-----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, P3W0Mo/Dgr0qDkcsxIkI4b1OtVqKwPBIp3pg4jaHJFGkOBFtTlLa8R8oVXxXrJ5A jZbnRJv2Woq4rZwNSqj28w== 0000912057-97-001661.txt : 19970127 0000912057-97-001661.hdr.sgml : 19970127 ACCESSION NUMBER: 0000912057-97-001661 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961102 FILED AS OF DATE: 19970124 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTIGRAM COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000877908 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942418021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1028 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19558 FILM NUMBER: 97510208 BUSINESS ADDRESS: STREET 1: 91 EAST TASMAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089440250 MAIL ADDRESS: STREET 1: 91 E TASMAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended NOVEMBER 2, 1996 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to _________________ Commission file number: 0-19558 CENTIGRAM COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-2418021 (State or other (I.R.S. Employer jurisdiction of Identification incorporation or Number) organization) 91 EAST TASMAN DRIVE SAN JOSE, CALIFORNIA (Address of principal 95134 executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0250 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EXCHANGE - -------------------------------------------------------- -------------------------------------------------------- Common Stock, $0.01 par value NASDAQ/National Market System
Securities registered pursuant to Section 12(g) of the Act: None 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 the 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. __X__ The aggregate market value of the voting stock held by non-affiliates of the Registrant (based on the closing price as reported on the NASDAQ/NMS for January 1, 1997) was $68,550,000. Shares of the Registrant's Common Stock, par value $0.001 per share, ("Common Stock") held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in calculating the aggregate market value of voting stock in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant's Common Stock, as of January 1, 1997 was 6,978,000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 1. BUSINESS The following contains forward-looking statements regarding future events or the future financial performance of Centigram Communications Corporation (Centigram or the Company) that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this Item 1 under "Manufacturing," "Patents, Trade Secrets and Licenses," "Competition," the last two paragraphs of "Sales and Distribution," and the last two paragraphs of "Research and Development," as well as in Item 7 hereof under "Certain Trends and Uncertainties" and elsewhere in this report. This report includes certain trademarks of Centigram and other companies. OVERVIEW Centigram designs, manufactures and markets wireless and wireline messaging and communications systems that integrate voice, data and facsimile on the Company's communications server, and provide access to this multimedia information through a telephone or PC. Centigram also licenses TruVoice, its patented text-to-speech software. Centigram's applications all operate on a common hardware and software platform based on industry-standard hardware and software which is the Company's implementation of its modular expandable system architecture (MESA). Centigram's system architecture enables a user generally to expand the capacity of a system in cost-effective increments from the Company's smallest to its largest system configuration. In the first quarter of fiscal 1996, the Company introduced its next-generation platform, the "Series 6." The Series 6, which extends across all size ranges of the Company's products, has been designed to offer significantly expanded capacity, improved fault tolerance and greater use of industry-standard hardware and software than the Company's prior platform. Incorporated into the Series 6 are the Multi-Vendor Industry Protocol (MVIP), digital signal processor (DSP) technology and Intel Pentium processors. Significant changes in hardware are required to upgrade from earlier generations of the Company's products to Series 6. These hardware changes include line cards, and for the Company's larger configurations, new hardware platforms which provide greater robustness and fault tolerance. The Company's systems are based on industry-standard computer hardware and operating system software. This enables the Company to bring additional product features and applications to market more quickly, to utilize low-cost, commonly available components and to capitalize on third party technological developments. Centigram's systems can be integrated with central office, mobile switch and paging terminal systems as well as with most telephone PBX systems. Such systems are used for switching telephone calls in a variety of customer premises equipment (CPE) and service provider environments. The Company's products can also connect with a broad range of host and local area network (LAN)-based computer systems, including systems based on widely-used mainframes and minicomputers and personal computers in LANs. In addition, Centigram systems located at different sites can be linked together in a digital network. Centigram's distribution strategy is to provide broad, effective market coverage through the Company's direct sales force and its distributors. The Company sells its complete line of systems to corporate and institutional end users through a broad network of distributors and original equipment manufacturers (OEMs). The Company also sells its systems directly to regional Bell operating companies (RBOCs), and to large independent telephone companies and service providers. In addition, the Company sells to service provider customers through an OEM arrangement with Motorola, Inc. Service providers in turn employ Centigram systems to provide services to corporate, institutional and individual end users. In recent periods the Company has been increasing its international sales and marketing efforts, particularly for international cellular service providers. Export sales were 30% and 23% of net revenue in fiscal 1996 and 1995, respectively, and 16% of net revenue in fiscal 1994. Since 1984, Centigram has been providing innovative, integrated messaging systems to the CPE and service provider marketplaces, becoming a leader in developing voice messaging and communications 2 products. Today, more than 20,000 Centigram systems are installed with more than 6,000 of them delivering revenue enhancing services to telephone companies, cellular providers, paging companies, and service bureaus. Centigram products allow users to play, answer and forward voice, fax and e-mail messages from any touch-tone telephone or PC anywhere in the world. Users can also add comments to any message, print fax documents at any fax machine, listen to e-mail messages and retrieve them by fax, and access one or more computer databases to retrieve stored information or process transactions. BACKGROUND The technologies which form the foundation for the Company's products--voice messaging, facsimile communications, e-mail, interactive-voice response (IVR) and text-to-speech--originally emerged as independent technologies and have historically been offered by different groups of vendors as stand-alone products with little, if any, ability to integrate with each other. These technologies can generally be described as follows: - VOICE MESSAGING enables users to store, send and receive information, or to access information from automated voice messaging systems, via the telephone. Voice messaging applications include telephone answering, automated attendant for inbound call routing, audio text and voice mail. - FACSIMILE technology permits communication of text and graphics over the public telephone network using hard copy input and output. - E-MAIL allows users to send and receive text and data through terminals or personal computers. - IVR allows users to access and update information stored in computer databases using the telephone as a terminal. For example, the financial services industry uses IVR to permit account balance inquiry and transaction execution. - TEXT-TO-SPEECH is a software solution which converts textual information stored in computer databases into synthesized speech. Recognition of the benefits of simple, integrated access to these communications technologies from any location continues to grow. The Company provides these benefits using either the telephone or the PC as a communications workstation. PRODUCTS AND PRODUCT FEATURES The Company's applications operate on a common software platform, which is Centigram's implementation of its MESA architecture. The MESA architecture allows the Company's systems generally to be upgraded in continual, cost-effective increments from the Company's smallest to its largest system configurations. In contrast, systems offered by the Company's principal competitors, due to their architectural constraints, more often require customers to purchase a new system in order to upgrade features or capacity. Significant changes in hardware are, however, required to upgrade from earlier generations of the Company's products to Series 6 products. These hardware changes include line cards, and for the Company's larger configurations, new hardware platforms which provide greater robustness and fault tolerance. The Company provides financial incentives to those customers desiring such upgrades as well as software programs to assist in the transfer of data, including recorded speech. Centigram's systems are available in configurations ranging from four ports, supporting 50-100 users in small installations, to 240 ports (depending on application configuration), supporting large headquarters and telecommunications service provider applications with over 60,000 users depending on the application. The Company sells its systems at prices ranging from below $10,000 to more than several hundred thousand dollars, depending on system configuration. The Company's MESA architecture uses a distributed processing approach that links separate modules together into a single system. Users can expand systems to provide more ports and hours of message storage by adding line cards and opening up partitions in the disk drive. Additional system 3 modules are added and linked as existing modules are fully used. This approach provides a low-cost entry-level product that can be expanded without replacing existing equipment. In addition, the Company offers connectivity between systems through MESA-Net, a digital networking option that can link up to 1,500 Centigram systems anywhere in the world. MESA-Net provides end-to-end digital networking which preserves the clarity of voice and fax messages and reduces transmission time and cost. MESA-Net provides two networking options. Low-traffic sites can use MESA-Net Async over modem connections. High traffic sites can use MESA-Net TCP/IP over high-speed Ethernet networks. MESA-Net II, introduced with the Series 6, enables messaging across wide area networks at Ethernet speeds using industry-standard TCP/IP protocols. The Company's products also support the Audio Messaging Interchange Specification (AMIS) analog networking protocol, providing interoperability with voicemail systems from other vendors. In addition, Centigram recently announced its participation in the joint development of the voice profile for Internet messaging (VPIM) protocol for transferring messages between disparate voice messaging servers. VPIM is being designed to enable the exchange of voice, fax or compound voice and fax messages between Centigram Series 6 communications servers and other vendors' voice messaging systems. MESA is based on standard hardware and software technology, such as MVIP, QNX (a multi-tasking, real-time operating system for Intel microprocessor-based computers) and the SCSI computer peripherals bus. The Company believes that its MESA architecture and its platform are unique in the industry, although it has not applied for patent protection. The Company believes this system architecture offers competitive advantages to the Company. In the event that competitors were to successfully implement a similar system architecture, it could have a material adverse effect on the Company's competitive position. The Company's Continuous System Operation Software (CSO) increases the reliability of Centigram's systems by providing a measure of fault tolerance in the Company's systems. Under CSO, the Company's operating system control is distributed across multiple modules within a system. If one module ceases to function, the balance of the operating system activity is shifted to the other modules and the systems continue to function. In addition, each of the Company's Series 6 configurations can store messages redundantly, thereby providing protection against system or disk drive failures. The Company believes that system reliability is a particularly important purchasing criterion for service providers and large CPE customers. Applications currently being used by end users of the Company's systems include the following: - A consumer durables manufacturer provides telephone access to messaging and calendar information via e-mail in printed, facsimile or audio form, in addition to voice mail messages.The system also gives sales and marketing staff 24-hour access to product literature and sales information through FaxMemo. - A nationwide paging company uses an integrated messaging application to provide services beyond voice messaging and paging to both outside callers and subscribers. Outside callers use the locator service and send a page for future delivery, while subscribers may hear their alphanumeric pages spoken in text-to-speech or have pages re-transmitted through mailbox commands. - An international cellular carrier offers a nationwide voice mail service through systems linked digitally by MESA-Net. A one call application automatically routes messages to the correct mailbox location regardless of call origination point. - A telephone company, through its directory assistance service, provides the capability for callers to leave voice mail messages for parties with unlisted numbers. - A cellular service provider sends a "record of entrance" to a computer database when a cellular subscriber roams into the service provider's territory.The system then calls the subscriber, welcomes the subscriber to the territory, and advises the subscriber as to available cellular system features. The Company's family of products include: 4 VOICEMEMO Centigram's VoiceMemo application provides voice messaging and call processing capabilities for customers in both CPE and service provider markets. Systems can be integrated with most central office, mobile switch and paging terminal systems as well as with most telephone PBX systems, including PBXs manufactured by AT&T, Fujitsu Ltd., Hitachi Ltd., Mitel Corporation, NEC Corporation, Northern Telecom and Siemens/ROLM. VoiceMemo provides a full range of features that have been designed to improve customer service, increase operating flexibility and employee productivity, and reduce communications costs. System services include: VOICE MESSAGING. Voice messaging enables users to store, send and receive information, or to access information from automated voice messaging systems, via the telephone. TELEPHONE ANSWERING. Telephone answering automatically answers a busy or unanswered telephone and records a voice message. AUTOMATED ATTENDANT. Automated attendant answers incoming calls and allows callers to direct calls to telephone extensions without the use of a human operator. PAGING. The VoiceMemo paging feature initiates a page upon receipt of voicemail messages. VoiceMemo supports all commonly available (tone only, tone/vibration, digital and voice) pagers. AUDIOTEXT. Audiotext adds a voice bulletin board to a voice messaging system, providing callers access to recorded announcements such as public service, product or service information. CALLAGENT. CallAgent is a software application which allows users to program the manner in which the telephone is answered and calls are directed. CALL PLACEMENT (OFF-SYSTEM MESSAGING). Call placement allows a VoiceMemo user to send messages to an "off-system" telephone number, such as a home number, much the same as a message is sent to a VoiceMemo mailbox. Before making a message, the user enters a telephone number to which the message is to be delivered. The system dials the off-system telephone and attempts to deliver the message. FAXMEMO Centigram's FaxMemo application enables a user to have facsimile communications delivered to voice mailboxes rather than directly to a facsimile machine. FaxMemo features include: FAX MAIL. Using FaxMemo, users can receive facsimile messages in their personal mailboxes with arrival notification, privacy and control. The user can route the facsimile message to any machine at any time, or distribute the facsimile to other users. Centigram's system permits forwarding of facsimile messages from one person to another, addition of voice comments and forwarding of facsimile messages to a facsimile machine or mailbox at a pre-arranged time. FAX BROADCASTING AND PUBLISHING. FaxMemo and the FaxIt feature of the Company's Voice Gateway product both support facsimile publishing and broadcast capabilities. Fax publishing makes frequently required documents such as sales literature, price lists, technical documentation and reports available to any facsimile machine. Fax broadcasting automatically distributes a facsimile message to a large distribution list. GUARANTEED FAX. Guaranteed Fax stores facsimile messages for a recipient when the message cannot be delivered to the recipient's facsimile machine at the time of its initial transmission because the machine is otherwise occupied. The facsimile message is automatically delivered to the recipient's facsimile machine when it becomes available. 5 ONEVIEW Centigram's OneView products allow users integrated access to multimedia messaging from their personal computers and, with OneView Remote, even while away from their offices. Connected through LAN-based personal computers operating under Microsoft-Registered Trademark- Windows-TM-, OneView gives users point and click access to their voice, fax and compound voice and fax messages by listing them in a single In Box window. During fiscal 1996 Centigram expanded OneView's remote capabilities to include a remote mode which allows users to work "off-line". OneView Remote users can create, play, answer and forward voice and fax messages from their personal computers from remote locations by accessing their messaging system, downloading their messages to their local hard disk, answering messages off-line, and reconnecting to the messaging system to deliver the messages. INTERACTIVE VOICE RESPONSE Interactive Voice Response (IVR) allows callers to access information in a computer database and update such information over the telephone. IVR applications use the telephone keypad as a terminal for data entry and provide voice output. Pre-recorded voice is used for standard and numeric responses, while text-to-speech provides an unlimited vocabulary, verbalizing any other information in the database. For example, account balance inquiry applications in the banking and finance industry are now commonplace and have led to increasing acceptance of IVR as a means of accessing information, improving customer service and lowering operating costs. Other applications include funds transfer, credit verification, insurance claim and policy status, dispatch of off-site personnel, freight status and location information, college class registration and automated order entry. TEXT-TO-SPEECH The Company's text-to-speech (TTS) software, TruVoice, takes textual information as input and generates high quality, computer generated speech output. TruVoice also contains an e-mail preprocessor that converts abbreviations and other language forms commonly used in e-mail into full text for text-to-speech processing. Workstations, personal computers and telecommunications systems now include the necessary hardware to make TTS a software option at significantly reduced end-user cost. In addition, multi-tasking operating systems make applications more useful and easier to develop, and recent advances in semiconductor DSP devices provide similar potential opportunities. As a result, the Company believes that increasing opportunities will emerge for TTS software. The Company offers its TTS software with certain of the Company's systems, on an initial and add-on basis, and is making the software available through third party licensing arrangements. The Company has entered into license agreements for its TruVoice software, including licenses to Microsoft, Group Sense Limited, AST, Dialogic, Intervoice and Natural Microsystems, and is in the process of negotiating other licenses. The Company has also engaged in joint promotional market development efforts with platform providers including Analog Devices and Sun Microsystems and has sold development kits to third party software developers. There can be no assurance that any additional licensing agreements or marketing arrangements will be consummated, or that any such agreements will result in any significant revenue to the Company. MOBILEMANAGER Centigram's MobileManager product adds call management to the message and information management services provided on the Series 6 platform. MobileManager is configured on a switching module that integrates with the Series 6 platform and allows calls to be transferred, connected or conferenced with other parties and destinations. MobileManager is the result of the 1995 joint marketing arrangement with Priority Call Management (PCM), a developer of intelligent telephony systems for large organizations and service providers. MobileManager services include: PERSONAL NUMBER SERVICE. Personal Number Service enables network operators to offer their subscribers the single telephone number that will seamlessly route important communications to 6 people on the move at their mobile number, office or home number, or any telephone number anywhere in the world. In addition to routing, the Personal Number application uses that same number for faxes, voice messages, text messages, and numeric or alpha pagers. PREPAID AND DEBIT CARD SERVICES. Prepaid and Debit Card Services allow carriers to offer creative, revenue-generating network services that are purchased in advance by subscribers whose account balances are debited in real time. CREDIT/CALLING CARD SERVICES. Credit/Calling Card Services let subscribers bill toll calls to a corporate calling card. Calling card service tracks and rates calls in real time to provide corporate expense management tools for mobile employees. CALLBACK. Callback lets customers call from anywhere in the world using lowest cost dial tone, least cost routing, and prepaid, or Credit/Calling card billing. SALES AND DISTRIBUTION The market for the Company's systems has generally been divided into two segments; the CPE market and the telecommunications services provider market. The CPE market includes corporations, government agencies, universities, professional service firms and other institutional end users that purchase systems for installation directly on their premises. Providers of telecommunications services, such as large telephone companies and independent service providers, including RBOCs, independent telephone companies, cellular providers and voice mail and paging service bureaus, use Centigram systems to deliver voice processing capabilities to third party customers on a subscription basis. In order to achieve broad market coverage, Centigram has developed two distinct sales channels focused on separate segments of the voice processing industry. The Company uses a broad network of distributors and OEMs to sell into the CPE market, including Ameritech, BellSouth, Fujitsu, GTE Customer Networks, Mitel Corporation, NEC Business Communications Systems, Sprint and WilTel Communication Systems. The Company sells its systems directly to RBOCs, such as NYNEX and BellSouth, and to large independent telephone companies and service providers such as BellSouth Mobility (BMI), CUE Network Corporation, e-Plus Mobilfunk, Optus Communications Pty Limited, Paging Network Inc. (PageNet), Sprint Corporation and Voice-Tel Enterprises. The Company also sells to service provider customers through an OEM arrangement with Motorola, Inc. These large telecommunications service providers typically require a sustained, intense direct selling effort and continual, comprehensive customer support. No customer represented more than 10% of net revenue in fiscal 1996. Sprint accounted for approximately 12% of net revenue in fiscal 1995. Fujitsu and Sprint accounted for approximately 13%, and 11%, respectively, of net revenue in fiscal 1994. The Company's top five customers collectively accounted for approximately 35%, 42% and 48% of the Company's net revenue during fiscal 1996, 1995 and 1994, respectively. Centigram believes that a high level of product support is essential to its success. The Company provides system documentation and training to distributors and to direct end-user customers. The training provided by the Company includes technical software courses, installation and maintenance courses, and customer support courses. In addition, Centigram maintains a support center 24 hours a day to assist with customer and distributor inquiries and offers on-site assistance through its field operations. In an effort to expand its high level of service to its customers in 1996, the Company launched its "Market Leadership Program" to deliver a comprehensive, fully integrated program designed to increase and expand service providers' revenue streams, maximize resources to reduce costs, and create market leadership in customer service. The program focuses on key areas of a service launch, including operations, market research, promotions, media relations, product packaging and pricing, sales planning and tracking, 7 customer support and billing requirements. The program also offers consulting services to help service providers create an enhanced services deployment plan customized to their market requirements. In recent periods, the Company has been increasing its focus on international sales, particularly direct sales to international cellular service providers. In fiscal 1996, The Company made substantial investments in sales and support and it now has sales offices in Europe, Asia, Australia and Latin America. Export sales were 30%, 23% and 16% of net revenue in fiscal 1996, 1995 and 1994, respectively. There can be no assurance that the Company will be able to maintain or increase its international sales or that the Company's sales subsidiaries will be able to compete effectively. International sales are subject to inherent risks, including the need to obtain certain regulatory approvals and meet other standards, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations, costs and risks of localizing products for foreign countries, more expensive support costs, longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax consequences, potential restrictions on repatriating earnings, and the burdens of complying with a wide variety of foreign laws. In particular, in both 1996 and 1995, the Company experienced significantly increased expenses associated with its efforts in expanding sales in certain export markets. Gains and losses on the conversion to U.S. dollars of assets and liabilities arising from international operations may contribute to fluctuations in the Company's results of operations, although such gains and losses have not to date been material to the Company's results of operations, and fluctuations in exchange rates could affect demand for the Company's products. In order to sell its products to customers in other countries, the Company must comply with governmental regulations, including U.S. export regulations, and convert its voice prompts to additional foreign languages. Foreign sales are also constrained by the limited penetration of touch-tone telephones in some countries and the Company's need to develop adequate sales and marketing channels. Most of the Company's distributors also offer systems manufactured by the competitors of the Company. Accordingly, the Company must compete within any distributor to have the distributor recommend the Company's products to end user customers. The Company also competes with other voice messaging providers for access to distributors. There can be no assurance that the Company will be able to maintain strong relationships with existing distributors or establish strong relationships with new distributors. In addition, certain former customers (including distributors) of the Company had in the past experienced financial difficulties resulting in the Company writing off related accounts receivable balances, and a number of the Company's current customers (including distributors) have limited financial resources. The loss of one or more key customers or distributors, the decision by any key distributor to offer a competitor's product line or otherwise de-emphasize the Company's products, or the weakening of the financial condition of any of the Company's key customers or distributors, could have a material adverse effect on the Company's operating results, financial position and cash flows. BACKLOG At November 2, 1996, the Company had a backlog of $19.4 million and at October 28, 1995, a backlog of $20.7 million. This decrease in year over year backlog reflects the fact that Series 6 was in full production in fiscal 1996, whereas at the end of 1995 Series 6 was not fully released for general availability. The Company includes in such backlog orders received that the Company believes are shippable within the next 12 months. The Company does not believe, however, that current or future backlog levels are necessarily indicative of future operating results. A significant portion of bookings and shipments in any quarter have historically occurred near the end of the quarter, and the Company has historically operated with very little backlog. There can be no assurance that backlog will not decrease in the future, that there will not be cancellation or deferral of a significant portion of backlog, or that the Company will maintain any backlog level in the future. 8 RESEARCH AND DEVELOPMENT Centigram's development strategy is focused on the development of new applications for the Company's product platform and the enhancement of the Company's MESA architecture. Expenditures for research and development were $20.2 million, $14.8 million and $12.6 million and as a percentage of net revenue these expenses were 19.3%, 21.3%, and 16.0% in fiscal 1996, 1995 and 1994, respectively. Development efforts are focused on continuing the development and testing of the Company's Series 6 platform, continuing to expand the capacity of the Company's systems (particularly for the telecommunications service provider and large CPE customer markets), enhancing voice messaging, IVR and facsimile product capabilities, developing additional capabilities to connect the Company's products with computer databases, high speed transmission networks and foreign communications networks with non-standard protocols, adding administration and network management capabilities to the Company's products, developing further the Company's text-to-speech software, and developing and enhancing the features and overall performance of the Company's systems. As the Company seeks to continue to add functionality to its products and to support a broader range of computer and LAN-based applications, the Company faces continually increasing technical challenges. There can be no assurance that the Company will be able to incorporate additional technologies into the Company's products or introduce new products in a timely manner in order to meet evolving market needs. As the functionality of the Company's systems increases, the complexity of the software utilized in such systems will also increase and software errors or "bugs" may become more numerous and difficult to cure. Identifying and correcting errors and making required design modifications is typically expensive and time consuming and the Company expects that such modifications will increase in complexity with the increasing sophistication of the Company's products. The Company has made a substantial investment in additional testing equipment as well as hiring additional employees to expand the Company's product testing capabilities. There can be no assurance that such investment will lead to reduced errors or that such errors will not in the future cause delays in product introductions and shipments, require costly design modifications or impair customer satisfaction with the Company's products. MANUFACTURING The Company's manufacturing operations consist primarily of final assembly and test and quality control of materials, components, subassemblies and systems. The Company's hardware and software product designs are proprietary but use industry-standard hardware components and an industry-standard, real time, multi-tasking operating system. The Company presently uses third parties to perform printed circuit board and subsystem assembly. Although the Company has not experienced significant problems with third party manufacturers in the past, there can be no assurance that such problems will not develop in the future. Although the Company generally uses standard parts and components for its products, certain microprocessors, semiconductor devices and other components are available only from sole source vendors. In addition, other components, including power supplies, disk drives, other semiconductor devices and line cards are presently available or acquired from a single source or from limited sources. The Company to date has been able to obtain adequate supplies of these components in a timely manner from existing sources or, when necessary, from alternative sources of supply. However, the inability to develop such alternative sources if and as required in the future, or to obtain sufficient sole or limited source components as required, would have a material adverse effect on the Company's operating results. PATENTS, TRADE SECRETS AND LICENSES The Company's success depends in part on its proprietary technology. While the Company attempts to protect its proprietary technology through patents, copyrights and trade secrets, as well as confidentiality agreements with customers, suppliers and employees and other security measures, the Company believes that its success will depend more upon innovation, technological expertise and distribution strength. There 9 can be no assurance that the Company will be able to protect its technology or that competitors will not be able to develop similar technology independently. The Company currently holds seven patents and has multiple patent applications on file. No assurance can be given that patents will issue from any applications filed by the Company or that, if patents do issue, the claims allowed will be sufficiently broad to protect the Company's technology. For example, the Company relies upon trade secret protection for its basic systems architecture and hardware platform, and does not hold any patents thereon. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. In addition, a number of other companies, including competitors of the Company, also hold patents in the same general area as the technology used by the Company. The Company has obtained licenses to use certain intellectual property, including patents, from others. The Company from time to time has received, and may receive in the future, letters alleging infringement of patent rights by the Company's products. While such letters are prevalent in the Company's industry and the Company has in the past been able to license necessary patents or technology on commercially reasonable terms, there can be no assurance that the Company would prevail in any litigation to enjoin the Company from selling its products on the basis of such alleged infringement, or that the Company would be able to license any valid and infringed patents on reasonable terms. EMPLOYEES As of November 2, 1996, the Company had 449 employees, of whom 128 were engaged in research and development, 227 in sales, marketing and customer support, 47 in manufacturing and quality assurance and 47 in finance and administration. The Company's future success will depend on its ability to attract, train, retain and motivate highly qualified employees, who are in great demand. The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. COMPETITION The Company competes in a number of markets within the communications systems industry, each of which is highly competitive. Many of the Company's competitors have substantially greater financial, technical, marketing and sales resources than the Company and have larger installed bases of existing systems. Furthermore, manufacturers of PBX equipment have a competitive advantage in selling to the installed base of users of their PBX equipment and, to an even greater degree, purchasers of new installations of their PBX equipment. The Company expects to encounter continued competition from both existing competitors and new market entrants. Increased competitive pressures could result in intensified price competition, which would adversely affect the Company's operating results. In addition, the Company believes that its ability to integrate its systems with many different telephone PBX and Centrex systems is an important competitive feature. Consequently, the Company's operating results could be adversely affected if PBX manufacturers, such as AT&T, Northern Telecom and ROLM, redesign their PBXs to limit current methods of integration. Although the Company is not aware that any significant PBX manufacturer is pursuing a strategy of redesigning its PBXs to limit the Company's current integrations there can be no assurance that such manufacturers are not doing so or will not do so in the future. ITEM 2. PROPERTIES The Company leases an 85,000 square foot headquarters facility, a 35,000 square foot manufacturing facility, and a 40,000 square foot office facility in San Jose, California, pursuant to leases that expire in September 2007, December 1998 and May 1998, respectively. The Company also leases training facilities and sales and support offices in various cities in the United States and overseas. 10 In December 1996, the Company entered into a 12 year lease for approximately 225,000 square feet of office space in San Jose, California at a base monthly rent of approximately $285,000. This lease contains a provision for the monthly rent to be adjusted upwards based on changes in the Consumer Price Index and also requires the Company to pay property taxes, insurance premiums, and normal maintenance costs. The Company believes that such facilities are adequate to meet its current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS The information in the second paragraph in the section entitled "Patents, Trade Secrets and Licenses" under Item 1 above is hereby incorporated by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 11 PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Centigram Communications Corporation Common Stock is traded on the over-the-counter market and is quoted on The Nasdaq National Market System under the symbol CGRM. As of November 2, 1996, there were approximately 400 stockholders of record. The following table sets forth for the periods indicated the high and low closing prices for the Company's Common Stock as reported by Nasdaq.
