 7. Landlord and Tenant agree upon , 199 ---------------------------- Final Tenant Improvement Plans, a final TI Cost Estimate, and a final Construction Schedule. Permitting & Governmental Approvals - --------------------------------------------------------------------------------------------------------- 8. Landlord submits the Final Tenant days after Task 7 is completed -------------- Improvement Plans to all applicable governmental authorities for Permits. 9. All governmental permits and , 199 --------------------------- approvals necessary for the construction of the Improvements for the Permitted Uses are obtained.
56 63 EXHIBIT "D" Commencement Date Memorandum With respect to that certain Lease Agreement ("Lease"), dated January ____, 1997, by and between South Bay/San Tomas Associates, a California general partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware corporation ("TENANT"), whereby Landlord leased to Tenant and Tenant leased from Landlord the Premises (as defined in the Lease). All terms not defined herein shall have the same meaning as set forth for such terms in the Lease. Tenant hereby acknowledges and certifies to Landlord as follows: (1) The Lease commenced on ___________________, 19___ ("Commencement Date"); (2) The Initial Term of the Lease shall expire on ____________________, ______ (the "Expiration Date"); (3) The initial Monthly Installment of Rent for the Premises is ____________ _______________________________ Dollars ($_________________); and (4) Tenant has accepted [and is currently in possession of] the Premises. IN WITNESS WHEREOF, this Commencement Date Memorandum is executed this ______ day of __________________, 199____. "Tenant" Auspex Systems, Inc., a Delaware corporation By: ------------------------------- Its: ------------------------------ 57 64 EXHIBIT "E" List of Hazardous Materials Tenant Will Use on The Premises 58 65 EXHIBIT "F" Description of Existing Environmental Reports Environmental Reports & Correspondence The Former Unisys Site 1. Environmental Baseline Report - Revised October 1989 A. Including the following tables, figures and appendices (359 pages) Tables 1. Tanks and Chemical Storage 2. Previous Tank Storage Summary 3. Groundwater Monitoring Data 10/88 Figures 1. Map 2. Site Map 3. Tank Locations 4. Previous Tank Storage Sites 5. Monitoring Well Locations Appendices PCB Information Asbestos Information Tank Pull 1/84 Well Destruction Investigation Hydrogeological Investigation 10/87 Unisys for SFRWQCB; Environmental Baseline Investigation (Appx 60 pages) Hydrogeological Investigation 11/88 Soil Gas Survey 5/89 Semi-Annual Sampling 5/89 Clarifier Removal 10/89 59 66 2. Tank Removal - Completed 2/6/90 - Santa Clara Fire Department Permit 3. Internal Memo 3/2/90 Regional Water Quality Control Board/2 pages 4. Letter: 3/5/90 to Unisys from Pacific Environmental Group, Inc./4 pages 5. Table 1: Summary of Current Groundwater Laboratory Results/4 pages. 6. Letter: 6/11/90 to E2C, Inc. from Chips Environmental Consultants/16 pages 7. Letter: 6/28/90 to South Bay Construction and Development Company from E2C, Inc./3 pages 8. Report: 6/29/90 Level II Environmental Site Assessment prepared by E2C, Inc. previously forwarded to ASK 3/17/92 9. Television inspection location sheet dated 7/16/90-VCR tape available/2 pages 10. Letter: 7/19/90 to City of Santa Clara from E2C, Inc./1 page 11. Progress report sanitary sewer line video and groundwater analysis dated 8/7/90 prepared by E2C, Inc./44 pages 12. Letter: 8/31/90 to South Bay Construction and Development Company from E2C, Inc./3 pages 13. Television inspection location sheet dated 8/31/90-VCR tape available/2 pages 14. Letter: 10/19/90 to Prevention Bureau, Santa clara Fire Department from Pacific Environmental Group, Inc./22 pages 15. Letter; 10/23/90 to South Bay Construction and Development Company from Unisys/9 pages 16. Letter: 11/1/90 to South Bay Construction and Development Company from Unisys/9 pages 17. Letter: 11/1/90 to Prevention Bureau, Santa Clara Fire Department from Pacific Environmental Group, Inc./8 pages 18. Letter: 11/21/90 to South Bay Construction and Development Company from E2C, Inc./6 pages 19. Letter: 1/3/91 to South Bay/San Thomas Associates from Unisys/2 pages 20. Memo: 1/29 91 to Unisys Corporation from Pacific Environmental group, Inc./41 pages 21. Fax: 2/11/91 to Unisys from E2C, Inc./7 pages 22. Final submittals-Unisys Corporation-Asbestos/25 pages 23. Letter: 3/15/91 to Pacific Environmental Group from Clayton Environmental Consultants/26 pages 24. Letter: 3/19/91 to E2C, Inc., from Pacific Environmental Group, Inc./16 pages 25. Letter: 3/21/91 to South Bay/San Tomas Associates from Unisys/16 pages 60 67 26. Letter: 3/21/91 to Unisys from Pacific Environmental Group, Inc./12 pages 27. Letter: 3/22/91 to South Bay Development Company from Unisys/2 pages 28. Fax: 4/4/91 to Pacific Environmental Group/1 page 29. Fax: 4/4/91 to Pacific Environmental Group/1 page 30. Fax: 4/8/91 from Pacific Environmental Group-Organic Analysis Data Sheets/8 pages 31. Fax: 4/10/91 from Pacific Environmental Group-Permits Santa Clara Fire Department/5 pages 32. Letter: 4/12/91 to San Francisco Regional Water Quality Control Board from Unisys/81 pages 33. Letter: 4/23/91 to South Bay Development Company from Unisys/1 page 34. Letter: 5/21/91 to South Bay Development Company from Unisys/7 pages 35. Uniform Hazardous Waste Manifests 5/22/91/44 pages 36. Letter: 6/5/91 to Unisys from California Regional Water Quality Control Board/2 pages 37. Report of Abatement Observation and Air Monitoring June 6, 1991 prepared by Law Associates/66 pages 38. Letter. 6/20/91 to Unisys from Pacific Environmental Group, Inc./18 pages 39. Soil & Groundwater Assessment dated July 11, 1991, prepared by E2C, Inc. 40. Fax: 8/28/91 to SBC&D Co., from E2C, Inc./7 pages 41. Letter: 1/14/92 to California Regional Water Quality Control Board from Unisys/8 pages 42. Letter: 1/14/92 to Unisys from Pacific Environmental Group, Inc./4 pages 43. Report: 1/20/92 Second and Third Quarter Split Sampling prepared by E2C, Inc./121 pages 44. Letter: 2/3/92 from Unisys from California Regional Water Quality Control Board/2 pages 45. Letter: 3/24/92 to South Bay Construction and Development from E2C, Inc./8 pages 46. Letter: 3/25/92 to Regional Water Quality Control Board from Unisys/12 pages 47. Report: 4/2/92 Installation of B-Zone Well prepared by E2C, Inc./53 pages 48. Report: 8/25/92 Phase I Environmental Assessments Building 14 prepared for the ASK Companies by Environ Corporation 49. Letter: 11/10/92 to South Bay Development Company from Unisys/9 pages; Justification for Removal 50. Letter: 12/11/92 to South Bay Construction and Development company from E2C, Inc./3 pages 61 68 51. Letter 12/11/92 to South Bay Construction and Development Company from E2C, Inc./4 pages 52. Letter: 12/11/92 to Regional Water Quality Control Board from Unisys/8 pages; Table-Unisys Monitoring Well Removal Notification 53. Letter: 12/14/92 to Regional Water Quality Control Board from E2C, Inc./4 pages 54. Letter: 12/21/92 to E2C, Inc. from California Regional Water Quality Control Board/1 page 55. Letter: 12/28/92 to The ASK Companies from South Bay Construction and Development Company/1 page 56. Letter: 1/22/93 to Regional Water Quality Control Board from Unisys/1 page 57. Fax: 3/29/93 to South Bay Construction and Development Company from E2C, Inc./2 pages 58. Letter: 4/1/93 to South Bay/San Tomas from E2C, Inc./1 page 59. Letter: 4/8/93 to South Bay Construction and Development Company from E2C, Inc./8 pages; Well Destruction Report 60. Letter: 6/15/93 to Regional Water Quality Control Board from Unisys/15 pages; Well Abandonment Report 61. Site Investigation Summary by Unisys Corporate Environmental Affairs dated March 6, 1995 containing Report, Figures, Tables and Appendices A through D 62. Letter: 6/22/95 to Regional Water Quality Control Board from Unisys/21 pages 63. Letter: 9/11/95 to Regional Water Quality Control Board from Unisys/8 pages 64. Letter: 12/19/95 to South Bay Construction and Development Company from Unisys/14 pages 65. Letter: 1/26/96 to California Regional Water Quality Control Board from Unisys/21 pages 66. Fax: 4/10/96 to Larry Patterson from Asbestos Control Center/13 pages 67. Report: 7/19/96 System Installation and Additional Investigation prepared by Unisys Corporate Environmental Affairs 62 69 EXHIBIT "G" Preliminary Title Report 63 70 EXHIBIT "H" CC&R's and Excluded Obligations Under CC&R's Described in the Title Report The documents referred to in the following specially enumerated exceptions in the Title Report attached as Exhibit "G" to this Lease constitute the "CC&R's" referred to in Paragraph 34 of the Lease. Pursuant to Paragraph 34 of the Lease, except as otherwise stated below as being obligations of Landlord, Tenant shall abide by and comply during the Lease Term with the obligations stated below with respect to the documents listed below to the extent the obligations arise from the ownership or occupancy of the Premises (and to the extent they arise from Landlord's ownership of the Premises together with Landlord's ownership of other property, then to the extent such obligations are reasonably allocable to the Premises). Exception No. 4 pertains to an Agreement Regarding Separation of Certain Utilities between the City of Santa Clara and Unisys Corporation. Tenant shall not be responsible for any obligations thereunder, with any obligations affecting the Premises to be borne by Landlord. Exception No. 5 pertains to a Grant Deed with Grant and Reservation of Easements from Unisys Corporation to Landlord. Tenant shall be responsible for the obligations embodied therein as relate to the use by Tenant of the easements which are reflected therein as appurtenances to the Premises. Exception No. 7 pertains to a Declaration of Covenants, Conditions, Restrictions and Easements between Landlord and Unisys Corporation. Tenant shall be responsible for the obligations thereunder pertaining to maintaining ingress and egress easement areas located within the boundaries of the Premises in the manner required by that Declaration and for the obligations not to unreasonably interfere with the surface water drainage easement in favor of Unisys over the Premises. Exception No. 5 pertains to a Grant Deed with Reservation of Easement from Unisys Corporation to Landlord, which grants Unisys Corporation certain rights of access over the Premises associated with the operation of groundwater monitoring wells on the Property. Paragraph 2(b) of this document indicates that the rights and obligations of the parties thereunder are set forth in and are subject to certain terms and conditions in the Agreement of Purchase and Sale and Escrow Instructions between Landlord and Unisys Corporation. Tenant's only obligation with regard to the easements reserved in this Grant Deed is not to unreasonably interfere with the access of Unisys to any monitoring wells that may be hereafter placed upon the Property. Landlord shall be responsible under this Lease to ensure that if any monitoring wells are to be installed on the Premises by Unisys, that they shall be installed in a manner which will not unreasonably interfere with Tenant's use of the Premises and that Unisys exercises its rights under this Grant Deed in manner not to unreasonably interfere with Tenant's use of the Premises. Exception No. 9 pertains to a Declaration of Covenants, Conditions, Restrictions and Easements executed by Landlord. Tenant shall have the obligations for maintenance of such easements and utilities as are located within the boundaries of the Premises as referred to in this Declaration, and the obligation to contribute the share of expenses (as provided therein) which is allocable to the Premises associated with the costs of maintenance of the easement areas on other parcels for the benefit of the Premises. As relates to easements over, under or across the Premises for the benefit of other parcels, Tenant shall have the right to obtain reimbursement from the owners of other parcels for the cost of maintenance of the easements in accordance with the terms of this Declaration, including recovery from Landlord to the extent it is at such time the owner of any other parcel which is obligated to share in such costs under this Declaration. Landlord shall cooperate with Tenant in any collection efforts from other owners. 64 EX-10.27 3 LEASE AGREEMENT DATED 1/14/97 1 LEASE AGREEMENT BY AND BETWEEN SOUTH BAY/SAN TOMAS ASSOCIATES AND AUSPEX SYSTEMS, INC. DATED AS OF JANUARY , 1997 2 TABLE OF CONTENTS
Page 1. Parties................................................................. 1 2. Demise of Premises...................................................... 1 3. Lease Term.............................................................. 1 A. Lease Term..................................................... 1 B. Commencement Date.............................................. 1 C. Commencement Date Memorandum................................... 2 D. Delay in Completion of Building................................ 2 E. Options to Extend.............................................. 2 F. Early Entry.................................................... 3 4. Rent.................................................................... 3 A. Time of Payment................................................ 3 B. Monthly Installment............................................ 4 C. Tenant Improvement Allowance................................... 6 D. Late Charge.................................................... 6 E. Additional Rent................................................ 7 F. Place of Payment............................................... 7 G. Advance Payment................................................ 7 5. Security Deposit........................................................ 7 6. Use of Premises......................................................... 8 A. Restrictions on Use............................................ 8 B. Initial Occupancy.............................................. 8 7. Taxes and Assessments................................................... 8 A. Tenant's Property.............................................. 8 B. Property Taxes................................................. 8 C. Property Taxes Defined......................................... 9 D. Other Taxes.................................................... 9 E. Tenant's Right to Contest...................................... 9 8. Insurance............................................................... 10 A. Indemnity...................................................... 10 B. Liability Insurance............................................ 10 C. Property Insurance............................................. 11 D. Tenant's Property Insurance.................................... 11 E. Mutual Waiver of Subrogation................................... 11
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Page 9. Utilities............................................................... 12 10. Repairs and Maintenance................................................. 12 A. Landlord's Repairs............................................. 12 B. Tenant's Repairs............................................... 13 11. Alterations............................................................. 15 A. Limitations.................................................... 15 B. Tenant's Rights................................................ 15 C. Alterations Required by Law.................................... 16 12. Acceptance of the Premises.............................................. 16 13. Default................................................................. 16 A. Events of Default.............................................. 16 B. Remedies....................................................... 17 C. Waivers........................................................ 19 14. Destruction............................................................. 19 A. Landlord's Duty to Restore..................................... 19 B. Landlord's Right to Terminate.................................. 20 C. Tenant's Right to Terminate.................................... 21 D. Abatement of Rent.............................................. 21 15. Condemnation............................................................ 22 A. Definition of Terms............................................ 22 B. Rights......................................................... 22 C. Total Taking................................................... 22 D. Partial Taking................................................. 22 16. Mechanics' Lien......................................................... 23 17. Inspection of the Premises.............................................. 23 18. Compliance with Laws.................................................... 23 19. Subordination........................................................... 23 A. Priority....................................................... 23 B. Subsequent Security Instruments................................ 24 C. Documents...................................................... 24 D. Tenant's Attornment............................................ 24 20. Holding Over............................................................ 24
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Page 21. Notices................................................................. 25 22. Attorneys' Fees......................................................... 25 23. Subleasing and Assignment............................................... 26 A. Landlord's Consent Required.................................... 26 B. Transferee Information Required................................ 26 C. Landlord's Rights.............................................. 26 D. Permitted Transfers............................................ 27 24. Successors.............................................................. 28 25. Mortgagee Protection.................................................... 28 26. Estoppel Certificate.................................................... 28 27. Surrender of Lease Not Merger........................................... 28 28. Waiver.................................................................. 29 29. General................................................................. 29 A. Captions....................................................... 29 B. Definition of Landlord......................................... 29 C. Time of Essence................................................ 29 D. Severability................................................... 29 E. Quiet Enjoyment................................................ 29 F. Law............................................................ 30 G. Agent.......................................................... 30 H. Lender......................................................... 30 I. Force Majeure.................................................. 30 30. Sign.................................................................... 30 31. Interest on Past Due Obligations........................................ 30 32. Surrender of the Premises............................................... 31 33. Authority............................................................... 31 34. CC&Rs................................................................... 31 35. Brokers................................................................. 32
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Page 36. Limitation on Landlord's Liability...................................... 32 37. Hazardous Material...................................................... 33 A. Definitions.................................................... 33 B. Landlord's Obligation.......................................... 33 C. Permitted Use.................................................. 33 D. Hazardous Materials Management Plan............................ 34 E. Use Restriction................................................ 35 F. Tenant Indemnity............................................... 35 G. Compliance..................................................... 35 H. Assignment and Subletting...................................... 36 I. Surrender...................................................... 36 J. Right to Appoint Consultant.................................... 36 K. Holding Over................................................... 37 L. Existing Environmental Reports................................. 37 M. Provisions Survive Termination................................. 37 N. Controlling Provisions......................................... 37 38. Landlord's Default...................................................... 37 39. Condition to Effectiveness.............................................. 38
6 LIST OF EXHIBITS Exhibit "A" - Legal Description of Parcel.........................................37 Exhibit "B" - Site Plan...........................................................38 Exhibit "C" - Improvement Agreement...............................................39 Exhibit "D" - Commencement Date Memorandum........................................54 Exhibit "E" - List of Hazardous Materials Tenant Will Use on The Premises.........55 Exhibit "F" - Description of Existing Environmental Reports.......................56 Exhibit "G" - Preliminary Title Report............................................60 Exhibit "H" - CCR's and Excluded Obligations......................................61