Fiscal Year 1996 HIGH LOW --------- --------- Fourth quarter ended November 2, 1996..................... $ 16 7/8 $ 12 3/4 Third quarter ended July 27, 1996......................... 23 5/8 12 7/8 Second quarter ended April 27, 1996....................... 23 3/4 15 7/8 First quarter ended January 27, 1996...................... 23 16 1/4
Fiscal Year 1996 HIGH LOW --------- --------- Fourth quarter ended October 28, 1995..................... $ 23 3/4 $ 15 5/8 Third quarter ended July 29, 1995......................... 15 5/8 12 3/4 Second quarter ended April 29, 1995....................... 17 13 5/8 First quarter ended January 28, 1995...................... 21 3/4 12 5/8
The Company has not paid and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The Company's bank credit line agreement requires the bank's consent to pay cash dividends. The Company believes factors such as quarter-to-quarter variances in financial results and announcements of new products and new orders by the Company or its competitors could cause the market price of the Company's Common Stock to fluctuate substantially. In addition, the stock prices for many high technology companies typically experience extreme price fluctuations, which often are not related to changes in their operating performance. Broad market fluctuations as well as general economic conditions, such as a recessionary period or high interest rates, may adversely affect the market price of the Company's Common Stock. ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED YEAR ENDED YEAR ENDED MONTH ENDED ------------------------------------ NOVEMBER 2, OCTOBER 28, OCTOBER 29, OCTOBER 1, OCTOBER 2, OCTOBER 3, 1996 1995 1994 1994 1993 1992 ----------- ----------- ----------- ---------- ----------- ----------- OPERATIONS DATA: Net revenue.................................... $ 104,324 $ 69,374 $ 1,988 $ 79,179 $ 60,002 $ 44,652 Net income (loss).............................. 1,000 (4,134) (1,890) 7,745 5,188 2,295 Net income (loss) per share.................... 0.14 (0.63) (0.30) 1.18 1.00 0.49 Research and development....................... 20,154 14,798 1,145 12,644 8,197 6,458 BALANCE SHEET DATA: Working capital................................ $ 65,297 $ 64,489 $ 70,132 $ 72,401 $ 25,682 $ 19,363 Total assets................................... 104,009 99,017 98,374 102,309 47,959 34,010 Long-term liabilities.......................... 78 232 409 436 822 1,101 Stockholders' equity........................... 83,412 79,800 81,006 83,177 32,149 23,881
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following contains forward-looking statements regarding future events or the future financial performance of Centigram that involve risks and uncertainties. These statements include but are not limited to statements related to changes in Centigram's research and development and selling, general and administrative expenses, Centigram's effective tax rates, Centigram's expenditures for capital equipment and sufficiency of Centigram's cash reserves. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this Item 7 under "Certain Trends and Uncertainties," in Item 1 hereof under "Manufacturing," "Patents, Trade Secrets and Licenses," "Competition," the last two paragraphs of "Sales and Distribution," and the last two paragraphs of "Research and Development" and elsewhere in this report. CHANGE IN FISCAL YEAR In the fourth quarter of fiscal 1995, the Company changed its fiscal year-end from the Saturday following September 30 to a fiscal year of 52 or 53 weeks ending on the Saturday nearest October 31. Fiscal 1996 included 53 weeks and ended November 2, 1996. Fiscal years 1995 and 1994 included 52 weeks and ended on October 28, 1995 and October 1, 1994, respectively. The month ended October 29, 1994 is separately reported. This change in the Company's fiscal periods was made primarily to improve the Company's operational efficiencies. By moving the Company's fiscal periods out one month, the Company's manufacturing operations have incurred reduced overtime payments during the December and July holiday periods. Also, because many of the Company's distributors have calendar quarter ends and place orders in the third month of the quarter, the Company has not always been able to process and ship these orders during this third month of the calendar quarter because of the late receipt of these orders. By staggering its fiscal quarters to end one month after the calendar quarter-end, the Company is in a better position to ship these late orders and at the same time avoid additional overtime and other expediting charges. PROPOSED ACQUISITION In October 1996 the Company entered into a letter of intent for the acquisition of Voice-Tel Enterprises and Voice-Tel Network ("Voice-Tel"). The proposed transaction will involve the Company issuing a certain number of shares of its common stock and assuming up to $11.5 million of debt in exchange for all the capital of Voice-Tel, and is intended to be accounted for as a pooling of interests. The exact terms of the transaction, which will be subject to regulatory approval and require the approval of both companies stockholders, will be determined upon signing of a definitive merger agreement. RESULTS OF OPERATIONS NET REVENUE Net revenue for fiscal 1996 was 50% higher than net revenue for fiscal 1995. This increase was primarily attributable to general expansion in the Company's channels of distribution in connection with the introduction of the Company's Series 6 platform, including an approximately 90% increase in service provider business, improved performance of the Company's larger distributors, and a 100% increase in sales to customers located outside the United States which increased from $15.9 million to $31.8 million. Sales of the Company's larger system configurations increased approximately 100% as compared to fiscal 1995, with smaller percentage increases in the Company's smaller product configurations and system upgrades and expansions. Net revenue for fiscal 1995 was 12% below net revenue for fiscal 1994. This decline in revenue primarily reflected a 30% decline in sales of the Company's large system configurations and reduced revenue from domestic, CPE and service provider customers. Such declines were offset in part by higher sales of the Company's smaller product configurations, increased revenue from services and licensing of 13 the Company's text-to-speech software, and a 29% increase in sales to customers located outside the United States. The Company believes that its revenue in fiscal 1995 was adversely affected by not having available during the year the new Series 6 product platform which was released in the first fiscal quarter of 1996. There can be no assurance that the market for voice processing products will grow in future periods at its historical percentage rate and the Company believes that the growth rates of certain market segments have declined from prior levels. There is also no assurance that the Company's markets will remain at current levels in future periods. Further, there can be no assurance that the Company will be able to increase or maintain its market share in the future, or to re-attain historical growth rates. See "Certain Trends and Uncertainties". GROSS MARGIN In the fourth quarter of fiscal 1996 the Company reclassified certain customer training and support costs from selling, general and administrative expense to cost of goods sold to more properly reflect their current and anticipated future direct correlation to product and service revenues. All financial data for fiscal 1996 and prior years have been reclassified for consistent presentation. Gross margin for fiscal 1996 was 59.2% as compared to 61.4% for fiscal 1995. This change in gross margin reflects lower margins on large system products due to higher warranty and international freight costs because of increased international shipments, offset in part by a favorable mix with large system products representing a larger percentage of sales than small system products (which typically carry lower margins). Gross margin for fiscal 1995 was 61.4% as compared to 65.9% for fiscal 1994. This change in gross margin in fiscal 1995 resulted from a shift in product mix to a larger percentage of sales of small product configurations, which typically carry lower gross margins, and a decrease in sales of large system configurations, which typically carry higher gross margins than other products; lower gross margin rates on these product lines as well as on upgrade and system expansion products; and higher provisions for obsolete inventory related to the Company's then forthcoming product transition. These factors were offset in part by higher revenue from services and licensing of the Company's text-to speech software which carries significantly higher than average gross margins. See "Certain Trends and Uncertainties". RESEARCH & DEVELOPMENT Research and development (R&D) expenses for fiscal 1996 were 36% higher than in fiscal 1995. This increase reflected general expansion of the Company's product development programs and increases in compensation expenses due to higher headcount, and depreciation. R&D expenses for fiscal 1995 were 17% higher than in fiscal 1994. This increase reflected the general expansion of the Company's new product development programs, including significant investments in the Series 6 platform. This increased spending was largely for higher staffing levels, depreciation, and facilities expenses, in particular, those facilities expenses related to the testing of new products. As a percentage of net revenue, R&D expenses were 19.3%, 21.3%, and 16.0% in fiscal 1996, 1995, and 1994, respectively. The large increase in research and development expenses as a percentage of net revenue in fiscal 1995 relative to fiscal 1994, resulted from a combination of higher research and development expenses and lower net revenue. The Company believes that ongoing development of new products and features is required to maintain and enhance its competitive position. The Company expects to continue to invest in R&D and therefore R&D expenses should continue to increase, notwithstanding the level of sales realized in future quarters. 14 SELLING, GENERAL & ADMINISTRATIVE Selling, general and administrative (SG&A) expenses in 1996 represented 41.0% of net revenue and were 28% higher than such expenses for fiscal 1995, when they represented 48.2% of net revenue. The increase in SG&A expenses in fiscal 1996 was primarily related to increased sales and marketing expenses and increased compensation and travel expenses due to higher headcount, offset in part by lower litigation expenses. SG&A expenses in 1995 represented 48.2% of net revenue and were 10% higher than such expenses for fiscal 1994, when they represented 38.3% of net revenue. The increase in SG&A expenses in fiscal 1995 was primarily related to increased levels of customer and sales support expenses and higher expenses related to international sales expansion, offset in part by lower litigation expenses. The Company believes that continued investments in sales and customer support, particularly in export markets, are essential to maintaining its competitive position and that the dollar amount of SG&A expenses will increase in future periods. The Company expects that the dollar amount of SG&A expenses will increase in future periods. OTHER INCOME AND EXPENSE, NET Interest income on investments increased in fiscal 1996 over such income in 1995 because of higher average interest yields as the Company shifted its short-term investments from tax free state and municipal bonds to higher yielding U.S. Government and agency obligations and corporate debt securities. Interest income increased in fiscal 1995 over 1994 because of higher average invested short-term balances and because of higher interest rates. Interest expense declined over the three-year period beginning in 1994 as the Company's capital lease balances declined. Fiscal 1995 included a charge of $550,000 for the Company's cost of settling its stockholder class action lawsuit and certain other litigation. PROVISION FOR INCOME TAXES The Company's effective tax rate was 5% in fiscal 1996 and 28% in fiscal 1994. The Company's effective tax rate for fiscal 1996 and 1994 was less than the statutory rate primarily because of tax-exempt interest income and a reduction in the deferred tax asset valuation account for prior year losses realized for tax purposes. The Company did not record an income tax benefit associated with the pre-tax loss for fiscal 1995, because deferred tax assets based on recoverable income taxes were recorded in prior periods. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term investments at November 2, 1996 were $42.1 million, decreasing $13.6 million from October 28, 1995. At the end of fiscal 1995 and 1994, cash, cash equivalents and short-term investments were $55.7 million and $60.4 million, respectively. Net cash used from operating activities was $4.9 million during fiscal 1996. Trade receivables at the end of fiscal 1996 increased $9.4 million from the prior year balance primarily due to increases in sales but also due to extended payment terms granted to selected service provider customers. Days sales outstanding (computed using quarterly revenues) were 86 days at the end of fiscal 1996, compared to 72 days at end of fiscal 1995. This increase in DSO was primarily due to a larger percentage of quarterly shipments occurring in the last month of fiscal 1996 as compared to the same period in the prior year. Inventory levels at November 2, 1996 increased $5.6 million over the fiscal 1995 balances because of increased levels of sales, increased inventory levels to support both the Series 5 platform and the new Series 6 platform, and increased customer support inventories. The Company expects investment in receivables and inventories will continue to represent a significant portion of working capital. During the fiscal year ended November 2, 1996, the Company made $10.6 million in capital expenditures. A significant portion of these expenditures were related to the introduction of the Series 6 platform and included expenses related to the upgrading and expanding of the Company's engineering test labs and training classrooms and equipment purchased for increased engineering development efforts. 15 The Company's principal sources of liquidity as of November 2, 1996 consisted of $42.1 million of cash and cash equivalents and short-term investments and $10.0 million available under the Company's bank line of credit (which expires May 1, 1997). The Company expects to review this bank line in fiscal 1997. This bank line requires the Company to maintain certain financial ratios, minimum working capital, minimum tangible net worth, and financial performance, and requires the bank's consent for the payment of cash dividends. The Company is in compliance with this agreement and there were no borrowings outstanding under the bank line as of November 2, 1996. The Company currently expects to spend approximately $9.0 million for capital equipment during fiscal 1997. The Company may finance a portion of these expenditures through leasing arrangements. The Company presently believes, notwithstanding its accumulated deficit, that its existing cash and short-term investments and credit under its line of credit and lease credit arrangements, will be sufficient to support the Company's working capital and capital equipment purchase requirements at least through fiscal 1997. CERTAIN TRENDS AND UNCERTAINTIES The Company has in the past experienced and will likely in the future experience substantial fluctuations in quarterly operating results. The Company generally has no long-term order commitments from its customers, and a significant portion of bookings and shipments in any quarter have historically occurred near the end of the quarter. Accordingly, the Company has historically operated with very little backlog, and net revenue has been difficult to predict. In addition, the portion of backlog shippable in the next quarter varies over time. As a result, revenue in future quarters will depend largely on the level of orders received during such quarters. If new order bookings do not meet expected levels, or if the Company experiences delays in shipments at the end of a quarter, operating results will be adversely affected, and these developments may not become apparent to the Company until near or at the end of a quarter. Net revenue can also be affected by product sales mix, distribution mix, the size and timing of customer orders and shipments, customer returns and reserves provided therefor, competitive pricing pressures, the effectiveness of key distributors in selling the Company's products, changes in distributor inventory levels, the timing of new product introductions by the Company and its competitors, regulatory approvals, and the availability of components for the Company's products, each of which is difficult to predict accurately. Each of such factors has in the past affected the Company's revenue. A significant portion of the Company's net revenue is attributable to a limited number of customers. The Company's top five customers, representing a combination of major distributors and service providers, accounted for approximately 35%, 42%, and 48% of the Company's net revenue in fiscal 1996, 1995, and 1994 respectively, although the Company's five largest customers were not the same in these periods. The Company has no long-term order commitments from any of its customers. Any material reduction in orders from one or more such customers or the cancellation or deferral of any significant portion of backlog could have an adverse effect on net revenue and operating results. Such concentration of sales typically results in a corresponding concentration of accounts receivable. Although the Company has established reserves for uncollectible accounts, the inability of any large customer to pay the Company could have a material adverse impact on the Company's financial position, results of operations and cash flows. See Risk and Uncertainties Note to "Consolidated Financial Statements". The Company's gross margin can be affected by a number of factors, including changes in product, distribution channel, and customer mix, cost and availability of parts and components, royalty obligations to suppliers of licensed software, provisions for warranty, retrofits, and excess and obsolete inventory, customer returns, and competitive pressures on pricing. The Company has experienced increasing competitive pricing pressure in all markets and expects this pricing pressure to continue. Further, distributors purchase products at discounts, and the Company's margins can therefore vary depending upon the mix of distributor and direct sales in any particular fiscal period. The Company anticipates that its sales mix will 16 fluctuate in future periods. As a result of the above factors, gross margin fluctuations are difficult to predict, and gross margins may decline from current levels in future periods. The Company's future success will depend in part upon the ability of the Company to continue to introduce new features and products as the Company's markets evolve, new technologies become available, and customers demand additional functionality. The Company's competitors continue to add functionality to their products, and any failure by the Company to introduce in a timely manner new products and features that meet customer requirements would adversely affect the Company's operating results and cash flows. The Company's ability to develop such new features and products depends in large measure on its ability to hire and retain qualified technical talent and outside contractors in highly competitive markets for such services. There can be no assurance that the Company's product development efforts will be successful, or that it will be able to introduce new products in a timely manner. In this regard, the Company during fiscal 1996, announced significant new products, after experiencing delays in the introduction of such products. Moreover, customers' expectations of the introduction of new products by the Company or its competitors can adversely affect sales of current products. In addition, upon the introduction of new products, the Company could be subject to higher customer returns with respect to prior generations of products, which could adversely affect financial position, operating results and cash flows. The Company presently uses third parties to perform printed circuit board and subsystem assembly. In addition, although the Company has not experienced significant problems with third-party manufacturers in the past, there can be no assurance that such problems will not develop in the future. Although the Company generally uses standard parts and components for its products, certain microprocessors, line cards, application cards and other semiconductor devices and other components are available from sole sources. Other components, including power supplies, disk drives, certain other semiconductor devices and subcontracted line card assemblies, are presently available or acquired from a single source or from limited sources. To date, the Company has been able to obtain adequate supplies of these components in a timely manner from existing sources or, when necessary, from alternative sources of supply. However, the inability to develop such alternative sources if and as required in the future, or to obtain sufficient sole or limited source components as required, would have a material adverse affect on the Company's operating results and cash flows. In addition, the Company's products are dependent on the QNX software operating system, a multitasking, real-time operating system for Intel microprocessor-based computers. In future periods, the Company's products may become increasingly dependent on software licensed from third party suppliers. There can be no assurance such licenses will continue to be available to the Company as needed or at commercially reasonable prices. In recent years, stock markets have experienced extreme price and volume trading volatility. This volatility has had a substantial effect on the market prices of securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad markets fluctuations may adversely affect the market price of the Company's common stock. In addition, the trading price of the Company's common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of new products or technological innovations by the Company or its competitors, and general conditions in the computer and communications industries. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements included with this Form 10-K are set forth under Item 14 hereof. 17 CONSOLIDATED BALANCE SHEETS
OCTOBER 28, NOVEMBER 2, 1996 1995 ---------------- --------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS Current Assets: Cash and cash equivalents................................................... $ 12,668 $ 10,633 Short-term investments...................................................... 29,408 45,082 Trade receivables, net of allowances of $2,055 and $1,941................... 27,741 18,330 Inventories................................................................. 11,467 5,821 Deferred tax assets......................................................... 1,424 2,103 Other current assets........................................................ 3,108 1,505 -------- ------- Total current assets...................................................... 85,816 83,474 Property and equipment, net................................................... 15,249 12,013 Intangible assets, net........................................................ 2,004 2,379 Deposits and other assets..................................................... 940 1,151 -------- ------- $ 104,009 $ 99,017 -------- ------- -------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................................ $ 9,739 $ 6,953 Accrued compensation........................................................ 4,202 4,092 Accrued expenses and other liabilities...................................... 6,424 7,763 Current portion of capital lease obligations................................ 154 177 -------- ------- Total current liabilities................................................. 20,519 18,985 Capital lease obligations..................................................... 78 232 Commitments and contingencies................................................. Stockholders' equity:......................................................... Preferred stock, $.001 par value, 1,000,000 authorized; none outstanding.... Common stock, $.001 par value, 25,000,000 authorized; 6,908,000 and 6,679,000 outstanding..................................................... 7 7 Additional paid-in capital.................................................. 88,767 85,808 Accumulated deficit......................................................... (4,992) (5,992) Unrealized loss on investments.............................................. (36) (14) Cumulative translation adjustments.......................................... (34) (9) Note receivable from officer................................................ (300) -- -------- ------- Total stockholders' equity................................................ 83,412 79,800 -------- ------- $ 104,009 $ 99,017 -------- ------- -------- -------
See accompanying notes. 18 CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED MONTH ENDED YEAR ENDED NOVEMBER 2, OCTOBER 28, OCTOBER 29, OCTOBER 1, 1996 1995 1994 1994 ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenue................................................... $ 104,324 $ 69,374 $ 1,988 $ 79,179 Cost and expenses: Cost of goods sold.......................................... 42,516 26,802 885 27,039 Research and development.................................... 20,154 14,798 1,145 12,644 Selling, general and administrative......................... 42,832 33,470 1,983 30,302 ----------- ----------- ----------- ----------- 105,502 75,070 4,013 69,985 ----------- ----------- ----------- ----------- Operating income (loss)....................................... (1,178) (5,696) (2,025) 9,194 Other income and expense, net................................. 2,231 1,618 135 1,563 ----------- ----------- ----------- ----------- Income (loss) before income taxes............................. 1,053 (4,078) (1,890) 10,757 Provision for income taxes.................................... 53 56 -- 3,012 ----------- ----------- ----------- ----------- Net income (loss)............................................. $ 1,000 $ (4,134) $ (1,890) $ 7,745 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) per share................................... $ 0.14 $ (0.63) $ (0.30) $ 1.18 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Common and common equivalent shares used in computing per share amounts............................................... 6,981 6,560 6,379 6,558 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. 19 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL UNREALIZED GAIN CUMULATIVE ------------------------ PAID-IN ACCUMULATED (LOSS) ON TRANSLATION SHARES AMOUNT CAPITAL DEFICIT INVESTMENTS ADJUSTMENTS ----------- ----------- ----------- ------------- ----------------- --------------- (IN THOUSANDS) Balances, October 3, 1993..... 4,847 $ 5 $ 39,857 $ (7,713) $ -- $ -- Sale of stock, net of issuance costs....................... 1,200 1 38,939 Shares issued under stock plans....................... 331 -- 2,323 Warrant repurchase............ (86) Tax benefits - stock plans.... 2,106 Net income.................... 7,745 ----- --- ----------- ------------- ----- --- Balances, October 1, 1994..... 6,378 6 83,139 32 -- -- Shares issued under stock plans....................... 3 -- 39 Unrealized (loss) on investments................. (322) Translation adjustments....... 1 Net loss...................... (1,890) ----- --- ----------- ------------- ----- --- Balances, October 29, 1994.... 6,381 6 83,178 (1,858) (322) 1 Shares issued under stock plans....................... 298 1 2,630 Unrealized gain on investments................. 308 Translation adjustments....... (10) Net loss...................... (4,134) ----- --- ----------- ------------- ----- --- Balances, October 28, 1995.... 6,679 7 85,808 (5,992) (14) (9) Shares issued under stock plans....................... 229 2,412 Tax benefits - stock plans.... 547 Unrealized loss on investments................. (22) Note receivable from officer.. Translation adjustments....... (25) Net income.................... 1,000 ----- --- ----------- ------------- ----- --- Balances, November 2, 1996.... 6,908 $ 7 $ 88,767 $ (4,992) $ (36) $ (34) ----- --- ----------- ------------- ----- --- ----- --- ----------- ------------- ----- --- NOTE RECEIVABLE FROM OFFICER TOTAL ----------- --------- Balances, October 3, 1993..... $ -- $ 32,149 Sale of stock, net of issuance costs....................... 38,940 Shares issued under stock plans....................... 2,323 Warrant repurchase............ (86) Tax benefits - stock plans.... 2,106 Net income.................... 7,745 ----- --------- Balances, October 1, 1994..... -- 83,177 Shares issued under stock plans....................... 39 Unrealized (loss) on investments................. (322) Translation adjustments....... 1 Net loss...................... (1,890) ----- --------- Balances, October 29, 1994.... -- 81,005 Shares issued under stock plans....................... 2,631 Unrealized gain on investments................. 308 Translation adjustments....... (10) Net loss...................... (4,134) ----- --------- Balances, October 28, 1995.... -- 79,800 Shares issued under stock plans....................... 2,412 Tax benefits - stock plans.... 547 Unrealized loss on investments................. (22) Note receivable from officer.. (300) (300) Translation adjustments....... (25) Net income.................... 1,000 ----- --------- Balances, November 2, 1996.... $ (300) $ 83,412 ----- --------- ----- ---------
See accompanying notes. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED MONTH ENDED YEAR ENDED NOVEMBER 2, OCTOBER 28, OCTOBER 29, OCTOBER 1, 1996 1995 1994 1994 ----------- ----------- ----------- ----------- (IN THOUSANDS) Cash and equivalents beginning of period...................... $ 10,633 $ 10,836 $ 16,625 $ 7,000 ----------- ----------- ----------- ----------- Cash flows from operations: Net income (loss)........................................... 1,000 (4,134) (1,890) 7,745 Depreciation and amortization............................... 7,729 5,418 368 3,535 Deferred taxes.............................................. 679 -- -- (334) Trade receivables........................................... (9,411) 2,416 2,495 (9,200) Inventories................................................. (5,646) 419 (2,030) (1,118) Other assets................................................ (1,392) (702) 37 (258) Accounts payable............................................ 2,786 1,365 (1,249) 2,010 Other liabilities and accrued expenses...................... (682) 866 (484) 4,351 ----------- ----------- ----------- ----------- (4,937) 5,648 (2,753) 6,731 ----------- ----------- ----------- ----------- Cash flows used for investing: Purchase of short-term investments.......................... (68,702) (63,900) (3,645) (61,937) Proceeds from sale and maturities of short-term investments............................................... 84,354 65,127 1,059 31,776 Purchase of property and equipment.......................... (10,615) (7,967) (459) (7,189) Purchase of intangible assets............................... -- (1,350) -- -- Note receivable from officer................................ (300) -- -- -- ----------- ----------- ----------- ----------- 4,737 (8,090) (3,045) (37,350) ----------- ----------- ----------- ----------- Cash flows from financing: Proceeds from sale of common stock, net of issuancecosts.... 2,412 2,621 40 41,177 Principal payments on capital leases and long-term obligations............................................... (177) (382) (31) (933) ----------- ----------- ----------- ----------- 2,235 2,239 9 40,244 ----------- ----------- ----------- ----------- Net change in cash and equivalents.......................... 2,035 (203) (5,789) 9,625 ----------- ----------- ----------- ----------- Cash and equivalents, end of period......................... $ 12,668 $ 10,633 $ 10,836 $ 16,625 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DATA Interest (paid)............................................... $ (37) $ (89) $ (10) $ (209) Income taxes (paid) refunded.................................. $ 383 $ (235) $ (5) $ (1,224) Investments fair value adjustment............................. $ (22) $ 308 $ (322) $ --
See accompanying notes. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF BUSINESS OPERATIONS Centigram Communications Corporation (the Company) designs, manufactures and markets wireless and wireline messaging communications systems that integrate voice, data and facsimile on the Company's communications server, and provide access to this multimedia information through a telephone or PC. The Company also licenses TruVoice, its patented text-to-speech software. In addition to these products, the Company offers installation, training, consulting, and post-contract support services to its customers. The principal geographic markets for the Company's products are North America, Australia, Latin America, the Far East and Europe. The Company sells primarily to distributors, Regional Bell Operating Companies, independent telephone companies, and other telecommunications service providers. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements include the Company and its wholly owned subsidiaries after eliminating all significant intercompany accounts and transactions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue from sales of the Company's products is recognized upon shipment to customers. Allowances for estimated future returns and exchanges are provided at that time based on the Company's return policies and experience. The Company recognizes software license revenue in accordance with AICPA Statement of Position 91-1, "Software Revenue Recognition." WARRANTY The Company generally warrants its products for one year. A provision for estimated future warranty costs is recorded at the time of revenue recognition. RESEARCH AND DEVELOPMENT Research and Development expenses include costs of developing new products and processes as well as design and engineering costs. Such costs are charged to expense as incurred. Product customization costs incurred pursuant to customer orders and/or contracts are included in cost of sales. Development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards No. 86. Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date. NET INCOME (LOSS) PER SHARE The computation of net income (loss) per share in each year is based on the weighted average number of shares outstanding. Stock options are included as share equivalents using the treasury stock method when the effect would be to decrease net income per share. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist of highly liquid investments with a maturity of three months or less and are carried at cost plus accrued interest which approximates fair value. Short-term investments have an initial maturity of greater than three months and are carried at fair value. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Capitalized leases and leasehold improvements are amortized using the straight-line method over the 22 shorter of the useful lives of the assets or the terms of the leases. Depreciation expense includes amortization of assets under capital leases and leasehold improvements. INTANGIBLE ASSETS Intangible assets consist of patent license acquisition costs and goodwill and are stated at cost. Patent license costs are being amortized over ten years, the estimated useful lives of the patents. Goodwill is also being amortized over ten years and represents the excess of the acquisition cost over the fair value of the net assets of Speech Plus, Inc. acquired on March 29, 1990. The carrying values of intangible assets are reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the asset is not fully recoverable, as determined, by the undiscounted cash flows of the acquired business or the related products over the remaining amortization period, the Company's carrying value is reduced to net realizable value. No such imparement charges have been incurred to date. Intangible amortization expense was approximately $375,000, $356,000, and $256,000, in fiscal 1996, 1995, and 1994, respectively. FOREIGN CURRENCY TRANSLATION The Company's international subsidiaries use their local currencies as their functional currencies. Assets and Liabilities are translated at exchange rates in effect at the balance sheet date, and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded to a separate component of stockholders' equity. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. EMPLOYEE STOCK PLANS The Company accounts for its stock option plans and its employee stock purchase plan in accordance with the provisions of the Accounting Principles Board's Opinion No. 25 "Accounting For Stock Issued to Employees" (APB 25). In October 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standard No. 123, "Accounting For Stock-Based Compensation" (FAS 123). FAS 123 provides an alternative to APB 25 and is effective for fiscal years beginning after December 15, 1995. The Company expects to continue to account for its employee stock plans in accordance with the provisions of APB 25. Accordingly, FAS 123 is not expected to have a material impact on the Company's financial position or results of operations. Effective with the issuance of the Company's fiscal year 1997 financial statements, the Company will disclose proforma net income (loss) and net income (loss) per share amounts as if FAS 123 were applied. CHANGE IN FISCAL YEAR In the fourth quarter of fiscal 1995, the Company changed its fiscal year-end from the Saturday following September 30 to a fiscal year of 52 or 53 weeks ending on the Saturday nearest October 31. Fiscal 1996 included 53 weeks and ended November 2, 1996. Fiscal 1995 and 1995 included 52 weeks and ended October 28, 1995 and October 1, 1994, respectively. The fiscal year transition period of October 2, 1994 to October 29, 1994 is separately reported. This change to the Company's fiscal year and fiscal quarters was made primarily to improve the Company's operational efficiencies. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted. RISK AND UNCERTAINTIES RECEIVABLES FROM CUSTOMER During 1996, the Company recorded sales of approximately $5.1 million (5% of sales) to one customer. As of November 2, 1996 the Company had approximately $2.3 million due from this same customer which purchases its inventory exclusively from Centigram. Although this customer has in the past met all its obligations to the Company including making payments of approximately $6.0 million on account during 1996, it continues to carry a working capital deficit and net capital deficiency and is currently seeking external financing. Accordingly, the Company continues to closely evaluate the credit risk associated with its continuing business with this customer. Although the Company believes all amounts due from this customer will be collected, the inability of this customer to pay amounts due to the Company 23 could have a material adverse effect on the Company's results of operations, financial position, and cash flows. In October 1996 the Company entered into a letter of intent for the acquisition of this same customer. The proposed transaction will involve the Company issuing a certain number of shares of its common stock and assuming up to $11.5 million of the customer's debt in exchange for all the capital of the customer, and is intended to be accounted for as a pooling of interests. The exact terms of the transaction, which will be subject to regulatory approval and require the approval of both companies stockholders, will be determined upon signing of a definitive merger agreement. SUPPLIES/SOURCE OF SUPPLY The Company's manufacturing operations consist primarily of final assembly and test and quality control of materials, components, subassemblies and systems. The Company's hardware and software product designs are proprietary but use industry-standard hardware components and an industry-standard, real time, multi-tasking operating system. The Company presently uses third parties to perform printed circuit board and subsystem assembly. Although the Company generally uses standard parts and components for its products, certain of these parts and components are available only from sole source vendor or from limited sources. The Company to date has been able to obtain adequate supplies of these components in a timely manner from existing sources or, when necessary, from alternative sources of supply. However, the inability to develop such alternative sources if and as required in the future, or to obtain sufficient sole or limited source components as required, would have a material adverse effect on the Company's operating results. DIVERSIFICATION OF CREDIT RISKS AND OFF-BALANCE-SHEET RISKS The Company's investments and trade receivables subject the Company to certain credit risks. The Company maintains cash and investments in various financial instruments, and maintains policies establishing credit and concentration criteria for such assets and limiting the exposure to any one institution or guarantor. Cash equivalents and short-term investments at November 2, 1996 consisted primarily of U.S. government and agency bonds and corporate debt obligations. The Company sells primarily to distributors, Regional Bell Operating Companies, independent telephone companies, and other telecommunications service providers. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. At November 2, 1996 five customers represented approximately 39% of the trade receivables. The Company occasionally enters into foreign exchange forward contracts to hedge certain balance sheet exposures. Gains and losses on the foreign exchange contracts are included in other income and expense, net, which offset foreign exchange gains or losses from revaluation of foreign currency-denominated balance sheet items. The counterparties to such contracts are major financial institutions. The Company continuously monitors its foreign exchange contract positions and limits the amount of agreements and contracts it enters into with any one party. No foreign exchange contracts were entered into during fiscal 1996. SHORT-TERM INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS Management determines the appropriate classifications of securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company has classified its investments as "available for sale" and recorded these investments at estimated fair value with unrealized gains and losses reported as a separate component of stockholders' equity. Investment income is recorded using an effective interest rate for each investment. This rate includes interest earned and an amortization of each investment's associated premium or discount over the term of the investment. Realized gains or losses, using the specific identification method, and declines in value judged to be other than temporary are also included in investment income. 24 Available-for-sale securities at November 2, 1996 consisted of:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS (LOSSES) FAIR VALUE ----------- ------------- ------------- ----------- (IN THOUSANDS) U.S. government and agency obligations.................. $ 13,224 $ 6 $ (72) $ 13,158 Corporate debt securities............................... 10,222 4 (3) 10,223 Temporary cash investments.............................. 4,976 29 -- 5,005 Municipal securities.................................... 1,022 -- -- 1,022 ----------- --- --- ----------- $ 29,444 $ 39 $ (75) $ 29,408 ----------- --- --- ----------- ----------- --- --- -----------