7 LEASE AGREEMENT 1. Parties. This Lease, dated for reference purposes as of January , 1997, is made by and between South Bay/San Tomas Associates, a California general partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware corporation ("TENANT"). 2. Demise of Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, upon the terms and conditions hereinafter set forth, those certain premises (the "PREMISES") situated in the City of Santa Clara, County of Santa Clara, State of California, described as follows: A. That Parcel of real property more particularly described in Exhibit "A" attached hereto (the "PARCEL"); B. One (1) single story building to be constructed by Landlord and located on the Parcel as shown on the site plan attached hereto as Exhibit "B" containing approximately ninety eight thousand four hundred thirty (98,430) square feet (the "BUILDING"). C. The shell and the associated site improvements for the Building (the "BUILDING SHELL") are to be constructed by Landlord in accordance with the provisions of the Improvement Agreement attached hereto as Exhibit "C" (the "IMPROVEMENT AGREEMENT"). D. The improvements (the "TENANT IMPROVEMENTS") to be constructed by Landlord in and about the Building in accordance with the provisions of the Improvement Agreement. The Building Shell and the Tenant Improvements are collectively referred to in this Lease as the "IMPROVEMENTS". 3. Lease Term. A. Lease Term. The term of this Lease (the "INITIAL LEASE TERM") shall be for twelve (12) years commencing on the Commencement Date (as defined below) and ending twelve (12) years thereafter unless sooner terminated pursuant to any provision hereof. B. Commencement Date. As used in this Lease, the term "COMMENCEMENT DATE" shall mean the later of March 1, 1998, or the date when all of the following have occurred with respect to the Improvements: (i) The construction of all of the Improvements has been substantially completed in accordance with the provisions of the Improvement Agreement attached hereto and the Final Plans therefor (except for minor punchlist items which do not substantially interfere with Tenant's use of the Premises), and all utilities are connected and available for Tenant's use; (ii) A certificate of occupancy or its equivalent (including a final building inspection) with respect to the Improvements has been issued by the City of Santa 8 Clara; and (iii) Landlord has given Tenant written notice that the events described in (i) and (ii) above have occurred. C. Commencement Date Memorandum. Within thirty (30) days following the Commencement Date, Tenant shall execute and deliver to Landlord a Commencement Date Memorandum in the form attached hereto as Exhibit "D" acknowledging the actual Commencement Date, the Expiration Date and the initial Monthly Installment (as defined in Subparagraph 4.A. hereof) of rent. D. Delay in Completion of Building. Notwithstanding the Commencement Date set forth in Subparagraph 3.B. above, if the construction of the Improvements to the Building have not been substantially completed in accordance with the provisions of the Improvement Agreement attached hereto and the Final Plans therefor (except for minor punchlist items which do not substantially interfere with Tenant's use of the Premises) by the later of (i) December 31, 1997, or (ii) six (6) months following the issuance of all required building permits for the construction of the Improvements to the Building (provided such time periods in (i) and (ii) shall be extended by force majeure delays and Tenant Delays as defined in Exhibit "C" hereto) (the "BUILDING COMPLETION DATE"), Tenant shall have the option to terminate this Lease (which shall be Tenant's sole remedy for such an event), which option may be exercised only by delivery to Landlord of a written notice of election to terminate within fifteen (15) days after the Building Completion Date and prior to substantial completion of the Improvements to the Building. E. Options to Extend. (i) Tenant shall have three (3) successive options (the "OPTIONS") to extend the Initial Lease Term for successive terms of sixty (60) months each (collectively, the "EXTENDED TERMS" and individually, the "FIRST EXTENDED TERM", the "SECOND EXTENDED TERM" and the "THIRD EXTENDED TERM"). The Initial Term as may be extended by Tenant shall be referred to herein as the "LEASE TERM." (ii) Tenant shall exercise each Option, if at all, by giving Landlord notice of Tenant's intention to do so at least two hundred seventy (270) days prior to the expiration of the then existing Lease Term. In no event shall any purported exercise of the Option by Tenant be effective if (a) an Event of Default (as defined in Subparagraph 13.A. hereof) exists at the time of such exercise or at the time such Extended Term would otherwise have commenced, or (b) Tenant had not timely exercised each previous Option(s) to extend the Lease. The Extended Terms shall be upon all of the terms and conditions hereof, except that the Monthly Installment and method of rental adjustment for each Extended Term shall be determined as set forth in Subparagraph 4.B.(iii) hereof. Unless expressly mentioned and approved in the written consent of Landlord referred to in Paragraph 23 hereof, the option rights of Tenant under this paragraph are granted for Tenant's personal benefit and may not be assigned 9 or transferred by Tenant. F. Early Entry. Tenant may enter the Premises prior to the Commencement Date to install fixtures and equipment therein, provided Tenant first obtains the prior written approval of Landlord for such entry, which approval shall not be unreasonably withheld but which Landlord may withhold if Landlord determines in its reasonable discretion that such entry will delay completion of construction of the Improvements which Landlord is required to construct pursuant to Exhibit "C". If Landlord permits Tenant to so enter upon the Premises, such entry shall be subject to all of the terms and conditions of this Lease, excepting only the obligation to pay the Monthly Installment of rent or Additional Rent (as defined in Subparagraph 4.E. below), and the duty to pay utility consumption costs and insurance. Tenant shall coordinate its entry onto the Premises with Landlord and the contractors and other personnel employed by Landlord. At all times during Tenant's right of entry, Landlord and Tenant shall reasonably cooperate to refrain from interfering with the construction activities of the other party's personnel; provided, Landlord shall not be required to cooperate with Tenant if such cooperation results in a delay in completing the Improvements. In any case, Tenant shall repair any damage to the Improvements constructed by Landlord resulting from the entry upon the Premises by Tenant or Tenant's Agents (as that term is defined in Subparagraph 29.G.) prior to the Commencement Date or caused by the installation of fixtures and equipment by Tenant or Tenant's Agents. If the entry by Tenant or Tenant's Agents upon the Premises prior to the Commencement Date interferes with Landlord's construction activities, then Landlord shall give Tenant written notice requesting that Tenant cease such interference. If Tenant does not immediately comply with such notice from Landlord requesting that Tenant cease interference with Landlord's construction activities, and if such failure to comply causes a delay in completing the construction of the Improvements, then the Commencement Date shall be deemed to have occurred on the date the Improvements would have been completed had there been no such delay caused by Tenant or its Agents. 4. Rent. A. Time of Payment. Tenant shall pay to Landlord as rent for the Premises the respective sums specified in Subparagraph 4.B. below (the "MONTHLY INSTALLMENT") each month in advance on the first day of each calendar month, without deduction or offset, prior notice or demand, commencing on the Commencement Date and continuing through the Lease Term, together with such additional rents as are payable by Tenant to Landlord under the terms of this Lease. The Monthly Installment for any period during the Lease Term which is less than one (1) full month shall be a pro rata portion of the Monthly Installment based upon a thirty (30) day month. B. Monthly Installment. (i) The Monthly Installment of rent for the first thirty (30) months following the Commencement Date shall be One Hundred Twenty Three Thousand Thirty Seven and 50/100 Dollars ($123,037.50). 10 (ii) Rental Adjustment. The Monthly Installment shall be adjusted at the beginning of the thirty-first (31st) month following the Commencement Date and every thirty (30) months thereafter during the Initial Lease Term (the "RENTAL ADJUSTMENT DATES"), to reflect any increase in the cost of living. The adjustment or adjustments, if any, shall be calculated upon the basis of the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All-Urban Consumers, for San Francisco-Oakland-San Jose (1982 - 1984 = 100), hereafter referred to as the "INDEX." The last published Index in effect on the Commencement Date shall be considered the "BASE". On each Rental Adjustment Date, the Monthly Installment then in effect shall be increased to an amount equal to the Monthly Installment in effect as of the first full month of the Lease Term multiplied by a fraction, the numerator of which is the Index as of such Rental Adjustment Date, and the denominator of which is the "Base"; provided, the Monthly Installment shall not increase by less than three percent (3%) per annum compounded annually or greater than seven percent (7%) per annum compounded annually on each Rental Adjustment Date. When the adjusted Monthly Installment is determined upon each Rental Adjustment Date, Landlord shall give Tenant written notice to that effect indicating how the new Monthly Installment figure was computed in accordance with this Subparagraph 4.B.(ii). If the Index does not exist on any Rental Adjustment Date in the same format as referred to in this paragraph, Landlord shall substitute (using conversion factors, as appropriate) in lieu thereof the index most nearly comparable to the Index then published by the Bureau of Labor Statistics, or successor or similar governmental agency, or if no governmental agency then publishes an index, Landlord shall substitute therefor the most nearly comparable index then published by a reputable private organization. (iii) Extended Term Rent. (a) As of the commencement of each Extended Term, the Monthly Installment and the method of rental adjustment (including the timing of adjustments and the basis for calculating the adjustments) for each Extended Term shall be the fair market rental, as of the commencement date of the Extended Term, for the Premises, as improved, and a method and timing of rental adjustments consistent with rental adjustment practices then prevailing in the marketplace for comparably sized projects designed for similar uses within a three (3) mile radius of the Premises. In the event the parties fail to agree upon the amount of the Monthly Installment and the method of rental adjustment for any of the Extended Terms within thirty (30) days after Landlord's receipt of Tenant's notice exercising the Option for such Extended Term, the Monthly Installment and the method of rental adjustment for such Extended Term shall be determined by appraisal in the manner hereafter set forth. (b) In the event it becomes necessary under this Subparagraph 4.B.(iii)(b) to determine the fair market rent to be used as the Monthly Installment and the method and timing of rental adjustments of the Premises by appraisal, Landlord and Tenant each shall appoint a real estate appraiser who shall be a member of The Appraisal Institute ("TAI") and who shall have a minimum of five (5) years of commercial appraisal experience in Santa Clara County and such appraisers shall each determine the fair market rent for the Premises, and 11 the method and timing of rental adjustments taking into account the value of the Premises (excluding Tenant's Property (as defined below) which Tenant shall be allowed to remove upon the expiration of this Lease), the amenities provided and prevailing comparable rentals and rental adjustment practices then prevailing in the marketplace for comparably sized projects designed for similar uses within a three (3) mile radius of the Premises. Such appraisers shall, within twenty (20) business days after their appointment, complete their appraisals and submit their appraisal reports to Landlord and Tenant. If the fair market rent of the Premises established in the two (2) appraisals varies by five percent (5%) or less of the higher rental, the average of the two shall be controlling. If said fair market rent varies by more than five percent (5%) of the higher rental, said appraisers, within ten (10) days after submission of the last appraisal, shall appoint a third appraiser who shall be a member of TAI and who shall have a minimum of five (5) years of commercial appraisal experience in Santa Clara County. Such third appraiser shall, within twenty (20) business days after his appointment, determine by appraisal the fair market rent of the Premises, taking into account the same factors referred to above, and submit his appraisal report to Landlord and Tenant. The fair market rent determined by the third appraiser for the Premises shall be averaged with the fair market rent determined by the one of the initial two appraisers that is closest to that of the third appraiser, unless the third appraiser's determination of the rent is less than that set forth in the lower appraisal previously obtained, in which case the value set forth in said lower appraisal shall be controlling, or unless it is greater than that set forth in the higher appraisal previously obtained, in which case the rental set forth in said higher appraisal shall be controlling. The method of adjusting rental periodically, including the manner and timing of such adjustments, shall be as determined by the initial two appraisers, if they agree on a single method; otherwise, it shall be as determined by the third appraiser. If either Landlord or Tenant fails to appoint an appraiser, or if an appraiser appointed by either of them fails, after his appointment, to submit his appraisal within the required period in accordance with the foregoing, the appraisal submitted by the appraiser properly appointed and timely submitting his appraisal shall be controlling. If the two appraisers appointed by Landlord and Tenant are unable to agree upon a third appraiser within the required period in accordance with the foregoing, application shall be made within twenty (20) days thereafter by either Landlord or Tenant to TAI, which shall appoint a member of said institute willing to serve as appraiser. Each party shall bear the cost of their own appraiser and the cost of the third appraiser under this Subparagraph shall be borne equally by Landlord and Tenant. C. Tenant Improvement Allowance. (i) Landlord shall make available for the payment of all TI Costs (as defined in the Improvement Agreement) an amount equal to One Million Nine Hundred Sixty Eight Thousand Six Hundred Dollars ($1,968,000) (the "TI ALLOWANCE"). To the extent that TI Costs exceed the total TI Allowance, Tenant shall pay the amount of such excess (with such excess referred to herein as "TENANT'S TI CONTRIBUTION"). After Landlord has expended the total TI Allowance, Tenant's TI Contribution shall be paid by Tenant to Landlord in installments as and when needed by Landlord to pay TI Costs that have been incurred by Landlord for the Building, with each installment to be paid within five (5) days after Landlord notifies Tenant that a progress payment toward TI Costs is to be made and supplies to Tenant an appropriate 12 accounting of all TI Costs incurred by Landlord and such other documentation as a construction lender might reasonably request. Such progress payments shall not be requested any more frequently than every thirty (30) days. (ii) Prior to the commencement of construction of the Tenant Improvements, Tenant shall, if requested to do so by Landlord, provide reasonable assurances to Landlord's Lender (as that term is defined in Subparagraph 29.H.) that the funds necessary to pay Tenant's TI Contribution will be immediately available to Landlord as and when needed to pay all TI Costs after Landlord has expended the TI Allowance, which assurances shall be reasonably satisfactory to Landlord and Landlord's Lender. D. Late Charge. Tenant acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or deed of trust covering the Premises. Accordingly, if any Monthly Installment, Additional Rent or any other sum due from Tenant shall not be received by Landlord within ten (10) days after Landlord's delivery to Tenant of written notice stating that such amount has not been paid when due, then Tenant shall pay to Landlord, as additional rent, a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord without payment of the overdue amount shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of its other rights and remedies granted hereunder. E. Additional Rent. All taxes, insurance premiums, late charges, costs, expenses and other sums which Tenant is required to pay under this Lease, together with all interest and penalties that may accrue thereon in the event of Tenant's failure to pay such amounts, and all reasonable damages, costs, and attorneys' fees and expenses which Landlord may incur by reason of any default of Tenant or failure on Tenant's part to comply with the terms of this Lease, shall be deemed to be additional rent ("ADDITIONAL RENT") and shall be paid in addition to the Monthly Installment of rent, and, in the event of nonpayment by Tenant, Landlord shall have all of the rights and remedies with respect thereto as Landlord has for the nonpayment of the Monthly Installment of rent. All items of Additional Rent, but excluding such taxes and assessment, utilities and insurance costs which are to be paid directly by Tenant or reimbursed by Tenant to Landlord, shall include an additional two percent (2%) of the actual expenditure or amount due in order to compensate Landlord for accounting, management and processing services. F. Place of Payment. Rent shall be payable in lawful money of the United States of America to Landlord at 511 Division Street, Campbell, California 95008 or to such other person(s) or at such other place(s) as Landlord may designate in writing. 13 G. Advance Payment. Concurrently with the execution of this Lease, Tenant shall pay to Landlord the sum of One Hundred Twenty Three Thousand Thirty Seven and 50/100 Dollars ($123,037.50) to be applied to the Monthly Installment of rent first accruing under this Lease. 5. Security Deposit. Concurrently with the execution of this Lease, Tenant shall pay to Landlord the sum of One Hundred Twenty Three Thousand Thirty Seven and 50/100 Dollars ($123,037.50) (the "SECURITY DEPOSIT") to secure the faithful performance by Tenant of each term, covenant and condition of this Lease. If Tenant shall at any time fail to make any payment or fail to keep or perform any term, covenant or condition on its part to be made or performed or kept under this Lease, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligation under this Lease, use, apply or retain the whole or any part of the Security Deposit (A) to the extent of any sum due to Landlord; (B) to make any required payment on Tenant's behalf; or (C) to compensate Landlord for any loss, damages, attorneys' fees or expense sustained by Landlord due to Tenant's default. In such event, Tenant shall, within five (5) days of written demand by Landlord, remit to Landlord sufficient funds to restore the Security Deposit to its original sum. No interest shall accrue on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its general funds. The Security Deposit, less any sums owing to Landlord or which Landlord is otherwise entitled to retain, shall be returned to Tenant within thirty (30) days after the termination of this Lease and vacancy of the Premises by Tenant. 6. Use of Premises. A. Restrictions on Use. Tenant shall use the Premises only in conformance with applicable governmental laws, for general office, engineering, research and development, light assembly, testing, warehousing and related lawful uses, and for no other purpose without the consent of Landlord. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorneys' fees or liabilities to the extent the foregoing arises out of the failure of Tenant to comply with any Law (as defined in Subparagraph 29.F.) applicable to Tenant's use and occupancy of the Premises. Tenant shall not commit or suffer to be committed, any waste upon the Premises, or any nuisance, or other acts or things which may disturb the quiet enjoyment of any other occupant of buildings adjacent to the Premises, or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful purpose, or place any loads upon the floor, walls or ceiling which would endanger the structure, or place any harmful liquids in the drainage system of the Premises. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the Building, except in trash containers placed inside exterior enclosures designated for that purpose by Landlord and except in compliance with all applicable Law. No materials, supplies, equipment, finished products or semifinished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the Parcel outside of the Building. Tenant shall strictly comply with the provisions of Paragraph 37 below. B. Initial Occupancy. Tenant shall be obligated to take possession and enter 14 into occupancy of the Premises within thirty (30) days following the Commencement Date. 7. Taxes and Assessments. A. Tenant's Property. Tenant shall pay before delinquency any and all taxes and assessments, license fees and public charges levied, assessed or imposed upon or against Tenant's fixtures, equipment, furnishings, furniture, appliances and personal property installed or located on or within the Premises ("Tenant's Property"). Tenant shall use its best efforts to cause all Tenant's Property to be assessed and billed separately from the real property of Landlord. If any of Tenant's Property shall be assessed with the Premises, Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days after receipt of a written statement from Landlord setting forth the taxes applicable to Tenant's Property. B. Property Taxes. Tenant shall pay, as Additional Rent, one hundred percent (100%) of all property taxes (as defined in Subparagraph 7.C. below) levied or assessed with respect to the Premises which are attributable to the Lease Term. Tenant shall pay such Property Taxes to Landlord not later than (i) ten (10) days prior to the delinquency date of such Property Taxes, or (ii) twenty (20) days after receipt of billing, whichever is later. If Tenant fails to do so, Tenant shall reimburse Landlord, on demand, for all interest, late fees and penalties that the taxing authority charges Landlord. In the event Landlord's Lender requires an impound for Property Taxes, then on the first day of each month during the Lease Term, Tenant shall pay Landlord one twelfth (1/12) of the annual Property Taxes. Tenant's liability hereunder shall be prorated to reflect the commencement and termination dates of this Lease. C. Property Taxes Defined. For the purpose of this Lease, "PROPERTY TAXES" means and includes all taxes, assessments (including, but not limited to, assessments for public improvements or benefits), taxes based on vehicles utilizing parking areas, taxes based or measured by the rent paid, payable or received under this Lease, taxes on the value, use, or occupancy of the Premises, the Building and/or the Parcel, and all other governmental impositions and charges of every kind and nature whatsoever, whether or not customary or within the contemplation of the parties hereto and regardless of whether the same shall be extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing which, at any time during the Lease Term, shall be applicable to the Premises, the Building and/or the Parcel or assessed, levied or imposed upon the Premises, the Building and/or the Parcel, or become due and payable and a lien or charge upon the Premises, the Building and/or the Parcel, or any part thereof, under or by virtue of any present or future laws, statutes, ordinances, regulations or other requirements of any governmental authority whatsoever. The term "Property Taxes" shall not include any federal, state or local net income, documentary transfer (unrelated to any transfer made of Tenant's interest under this Lease), franchise (unrelated to Tenant's operations), estate, gift or inheritance tax imposed on Landlord (the "PROPERTY TAX EXCLUSIONS"). D. Other Taxes. Tenant shall, as Additional Rent, pay or reimburse Landlord for any tax based upon, allocable to, or measured by the area of the Premises or the Building or 15 the Parcel; or by the rent paid, payable or received under this Lease; any tax upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Premises or any portion thereof; any privilege tax, excise tax, business and occupation tax, gross receipts tax, sales and/or use tax, water tax, sewer tax, employee tax, occupational license tax imposed upon Landlord or Tenant with respect to the Premises; any tax upon this transaction or any document to which Tenant is a party creating or transferring any of Tenant's interest or estate in the Premises; provided, however that nothing in this Subparagraph shall require Tenant to pay any Property Tax Exclusions. E. Tenant's Right to Contest. Tenant shall have the right, by appropriate proceedings, to protest or contest any assessment, reassessment or allocation of Property Taxes or any change therein. In the contest or proceedings, Tenant may act in its own name and/or the name of Landlord and Landlord will, at Tenant's request and expense, cooperate with Tenant in any way Tenant may reasonably require in connection with such contest. Tenant must pay all Property Taxes as and when required by Subparagraph 7.B., even those which are the subject of such protest or contest, but Tenant may sue to recover overpayments or Property Taxes as part of any such contest. With respect to any contest of Property Taxes, Tenant shall indemnify and hold Landlord and the Premises harmless from any liens or damage arising out of such protest or contest and shall pay any judgment that may be rendered for which Tenant would otherwise be liable under this Lease without such contest or protest. Any contest conducted by Tenant under this paragraph shall be at Tenant's expense and if interest or late charges become payable as a result of such contest or protest, Tenant shall pay the same. Any tax assessments reimbursed to Landlord as a consequence of such contest shall be reimbursed to Tenant, to the extent originally paid by Tenant under the terms of this Lease. 