Available-for-sale securities at October 28, 1995 consisted of:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS (LOSSES) FAIR VALUE ----------- ------------- ------------- ----------- (IN THOUSANDS) State and municipal bonds............................... $ 45,096 $ 57 $ (71) $ 45,082 ----------- --- --- ----------- ----------- --- --- -----------
Contractual maturities of available-for-sale securities at November 2, 1996 are as follows:
AMORTIZED ESTIMATED COST FAIR VALUE ----------- ----------- (IN THOUSANDS) Due in one year or less.......................................................... $ 22,767 $ 22,802 Due in one to three years........................................................ 6,677 6,606 ----------- ----------- $ 29,444 $ 29,408 ----------- ----------- ----------- -----------
The fair values of the Company's short-term investments are based on quoted market prices at November 2, 1996 and October 28, 1995. BANK CREDIT LINES The Company has a $10,000,000 unsecured line of credit which expires May 1, 1997. Amounts borrowed bear interest at various rates as defined under the agreement, including the bank's reference rate (8.25% at November 2, 1996). The loan agreement requires the Company to maintain certain financial ratios, minimum working capital, and minimum tangible net worth and requires the banks' consent for the payment of cash dividends. The Company is in compliance with this agreement and there were no borrowings outstanding under the line on November 2, 1996. The Company also has contracts with banks allowing it to enter into foreign currency spot and future exchange transactions in amounts not to exceed $15,000,000 outstanding at one time. A portion of these amounts, $5,000,000, expires May 1, 1997. At November 2, 1996, the Company had no outstanding foreign exchange contracts. 25 BALANCE SHEET COMPONENTS
1996 1995 ---------- ---------- (IN THOUSANDS) INVENTORIES Raw materials............................................................................. $ 4,603 $ 2,516 Work-in-process........................................................................... 2,898 2,010 Finished goods............................................................................ 3,966 1,295 ---------- ---------- $ 11,467 $ 5,821 ---------- ---------- ---------- ---------- PROPERTY AND EQUIPMENT Equipment................................................................................. $ 30,810 $ 21,364 Furniture and fixtures.................................................................... 3,514 2,997 Leasehold improvements.................................................................... 2,593 2,238 ---------- ---------- 36,917 26,599 Less accumulated depreciation and amortization............................................ (21,668) (14,586) ---------- ---------- $ 15,249 $ 12,013 ---------- ---------- ---------- ---------- INTANGIBLE ASSETS Goodwill.................................................................................. $ 2,557 $ 2,557 Patent licenses........................................................................... 1,350 1,350 Less accumulated amortization............................................................. (1,903) (1,528) ---------- ---------- $ 2,004 $ 2,379 ---------- ---------- ---------- ---------- ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses.......................................................................... $ 3,680 $ 3,679 Deferred income and rent.................................................................. 519 1,740 Other liabilities......................................................................... 2,225 2,344 ---------- ---------- $ 6,424 $ 7,763 ---------- ---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES LEASES The Company leases its facilities and certain equipment under noncancellable operating leases expiring through 2001 and beyond. Leases for the Company's three principal operating facilities require the Company to pay property taxes, insurance premiums and normal maintenance costs, and one such lease contains provisions for rental adjustments. In December 1996, the Company entered into a 12 year lease for approximately 225,000 square feet of office space in San Jose, California at a base monthly rent of approximately $285,000. This lease contains a provision for the monthly rent to be adjusted upwards based on changes in the Consumer Price Index and also requires the Company to pay property taxes, insurance premiums, and normal maintenance costs. In December 1996, the Company amended the lease of its principal San Jose office facility. The term of this lease was extended to September 2007 with fixed base rent adjustments in each year of the lease. 26 Future minimum lease payments under noncancellable operating leases and the present value of future minimum capital lease payments as of November 2, 1996, and as adjusted for the December 1996 commitments as noted above, are as follows:
CAPITAL OPERATING LEASES LEASES ----------- ----------- YEARS 1997............................................................................... $ 168 $ 2,360 1998............................................................................... 80 4,563 1999............................................................................... -- 5,136 2000............................................................................... -- 5,201 2001 and beyond.................................................................... -- 43,533 ----- ----------- Total minimum payments............................................................. $ 248 $ 60,793 ----- ----------- ----------- Less amount representing interest.................................................. (16) ----- Present value of minimum lease payments............................................ 232 ----- Less current portion............................................................... (154) ----- $ 78 ----- -----
Equipment acquired by the company under capital lease arrangements and related accumulated amortization are as follows:
1996 1995 --------- --------- (IN THOUSANDS) Equipment, at cost..................................................................... $ 640 $ 640 Less accumulated amortization.......................................................... (640) (531) --------- --------- $ -- $ 109 --------- --------- --------- ---------
Rent expense totaled approximately $1,964,000, $1,475,000 and $1,405,000 for years 1996, 1995 and 1994, respectively. LETTERS OF CREDIT The Company frequently enters into purchase agreements with vendors whereby the Company guarantees payment with standby letters of credit. Also, letters of credit are provided as performance securities for certain sales contracts. Various standby letters of credit totaling $800,000 and $175,000 were outstanding as of November 2, 1996 and October 28, 1995, respectively. LITIGATION The Company from time to time has received letters from other parties, including competitors of the Company, that make allegations of patent infringement. Certain lawsuits have also arisen from time to time in the ordinary course of business. The Company believes the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations, or cash flows. STOCKHOLDERS' EQUITY SHARES RESERVED The Company has reserved 1,494,000 and 131,000 common shares for the Company's Stock Option Plans and the Employee Stock Purchase Plan, respectively, at November 2, 1996. STOCKHOLDER RIGHTS PLAN The Company has adopted a Stockholder Rights Plan (the Rights Plan) which is intended to protect stockholders from unfair or coercive takeover practices. In accordance with the Rights Plan, the Company declared a dividend distribution of one Preferred Share Purchase Right (the Purchase Right) for each outstanding share of the Company's common stock held at the close of business on November 30, 1992. 27 Each Purchase Right entitles the registered holder to purchase from the Company a unit consisting of one-thousandth of a share of the Company's Series A Participating Preferred Stock at an exercise price of $115.00. The Purchase Rights separate from the common stock and become exercisable by the holders and are redeemable by the Company on various dates and in certain situations as defined in the Rights Plan. The Purchase Rights expire November 30, 2002. NOTE RECEIVABLE FROM OFFICER In April 1996, the Company loaned $300,000 to an officer of the corporation. The note is payable in full April 15, 2001, with interest thereon at the rate of 5.88% per annum, compounded annually. The note is presently secured by 20,428 common shares of the Company owned by the officer. The Board of Directors has approved an amendment to the note whereby a security interest in real property of such officer will replace the common shares as security for the note. STOCK AND BENEFIT PLANS EMPLOYEE STOCK PURCHASE PLAN The Company's 1991 Employee Stock Purchase Plan (the Purchase Plan), as amended, allows eligible employees through payroll deduction to purchase shares of the Company's common stock at the lower of 85% of the fair market value of the stock on the first or last day of a six-month offering period, or such other offering period as determined by the Board of Directors but at no time to exceed 27 months. Approximately 107,000 and 94,000 shares were issued under the Purchase Plan at average prices of $13.70 and $14.35 per share in 1996 and 1995, respectively. STOCK OPTION PLANS The Company has in effect two stock option plans: the Amended and Restated 1987 Incentive Stock Option Plan (the 1987 Plan) and the 1995 Nonstatutory Stock Option Plan (the 1995 Plan). The 1987 plan expires by its terms in December 1997. In addition, the Board of Directors of the Company has approved a third Stock Option Plan, the 1997 Stock Plan (the 1997 Plan), and will submit such Plan to the stockholders of the Company for approval at the Company's next Annual Meeting of Stockholders. The 1987 Plan and the 1997 Plan both have a ten year term and provide for the granting of incentive stock options and nonstatutory stock options to officers, directors, employees and consultants of the Company at prices ranging from 100% to 110% of the fair market value of the common stock on the date of grant as determined by the Board of Directors. Also, stock options are automatically granted to directors who are not employees of the Company. Options generally expire five or ten years after the date of grant. The vesting and exercise provisions of option grants are determined by the Board of Directors. Options to new employees generally vest at the rate of 25% of the shares subject to the option one year after the date of grant, and then ratably over the following 36 months, based on continued service to the Company. Options granted to current employees generally vest at the rate of 12.5% of the shares subject to the option six months after the date of grant and then ratably over the following 42 months, based on continued service to the Company. Options to outside directors generally vest in equal monthly amounts over a three-year or one-year period depending on the nature of the option. Unexercised options are canceled thirty days following termination of the optionee's service to the Company. The 1995 Plan has a ten year term and was approved by the Board of Directors on July 25, 1995. The 1995 plan provides for the granting of nonstatutory stock options to employees (excluding officers and directors) and consultants of the Company at the fair market value of the common stock on the date of the option grant. The vesting and exercise provisions of option grants are determined by the Board of Directors, and are generally similar to those provided under the 1987 Plan. 28 A summary of stock option plan transactions follows:
MONTH ENDED OCTOBER 1996 1995 29, 1994 1994 ------------------- ------------------- ------------------- ------------------- (IN THOUSANDS, EXCEPT PRICE PER SHARE) Number of option shares Granted................................ 637 895 -- 283 Exercised.............................. (123) (207) (4) (263) Canceled............................... (147) (572) (2) (36) Outstanding at end of year............. 1,331 964 848 854
Option price per share $14.00 - Granted....................... $21.88 $12.63 -$21.50 $-- $11.75 -$41.50 Exercised..................... 3.20 - 19.00 2.04 - 19.00 1.20 - 16.75 1.20 - 16.75 Canceled...................... 5.00 - 21.50 2.40 - 41.50 1.20 - 40.25 1.20 - 41.00 Outstanding at end of year.... 5.00 - 40.25 3.20 - 40.25 2.04 - 41.50 1.20 - 41.50
Options to purchase approximately 472,000 and 291,000 shares were exercisable at November 2, 1996, and October 28, 1995, respectively, at the per share price ranges noted above. At November 2, 1996, 157,000 shares remain available for granting under these plans. EMPLOYEE BENEFIT PLAN The Company has an employee savings plan, which qualifies under Section 401(k) of the Internal Revenue Code (the 401(k) Plan). Under the 401(k) Plan, all eligible employees may defer from 1% to 20% of their pre-tax compensation, but not more than statutory limits. The Company is allowed to make contributions as defined in the 401(k) Plan and as approved by the Board of Directors. Company contributions of $327,000 were made through November 2, 1996. The Company contributed $152,000 and $175,000 in 1996 and 1995, respectively. In December 1996 the Board of Directors approved a 401(k) matching program, not to exceed $500 per eligible employee. OTHER INCOME AND EXPENSE, NET Other income and expense, net consists of:
1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Investment income.......................................................... $ 2,321 $ 2,287 $ 1,797 Interest expense........................................................... (76) (108) (227) Other...................................................................... (14) (561) (7) --------- --------- --------- $ 2,231 $ 1,618 $ 1,563 --------- --------- --------- --------- --------- ---------
INCOME TAXES Income tax provisions have been determined in accordance with statement of Financial Accounting Standards No. 109--Accounting for Income Taxes ("FAS 109). 29 The components of the provision for income taxes are as follows:
1996 1995 1994 --------- --------- --------- (IN THOUSANDS) FEDERAL Current....................................................................... $ (901) $ -- $ 2,465 Deferred...................................................................... 901 -- (103) STATE Current....................................................................... -- -- 881 Deferred...................................................................... -- -- (231) FOREIGN Current....................................................................... 53 56 -- --------- --- --------- 53 56 -- --------- --- --------- $ 53 $ 56 $ 3,012 --------- --- --------- --------- --- ---------
The tax benefits resulting from the exercise of nonqualified stock options and the disqualifying dispositions of shares acquired under the Company's stock option plans and employee stock purchase plan reduced taxes currently payable as shown above by $547,000, $0 and $2,106,000, in 1996, 1995 and 1994, respectively. Such benefits are credited to additional paid-in capital when realized. The total provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before taxes as follows:
1996 1995 1994 ----------- ----------- ----------- Income tax (benefit) computed at federal statutory rate.................. 34.0% (34.0%) 34.0% State taxes, net of federal benefit...................................... -- -- 3.2 Foreign taxes............................................................ 5.0 1.4 -- Goodwill amortization.................................................... 8.3 2.1 .8 Benefit of tax net operating loss........................................ -- -- (3.3) Adjustment to valuation allowance........................................ (27.3) -- (3.3) Tax-exempt interest income............................................... (16.1) (19.0) (5.0) Temporary differences and tax net operating losses for which no current benefit is recognized................................................... -- 49.5 -- Other individually immaterial items...................................... 1.1 1.4 1.6 ----- ----- --- Effective tax rate....................................................... 5.0% 1.4% 28.0% ----- ----- --- ----- ----- ---
30 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows:
1996 1995 --------- --------- (IN THOUSANDS) DEFERRED TAX LIABILITIES Difference in accounting periods.................................................. $ (2,854) $ -- DEFERRED TAX ASSETS Net operating loss carryforwards.................................................. 2,576 3,302 Tax credit carryforwards.......................................................... 2,622 797 Fixed assets...................................................................... 986 456 Allowance for doubtful accounts................................................... 839 654 Other accruals and reserves not currently deductible for tax purposes............. 1,897 1,488 Inventory valuation accounts...................................................... 2,272 1,417 Difference in accounting periods.................................................. -- 186 Other............................................................................. 41 210 --------- --------- 11,233 8,510 Valuation allowance............................................................... (6,356) (5,586) --------- --------- 4,877 2,924 --------- --------- Total deferred taxes.............................................................. $ 2,023 $ 2,924 --------- --------- --------- ---------
The change in the valuation allowance was a net increase of $770,000 and $3,468,000 and a net decrease of $1,013,000 for 1996, 1995, and 1994, respectively. Approximately $655,000 of the valuation allowance is related to stock options which will be credited to additional paid-in capital when realized. As of November 2, 1996, the Company has federal tax net operating loss carryforwards of approximately $6,000,000 which will expire in 1998 through 2002, if not utilized. Also available at November 2, 1996 are tax credit carryforwards for federal and state income tax purposes of approximately $2,200,000 and $650,000 respectively, which will expire in the years 2002 through 2011, if not utilized. Utilization of approximately $4,000,000 of the federal net operating loss carryforwards and the deduction equivalent of approximately $118,000 of tax credit carryforwards are limited to less than $1,000,000 per year, due to the application of the change in ownership provisions of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in a single industry segment: the design, manufacture and marketing of systems and software for communications applications including voice messaging, facsimile storage and forwarding and interactive voice response. No customer represented more than 10% of net revenue in 1996. Sprint Corporation (Sprint) accounted for approximately 12% of net revenue in 1995 and Fujitsu Business Communications Systems (Fujitsu) and Sprint accounted for approximately 13% and 11% of net revenue, respectively, in 1994. 31 Export revenue consist of sales from the Company's U.S. operating company to non-affiliated customers by geographic area after adjustments to include such export sales based on the location of the customer:
1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Latin America.......................................................... $ 9,800 $ 2,900 $ 2,800 Australia.............................................................. 9,000 4,000 3,600 Canada................................................................. 5,900 3,600 2,500 Europe................................................................. 5,600 2,700 1,900 Far East............................................................... 1,500 2,700 1,500 --------- --------- --------- $ 31,800 $ 15,900 $ 12,300 --------- --------- --------- --------- --------- ---------
SUBSEQUENT EVENT In December 1996, the Board of Directors approved an increase in shares reserved for issuance under the Company's stock option plans and the Employee Stock Purchase plan of 277,000 and 100,000, respectively, and in January 1997 approved the 1997 Plan which has 375,000 shares reserved for issuance. The increase in the shares for the Employee Stock Purchase Plan and the adoption of the 1997 Plan are subject to stockholders' approval. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 Net revenue........................................................... $ 24,013 $ 24,533 $ 26,500 $ 29,278 Gross margin (1)...................................................... 14,502 13,583 15,714 18,009 Research and development.............................................. 4,574 4,961 5,114 5,505 Operating income (loss)............................................... 42 (1,861) 100 541 Net income (loss)..................................................... 507 (1,311) 710 1,094 Net income (loss) per share (2)....................................... $ .07 $ (.19) $ .10 $ .16 Shares used in per share calculations................................. 6,980 6,806 6,958 6,954 1995 Net revenue........................................................... $ 14,916 $ 16,450 $ 17,570 $ 20,438 Gross margin (1)...................................................... 9,561 10,286 10,034 12,691 Research and development.............................................. 3,509 3,508 3,814 3,967 Operating income (loss)............................................... (1,368) (859) (2,152) (1,317) Net income (loss)..................................................... (770) (320) (1,683) (1,361) Net income (loss) per share (2)....................................... $ (.12) $ (.05) $ (.26) $ (.21) Shares used in per share calculations................................. 6,485 6,530 6,590 6,636
- ------------------------ (1) In the fourth quarter of 1996, the Company reclassified certain customer training and support costs from selling, general, and administrative expense to cost of goods sold to more properly reflect their current and anticipated future direct correlation to product and service revenues. All 1996 and 1995 quarterly financial data have been reclassified for consistent presentation. (2) Net income (loss) per share is computed independently for each of the quarters presented and therefore may not sum to the total for the year. 32 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS CENTIGRAM COMMUNICATIONS CORPORATION We have audited the accompanying consolidated balance sheets of Centigram Communications Corporation as of November 2, 1996 and October 28, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the two years in the period ended November 2, 1996, the one-month period ended October 29, 1994, and the year ended October 1, 1994. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centigram Communications Corporation at November 2, 1996 and October 28, 1995, and the consolidated results of its operations and its cash flows for the two years in the period ended November 2, 1996, the one-month period ended October 29, 1994, and the year ended October 1, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP San Jose, California November 26, 1996 except for the second paragraph of "Commitments and Contingencies" and the note "Subsequent Event" as to which date is December 20, 1996 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the Proxy Statement for the Company's Annual Meeting of Stockholders scheduled to be held on March 24, 1997, under the headings "Proposal No. 1" and "Management". ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Proxy Statement for the Company's Annual Meeting of Stockholders, scheduled to be held on March 24, 1997, under the heading "Executive Officer Compensation". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the Proxy Statement for the Company's Annual Meeting of Stockholders, scheduled to be held on March 24, 1997, under the heading "Security Ownership of Management". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Proxy Statement for the Company's Annual Meeting of Stockholders, scheduled to be held on March 24, 1997, under the heading "Certain Transactions". 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS OF CENTIGRAM COMMUNICATIONS CORPORATION ARE INCLUDED IN ITEM 8:
PAGE ----- FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS: Report of Independent Auditors 33 Consolidated Balance Sheets--November 2, 1996 and October 28, 1995 18 Consolidated Statement of Operations--Years ended November 2, 1996 and October 28, 1995, one-month ended October 29, 1994, and year ended October 1, 1994 19 Consolidated Statements of Stockholder's Equity--Years ended November 2, 1996 and October 28, 1995, one-month ended October 29, 1994, and year ended October 1, 1994 20 Consolidated Statements of Cash Flows--Years ended November 2, 1996 and October 28, 1995, one-month ended October 29, 1994, and year ended October 1, 1994 21 Notes to Consolidated Financial Statements--November 2, 1996 (except quarterly financial data) 22 SUPPLEMENTARY FINANCIAL DATA NOT COVERED BY REPORT OF INDEPENDENT AUDITORS: Quarterly Financial Data in Notes to Consolidated Financial Statements 32
(A) 2. FINANCIAL STATEMENT SCHEDULES: The following financial schedules of the Registrant for the years ended November 2, 1996 and October 28, 1995, the one-month period ended October 29, 1994, and the year ended October 1, 1994 are filed as part of this report. SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS: Schedule II--Valuation and Qualifying Accounts S-1
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the last quarter of the fiscal year covered by this Annual Report on Form 10-K. (C) EXHIBITS (The Company will furnish to any stockholders who so request a copy of this Annual Report on Form 10-K, as amended, including a copy of any Exhibit listed below, provided that the Company may require payment of a reasonable fee not to exceed its expense in furnishing any such Exhibit.)
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 3.1 Second Restated Certificate of Incorporation of Registrant.(1) 3.2 Bylaws of Registrant.(1) 4.1 Preferred Shares Rights Agreement dated as of October 20, 1992 by and between Registrant and The First National Bank of Boston.(2) 4.2 Amendment to Preferred Shares Rights Agreement dated April 26, 1994.(4) 10.1 Amended and Restated 1987 Incentive Stock Option Plan.(4) 10.2 Amended and Restated 1991 Employee Stock Purchase Plan.(4)
35
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.3 Settlement Agreement and Cross-License between the Company and VMX, Inc. dated June 29, 1990.(1)+ 10.4 Standard Triple Net Industrial Lease between the Company and Pactel Properties dated May 30, 1990.(1) 10.7 Form of Change of Control Agreement.(1) 10.8 Employment Agreement dated February 22, 1985 by and between Registrant and George H. Sollman, as amended.(1) 10.11 Credit Agreement dated as of March 28, 1994 by and between the Registrant and Silicon Valley Bank.(4) 10.12 Industrial Lease Agreement dated June 7, 1993 between the Company and Aetna Life Insurance Company.(3) 10.13 Loan Modification Agreement entered into as of April 21, 1995 between the Registrant and Silicon Valley Bank.(5) 10.14 Loan Modification Agreement entered into as of September 12, 1995 between the Registrant and Silicon Valley Bank.(5) 10.15 1995 Nonstatutory Stock Option Plan.(5) 10.16 Amendment to Triple Net Industrial Lease Between the Company and Bryan/Cilker Properties (successor in interest to Pactel Properties) dated December 23, 1996 10.17 1997 Stock Plan 10.18 Promissory Note dated April 15, 1996 between the Company and George H. Sollman. 10.19 Standard Triple Net Industrial Lease between the Company and Sobrato Interests III dated December 20, 1996. 10.20 Standard Triple Net Industrial Lease between the Company and Sobrato Interests III dated December 20, 1996. 11.1 Statement of Computation of Earnings Per Share. 21.1 List of Subsidiaries of Registrant. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedules.
- ------------------------ (1) Incorporated by reference to the Form S-1 Registration Statement as filed with the Securities and Exchange Commission on October 10, 1991 (Registration No. 33-42039). (2) Incorporated by reference to the Form 8-A Registration Statement as filed with the Securities and Exchange Commission on November 3, 1992. (3) Incorporated by reference to Annual Report on Form 10-K for fiscal 1993. (4) Incorporated by reference to Annual Report on Form 10-K for fiscal 1994. (5) Incorporated by reference to Annual Report on Form 10-K for fiscal 1995. + Confidential treatment granted as to certain portions. 36 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. CENTIGRAM COMMUNICATIONS CORPORATION Date: January 23, 1997 By: /s/ GEORGE H. SOLLMAN ----------------------------------------- George H. Sollman PRESIDENT AND CHIEF EXECUTIVE OFFICER KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints George H. Sollman and Dennis P. Wolf, 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 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 said attorneys-in-fact, or his 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 on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- President, Chief Executive /s/ GEORGE H. SOLLMAN Officer, Director ---------------------------- (Principal Executive January 23, 1997 George H. Sollman Officer) /s/ DENNIS P. WOLF ---------------------------- Senior Vice President and January 23, 1997 Dennis P. Wolf Chief Financial Officer /s/ THOMAS E. BRUNTON Vice President and ---------------------------- Controller (Principal January 23, 1997 Thomas E. Brunton Accounting Officer) /s/ JAMES H. BOYLE ---------------------------- Director January 23, 1997 James H. Boyle /s/ JAMES F. GIBBONS ---------------------------- Director January 23, 1997 James F. Gibbons /s/ J. MICHAEL JARVIS ---------------------------- Director January 23, 1997 J. Michael Jarvis /s/ DEAN O. MORTON ---------------------------- Director January 23, 1997 Dean O. Morton 37 CENTIGRAM COMMUNICATIONS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER ACCOUNTS AT END OF DESCRIPTION OF PERIOD EXPENSES (2) DEDUCTIONS (1) PERIOD - -------------------------------------------------- ----------- ------------- --------------- --------------- --------- Year ended November 2, 1996 Allowance for doubtful accounts................. $ 841 $ 330 $ -- $ 216 $ 955 Product return reserve.......................... 1,100 -- -- -- 1,100 Year ended October 28, 1995 Allowance for doubtful accounts................. $ 1,380 $ -- $ -- $ 539 $ 841 Product return reserve.......................... 825 -- 275 -- 1,100 Month ended October 29, 1994 Allowance for doubtful accounts................. $ 1,383 $ 5 $ -- $ 8 $ 1,380 Product return reserve.......................... 750 -- 75 -- 825 Year ended October 1, 1994 Allowance for doubtful accounts................. $ 1,250 $ 165 $ -- $ 32 $ 1,383 Product return reserve.......................... 500 -- 250 -- 750
- ------------------------ (1) Writeoffs of uncollectible accounts, net of recoveries. (2) The product return reserve is charged to revenue. S-1 EX-10.16 2 EX-10.16 EXHIBIT 10.16 FIRST AMENDMENT TO LEASE This First Amendment to Lease ("First Amendment") is made and entered into as of this 23rd day of December, 1996 by and between Evelyn L. Bryan and Robert A. Bryan, Trustees UTA dated November 3, 1987, Bryan Tax Deferral Trust and George E. Cilker and Elizabeth B. Cilker, Trustees, UTA dated May 9, 1979, the Cilker Revocable Trust, dba Bryan/Cilker Properties ("Landlord") and Centigram Communications Corporation, a California Corporation ("Tenant"). RECITALS -------- A. WHEREAS, PacTel Properties and Centigram Communications Corporation entered into that certain Lease dated May 30, 1990, (the "Lease") for the premises commonly known as 91 East Tasman Drive, San Jose, California and more particularly described in the Lease (the "Premises"). B. WHEREAS, on July 31, 1991, Landlord, Bryan/Cilker Properties, became the legal successors in interest under the Lease to PacTel Properties, a California corporation. C. WHEREAS, the term of the Lease is scheduled to expire on September 30, 1997. AGREEMENT --------- NOW, THEREFORE, in consideration of the foregoing recitals and mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to the Lease as follows: 1. TERM. Paragraph 3.1 (Term) of the Lease is hereby amended to extend the Term for a period of ten (10) years, commencing October 1, 1997 and expiring September 30, 2007. 2. RENT. Paragraph 4.1 (Base Rent) of the Lease is hereby amended as follows: BASE MONTHLY RENT ----------------- Months 1 - 12 10/1/97 thru 9/30/98 $ 100,358 Months 13 - 24 10/1/98 thru 9/30/99 $ 104,540 Months 25 - 36 10/1/99 thru 9/30/00 $ 108,722 Months 37 - 48 10/1/00 thru 9/30/01 $ 112,903 Months 49 - 60 10/1/01 thru 9/30/02 $ 117,085 Months 61 - 72 10/1/02 thru 9/30/03 $ 121,266 Months 73 - 84 10/1/03 thru 9/30/04 $ 125,448 Months 85 - 96 10/1/04 thru 9/30/05 $ 129,630 Months 97 - 108 10/1/05 thru 9/30/06 $ 133,811 Months 109 - 120 10/1/06 thru 9/30/07 $ 137,933 3. CONDITION OF PREMISES. Paragraph 5.3 (Condition of Premises) is hereby amended by adding a third paragraph as follows: (C) Tenant acknowledges that Tenant has been occupying the Premises pursuant to the terms and conditions of the Lease, and as such, accepts the Premises in its presently existing "as is" condition. Tenants's past, present, and future possession of the Premises shall conclusively establish that the Premises are at such time in good and satisfactory order, condition and repair. 4. SECURITY DEPOSIT. Paragraph 20 (Security Deposit) shall be deleted in its entirety and the following paragraph shall be inserted in its place: Tenant shall deposit with Landlord upon execution of this First Amendment to Lease the sum of ONE HUNDRED THOUSAND AND NO/100THS Dollars ($100,000.00) as the Security Deposit for the full and faithful performance of every provision of this Lease to be performed by Tenant. These funds shall be placed in an interest bearing account at a Federally Chartered Financial Institution, the location of which shall be at the discretion of Landlord, where the interest thereon shall accumulate within said account and shall accrue to Tenant, except as provided for in the following sentence. If Tenant defaults with respect to any provision of this Lease, Landlord may apply all or any part of the Security Deposit for the payment of any rent or other sum in default, the repair of such damage to the Premises or the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default to the full extent permitted by law. If any portion of the Security Deposit is so applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds, however, Tenant shall be entitled to interest on the Security Deposit. If Tenant is not otherwise in default pursuant to Paragraph 12 herein, the Security Deposit or any balance thereof, including interest, shall be returned to Tenant within thirty (30) days of termination of the Lease. 5. OPTION TO EXTEND TERM. Paragraphs 45(a) and 45(b) of the Lease is hereby amended in part as follows: 45(a). Tenant shall have an option (the "Extension Option") to extend the term of this lease for one (1) additional period of five (5) years beyond the expiration date hereof (9/30/07) (the "Option Term"). 45(b). OPTION RENTAL RATE. The Base Monthly Rent payable for the first year of the Option Term shall be an amount equal to the greater of (i) 100% of the "Prevailing Market Rent" or (ii) the Base Rent due hereunder during the last month of the Initial Term of the Lease. For purposes of this Lease, the "Prevailing Market Rent" shall mean "...... (such as Tenant Improvement Allowance, free rent or moving expenses)." Commencing each year thereafter (years 2 through 5) the Base Monthly Rent shall be increased five cents ($0.05) per rentable square foot. Except as set forth in this First Amendment, the Lease is unmodified and in full force and effect. 2 In witness whereof, the parties hereto have executed this First Amendment as of the date and year first above written. LANDLORD TENANT Bryan/Cilker Properties Centigram Communications Corporation a Delaware corporation ROBERT A BRYAN AND EVELYN L. BRYAN, TRUSTEES OF THE BRYAN TAX-DEFERRAL TRUST, By /s/ George Sollman DATED NOVEMBER 3, 1987 ------------------------------- George Sollman Its: President and Chief Executive Officer ------------------------------ - ---------------------------------- Date: 10/20/96 Robert A. Bryan Date ------------------------------ 91 East Tasman Drive San Jose, California - ---------------------------------- Evelyn L. Bryan Date GEORGE E. CILKER AND ELIZABETH B. CILKER, TRUSTEES OF THE CILKER REVOCABLE TRUST, DATED MAY 9, 1979 - ---------------------------------------- George E. Cilker Date - ---------------------------------------- Elizabeth B. Cilker Date 5450 Thornwood Drive, Suite G San Jose, California 95123 3 EX-10.17 3 EX-10.17 CENTIGRAM COMMUNICATIONS CORPORATION 1997 STOCK PLAN 1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees, Directors and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. The Plan also provides for automatic grants to Outside Directors. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (f) "COMMON STOCK" means the common stock of the Company. (g) "COMPANY" means Centigram Communications Corporation, a Delaware corporation. (h) "CONSULTANT" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. (i) "DIRECTOR" means a member of the Board. (j) "DISABILITY" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. 2 (p) "NOTICE OF GRANT" means a written or electronic notice evidencing certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (q) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "OPTION" means a stock option granted pursuant to the Plan. (s) "OPTION AGREEMENT" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (t) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price. (u) "OPTIONED STOCK" means the Common Stock subject to an Option. (v) "OPTIONEE" means the holder of an outstanding Option granted under the Plan. (w) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (x) "PLAN" means this 1997 Stock Plan. (y) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (z) "SECTION 16(b)" means Section 16(b) of the Exchange Act. (aa) "SERVICE PROVIDER" means an Employee, Director or Consultant. (bb) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (cc) "SUBSIDIARY" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 375,000 Shares. The Shares may be authorized, but unused, or reacquired Shares of Common Stock. For purposes of this Section 3, (i) "unissued Shares" means Shares reserved for issuance but not covered by grants under this Plan or under the Amended and Restated 1987 Incentive Stock Option Agreement (the "1987 Plan"), which 1987 Plan shall terminate automatically in 1997 or upon approval by the Board of this Plan, whichever is earlier, and (ii) "reacquired Shares" means Shares 3 covered by grants under this Plan or the 1987 Plan which are not issued to participants, or which are returned to the Company upon forfeiture of such Shares. If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); PROVIDED, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option, shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. (i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) SECTION 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) RULE 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) OTHER ADMINISTRATION. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (iv) to approve forms of agreement for use under the Plan; 4 (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option of the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. ELIGIBILITY. Nonstatutory Stock Options may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 5 6. LIMITATIONS. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 250,000 Shares. (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 500,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iv) If an Option is canceled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the canceled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 8. TERM OF OPTION. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be 6 five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. OPTION EXERCISE PRICE AND CONSIDERATION. (a) EXERCISE PRICE. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) FORM OF CONSIDERATION. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; 7 (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. 8 (b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for thirty (30) days following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS. All grants hereunder shall be automatic and shall be made strictly in accordance with the following provisions upon the expiration or termination of the 1987 Plan: 9 (a) No person shall have discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (b) Each Outside Director who shall commence service after the approval of this Plan by the Board shall automatically receive an Option to purchase Fifteen Thousand (15,000) Shares upon such commencement of service. 1/36 of the Shares subject to such Option shall vest one month after the date of grant of such Option, and 1/36 of the Shares subject to such Option shall vest each month thereafter, subject to the Outside Director continuing to be a Service Provider on such dates. (c) Each year on the day immediately following the date of such Annual Meeting, during the term of this Plan, each Outside Director shall automatically receive an Option to purchase Five Thousand (5,000) Shares; provided, however, any newly elected Outside Director who has served on the Board for less than six (6) months prior to the scheduled Annual Meeting shall not be eligible to receive the Option to purchase Five Thousand (5,000) Shares until the next following scheduled Annual Meeting. 1/12 of the Shares subject to such Option shall vest one month after the date of grant of such Option, and 1/12 of the Shares subject to such Option shall vest each month thereafter, subject to the Outside Director continuing to be a Service Provider on such dates. 12. NON-TRANSFERABILITY OF OPTIONS. Unless determined otherwise by the Administrator, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate. 13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET SALE. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option as well as the price per share of Common Stock covered by each such outstanding Option shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the 10 effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) MERGER OR ASSET SALE. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option for each Share of Optioned Stock subject to the Option to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 14. DATE OF GRANT. The date of grant of an Option shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan. (b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. 11 (c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. CONDITIONS UPON ISSUANCE OF SHARES. (a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. 12 CENTIGRAM COMMUNICATIONS CORPORATION 1997 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number _________________________ Date of Grant _________________________ Vesting Commencement Date _________________________ Exercise Price per Share $________________________ Total Number of Shares Granted _________________________ Total Exercise Price $_________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _________________________ VESTING SCHEDULE: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates. 1 TERMINATION PERIOD: This Option may be exercised for 90 days after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for such longer period as provided in the Plan. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. GRANT OF OPTION. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. EXERCISE OF OPTION. (a) RIGHT TO EXERCISE. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) METHOD OF EXERCISE. This Option is exercisable by delivery of an exercise notice, in the form attached as EXHIBIT A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to [Title] of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 2 3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; or (b) check; or (c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. TAX CONSEQUENCES. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) EXERCISING THE OPTION. (i) NONSTATUTORY STOCK OPTION. The Optionee may incur regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (ii) INCENTIVE STOCK OPTION. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair 3 Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. (b) DISPOSITION OF SHARES. (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. 7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. 8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS 4 CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE CENTIGRAM COMMUNICATIONS CORPORATION ___________________________________ _______________________________________ Signature By ____________________________________ ______________________________________ Print Name Title ____________________________________ Residence Address ____________________________________ 5 CONSENT OF SPOUSE The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. _______________________________________ Spouse of Optionee 6 EXHIBIT A CENTIGRAM COMMUNICATIONS CORPORATION 1997 STOCK PLAN EXERCISE NOTICE Centigram Communications Corporation 91 East Tasman Drive San Jose, CA 95134 Attention: __________________ 1. EXERCISE OF OPTION. Effective as of today, ________________, 199__, the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of Centigram Communications Corporation (the "Company") under and pursuant to the 1997 Stock Plan (the "Plan") and the Stock Option Agreement dated ______________________, 19___ (the "Option Agreement"). The purchase price for the Shares shall be $______________, as required by the Option Agreement. 2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the full purchase price for the Shares. 3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. RIGHTS AS SHAREHOLDER. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in [Section 13] of the Plan. 5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire 1 agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. Submitted by: Accepted by: PURCHASER CENTIGRAM COMMUNICATIONS CORPORATION __________________________________ _____________________________________ Signature By __________________________________ _____________________________________ Print Name Its ADDRESS: ADDRESS: _________________________________ Centigram Communications Corporation 91 East Tasman Drive _________________________________ San Jose, CA 95134 _____________________________________ Date Received 2 LANGUAGE TO BE INSERTED INTO OPTION AGREEMENT IF ADMINISTRATOR ALLOWS THE OPTIONEE TO BE ABLE TO PAY FOR OPTIONS BY PROMISSORY NOTE: (_) with the Administrator's consent, delivery of Optionee's promissory note (the "Note") in the form attached hereto as EXHIBIT C, in the amount of the aggregate Exercise Price of the Exercised Shares together with the execution and delivery by the Optionee of the Security Agreement attached hereto as EXHIBIT B. The Note shall bear interest at the "applicable federal rate" prescribed under the Code and its regulations at time of purchase, and shall be secured by a pledge of the Shares purchased by the Note pursuant to the Security Agreement. 3 EXHIBIT B SECURITY AGREEMENT This Security Agreement is made as of __________, 19___ between Centigram Communications Corporation, a Delaware corporation ("Pledgee"), and _______________________ ("Pledgor"). RECITALS Pursuant to Pledgor's election to purchase Shares under the Option Agreement dated ________ (the "Option"), between Pledgor and Pledgee under Pledgee's 1997 Stock Plan, and Pledgor's election under the terms of the Option to pay for such shares with his promissory note (the "Note"), Pledgor has purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price of $________ per share, for a total purchase price of $__________. The Note and the obligations thereunder are as set forth in EXHIBIT C to the Option. NOW, THEREFORE, it is agreed as follows: 1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Commercial Code, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number ______, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: a. PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. b. ENCUMBRANCES. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. 1 c. MARGIN REGULATIONS. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. VOTING RIGHTS. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. STOCK ADJUSTMENTS. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. OPTIONS AND RIGHTS. In the event that, during the term of this pledge, subscription Options or other rights or options shall be issued in connection with the pledged Shares, such rights, Options and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. DEFAULT. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: a. Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or b. Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder here-under upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of 2 Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. TERM. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. PLEDGEHOLDER LIABILITY. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. GOVERNING LAW. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of California. 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" _________________________________ Signature _________________________________ Print Name Address: _________________________________ _________________________________ "PLEDGEE" Centigram Communications Corporation, a Delaware corporation ________________________________ Signature ________________________________ Print Name ________________________________ Title "PLEDGEHOLDER" ________________________________ Secretary of Centigram Communications Corporation 4 EXHIBIT C NOTE $_______________ [City, State] ______________, 19___ FOR VALUE RECEIVED, _______________ promises to pay to Centigram Communications Corporation, a Delaware corporation (the "Company"), or order, the principal sum of _______________________ ($_____________), together with interest on the unpaid principal hereof from the date hereof at the rate of _______________ percent (____%) per annum, compounded semiannually. Principal and interest shall be due and payable on __________, 19___. Payment of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Option, dated as of ________________. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. In the event the undersigned shall cease to be an employee, director or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. ____________________________________ ____________________________________ 1 EX-10.18 4 EX-10.18 PROMISSORY NOTE --------------- $300,000.00 San Jose, California April 15, 1996 -- FOR VALUE RECEIVED, the undersigned, George H. Sollman, hereby promises to pay to Centigram Communications Corporation, a Delaware corporation (the "Company"), the principal sum of Three Hundred Thousand and No/100 Dollars ($300,000.00), which interest thereon at the simple rate of 5.88% per annum, compounded annually, at the principal offices of the Company, upon the following terms and conditions: The principal amount of this Note and all accrued but unpaid interest from the date hereof shall be due on April 15, 2001. In the event that prior to April 15, 2001, the undersigned shall cease to be an employee of the Company for any reason other than death or permanent disability, then the principal amount of this Note shall be due and payable on written demand by the Company on or at any time after the tenth (10th) day following the occurrence of one or more of such events, together with all interest accrued but unpaid thereon. The undersigned shall have the right to prepay at any time, and from time to time, without premium or penalty all or any portion of the principal and/or accrued interest hereunder. The undersigned hereby waives presentment, protest, demand for payment, notice of dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. This Note is originally secured by a pledge of twenty thousand four hundred twenty-eight (20,428) Common Shares of the Company pursuant to a Stock Pledge Agreement of even date herewith which is on file with the Secretary of the Company. The undersigned agrees to pay any costs of collection of this Note, including without limitation reasonable attorney's fees and costs, in the event it is not fully paid when due. This Note has been made and delivered in the State of California and shall be construed in accordance with, and all actions arising hereunder shall be governed by, the laws of the State of California. April 15, 1996 -- /s/ George H. Sollman ---------------------------- George H. Sollman STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "PLEDGE AGREEMENT"), dated as of April ____, 1996, is executed by George H. Sollman ("PLEDGOR") in favor of Centigram Communications Corporation, a Delaware corporation ("COMPANY"). RECITALS -------- A. Pledgor has borrowed Three Hundred Thousand Dollars ($300,000) from Company pursuant to a full recourse promissory note, a copy of which is attached hereto as Exhibit A (the "Note"), in favor of Company in such amount. B. To secure the payment when due of all amounts under the Note, Pledgor is pledging Twenty Thousand Four Hundred Twenty-Eight (20,428) shares of Common Stock of Company (the "SHARES") held by Pledgor pursuant to the terms and conditions of this Agreement. AGREEMENT --------- NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Company as follows: 1. DEFINITIONS. When used in this Pledge Agreement, the following terms shall have the following respective meanings: "COLLATERAL" shall have the meaning given to that term in PARAGRAPH 2 hereof. "OBLIGATIONS" shall mean and include all obligations owed by Pledgor to Company under the Note, including without limitation all interest, fees, charges, expenses, attorneys' fees and accountants' fees and costs chargeable to Pledgor or payable by Pledgor. "UCC" shall mean the Uniform Commercial Code as in effect in the State of California from time to time. 2. PLEDGE. As security for the payment and performance of the Obligations, Pledgor hereby pledges and assigns to Company and grants to Company a security interest in all right, title and interest of Pledgor in and to the Shares, and all proceeds of the foregoing, including, without limitation, all dividends, additional shares of stock, certificates and other money and property received and receivable by Pledgor in connection with the foregoing (the "COLLATERAL"). 3. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants to Company that (a) Pledgor is the record and beneficial owner of the Collateral (or, in the case of after-acquired Collateral, at the time Pledgor acquires rights in the Collateral, will be the record and beneficial owner thereof) and no other person has (or, in the case of after-acquired Collateral, at the time Pledgor acquires rights therein, will have) any right, title, claim or interest (by way of lien or otherwise) in, against or to the Collateral; (b) upon delivery to Company of all Collateral consisting of securities, Company will have a first priority perfected security interest in such Collateral; (c) Pledgor currently owns the Shares, which Shares have been duly and validly issued and are fully paid and nonassessable; and (d) Pledgor maintains his or her primary residence in the State of California. 4. COVENANTS. Pledgor hereby agrees (a) to perform all acts that may be necessary to maintain, preserve, protect and perfect the Collateral, the lien granted to Company therein and the first priority of such lien; (b) to deliver, within sixty (60) days from the date hereof, to Company all originals of certificates and other documents, instruments and agreements evidencing the Shares, together with such blank stock powers executed by Pledgor as Company may request (c) to procure, execute and deliver from time to time any endorsements, assignments, financing statements and other documents, instruments and agreements and take other actions deemed necessary or appropriate by Company to perfect, maintain and protect its lien hereunder and the priority thereof; (d) to appear in and defend any action or proceeding which may affect its title to or Company's interest in the Collateral; (e) not to surrender or lose possession of (other than to Company), sell, encumber, lease, rent, or otherwise dispose of or transfer any Collateral or right or interest therein and to keep the Collateral free of all liens; and (f) not to take any action contrary to the intent of this Pledge Agreement. 5. VOTING RIGHTS PRIOR TO DEFAULT. Unless an Event of Default (as defined in SUBPARAGRAPH 6(b) hereof) shall have occurred and Company shall have given notice to Pledgor of Company's intent to exercise its rights pursuant to SUBPARAGRAPH 6(b) below, Pledgor shall be permitted to exercise all voting and corporate rights with respect to the Shares; PROVIDED, HOWEVER, that no vote shall be cast or corporate right exercised or other action taken which could impair the Collateral or which would be inconsistent with or could result in a default in the payment of principal or interest under the Note. 6. DEFAULT AND REMEDIES. (a) EVENTS OF DEFAULT. Pledgor shall be deemed in default under this Pledge Agreement upon the occurrence of a default in the payment when due of principal or interest under the Note or the breach by Pledgor of any term of the Note or this Pledge Agreement (each an "EVENT OF DEFAULT"). (b) DIVIDENDS, VOTING RIGHTS, ETC. Upon the occurrence of any Event of Default, Company may, upon notice to Pledgor, to the extent permissible under applicable law, (i) pay all dividends on Shares to the account of Company, receive and collect all such dividends and make application thereof to the obligations in such order as Company may determine, and (ii) register the Shares in its name or the name of the Company's nominee, and the Company or the Company's nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to the Shares at any meeting of shareholders of Company or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to the Shares as if they were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Shares upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of the Company, or upon the exercise by Pledgor or Company of any right, privilege or option pertaining to the Shares, and in connection therewith, the right to deposit and deliver any and all of the Shares with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine), all without liability except to account for property actually received by them, but Company shall have no duty to Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (c) ADDITIONAL REMEDIES. Upon the occurrence of an Event of Default, Company may exercise, in addition to all other rights and remedies granted in this Pledge Agreement and in the Note, all rights and remedies of a secured party under the UCC. Without limiting the generality of the foregoing, Company may, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind to or upon Pledgor or any other person (except notice of time and place of sale and any other notice required by law referred to below) forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give an option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of Company or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Company shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such 2 private sale or sales to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Pledgor, which right or equity is hereby waived and released. Company shall apply any proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of Company hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel to Company, to the payment in whole or in part of the Obligations, in such order as Company may elect, and only after such application and after the payment by Company of any other amount required by any provision of law, need Company account for the surplus, if any, to Pledgor. To the extent permitted by applicable law, Pledgor waives all claims, damages and demands it may acquire against Company arising out of the exercise by it of any rights hereunder except as may arise solely from Company's gross negligence or willful misconduct. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. Pledgor further waives and agrees not to assert any rights or privileges which it may acquire under Section 9112 of the UCC. 7. SALE OF SHARES. (a) PRIVATE SALE. Pledgor recognizes that Company may be unable to effect a public sale of any or all of the Shares, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for its own account for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. Company shall be under no obligation to delay a sale of any of the Shares for the period of time necessary to register such securities for public sale under the Securities Act, or under applicable state securities laws. (b) FURTHER ASSURANCES. Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Shares pursuant to this Pledge Agreement valid and binding and in compliance with any and all other applicable laws, rules and regulations of all governmental authorities. Pledgor further agrees that a breach of any of the covenants contained in this PARAGRAPH 7 will cause irreparable injury to Company, that Company has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this PARAGRAPH 7 shall be specifically enforceable against Pledgor, and Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred. 8. LIMITATION ON DUTIES REGARDING COLLATERAL. Company's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9207 of the UCC or otherwise, shall be to deal with it in the same manner as Company deals with similar securities and property for its own account. Neither Company nor any of its employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Pledgor or otherwise. 3 9. MISCELLANEOUS. (a) NOTICES. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Company or Pledgor under this Pledge Agreement shall be duly given or made if sent in writing by certified mail, recognized overnight courier or hand delivery and shall be effective upon delivery to the recipient. (b) NONWAIVER. No failure or delay on Company's part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) AMENDMENTS AND WAIVERS. This Pledge Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Pledgor and Company. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given. (d) ASSIGNMENTS. This Pledge Agreement shall be binding upon and inure to the benefit of Company and Pledgor and their respective successors and assigns; provided that Pledgor may not assign its obligations hereunder without the written consent of Company. (e) CUMULATIVE RIGHTS, ETC. The rights, powers and remedies of Company under this Pledge Agreement shall be in addition to all rights, powers and remedies given to Company by virtue of any applicable law, rule or regulation of any governmental entity, the Note, any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Company's rights hereunder. Pledgor waives any right to require Company to proceed against any person or to exhaust any Collateral or to pursue any remedy in Company's power. (f) PAYMENTS FREE OF TAXES, ETC. All payments made by Pledgor under this Pledge Agreement shall be made by Pledgor free and clear of and without deduction for any and all present and future taxes, levies, charges, deductions and withholdings. In addition, Pledgor shall pay upon demand any stamp or other taxes, levies or charges of any jurisdiction with respect to the execution, delivery, registration, performance and enforcement of this Pledge Agreement. (g) PARTIAL INVALIDITY. If any time any provision of this Pledge Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Pledge Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (h) GOVERNING LAW. This Pledge Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. (i) AUTHORIZED ACTION BY PLEDGEES. Pledgor hereby irrevocably appoints Company as its attorney-in-fact and agree that Company may perform (but Company shall not be obligated to and shall incur no liability to Pledgor or any third party for failure so to do) any act which Pledgor is obligated by this Pledge Agreement or the Note to perform, and to exercise such rights and powers as Pledgor might exercise with respect to the Collateral, including, without limitation, the right to (a) exercise (1) all voting, corporate and other rights pertaining to the Shares at any meeting of shareholders of the Company or otherwise and (2) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to the Shares; (b) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (c) enter into any extension, reorganization, deposit, merger, consolidation or other agreement 4 pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (d) insure, process and preserve the Collateral; (e) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral and (f) pay any indebtedness of Pledgor relating to the Collateral. Pledgor agrees to reimburse Company upon demand for any reasonable costs and expenses, including, without limitation, attorneys' fees and costs. Company may incur while acting as Pledgor's attorney-in-fact hereunder, all of which costs and expenses are included in the Obligations. [Remainder of Page Intentionally Left Blank] 5 IN WITNESS WHEREOF, Pledgor has caused this Pledge Agreement to be executed as of the day and year first above written. /s/ George H. Sollman ---------------------------- George H. Sollman Acknowledged and Agreed to by: CENTIGRAM COMMUNICATIONS CORPORATION By: /s/ Anthony R. Muller ------------------------------------- Name: Anthony R. Muller Title: Chief Financial Officer 6 EX-10.19 5 EX-10.19 INTERIOR PARCEL - EIICHI SOBRATO 10600 N. De Anza Boulevard, Suite 200 DEVELOPMENT Cupertino, CA 95014-2075 COMPANIES (408) 446-0700 FAX (408) 446-0583 LEASE BETWEEN SOBRATO INTERESTS III AND CENTIGRAM COMMUNICATIONS CORPORATION Section Page # - ------- ------ Parties.......................................................................1 Premises......................................................................1 Use...........................................................................2 Term and Rental...............................................................2 Rental Adjustment.........................................................2 Security Deposit..............................................................3 Late Charges..................................................................5 Construction and Possession ..................................................5 Building Shell Construction...............................................5 Tenant Improvement Plans..................................................5 Final Building Shell Plans................................................6 Change Orders.............................................................6 Construction..............................................................7 Insurance/Indemnity.......................................................7 Punch List & Warranty.....................................................8 Other Work by Tenant......................................................8 Landlord's Failure to Complete Construction...............................8 Acceptance of Possession and Covenants to Surrender...........................9 Uses Prohibited..............................................................10 Alterations and Additions....................................................10 Maintenance of Premises......................................................11 Tenant's Obligations.....................................................11 Landlord's Obligations...................................................12 Capital Replacements.....................................................12 Hazard Insurance.............................................................12 Tenant's Use.............................................................12 Landlord's Insurance.....................................................12 Tenant's Insurance.......................................................13 Waiver...................................................................13 Taxes........................................................................13 Utilities....................................................................14 Abandonment..................................................................14 Free From Liens..............................................................14 Compliance With Governmental Regulations.....................................14 Toxic Waste and Environmental Damage.........................................15 Tenant's Responsibility..................................................15 Tenant's Indemnity Regarding Hazardous Materials.........................16 Actual Release by Tenant.................................................16 Landlord's Indemnity Regarding Hazardous Materials.......................17 Environmental Monitoring.................................................17 Indemnity....................................................................17 Advertisements and Signs.....................................................18 Attorney's Fees..............................................................18 Tenant's Default.............................................................18 Remedies.................................................................19 Right to Re-enter........................................................19 Abandonment..............................................................19 No Termination...........................................................20 Surrender of Lease...........................................................20 Landlord's Default...........................................................20 Notices......................................................................21 Entry by Landlord............................................................21 Destruction of Premises......................................................22 Destruction by an Insured Casualty.......................................22 Destruction by an Uninsured Casualty.....................................23 Assignment or Sublease.......................................................23 Consent by Landlord......................................................23 Assignment or Subletting Consideration...................................24 No Release...............................................................24 Effect of Default........................................................24 Permitted Transfers......................................................25 Page ii Condemnation.................................................................25 Effects of Conveyance........................................................25 Subordination................................................................26 Waiver.......................................................................26 Holding Over.................................................................27 Successors and Assigns.......................................................27 Estoppel Certificates........................................................27 Option to Extend the Lease Term..............................................27 Grant and Exercise of Option.............................................28 Determination of Fair Market Rental......................................28 Resolution of a Disagreement over the Fair Market Rental.................29 Options......................................................................30 Quiet Enjoyment..............................................................30 Brokers......................................................................30 Landlord's Liability.........................................................30 Authority of Parties.........................................................30 Transportation Demand Management programs....................................30 Dispute Resolution...........................................................30 Interference with Use of Premises............................................31 Existing Victorian Home......................................................31 Miscellaneous Provisions.....................................................32 Rent.....................................................................32 Management Fee...........................................................32 Performance by Landlord..................................................32 Interest.................................................................32 Rights and Remedies......................................................32 Survival of Indemnities..................................................32 Severability.............................................................32 Choice of Law............................................................32 Time.....................................................................32 Entire Agreement.........................................................33 Representations..........................................................33 No Presumption Against Drafter...........................................33 Headings.................................................................33 Exhibits.................................................................33 Page iii Cross-Default................................................................33 EXHIBIT A - Premises, Building & Project.....................................35 EXHIBIT B - Shell Plans and Specifications...................................36 EXHIBIT C - Building Shell Definition........................................37 EXHIBIT D - Tenant Improvement Plans and Specifications......................40 Page iv SOBRATO 10600 N. De Anza Boulevard, Suite 200 DEVELOPMENT Cupertino, CA 95014-2075 COMPANIES (408) 446-0700 FAX (408) 446-0583 1. PARTIES: THIS LEASE, is entered into on this 20th day of December, 1996, between SOBRATO INTERESTS III, a California Limited Partnership, whose address is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014 and CENTIGRAM COMMUNICATIONS CORPORATION, a Delaware Corporation, whose address is 91 East Tasman Drive, San Jose, CA 95134, hereinafter called respectively Landlord and Tenant. The effectiveness of this Lease is expressed conditioned upon (i) execution by Landlord and Tenant of the Adjacent Building Lease (as defined below), (ii) Tenant's receipt of a recognition and non-disturbance agreement in a form and substance reasonably acceptable to Tenant from Ground Lessor and from any and all other ground lessors with an interest in the Parcel (defined below) and from any and all lenders with a lien on the Ground Lease (defined below) or the Parcel, and (iii) Landlord's ability to obtain a building permit for construction of a building of not less than 100,000 rentable square feet with the number of parking spaces required by code. In the event any of the foregoing conditions have not been satisfied or waived by the parties within thirty (30) days following execution of this Lease, either Landlord or Tenant shall have the option to terminate this lease by providing written notice to the other party. Upon the execution of this Lease, Landlord shall deliver to Tenant a copy of Landlord's ground lessee's title insurance policy for the Parcel and, if in die possession or control of Landlord, a current preliminary title report for the Parcel reflecting the state of title to the Parcel. 2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord those certain Premises with the appurtenances, situated in the City of San Jose, County of Santa Clara, State of California, located within a four-story steel frame building to be constructed by Landlord consisting of approximately 110,881 rentable square feet (the "Building") on a parcel leased by Landlord from Eiichi and Suzuye Sakauye ("Ground Lessor") consisting of approximately 5.0 acres and an existing historic Victorian home consisting of approximately 2,500 rentable square feet (the "Historic Home") located at the corner of Guadalupe Parkway and North First Street as outlined in red on EXHIBIT "A" ("Parcel"). In addition Tenant shall have the right to use the common area consisting of all parking areas, sidewalks and landscape areas ("Common Area") surrounding the Building and an additional building of 110,881 square feet ("Adjacent Building") which Landlord intends to construct for Tenant on the adjacent land leased from Kenji and Shizu Sakauye totaling approximately 5.0 acres pursuant to another lease between the parties of even date herewith ("Adjacent Building Lease"). The Premises, the Adjacent Building, the Historic Home and the Common Area shall comprise the "Project". Tenant shall have exclusive use of approximately 370 parking spaces within the Parcel. Unless expressly provided otherwise, the term Premises as used herein shall include the Tenant Improvements (defined in Section 7.B) constructed by Tenant Page 1 pursuant to Section 7.B. Tenant acknowledges Landlord's right to and hereby consents to construction of the Adjacent Building. 3. USE: Tenant may use the Premises only for the following purposes and shall not change the use of the Premises without the prior written consent of Landlord: Office, research and development, marketing, light manufacturing, storage and other incidental uses. Landlord makes no representation or warranty that any specific use of the Premises desired by Tenant is permitted pursuant to any Laws. 4. TERM AND RENTAL: The term ("Lease Term") shall be for one hundred forty four (144) months, commencing upon the later to occur of (i) two (2) months following the date on which Landlord allows Tenant access to the Premises to begin construction of the Tenant Improvements pursuant to Section 7.H, as such two (2) month period is extended by Landlord Delays (hereinafter defined), or (ii) substantial completion of the Building Shell, as defined in Section 7.D ("Commencement Date"), and ending one hundred forty four (144) months thereafter ("Expiration Date"). In addition to all other sums payable by Tenant under this Lease, Tenant shall initially pay as base monthly rent ("Base Monthly Rent") for the Premises in the amount of One Hundred Forty Five Thousand One Hundred Twenty Seven and 68/100 Dollars ($145,127.68) commencing two (2) months following the Commencement Date as such two (2) month period is extended by Landlord Delays (hereinafter defined). Commencing twelve (12) months following the Commencement Date, the Base Monthly Rent shall increase to One Hundred Forty Nine Thousand Five Hundred Sixty Two and 92/100 Dollars ($149,562.92). As used herein, the term "Landlord Delays" shall mean delays in Tenant's construction of the Tenant Improvements that are caused by Landlord, Landlord's contractors, defects in the Building Shell and failure of the Building Shell to conform to the Final Building Shell Plans. Two months prior to the date Landlord reasonably estimates the Building Shell will be substantially completed, Landlord shall give Tenant written notice and shall exercise its best efforts to allow Tenant and its contractor and subcontractors access to the Premises to commence construction or installation of the Tenant Improvement Work. Such early access to the Premises shall not be permitted, however, if the same would materially delay or interfere with the completion of construction of the Building Shell. Base Monthly Rent shall be due in advance on or before the first day of each calendar month during the Lease Term. All sums payable by Tenant under this Lease shall be paid to Landlord in lawful money of the United States of America, without offset or deduction and without prior notice or demand, at the address specified in Section 1 of this Lease or at such place or places as may be designated by Landlord during the Lease Term. Base Monthly Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. A. RENTAL ADJUSTMENT: Beginning thirty (30) months after the Commencement Date, and every thirty (30) months thereafter during the initial lease term (an "Adjustment Date"), the Page 2 then-payable Base Monthly Rent shall be subject to adjustment based on the increase, if any, in the Consumer Price Index that has occurred during the thirty (30) months preceding the then-applicable Adjustment Date. The basis for computing the adjustment shall be the U.S. Department of Labor, Bureau of Labor Statistic's Consumer Price Index for All Urban Consumers, All Items, 1982-84=100, for the San Francisco-Oakland-San Jose area ("Index"). The Index most recently published preceding the Commencement Date for the first Adjustment (or previous Adjustment Date, as applicable), shall be considered the "Base Index". If the Index most recently published preceding the Adjustment Date ("Comparison Index") is greater than the Base Index, the then-payable Base Monthly Rent shall be increased by multiplying the then-payable Base Monthly Rent by a fraction, the numerator of which is the Comparison Index and the denominator of which is the Base Index. On adjustment of the Base Monthly Rent, Landlord shall notify Tenant by letter stating the new Base Monthly Rent. Landlord's failure to adjust Base Monthly Rent on an Adjustment Date shall not prevent Landlord from retroactively adjusting Base Monthly Rent at any subsequent time during the Lease Term. If the Index base year is changed so that it differs from 1982-84=100, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the Lease Term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the index had not been discontinued or revised. 