8. Insurance. A. Indemnity. Tenant agrees to indemnify, protect and defend Landlord against and hold Landlord harmless from any and all claims, causes of action, judgments, obligations or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees), to the extent they arise out of, the operation, maintenance, use or occupancy of the Premises by Tenant and/or its Agents (except to the extent they arise from the negligence or willful misconduct of Landlord or its Agents). This Lease is made on the express understanding that Landlord shall not be liable for, or suffer loss by reason of, injury to person or property, from whatever cause (except to the extent it arises from the negligence or willful misconduct of Landlord or its Agents), which in any way may be connected with the operation, maintenance, use or occupancy of the Premises by Tenant and/or its Agents specifically including, without limitation, any liability for injury to the person or property of Tenant or its Agents. B. Liability Insurance. Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy of commercial general liability insurance insuring Landlord and Tenant against claims and liabilities arising out of the operation, maintenance, use, or occupancy of the Premises. Such insurance shall provide combined single limit coverage of 16 not less than Five Million Dollars ($5,000,000.00) per occurrence. Landlord shall have the right to require Tenant to increase the amount of coverage of such public liability insurance to the extent reasonably necessary to bring such insurance coverage into conformity with the level of coverage commonly carried by similar businesses in California leasing comparable buildings in the vicinity of the Premises, which right Landlord may exercise no more frequently than once every two (2) years during the Lease Term. The insurance shall be provided by companies (i) admitted to issue insurance in California and (ii) having a general policyholders' rating of at least "A" and a financial rating of at least "VIII" as set forth in the most current issue of Best's Insurance Guide. Tenant shall deliver to Landlord, prior to possession, and at least thirty (30) days prior to the expiration of any insurance policy required hereby, a certificate of insurance evidencing the existence of such policy and the certificate shall certify that the policy (1) names Landlord as an additional insured, (2) shall not be canceled or altered without thirty (30) days prior written notice to Landlord, (3) insures performance of the indemnity set forth in Subparagraph 8.A. above, (4) the coverage is primary and any coverage by Landlord is in excess thereto and (5) contains a cross-liability endorsement. Landlord may maintain a policy or policies of commercial general liability insurance insuring Landlord (and such others as are designated by Landlord), against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Premises, with such limits of coverage as Landlord may from time to time determine are reasonably necessary for its protection. Tenant shall, as Additional Rent, reimburse Landlord for the cost of any such insurance policy within ten (10) days after receipt of billing. C. Property Insurance. Landlord shall, at Tenant's expense, obtain and keep in force during the Lease Term a policy of insurance covering loss or damage to the Improvements, in the amount of the full replacement value thereof with an Agreed Amount Endorsement, providing protection against those perils included within the classification of "special form" insurance, plus a policy of rental income insurance in the amount of one hundred percent (100%) of twelve (12) months' rent (including, without limitation, sums payable as Additional Rent), together with such additional coverages (such as earthquake and/or flood insurance) which Landlord may elect to maintain from time to time or which may be required from time to time by Landlord's Lender or by Tenant. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord on the Building and Tenant Improvements. Tenant shall pay to Landlord, as Additional Rent, the cost of such insurance procured and maintained by Landlord on an annual basis within ten (10) days after receipt of demand therefore from Landlord. Tenant's liability for the cost of such insurance shall be prorated as of the commencement and termination of the Lease Term. Tenant acknowledges that such insurance procured by Landlord shall contain a deductible which reduces Tenant's cost for such insurance and, in the event of loss or damage, Tenant shall be required to pay to Landlord the amount of such deductible; provided, Tenant's liability for such deductible shall not exceed Twenty Five Thousand Dollars ($25,000), except Tenant's liability for the deductible on Landlord's earthquake insurance shall not exceed ten percent (10%) of the policy amount. 17 D. Tenant's Property Insurance. Tenant acknowledges that the insurance to be maintained Landlord on the Premises pursuant to Paragraph 8.C. above will not insure any of Tenant's Property. Accordingly, Tenant, at Tenant's own expense, shall maintain in full force and effect on all of Tenant's Property in the Premises, a policy of "special form" coverage insurance to the extent of at least ninety percent (90%) of insurable value of such property. E. Mutual Waiver of Subrogation. Notwithstanding anything to the contrary contained in this Lease, Tenant and Landlord hereby mutually waive their respective rights of recovery against each other of any loss of or damage to the property of either party, to the extent such loss or damage is insured by either party at the time of such loss or damage or required to be insured pursuant to this Lease by the party having the right of recovery against the other party for such loss or damage. Each party shall obtain any special endorsements, if required by the insurer, whereby the insurer waives its right of subrogation against the other party hereto. The provisions of this Subparagraph 8.E. shall not apply in those instances in which the waiver of subrogation would cause either party's insurance coverage to be voided or otherwise made uncollectible; provided, such party has afforded the other party at least thirty (30) days prior written notice of such fact and a period of at least thirty (30) days has elapsed after delivery of such notice without identification of alternative, reasonably equivalent insurance that can be obtained without a voiding provision based on this waiver of subrogation. 9. Utilities. Tenant shall pay for all water, gas, light, heat, power, electricity, telephone, trash pick-up, sewer charges, and all other services supplied to or consumed on the Premises, and all taxes and surcharges thereon. 18 10. Repairs and Maintenance. A. Landlord's Repairs. Subject to the provisions of Paragraphs 14 and 15 and the Improvement Agreement, Landlord, at its expense, shall keep and maintain the exterior walls and the structural elements of the Building in good order and repair. Landlord shall not, however, be required to maintain, repair or replace the interior surface of exterior walls, nor shall Landlord be required to maintain, repair or replace windows, doors, skylights or plate glass. Landlord shall not be in default because it fails to make repairs under this Subparagraph 10.A. until a reasonable time after receipt of written notice from Tenant of the need for such repairs. Notwithstanding the foregoing but subject to Subparagraph 8.E., Tenant shall reimburse Landlord, as Additional Rent, within fifteen (15) days after receipt of billing, for the cost of maintenance and repairs of the exterior walls and structural elements of the Building to the extent such maintenance or repair is required because of the negligence or willful misconduct of Tenant or its Agents, except as otherwise provided in Subparagraph 8.E. As used herein, the term "STRUCTURAL ELEMENTS OF THE BUILDING" shall mean and be limited to the foundations, footings, floor slab (but not flooring), roof structure (but not roofing or roof membrane), load bearing walls and structural portion of any second floor. If (a) repairs are required to be made by Landlord pursuant to this Subparagraph 10.A., (b) the failure to immediately make such repairs poses a threat of imminent danger to people or property, and (c) after Landlord's receipt of notice from Tenant for the need to make such repairs, Landlord does not immediately make such repairs, then Tenant shall be allowed to make such repairs and Landlord shall reimburse Tenant for the reasonable third party costs incurred by Tenant upon receipt of written invoices for such repairs, lien releases from the third party making such repairs and inspection of the repairs made by Tenant. 19 B. Tenant's Repairs. (i) Except as expressly provided in Subparagraphs 8.E. and 10.A. above, Paragraphs 14 and 15 below and the Improvement Agreement, Tenant shall, at its sole cost, keep and maintain the entire Premises and every part thereof, including without limitation, the windows, window frames, plate glass, glazing, skylights, truck doors, doors and all door hardware, the interior walls and partitions, interior surfaces of exterior walls, carpets, flooring, roofing, roof membrane, gutters, down spouts, the electrical, plumbing, lighting, heating, ventilating and air conditioning systems and equipment, and all areas outside the Building (including all landscaping, irrigation systems, paving, driveways, parking areas, sidewalks, fences, signs and exterior lighting) in good order, condition and repair. The term "repair" shall include replacements, restorations and/or renewals when necessary as well as painting. Except as expressly provided in Subparagraphs 8.E. and 10.A. above, Paragraphs 14 and 15 below and the Improvement Agreement, Tenant's obligation shall extend to all alterations, additions and improvements to the Premises, and all fixtures and appurtenances therein and thereto. Tenant shall, at all times during the Lease Term, have in effect a service contract for the maintenance of the heating, ventilating and air conditioning ("HVAC") equipment with an HVAC repair and maintenance contractor reasonably approved by Landlord. The HVAC service contract shall provide for periodic inspection and servicing at least once every three (3) months during the Lease Term, and Tenant shall provide Landlord with a copy of such contract and all periodic service reports. Landlord shall assign to Tenant for the Lease Term the benefit of all warranties available to Landlord which would reduce the cost of performing the obligations of Tenant to make repairs under this Subparagraph 10.B. Landlord shall cooperate with Tenant in the enforcement of such warranties. Notwithstanding anything to the contrary in this Lease, Tenant shall have no responsibility to perform or construct, any repair, maintenance or improvement that Landlord is required to perform pursuant to any other term of this Lease or the Improvement Agreement. (ii) Should Tenant fail to commence to make repairs required of Tenant hereunder within ten (10) days after written notice from Landlord or should Tenant fail thereafter to diligently complete the repairs, Landlord, in addition to all other remedies available hereunder or by Law and without waiving any alternative remedies, may make the same, and in that event, Tenant shall reimburse Landlord as Additional Rent for the cost of such maintenance or repairs within ten (10) days of written demand by Landlord. (iii) Notwithstanding anything to the contrary in this Lease, any capital replacements to the Premises which are otherwise found to be the obligation of Tenant under this Lease, whether or not required by law, which are required by generally accepted accounting principles ("GAAP") to be capitalized ("CAPITAL REPLACEMENTS") shall be made by and paid for by the parties in accordance with the following: (a) Tenant shall promptly undertake and diligently complete, and Tenant shall be solely responsible for the cost of, all Capital Replacements that have a cost 20 less than One Hundred Twenty Thousand Dollars ($120,000). (b) Upon Tenant's written notice to Landlord for the need of any Capital Replacement which Landlord is required to make pursuant to this Subparagraph 10.B.(iii)(b), Landlord shall promptly undertake and diligently complete all Capital Replacements having a cost in excess of One Hundred Twenty Thousand Dollars ($120,000) ("LANDLORD'S CAPITAL REPLACEMENTS"). The cost of Landlord's Capital Replacements shall be borne by the parties as follows: (1) Tenant shall reimburse Landlord for Tenant's Share of the Cost of Landlord's Capital Replacement within ten (10) days following delivery to Tenant of reasonable documentation of the amount owing by Tenant for completed work, which payments may be demanded by Landlord of Tenant on a monthly basis as the work progresses. The "TENANT'S SHARE OF THE COST OF LANDLORD'S CAPITAL REPLACEMENT," shall be equal to the total cost reasonably incurred by Landlord to construct, permit and/or plan a Landlord's Capital Replacement (the "CAPITAL COST") times a fraction, the numerator of which is equal to the number of unexpired months in the then existing Lease Term (without any consideration of Extended Terms that have not commenced), and the denominator of which is equal to the useful life (expressed in months) of such Landlord's Capital Replacement. The remainder of such cost shall be borne by Landlord, subject to Subparagraphs 10.B.(iii)(b)(2) and 10.B.(iii)(b)(3), below. (2) If the Lease Term is extended by Tenant as herein permitted, then as a condition to each such extension and within ten (10) days following Landlord's written demand therefor, Tenant shall make an additional reimbursement of the Capital Cost of Landlord's Capital Replacement in an amount equal to the Capital Cost times a fraction, the numerator of which is equal to the lesser of (A) the useful life (expressed in months) of such Landlord's Capital Replacement not subject to reimbursement under Subparagraph 10.B.(iii)(b)(1) above and not subject to reimbursement under this Subparagraph 10.B.(iii)(b)(2) with respect to a prior extension of the Lease Term, or (B) the number of months in the extension period, and the denominator of which is equal to the total useful life (expressed in months) of such Landlord's Capital Replacement. (3) If Landlord terminates this Lease on account of an Event of Default by Tenant, as permitted by Section 13.B.(ii) below, then in addition to Landlord's other remedies, Tenant shall pay to Landlord upon demand so much of the Capital Cost of Landlord's Capital Replacement, which has not been theretofore reimbursed by Tenant to Landlord. (iv) Landlord shall have no maintenance or repair obligations whatsoever with respect to the Premises except as expressly provided in this Lease and the Improvement Agreement. Tenant hereby expressly waives the provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Landlord as provided in Section 1942 of said Civil Code; provided, Tenant shall have the right to cure Landlord's defaults pursuant to the terms and conditions of 21 Paragraph 38 hereof. 11. Alterations. A. Limitations. Tenant shall not make, or suffer to be made, any alterations, improvements or additions in, on, about or to the Premises or any part thereof, without the prior written consent of Landlord (which consent shall not be unreasonably withheld) and without a valid building permit issued by the appropriate governmental authority; provided, however, Landlord's consent shall not be required for interior non-structural alterations which (i) cost less than Twenty Thousand Dollars ($20,000.00) per work of improvement and (ii) cost less than Seventy Five Thousand Dollars ($75,000.00) for all alterations made in any twelve (12) month period. As a condition to, and concurrently with, the giving of such consent Landlord may require that Tenant agree to remove any such alterations, improvements or additions at the termination of this Lease, and to restore the Premises to their prior condition. Unless Landlord requires that Tenant remove any such alteration, improvement or addition at the time that Landlord provides its consent thereto, any alteration, addition or improvement to the Premises, except movable furniture and trade fixtures not affixed to the Premises, shall become the property of Landlord upon termination of the Lease and shall remain upon and be surrendered with the Premises at the termination of this Lease. Without limiting the generality of the foregoing, all heating, lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts, main and subpanels), air conditioning, partitioning, drapery, and carpet installations made by Tenant regardless of how affixed to the Premises, together with all other additions, alterations and improvements that have become an integral part of the Building, shall be and become the property of the Landlord upon termination of the Lease, and shall not be deemed trade fixtures, and shall remain upon and be surrendered with the Premises at the termination of this Lease. B. Tenant's Rights. All trade fixtures, movable furniture and personal property installed in the Premises at Tenant's expense (collectively, "TENANT'S PROPERTY") shall at all times remain Tenant's property and Tenant shall be entitled to all depreciation, amortization and other tax benefits with respect thereto, except for Tenant's Property which cannot be removed without structural injury to the Premises. At any time during the Lease Term, Tenant may remove Tenant's Property from the Premises, provided Tenant repairs all damage caused by such removal. Landlord shall have no lien or other interest whatsoever in any item of Tenant's Property or any portion thereof or interest therein, located in the Premises or elsewhere, and Landlord hereby waives all such liens and interests. Within ten (10) days following Tenant's written request, Landlord shall execute documents in form reasonably acceptable to Tenant and Landlord to evidence Landlord's waiver of any right, title, lien or interest in Tenant's Property located in the Premises. C. Alterations Required by Law. If, during the Lease Term, any alteration, addition or change of any sort to all or any portion of the Premises is required by Law, Tenant shall promptly make the same at its sole cost and expense; provided, Tenant shall only be obligated to make alterations, additions or changes required by Law to the "structural elements of the Building" (as defined in Subparagraph 10.A. above), if such requirement is triggered by (i) 22 Tenant's particular use of the Premises, or (ii) Tenant's alterations, improvements or additions in, on, about or to the Premises or any part thereof; and if Landlord has performed its obligations under this Lease with respect to the structural elements of the Building. 12. Acceptance of the Premises. By entry and taking possession of the Premises pursuant to this Lease, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the Premises in their condition existing as of the date of such entry and Tenant further accepts the Tenant Improvements to be constructed by Landlord, if any, as being completed in accordance with the plans and specifications for such Tenant Improvements, except for punch list items, and any express warranties by and obligations of Landlord set forth in this Lease. Tenant acknowledges that neither the Landlord nor Landlord's agents has made any representation or warranty as to the suitability of the Premises to the conduct of Tenant's business. Any agreements, warranties or representations not expressly contained herein shall in no way bind either Landlord or Tenant, and Landlord and Tenant expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement not contained in this Lease. This Lease constitutes the entire understanding between the parties hereto and no addition to, or modification of, any term or provision of this Lease shall be effective until set forth in a writing signed by both Landlord and Tenant. 13. Default. A. Events of Default. A breach of this Lease by Tenant shall exist if any of the following events (hereinafter referred to as "EVENT OF DEFAULT") shall occur: (i) Default in the payment when due of any installment of rent or other payment required to be made by Tenant hereunder, where such default shall not have been cured within five (5) days after written notice of such default is given to Tenant; (ii) Tenant's failure to perform any other term, covenant or condition contained in this Lease where such failure shall have continued for twenty (20) days after written notice of such failure is given to Tenant; provided, however, Tenant shall not be deemed in default if Tenant commences to cure such failure within said twenty (20) day period and thereafter diligently prosecutes such cure to completion; (iii) Tenant vacates the Premises for sixty (60) consecutive days and upon the expiration of such sixty (60) day period, Tenant has failed to perform any term, covenant or condition contained in this Lease (under such circumstances Tenant shall have no right to cure the default and Landlord shall have no requirement to notify Tenant of the default except as required by law); (iv) Tenant's assignment of its assets for the benefit of its creditors; (v) The sequestration of, attachment of, or execution on, any 23 substantial part of the property of Tenant or on any property essential to the conduct of Tenant's business, shall have occurred and Tenant shall have failed to obtain a return or release of such property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; (vi) Tenant or any guarantor of Tenant's obligations hereunder shall commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any Law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seek appointment of a receiver, trustee, custodian, or other similar official for it or for all or any substantial part of its property; or (vii) Any case, proceeding or other action against Tenant or any guarantor of Tenant's obligations hereunder shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any Law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof or (ii) remains undismissed for a period of sixty (60) days. Any notice given by Landlord in order to satisfy the requirements of this Subparagraph 13.B. shall also satisfy the notice requirements of California Code of Civil Procedure Section 1161 and all similar statutes regarding unlawful detainer proceedings. B. Remedies. Upon any Event of Default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law, to which Landlord may resort cumulatively, or in the alternative: (i) Recovery of Rent. Landlord shall be entitled to keep this Lease in full force and effect (whether or not Tenant shall have abandoned the Premises) and to enforce all of its rights and remedies under this Lease, including the right to recover rent and other sums as they become due, plus interest at the Permitted Rate (as defined in Paragraph 31 below) as therein provided. (ii) Termination. Landlord may terminate this Lease by giving Tenant written notice of termination in accordance with applicable law. On the giving of the notice all of Tenant's rights in the Premises shall terminate. Upon the giving of the notice of termination, Tenant shall surrender and vacate the Premises in the condition required by Paragraph 32, and Landlord may re-enter and take possession of the Premises and all the remaining improvements or property and eject Tenant or any of Tenant's subtenants, assignees or other person or persons claiming any right under or through Tenant or eject some and not others or eject none. This Lease may also be terminated by a judgment specifically providing for termination. Any termination under this paragraph shall not release Tenant from the payment of any sum then due 24 Landlord or from any claim for damages or rent previously accrued or then accruing against Tenant. In no event shall any one or more of the following actions by Landlord constitute a termination of this Lease: (a) maintenance and preservation of the Premises; (b) efforts to relet the Premises; (c) appointment of a receiver in order to protect Landlord's interest hereunder; (d) consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to provisions hereof concerning subletting and assignment or otherwise; or (e) any other action by Landlord or Landlord's agents intended to mitigate the adverse effects from any breach of this Lease by Tenant. (iii) Damages. In the event this Lease is terminated pursuant to Subparagraph 13.B.(ii) above, or otherwise, Landlord shall be entitled to damages in the following sums: (a) the worth at the time of award of the unpaid rent which has been earned at the time of termination; plus (b) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (d) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom including, without limitation, the following: (i) reasonable expenses for cleaning, repairing or restoring the Premises to surrender condition; (ii) real estate broker's fees, advertising costs and other expenses of reletting the Premises which are reasonably incurred by Landlord and applicable to the period after termination of this Lease; (iii) reasonable costs of carrying the Premises such as taxes and insurance premiums thereon, utilities and security precautions not otherwise included in Additional Rent; (iv) expenses in retaking possession of the Premises; and (v) reasonable attorneys' fees and court costs. 25 (e) The "worth at the time of award" of the amounts referred to in Subparagraphs (a) and (b) of this Subparagraph 13.B.(iii), is computed by allowing interest at the Permitted Rate. The "worth at the time of award" of the amounts referred to in Subparagraph (c) of this Subparagraph 13.B.(iii) is computed by discounting such amount at the discount rate of the Federal Reserve Board of San Francisco at the time of award plus one percent (1%). The term "rent" as used in this Paragraph 13 shall include all sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. C. Waivers. Tenant hereby waives any right of redemption or relief from forfeiture under the laws of the State of California, or under any other present or future law, including the provisions of Sections 1174 and 1179 of the California Code of Civil Procedure. 14. Destruction. A. Landlord's Duty to Restore. If the Improvements are damaged by any peril after the Commencement Date of this Lease, Landlord shall restore the Premises unless the Lease is terminated by Landlord pursuant to Subparagraph 14.B. or by Tenant pursuant to Subparagraph 14.C. All insurance proceeds available from the property damage insurance carried by Landlord pursuant to Subparagraph 8.C. shall be paid to and become the property of Landlord and shall be used for the restoration of the Premises, unless this Lease is terminated pursuant to Subparagraphs 14.B. or 14.C. or as otherwise required by Landlord's Lender. If this Lease is terminated pursuant to either Subparagraphs 14.B. or 14.C., then all insurance proceeds available from the insurance required to be carried by Tenant which covers loss to property that is Landlord's property or would become Landlord's property on the termination of this Lease shall be paid to and become the property of Landlord. If this Lease is not so terminated, then Landlord shall be entitled to all such insurance proceeds and upon receipt of such insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Premises, to the extent then allowed by Law, to substantially the same condition in which the Premises were immediately prior to such damage. Landlord's obligation to restore shall be limited to the Building and Tenant Improvements constructed by Landlord as they existed as of the Commencement Date and to the extent Landlord receives insurance proceeds, any Tenant Improvements as they existed as of the Commencement Date which were paid for by Tenant, excluding any Tenant's Property or Tenant Improvements paid for by Tenant to the extent Landlord does not receive insurance proceeds for such Tenant Improvements. B. Landlord's Right to Terminate. Landlord shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Tenant of a written notice of election to terminate within thirty (30) days after the date of such damage: (i) The Improvements are damaged by any peril either (i) covered by the type of insurance Landlord is required to carry pursuant to Subparagraph 8.C. or (ii) covered by valid and collectible insurance actually carried by Landlord and in force at the time of such 26 damage or destruction, to such an extent that the estimated restoration cost exceeds fifty percent (50%) of the then actual replacement cost thereof. (ii) The Improvements are damaged by any peril both (i) not covered by the type of insurance Landlord is required to carry pursuant to Subparagraph 8.C. and (ii) not covered by valid and collectible insurance actually carried by Landlord and in force at the time of such damage or destruction, to such an extent that the estimated restoration cost exceeds five percent (5%) of the then actual replacement cost of the Improvements; provided, however, that Landlord may not terminate this Lease pursuant to this Subparagraph 14.B.(ii) if Tenant agrees in writing to pay the amount by which the restoration cost exceed five percent (5%) of the replacement cost of the Improvements and deposits with Landlord or provides other reasonable assurances of payment (which assurances must be approved by Landlord's Lender) of an amount equal to the estimated amount of such excess within thirty (30) days after Landlord has notified Tenant with its election to terminate this Lease pursuant to this Subparagraph 14.B.(ii). (iii) The Improvements are damaged by any peril during the last twelve (12) months of the Lease Term to such an extent that the estimated cost to restore equals or exceeds an amount equal to six (6) times the Monthly Installment of rent then due; provided, however, that Landlord may not terminate this Lease pursuant to this Subparagraph 14.B.(iii) if Tenant, at the time of such damage, has an express written option to further extend the term of this Lease and Tenant exercises such option to so further extend the Lease Term within fifteen (15) days following notice of Landlord's termination of this Lease. (iv) The Improvements are damaged by any peril and, because of the Laws then in force, may not be restored at a cost less than or equal to the available insurance proceeds and any amounts Tenant is required by this Lease to pay or Tenant otherwise elects to pay, to substantially the same condition in which it was prior to such damage. C. Tenant's Right to Terminate. If the Improvements are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to Subparagraph 14.B., then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the restoration work required of Tenant may be completed and the permits required for such work can be obtained. Tenant shall have the option to terminate this Lease in whole or in part as specified below in the event any of the following occurs, which option may be exercised only by delivery to Landlord of a written notice of election to terminate within fifteen (15) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: (i) If the Building is damaged by any peril and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Building cannot be substantially completed within two hundred seventy (270) days after the date of the damage, then Tenant may terminate this Lease. (ii) If the Building is damaged by any peril and all permits required for 27 the commencement of restoration are not obtained within sixty (60) days beyond the time estimated by Landlord's architect or construction consultant, or if following receipt of such permits the restoration is not completed within sixty (60) days beyond the time estimated by Landlord's architect or construction consultant as the required restoration time (provided such time periods shall be extended by force majeure delays), then Tenant may terminate this Lease. (iii) If the Building is damaged by any peril within twelve (12) months of the last day of the Lease Term, and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Premises cannot be substantially completed within ninety (90) days after the date of such damage, then Tenant may terminate this Lease. D. Abatement of Rent. In the event of damage to the Premises which does not result in the termination of this Lease, the Monthly Installment of rent and Additional Rent shall be temporarily abated from the date of inception of the loss until the damaged Building is restored, in proportion to the degree to which Tenant's use of the Premises is impaired by such damage. Tenant shall not be entitled to any compensation from Landlord for loss of Tenant's property or loss to Tenant's business caused by such damage or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law, hereinafter enacted. 15. Condemnation. A. Definition of Terms. For the purposes of this Lease, the term (1) "TAKING" means a taking of the Premises or damage to the Premises related to the exercise of the power of eminent domain and includes a voluntary conveyance, in lieu of court proceedings, to any agency, authority, public utility, person or corporate entity empowered to condemn property; (2) "TOTAL TAKING" means the taking of the entire Premises or so much of the Premises as to prevent or substantially impair the use thereof by Tenant for the uses herein specified; (3) "PARTIAL TAKING" means a Taking which does not constitute a Total Taking; (4) "DATE OF TAKING" means the date upon which the title to the Premises, or a portion thereof, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor; and (5) "AWARD" means the amount of any award made, consideration paid, or damages ordered as a result of a Taking. B. Rights. The parties agree that in the event of a Taking all rights (as between them) in and to an Award shall be as set forth herein and Tenant shall have no right to any Award except as set forth herein; provided, however, that Tenant shall be entitled to any award for the taking of Tenant's Property. C. Total Taking. In the event of a Total Taking during the Lease Term (1) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the Premises shall cease and terminate as of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent and any unapplied security deposit; (3) Tenant shall pay Landlord any unpaid rent or charges due Landlord under the Lease, each prorated as of the Date of Taking; (4) Tenant shall 28 receive from the Award those portions of the Award attributable to Tenant's Property and for moving expenses of Tenant; and (5) the remainder of the Award shall be paid to and be the property of Landlord. D. Partial Taking. In the event of a Partial Taking during the Lease Term (1) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the portion of the Premises taken shall cease and terminate as of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent and any unapplied security deposit relating to the portion of the Premises taken based on a square footage basis; (3) Tenant shall pay Landlord any unpaid rent or charges due Landlord under the Lease for the portion of the Premises taken, each prorated as of the Date of Taking; (4) from and after the Date of Taking the Monthly Installment of rent shall be an amount equal to the product obtained by multiplying the Monthly Installment of rent immediately prior to the Taking by a fraction, the numerator of which is the number of square feet contained in the Building after the Taking and the denominator of which is the number of square feet contained in the Building prior to the Taking; (5) Tenant shall receive from the Award those portions of the Award attributable to Tenant's Property and for moving expenses of Tenant; and (6) the remainder of the Award shall be paid to and be the property of Landlord. 16. Mechanics' Lien. Tenant shall (A) pay for all labor and services performed for, materials used by or furnished to, Tenant or any contractor employed by Tenant with respect to the Premises; (B) indemnify, defend, protect and hold Landlord and the Premises harmless and free from any liens, claims, liabilities, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for, materials used by or furnished to, Tenant or any contractor employed by Tenant with respect to the Premises; (C) give notice to Landlord in writing five (5) days prior to employing any laborer or contractor to perform services related to, or receiving materials for use upon the Premises; and (D) permit Landlord to post a notice of nonresponsibility in accordance with the statutory requirements of California Civil Code Section 3094 or any amendment thereof. In the event Tenant is required to post an improvement bond with a public agency in connection with the above, Tenant agrees to include Landlord as an additional obligee. 17. Inspection of the Premises. Tenant shall permit Landlord and its agents to enter the Premises at any reasonable time for the purpose of inspecting the same, performing Landlord's maintenance and repair responsibilities (upon 24 hour prior notice except in an emergency), posting a notice of non-responsibility for alterations, additions or repairs and at any time within two hundred seventy (270) days prior to expiration of this Lease, to place upon the Premises, ordinary "For Lease" or "For Sale" signs. 18. Compliance with Laws. Tenant shall, at its own cost, comply with all of the requirements of all municipal, county, state and federal authorities now in force, or which may hereafter be in force, pertaining to Tenant's use and occupancy of the Premises, and shall faithfully observe all municipal, county, state and federal law, statutes or ordinances now in force or which may hereafter be in force pertaining to Tenant's use and occupancy of the Premises. The judgment of any court of competent jurisdiction or the admission of Tenant in any action or 29 proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use and occupancy of the Premises shall be conclusive of the fact that such violation by Tenant has occurred. Tenant shall indemnify, protect, defend, and hold Landlord harmless against any loss, expense, damage, attorneys' fees or liability to the extent arising out of the failure of Tenant to comply with any applicable law, except to the extent such failure of Tenant to comply with any applicable law is caused by the negligence or willful misconduct of Landlord or its Agents. 19. Subordination. The following provisions shall govern the relationship of this Lease to any underlying lease, mortgage or deed of trust which now or hereafter affects the Premises or Landlord's interest or estate therein and any renewal, modification, consolidation, replacement, or extension thereof (a "SECURITY INSTRUMENT"). A. Priority. This Lease is subject and subordinate to all Security Instruments existing as of the Commencement Date. However, if any Lender so requires, this Lease shall become prior and superior to any such Security Instrument. Landlord, as a condition to Tenant's obligations under this Lease, shall obtain a recognition and non-disturbance agreement from all existing lienholders in form reasonably acceptable to Tenant and Landlord's Lender. B. Subsequent Security Instruments. At Landlord's election, this Lease shall become subject and subordinate to any Security Instrument created after the Commencement Date, provided that the Lender holding such Security Agreement agrees that in the event of foreclosure of the Security Instrument in question, such Lender shall recognize the tenancy of Tenant on the terms and conditions contained in this Lease so long as no Event of Default (as defined in Paragraph 13.A. hereof) exists on the date such person acquires the Premises. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed so long as no Event of Default exists on the date such person acquires the Premises, unless this Lease is otherwise terminated pursuant to its terms. C. Documents. Tenant shall execute any reasonable document or instrument required by Landlord or any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily and reasonably requires in connection with such agreements, including provisions that the Lender not be liable for (1) the return of the Security Deposit unless the Lender receives it from Landlord, and (2) any defaults on the part of Landlord occurring prior to the time that the Lender takes possession of the Premises in connection with the enforcement of its Security Instrument. Tenant's failure to execute any such document or instrument within ten (10) days after written demand therefor shall constitute a default by Tenant. Tenant's obligation to execute and deliver any subordination agreement to any future Lender shall be conditioned upon such Lender agreeing that in the event of foreclosure of the mortgage or termination of the ground lease in question, such Lender shall recognize the tenancy of Tenant on the terms and conditions contained in this Lease as long as no Event of Default exists on the date such person acquires the Premises. D. Tenant's Attornment. Subject to the recognition obligations under 30 Subparagraphs 19.B. and 19.C. above, Tenant shall attorn (1) to any purchaser of the Premises at any foreclosure sale or private sale conducted pursuant to any Security Instrument encumbering the Premises; (2) to any grantee or transferee designated in any deed given in lieu of foreclosure; or (3) to the lessor under any underlying ground lease should such ground lease be terminated. 20. Holding Over. This Lease shall terminate without further notice at the expiration of the Lease Term. Any holding over by Tenant after expiration shall not constitute a renewal or extension or give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after the expiration without the consent of Landlord shall be construed to be a tenancy from month to month, at one hundred fifty percent (150%) of the monthly rent for the last month of the Lease Term, and shall otherwise be on the terms and conditions herein specified insofar as applicable. 21. Notices. Any notice required or desired to be given under this Lease shall be in writing with copies directed as indicated below and shall be personally served or given by facsimile (with receipt confirmed by telephone), personal delivery, mail or by prepaid next-business day courier. Personal delivery, mail and facsimile transmittal shall be effective when received or delivery is refused by the party. Any notice given by courier shall be deemed to have been given on the next business day after the time such notice was sent, addressed to the party to be served with a copy as indicated herein at the last address given by that party to the other party under the provisions of this paragraph. At the date of execution of this Lease, the address of Landlord is: South Bay Development Company, Inc. 511 Division Street Campbell, California 95008 Attn: Mr. Scott Trobbe With a copy to: South Bay/San Tomas Associates c/o AEW Real Estate Advisors, Inc. 399 Boylston Street Boston, Massachusetts 02116 Attn: Mr. Christopher Kazantis and the address of Tenant is: Auspex Systems, Inc. 5200 Great America Parkway Santa Clara, California 95054 Attn: General Counsel After the Commencement Date, the address of Tenant will be at the Premises. 31 22. Attorneys' Fees. In the event either party shall bring any action or legal proceeding for damages for any alleged breach of any provision of this Lease, to recover rent or possession of the Premises, to terminate this Lease, or to enforce, protect or establish any term or covenant of this Lease or right or remedy of either party, the prevailing party shall be entitled to recover as a part of such action or proceeding, reasonable attorneys' fees and court costs, including attorneys' fees and costs for appeal, as may be fixed by the court or jury. The term "prevailing party" shall mean the party who received substantially the relief requested, whether by settlement, dismissal, summary judgment, judgment, or otherwise. 