5. SECURITY DEPOSIT: Concurrently with Tenant's execution of this Lease, Tenant has deposited with Landlord the sum of One Hundred Forty Thousand Dollars ($140,000.00) ("Security "Deposit"). Landlord shall not be required to separate the Security Deposit from Landlord's other funds and Tenant shall not be entitled to interest on the Security Deposit. If Tenant defaults with respect to any provisions of the Lease, including but not limited to the provisions relating to payment of Base Monthly Rent or other charges, Landlord may, to the extent reasonably necessary to remedy Tenant's default, use any or all of the Security Deposit towards payment of the following: (i) Base Monthly Rent or other charges in default; (ii) any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default; and (iii) any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant shall, within ten (10) days after written demand from Landlord, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its full original amount, and shall pay to Landlord such other sums as necessary to reimburse Landlord for any sums paid by Landlord. The Security Deposit shall be returned to Tenant within thirty (30) days after the Expiration Date and surrender of the Premises to Landlord, less any amount deducted in accordance with this Section, together with Landlord's written notice itemizing the amounts and purposes for such deduction. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer the Security Deposit to Landlord's successor in interest. Page 3 At Tenant's election, in lieu of the Security Deposit, Tenant may at any time simultaneously with, or following the execution of this Lease, deliver to Landlord an irrevocable letter of credit payable in favor of Landlord in the amount of One Hundred Forty Thousand Dollars ($140,000). The letter of credit shall provide that it is automatically renewable until the date that is not earlier than the expiration of the term hereby demised without any action whatsoever on the part of Landlord; provided that the issuing bank shall have the right not to renew said letter of credit on written notice to Landlord not less than the expiration of the then current term thereof (it being understood, however, that the privilege of the issuing bank not to renew said letter of credit shall not, in any event, diminish the obligation of Tenant to maintain such irrevocable letter of credit with Landlord through the expiration of the term hereby demised). The form and terms of the letter of credit, and the bank issuing the same, shall be reasonably acceptable to Landlord and the letter of credit shall provide, among other things, in effect that: (i) Landlord, or its then managing agent, shall have the right to draw down an amount up to the amount of the sums then due to Landlord under this Lease upon the presentation to the issuing bank of Landlord's (or Landlord's then managing agent's) statement that such amount is due to Landlord under the terms and conditions of this Lease, it is being understood that such statement shall be duly signed by a general partner of Landlord; (ii) The letter of credit will be honored by the issuing bank without inquiry as to the accuracy thereof and regardless of whether the Tenant disputes the content of such statement; (iii) In the event of a transfer of Landlord's interest in the Building, Landlord shall have the right to transfer the letter of credit to the Transferee and the provision hereof shall apply to every transfer or assignment of said letter of credit to a new Landlord (or it Tenant is not able to obtain a transferable letter of credit, then Tenant shall cause the letter of credit to be replaced or amended such that the new Landlord may draw). If as a result of any such application of all or any part of the proceeds of the Letter of Credit, the amount of the lever of credit shall be less than $140,000, Tenant shall forthwith provide Landlord with additional letter(s) of credit (or a cash security deposit) in an amount equal to the deficiency. Any such cash security deposit, and any proceeds of the letter of credit which are not applied to sums owed by Tenant to Landlord, shall be held by Landlord as a security deposit under the first two paragraphs of this Section 5. Without limiting the generality of the foregoing, if the letter of credit expires earlier than sixty (60) days after the expiration of the term of this Lease, or the issuing bank notifies Landlord that it shall not renew the letter of credit, Landlord will accept a renewal thereof or substitute letter of credit (such renewal or substitute letter of credit to be in effect not later than the expiration of the expiring letter of credit), irrevocable and automatically renewable as above provided upon the same terms as the expiring letter of credit or such other terms as may be reasonably acceptable to Landlord. However, (i) if the letter of credit is not timely renewed or a substitute letter of credit is Page 4 not timely provided, (ii) or if Tenant fails to maintain the letter of credit in the amount and terms set forth in this Section 5, Tenant must promptly deposit with Landlord cash security in the amounts required by, and to be held subject to and in accordance with, all of the terms and conditions set forth in the first two paragraphs of this Section 5, failing which the Landlord may present such letter of credit to the bank, in accordance with the terms of this Section 5, and the entire amount of the letter of credit shall be paid to Landlord and shall be held by Landlord as provided in the first two paragraphs of this Section 5. 6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to Landlord of Base Monthly Rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which is extremely difficult to ascertain. Such costs include but are not limited to: administrative, processing, accounting, and late charges which may be imposed on Landlord by the terms of any contract,, revolving credit, mortgage, or trust deed covering the Premises. Accordingly, if any installment of Base Monthly Rent or other sum due from Tenant shall not be received by Landlord or its designee when due, Tenant shall pay to Landlord a late charge equal to five (5%) percent of such overdue amount, which late charge shall be due and payable on the same date that the overdue amount was due. Landlord agrees to provide Tenant a notice to pay rent or quit if the Base Monthly Rent is not received when due and further agrees to waive said late charge in the event all amounts set forth in such notice are paid in full by cashier's check within five (5) days after Landlord's service upon Tenant of such notice. The parties 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 by Landlord of such late charge shall not constitute a waiver of Tenant's default with respect to such overdue amount nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. 7. CONSTRUCTION AND POSSESSION: A. BUILDING SHELL CONSTRUCTION. Landlord shall cause the shell of the Building ("Building Shell") to be constructed by independent contractors to be employed by and under the supervision of Landlord's affiliated construction company, Sobrato Construction Corporation in accordance with the conceptual Building Shell plans and guideline specifications prepared by Arctec ("Architect") and approved by Landlord and Tenant, which are attached hereto as EXHIBIT "B" ("Preliminary Shell Plans and Specifications") and Final Building Shell Plans (defined in subsection 7.C below). Landlord shall construct the Building Shell in accordance with all applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances, and shall correct any violations of such laws at no cost to Tenant. Landlord shall pay for all costs and expenses associated with the construction of the Building Shell. The Building Shell shall include those items set forth in the attached EXHIBIT "C" ("Building Shell Definition"). B. TENANT IMPROVEMENT PLANS. Tenant, at Tenant's sole cost and expense, has also Page 5 hired the Architect to prepare plans and outline specifications which will be attached hereto upon completion as EXHIBIT "D" ("Tenant Improvement Plans and Specifications") with respect to the construction of improvements to the interior premises ("Tenant Improvements"). The Tenant Improvements shall consist of all items not included within in the scope of the Building Shell Definition. Tenant has hired Permian Builders as the general contractor for the Tenant Improvements ("General Contractor"). Tenant shall cause the General Contractor to construct the Tenant Improvements in accordance with all Tenant Improvement Plans and Specifications. Landlord shall provide Tenant a work allowance to be utilized by Tenant for the construction of Tenant Improvements ("Work Allowance") in the amount of One Million Six Hundred Fifty Thousand and No/100 Dollars ($1,650,000.00). The Work Allowance shall be paid by Landlord to Tenant as payments become due to General Contractor. The Tenant Improvements shall become the property of Tenant upon installation and shall not be removed or altered by Tenant without the prior written consent of Landlord as provided in Section 10. Tenant shall have the right to depreciate and claim and collect any investment tax credits in the Tenant Improvements during the Lease Term. Upon expiration of the Lease Term or any earlier termination of the Lease, the Tenant Improvements shall become the property of Landlord and shall remain upon and be surrendered with the Premises, and title thereto shall automatically vest in Landlord without any payment therefore. C. FINAL BUILDING SHELL PLANS. Within thirty (30) days following execution of this Lease, Landlord shall deliver the final Building Shell Plans and Specifications for Tenant's review and approval ("Final Building Shell Plans"). The Final Building Shell Plans shall include those items set forth in the Building Shell Definition attached as EXHIBIT "C" and shall be a natural evolution of the Preliminary Building Shell Plans and Specifications attached as EXHIBIT "B". Tenant's approval of the Final Building Shell Plans is not a representation or warranty that such improvements illustrated therein are in compliance with applicable building codes or the ADA. D. CHANGE ORDERS. Tenant shall have the right to order changes in the manner and type of construction of the Building Shell. Any change order submitted by Tenant after ten (10) days from the date of issuance by the City of San Jose of a building permit for the construction of the Building Shell, which causes either Landlord's construction schedule to be delayed, shall cause the Commencement Date to occur one (1) day in advance of the date the Building Shell is Substantially Complete (as defined in Section 7.E) for each day of delay. Upon request and prior to Tenant's submitting any binding change order, Landlord shall promptly provide Tenant with written statements of the cost to implement and the time delay and increased construction costs associated with any proposed change order, which statements shall be binding on Landlord. If no time delay or increased construction cost amount is noted on the written statement, the parties agree that there shall be no adjustment to the construction cost or the Commencement Date associated with such change order. If ordered by Tenant, Landlord shall implement such change order and the cost of constructing the Building Shell shall be increased in accordance with the cost statement previously Page 6 delivered by Landlord to Tenant for any such change order. E. CONSTRUCTION. Landlord shall use its best efforts to obtain a building permit from the City of San Jose as soon as possible after Tenant's approval of the Final Building Shell Plans. The Building Shell shall be deemed substantially complete ("Substantially Complete") when (i) the Building Shell has been substantially completed in accordance with the Final Building Shell Plans, as evidenced by the issuance of a certificate of occupancy or its equivalent by the appropriate governmental authority for the Building Shell, and the issuance of a certificate by the Architect certifying that the Building Shell have been completed in accordance with the Final Building Shell Plans and (ii) only punch list type work remains to be completed and such punch list work does not materially affect Tenant's ability to use the Premises in the manner contemplated by this Lease. F. INSURANCE/INDEMNITY. Landlord shall indemnify, protect, defend and hold Tenant harmless from and against all liability, cost, expense, or damage, including attorneys fees, arising from construction of the Building Shell; construction defects; or failure to properly construct the Building Shell in accordance with the approved Final Building Shell Plans. Tenant's review and approval of plans, specifications, or any other documents shall not relieve Landlord from its obligations under the foregoing indemnification. Landlord shall procure a "Broad Form" liability insurance policy on an occurrence basis, with a minimum combined single limit in the amount of Three Million Dollars ($3,000,000.00), insuring all Landlord's construction activities with respect to the Building and Premises naming Tenant and Permian Builders as additional insureds and Landlord shall cause its general contractor to procure a "Broad Form" liability insurance policy on an occurrence basis, with a minimum combined single limit in the amount of Three Million Dollars ($3,000,000) insuring all of such general contractors' construction activities with respect to the Building and Premises and naming Tenant and Permian Builders as additional insureds. Such insurance shall not be modified or canceled without thirty (30) days prior notice to Tenant. Tenant shall indemnify, protect, defend and hold Landlord harmless from and against all liability, cost, expense, or damage, including attorneys fees, arising from construction of the Tenant Improvements; construction defects; or failure to properly construct the Tenant Improvements in accordance with the approved Tenant Improvement Plans and Specifications. Landlord's review and approval of plans, specifications, or any other documents shall not relieve Tenant from its obligations under the foregoing indemnification. Tenant shall cause General Contractor to procure a "Broad Form" liability insurance policy, on an occurrence basis, in a minimum combined single limit in the amount of Three Million Dollars ($3,000,000.00), insuring all General Contractor's construction activities with respect to the Building and Premises naming Landlord and Sobrato Construction Corporation as additional insureds. Such insurance shall not be modified or canceled without thirty (30) days prior notice to Landlord. Landlord shall also procure (as a cost of the Building Shell) builder's risk insurance for the Page 7 full replacement cost of the Building Shell and Tenant Improvements while the Building and Tenant Improvements are under construction, up until the date that the fire insurance policy described in Lease Section 12 is in full force and effect. G. PUNCH LIST & WARRANTY. After the Building Shell is Substantially Complete, Landlord shall immediately correct any construction defect or other "punch list" item which Tenant brings to Landlord's attention. All such work shall be performed so as to cause the least possible interruption to Tenant and its activities on the Premises. Landlord shall cause its contractor to provide a standard contractor's warranty with respect to the Building Shell for one (1) year from the Commencement Date and Landlord shall warrant the Building Shell against defects in workmanship or material for one (1) year from the Commencement Date. Such warranties shall exclude routine maintenance, damage caused by Tenant's negligence or misuse, and acts of God. Landlord shall also promptly correct or cure, after written notice from Tenant given from time to time and at no cost to Tenant, any failure of the Building Shell to comply with laws in effect as of the date of completion of the Building Shell (including, without limitation, building code violations). H. OTHER WORK BY TENANT. All work not within the scope of work not described in the Shell Plans and Specifications shall be furnished and installed by Tenant or the General Contractor. When the construction of the Building Shell has proceeded to the point where the construction of the Tenant Improvements may begin, Landlord shall notify General Contractor and shall permit General Contractor and as authorized representatives and contractors access to the Premises before the Commencement Date without the payment of rent for the purpose of constructing the Tenant Improvements. Any such installation work by Tenant or its General Contractor shall be undertaken upon the following conditions: (i) if the entry into the Premises by Tenant or its representatives or contractors interferes with or delays Landlord's work, Tenant shall cause the party responsible for such interference or delay to leave the Premises; and (ii) any contractor used by Tenant or its General Contractor in connection with such entry and installation shall use union labor if the use of nonunion labor would disrupt Landlord's work when both Landlord and Tenant's contractors are working in the Premises. I. LANDLORD'S FAILURE TO COMPLETE CONSTRUCTION: Notwithstanding the foregoing, (i) if the Premises are not Substantially Complete on or before that date which is eight (8) months following the date on which Landlord obtains a building permit from the City of San Jose allowing Landlord to begin construction of the Building, Tenant shall be entitled to rental abatement hereunder of one (1) day's rent for each day beyond said eight (8) month period in which the Building Shell is not Substantially Complete (i.e., the date on which Tenant is required to commence paying rent under this Lease shall be extended by one day for each day beyond said eight month period during which the Building Shell is not Substantially Complete). The above dates shall be extended one day for every day of delay in completion caused by labor strikes, material shortages, inclement weather, Tenant Delays or other causes beyond the reasonable control of Landlord ("Force Page 8 Majeure Delays"); provided, however, that Landlord must notify Tenant in writing within five (5) days after the occurrence of any such Force Majeure Delay, and if Landlord does not so notify Tenant in writing, then the applicable Force Majeure Delay shall be deemed not to have commenced until the date which is five (5) days prior to the date Tenant actually receives written notice from Landlord advising Tenant of the applicable Force Majeure Delay event. If the Premises are not Substantially Complete on or before May 1, 1998 (the "Latest Completion Date"), then Tenant may terminate this Lease and the Adjacent Building Lease by written notice to Landlord given on or before May 15, 1998. The Latest Completion Date shall be extended by Tenant Delays but not by delays in completion caused by labor strikes, material shortages, inclement weather or any other causes beyond the reasonable control of Landlord (other than Tenant Delays). The delay in the commencement of rent, the abatement of rent, and termination right provided above shall be the sole and exclusive remedies of Tenant with respect by the failure by Landlord to achieve Substantial Completion by the Commencement Date. 8. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER: On the Commencement Date, Landlord shall deliver and Tenant shall accept the Premises as being in good and sanitary order, condition and repair, and shall accept the Premises and the other improvements in their present condition, subject to (i) a reservation of claims of latent defects, (ii) the warranties from Landlord contained in this Lease, (iii) Landlord's obligations under Section 7.G to correct construction defects, (iv) any failure of the Building Shell to comply with laws in effect as of the date of completion, and (v) Landlord's obligation to complete punch list items, and (vi) Landlord and its general contractor's one (1) year warranties described in Section 7.G above, and any other applicable warranties. Within one hundred twenty (120) days after the Commencement Date, Tenant agrees to be in occupancy of at least fifty percent (50%) of the rentable square footage of the Premises. Tenant further agrees on Expiration Date or on the sooner termination of this Lease, to surrender the Premises to Landlord in good condition and repair, reasonable wear and tear excepted. "Good condition" means that all interior walls, floors, suspended ceilings, and carpeting within the Premises will be cleaned to the same condition as existed at the Commencement Date, normal wear and tear and acts of God excepted. Tenant agrees, at its sole cost, to remove all phone and data cabling from the suspended ceiling, repair or replace broken ceiling tiles, and relevel the ceiling if required due to Tenant's cabling. On or before the Expiration Date or sooner termination of this Lease, Tenant shall remove all its personal property and trade fixtures from the Premises. All property and fixtures not so removed shall be deemed as abandoned by Tenant. Approximately sixty (60) days prior to the Expiration Date, Landlord shall notify Tenant in writing whether Landlord will require the removal of any Alterations made by Tenant to the Premises, except for such Alterations Landlord has previously agreed to allow to remain on the Premises pursuant to paragraph 10 below. If Landlord shall so require, Tenant shall, at Tenant's sole cost and expense, remove such Alterations as Landlord requires and shall repair and restore said Premises or such Page 9 parts thereof before the Expiration Date. Such repair and restoration shall include causing the Premises to be brought into compliance with all applicable building codes and laws in effect at the time of the removal to extent such compliance is necessitated by the repair and restoration work. In no event, however, shall Tenant be required to remove any of the Tenant Improvements constructed by Tenant prior to its initial occupancy of the Premises. If the Premises are not surrendered at the Expiration Date or sooner termination of this Lease in the condition required by this Section 8, Tenant shall be deemed in a holdover tenancy pursuant to Section 34, and Tenant shall indemnify, defend, and hold Landlord harmless against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. 9. USES PROHIBITED: Tenant shall not commit or suffer to be committed on the Premises any waste, nuisance, or other act or thing which disturb the quiet enjoyment of any other tenant in or around the Premises, nor allow any sale by auction or any other use of the Premises for an unlawful purpose. Tenant shall not place any loads upon the floor, walls, or ceiling which endanger the structure, nor use any machinery or apparatus which harmfully vibrate or shake the Premises, nor shall Tenant place any harmful liquids, waste materials, or hazardous materials in the drainage system or upon or in the soils surrounding the Building. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature, or any waste materials, refuse, scrap or debris, shall be stored upon or permitted to remain on any portion of the Premises outside of the Building except in storage enclosures designed for such purposes. 10. ALTERATIONS AND ADDITIONS: Tenant shall be entitled without obtaining Landlord's consent, to make any alteration or addition to the Premises ("Alterations") which (i) does not affect the structure of the Building, (ii) cost does not exceed Fifty Thousand Dollars ($50,000.00) per alteration nor an aggregate of One Hundred Thousand Dollars ($100,000.00) in any twelve (12) month period. All other Alterations shall require Landlord's consent. If Landlord's consent is required, Tenant shall deliver to Landlord the proposed architectural and structural plans for the Alteration and Landlord shall have a period of ten (10) business days thereafter to grant its consent, which consent shall not be unreasonably withheld. Landlord shall indicate in writing to Tenant at the time of Tenant's request, whether or not Landlord will require Tenant to remove such Alteration at the Expiration Date. If, at the time Landlord consents to any Alteration, Landlord does not require Tenant to remove such Alteration at the Expiration Date, then Landlord shall be deemed to have waived such right to require Tenant to remove such Alteration so consented to. After obtaining Landlord's consent, Tenant shall not proceed to make such Alterations until Tenant has obtained all required governmental approvals and permits, and provided Landlord reasonable security, in form reasonably approved by Landlord, to protect Landlord against mechanics' lien claims (if such Alterations exceed $1,000,000 in cost). Tenant agrees to provide Landlord written notice of the anticipated and actual start-date of the work, and a complete set of half-size (15" X 21") vellum as-built drawings. All Alterations shall be constructed in compliance with applicable buildings codes Page 10 and laws. Any Alterations, except movable furniture and trade fixtures, shall become at once a part of the realty and belong to Landlord but shall nevertheless be subject to removal by Tenant as provided in this Section 10 and Section 8 above. Alterations which are not deemed as trade fixtures include heating, lighting, electrical systems, air conditioning, partitioning, carpeting, or any other installation which has become an integral part of the Premises. All Alterations shall be maintained, replaced or repaired by Tenant at its sole cost and expense. 11. MAINTENANCE OF PREMISES: A. TENANT'S OBLIGATIONS: Subject to Sections 11.B, 28 and 30 below, Tenant shall, at is sole cost, keep, maintain, repair, and replace as and when necessary said Premises and appurtenances and every part hereof in good and sanitary order, condition, and repair, including but not limited to the following: roof membrane, glazing, caulking, sidewalks, parking areas, site utilities, elevator, telephone, plumbing, electrical, HVAC systems, and all Tenant Improvements. Notwithstanding the foregoing, Tenant shall have no responsibility to perform any repair, maintenance or improvement (i) necessitated by the acts or omissions of Landlord or its agents, employees or contractors, (ii) occasioned by fire, acts of God or other casualty, whether or not covered by insurance, or by the exercise of the power of eminent domain, (iii) required as a consequence of any violation of laws or construction defect in the Premises existing as of the Commencement Date, or (iv) for which Landlord has a right of reimbursement from others. Tenant shall provide Landlord a copy of a service contract between Tenant and: (i) a licensed air conditioning and heating contractor providing for bi-monthly maintenance of all air conditioning and heating equipment at the Premises; and (ii) a licensed elevator maintenance contractor providing for monthly maintenance of all elevator related systems. Tenant shall pay the cost of all air conditioning, heating, and elevator equipment repairs or replacements which are excluded from such service contract or any existing equipment warranties. All wall surfaces and floor tile are to be maintained in an as good a condition as when Tenant took possession free of holes, gouges, or defacements. Tenant shall also be responsible, at its sole cost and expense, for the preventive maintenance of the membrane of the roof, which responsibility shall be deemed properly discharged if Tenant contracts, at its sole cost, with a licensed roof contractor reasonably satisfactory to Tenant and Landlord to inspect the roof membrane at least every six (6) months, with the first inspection due the sixth (6th) month after the Commencement Date; and Tenant performs, at Tenant's sole cost, all preventive maintenance recommendations made by such contractor within a reasonable time after such recommendations are made. Such preventive maintenance might include acts such as clearing storm gutters and drains, removing debris from the roof membrane, trimming trees overhanging the roof membrane, applying coating materials to seal roof penetrations, repairing blisters, and other routine measures. Tenant shall provide Landlord a copy of such preventive maintenance contract and paid invoices for the recommended work. Tenant agrees, at its sole cost, to water, maintain, and replace Page 11 when necessary, any shrubbery and landscaping. B. LANDLORD'S OBLIGATIONS: Landlord at its sole cost and expense, shall maintain in good condition, order, and repair, and replace as and when necessary, all structural portions of the Building, including, without limitation, the foundation, exterior load bearing walls and roof structure of the Building Shell. C. CAPITAL REPLACEMENTS: If as a part of Tenant's fulfillment of its maintenance obligations under Section 11.A above, a capital improvement or replacement to the Premises (not required by new laws, rules or regulations) is paid for by Tenant which costs in excess of One Hundred Thousand Dollars ($100,000.00), Landlord shall, within ten (10) days following receipt of written invoices and supporting documentation evidencing costs incurred by Tenant, reimburse Tenant for the entire cost of the capital improvement or replacement less that portion of the cost equal to the product of such tool cost multiplied by a fraction, the numerator of which is the number of years remaining in the Lease Term, and the denominator of which is the useful life (in years) of the capital improvement or replacement. 12. HAZARD INSURANCE: A. TENANT'S USE: Tenant shall not use or permit the Premises, or any part thereof, to be used for any purpose other than that for which the Premises are hereby leased; and no use of the Premises shall be made or permitted, nor acts done, which will cause a cancellation of any insurance policy covering the Premises or any part thereof, nor shall Tenant sell or permit to be sold, kept, or used in or about the Premises, any article prohibited by the standard form of fire insurance policies. Tenant shall, at its sole cost, comply with all reasonable requirements of any insurance company or organization necessary for the maintenance of reasonable fire and public liability insurance covering the Premises and appurtenances. B. LANDLORD'S INSURANCE: Landlord agrees to purchase and keep in force fire, extended coverage, earthquake (at Landlord's election if commercially available and required by Landlord's lender), owner's liability, and 12-month rental loss insurance. The amount of the fire, extended coverage and earthquake insurance shall equal the replacement cost of the Building Shell and Tenant Improvements as determined by Landlord's insurance company's appraisers. Tenant agrees to pay Landlord as additional rent, on demand, the full cost of said insurance as evidenced by insurance billings to Landlord, and in the event of damage covered by said insurance, the amount of any deductible under such policy. In no event, however, shall Tenant's obligation to reimburse Landlord for the deductible exceed $25,000.00. Payment shall be due to Landlord within thirty (30) days after written invoice to Tenant. Notwithstanding the foregoing, Tenant's obligation to pay the cost of earthquake insurance premiums shall be limited to an amount no greater than four (4) times the cost of the fire and extended coverage premiums. It is understood and agreed that Tenant's obligation Page 12 under this Section will be prorated to reflect the Lease Commencement and Expiration Dates. C. TENANT'S INSURANCE: Tenant agrees, at as sole cost, to insure its personal property, Tenant Improvements (for which it has paid from sources other than the Work Allowance), and Alterations for their full replacement value (without depreciation) and to obtain worker's compensation and public liability and property damage insurance for occurrences within the Premises with combined limits for bodily injury and property damage of at least $1,000,000.00 per occurrence and a general aggregate limit of at least $5,000,000.00. Tenant's liability insurance shall be primary insurance containing a cross-liability endorsement, and shall provide coverage on an "occurrence" rather than on a "claims made" basis. Tenant shall name Landlord and Landlord's lender as an additional insured and shall deliver a copy of the policies and renewal certificates to Landlord. All such policies shall provide for thirty (30) days' prior written notice to Landlord of any cancellation, termination, or reduction in coverage. D. WAIVER: To the extent of the insurance proceeds paid by the applicable insurance company, Landlord and Tenant hereby waive all rights each may have against the other on account of any loss or damage sustained by Landlord or Tenant, as the case may be, or to the Premises or its contents or any other property, which may arise from any risk covered by their respective insurance policies (or which would have been covered had such insurance policies been maintained in accordance with this Lease) as set forth above or which are otherwise maintained by Landlord or Tenant. The parties shall use their reasonable efforts to obtain from their respective insurance companies a waiver of any right of subrogation which said insurance company may have against Landlord or Tenant, as the case may be. 13. TAXES: Tenant shall be liable for and shall pay as additional rental, prior to delinquency, the following: (i) all taxes and assessments levied against Tenant's personal property and trade or business fixtures; (ii) all real estate taxes and assessment installments or other impositions or charges which may be levied on the Premises or upon the occupancy of the Premises, including any substitute or additional charges which may be imposed applicable to the Lease Term; and (iii) real estate tax increases due to a sale, transfer or other change of ownership of the Premises as it appears on the City and County tax bills during the Lease Term. Tenant's obligation under this Section shall be prorated to reflect the Lease Commencement and Expiration Dates. If, at any time during the Lease Term a tax, excise on rents, business license tax or any other tax, however described, is levied or assessed against Landlord as a substitute or addition, in whole or in part, for taxes assessed or imposed on land or Buildings, Tenant shall pay and discharge its pro rata share of such tax or excise on rents or other tax before it becomes delinquent; except that this provision is not intended to cover net income taxes, inheritance, gift or estate tax imposed upon Landlord. In the event that a tax is placed, levied, or assessed against Landlord and the taxing authority takes the position that Tenant cannot pay and discharge its pro rata share of such tax on behalf of Landlord, then at Landlord's sole election, Landlord may increase the Base Monthly Rent by the exact amount Page 13 of such tax and Tenant shall pay such increase. Both Landlord and Tenant shall have the right to seek a reduction in the assessed value of the Premises. If by virtue of any application or proceeding brought by or on behalf of Landlord, there results a reduction in the assessed value of the Premises during the Lease Term, Tenant agrees to reimburse Landlord for all costs incurred by Landlord in connection with such application or proceeding provided such costs do not exceed the present value of the savings. 14. UTILITIES: Tenant shall pay directly to the providing utility all water, gas, electric, telephone, and other utilities supplied to the Premises. Except due to the negligence or willful misconduct of Landlord, Landlord shall not be liable for loss of or injury to person or property, however occurring, through or in connection with or incidental to furnishing or failure to furnish utilities to the Premises, and, except as provided in Section 44, Tenant shall not be entitled to abatement or reduction of any portion of Base Monthly Rent or any other amount payable under this Lease. 15. ABANDONMENT: Tenant shall not abandon the Premises at any time during the Lease Term. In the event Tenant abandons or surrenders the Premises or is dispossessed by process of law or otherwise, any personal property belonging to Tenant left on the Premises shall be deemed as abandoned at the option of Landlord, except such property as may be mortgaged to Landlord. 16. FREE FROM LIENS: Tenant shall keep the Premises free from all liens arising out of work performed, materials furnished, or obligations incurred by Tenant or claimed to have been performed for Tenant. In the event Tenant fails to discharge any such lien within twenty (20) days after receiving notice of the filing, Landlord shall be entitled to discharge the lien at Tenant's expense and all resulting costs incurred by Landlord, including attorney's fees shall be due from Tenant as additional rent. 17. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at its sole cost and expense, comply with and faithfully observe in its use of the Premises all laws, regulations and other requirements of all Municipal, County, State and Federal authorities now in force, or which may hereafter be in force, pertaining to Tenant's specific use 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 law, regulation or other requirement in its use of the Premises shall be conclusive of that fact as between Landlord and Tenant. If any improvement or alteration to the Premises is required as a result of any future laws or regulations affecting the Premises not related to Tenant's specific use of the Premises, and provided further said improvement or alteration is not required because of Alterations made by Tenant, the cost of such improvements shall be allocated between Landlord and Tenant such that Tenant shall pay to Landlord as additional rent an amount determined as follows: Page 14 (a) all costs reasonably incurred by Landlord to construct such improvement shall be fully amortized over the useful life of such improvement with interest on the unamortized balance at the prevailing market rate Landlord would pay if it borrowed funds to construct such improvements from an institutional lender, and Landlord shall inform Tenant of such monthly amortization payment required to so amortize such costs, and shall also provide Tenant with the information upon which such determination is made; and (b) as additional rent Tenant shall pay the monthly amortization payment with respect to any such capital improvement required as a result of any future law or regulation affecting the Premises which is not related to Tenant's specific use of the Premises as stated above. Tenant's obligation to make payments hereunder with respect to any particular capital improvement shall commence when such improvement has been substantially completed and shall cease upon the earlier of the expiration of the Lease term (but not upon a termination due to any Event of Default on the part of Tenant) or the end of the term over which the costs of constructing the particular improvement were amortized. Payments of such additional rent required under this Section 17 shall be made concurrently with payments of Base Monthly Rent. 18. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: A. TENANT'S RESPONSIBILITY: Without the prior written consent of Landlord, Tenant shall not bring, use, or permit upon the Premises, or generate, create, release, emit, or dispose (nor permit any of the same) from the Premises any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste, including without limitation, material or substance having characteristics of ignitability, corrosivity, reactivity, or toxicity or substances or materials which are listed on any of the Environmental Protection Agency's lists of hazardous wastes or which are identified in Division 22 Title 26 of the California Code of Regulations as the same may be amended from time to time ("Hazardous Materials") unless such Hazardous Materials are used (i) in compliance with all applicable laws, and (ii) are commonly used in connection with general office use. In order to obtain consent, Tenant shall deliver to Landlord its written proposal describing the toxic material to be brought onto the Premises, measures to be taken for storage and disposal thereof, safety measures to be employed to prevent pollution of the air, ground, surface and ground water. Landlord's approval may be withheld in its reasonable judgment. In the event Landlord consents to Tenant's use of Hazardous Materials on the Premises, Tenant represents and warrants that it will do the following: (i) adhere to all reporting and inspection requirements imposed by Federal, State, County or Municipal laws, ordinances or regulations and will provide Landlord a copy of any such reports or agency inspections; (ii) obtain and provide Landlord copies of all necessary permits required for the use and handling Hazardous Materials on the Premises; (iii) enforce Hazardous Materials handling and disposal practices consistent with industry standards; (iv) surrender the Premises free from any Hazardous Materials arising from Tenant's bringing, using, permitting, generating, creating, releasing, emitting or disposing of Hazardous Materials; and (v) properly close the facility with Page 15 regard to Hazardous Materials including the removal or decontamination of any process piping, mechanical ducting, storage tanks, containers, or trenches which have come into contact with Hazardous Materials and obtain a closure certificate from the local administering agency prior to the Expiration Date. B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall, at its sole cost, comply with all laws pertaining to, and shall indemnify and hold Landlord harmless from, any claims, liabilities, costs or expenses incurred or suffered by Landlord arising from the bringing, using, authorizing, generating, emitting or disposing of Hazardous Materials by Tenant during the Lease Term. Tenant's indemnification and hold harmless obligations include, without limitation, the following: (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation with respect to Hazardous Materials generated or disposed of by Tenant, its agents, employees or contractors; (ii) claims, liabilities, costs or expenses pertaining to the identification, monitoring, cleanup, containment, or removal of Hazardous Materials generated or disposed of by Tenant, its agents, employees or contractors from soils, riverbeds or aquifers including the provision of an alternative public drinking water source; and (iii) all costs of defending such claims. C. ACTUAL RELEASE BY TENANT: Each party agrees to notify the other of any known lawsuits or order which relate to the remedying of or actual release of Hazardous Materials on or into the soils or ground water at or under the Premises. Each party shall also provide the other all notices required by Section 25359.7(b) of the Health and Safety Code and all other notices required by law to be given in connection with Hazardous Materials. In the event of any such release of Hazardous Materials by Tenant, Tenant agrees to meet and confer with Landlord and its Lender to attempt to eliminate and mitigate any financial exposure to such Lender and resultant exposure to Landlord under California Code of Civil Procedure section 736(b) as a result of such release, and promptly to take reasonable monitoring, cleanup and remedial steps given, inter alia, the historical uses to which the Property has and continues to be used, the risks to public health posed by the release by Tenant, the then available technology and the costs of remediation, cleanup and monitoring, consistent with acceptable customary practices for the type and severity of such contamination and all applicable laws. Nothing in the preceding sentence shall eliminate, modify or reduce the obligation of Tenant under Section 18.B of this Lease to indemnify and hold Landlord harmless from any claims liabilities, costs or expenses incurred or suffered by Landlord. Tenant shall provide Landlord prompt written notice of Tenant's monitoring, cleanup and remedial steps. Page 16 In the absence of an order of any federal, state or local governmental or quasigovernmental agency relating to the cleanup, remediation or other response action required by applicable law, any dispute arising between Landlord and Tenant concerning Tenant's obligation to Landlord under this Section 18.C concerning the level, method, and manner of cleanup, remediation or response action required in connection with such a release of Hazardous Materials shall be resolved by mediation and/or arbitration pursuant to the provisions of Section 45 of this Lease. D. LANDLORD'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Landlord shall indemnify and hold Tenant harmless from any claims, liabilities, costs or expenses incurred or suffered by Tenant related to the removal, investigation, monitoring or remediation of Hazardous Materials which are present on the Premises as of the Commencement Date or which come to be present on the Premises due to the acts of Landlord, its employees, agents or contractors. Landlord's indemnification and hold harmless obligations include, without limitation, (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation with respect to Hazardous Materials generated or disposed of by Landlord, its agents, employees or contractors, (ii) claims, liabilities, costs or expenses pertaining to the identification, monitoring, cleanup, containment, or removal of Hazardous Materials generated or disposed of by Landlord, its agents, employees or contractors from soils, riverbeds or aquifers including the provision of an alternative public drinking water source, and (iii) all costs of defending such claims. In no event shall Landlord be liable under this Lease for any consequential damages suffered or incurred by Tenant as a result of any such contamination. E. ENVIRONMENTAL MONITORING: Provided Landlord (i) gives reasonable prior notice (except in case of emergency) and (ii) minimizes its interference with Tenant's business, Landlord and its agents shall have the right to inspect, investigate, sample and monitor the Premises including any air, soil, water, ground water or other sampling or any other testing, digging, drilling or analysis to determine whether Tenant is complying with the terms of this Section 18. If Landlord discovers that Tenant is not in compliance with the terms of this Section 18, any such reasonable costs incurred by Landlord, including attorneys' and consultants' fees, shall be due and payable by Tenant to Landlord within thirty (30) days following Landlord's written demand therefore. 19. INDEMNITY: As a material part of the consideration rendered to Landlord, Tenant hereby waives all claims against Landlord for damages to goods, wares and merchandise, and all other personal property in, upon or about said Premises and for injuries to persons in or about said Premises, from any cause (other than due to the negligence or willful misconduct of Landlord, its agents, employees, invitees and contractors) arising at any time to the fullest extent permitted by law, and Tenant shall indemnify and hold Landlord exempt and harmless from any damage or Page 17 injury to any person, or to the goods, wares and merchandise and all other personal property of any person, arising from the use of the Premises, Building, and/or Project by Tenant, its employees, contractors, agents and invitees or from the failure of Tenant to keep the Premises in good condition and repair as herein provided, except to the extent due to the negligence or willful misconduct of Landlord, its employees, agents, invitees, or contractors. Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant, its employees, contractors, agents and invitees, Tenant will indemnify and hold Landlord harmless from any such claim or liability including Landlord's costs and expenses and reasonable attorney's fees incurred in defending such claims. 20. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be placed, in, upon or about the Premises any signs not approved by the city or other governing authority. Tenant will not place or permit to be placed upon the Premises any signs, advertisements or notices without the written consent of Landlord as to type, size, design, lettering, coloring and location, which consent will not be unreasonably withheld. Any sign placed on the Premises shall be removed by Tenant, at its sole cost, prior to the Expiration Date or promptly following the earlier termination of the lease, and Tenant shall repair, at its sole cost, any damage or injury to the Premises caused thereby, and if not so removed, then Landlord may have same so removed at Tenant's expense. 21. ATTORNEY'S FEES: In the event a suit or alternative form of dispute resolution is brought for the possession of die Premises, for the recovery of any sum due hereunder, to interpret the Lease, or because of the breach of any other covenant herein; then the losing party shall pay to the prevailing party reasonable attorney's fees including the expense of expert witnesses, depositions and court testimony as part of its costs which shall be deemed to have accrued on the commencement of such action. The prevailing party shall also be entitled to recover all costs and expenses including reasonable attorney's fees incurred in enforcing any judgment or award against the other party. The foregoing provision relating to post-judgment costs is severable from all other provisions of this Lease. 22. TENANT'S DEFAULT: The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: (i) Tenant's failure to pay any rent due under this Lease by die date such rent is due, which failure continues for ten (10) days after written notice from Landlord; (ii) the abandonment of the Premises by Tenant; (iii) Tenant's failure to observe and perform any other required provision of this Lease, where such failure continues for thirty (30) days after written notice from Landlord (provided however, that if the nature of the default is such that it cannot reasonably be cured within the 30-day period, Tenant shall not be deemed in default if Tenant commences within such period to cure the default and thereafter diligently prosecutes the cure to completion); (iv) Tenant's making of any general assignment for the benefit of creditors; (v) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition Page 18 filed against Tenant, the same is dismissed after the filing); (vi) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; (vii) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days; or (viii) an uncured default by Tenant under the Adjacent Building Lease after applicable notice has been given and any applicable cure period has expired. The notice requirements set forth herein are in lieu of and not in addition to the notices required by California Code of Civil Procedure Section 1161. Any notice given by Landlord to Tenant pursuant to California Code of Civil Procedure 1161 regarding Tenant's failure to pay rent under this Lease by the date due shall provide Tenant with a period of at least ten (10) (lays to pay such rent or quit. A. REMEDIES: In the event of any such default by Tenant, then in addition to other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event Landlord elects to so terminate this Lease, Landlord may recover from Tenant all the following: (i) the worth at time of award of any unpaid rent which had been earned at the time of such termination; (ii) the worth at 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 for the same period that Tenant proves could have been reasonably avoided; (iii) the worth at time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (iv) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom; and (v) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted by applicable California law. The term "rent", as used herein, is defined as the minimum monthly installments of Base Monthly Rent and all other sums required to be paid by Tenant pursuant to this Lease, all such other sums being deemed as additional rent due hereunder. As used in (i) and (ii) above, "worth at the time of award" shall be computed by allowing interest at a rate equal to the discount rate of the Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used in (iii) above, "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one (1%) percent. B. RIGHT TO RE-ENTER: In the event of any such default by Tenant, Landlord shall have the right, after terminating this Lease, to re-enter the Premises and remove all persons and property. Such property may be removed and stored in a public warehouse or elsewhere at the cost of and "or the account of Tenant, and disposed of by Landlord in any manner permitted by law. C. ABANDONMENT: If Landlord does not elect to terminate this Lease as provided in Page 19 Section 22.A or 22.B above, then the provisions of California Civil Code Section 1951.4, (Landlord may continue the lease in effect after Tenant's breach and abandonment and recover rent as it becomes due if Tenant has a right to sublet and assign, subject only to reasonable limitations) as amended from time to time, shall apply and Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. In the event that Landlord elects to so relet, rentals received by Landlord from such reletting shall be applied in the following order to: (i) the payment of any indebtedness other than Base Monthly Rent due hereunder from Tenant to Landlord; (ii) the payment of any cost of such reletting; (iii) the payment of the cost of any alterations and repairs to the Premises necessary to relet the Premises; and (iv) the payment of Base Monthly Rent due and unpaid hereunder. The residual rentals, if any, shall be held by Landlord and applied in payment of future Base Monthly Rent as the same may become due and payable hereunder. In the event the portion of rentals received from such reletting which is applied to the payment of rent hereunder during any month be less than the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any reasonable costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. D. NO TERMINATION: Landlord's re-entry or taking possession of the Premises pursuant to 22.B or 22.C of this Section 22 shall not be construed as an election to terminate this Lease unless written notice of such intention is given to Tenant or unless the termination is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such default. 23. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not automatically effect a merger of the Lease with Landlord's ownership of the Premises. Instead, at me option of Landlord, Tenant's surrender may terminate all or any existing subleases or subtenancies or may operate as an assignment to Landlord of any or all such subleases or subtenancies, thereby creating a direct Landlord-Tenant relationship between Landlord and any subtenants. 24. This paragraph intentionally left blank. 25. LANDLORD'S DEFAULT: In the event of Landlord's failure to perform any of its covenants or agreements under this Lease, Tenant shall give Landlord written notice of such failure and shall give Landlord thirty (30) days to cure or commence to cure such failure prior to any claim Page 20 for breach or resultant damages, provided, however, that if the nature of the default is such that it cannot reasonably be cured within the 30-day period, Landlord shall not be deemed in default if it commences within such period to cure, and thereafter diligently prosecutes the same to completion. Further in the event that this Lease is terminated due to an uncured default by Landlord, Tenant shall also have the right to terminate the Adjacent Building Lease after written notice and expiration of any applicable cure period. Upon any such failure by Landlord, Tenant shall also give notice by registered or certified mail to any person or entity with a security interest in the Premises ("Mortgagee") that has provided Tenant with notice of its interest in the Premises, and shall provide Mortgagee a reasonable opportunity to cure such failure, including such time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effectuate a cure. Tenant agrees that each of the Mortgagees to whom this Lease has been assigned is an expressed third-party beneficiary hereof. Tenant shall not make any prepayment of rent more than one (1) month in advance without the prior written consent of Mortgagee. Tenant waives any right under California Civil Code Section 1950.7 or any other present or future law to the collection of any payment or deposit from Mortgagee or any purchaser at a foreclosure sale of Mortgagee's interest unless Mortgagee or such purchaser shall have actually received and not refunded the applicable payment or deposit. 26. NOTICES: All notices, demands, requests, or consents required to be given under this Lease shall be sent in writing by U.S. certified mail, return receipt requested, overnight delivery by a reputable carrier, or by personal delivery addressed to the party to be notified at the address for such party specified in Section 1 of this Lease, or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days prior notice to the notifying party. 27. ENTRY BY LANDLORD: Landlord (i) shall not enter the Premises without first giving twenty-four (24) hours notice to Tenant of such entry except in the case of emergency, (ii) shall be accompanied by an employee of Tenant at all times while in the Premises, (iii) shall comply with Tenant's security procedures applicable to the Premises, and (iv) shall not unreasonably interfere with Tenant's use of the Premises. Provide the foregoing conditions are satisfied, Tenant shall permit Landlord and his agents to enter into and upon the Premises at all reasonable times, and without any rent abatement (except as otherwise provided in Section 45) or reduction or any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned, for the following purposes: (i) inspecting and maintaining the Premises; (ii) making repairs, alterations or additions to the Premises; (iii) to construct the Adjacent Building; and (iv) performing any obligations of Landlord under the Lease including remediation of hazardous materials if determined to be the responsibility of Landlord. If Landlord or its agents, employees or contractors are negligent in connection with or during any such entry, or if any such entry unreasonably interferes with Tenant's use of the Premises, then subject to Section 41 below, Landlord shall be liable therefore. Tenant shall permit Landlord and his agents, at any time within one hundred eighty (180) days prior to the Expiration Date (or at any time during the Lease if Tenant is in default hereunder after notice Page 21 and expiration of any applicable cure period), to place upon the Premises "For Lease" signs and exhibit the Premises to real estate brokers and prospective tenants subject to the conditions contained in this Section 27. 28. DESTRUCTION OF PREMISES: A. DESTRUCTION BY AN INSURED CASUALTY: In the event of a destruction of the Premises during the Lease Term by a casualty for which Landlord has received insurance proceeds sufficient to repair the damage or destruction, Landlord shall repair the same to the extent of such proceeds. Such destruction shall not annul or void this Lease; however, Tenant shall be entitled to a proportionate reduction of Base Monthly Rent commencing on the date of damage or destruction and continuing while repairs are being made, such proportionate reduction to be based upon the extent to which the repairs or damage interferes with Tenant's business in the Premises, as reasonably determined by Landlord. Within sixty (60) days after any damage or destruction of the Premises, Landlord shall notify Tenant in writing of Landlord's estimate of the time required to repair the damage or destruction, and if Landlord estimates that the repairs cannot be made in 180 days from the date of receipt of all governmental approvals necessary under the laws and regulations of State, Federal, County or Municipal authorities, as reasonably determined by Landlord, or if the repairs actually take longer than said 180 day period, then Tenant may terminate this Lease within fifteen (15) days of Landlord's notice or the expiration of the 180 day period as applicable. Landlord shall use reasonable efforts to promptly obtain all governmental approvals and permits required for the repairs. Notwithstanding the foregoing, either Landlord or Tenant shall have the option to terminate the Lease in the event of a total destruction of the Premises or in the event of a partial destruction occurs in the last year of the Lease Term and will take more than sixty (60) days to repair; provided, however, that if the partial destruction occurs after Tenant shall have exercised its Option under Section 37 below or if Tenant exercises its Option under Section 37 within twenty days following the event of partial damage or destruction, then the last year of the Lease Term shall be deemed to be the last year of the Option Term. In no event shall Landlord be required to replace or restore Alterations, Tenant's fixtures or personal property. With respect to a destruction which Landlord is obligated to repair or may elect to repair under the terms of this Section, Tenant waives the provisions of Section 1932, and Section 1933, Subdivision 4, of the Civil Code of the State of California, and- any other similarly enacted statute, and the provisions of this Section 28 shall govern in the case of such destruction. In the event that this Lease is terminated as the result of damage or destruction and any insurance proceeds are payable to Landlord, Landlord shall deliver to Tenant a portion of such insurance proceeds equal to the portion of the costs of the Tenant Improvements paid for by Tenant ("Tenant's Contribution") that remains unamortized as of the date this Lease is terminated (calculated by amortizing Tenant's Contribution on a straight-line basis over the initial term of this Lease, or if the termination occurs after Tenant exercises its Option under Section 37 below, then Page 22 calculated by amortizing Tenant's Contribution on a straight-line basis over the term of this Lease, as so extended); provided, however, that Landlord's obligation to pay such insurance proceeds to Tenant shall be subject and subordinate to any obligation that Landlord may have to apply such insurance proceeds to any loans made to Landlord for the construction of the Building Shell which are secured by the Building Shell and the Ground Lease. B. DESTRUCTION BY AN UNINSURED CASUALTY: In the event of a destruction of the Premises during the Lease Term by a casualty for which Landlord will not received insurance proceeds sufficient to repair the damage or destruction (except for any deductible amount) and Tenant has not elected to contribute the shortfall (excluding any deductible amount payable by Landlord), the Lease shall automatically terminate unless (i) Landlord elects to rebuild, and (ii) the damage can be repaired within one hundred eighty (180) days from the date of receipt of all governmental approvals necessary under the laws and regulations of State, Federal, County or Municipal authorities, as reasonably determined by Landlord and communicated to Tenant in writing within sixty (60) days after the damage or destruction. 29. ASSIGNMENT OR SUBLEASE: A. CONSENT BY LANDLORD: Except as specifically provided in this Section 29, Tenant may not assign, sublet, hypothecate, or allow a third party to use the Premises without the express written consent of Landlord which shall not be unreasonably withheld or delayed. In the event Tenant desires to assign this Lease or any interest herein including, without limitation, a pledge, mortgage or other hypothecation, or sublet the Premises or any part thereof, Tenant shall deliver to Landlord executed counterparts of any agreement and of all ancillary agreements with the proposed assignee/subtenant, and a notice containing the name and address of the proposed assignee/subtenant, proposed use of the Premises, rental rate and current financial statement. At Landlord's request, Tenant shall also provide additional information reasonably required by Landlord to determine whether it will consent to the proposed assignment or sublease. Landlord shall have a ten (10) day period following receipt of all the foregoing within which to notify Tenant in writing that Landlord elects to: (i) permit Tenant to assign or sublet such space to the named assignee/subtenant on the terms and conditions set forth in the notice; or (ii) refuse consent. If Landlord should fail to notify Tenant in writing of such election within the 10-day period, Landlord shall be deemed to have elected option (ii) above. In the event Landlord elects option (i) above, Landlord's written consent to the proposed assignment or sublease shall not be unreasonably withheld, provided and upon the condition that: (i) the proposed assignee or subtenant is engaged in a business that is limited to the use expressly permitted under this Lease; (ii) the proposed assignee or subtenant is a company with sufficient financial worth and management ability to undertake the financial obligation of this Lease and Landlord has been furnished with reasonable proof thereof; (iii) the proposed assignment or sublease is in form reasonably satisfactory to Landlord; (iv) Tenant reimburses Landlord on demand for any reasonable costs that may be incurred by Landlord in Page 23 connection with said assignment or sublease, including the costs of making investigations as to the acceptability of the proposed assignee or subtenant and legal costs incurred in connection with the granting of any requested consent; and (v) Tenant shall not have advertised or publicized in any way the availability of the Premises without prior notice to Landlord. In the event all or any one of the foregoing conditions are not satisfied, Landlord shall be considered to have acted reasonably if it withholds its consent. B. ASSIGNMENT OR SUBLETTING CONSIDERATION: Any rent or other economic consideration realized by Tenant under any sublease and assignment, in excess of the rent payable hereunder and reasonable subletting and assignment costs (which shall include without limitations, all tenant improvement costs expended for the subtenant, attorney's fees and brokerage commissions), shall be divided and paid fifty percent (50%) to Landlord and fifty percent (50%) to Tenant. Tenant's obligation to pay over Landlord's portion of the consideration constitutes an obligation for additional rent hereunder. The above provisions relating to Landlord's right to terminate the Lease and relating to the allocation of bonus rent are independently negotiated terms of the Lease which constitute a material inducement for the Landlord to enter into the Lease, and are agreed by the parties to be commercially reasonable. No assignment or subletting by Tenant shall relieve it of any obligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. C. NO RELEASE: Notwithstanding any such sublease or assignment and the acceptance of rent by Landlord from any subtenant or assignee, Tenant and any guarantor shall remain fully liable for the payment of Base Monthly Rent and additional rent due, and to become due hereunder, for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and for all acts and omissions of any licensee, subtenant, assignee or any other person claiming under or through any subtenant or assignee that shall be in violation of any of the terms and conditions of this Lease, and any such violation shall be deemed a violation by Tenant. Tenant shall indemnify, defend and hold Landlord harmless from and against all losses, liabilities, damages, costs and expenses (including reasonable attorney fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any real estate brokers or other persons claiming compensation in connection with the proposed assignment or sublease. D. EFFECT OF DEFAULT: In the event of Tenant's default, Tenant hereby assigns all rents due from any assignment or subletting to Landlord as security for performance of its obligations under this Lease, and Landlord may collect such rents as Tenant's Attorney-in-Fact, except that Tenant may collect such rents unless a default occurs as described in Section 22 and 24 above and such default is continuing. A Lease termination due to Tenant's default shall not automatically terminate an assignment or sublease then in existence; rather at Landlord's election, such assignment or sublease shall survive the Lease termination, the assignee or subtenant shall attorn to Landlord, Page 24 and Landlord shall undertake the obligations of Tenant under the sublease or assignment; except that Landlord shall not be liable for prepaid rent, security deposits or other debuts of Tenant to the subtenant or assignee, or for any acts or omissions of Tenant, its agents, employees, contractors or invitees. E. PERMITTED TRANSFERS: Tenant may, without Landlord's prior written consent, sublet the Premises or assign the Lease to: (i) a subsidiary, affiliate, division or corporation controlled 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 Tenant's assets, provided, however, that the sublessee or assignee has a net worth sufficient to meet is obligations under this Lease ("Permitted Transferees"). For the purpose of this Lease, sale of Tenant's capital stock through any public exchange shall not be deemed an assignment, subletting, or any other transfer of the Lease or the Premises. 30. CONDEMNATION: If any part of the Premises shall be taken for any public or quasipublic use, under any statute or by right of eminent domain or private purchase in lieu thereof, and only a part thereof remains which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the day before the vests in the condemnor or purchaser ("Vesting Date") and Base Monthly Rent payable hereunder shall be adjusted so that Tenant is required to pay for the remainder of the Lease Term only such portion of Base Monthly Rent as the value of the part remaining after such taking bears to the value of the entire Premises prior to such taking; but in such event Tenant shall have the option to terminate this Lease as of the Vesting Date if the portion remaining is no longer suitable for Tenant's intended use. If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, this Lease shall terminate on the Vesting Date. If part or all of the Premises be taken, all compensation awarded upon such taking shall go to Landlord, and Tenant shall have no claim thereto; but Landlord shall cooperate with Tenant, without cost to Landlord, to recover compensation for damage to or taking of any Alterations, Tenant Improvements paid for by Tenant from sources other than the Work Allowance, or for Tenant's moving costs. Tenant hereby waives the provisions of California Code of Civil Procedures Section 1265.130 and any other similarly enacted statue, and the provisions of this Section 30 shall govern in the case of such taking. 31. EFFECTS OF CONVEYANCE: As used in this Lease, the term "Landlord" is defined only as the owner for the time being of the Premises, so that in the event of any sale or other conveyance of the Premises or in the event of a master lease of the Premises, Landlord shall be entirely freed and relieved of all its covenants and obligations hereunder to the extent such obligations accrue after the date of said sale or master lease, and only to the extent the purchaser or master lessee agrees in writing to assume the obligations of Landlord hereunder arising after said sale or master lease, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale or the master tenant of the Premises, that the purchaser or Page 25 master tenant of the Premises has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. Such transferor shall transfer and deliver Tenant's security deposit to the purchaser at any such sale or the master tenant of the Premises, and thereupon the transferor shall be discharged from any further liability in reference thereto. 32. SUBORDINATION: Subject to the recognition and nondisturbance agreements described in Section 1, this Lease is subject and subordinate to ground and underlying leases, mortgages and deeds of trust (collectively "Encumbrances") which may now affect the Premises, to any covenants, conditions or restrictions of record, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance ("Holder") require that its Lease be prior and superior thereto, within seven (7) days after written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver all documents or instruments, in the reasonable form presented to Tenant, which Landlord or Holder deems necessary or desirable for such purposes. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the Premises or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof, on the condition that the Holder delivers to Tenant a non-disturbance agreement providing that in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed of trust, the Holder agrees to recognize Tenant's rights under this Lease as long as Tenant is not then in default and continues to pay Base Monthly Rent and additional rent and observes and performs all required provisions of this Lease (in each case, after notice and the expiration of any applicable cure period). Within fifteen (15) days after Landlord's written request, Tenant shall execute any reasonable documents required by Landlord or the Holder to make this Lease subordinate to any lien of the Encumbrance provided Tenant shall have received a Nondisturbance Agreement from the Holder of the applicable Encumbrance. If Tenant fails to do so, then in addition to such failure constituting a default by Tenant it shall be deemed that this Lease is so subordinated to such Encumbrance provided Tenant shall have received a Nondisturbance Agreement from the Holder of the applicable Encumbrance. Notwithstanding anything to the contrary in this Section, Tenant hereby attorns, and agrees to attorn. to any entity purchasing or other-wise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such encumbrance. 33. 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. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such Page 26 preceding breach at the time of acceptance of such rent. No payment by Tenant or receipt by Landlord of a lesser amount than any installment of rent due shall be deemed to be other than payment on account of the amount due. No delay or omission in the exercise of any right or remedy by Landlord or Tenant shall impair such right or remedy or be construed as a waiver thereof by the non-defaulting party. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute acceptance of the surrender of the Premises by Tenant before the Expiration Date (only written notice from Landlord to Tenant of acceptance shall constitute such acceptance of surrender of the Premises). Landlord's consent to or approval of any act by Tenant which require Landlord's consent or approvals shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. 34. HOLDING OVER: Any holding over after the termination or Expiration Date with Landlord's consent, shall be construed as month-to-month tenancy, terminable on thirty (30) days written notice from either party, and Tenant shall pay as Base Monthly Rent to Landlord a rate equal to one hundred thirty three percent (133%) of the Base Monthly Rent due in the month preceding the termination or Expiration Date, plus all other amounts payable by Tenant under this Lease. Any holding over shall otherwise be on the terms and conditions herein specified, except those provisions relating to the Lease Term and any options to extend or renew, which provisions shall be of no further force and effect following the expiration of the applicable exercise period. Tenant shall indemnify, defend, and hold Landlord harmless from all loss or liability (including, without limitation, any loss or liability resulted from any claim against Landlord made by any succeeding tenant) resulting from Tenant's failure to timely surrender the Premises to Landlord and losses to Landlord due to lost opportunities to lease the Premises to succeeding tenants. 35. SUCCESSORS AND ASSIGNS: Subject to the provisions of Section 29, the covenants and conditions of this Lease shall apply to and bind the heirs, successors, executors, administrators and assigns of all parties hereto; and all parties hereto shall be jointly and severally liable hereunder. 36. ESTOPPEL CERTIFICATES: At any time during the Lease Term, Landlord or Tenant shall, within fifteen (15) days following written notice from the other, execute and deliver a written statement certifying, if true, the following: (i) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification); (ii) the date to which rent and other charges are paid in advance, if any; (iii) acknowledging that there are not, to the party's knowledge, any uncured defaults (or specifying such defaults if they are claimed); and (iv) such other information as may be reasonably requested. Any such statement may be conclusively relied upon by a third party. Tenant agrees to provide, within twenty (20) days of Landlord's request, Tenant's most recent annual report and latest quarterly reports. 37. OPTION TO EXTEND THE LEASE TERM: Page 27 A. GRANT AND EXERCISE OF OPTION: Landlord grants to Tenant, subject to the terms and conditions set forth in this Section, the option (the "Option") to extend the Lease Term for an additional term (the "Option Term") of one hundred twenty (120) months. The Option shall be exercised, if at all, by written notice to Landlord no earlier than eighteen (18) months prior to the Expiration Date but no later than twelve (12) months prior to the Expiration Date. Tenant's ability to exercise the Option is expressly conditioned on Tenant's exercise of its option to extend the Adjacent Building Lease. If Tenant exercises the Option, all of the terms, covenants and conditions of this Lease except this Section shall apply during the Option Term as though the expiration date of the Option Term was the date originally set forth herein as the Expiration Date, provided that the terms of EXHIBIT B shall not apply to the Option Term and Tenant shall not have any obligation in connection with the Option Term to make or pay for any tenant improvements and provided, further, that Base Monthly Rent for the Premises payable by Tenant during the Option Term shall be the greater of either (i) the Base Monthly Rent applicable to the period immediately prior to the commencement of the Option Term, or (ii) ninety five percent (95%) of the Fair Market Rental as hereinafter defined. Notwithstanding anything herein to the contrary, if Tenant is in monetary or material non-monetary default under any of the terms, covenants or conditions of this Lease either at the time Tenant exercises the Option or as the commencement date of the Option Term (after notice and expiration of any applicable cure period), Landlord shall have, in addition to all of Landlords other rights and remedies provided in this Lease, the right to terminate the Option upon notice to Tenant, in which event the expiration date of this Lease shall be and remain the Expiration Date. As used herein, the term "Fair Market Rental" is defined as the rental and all other monetary payments, including any escalations and adjustments thereto (including without limitation Consumer Price Indexing) that Landlord could obtain during the Option Term from a third party desiring to lease the Premises, based upon the current use and other potential uses of the Premises under or permitted by this Lease, as determined by the rents then being obtained for new leases of space comparable in age and quality to the Premises in the locality of the Building. The parties hereto agree that in calculating the Fair Market Rental of the Premises, the value of all Tenant Improvements and Alterations paid for solely by Tenant shall not be taken into consideration. The parties further agree that the appraisers shall be instructed that the foregoing five percent (5%) discount is intended to reduce comparable rents which include (i) brokerage commissions, (ii) tenant improvement allowances, and (iii) vacancy costs, to account for the fact that Landlord will not suffer such costs in the event Tenant exercises its Option. B. DETERMINATION OF FAIR MARKET RENTAL: If Tenant exercises the Option, Landlord shall send Tenant a notice setting forth the Fair Market Rental for the Option Term within thirty (30) days following the Exercise Date. If Tenant disputes Landlord's determination of Fair Market Rental for the Option Term, Tenant shall, within thirty (30) days after the date of Landlord's notice setting forth Fair Market Rental for the Option Term, send to Landlord a notice stating that Tenant either elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease Page 28 shall terminate on the Expiration Date, or that Tenant disagrees with Landlord's determination of Fair Market Rental for the Option Term and elects to resolve the disagreement as provided in Section 37.C below. If Tenant does not send Landlord a notice as provided in the previous sentence, Landlord's determination of Fair Market Rental shall be the basis for determining the Base Monthly Rent payable by Tenant during the Option Term. If Tenant elects to resolve the disagreement as provided in Section 37.C and such procedures are not concluded prior to the commencement date of the Option Term, Tenant shall pay to Landlord as Base Monthly Rent the Fair Market Rental as determined by Landlord in the manner provided above. If the Fair Market Rental as finally determined pursuant to Section 37.C is greater than Landlord's determination, Tenant shall pay Landlord the difference between the amount paid by Tenant and the Fair Market Rental as so determined in Section 37.C within thirty (30) days after such determination. If the Fair Market Rental as finally determined in Section 37.C is less than Landlord's determination, the difference between the amount paid by Tenant and the Fair Market Rental as so determined in Section 37.C shall be credited against the next installments of rent due from Tenant to Landlord hereunder. C. RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any disagreement regarding Fair Market Rental shall be resolved as follows: 1. Within thirty (30) days after Tenant's response to Landlord's notice setting forth the Fair Market Rental, Landlord and Tenant shall meet at least two (2) times at a mutually agreeable time and place, in an attempt to resolve the disagreement. 