23. Subleasing and Assignment. A. Landlord's Consent Required. Tenant's interest in this Lease is not assignable, by operation of Law or otherwise, nor shall Tenant have the right to sublet the Premises, transfer any interest of Tenant therein or permit any use of the Premises by another party, without the prior written consent of Landlord to each such assignment, subletting, transfer or use, which consent Landlord agrees not to withhold unreasonably subject to the provisions of Subparagraph 23.C. below. A consent to one assignment, subletting, occupancy or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupancy or use by another party. Any assignment or subletting without such consent shall be void and shall, at the option of Landlord, terminate this Lease. Landlord's waiver or consent to any assignment or subletting hereunder shall not relieve Tenant from any obligation under this Lease unless the consent shall so provide. B. Transferee Information Required. If Tenant desires to assign its interest in this Lease or sublet the Premises, or transfer any interest of Tenant therein, or permit the use of the Premises by another party (hereinafter collectively referred to as a "TRANSFER"), Tenant shall give Landlord at least twenty (20) business days prior written notice of the proposed Transfer and of the terms of such proposed Transfer, including, but not limited to, the name and legal composition of the proposed transferee, a financial statement of the proposed transferee, the nature of the proposed transferee's business to be carried on in the Premises (including a list of the type and quantities of all Hazardous Materials to be used by the transferee on the Premises), the payment to be made or other consideration to be given to Tenant on account of the Transfer, and such other pertinent information as may be reasonably requested by Landlord, all in sufficient detail to enable Landlord to evaluate the proposed Transfer and the prospective transferee. C. Landlord's Rights. It is the intent of the parties hereto that this Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. The parties agree that this Lease is not intended to have a bonus value nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this Lease or the right to use or occupy the Premises as a result of any favorable terms contained herein, or future changes in the market for leased space. It is the intent of the parties that any such bonus value that may attach to this Lease shall be and remain the exclusive 32 property of Landlord, except as provided in Subparagraph 23.C.(ii) below. In the event Tenant seeks to Transfer its interest in this Lease or the Premises, Landlord shall have the following options, which shall be exercised by Landlord, within twenty (20) business days of Landlord receiving all of the information regarding the Transfer that is required under Subparagraph 23.B., at Landlord's sole choice without limiting Landlord in the exercise of any other right or remedy which Landlord may have by reason of such proposed Transfer: (i) In the event of a Transfer constituting either an assignment of the entire Lease or a sublease of substantially all of the Premises for all or substantially all of the balance of the Lease Term, Landlord may elect to terminate this Lease effective as of the proposed effective date of the proposed Transfer and release Tenant from any further liability hereunder accruing after such termination date by giving Tenant written notice of such termination within fifteen (15) days after receipt by Landlord of Tenant's notice of intent to Transfer as provided above. If Landlord makes such election to terminate this Lease, Tenant shall surrender the Premises, in accordance with Paragraph 32, on or before the effective termination date; or (ii) Landlord may consent to the proposed Transfer on the condition that Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%) of any and all rents or other consideration (including key money) received by Tenant from the transferee by reason of such Transfer in excess of the rent payable by Tenant to Landlord under this Lease (after reimbursement to Tenant of any brokerage commissions, attorneys' fees and advertising expenses incurred by Tenant in connection with the Transfer, and any tenant improvement costs related to such Transfer that are incurred by Tenant). Tenant expressly agrees that the foregoing is a reasonable condition for obtaining Landlord's consent to any Transfer; (iii) Landlord may consent to the proposed Transfer on the condition that if such Transfer is an assignment that Landlord in its sole and absolute discretion shall determine whether such Transfer shall include the right to exercise the Options to extend the Lease Term; (iv) Landlord may withhold its consent in its sole and absolute discretion to the proposed Transfer if the Transfer is a sublease and the term of the such sublease extends beyond the then existing Lease Term (the "then existing Lease Term" shall not include any unexercised options to extend the Lease Term); or (v) Landlord may reasonably withhold its consent to the proposed Transfer. If Landlord agrees to consent to the proposed Transfer pursuant to Subparagraphs 23.C.(ii) or 23.C.(iii), Landlord shall provide such consent on Landlord's form within ten (10) business days of Landlord electing such option and receiving the final version of the document evidencing the Transfer. 33 D. Permitted Transfers. Notwithstanding the foregoing, Tenant may, without Landlord's prior written consent and without providing to Landlord the option described in Subparagraph 23.C.(i) above, assign its interest in the Lease or sublet the Premises or a portion thereof to (i) a subsidiary, affiliate, division or corporation controlled by or under common control with Tenant; (ii) a successor corporation related to Tenant by merger, consolidation, non-bankruptcy reorganization or government action; or (iii) a purchaser of substantially all of the Tenant's assets; provided that, in each instance described above, (a) each assignee assumes the obligations of Tenant under this Lease and each sublessee agrees to abide by this Lease in a written instrument delivered to Landlord; (b) Tenant as transferor remains liable as a primary obligor for the obligations of the tenant under this Lease; and (c) the financial strength of the transferee tenant is no less than Tenant's financial strength as of the Commencement Date or the date of such Transfer, whichever is greater. 24. Successors. The covenants and agreements contained in this Lease shall be binding on and inure to the benefit of the parties hereto and on their respective heirs, successors and assigns (to the extent the Lease is assignable). 25. Mortgagee Protection. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage encumbering the Premises, whose address shall have been previously furnished to Tenant in writing by Landlord. Such beneficiary or mortgagee shall have the right to cure Landlord's default and so long as such beneficiary or mortgagee is making reasonable efforts to cure Landlord's default, including, but not limited to, obtaining possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effect a cure, Tenant shall not have the right to terminate this Lease. 26. Estoppel Certificate. Tenant and Landlord agree within ten (10) days following request by the other party to (A) execute and deliver to other party any documents, including estoppel certificates presented to a party by the other party, (1) certifying that this Lease is unmodified, or if modified, indicating the modifications, and in full force and effect and the date to which the rent and other charges are paid in advance, if any, and (2) acknowledging that there are not, to such party's knowledge, any uncured defaults on the part of other party hereunder, or specifying the defaults, if any, and (3) evidencing the status of the Lease as may be reasonably required either by a lender making a loan to Landlord or to Tenant to be secured by a deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord, and (B) Tenant agrees to deliver to Landlord the financial statement of Tenant with an opinion of a certified public accountant, including a balance sheet and profit and loss statement, for the last completed fiscal year all prepared in accordance with generally accepted accounting principles consistently applied. Tenant's failure to deliver an estoppel certificate within ten (10) days following a request by Landlord shall be an Event of Default under this Lease. Landlord's failure to deliver an estoppel certificate within ten (10) days following a request by Tenant shall be an event of default under this Lease. 27. Surrender of Lease Not Merger. The voluntary or other surrender of this Lease by 34 Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or any existing subleases or subtenants, or operate as an assignment to Landlord of any or all such subleases or subtenants. 28. Waiver. The waiver by Landlord or Tenant of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. Any waiver shall be in writing and signed by both Landlord and Tenant. 29. General. A. Captions. The captions and paragraph headings used in this Lease are for the purposes of convenience only. They shall not be construed to limit or extend the meaning of any part of this Lease, or be used to interpret specific sections. The word(s) enclosed in quotation marks shall be construed as defined terms for purposes of this Lease. As used in this Lease, the masculine, feminine and neuter and the singular or plural number shall each be deemed to include the other whenever the context so requires. B. Definition of Landlord. The term Landlord as used in this Lease, so far as the covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner at the time in question of the fee title of the Premises, and in the event of any transfer or transfers of the title of such fee, the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved of all liability with respect to performance of any covenants or obligations on the part of Landlord contained in this Lease to be performed after the date of such transfer or conveyance which are assumed in writing by the transferee; provided that any funds in the hands of Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject as aforesaid, be binding upon each Landlord, its heirs, personal representatives, successors and assigns only with respect to the obligations of Landlord arising during its respective period of ownership. C. Time of Essence. Time is of the essence for the performance of each term, covenant and condition of this Lease. D. Severability. In case any one or more of the provisions contained herein, except for the payment of rent, shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. This Lease shall be construed and enforced in accordance with the laws of the State of California. E. Quiet Enjoyment. Upon Tenant paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Tenant's part to be 35 observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. F. Law. As used in this Lease, the term "LAW" or "LAWS" shall mean any judicial decision, statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any government agency or authority having jurisdiction over the parties to this Lease or the Premises or both, in effect at the Commencement Date of this Lease or any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g., board of fire examiners, public utility or special district). G. Agent. As used in this Lease, the term "AGENT" shall mean, with respect to either Landlord or Tenant, its respective agents, employees, contractors (and their subcontractors), and invitees (and in the case of Tenant, its subtenants). H. Lender. As used in this Lease, the term "LENDER" shall mean any beneficiary, mortgagee, secured party or other holder of any deed of trust, mortgage or other written security device or agreement affecting Landlord's interest in the Premises. I. Force Majeure. Any prevention, delay or stoppage due to strikes, lock-outs, inclement weather, labor disputes, inability to obtain labor, materials, fuels or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other acts of God, and other causes beyond the reasonable control of the party obligated to perform (except financial inability) shall excuse the performance, for a period equal to the period of any said prevention, delay or stoppage, or any obligation hereunder except the obligation of Tenant to pay rent or any other sums due hereunder. 30. Sign. Tenant shall not place or permit to be placed any sign or decoration on the Parcel or the exterior of the Building without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Tenant, upon written notice by Landlord, shall immediately remove any sign or decoration that Tenant has placed or permitted to be placed on the Parcel or the exterior of the Building without the prior written consent of Landlord, and if Tenant fails to so remove such sign or decoration within five (5) days after Landlord's written notice, Landlord may enter upon the Premises and remove said sign or decoration and Tenant agrees to pay Landlord, as additional rent upon demand, the cost of such removal. At the termination of this Lease, Tenant shall remove any sign which it has placed on the Parcel or Building and shall repair any damage caused by the installation or removal of such sign. 31. Interest on Past Due Obligations. Any Monthly Installment of rent due from Tenant, or any other sum due under this Lease from Tenant, which is received by Landlord after the date ten (10) days following the date written notice is given by Landlord to Tenant that such sum has not been paid when due, shall bear interest from said due date until paid, at an annual rate equal to the lower of (the "PERMITTED RATE"): (1) twelve percent (12%); or (2) five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the twenty- 36 fifth (25th) day of the month immediately preceding the due date, on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended. Payment of such interest shall not excuse or cure any default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees reasonably incurred by Landlord in collection of such amounts. 32. Surrender of the Premises. On the last day of the term hereof, or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord in their condition existing as of the Commencement Date of this Lease, except for (A) ordinary wear and tear; (B) acts of God; (C) condemnation; (D) Hazardous Materials which Tenant is not responsible for pursuant to this Lease; and (E) all alterations, improvements or additions which Tenant is not required to remove pursuant to this Lease. Tenant shall surrender the Premises with all originally painted interior walls washed, and other interior walls cleaned, and repaired or replaced, the air conditioning and heating equipment serviced and repaired by a reputable and licensed service firm as required by Paragraph 10.B. hereof, all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove all of Tenant's Property from the Premises, and all property not so removed shall be deemed abandoned by Tenant. Tenant, at its sole cost, shall repair any damage to the Premises caused by the removal of Tenant's Property, which repair shall include, without limitation, the patching and filling of holes and repair of structural damage. If the Premises are not so surrendered at the termination of this Lease, Tenant shall indemnify, defend, protect and hold Landlord harmless from and against loss or liability resulting from delay by Tenant in so surrendering the Premises including without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. 33. Authority. The undersigned parties hereby warrant that they have proper authority and are empowered to execute this Lease on behalf of Landlord and Tenant, respectively. 34. CC&Rs. This Lease is made subject to all matters of public record affecting title to the property of which the Premises are a part as described in the Preliminary Title Report dated October 2, 1996, prepared by Santa Clara Land Title Company, Order No. 00121234, a copy of which is attached hereto as Exhibit "G" (the "TITLE REPORT"). Tenant shall abide by and comply with all private conditions, covenants and restrictions of public record now or hereafter affecting the Premises as described on Exhibit "H" with reference to the Title Report ("CC&RS"), except as may be otherwise provided in Exhibit "H". Landlord represents and warrants that to its actual knowledge no violation of the CC&Rs exists as of the date of this Lease. During the Lease Term, Landlord shall promptly notify Tenant of any modification to the CC&Rs. 35. Brokers. The parties represent and warrant to each other that they have not dealt with any broker respecting this transaction other than Cooper/Brady Corporate Real Estate Services (the "BROKER") and hereby agree to indemnify and hold each other harmless from and against any brokerage commission or fee, obligation, claim or damage (including attorneys' fees) paid or incurred respecting any broker claiming through the other party or with which/whom the 37 other party has dealt. Landlord shall pay commission owing to the Broker pursuant to a separate agreement between Landlord and the Broker. 36. Limitation on Landlord's Liability. Tenant, for itself and its successors and assigns (to the extent this Lease is assignable), hereby agrees that in the event of any actual, or alleged, breach or default by Landlord under this Lease that: A. Tenant's sole and exclusive remedy and recourse against Landlord shall be as against Landlord's interest in the Premises and this Lease; B. No partner of Landlord shall be sued or named as a party in a suit or action (except as may be necessary to secure jurisdiction of the partnership) for the breach of any obligation of Landlord or the act or omission of Landlord or its Agents; C. No service of process shall be made against any partner of Landlord with respect to any claim arising under or out of this Lease (except as may be necessary to secure jurisdiction of the partnership); D. No partner of Landlord shall be required to answer or otherwise plead to any service of process with respect to any claim arising under or out of this Lease (except as may be necessary to secure jurisdiction of the partnership); E. No judgment will be taken against any partner of Landlord for the breach of any obligation of Landlord or the act or omission of Landlord or its Agents; F. Any such judgment taken against any partner of Landlord may be vacated and set aside at any time nunc pro tunc; G. No writ of execution will ever be levied against the assets of any partner of Landlord for a judgment based on any breach of a Landlord's obligations under this Lease or any act or omission of Landlord; and H. The covenants and agreements of Tenant set forth in this Paragraph 36 shall be enforceable by Landlord and any partner of Landlord. 38 37. Hazardous Material. A. Definitions. As used herein, the term "HAZARDOUS MATERIAL" shall mean any substance: (i) the presence of which requires investigation or remediation under any federal, state or local statute, regulation, ordinance, order, action, policy or common law; (ii) which is or becomes defined as a "hazardous waste," "hazardous substance," pollutant or contaminant under any federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, the State of California or any political subdivision thereof; (iv) the presence of which on the Premises causes or threatens to cause a nuisance upon the Premises or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about the Premises; (v) the presence of which on adjacent properties could constitute a trespass by Landlord or Tenant; (vi) without limitation which contains gasoline, diesel fuel or other petroleum hydrocarbons; (vii) without limitation which contains polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde foam insulation; or (viii) without limitation radon gas. B. Landlord's Obligation. Except for the Existing Environmental Condition (as defined in Subparagraph 37.L. hereof), Landlord has no actual knowledge, without any duty to make investigation, of any Hazardous Materials present in the soil or groundwater of the Parcel. Landlord, at its sole cost, shall comply with all Laws which impose liability or responsibility upon either Landlord or Tenant to investigate, remediate or otherwise take any action with respect to the Existing Environmental Condition; provided, however, that this covenant shall not require Landlord to perform any obligation Tenant has under this Paragraph 37. Subject to Subparagraph 8.E., Landlord shall indemnify, defend, protect and hold Tenant harmless from and against all liabilities, claims, penalties, fines, response costs and other expenses (including reasonable attorneys' fees) which result from Landlord's failure to timely perform the obligation stated in the immediate preceding sentence. C. Permitted Use. Subject to the compliance by Tenant with the provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall be permitted to use and store on the Premises those Hazardous Materials listed in Exhibit "E" attached hereto, in the quantities set forth in Exhibit "E" and such other Hazardous Materials approved by Landlord in writing. D. Hazardous Materials Management Plan. (i) Prior to Tenant or its subtenant using, handling, transporting or storing any Hazardous Material at or about the Premises (including, without limitation, those listed in Exhibit "E" other than customary quantities of janitorial and office supplies), Tenant shall submit to Landlord a Hazardous Materials Management Plan ("HMMP") for Landlord's review and approval, which approval shall not be unreasonably withheld. The HMMP shall 39 describe: (aa) the quantities of each material to be used, (bb) the purpose for which each material is to be used, (cc) the method of storage of each material, (dd) the method of transporting each material to and from the Premises and within the Premises, (ee) the methods Tenant will employ to monitor the use of the material and to detect any leaks or potential hazards, and (ff) any other information any department of any governmental entity (city, state or federal) requires prior to the issuance of any required permit for the Premises or during Tenant's occupancy of the Premises. Landlord may, but shall have no obligation to review and approve the foregoing information and HMMP, and such review and approval or failure to review and approve shall not act as an estoppel or otherwise waive Landlord's rights under this Lease or relieve Tenant of its obligations under this Lease; provided that a failure to review and approve within a reasonable time shall not be deemed a disapproval. If Landlord determines in good faith by inspection of the Premises or review of the HMMP that the methods in use or described by Tenant are not adequate in Landlord's good faith judgment to prevent or eliminate the existence of environmental hazards, then Tenant shall not use, handle, transport, or store such Hazardous Materials at or about the Premises unless and until such methods are approved by Landlord in good faith and added to an approved HMMP. Once approved by Landlord, Tenant shall strictly comply with the HMMP and shall not change its use, operations or procedures with respect to Hazardous Materials without submitting an amended HMMP for Landlord's review and approval as provided above. (ii) Tenant shall pay to Landlord when Tenant submits an HMMP (or amended HMMP) the amount reasonably determined by Landlord to cover all Landlord's costs and expenses reasonably incurred in connection with Landlord's review of the HMMP which costs and expenses shall include, among other things, all reasonable out-of-pocket fees of attorneys, architects, or other consultants incurred by Landlord in connection with Landlord's review of the HMMP. Landlord shall have no obligation to consider a request for consent to a proposed HMMP unless and until Tenant has paid to Landlord its reasonable estimate of all such costs and expenses to Landlord, and Tenant shall pay all such costs and expenses to Landlord irrespective of whether Landlord consents to such proposed HMMP. Tenant shall pay to Landlord on demand the excess, if any, of such costs and expenses actually incurred by Landlord over the amount of such costs and expenses actually paid by Tenant, and Landlord shall promptly refund to Tenant the excess, if any, of such costs and expenses actually paid by Tenant over the amount of such costs and expenses actually incurred by Landlord. E. Use Restriction. Except as specifically allowed in Subparagraph C above, Tenant shall not cause or permit any Hazardous Material to be used, stored, generated, discharged, transported to or from, or disposed of in or about the Premises, or any other land or improvements in the vicinity of the Premises. Without limiting the generality of the foregoing, Tenant, at its sole cost, shall comply with all Laws relating to the storage, use, generation, transport, discharge and disposal by Tenant or its Agents of any Hazardous Material. If the presence of any Hazardous Material on the Premises (other than an Existing Environmental Condition) caused or permitted by Tenant or its Agents results in contamination of the Premises or any soil, air, ground or surface waters under, through, over, on, in or about the Premises, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and/or the 40 surrounding real property to the condition existing prior to the appearance of such Hazardous Material to the extent feasible and in all events, to a condition which complies with applicable Environmental Law. In the event there is a release, discharge or disposal of or contamination of the Premises by a Hazardous Material which is of the type that has been stored, handled, transported or otherwise used or permitted by Tenant or its Agents on or about the Premises (other than an Existing Environmental Condition), Tenant shall have the burden of proving that such release, discharge, disposal or contamination is not the result of the acts or omissions of Tenant or its Agents. F. Tenant Indemnity. Tenant shall defend, protect, hold harmless and indemnify Landlord and its Agents and Lenders with respect to all actions, claims, losses (including, diminution in value of the Premises), fines, penalties, fees (including, but not limited to, attorneys' and consultants' fees) costs, damages, liabilities, remediation costs, investigation costs, response costs and other expenses arising out of, resulting from, or caused by (i) any Hazardous Material used, generated, discharged, transported to or from, stored, or disposed of by Tenant or its Agents in, on, under, over, through or about the Premises and/or the surrounding real property or (ii) any disposal or release of any Hazardous Material on the surface of the Premises occurring after the Commencement Date and prior to the termination of this Lease that is not the result of the negligent acts or wilful misconduct of Landlord or its Agents; provided that in no event shall the foregoing create any liability in Tenant for an Existing Environmental Condition. Tenant shall not suffer any lien to be recorded against the Premises as a consequence of the disposal of any Hazardous Material on the Premises by Tenant or its Agents, including any so called state, federal or local "super fund" lien related to the "clean up" of any such Hazardous Material in, over, on, under, through, or about the Premises. G. Compliance. Tenant shall immediately notify Landlord, and Landlord shall notify Tenant, of any inquiry, test, investigation, enforcement proceeding by or against Tenant or the Premises concerning contamination of the Premises caused by any Hazardous Material. Any remediation plan prepared by or on behalf of Tenant must be submitted to Landlord prior to conducting any work pursuant to such plan and prior to submittal to any applicable government authority and shall be subject to Landlord's consent which consent shall not be unreasonably withheld or delayed. Tenant acknowledges that Landlord, as the owner of the Property, at its election, shall have the sole right to negotiate, defend, approve and appeal any action taken or order issued with regard to any Hazardous Material by any applicable governmental authority. H. Assignment and Subletting. It shall not be unreasonable for Landlord to withhold its consent to any proposed assignment or subletting if (i) the proposed assignee's or subtenant's anticipated use of the Premises involves the storage, generation, discharge, transport, use or disposal of any Hazardous Material (other than reasonable quantities of office supplies, warehouse supplies and janitorial supplies that may contain Hazardous Materials) in a manner which represents a risk to the health and safety of persons on or about the Premises, and in Landlord's opinion, that risk is a material risk; (ii) if the proposed assignee or subtenant has been required by any prior landlord, lender or governmental authority to "clean up" or remediate any 41 Hazardous Material resulting from the negligence or affirmative actions of the proposed assignee or subtenant within the last five (5) years; (iii) if the proposed assignee or subtenant is subject to investigation or enforcement order or proceeding by any governmental authority in connection with the use, generation, discharge, transport, disposal or storage of any Hazardous Material resulting from the negligence or affirmative actions of the proposed assignee or subtenant within the last five (5) years. I. Surrender. Upon the expiration or earlier termination of the Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from the Premises that Tenant or its Agents introduced to the Premises. If Tenant fails to so surrender the Premises, Tenant shall indemnify, protect, defend and hold Landlord harmless from and against all damages to the extent resulting from Tenant's failure to surrender the Premises as required by this Paragraph, including, without limitation, any actions, claims, losses, liabilities, fees (including, but not limited to, attorneys' and consultants' fees), fines, costs, penalties, or damages in connection with the condition of the Premises including, without limitation, damages occasioned by the inability to relet the Premises or a reduction in the fair market and/or rental value of the Premises by reason of the existence of any Hazardous Material that Tenant or its Agents introduced in, on, over, under, through or around the Premises. J. Right to Appoint Consultant. If Tenant or its Agents have used Hazardous Materials (other than customary quantities of janitorial or office supplies), Landlord shall have the right to appoint a consultant, at Tenant's expense, to conduct an investigation to determine whether any Hazardous Material is being used, generated, discharged, transported to or from, stored or disposed of in, on, over, through, or about the Premises, in an inappropriate or unlawful manner. If Tenant has violated any Law or covenant in this Lease regarding the use, storage or disposal of Hazardous Materials on or about the Premises, Tenant shall reimburse Landlord for the cost of such investigation. Tenant, at its expense, shall comply with all reasonable recommendations of the consultant or take other steps approved by Landlord required to conform Tenant's use, storage or disposal of Hazardous Materials to the requirements of applicable Law or to fulfill the obligations of Tenant hereunder. K. Holding Over. If during the Lease Term, Tenant or any of its Agents is required to take any action of any kind required or requested to be taken by any governmental authority to clean-up, remove, remediate or monitor any Hazardous Material (the presence of which is the result of the acts or omissions of Tenant or its Agents and other than an Existing Environmental Condition) and such action is not completed prior to the expiration or earlier termination of the Lease, Tenant shall be deemed to have impermissibly held over until such time as such required action is completed, and Landlord shall be entitled to all damages directly or indirectly incurred in connection with such holding over, including without limitation, damages occasioned by the inability to re-let the Premises or a reduction of the fair market and/or rental value of the Premises. L. Existing Environmental Reports. Tenant hereby acknowledges that it has received, read and reviewed the reports and test results described in Exhibit "F" attached hereto 42 and made a part hereof (the "EXISTING ENVIRONMENTAL REPORTS"). The Hazardous Materials currently present in, on or under the Premises or the soil, groundwater, surface water or air thereof, or in, on, or under any property in the vicinity of the Premises, or the soil, groundwater, surface water or air thereof, as described in the Existing Environmental Reports are referred to herein as the "EXISTING ENVIRONMENTAL CONDITION". Tenant shall keep the Existing Environmental Reports and all information contained therein confidential, except Tenant shall be allowed to disclose such information to Tenant's consultants and attorneys provided such parties agree to keep the information confidential. M. Provisions Survive Termination. The provisions of this Paragraph 37 shall survive the expiration or termination of this Lease. N. Controlling Provisions. The provisions of this Paragraph 37 are intended to govern the rights and liabilities of the Landlord and Tenant under this Lease respecting Hazardous Materials to the exclusion of any other provisions in this Lease that might otherwise be deemed applicable. The provisions of this Paragraph 37 shall be controlling with respect to any provisions in this Lease that are inconsistent with this Paragraph 37. 38. Landlord's Default. A. If Tenant believes Landlord has failed to perform or provide any service or pay any sum which Tenant in good faith believes Landlord is obligated to provide, perform or pay under this Lease, Tenant shall provide Landlord with written notice thereof. If Landlord does not perform or provide the required service or make such required payment within thirty (30) days after receipt of Tenant's notice (or if such failure cannot be cured within such thirty (30) day period, if Landlord does not promptly commence to provide or cure the same and diligently pursue the same to completion), Tenant shall have the right to provide, perform or pay the same. If Tenant, after such notice, provides and performs such service or makes such payment and sends to Landlord a written statement reflecting the reasonable costs for providing the same or the amount paid and Landlord fails to pay the same within twenty (20) days after receipt of such notice, Tenant shall have the right to seek and obtain damages from Landlord. B. In the event of any default by Landlord, Tenant's exclusive remedies shall be an action for specific performance or an action for damages. Tenant hereby waives the benefit of any laws granting it the right to terminate this Lease or withhold rent on account of any Landlord default. Tenant waives the provisions of Sections 1932(l), 1941 and 1942 of the California Civil Code and any similar or successor law regarding Tenant's right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under this Lease. 39. Condition to Effectiveness. The effectiveness of this Lease is conditioned upon Landlord obtaining architectural approval by April 1, 1997 from the City of Santa Clara for the construction of the Building. This condition is for the benefit of Tenant and Tenant may waive this condition by written notice to Landlord on or before April 1, 43 1997. If on or before April 1, 1997 this condition is neither fulfilled nor waived by Tenant, then this Lease shall automatically terminate, Landlord shall return the Security Deposit to Tenant and the parties shall have no further rights or obligations hereunder. If this condition is fulfilled or waived by Tenant on or before April 1, 1997, then this Lease shall continue in full force and effect. Landlord shall use good faith and all reasonable efforts to obtain the architectural approval by April 1, 1997. 44 IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below. LANDLORD TENANT South Bay/San Tomas Associates, Auspex Systems, Inc., a California general partnership a Delaware corporation By: CIIF Associates II Limited partnership, a Delaware limited partnership, its general partner By: -------------------------------- By:AEW Advisors, Inc., Its: a Massachusetts corporation, its ------------------------------- managing general partner By: ----------------------------- Its: ---------------------------- 45 EXHIBIT "A" Legal Description of Parcel 46 EXHIBIT "B" Site Plan 47 EXHIBIT "C" Improvement Agreement THIS IMPROVEMENT AGREEMENT by and between SOUTH BAY/SAN TOMAS ASSOCIATES ("Landlord") and AUSPEX SYSTEMS, INC. ("Tenant"), dated January , 1997, is made part of that Lease (the "Lease"), between Landlord and Tenant, dated concurrently herewith. Landlord and Tenant agree that the following terms are part of the lease: 1. Definitions: Except as defined below, capitalized terms in this Improvement Agreement shall have the meanings given those terms in the Lease. (a) Architect shall collectively mean all architects, structural engineers, mechanical engineers, and other design professionals retained by Landlord and needed to design the Tenant Improvements. (b) Applicable Laws and Restrictions shall mean all laws (including without limitation the Americans With Disabilities Act), building codes, ordinances, regulations, title covenants, conditions and restrictions. (c) Approved Plans shall mean the Final Tenant Improvement Plans, as the same may be modified by a Change Order issued in accordance with this Improvement Agreement. (d) Building shall mean the Building Shell and all of the Tenant Improvements therein. (e) Building Shell shall mean (concrete or one story tilt-up building), having the general specifications described on attached Exhibit 1, which shall be constructed by Landlord for Tenant generally in the location and configuration shown on Exhibit B to the Lease. (f) Construction Documents shall mean the Final Tenant Improvement Plans, and any and all bid packages, contracts with Contractors and agreement with the Architect. (g) Contractor(s) shall mean South Bay Construction and Development Company and all other contractors, design-build contractors, subcontractors, and material supplies who provide labor and material for construction of the Tenant Improvements. To the extent required by Applicable Laws and Restrictions, each Contractor shall be duly licensed by the State of California. (h) Construction Schedule shall mean the schedule for the commencement, prosecution and Substantial Completion of the Tenant Improvements, which shall be in substantially the form of attached Exhibit 2, and which shall be approved by the parties pursuant to this Improvement Agreement and, when agreed upon attached hereto in replacement of 48 Exhibit 2 and incorporated herein by this reference. (i) Final Tenant Improvement Plans shall mean those plans, specifications and working drawings for the Tenant Improvements, which shall be prepared, approved and identified in Exhibit 3 when approved in writing by Landlord and Tenant, and thereafter incorporated herein by this reference. (j) Force Majeure shall mean any prevention, delay or stoppage due to strikes, lock-outs, inclement weather, labor disputes, inability to obtain labor, materials, fuels or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other acts of God, and other causes beyond the reasonable control of the party obligated to perform (except financial inability) shall excuse the performance, for a period equal to the period of any said prevention, delay or stoppage, or any obligation hereunder except the obligation of Tenant to pay any sums due hereunder. (k) Landlord's Representative shall mean Scott Trobbe, whose telephone number is (408) 379-0400, whose facsimile number is (408) 379-3229, and whose address for delivered notice is South Bay Development Company, Inc., 511 Division Street, Campbell, California 95008, or such other person as Landlord shall designate in writing to Tenant as its authorized representative for the proposes of administering this Improvement Agreement. Landlord's Representative may change its numbers and address by deliver of three (3) business days notice to Tenant's Representative. (l) Planning Schedule shall mean the schedule for the preparation, approval and permitting of the Approved Plans for the Tenant Improvements attached hereto as Exhibit 4, and incorporated herein by this reference. (m) Permits shall mean all of the permits, inspections, approvals and consents of governmental authorities. (n) Substantial Completion shall mean that (i) the Tenant Improvements have been completed in accordance with the provisions of this Improvement Agreement and the Final Tenant Improvement Plans therefor (except for minor punchlist items which do not substantially interfere with Tenant's use of the Premises), (ii) all utilities are connected and available for Tenant's use, and (iii) all necessary governmental approvals for occupancy of the Building have been obtained (including, if applicable, a certificate of occupancy); provided, however that, to the extent that Substantial Completion of the Building is delayed because of a Tenant Delay, the Substantial Completion Date shall be deemed to be the date the Building would have otherwise been Substantially Completed, absent the Tenant Delay. (o) Tenant Delay shall mean any delay in the Substantial Completion of the Tenant Improvements as a consequence of (i) Tenant's failure to promptly review and approve or properly disapprove plans for the Tenant Improvements in accordance with this Improvement Agreement and within the time permitted by the Planning Schedule; (ii) Tenant's request for 49 special materials, finishes, or installations which are not readily available, provided the length of Tenant Delay due to such unavailability shall not exceed the amount of delay approved by Tenant when such materials, components, finish, or improvements were requested by Tenant; (iii) Change Orders requested by Tenant and approved by Landlord, provided that the amount of Tenant Delay as a consequence of any Change Order may not exceed the amount of delay specified in the Change Order; (iv) Tenant's failure to complete any of its own improvement work identified in the Construction Schedule as being necessary for the Substantial Completion of the Tenant Improvements by the date specified in the Construction Schedule for completion of such work; (v) interference with Landlord's work caused by Tenant or Tenant's contractors or subcontractors. (p) Tenant Improvements shall mean those improvements that Landlord is obligated to construct in the Premises pursuant to Final Tenant Improvement Plans. (q) TI Allowance shall mean an amount equal to One Million Nine Hundred Sixty Eight Thousand Six Hundred Dollars ($1,968,000), which allowance is already reflected in the Monthly Installment amount set forth in Subparagraph 4.B. of the Lease. (r) TI Costs shall mean all sums (i) paid to Contractors for labor and materials furnished in connection with construction of the Tenant Improvements; (ii) all costs, expenses, payments, fees, and charges whatsoever paid or incurred by Landlord to or at the direction of any city, county, or other governmental authority or agency which are required to be paid by Landlord in order to obtain all necessary governmental permits, licenses, inspections and approvals relating to the construction of the Tenant Improvements and the use and occupancy of the Premises, including without limitation all in lieu fees and utility fees; (iii) engineering and architectural fees for services required in connection with the design and construction of the Tenant Improvements; and (iv) premiums, if any, for course of construction insurance and for payment and completion bonds relating only to construction of the Tenant Improvements. In no event shall TI Costs include any of the following, all of which shall be the sole obligation of Landlord: (a) any cost attributable to the Building Shell, including without limitation the cost to design, permit, or construct the Building Shell improvements described on Exhibit 1 to this Exhibit "C", (b) charges and expenses for changes to the Construction Documents which have not been approved in writing by Tenant, except for those changes to the Construction Documents required by governmental authority, (c) wages, labor and overhead for overtime and premium time, unless approved in writing by Tenant; (d) additional costs and expenses incurred by Landlord on account of any Contractors' or Architects' default or construction defects in the Improvements; (e) interest and fees for construction financing; (f) labor and overhead costs for Landlord's employees and office; and (g) bond premiums. (s) TI Cost Estimate shall mean the total estimated cost of constructing the Tenant Improvements prepared and approved by Landlord and Tenant in accordance with this Improvement Agreement, as modified by change orders issued in accordance with this Improvement Agreement. 50 2. Designation of Representative. Landlord and Tenant hereby respectively appoint Landlord's Representative and Tenant's Representative as its sole representative for the purposes of this Improvement Agreement. Until replaced by written notice, Landlord's Representative and Tenant's Representative shall have the full authority and responsibility to act on behalf of Landlord and Tenant, respectively, as required in this Improvement Agreement. 