2. If within the 30-day period referred to above, Landlord and Tenant cannot reach agreement as to Fair Market Rental, each party shall select one appraiser to determine Fair Market Rental. Each such appraiser shall arrive at a determination of Fair Market Rental and submit their conclusions to Landlord and Tenant within thirty (30) days after the expiration of the 30-day consultation period described above. 3. If only one appraisal is submitted within the requisite time period, it shall be deemed as Fair Market Rental. If both appraisals are submitted within such time period and the two appraisals so submitted differ by less than ten percent (10%), the average of the two shall be deemed as Fair Market Rental. If the two appraisals differ by more than 10%, the appraisers shall immediately select a third appraiser who shall, within thirty (30) days after his selection, make and submit to Landlord and Tenant a determination of Fair Market Rental. This third appraisal will then be averaged with the closer of the two previous appraisals and the result shall be Fair Market Rental. 4. All appraisers specified pursuant to this Section shall be members of the American Institute of Real Estate Appraisers with not less than ten (10) years experience appraising office and industrial properties in the Santa Clara Valley. Each party shall pay the cost of the appraiser selected by such party and one-half of the cost of the third appraiser. Page 29 38. OPTIONS: In the event Tenant has multiple options to extend this Lease, a later option to extend the Lease cannot be exercised unless the prior option has been so exercised. 39. QUIET ENJOYMENT: Upon Tenant's faithful and timely performance of all the terms and covenants of the Lease and except as otherwise provided in this Lease, Tenant shall quietly have and hold the Premises for the Lease Term and any extensions thereof. 40. BROKERS: Landlord and Tenant represent they have not utilized or contacted a real estate broker or finder with respect to this Lease other than BT Commercial and each party agrees to indemnify, defend and hold the other harmless against any claim, cost, liability or cause of action asserted by any other broker or finder. 41. LANDLORD'S LIABILITY: If Tenant recovers a money judgment against Landlord arising in connection with this Lease, the judgment shall be satisfied only out of (i) all rents and profits from the Parcel, (ii) Landlord's interest in the Parcel, and (iii) Landlord's insurance and interest in any insurance proceeds and neither Landlord nor any of its partners, officers, directors, agents, trustees, shareholders or employees shall be liable personally for any deficiency. Tenant expressly waives all rights to proceed against the individual partners or the officers, directors or shareholders of any corporate partner, except to the extent of their interest in said limited partnership. 42. AUTHORITY OF PARTIES: Tenant represents and warrants that it is duly formed and in good standing, and is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. Landlord represents and warrants that it is duly formed and in good standing, and is duly authorized to execute and deliver this Lease on behalf of said partnership, and that this Lease is binding upon said partnership in accordance with its terms. At Landlord's request, Tenant shall provide Landlord with corporate resolutions or other proof in a form acceptable to Landlord, authorizing the execution of the Lease. 43. TRANSPORTATION DEMAND MANAGEMENT PROGRAMS: Should a government agency or municipality require Landlord or Tenant to institute a TDM (Transportation Demand Management) program, Tenant agrees to pay the cost or expenses associated with such TDM programs which are required for the Premises. 44. DISPUTE RESOLUTION: Except for the Tenant's failure to timely pay Base Monthly Rent, any controversy, dispute, or claim of whatever nature arising out of, in connection with, or in relation to the interpretation, performance or breach of this Lease, including any claim based on Page 30 contract, tort, or statute, shall be resolved at the request of any party to this agreement through a two-step dispute resolution process administered by JAMS or another judicial and mediation service mutually acceptable to the parties involving first mediation, followed, if necessary, by final and binding arbitration administered by and in accordance with the then-existing rules and practice of the judicial and mediation service selected, and judgment upon any award rendered by the arbitrator(s) may be entered by any State or Federal Court having jurisdiction thereof. 45. INTERFERENCE WITH USE OF PREMISES: If the Premises should become unsuitable for Tenant's use as a consequence of (i) die presence of any Hazardous Material which does not result from Tenant's use, storage or disposal of such material in violation of applicable Law, or (ii) as the result of a cessation of utilities not caused by Tenant or from a casualty, which persists for seventy two (72) consecutive hours or which is caused by Landlord, ("Interfering Event") then Tenant shall be entitled to an abatement of rent to the extent of the interference with Tenant's use of the Premises occasioned thereby from the date of the Interfering Event, and, if such interference cannot be corrected or the damage resulting therefrom repaired so that the Premises will be reasonably suitable for Tenant's intended use within one hundred eighty (180) days following the occurrence of the Interfering Event, then Tenant shall be entitled to terminate ads Lease by delivery of written notice to the other within five (5) days following the expiration of such one hundred eighty (180) day period. 46. EXISTING VICTORIAN HOME: Landlord agrees to relocate the Historic Home onto the Parcel in the location shown in Exhibit "A" and remodel or improve the interior and exterior of the Historic Home in compliance with the conditions set forth by the City of San Jose and all applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances to allow Tenant to utilize the Historic Home for general office/conference uses and Tenant shall have the right under this Lease to utilize the Historic Home for such purposes. The cost of the improvements to the Historic Home shall be paid by Landlord and Tenant as follows: (i) Landlord shall pay the cost to relocate the Home (which scope of work is outlined in EXHIBIT "E") and the first Two Hundred Twelve Thousand Dollars ($212,000.00) of improvement costs, (ii) Tenant shall pay the next Fifty Thousand Dollars ($50,000.00) of improvement costs (if necessary), and (iii) Landlord shall pay any remaining improvement costs (if necessary). The Historic House shall be considered part of the Premises for all purposes under this Lease except that me portion of the Base Monthly Rent applicable to the Historic House shall be $3,200 per month (as provided in Section it above and subject to escalation pursuant to Section 4.B) and the provisions of Section 4 of this Lease to the contrary notwithstanding, Tenant's obligation to pay Base Monthly Rent for the Historic House shall not commence until the later of (i) the date the Historic House has be relocated, remodeled and improved by Landlord as provided in this Section 46 above, or (ii) the date two (2) months following the Commencement Date of the Lease as such two month period is extended by Landlord Delays as described in Section 4 of the Lease. Landlord shall Page 31 use commercially reasonable efforts to complete the relocation and improvement of the Historic House prior to the Commencement Date. 47. MISCELLANEOUS PROVISIONS: A. RENT: All monetary sums due from Tenant to Landlord under this Lease, including, without limitation those referred to as "additional rent", shall be deemed as rent. B. MANAGEMENT FEE: During the Lease Term commencing two months following the Commencement Date, Tenant shall pay Landlord a fee of two percent (2%) of the Base Monthly Rent to reimburse Landlord for property management costs related to the Project. C. PERFORMANCE BY LANDLORD: If Tenant fails to perform any obligation required under this Lease or by law or governmental regulation, Landlord in its sole discretion may, after giving Tenant at leak thirty (30) days prior written notice, without waiving any rights or remedies and without releasing Tenant from its obligations hereunder, perform such obligation, in which event Tenant shall pay Landlord as additional rent all sums paid by Landlord in connection with such substitute performance, including interest as provided in Section 47.D below within ten (10) days of Landlord's written notice for such payment. D. INTEREST: All sums due hereunder, if not paid by Tenant or Landlord within thirty (30) days after they are due, shall bear interest at the maximum rate the parties are permitted to contract for under California law, accruing from the date due until the date paid. E. RIGHTS AND REMEDIES: All rights and remedies hereunder are cumulative and not alternative to the extent permitted by law, and are in addition to all other rights and remedies in law and in equity. F. SURVIVAL OF INDEMNITIES: All indemnification, defense, and hold harmless obligations of Landlord and Tenant under this Lease shall survive the expiration or sooner termination of the Lease. G. SEVERABILITY: If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction, the remainder of the Lease shall not be invalidated thereby but shall be enforceable in accordance with its terms, omitting the invalid or unenforceable term. H. CHOICE OF LAW: This Lease shall be governed by and construed in accordance with California law. Venue shall be Santa Clara County. I. TIME: Time is of the essence hereunder. Page 32 J. ENTIRE AGREEMENT: This Lease contains all of the agreements and conditions made between the parties hereto and may not be modified orally or in any other manner other than by written agreement signed by all parties hereto or their respective successors in interest. This Lease supersedes and revokes all previous negotiations, letters of intent, lease proposals, brochures, agreements, representations, promises, warranties, and understandings, whether oral or in writing, between the parties or their respective representatives or any other person purporting to represent Landlord or Tenant. K. REPRESENTATIONS: Except as expressly provided in this Lease, Tenant acknowledges that neither Landlord nor any of its employees or agents have made any agreements, representations, warranties or promises with respect to the Premises or with respect to present or future rents, expenses, operations, tenancies or any other matter. Except as herein expressly set forth herein, Tenant relied on no statement of Landlord or its employees or agents for that purpose. L. NO PRESUMPTION AGAINST DRAFTER: Landlord and Tenant understand, agree and acknowledge that this Lease has been freely negotiated by both parties; and that in any controversy, dispute, or contest over the meaning, interpretation, validity, or enforceability of this Lease or any of its terms or conditions, there shall be no inference, presumption, or conclusion drawn whatsoever against either party by virtue of that party having drafted this Lease or any portion thereof. M. HEADINGS: The headings or titles to the Sections of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. N. EXHIBITS: All exhibits referred to are attached to this Lease and incorporated by reference. 48. CROSS-DEFAULT. If this Lease is terminated as the result of a default by Landlord or Tenant or the exercise by Landlord or Tenant of any right to terminate given to Landlord or Tenant under this Lease (other than a right to terminate exercised by Landlord or Tenant with respect to damage to or destruction of the Premises), then subject to the provisions of Section 28.A concerning the payment by Landlord to Tenant of the unamortized cost of the Tenant Improvements paid for by Tenant, the non-defaulting party may elect to terminate the Adjacent Lease by giving written notice of such termination to the other party concurrently with, or within ten (10) business days after, the termination of this Lease. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and year first above written. LANDLORD: SOBRATO INTERESTS III TENANT: CENTIGRAM COMMUNICATIONS CORP. Page 33 a California Limited Partnership a Delaware Corporation By: /s/ signature unreadable By: /s/ signature unreadable ------------------------ ------------------------ Its: General Partner Its: President & CEO Page 34 EXHIBIT "A" - PREMISES, BUILDING & PROJECT NOT SHOWN IMAGE NOT SHOWN Page 35 EXHIBIT "B" - SHELL PLANS AND SPECIFICATIONS (SHEET REFERENCES TO BE ATTACHED) ARCHITECTURAL DRAWINGS SHEET NO. SHEET NAME A0.1 Project Information and Notes A1.0 Site Plan A2.0A Building One - First Level Floor Plan A2.1A Building One - Second Level Floor Plan A2.2A Building One - Third Level Floor Plan A2.3A Building One - Fourth Level Floor Plan A2.4A Building One - Roof Plan A2.5B Building Two - First Level Floor Plan A2.6B Building Two - Second Level Floor Plan A2.7B Building Two - Third Level Floor Plan A2.8B Building Two - Fourth Level Floor Plan A2.9B Building Two - Roof Plan A3.0A Building One - North and South Exterior Elevations A3.1A Building One - East and West Exterior Elevations A3.2B Building Two - East and West Exterior Elevations A3.38 Building Two - North and South Exterior Elevations A4.0 Wall Sections A4.1 Wall Sections A4.2 Wall Sections A4.3 Wall Sections A6.0 Detail Stair Floor Plans A6.1 Stair Details A6.2 Stair Sections and Details CIVIL DRAWINGS C-1 Topographical Survey C-2 Preliminary Grading Plan Page 36 STRUCTURAL DRAWINGS S1 Horne House Foundation Plans and Details S2.0 Building One Foundation Plan S2.1 Building One - Second Floor Framing Plan S2.2 Building One - Third Floor Framing Plan S2.3 Building One - Fourth Floor Framing Plan S3.1 Building One - Braced Frame Elevations S3.2 Typical Structural Details S6.l Wall Sections S6.2 Wall Sections S6.3 Wall Sections S6.4 Wall Sections S3.1 Panel Elevations S3.2 Panel Elevations S3.3 Panel Elevations S4.0 Foundation Details ELECTRICAL DRAWINGS SE.1 Site Electrical Plan E.1a Building One - First Level Power Plan E1.b Building Two - First Level Power Plan E2.a Building One a Second Level Power Plan E2.b Building Two - Second Level Power Plan LANDSCAPE DRAWINGS L1.1 General Landscape Notes and Legend Ll.2 Plant List and Planting Notes L2.1 Irrigation Site Plan L4.l Planting Site Plan L6.1 Landscape Details L7.1 Fountain Plan, Notes and Details EXHIBIT "C" - BUILDING SHELL DEFINITION The Building Shell shall be a four -story steel frame structure with 90% of the perimeter containing glass. The Building Shell shall include the following items: 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 building structure. (b) Five inch (5") thick concrete slab on grade with below grade vapor barrier and welded wire mesh and any other reinforcing or structural connections that may be necessary or required as specified by structural engineer. (c) Complete structural framing system comprised of rolled steel or pipe columns, light weight braced-frame steel structure with corrugated metal deck and concrete toping over and openweb bar joist and girder floor support system, all members fireproofed as required by code. Floor support system shall provide for a minimum of 120 pounds per square foot live load. (d) Tinted high performance glass with Robertson composite metal panels including required caulking and sealants. Four (4) exterior double doors, door closers and locking devices as necessary. (e) Four (4) ply built up roofing with cap sheet by Owens-Corning, John Manville, or equal and all flashings over a rigid insulated corrugated metal deck roof system. (f) Exterior painting of any concrete with Tex-Coat or Kel-Tex textural paint, all caulking of exterior concrete joints in preparation for painting. (g) Two (2) steel fire stairs at perimeter of building One ship ladder to roof of building with roof hatch. (h) Mechanical roof screen. (i) Loading area with grade level access with hydraulic scissors lift external of building. (j) penetrations of the roof and floor for the mechanical ducting and for the elevators (elevator penetrations to accommodate two hydraulic passenger elevators at the core and one freight elevator near the dock area) (k) Riser for Building sprinkler system (no sprinkler grid or drops) Page 37 2. 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, landscape irrigation, storm drainage, utility service laterals, curbs, gutters, sidewalks, specialty paving (if required, i.e. reinforced roadway section to truck doors), retaining walls, planters, trash enclosure, parking lot and landscape lighting and other exterior lighting per code. Landscape design to include screen dining patio (no furniture) and three flag poles with bases. (b) Paving sections for automobile and truck access shall be according to the Geologic Soils Report (c) All parking lot striping to include handicap spaces and signage. (d) Underground site storm drainage system shall be connected to the city storm system main. 3. PLUMBING (a) Underground sanitary sewer laterals connected to the city sewer main in the street and stubbed to the core of the building. (b) Domestic water mains connected to the city water main in the street and stubbed to the building. (c) Roof drain leaders and downspouts piped and connected to the site storm drainage system. (d) Gas lines connected to the city or public utility mains and run to gas meters adjacent to, and in close proximity to the building. Meter supplied by utility company. 4. ELECTRICAL (a) A primary electrical raceway service from the street to the building, including underground conduit, wire feeders, and transformer pads. Transformer supplied by utility company. Underground conduits and secondary feeders from transformer pads into the building. (b) 4" Underground conduit from the street to the building for telephone trunk lines by Pacific Telephone. Page 38 (c) An electrically operated landscape irrigation system, with controller, that is a complete and functioning system. (e) Underground conduit from the building to the main fire protection system post indicator valve (PIV) for installation of supervisory alarm wiring. (f) Telephone and data conduits between the Building and the Adjacent Building All other costs shall be deemed Tenant Improvements. Page 39 EXHIBIT "D" - TENANT IMPROVEMENT PLANS AND SPECIFICATIONS (SHEET REFERENCES TO BE ATTACHED) Page 40 EXHIBIT "E" - HISTORIC HOME RELOCATION SCOPE (SHEET REFERENCES TO BE ATTACHED) [LOGO] HORNE HOUSE RELOCATION ACTIVITIES In conjunction with the development of Centigram's Headquarters Facility at North First and Guadalupe Parkway, the develop will relocate the historic Horne House to a new location on the development site. Those activities, that the developer will perform at his cost, not subject to deduce from the improvement allowances agreed to in the lease, are outlined below. RELOCATION-DEVELOPER COST 1. Preparation of pathway for transit of house from existing location to new location. 2. Preparation and placement of foundation for the new house. The new configuration will eliminate the basement and cause the house floor structure to be positioned within 18" of the ground (crawl space). 3. Extension of utility services in the house for its reconnection, to include sanitary sewer, water, electricity, and telephone conduit. Should the City require that the relocated structure have fire sprinklers installed, the fire sprinkler main would also be extended to the house perimeter. 4. The physical move of the house and its placement on the new foundation. 5. Patching and repair/restoration of any damage to the house caused by the move process, i.e. patching any holes in the side walls caused by placement of support beams under or over the structure and repair of walls, floor and roof in the event that the house is divided into sections in order to facilitate its move. 6. Demolition and removal of the old foundation, site improvements and terminated utility services. 7. Any other items required by the City as part of the relocation activity, excluding external/internal improvements. Page 41 EX-10.20 6 EX-10.20 Corner Parcel - Kenji SOBRATO 10600 N. De Anza Boulevard, Suite 200 DEVELOPMENT Cupertino, CA 95014-2075 COMPANIES (408) 446-0700 FAX (408) 446-0583 LEASE BETWEEN SOBRATO INTERESTS III AND CENTIGRAM COMMUNICATIONS CORPORATION Section Page # - ------- ------ Parties........................................................................1 Premises.......................................................................1 Use............................................................................2 Term and Rental................................................................2 Rental Adjustment..........................................................2 Security Deposit...............................................................3 Late Charges...................................................................5 Construction and Possession....................................................5 Building Shell Construction................................................5 Tenant Improvement Plans...................................................5 Final Building Shell Plans.................................................6 Change Orders..............................................................6 Construction...............................................................7 Insurance/Indemnity........................................................7 Punch List & Warranty......................................................8 Other Work by Tenant.......................................................8 Landlord's Failure to Complete Construction................................8 Acceptance of Possession and Covenants to Surrender............................9 Uses Prohibited...............................................................10 Alterations and Additions.....................................................10 Maintenance of Premises.......................................................11 Tenant's Obligations......................................................11 Landlord's Obligations....................................................12 Capital Replacements......................................................12 Hazard Insurance..............................................................12 Tenant's Use..............................................................12 Landlord's Insurance......................................................12 Tenant's Insurance........................................................13 Waiver....................................................................13 Taxes.........................................................................13 Utilities.....................................................................14 Abandonment...................................................................14 Free From Liens...............................................................14 Compliance With Governmental Regulations......................................14 Toxic Waste and Environmental Damage..........................................15 Tenant's Responsibility...................................................15 Tenant's Indemnity Regarding Hazardous Materials..........................16 Actual Release by Tenant..................................................16 Landlord's Indemnity Regarding Hazardous Materials........................17 Environmental Monitoring..................................................17 Indemnity.....................................................................17 Advertisements and Signs......................................................18 Attorney's Fees...............................................................18 Tenant's Default..............................................................18 Remedies..................................................................19 Right to Re-enter.........................................................19 Abandonment...............................................................19 No Termination............................................................20 Surrender of Lease............................................................20 Landlord's Default............................................................20 Notices.......................................................................21 Entry by Landlord.............................................................21 Destruction of Premises.......................................................22 Destruction by an Insured Casualty........................................22 Destruction by an Uninsured Casualty......................................23 Assignment or Sublease........................................................23 Consent by Landlord.......................................................23 Assignment or Subletting Consideration....................................24 No Release................................................................24 Effect of Default.........................................................24 Permitted Transfers.......................................................25 Page ii Condemnation..................................................................25 Effect of Conveyance..........................................................25 Subordination.................................................................26 Waiver........................................................................26 Holding Over..................................................................27 Successors and Assigns........................................................27 Estoppel Certificates.........................................................27 Option to Extend the Lease Term...............................................27 Grant and Exercise of Option..............................................28 Determination of Fair Market Rental.......................................28 Resolution of a Disagreement over the Fair Market Rental..................29 Options.......................................................................30 Quiet Enjoyment...............................................................30 Brokers.......................................................................30 Landlord Liability............................................................30 Authority of Parties..........................................................30 Transportation Demand Management programs.....................................30 Dispute Resolution............................................................30 Interference with Use of Premises.............................................31 Existing Victorian Home.......................................................31 Miscellaneous Provisions......................................................31 Rent......................................................................31 Management Fee............................................................31 Performance by Landlord...................................................31 Interest..................................................................31 Rights and Remedies.......................................................32 Survival of Indemnities...................................................32 Severability..............................................................32 Choice of Law.............................................................32 Time......................................................................32 Entire Agreement..........................................................32 Representations...........................................................32 No Presumption Against Drafter............................................32 Headings..................................................................33 Exhibits..................................................................33 Page iii Cross-Default.................................................................33 EXHIBIT A - Premises, Building & Project......................................34 EXHIBIT B - Shell Plans and Specifications....................................35 EXHIBIT C - Building Shell Definition.........................................36 EXHIBIT D - Tenant Improvement Plans and Specifications.......................39 Page iv SOBRATO 10600 N. De Anza Boulevard, Suite 200 DEVELOPMENT Cupertino, CA 95014-2075 COMPANIES (408) 446-0700 FAX (408) 446-0583 1. PARTIES: THIS LEASE, is entered into on this 20th day of December, 1996, between SOBRATO INTERESTS III, a California Limited Partnership, whose address is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014 and CENTIGRAM COMMUNICATIONS CORPORATION, a Delaware Corporation, whose address is 91 East Tasman Drive, San Jose, CA 95134, hereinafter called respectively Landlord and Tenant. The effectiveness of this Lease is expressed conditioned upon (i) execution by Landlord and Tenant of the Adjacent Building Lease (as defined below), (ii) Tenant's receipt of a recognition and non-disturbance agreement in a form and substance reasonably acceptable to Tenant from Ground Lessor and from any and all other ground lessors with an interest in the Parcel (defined below) and from any and all lenders with a lien on the Ground Lease (defined below) or the Parcel, and (iii) Landlord's ability to obtain a building permit for construction of a building of not less than 100,000 rentable square feet with the number of parking spaces required by code. In the event any of the foregoing conditions have not been satisfied or waived by the parties within thirty (30) days following execution of this Lease, either Landlord or Tenant shall have the option to terminate this lease by providing written notice to the other party. Upon the execution of this Lease, Landlord shall deliver to Tenant a copy of Landlord's ground lessee's title insurance policy for the Parcel and, if in the possession or control of Landlord, a current preliminary title report for the Parcel reflecting the state of title to the Parcel. 2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord those certain Premises with the appurtenances, situated in the City of San Jose, County of Santa Clara, State of California, located within a four-story steel frame building to be constructed by Landlord consisting of approximately 110,881 rentable square feet (the "Building") on a parcel leased by Landlord from Kenji and Shizu Sakauye ("Ground Lessor") consisting of approximately 5.0 acres located at the corner of Guadalupe Parkway and North First Street as outlined in red on EXHIBIT "A" ("Parcel"). In addition Tenant shall have the right to use the common area consisting of all parking areas, sidewalks and landscape areas ("Common Area") surrounding the Building and an additional building of 110,881 square feet ("Adjacent Building") which Landlord intends to construct for Tenant and an existing historic Victorian home consisting of approximately 2,500 rentable square feet (the "Historic Home") on the adjacent land leased from Eiichi and Suzuye Sakauye totaling approximately 5.0 acres pursuant to another lease between the parties of even date herewith ("Adjacent Building Lease"). The Premises, the Adjacent Building, the Historic Home and the Common Area shall comprise the "Project". Tenant shall have exclusive use of approximately 370 parking spaces within the Parcel. Unless expressly provided otherwise, the term Premises as used herein shall include the Tenant Improvements (defined in Section 7.B) constructed by Tenant Page 1 pursuant to Section 7.B. Tenant acknowledges Landlord's right to and hereby consents to construction of the Adjacent Building. 3. USE: Tenant may use the Premises only for the following purposes and shall not change the use of the Premises without the prior written consent of Landlord: Office, research and development, marketing, light manufacturing, storage and other incidental uses. Landlord makes no representation or warranty that any specific use of the Premises desired by Tenant is permitted pursuant to any Laws. 4. TERM AND RENTAL: The term ("Lease Term") SHALL BE FOR ONE HUNDRED FORTY FOUR (144) MONTHS, commencing upon the later to occur of (i) two (2) months following the date on which Landlord allows Tenant access to the Premises to begin construction of the Tenant, Improvements as such two (2) month period is, extended by Landlord Delays (hereinafter defined), or (ii) substantial completion of the Building Shell, as defined in Section 7.D ("Commencement Date"), and ending one hundred forty four (144) months thereafter ("Expiration Date"). In addition to all other sums payable by Tenant under this Lease, Tenant shall initially pay as base monthly rent ("Base Monthly Rent") for the Premises in the amount of ONE HUNDRED FORTY ONE THOUSAND NINE HUNDRED TWENTY SEVEN AND 68/00 DOLLARS ($141,927.68) commencing two (2) month period is extended by Landlord Delays (hereinafter defined). Commencing TWELVE (12) MONTHS following the Commencement Date, the Base Monthly Rent shall increase to One Hundred Forty Six Thousand Three Hundred Sixty Two and 92/100 Dollars ($146,362.92). As used herein, the term "Landlord Delays" shall mean delays in Tenant's construction of the Tenant Improvements that are caused by Landlord, Landlord's contractors, defects in the Building Shell and failure of the Building Shell to conform to the Final Building Shell Plans. Two months prior to the date Landlord reasonably estimates the Building Shell will be substantially completed, Landlord shall give Tenant written notice and shall exercise its best efforts to allow Tenant and its contractor and subcontractors access to the Premises to commence construction or installation of the Tenant Improvement Work. Such early access to the Premises shall not be permitted, however, if the same would materially delay or interfere with the completion of construction of the Building Shell. Base Monthly Rent shall be due in advance on or before the first day of each calendar month during the Lease Term. All sums payable by Tenant under this Lease shall be paid to Landlord in lawful money of the United States of America, without offset or deduction and without prior notice or demand, at the address specified in Section 1 of this Lease or at such place or places as may be designated by Landlord during the Lease Term. Base Monthly Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. A. RENTAL ADJUSTMENT: Beginning thirty (30) months after the Commencement Date, and every thirty (30) months thereafter during the initial lease term (an "Adjustment Date"), the Page 2 then-payable Base Monthly Rent shall be subject to adjustment based on the increase, if any, in the Consumer Price Index that has occurred during the thirty (30) months preceding the then-applicable Adjustment Date. The basis for computing the adjustment shall be the U.S. Department of Labor, Bureau of Labor Statistic's Consumer Price Index for All Urban Consumers, All Items, 1982-84=100, for the San Francisco-Oakland-San Jose area ("Index"). The Index most recently published preceding the Commencement Date for the first Adjustment (or previous Adjustment Date, as applicable), shall be considered the "Base Index". If the Index most recently published preceding the Adjustment Date ("Comparison Index") is greater than the Base Index, the then-payable Base Monthly Rent shall be increased by multiplying the then-payable Base Monthly Rent by a fraction, the numerator of which is the Comparison Index and the denominator of which is the Base Index. On adjustment of the Base Monthly Rent, Landlord shall notify Tenant by letter stating the new Base Monthly Rent. Landlord's failure to adjust Base Monthly Rent on an Adjustment Date shall not prevent Landlord from retroactively adjusting Base Monthly Rent at any subsequent time during the Lease Term. If the Index base year is changed so that it differs from 1982-84=100, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the Lease Term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the index had not been discontinued or revised. 5. SECURITY DEPOSIT: Concurrently with Tenant's execution of this Lease, Tenant has deposited with Landlord the sum of One Hundred Forty Thousand Dollars ($140,000.00) ("Security "Deposit"). Landlord shall not be required to separate the Security Deposit from Landlord's other funds and Tenant shall not be entitled to interest on the Security Deposit. If Tenant defaults with respect to any provisions of the Lease, including but not limited to the provisions relating to payment of Base Monthly Rent or other charges, Landlord may, to the extent reasonably necessary to remedy Tenant's default, use any or all of the Security Deposit towards payment of the following: (i) Base Monthly Rent or other charges in default; (ii) any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default; and (iii) any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant shall, within ten (10) days after written demand from Landlord, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its full original amount, and shall pay to Landlord such other sums as necessary to reimburse Landlord for any sums paid by Landlord. The Security Deposit shall be returned to Tenant within thirty (30) days after the Expiration Date and surrender of the Premises to Landlord, less any amount deducted in accordance with this Section, together with Landlord's written notice itemizing the amounts and purposes for such deduction. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer the Security Deposit to Landlord's successor in interest. Page 3 At Tenant's election, in lieu of the Security Deposit, Tenant may at any time simultaneously with, or following the execution of this Lease, deliver to Landlord an irrevocable letter of credit payable in favor of Landlord in the amount of One Hundred Forty Thousand Dollars ($140,000). The letter of credit shall provide that it is automatically renewable until the date that is not earlier than the expiration of the term hereby demised without any action whatsoever on the part of Landlord; provided that the issuing bank shall have the right not to renew said letter of credit on written notice to Landlord not less than the expiration of the then current term thereof (it being understood, however, that the privilege of the issuing bank not to renew said letter of credit shall not, in any event, diminish the obligation of Tenant to maintain such irrevocable letter of credit with Landlord through the expiration of the term hereby demised). The form and terms of the letter of credit, and the bank issuing the same, shall be reasonably acceptable to Landlord and the letter of credit shall provide, among other things, in effect that: (i) Landlord, or its then managing agent, shall have the right to draw down an amount up to the amount of the sums then due to Landlord under this Lease upon the presentation to the issuing bank of Landlord's (or Landlord's then managing agent's) statement that such amount is due to Landlord under the terms and conditions of this Lease, is being understood that such statement shall be duly signed by a general partner of Landlord; (ii) The letter of credit will be honored by the issuing bank without inquiry as to the accuracy thereof and regardless of whether the Tenant disputes the content of such statement; (iii) In the event of a transfer of Landlord's interest in the Building, Landlord shall have the right to transfer the letter of credit to the Transferee and the provision hereof shall apply to every transfer or assignment of said letter of credit to a new Landlord (or it Tenant is not able to obtain a transferable letter of credit, then Tenant shall cause the letter of credit to be replaced or amended such that the new Landlord may draw). If as a result of any such application of all or any part of the proceeds of the Letter of Credit, the amount of the letter of credit shall be less than $140,000, Tenant shall forthwith provide Landlord with additional letter(s) of credit (or a cash security deposit) in an amount equal to the deficiency. Any such cash security deposit, and any proceeds of the letter of credit which are not applied to sums owed by Tenant to Landlord, shall be held by Landlord as a security deposit under the first two paragraphs of this Section 5. Without limiting the generality of the foregoing, if the letter of credit expires earlier than sixty (60) days after the expiration of the term of this Lease, or the issuing bank notifies Landlord that it shall not renew the letter of credit, Landlord will accept a renewal thereof or substitute letter of credit (such renewal or substitute letter of credit to be in effect not later than the expiration of the expiring letter of credit), irrevocable and automatically renewable as above provided upon the same terms as the expiring letter of credit or such other terms as may be reasonably acceptable to Landlord. However, (i) if the letter of credit is not timely renewed or a substitute letter of credit is Page 4 not timely provided, (ii) or if Tenant fails to maintain the letter of credit in the amount and terms set forth in this Section 5, Tenant must promptly deposit with Landlord cash security in the amounts required by, and to be held subject to and in accordance with, all of the terms and conditions set forth in the first two paragraphs of this Section 5, failing which the Landlord may present such letter of credit to the bank, in accordance with the terms of this Section 5, and the entire amount of the letter of credit shall be paid to Landlord and shall be held by Landlord as provided in the first two paragraphs of this Section 5. 