3. Preparation and Approval of Plans. (a) Retention of Architect(s). Tenant shall retain the Architect(s) to prepare the plans and specifications for the Tenant Improvements, subject to Landlord's reasonable approval. (b) Tenant Improvement Plans. (i) To facilitate timely commencement and Substantial Completion of the Tenant Improvements, within the time specified in the Planning Schedule, Tenant shall prepare and submit to Landlord for Landlord's approval the Tenant's design requirements for the Tenant Improvements. At such time as Landlord has approved the Tenant's design requirements and within the time provided in the Planning Schedule, Landlord shall cause the Architect to proceed with the preparation of preliminary plans and specifications, and a preliminary cost estimate for the Tenant Improvements and shall notify Tenant of any revisions that may need to be made to the previously approved construction schedule. Tenant shall review and approve or disapprove of such items and any changes in the Construction Schedule within the time permitted by the Planning Schedule. If Tenant does not approve any preliminary plan or specification, the preliminary cost estimate, or a construction schedule change, Tenant and Landlord shall work with the Architect and negotiate in good faith to reach agreement on all such items within the time permitted by the Planning Schedule. (ii) When the preliminary space plans, elevations, preliminary cost estimate and any Construction Schedule changes have been approved by Tenant, Landlord shall cause the Architect to prepare and deliver to Tenant by the date specified in the Planning Schedule (i) proposed final plans, specifications and working drawings for the Tenant Improvements, (ii) a proposed final TI Cost Estimate, and (iii) a proposed final Construction Schedule for the Improvements substantially in the form of attached Exhibit 2, all of which shall be consistent with, and logical evolutions of the preliminary plans and elevations approved by Tenant pursuant to the foregoing, the terms of this Improvement Agreement and the Construction Schedule and the changes thereto previously approved by the parties. Tenant shall review and approve the proposed final plans, specifications, and working drawings for the Tenant Improvements, the proposed TI Cost Estimate, or the proposed final Construction Schedule within the time permitted by the Planning Schedule. If Tenant reasonably disapproves of the plans, specifications or working drawings for the Tenant Improvements (which disapproval can only be based upon whether such plans, specification or working drawings are consistent with the preliminary plans), the proposed TI Cost Estimate, and/or the proposed final Construction Schedule, then Landlord and Tenant shall negotiate in good faith, using all reasonable efforts to 51 reach agreement on such items within the time specified in the Planning Schedule; provided, however, that Landlord shall not unreasonably withhold its approval of such change requested by Tenant to the Tenant Improvements which does not materially delay the Scheduled Completion Date for the Tenant Improvements nor materially increase the cost that will be incurred by Landlord in constructing the Tenant Improvements. If Tenant believes that the cost estimate is incorrect, it may require that all or any portion of the work be submitted for competitive bids, in which case the amount for the rebid work included in the TI Cost Estimate shall not exceed the lowest responsible bid(s) from responsible Contractor(s) and Supplier(s) for such work. The plans, specifications, and working drawings for the Tenant Improvements, the final TI Cost Estimate, and the Construction Schedule approved by Tenant and Landlord pursuant to this Section, shall be the "Final Tenant Improvement Plans," "TI Cost Estimate" and "Construction Schedule" for the purposes of this Improvement Agreement. (c) Disapprovals and Failures to Respond. Any disapproval by Tenant of a preliminary plan, space plan, elevation final plan, specification, cost estimate, or construction schedule item submitted for its approval shall be communicated only by a writing, which is delivered to Landlord within the time permitted by the Planning Schedule and which specifies the disapproved item(s), the reason(s) for the disapproval, and the changes required to make the item acceptable to Tenant. If Tenant's disapproval of any item requiring its approval under this Construction Agreement is not delivered in accordance with the procedures and time limits specified in this Improvement Agreement, then Tenant shall be deemed to have given its approval to such item. (d) Changes to Plans, Cost Estimate and Construction Schedule. When the Final Tenant Improvement Plans, the TI Cost Estimate and Construction Schedule have been approved by Landlord and Tenant as provided above, the description of said plans and the Construction Schedule shall be initialed by the parties and attached to this Agreement as Exhibits 2 and 3, respectively. Once the Final Tenant Improvement Plans, the TI Cost Estimate, and the Construction Schedule (including, without limitation, the Scheduled Completion Date specified therein) are approved by Landlord and Tenant as provided above, neither party shall thereafter have the right to order extra work or change orders, nor will the Construction Schedule or the TI Cost Estimate be modified, except by a written "Change Order" approved by Landlord and Tenant, which approval shall not be unreasonably withheld, except as expressly stated to the contrary below. The Change Order shall clearly describe (i) the change, (ii) the party required to perform the change, (iii) any modification of the Approved Plans, (iv) the amount of delay or the time saved resulting therefrom and any revision of the Construction Schedule and Scheduled Completion Date occasioned by the change, (v) any added or reduced TI Cost resulting from the Change, (vi) any other cost, and the manner of payment of such costs which Tenant may be required to pay with respect to a Change requested by Tenant, or Landlord may be required to reimburse to Tenant as a consequence of a change requested by Landlord. (e) Application for Permits. As soon as the Final Tenant Improvement Plans are approved by Landlord and Tenant, Landlord shall submit said plans to all appropriate governmental agencies and private parties from whom Permits are required for the construction 52 and use of the Tenant Improvements. Landlord shall notify Tenant of any changes required by any governmental agencies, and Tenant shall have seven (7) days thereafter to indicate its approval thereof. All such changes required by governmental agencies shall be deemed acceptable to Tenant unless Tenant's use of the Premises is materially impaired thereby. The final plans, specifications and working drawings as approved, and all change orders specifically permitted pursuant to Subparagraph (c) below, shall be referred to herein as the "Approved Plans." 4. Construction. (a) General Contractor. South Bay Development and Construction Company shall serve as the general Contractor. Contractor's fee as general Contractor for the Tenant Improvements shall be calculated as follows and shall be included in the TI Cost Estimate: five percent (5%) of the TI Costs not including such Contractor's fee. (b) Subcontracts and Materials. Prior to issuance of any subcontract relating to Tenant Improvements, Landlord shall submit for Tenant's approval (which approval shall not be unreasonably withheld) a list of the Contractors and Suppliers for the Tenant Improvement work. At Tenant's request, all labor and materials for the Tenant Improvements shall be competitively bid by at least two (2) Contractors or Suppliers. Landlord may also bid on such work. If Tenant so desires, Tenant may also select a Contractor or Supplier, reasonably acceptable to Landlord, to bid the work. All bids shall be opened simultaneously. Landlord shall have the right to select the Contractor or Supplier to perform the work. Notwithstanding Tenant's right to approve the Contractors and Suppliers, the Contractors and Suppliers are a contractor only for Landlord, and Tenant shall have no liability to any Contractor or Supplier under any Construction Document or otherwise with respect to the Tenant Improvements; provided, Tenant shall be required to reimburse Landlord for its portion of the TI Costs pursuant to this Improvement Agreement. (c) Commencement and Completion of Improvements. As soon as (i) the Approved Plans have been developed as provided above, and (ii) all necessary Permits for commencement of construction of the Tenant Improvements have been obtained, Landlord shall cause its Contractor(s) to commence and to thereafter diligently prosecute to completion the construction of the Tenant Improvements in accordance with the Approved Plans by the Scheduled Completion Dates therefor contained in the Construction Schedule; provided, however, Landlord shall not be liable for delay in the Substantial Completion Date for the Building to the extent reasonably attributable to a Force Majeure Delay, except as specifically provided in this Lease. (d) Standard of Construction. Landlord shall cause all work to be constructed in a good and workmanlike manner, free from material design and workmanship defects in accordance with the Approved Plans, the other Construction Documents, the Permits, and Applicable Law and Restrictions. Notwithstanding anything to the contrary in the Lease or this Improvement Agreement, Tenant's acceptance of the Landlord's Work shall not waive the 53 foregoing warranty and Landlord shall promptly remedy all violations of the warranty at its sole cost and expense which occur during the first twelve (12) months of the Lease Term. Such warranty shall expire and be of no further force or effect on the date which is twelve (12) months after the Commencement Date. Tenant shall promptly notify Landlord in writing during the warranty period of any defect in construction or in the operation of equipment discovered during such period, and promptly thereafter Landlord shall commence the cure of such defect and complete such cure with diligence at Landlord's sole cost. After said twelve (12) month period, Tenant shall conclusively be deemed to have approved the construction of the Tenant Improvements and accepted them "as is", subject only to defects claimed as provided above. With respect to defects discovered after the expiration of said one (1) year period, the parties hereto acknowledge that it is their intention that Tenant have the benefit of any construction or equipment warranties existing in favor of Landlord that would assist Tenant in correcting such construction defects and in discharging its obligations regarding the repair and maintenance of the Premises. Upon request by Tenant following the expiration of such twelve (12) month period, Landlord shall inform Tenant of all written construction and equipment warranties existing in favor of Landlord which affect the Tenant Improvements. Landlord shall assign such warranties to Tenant upon request in order that Tenant may enforce the same. (e) Tenant Fixturing. Landlord shall use all reasonable efforts to complete construction of Tenant Improvements of the Building to a point permitting Tenant's entry for installation of its fixtures and equipment on or before the date specified in the Construction Schedule. When the construction of the Building has proceeded to the point where Tenant's installation of its fixtures and equipment in the Building can be commenced in accordance with good construction practice, the Landlord shall notify Tenant to that effect and shall permit Tenant and its authorized representatives and contractors to have access to the Building for a period of not less than thirty (30) days for the purpose of installing Tenant's trade fixtures, equipment and other Tenant's Property in the Building. Landlord and Tenant shall cooperate in good faith to schedule and coordinate Tenant's fixturing with the Landlord's construction in a manner which will assure Substantial Completion of the Improvements by the Scheduled Completion Dates, will reduce each party's cost, and ensure labor harmony. While performing fixturing, Tenant shall comply, and shall cause its employees, contractors and suppliers to comply, with the reasonable work rules observed by Landlord's Contractors and Suppliers. (f) Inspection & Punchlist. Tenant's Representative and Tenant's architect, designers and consultants shall have the right to enter on the Premises at all reasonable times and upon notice to Landlord's Representative for the purpose of inspecting the progress of the work. Tenant's Representative, Landlord's Representative and the Architect(s), and such advisers as they shall desire, shall inspect the Building upon its Substantial Completion using their best efforts to discover all uncompleted or defective construction. After such inspection has been completed, a list of "punchlist" items shall be prepared by Landlord which the parties agree are to be corrected by Landlord. Landlord shall use its best efforts to complete and/or repair such "punchlist" items within thirty (30) days. Tenant's taking possession of the Premises shall be deemed to be an acceptance by Tenant of the Premises as complete and in accordance with the terms of this Lease, subject to completion of the punchlist items within said period. 54 5. Payment of Construction Costs. Landlord and Tenant shall each bear their own cost for performance of their respective obligations under this Improvement Agreement, except that Tenant shall reimburse Landlord for the amount, if any, by which the TI Cost exceeds the TI Allowance in the following manner: Landlord shall submit receipted bills and/or lien releases evidencing Landlord's payment of TI Costs in such amounts and at such times as bills are submitted to Landlord for the TI Costs by Contractors and Suppliers for Tenant Improvement work in place prior to the date of the bill (a "TI Progress Cost"). On or before the twenty-fifth (25th) day following receipt of the request, Tenant shall pay to Landlord a sum equal to (i) the TI Progress Cost times a fraction, the numerator of which shall be equal to the TI Cost Estimate minus the TI Allowance and the denominator of which shall be equal to the TI Cost Estimate, minus (ii) the sums previously reimbursed by Tenant to Landlord; provided, however that in no event shall Tenant be required to reimburse Landlord (1) for more than 90% of the difference between the TI Cost Estimate and the TI Allowance prior to the Substantial Completion Date, (2) so long as Landlord has failed to use the reimbursements previously paid by Tenant to discharge the obligation of the Landlord to the Contractors and Suppliers, or (3) so long as Landlord is in default of its obligations under this Improvement Agreement in any material respect. 6. Delay In Completion Caused By Tenant. The parties hereto acknowledge that the date on which Tenant's obligation to pay the Monthly Installment would otherwise commence could be delayed because of Tenant Delays. It is the intent of the parties hereto that Tenant's obligation to pay the Monthly Installments of rent not be delayed by any of such causes or by any other act of Tenant, and in the event it is so delayed, then Tenant's obligation to pay the Monthly Installments shall commence as of the date it would otherwise have commenced absent said Tenant Delay. Tenant Delays in excess of thirty (30) days for any of the above-mentioned reasons may affect Landlord's financing of construction of the Premises, and Tenant agrees to pay any reasonable additional financing costs, including loan fees, incurred by Landlord as a result thereof. 7. Notices. The notices to be delivered to the parties pursuant to this Improvement Agreement shall be given by personal delivery or by facsimile (with receipt confirmed) to the Tenant's Representative and the Landlord's Representative at the following address and facsimile number. 55 Tenant's Representative: [FOLLOWING EXECUTION OF THIS LEASE, TENANT SHALL PROMPTLY PROVIDE LANDLORD WITH THE NAME, ADDRESS AND FACSIMILE NUMBER FOR TENANT'S REPRESENTATIVE.] Address: --------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- Facsimile: ------------------------------------------------------------- Landlord's Representative: Address: South Bay Development Company, Inc. 511 Division Street Campbell, California 95008 Attn: Mr. Scott Trobbe Facsimile: (408) 379-3229 8. Miscellaneous. Except as otherwise expressly provided in this Improvement Agreement, whenever either party's consent, approval, designation, or advice is required by the other party, such consent, approval, designation, or advice shall not be unreasonably withheld or delayed. This Improvement Agreement and the Lease contain the entire agreement between the parties with respect to the construction of the Tenant Improvements and, in the event of any conflict between the terms of this Improvement Agreement and the Lease, this Improvement Agreement shall prevail. This Improvement Agreement may be amended and the provisions hereof may be waived only by a writing signed by Landlord and Tenant and the provisions hereof shall be binding upon the successors and assigns of the parties to the Lease. If any legal action, arbitration or other proceeding is commenced to interpret or enforce this Improvement Agreement, the prevailing party in such action, arbitration or proceeding shall be entitled to recover its reasonable attorneys' fees and costs. 56 IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below. LANDLORD TENANT South Bay/San Tomas Associates, Auspex Systems, Inc., a California general partnership a Delaware corporation By:CIIF Associates II Limited partnership, a Delaware limited partnership, its general partner By: -------------------------------- By:AEW Advisors, Inc., Its: a Massachusetts corporation, ------------------------------- its managing general partner By: ------------------------------------ Its: ----------------------------------- 57 EXHIBIT 1 TO EXHIBIT C DEFINITION OF BUILDING SHELL The components and systems below shall be included in the design of the new building. All code requirements should be considered minimum beginning requirements and not the highest level of design. Landlord's cost shall include all "hard and soft" costs related to the construction of the site and shell, including architectural and engineering services, permits, utility fees for connections and meters, etc. 1. BUILDING STRUCTURE (a) All foundations to include footings, piers, caissons, pilings, grade beams, foundation walls or other building foundation components required to support the entire building structure. (b) Columns shall be steel box or pipe columns. (c) All columns, beams, joists, purlins, headers, or other framing members to support the roof and roofing membrane. (d) Five inch (5") thick concrete slab on grade with welded wire mesh and any other reinforcing or structural connections that may be necessary or required. (e) Exterior walls that enclose the perimeter of the building with steel reinforcing and structural connections that may be necessary or required. (f) All exterior glass and glazing with anodized aluminum frames. Glass to be tinted as appropriate to the aesthetic design of the building. All exterior doors, door closer and locking devices necessary for proper functioning. (g) Wood panel roof system to support roofing membrane. (h) Three (3) ply built up roofing with cap sheet and all flashings by Owens-Corning, John Manville, or equal. (i) Exterior painting of all concrete with Tex-Coat or Kel-Tex textural paint. All caulking of exterior concrete joints in preparation for painting. (j) The foundation and structural framing should be designed to 58 support a minimum live load of 100 psf in all areas. (k) The floor-to-floor height of the building shall allow a minimum of 10'- 0" interior drop ceiling height. 2. PLUMBING (a) Underground sanitary sewer laterals connected to the city sewer main in the street and piped into the building and under the concrete slab on grade for the length of the building. Main waste lines under the slabs will be in as close proximity as possible to the building rest room locations. (b) Domestic water mains connected to the city water main in the street and stubbed to the building. Water mains to the building shall not be less than 2.5" in size. (c) Roof drain leaders piped and connected to the site storm drainage systems. (d) Gas lines connected to the city public utility mains and gas meters adjacent to, and in close proximity to the building. Meters supplied by utility company. 3. ELECTRICAL (a) All primary electrical service to the building that is complete including underground conduit and wire feeders from transformer pads into the building's main switchgear electrical room. The electrical characteristics of the secondary side of transformers shall be 277/480 Volt. 3 Phase and the rated capacity of the transformers shall be 4,000 amps for the building. All electrical panels and breakers will have isolated grounds and surge protectors. (b) Underground pull section, meter, and panel(s), for site lighting and landscaping. (c) Underground conduit from the street to the building for telephone trunk line service by Pacific Telephone. Conduit to the building shall not be less than 4". (d) An electrically operated landscape irrigation controller that is a complete and functioning system. 59 (e) Underground conduit from the building to the main fire protection system, shut off valve (PIV) for installation of security alarm wiring. (f) All parking lot and landscaping lighting to include fixtures, underground conduit, wire, distribution panel and controller. All exterior lighting shall be a complete and functioning system. 4. FIRE PROTECTION (SPRINKLERS) (a) A complete and fully functional overhead system distributed throughout the building. The systems shall be classified ordinary hazard group II and be distributed throughout the building. (b) System shall include all sprinkler heads that may be required by building codes above the ceiling, when ceilings are installed. (c) Site sprinkler main to be sized adequately to support Tenant's uses within the building. 5. SITEWORK (a) All work outside the building perimeter walls shall be considered site work for the building shell and shall include grading, asphalt concrete, paving, landscaping (hard and soft), landscape irrigation, storm drainage, utility service laterals, including conduit for voice and data connecting the building, curbs, gutters, sidewalks, specialty paving (if required), retaining walls, fencing and gates, trash enclosures, planters, sign monuments, parking lot and landscape lighting and other exterior lighting per code. (b) Paving sections for automobile and truck access shall be according to the Geological Soils Report. (c) All parking lot striping to include handicap signage and spaces (parking ratio: no less than 1 space per 295 gross square feet). (d) Underground site storm drainage system shall be connected to the city storm system main. 60 EXHIBIT 2 TO EXHIBIT C CONSTRUCTION SCHEDULE [TO BE DETERMINED] 61 EXHIBIT 3 TO EXHIBIT C FINAL TENANT IMPROVEMENT PLANS [TO BE DETERMINED] 62 EXHIBIT 4 TO EXHIBIT C PLANNING SCHEDULE [TO BE DETERMINED]
Required Action Last Date for Completion - --------------------------------------------------------- --------------------------------------------------------- Tenant Improvements Plans and Specifications - --------------------------------------------------------- -------------------------------------------------------- 1. Tenant delivers its design __________________ , 199__ requirements_________________________ to______________________. 2. Landlord causes the Architect to __________________days after Task 1 is satisfied deliver preliminary plans, and a preliminary cost estimate for the Tenant Improvements and a list of any expected construction schedule changes to Tenant for its review. 3. Tenant approves or disapproves the ______________ days after Task 2 is completed items delivered pursuant to Task 8. 4. Landlord and Tenant agree upon ____________________________, 199__ preliminary plans, a cost estimate and any construction schedule changes for Tenant Improvements. 5. Landlord delivers proposed plans, ______________ days after Task 4 is completed specifications and working drawings, a proposed final TI Cost Estimate for the Tenant Improvements, and a final Construction Schedule to Tenant for its review. 6. Tenant approves or disapproves the ______________ days after Task 5 is completed items delivered pursuant to Task 1. 7. Landlord and Tenant agree upon Final ____________________________, 199__ Tenant Improvement Plans, a final TI Cost Estimate, and a final Construction Schedule. Permitting & Governmental Approvals - -------------------------------------------------------------------------------------------------------------------- 8. Landlord submits the Final Tenant ______________ days after Task 7 is completed Improvement Plans to all applicable governmental authorities for Permits. 9. All governmental permits and approvals ____________________________, 199__ necessary for the construction of the Improvements for the Permitted Uses are obtained.
63 EXHIBIT "D" Commencement Date Memorandum With respect to that certain Lease Agreement ("Lease"), dated January ___, 1997, by and between South Bay/San Tomas Associates, a California general partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware corporation ("TENANT"), whereby Landlord leased to Tenant and Tenant leased from Landlord the Premises (as defined in the Lease). All terms not defined herein shall have the same meaning as set forth for such terms in the Lease. Tenant hereby acknowledges and certifies to Landlord as follows: (1) The Lease commenced on ___________________, 19___ ("Commencement Date"); (2) The Initial Term of the Lease shall expire on ____________________, ______ (the "Expiration Date"); (3) The initial Monthly Installment of Rent for the Premises is ____________ _______________________________ Dollars ($_________________); and (4) Tenant has accepted [and is currently in possession of] the Premises. IN WITNESS WHEREOF, this Commencement Date Memorandum is executed this ______ day of __________________, 199____. "Tenant" Auspex Systems, Inc., a Delaware corporation By: -------------------------- Its: ------------------------- 64 EXHIBIT "E" List of Hazardous Materials Tenant Will Use on The Premises 65 EXHIBIT "F" Description of Existing Environmental Reports Environmental Reports & Correspondence The Former Unisys Site 1. Environmental Baseline Report - Revised October 1989 A. Including the following tables, figures and appendices (359 pages) Tables 1. Tanks and Chemical Storage 2. Previous Tank Storage Summary 3. Groundwater Monitoring Data 10/88 Figures 1. Map 2. Site Map 3. Tank Locations 4. Previous Tank Storage Sites 5. Monitoring Well Locations Appendices PCB Information Asbestos Information Tank Pull 1/84 Well Destruction Investigation Hydrogeological Investigation 10/87 Unisys for SFRWQCB; Environmental Baseline Investigation (Appx 60 pages) Hydrogeological Investigation 11/88 Soil Gas Survey 5/89 Semi-Annual Sampling 5/89 66 Clarifier Removal 10/89 2. Tank Removal - Completed 2/6/90 - Santa Clara Fire Department Permit 3. Internal Memo 3/2/90 Regional Water Quality Control Board/2 pages 4. Letter: 3/5/90 to Unisys from Pacific Environmental Group, Inc./4 pages 5. Table 1: Summary of Current Groundwater Laboratory Results/4 pages. 6. Letter: 6/11/90 to E2C, Inc. from Chips Environmental Consultants/16 pages 7. Letter: 6/28/90 to South Bay Construction and Development Company from E2C, Inc./3 pages 8. Report: 6/29/90 Level II Environmental Site Assessment prepared by E2C, Inc. previously forwarded to ASK 3/17/92 9. Television inspection location sheet dated 7/16/90-VCR tape available/2 pages 10. Letter: 7/19/90 to City of Santa Clara from E2C, Inc./1 page 11. Progress report sanitary sewer line video and groundwater analysis dated 8/7/90 prepared by E2C, Inc./44 pages 12. Letter: 8/31/90 to South Bay Construction and Development Company from E2C, Inc./3 pages 13. Television inspection location sheet dated 8/31/90-VCR tape available/2 pages 14. Letter: 10/19/90 to Prevention Bureau, Santa clara Fire Department from Pacific Environmental Group, Inc./22 pages 15. Letter; 10/23/90 to South Bay Construction and Development Company from Unisys/9 pages 16. Letter: 11/1/90 to South Bay Construction and Development Company from Unisys/9 pages 17. Letter: 11/1/90 to Prevention Bureau, Santa Clara Fire Department from Pacific Environmental Group, Inc./8 pages 18. Letter: 11/21/90 to South Bay Construction and Development Company from E2C, Inc./6 pages 19. Letter: 1/3/91 to South Bay/San Thomas Associates from Unisys/2 pages 20. Memo: 1/29 91 to Unisys Corporation from Pacific Environmental group, Inc./41 pages 21. Fax: 2/11/91 to Unisys from E2C, Inc./7 pages 22. Final submittals-Unisys Corporation-Asbestos/25 pages 23. Letter: 3/15/91 to Pacific Environmental Group from Clayton Environmental Consultants/26 pages 24. Letter: 3/19/91 to E2C, Inc., from Pacific Environmental Group, Inc./16 pages 67 25. Letter: 3/21/91 to South Bay/San Tomas Associates from Unisys/16 pages 26. Letter: 3/21/91 to Unisys from Pacific Environmental Group, Inc./12 pages 27. Letter: 3/22/91 to South Bay Development Company from Unisys/2 pages 28. Fax: 4/4/91 to Pacific Environmental Group/1 page 29. Fax: 4/4/91 to Pacific Environmental Group/1 page 30. Fax: 4/8/91 from Pacific Environmental Group-Organic Analysis Data Sheets/8 pages 31. Fax: 4/10/91 from Pacific Environmental Group-Permits Santa Clara Fire Department/5 pages 32. Letter: 4/12/91 to San Francisco Regional Water Quality Control Board from Unisys/81 pages 33. Letter: 4/23/91 to South Bay Development Company from Unisys/1 page 34. Letter: 5/21/91 to South Bay Development Company from Unisys/7 pages 35. Uniform Hazardous Waste Manifests 5/22/91/44 pages 36. Letter: 6/5/91 to Unisys from California Regional Water Quality Control Board/2 pages 37. Report of Abatement Observation and Air Monitoring June 6, 1991 prepared by Law Associates/66 pages 38. Letter: 6/20/91 to Unisys from Pacific Environmental Group, Inc./18 pages 39. Soil & Groundwater Assessment dated July 11, 1991, prepared by E2C, Inc. 40. Fax: 8/28/91 to SBC&D Co., from E2C, Inc./7 pages 41. Letter: 1/14/92 to California Regional Water Quality Control Board from Unisys/8 pages 42. Letter: 1/14/92 to Unisys from Pacific Environmental Group, Inc./4 pages 43. Report: 1/20/92 Second and Third Quarter Split Sampling prepared by E2C, Inc./121 pages 44. Letter: 2/3/92 from Unisys from California Regional Water Quality Control Board/2 pages 45. Letter: 3/24/92 to South Bay Construction and Development from E2C, Inc./8 pages 46. Letter: 3/25/92 to Regional Water Quality Control Board from Unisys/12 pages 47. Report: 4/2/92 Installation of B-Zone Well prepared by E2C, Inc./53 pages 48. Report: 8/25/92 Phase I Environmental Assessments Building 14 prepared for the ASK Companies by Environ Corporation 49. Letter: 11/10/92 to South Bay Development Company from Unisys/9 pages; Justification for 68 Removal 50. Letter: 12/11/92 to South Bay Construction and Development Company from E2C, Inc./3 pages 51. Letter: 12/11/92 to South Bay Construction and Development Company from E2C, Inc./4 pages 52. Letter: 12/11/92 to Regional Water Quality Control Board from Unisys/8 pages; Table-Unisys Monitoring Well Removal Notification 53. Letter: 12/14/92 to Regional Water Quality Control Board from E2C, Inc./4 pages 54. Letter: 12/21/92 to E2C, Inc. from California Regional Water Quality Control Board/1 page 55. Letter: 12/28/92 to The ASK Companies from South Bay Construction and Development Company/1 page 56. Letter: 1/22/93 to Regional Water Quality Control Board from Unisys/1 page 57. Fax: 3/29/93 to South Bay Construction and Development Company from E2C, Inc./2 pages 58. Letter: 4/1/93 to South Bay/San Tomas from E2C, Inc./1 page 59. Letter: 4/8/93 to South Bay Construction and Development Company from E2C, Inc./8 pages; Well Destruction Report 60. Letter: 6/15/93 to Regional Water Quality Control Board from Unisys/15 pages; Well Abandonment Report 61. Site Investigation Summary by Unisys Corporate Environmental Affairs dated March 6, 1995 containing Report, Figures, Tables and Appendices A through D 62. Letter: 6/22/95 to Regional Water Quality Control Board from Unisys/21 pages 63. Letter: 9/11/95 to Regional Water Quality Control Board from Unisys/8 pages 64. Letter: 12/19/95 to South Bay Construction and Development Company from Unisys/14 pages 65. Letter: 1/26/96 to California Regional Water Quality Control Board from Unisys/21 pages 66. Fax: 4/10/96 to Larry Patterson from Asbestos Control Center/13 pages 67. Report: 7/19/96 System Installation and Additional Investigation prepared by Unisys Corporate Environmental Affairs 69 EXHIBIT "G" Preliminary Title Report 70 EXHIBIT "H" CC&R's and Excluded Obligations Under CC&R's Described in the Title Report The documents referred to in the following specially enumerated exceptions in the Title Report attached as Exhibit "G" to this Lease constitute the "CC&R's" referred to in Paragraph 34 of the Lease. Pursuant to Paragraph 34 of the Lease, except as otherwise stated below as being obligations of Landlord, Tenant shall abide by and comply during the Lease Term with the obligations stated below with respect to the documents listed below to the extent the obligations arise from the ownership or occupancy of the Premises (and to the extent they arise from Landlord's ownership of the Premises together with Landlord's ownership of other property, then to the extent such obligations are reasonably allocable to the Premises). Exception No. 6 pertains to an Agreement Regarding Separation of Certain Utilities between the City of Santa Clara and Unisys Corporation. Tenant shall not be responsible for any obligations thereunder, with any obligations affecting the Premises to be borne by Landlord. Exception No. 7 pertains to a Grant Deed with Grant and Reservation of Easements from Unisys Corporation to Landlord. Tenant shall be responsible for the obligations embodied therein as relate to the use by Tenant of the easements which are reflected therein as appurtenances to the Premises. Exception No. 8 pertains to a Declaration of Covenants, Conditions, Restrictions and Easements between Landlord and Unisys Corporation. Tenant shall be responsible for the obligations thereunder pertaining to maintaining ingress and egress easement areas located within the boundaries of the Premises in the manner required by that Declaration and for the obligations not to unreasonably interfere with the surface water drainage easement in favor of Unisys over the Premises. Exception No. 7 pertains to a Grant Deed with Reservation of Easement from Unisys Corporation to Landlord, which grants Unisys Corporation certain rights of access over the Premises associated with the operation of groundwater monitoring wells on the Property. Paragraph 2(b) of this document indicates that the rights and obligations of the parties thereunder are set forth in and are subject to certain terms and conditions in the Agreement of Purchase and Sale and Escrow Instructions between Landlord and Unisys Corporation. Tenant's only obligation with regard to the easements reserved in this Grant Deed is not to unreasonably interfere with the access of Unisys to any monitoring wells that may be hereafter placed upon the Property. Landlord shall be responsible under this Lease to ensure that if any monitoring wells are to be installed on the Premises by Unisys, that they shall be installed in a manner which will not unreasonably interfere with Tenant's use of the Premises and that Unisys exercises its rights under this Grant Deed in manner not to unreasonably interfere with Tenant's use of the Premises. Exception No. 10 pertains to a Declaration of Covenants, Conditions, Restrictions and Easements executed by Landlord. Tenant shall have the obligations for maintenance of such easements and utilities as are located within the boundaries of the Premises as referred to in this Declaration, and the obligation to contribute the share of expenses (as provided therein) which is allocable to the Premises associated with the costs of maintenance of the easement areas on other parcels for the benefit of the Premises. As relates to easements over, under or across the Premises for the benefit of other parcels, Tenant shall have the right to obtain reimbursement from the owners of other parcels for the cost of maintenance of the easements in accordance with the terms of this Declaration, including recovery from Landlord to the extent it is at such time the owner of any other parcel which is obligated to share in such costs under this Declaration. Landlord shall cooperate with Tenant in any collection efforts from other owners. EX-11.1 4 CALCULATION OF EARNING PER SHARE 1 EXHIBIT 11.1 AUSPEX SYSTEMS, INC. & SUBSIDIARIES STATEMENT OF COMPUTATION OF COMMON AND COMMON EQUIVALENT SHARES (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE THREE YEARS ENDED ------------------------------------ JUNE 30, JUNE 30, JUNE 30, 1997 1996 1995 ------- ------- ------- Net Income ......................................... $13,420 $19,830 $12,411 Weighted average common shares outstanding ......... 24,641 23,701 23,029 Weighted average common equivalent shares Common stock options .......................... 1,017 2,001 1,342 Total weighted average common shares and equivalents 25,658 25,702 24,371 ======= ======= ======= Net income per share ............................... $ 0.52 $ 0.77 $ 0.51 ======= ======= =======
EX-21.1 5 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21.1 AUSPEX SYSTEMS, INC. (AS OF JUNE 30, 1997)
DATE OF NAME INCORPORATION PLACE OF INCORPORATION ---- ------------- ---------------------- Auspex International, Inc. 07/19/93 California, USA Systemes Auspex, Inc. 07/02/93 Quebec, Canada Auspex Systems Limited 08/23/93 Reading, United Kingdom Auspex Systems GmbH 09/24/93 Munich, Germany Auspex Systems S.A. 12/23/93 Paris, France Auspex Foreign Sales Corporation 08/03/92 Barbados
EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Registration Statements No 33-67100, No. 33-76640 and No. 333-00886 on Form S-8. ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP San Jose, California September 23, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 25,056 35,830 44,323 1,193 18,096 134,270 62,988 42,952 157,152 28,836 0 0 0 25 128,291 157,152 182,533 202,486 79,062 93,008 87,422 100 20 24,362 10,942 13,420 0 0 0 13,420 .52 0
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