6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to Landlord of Base Monthly Rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which is extremely difficult to ascertain. Such costs include but are not limited to: administrative, processing, accounting, and late charges which may be imposed on Landlord by the terms of any contract, revolving credit, mortgage, or trust deed covering the Premises. Accordingly, if any installment of Base Monthly Rent or other sum due from Tenant shall not be received by Landlord or its designee when due, Tenant shall pay to Landlord a late charge equal to five (5%) percent of such overdue amount, which late charge shall be due and payable on the same date that the overdue amount was due. Landlord agrees to provide Tenant a notice to pay rent or quit if the Base Monthly Rent is not received when due and further agrees to waive said late charge in the event all amounts set forth in such notice are paid in full by cashier's check within five (5) days after Landlord's service upon Tenant of such notice. The parties 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 by Landlord of such late charge shall not constitute a waiver of Tenant's default with respect to such overdue amount nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. 7. CONSTRUCTION AND POSSESSION: A. BUILDING SHELL CONSTRUCTION. Landlord shall cause the shell of the Building ("Building Shell") to be constructed by independent contractors to be employed by and under the supervision of Landlord's affiliated construction company, Sobrato Construction Corporation in accordance with the conceptual Building Shell plans and guideline specifications prepared by Arctec ("Architect") and approved by Landlord and Tenant, which are attached hereto as EXHIBIT "B" ("Preliminary Shell Plans and Specifications") and Final Building Shell Plans (defined in subsection 7.C below). Landlord shall construct the Building Shell in accordance with all applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances, and shall correct any violations of such laws at no cost to Tenant. Landlord shall pay for all costs and expenses associated with the construction of the Building Shell. The Building Shell shall include those items set forth in the attached EXHIBIT "C" ("Building Shell Definition"). B. TENANT IMPROVEMENT PLANS. Tenant, at Tenant's sole cost and expense, has also Page 5 hired the Architect to prepare plans and outline specifications which will be attached hereto upon completion as EXHIBIT "D" ("Tenant Improvement Plans and Specifications") with respect to the construction of improvements to the interior premises ("Tenant Improvements"). The Tenant Improvements shall consist of all items not included within in the scope of the Building Shell Definition. Tenant has hired Permian Builders as the general contractor for the Tenant Improvements ("General Contractor"). Tenant shall cause the General Contractor to construct the Tenant Improvements in accordance with all Tenant Improvement Plans and Specifications. Landlord shall provide Tenant a work allowance to be utilized by Tenant for the construction of Tenant Improvements ("Work Allowance") in the amount of One Million Six Hundred Fifty Thousand and No/100 Dollars ($1,650,000.00). The Work Allowance shall be paid by Landlord to Tenant as payments become due to General Contractor. The Tenant Improvements shall become the property of Tenant upon installation and shall not be removed or altered by Tenant without the prior written consent of Landlord as provided in Section 10. Tenant shall have the right to depreciate and claim and collect any investment tax credits in the Tenant Improvements during the Lease Term. Upon expiration of the Lease Term or any earlier termination of the Lease, the Tenant Improvements shall become the property of Landlord and shall remain upon and be surrendered with the Premises, and title thereto shall automatically vest in Landlord without any payment therefore. C. FINAL BUILDING SHELL PLANS. Within thirty (30) days following execution of this Lease, Landlord shall deliver the final Building Shell Plans and Specifications for Tenant's review and approval ("Final Building Shell Plans"). The Final Building Shell Plans shall include those items set forth in the Building Shell Definition attached as EXHIBIT "C" and shall be a natural evolution of do Preliminary Building Shell Plans and Specifications attached as EXHIBIT "B". Tenant's approval of the Final Building Shell Plans is not a representation or warranty that such improvements illustrated therein are in compliance with applicable building codes or the ADA. D. CHANGE ORDERS. Tenant shall have the right to order changes in the manner and type of construction of the Building Shell. Any change order submitted by Tenant after ten (10) days from the date of issuance by the City of San Jose of a building permit for the construction of the Building Shell, which causes either Landlord's construction schedule to be delayed, shall cause the Commencement Date to occur one (1) day in advance of the date the Building Shell is Substantially Complete (as defined in Section 7.E) for each day of delay. Upon request and prior to Tenant's submitting any binding change order Landlord shall promptly provide Tenant with written statements of the cost to implement and the time delay and increased construction costs associated with any proposed change order, which statements shall be binding on Landlord. If no time delay or increased construction cost amount is noted on the written statement, the parties agree that there shall be no adjustment to the construction cost or the Commencement Date associated with such change order. If ordered by Tenant, Landlord shall implement such change order and the cost of constructing the Building Shell shall be increased in accordance with the cost statement previously Page 6 delivered by Landlord to Tenant for any such change order. E. CONSTRUCTION. Landlord shall use its best efforts to obtain a building permit from the City of San Jose as soon as possible after Tenant's approval of the Final Building Shell Plans. The Building Shell shall be deemed substantially complete ("Substantially Complete") when (i) the Building Shell has been substantially completed in accordance with the Final Building Shell Plans, as evidenced by the issuance of a certificate of occupancy or its equivalent by the appropriate governmental authority for the Building Shell, and the issuance of a certificate by the Architect certifying that the Building Shell have been completed in accordance with the Final Building Shell Plans and (ii) only punch list type work remains to be completed and such punch list work does not materially affect Tenant's ability to use the Premises in the manner contemplated by this Lease. F. INSURANCE/INDEMNITY. Landlord shall indemnify, protect, defend and hold Tenant harmless from and against all liability, cost, expense, or damage, including attorneys fees, arising from construction of the Building Shell; construction defects; or failure to properly construct the Building Shell in accordance with the approved Final Building Shell Plans. Tenant's review and approval of plans, specifications, or any other documents shall not relieve Landlord from its obligations under the foregoing indemnification. Landlord shall procure a "Broad Form" liability insurance policy on an occurrence basis, with a minimum combined single limit in the amount of Three Million Dollars ($3,000,000.00), insuring all Landlord's construction activities with respect to the Building and Premises naming Tenant and Permian Builders as additional insureds and Landlord shall cause its general contractor to procure a "Broad Form" liability insurance policy on an occurrence basis, with a minimum combined single limit in the amount of Three Million Dollars ($3,000,000) insuring all of such general contractors' construction activities with respect to the Building and Premises and naming Tenant and Permian Builders as additional insureds. Such insurance shall not be modified or canceled without thirty (30) days prior notice to Tenant. Tenant shall indemnify, protect, defend and hold Landlord harmless from and against all liability, cost, expense, or damage including attorneys fees, arising from construction of the Tenant Improvements; construction defects; or failure to properly construct the Tenant Improvements in accordance with the approved Tenant Improvement Plans and Specifications. Landlord's review and approval of plans, specifications, or any other documents shall not relieve Tenant from its obligations under the foregoing indemnification. Tenant shall cause General Contractor to procure a "Broad Form" liability insurance policy, on an occurrence basis, in a minimum combined single limit in the amount of Three Million Dollars ($3,000,000.00), insuring all General Contractor's construction activities with respect to the Building and Premises naming Landlord and Sobrato Construction Corporation as additional insureds. Such insurance shall not be modified or canceled without thirty (30) days prior notice to Landlord. Landlord shall also procure (as a cost of the Building Shell) builder's risk insurance for the Page 7 full replacement cost of the Building Shell and Tenant Improvements while the Building and Tenant Improvements are under construction, up until the date that the fire insurance policy described in Lease Section 12 is in full force and effect. G. PUNCH LIST & WARRANTY. After the Building Shell is Substantially Complete, Landlord shall immediately correct any construction defect or other "punch list" item which Tenant brings to Landlord's attention. All such work shall be performed so as to cause the least possible interruption to Tenant and its activities on the Premises. Landlord shall cause its contractor to provide a standard contractor's warranty with respect to the Building Shell for one (1) year from the Commencement Date and Landlord shall warrant the Building Shell against defects in workmanship or material for one (1) year from the Commencement Date. Such warranties shall exclude routine maintenance, damage caused by Tenant's negligence or misuse, and acts of God. Landlord shall also promptly correct or cure, after written notice from Tenant given from time to time and at no cost to Tenant, any failure of the Building Shell to comply with laws in effect as of the date of completion of the Building Shell (including, without limitation, building code violations). H. OTHER WORK BY TENANT. All work not within the scope of work not described in the Shell Plans and Specifications shall be furnished and installed by Tenant or the General Contractor. When the construction of the Building Shell has proceeded to the point where the construction of the Tenant Improvements may begin, Landlord shall notify General Contractor and shall permit General Contractor and its authorized representatives and contractors access to the Premises before the Commencement Date without the payment of rent for the purpose of constructing the Tenant Improvements. Any such installation work by Tenant or its General Contractor shall be undertaken upon the following conditions: (i) if the entry into the Premises by Tenant or its representatives or contractors interferes with or delays Landlord's work, Tenant shall cause the party responsible for such interference or delay to leave the Premises; and (ii) any contractor used by Tenant or its General Contractor in connection with such entry and installation shall use union labor if the use of nonunion labor would disrupt Landlord's work when both Landlord and Tenant's contractors are working in the Premises. I. LANDLORD'S FAILURE TO COMPLETE CONSTRUCTION: Notwithstanding the foregoing, (i) if the Premises are not Substantially Complete on or before that date which is eight (8) months following the date on which Landlord obtains a building permit from the City of San Jose allowing Landlord to begin construction of the Building, Tenant shall be entitled to rental abatement hereunder of one (1) day's rent for each day beyond said eight (8) month period in which the Building Shell is not Substantially Complete (i.e., the date on which Tenant is required to commence paying rent under this Lease shall be extended by one day for each day beyond said eight month period during which the Building Shell is not Substantially Complete). The above dates shall be extended one day for every day of delay in completion caused by labor strikes, material shortages, inclement weather, Tenant Delays or other causes beyond the reasonable control of Landlord ("Force Page 8 Majeure Delays"); provided, however, that Landlord must notify Tenant in writing within five (5) days after the occurrence of any such Force Majeure Delay, and if Landlord does not so notify Tenant in writing, then the applicable Force Majeure Delay shall be deemed not to have commenced until the date which is five (5) days prior to the date Tenant actually receives written notice from Landlord advising Tenant of the applicable Force Majeure Delay event. If the Premises are not Substantially Complete on or before May 1, 1998 (the "Latest Completion Date"), then Tenant may terminate this Lease and the Adjacent Building Lease by written notice to Landlord given on or before May 15, 1998. The Latest Completion Date shall be extended by Tenant Delays but not by delays in completion caused by labor strikes, material shortages, inclement weather or any other causes beyond the reasonable control of Landlord (other than Tenant Delays). The delay in the commencement of rent, the abatement of rent, and termination right provided above shall be the sole and exclusive remedies of Tenant with respect by the failure by Landlord to achieve Substantial Completion by the Commencement Date. 8. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER: On the Commencement Date, Landlord shall deliver and Tenant shall accept the Premises as being in good and sanitary order, condition and repair, and shall accept the Premises and the other improvements in their present condition, subject to (i) a reservation of claims of latent defects, (ii) the warranties from Landlord contained in this Lease, (iii) Landlord's obligations under Section TG to correct construction defects, (iv) any failure of the Building Shell to comply with laws in effect as of the date of completion, and (v) Landlord's obligation to complete punch list items, and (vi) Landlord and its general contractor's one (1) year warranties described in Section 7.G above, and any other applicable warranties. Within one hundred twenty (120) days after the Commencement Date, Tenant agrees to be in occupancy of at least fifty percent (50%) of the rentable square footage of the Premises. Tenant further agrees on Expiration Date or on the sooner termination of this Lease, to surrender the Premises to Landlord in good condition and repair, reasonable wear and tear excepted. "Good condition" means that all interior calls, floors, suspended ceilings, and carpeting within the Premises will be cleaned to the same condition as existed at the Commencement Date, normal wear and tear and acts of God excepted. Tenant agrees, at its sole cost, to remove all phone and data cabling from the suspended ceiling, repair or replace broken ceiling tiles, and relevel the ceiling if required due to Tenant's cabling. On or before the Expiration Date or sooner termination of this Lease, Tenant shall remove all its personal property and trade fixtures from the Premises. All property and fixtures not so removed shall be deemed as abandoned by Tenant. Approximately sixty (60) days prior to the Expiration Date, Landlord shall notify Tenant in writing whether Landlord will require the removal of any Alterations made by Tenant to the Premises, except for such Alterations Landlord has previously agreed to allow to remain on the Premises pursuant to paragraph 10 below. If Landlord shall so require, Tenant shall, at Tenant's sole cost and expense, remove such Alterations as Landlord requires and shall repair and restore said Premises or such Page 9 parts thereof before the Expiration Date. Such repair and restoration shall include causing the Premises to be brought into compliance with all applicable building codes and laws in effect at the time of the removal to extent such compliance is necessitated by the repair and restoration work. In no event, however, shall Tenant be required to remove any of the Tenant Improvements constructed by Tenant prior to its initial occupancy of the Premises. If the Premises are not surrendered at the Expiration Date or sooner termination of this Lease in the condition required by this Section 8, Tenant shall be deemed in a holdover tenancy pursuant to Section 34, and Tenant shall indemnify, defend, and hold Landlord harmless against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. 9. USES PROHIBITED: Tenant shall not commit or suffer to be committed on the Premises any waste, nuisance, or other act or thing which disturb the quiet enjoyment of any other tenant in or around the Premises, nor allow any sale by auction or any other use of the Premises for an unlawful purpose. Tenant shall not place any loads upon the floor, walls, or ceiling which endanger the structure, nor use any machinery or apparatus which harmfully vibrate or shake the Premises, nor shall Tenant place any harmful liquids, waste materials, or hazardous materials in the drainage system or upon or in the soils surrounding the Building. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature, or any waste materials, refuse, scrap or debris, shall be stored upon or permitted to remain on any portion of the Premises outside of the Building except in storage enclosures designed for such purposes. 10. ALTERATIONS AND ADDITIONS: Tenant shall be entitled without obtaining Landlord's consent, to make any alteration or addition to the Premises ("Alterations") which (i) does not affect the structure of the Building, (ii) cost does not exceed Fifty Thousand Dollars ($50,000.00) per alteration nor an aggregate of One Hundred Thousand Dollars ($100,000.00) in any twelve (12) month period. All other Alterations shall require Landlord's consent. If Landlord's consent is required, Tenant shall deliver to Landlord the proposed architectural and structural plans for the Alteration and Landlord shall have a period of ten (10) business days thereafter to grant its consent, which consent shall not be unreasonably withheld. Landlord shall indicate in writing to Tenant at the time of Tenant's request, whether or not Landlord will require Tenant to remove such Alteration at the Expiration Date. If, at the time Landlord consents to any Alteration, Landlord does not require Tenant to remove such Alteration at the Expiration Date, then Landlord shall be deemed to have waived such right to require Tenant to remove such Alteration so consented to. After obtaining Landlord's consent, Tenant shall not proceed to make such Alterations until Tenant has obtained all required governmental approvals and permits, and provided Landlord reasonable security, in form reasonably approved by Landlord, to protect Landlord against mechanics' lien claims (if such Alterations exceed $1,000,000 in cost). Tenant agrees to provide Landlord written notice of the anticipated and actual start-date of the work, and a complete set of half-size (15" X 21") vellum as-built drawings. All Alterations shall be constructed in compliance with applicable buildings codes Page 10 and laws. Any Alterations, except movable furniture and trade fixtures, shall become at once a part of the realty and belong to Landlord but shall nevertheless be subject to removal by Tenant as provided in this Section 10 and Section 8 above. Alterations which are not deemed as trade fixtures include heating, lighting, electrical systems, air conditioning, partitioning, carpeting, or any other installation which has become an integral part of the Premises. All Alterations shall be maintained, replaced or repaired by Tenant at its sole cost and expense. 11. MAINTENANCE OF PREMISES: A. TENANT'S OBLIGATIONS: Subject to Sections 11.B, 28 and 30 below, Tenant shall, at its sole cost, keep, maintain, repair, and replace as and when necessary said Premises and appurtenances and every part hereof in good and sanitary order, condition, and repair, including but not limited to the following: roof membrane, glazing, caulking, sidewalks, parking areas, site utilities, elevator, telephone, plumbing, electrical, HVAC systems, and all Tenant Improvements. Notwithstanding the foregoing, Tenant shall have no responsibility to perform any repair, maintenance or improvement (i) necessitated by the acts or omissions of Landlord or its agents, employees or contractors, (ii) occasioned by fire, acts of God or other casualty, whether or not covered by insurance, or by the exercise of the power of eminent domain, (iii) required as a consequence of any violation of laws or construction defect in the Premises existing as of the Commencement Date, or (iv) for which Landlord has a right of reimbursement from others. Tenant shall provide Landlord a copy of a service contract between Tenant and: (i) a licensed air conditioning and heating contractor providing for bi-monthly maintenance of all air conditioning and heating equipment at the Premises; and (ii) a licensed elevator maintenance contractor providing for monthly maintenance of all elevator related systems. Tenant shall pay the cost of all air conditioning, heating, and elevator equipment repairs or replacements which are excluded from such service contract or any existing equipment warranties. All wall surfaces and floor tile are to be maintained in an as good a condition as when Tenant took possession free of holes, gouges, or defacements. Tenant shall also be responsible, at its sole cost and expense, for the preventive maintenance of the membrane of the roof, which responsibility shall be deemed properly discharged if Tenant contracts, at as sole cost, with a licensed roof contractor reasonably satisfactory to Tenant and Landlord to inspect the roof membrane at least every six (6) months, with the first inspection due the sixth (6th) month after the Commencement Date; and Tenant performs, at Tenant's sole cost, all preventive maintenance recommendations made by such contractor within a reasonable time after such recommendations are made. Such preventive maintenance might include acts such as clearing storm gutters and chains, removing debris from the roof membrane, trimming trees overhanging the roof membrane, applying coating materials to seal roof penetrations, repairing blisters, and other routine measures. Tenant shall provide Landlord a copy of such preventive maintenance contract and paid invoices for the recommended work. Tenant agrees, at its sole cost, to water, maintain, and replace Page 11 when necessary, any shrubbery and landscaping. B. LANDLORD'S OBLIGATIONS: Landlord at its sole cost and expense, shall maintain in good condition, order, and repair, and replace as and when necessary, all structural portions of the Building, including, without limitation, the foundation, exterior load bearing walls and roof structure of the Building Shell. C. CAPITAL REPLACEMENTS: If as a part of Tenant's fulfillment of its maintenance obligations under Section 11.A above, a capital improvement or replacement to the Premises (not required by new laws, rules or regulations) is paid for by Tenant which costs in excess of One Hundred Thousand Dollars ($100,000.00), Landlord shall, within ten (10) days following receipt of written invoices and supporting documentation evidencing costs incurred by Tenant, reimburse Tenant for the entire cost of the capital improvement or replacement less that portion of the cost equal to the product of such tool cost multiplied by a fraction, the numerator of which is the number of years remaining in the Lease Term, and the denominator of which is the useful life (in years) of the capital improvement or replacement. 12. HAZARD INSURANCE: A. TENANT'S USE: Tenant shall not use or permit the Premises, or any part thereof, to be used for any purpose other than that for which the Premises are hereby leased; and no use of the Premises shall be made or permitted, nor acts done, which will cause a cancellation of any insurance policy covering the Premises or any part thereof, nor shall Tenant sell or permit to be sold, kept, or used in or about the Premises, any article prohibited by the standard form of fire insurance policies. Tenant shall, at its sole cost, comply with all reasonable requirements of any insurance company or organization necessary for the maintenance of reasonable fire and public liability insurance covering the Premises and appurtenances. B. LANDLORD'S INSURANCE: Landlord agrees to purchase and keep in force fire, extended coverage, earthquake (at Landlord's election if commercially available and required by Landlord's lender), owner's liability, and 12-month rental loss insurance. The amount of the fire, extended coverage and earthquake insurance shall equal the replacement cost of the Building Shell and Tenant Improvements as determined by Landlord's insurance company's appraisers. Tenant agrees to pay Landlord as additional rent, on demand, the full cost of said insurance as evidenced by insurance billings to Landlord, and in the event of damage covered by said insurance, the amount of any deductible under such policy. In no event, however, shall Tenant's obligation to reimburse Landlord for the deductible exceed $25,000.00. Payment shall be due to Landlord within thirty (30) days after written invoice to Tenant. Notwithstanding the foregoing, Tenant's obligation to pay the cost of earthquake insurance premiums shall be limited to an amount no greater than four (4) times the cost of the fire and extended coverage premiums. It is understood and agreed that Tenant's obligation Page 12 under this Section will be prorated to reflect the Lease Commencement and Expiration Dates. C. TENANT'S INSURANCE: Tenant agrees, at as sole cost, to insure its personal property, Tenant Improvements (for which it has paid from sources other than the Work Allowance), and Alterations for their full replacement value (without depreciation) and to obtain worker's compensation and public liability and property damage insurance for occurrences within the Premises with combined limits for bodily injury and property damage of at least $1,000,000.00 per occurrence and a general aggregate limit of at least $5,000,000.00. Tenant's liability insurance shall be primary insurance containing a cross-liability endorsement, and shall provide coverage on an "occurrence" rather than on a "claims made" basis. Tenant shall name Landlord and Landlord's lender as an additional insured and shall deliver a copy of the policies and renewal certificates to Landlord. All such policies shall provide for thirty (30) days' prior written notice to Landlord of any cancellation, termination, or reduction in coverage, D. WAIVER: To the extent of the insurance proceeds paid by the applicable insurance company, Landlord and Tenant hereby waive all rights each may have against the other on account of any loss or damage sustained by Landlord or Tenant, as the case may be, or to the Premises or its contents or any other property, which may arise from any risk covered by their respective insurance policies (or which would have been covered had such insurance policies been maintained in accordance with this Lease) as set forth above or which are otherwise maintained by Landlord or Tenant. The parties shall use their reasonable efforts to obtain from their respective insurance companies a waiver of any right of subrogation which said insurance company may have against Landlord or Tenant, as the case may be. 13. TAXES: Tenant shall be liable for and shall pay as additional rental, prior to delinquency, the following: (i) all taxes and assessments levied against Tenant's personal property and trade or business fixtures; (ii) all real estate taxes and assessment installments or other impositions or charges which may be levied on the Premises or upon the occupancy of the Premises, including any substitute or additional charges which may be imposed applicable to the Lease Term; and (iii) real estate tax increases due to a sale, transfer or other change of ownership of the Premises as it appears on the City and County tax bills during the Lease Term. Tenants obligation under this Section shall be prorated to reflect the Lease Commencement and Expiration Dates. If, at any time during the Lease Term a tax, excise on rents, business license tax or any other tax, however described, is levied or assessed against Landlord as a substitute or addition, in whole or in part, for taxes assessed or imposed on land or Buildings, Tenant shall pay and discharge its pro rata share of such tax or excise on rents or other tax before it becomes delinquent; except that this provision is not intended to cover net income taxes, inheritance, gift or estate tax imposed upon Landlord. In the event that a tax is placed, levied, or assessed against Landlord and the taxing authority takes the position that Tenant cannot pay and discharge its pro rata share of such tax on behalf of Landlord, then at Landlord's sole election, Landlord may increase the Base Monthly Rent by the exact amount Page 13 of such tax and Tenant shall pay such increase. Both Landlord and Tenant shall have the right to seek a reduction in the assessed value of the Premises. If by virtue of any application or proceeding brought by or on behalf of Landlord, there results a reduction in the assessed value of the Premises during the Lease Term, Tenant agrees to reimburse Landlord for all costs incurred by Landlord in connection with such application or proceeding provided such costs do not exceed the present value of the savings. 14. UTILITIES: Tenant shall pay directly to the providing utility all water, gas, electric, telephone, and other utilities supplied to the Premises. Except due to the negligence or willful misconduct of Landlord, Landlord shall not be liable for loss of or injury to person or property, however occurring, through or in connection with or incidental to furnishing or failure to furnish utilities to the Premises, and, except as provided in Section 44, Tenant shall not be entitled to abatement or reduction of any portion of Base Monthly Rent or any other amount payable under this Lease. 15. ABANDONMENT: Tenant shall not abandon the Premises at any time during the Lease Term. In the event Tenant abandons or surrenders the Premises or is dispossessed by process of law or otherwise, any personal property belonging to Tenant left on the Premises shall be deemed as abandoned at the option of Landlord, except such property as may be mortgaged to Landlord. 16. FREE FROM LIENS: Tenant shall keep the Premises free from all liens arising out of work performed, materials furnished, or obligations incurred by Tenant or claimed to have been performed for Tenant In the event Tenant fails to discharge any such lien within twenty (20) days after receiving notice of the filing, Landlord shall be entitled to discharge the lien at Tenant's expense and all resulting costs incurred by Landlord, including attorney's fees shall be due from Tenant as additional rent. 17. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at its sole cost and expense, comply with and faithfully observe in its use of the Premises all laws, regulations and other requirements of all Municipal, County, State and Federal authorities now in force, or which may hereafter be in force, pertaining to Tenant's specific use 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 law, regulation or other requirement in its use of the Premises shall be conclusive of that fact as between Landlord and Tenant. If any improvement or alteration to the Premises is required as a result of any future laws or regulations affecting the Premises not related to Tenant's specific use of the Premises, and provided further said improvement or alteration is not required because of Alterations made by Tenant, the cost of such improvements shall be allocated between Landlord and Tenant such that Tenant shall pay to Landlord as additional rent an amount determined as follows: Page 14 (a) all costs reasonably incurred by Landlord to construct such improvement shall be fully amortized over the useful life of such improvement with interest on the unamortized balance at the prevailing market rate Landlord would pay if A borrowed funds to construct such improvements from an institutional lender, and Landlord shall inform Tenant of such monthly amortization payment required to so amortize such costs, and shall also provide Tenant with the information upon which such determination is made; and (b) as additional rent, Tenant shall pay the monthly amortization payment with respect to any such capital improvement required as a result of any future law or regulation affecting the Premises which is not related to Tenant's specific use of the Premises as stated above. Tenant's obligation to make payments hereunder with respect to any particular capital improvement shall commence when such improvement has been substantially completed and shall cease upon the earlier of the expiration of the Lease term (but not upon a termination due to any Event of Default on the part of Tenant) or the end of the term over which the costs of constructing the particular improvement were amortized. Payments of such additional rent required under this Section 17 shall be made concurrently with payments of Base Monthly Rent. 18. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: A. TENANT'S RESPONSIBILITY: Without the prior written consent of Landlord, Tenant shall not bring, use, or permit upon the Premises, or generate, create, release, emit, or dispose (nor permit any of the same) from the Premises any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste, including without limitation, material or substance having characteristics of ignitability, corrosivity, reactivity, or toxicity or substances or materials which are listed on any of the Environmental Protection Agency's lists of hazardous wastes or which are identified in Division 22 Title 26 of the California Code of Regulations as the same may be amended from time to time ("Hazardous Materials") unless such Hazardous Materials are used (i) in compliance with all applicable laws, and (ii) are commonly used in connection with general office use. In order to obtain consent, Tenant shall deliver to Landlord its written proposal describing the toxic material to be brought onto the Premises, measures to be taken for storage and disposal thereof, safety measures to be employed to prevent pollution of the air, ground, surface and ground water. Landlord's approval may be withheld in its reasonable judgment. In the event Landlord consents to Tenant's use of Hazardous Materials on the Premises, Tenant represents and warrants that it will do the following: (i) adhere to all reporting and inspection requirements imposed by Federal, State, County or Municipal laws, ordinances or regulations and will provide Landlord a copy of any such reports or agency inspections; (ii) obtain and provide Landlord copies of all necessary permits required for the use and handling Hazardous Materials on the Premises; (iii) enforce Hazardous Materials handling and disposal practices consistent with industry standards; (iv) surrender the Premises free from any Hazardous Materials arising from Tenant's bringing, using, permitting, generating, creating, releasing, emitting or disposing of Hazardous Materials; and (v) properly close the facility with Page 15 regard to Hazardous Materials including the removal or decontamination of any process piping, mechanical ducting, storage tanks, containers, or trenches which have come into contact with Hazardous Materials and obtain a closure certificate from the local administering agency prior to the Expiration Date. B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall, at its sole cost, comply with all laws pertaining to, and shall indemnify and hold Landlord harmless from, any claims, liabilities, costs or expenses incurred or suffered by Landlord arising from the bringing, using, authorizing, generating, emitting or disposing of Hazardous Materials by Tenant during the Lease Term. Tenant's indemnification and hold harmless obligations include, without limitation, the following: (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation with respect to Hazardous Materials generated or disposed of by Tenant, its agents, employees or contractors; (ii) claims, liabilities, costs or expenses pertaining to the identification, monitoring, cleanup, containment, or removal of Hazardous Materials generated or disposed of by Tenant, its agents, employees or contractors from soils, riverbeds or aquifers including the provision of an alternative public drinking water source; and (iii) all costs of defending such claims. C. ACTUAL RELEASE BY TENANT: Each party agrees to notify the other of any known lawsuits or order which relate to the remedying of or actual release of Hazardous Materials on or into the soils or ground water at or under the Premises. Each party shall also provide the other all notices required by Section 25359.7(b) of the Health and Safety Code and all other notices required by law to be given in connection with Hazardous Materials. In the event of any such release of Hazardous Materials by Tenant, Tenant agrees to meet and confer with Landlord and its Lender to attempt to eliminate and mitigate any financial exposure to such Lender and resultant exposure to Landlord under California Code of Civil Procedure section 736(b) as a result of such release, and promptly to take reasonable monitoring, cleanup and remedial steps given, inter alia, the historical uses to which the Property has and continues to be used, the risks to public health posed by the release by Tenant, the then available technology and the costs of remediation, cleanup and monitoring, consistent with acceptable customary practices for the type and severity of such contamination and all applicable laws. Nothing in the preceding sentence shall eliminate, modify or reduce the obligation of Tenant under Section 18.B of this Lease to indemnify and hold Landlord harmless from any claims liabilities, costs or expenses incurred or suffered by Landlord. Tenant shall provide Landlord prompt written notice of Tenant's monitoring, cleanup and remedial steps. Page 16 In the absence of an order of any federal, state or local governmental or quasi-governmental agency relating to the cleanup, remediation or other response action required by applicable law, any dispute arising between Landlord and Tenant concerning Tenant's obligation to Landlord under this Section 18.C concerning the level, method, and manner of cleanup, remediation or response action required in connection with such a release of Hazardous Materials shall be resolved by mediation and/or arbitration pursuant to the provisions of Section 45 of this Lease. D. LANDLORD'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Landlord shall indemnify and hold Tenant harmless from any claims, liabilities, costs or expenses incurred or suffered by Tenant related to the removal, investigation, monitoring or remediation of Hazardous Materials which are present on the Premises as of the Commencement Date or which come to be present on the Premises due to the acts of Landlord, its employees, agents, or contractors. Landlord's indemnification and hold harmless obligations include, without limitation, (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State,, County or Municipal law, ordinance or regulation with respect to Hazardous Materials generated or disposed of by Landlord, its agents, employees or contractors, (ii) claims, liabilities, costs or expenses pertaining to the identification, monitoring, cleanup, containment," or removal of Hazardous Materials generated or disposed of by Landlord, its agents, employees or contractors from soils, riverbeds or aquifers including the provision of an alternative public drinking water source, and (iii) all costs of defending such claims. In no event shall Landlord be liable under this Lease for any consequential damages suffered or incurred by Tenant as a result of any such contamination. E. ENVIRONMENTAL MONITORING: Provided Landlord (i) gives reasonable prior notice (except in case of emergency) and (ii) minimizes its interference with Tenant's business, Landlord and its agents shall have the right to inspect, investigate, sample and monitor the Premises including any air, soil, water, ground water or other sampling or any other testing, digging, drilling or analysis to determine whether Tenant is complying with the terms of this Section 18. If Landlord discovers that Tenant is not in compliance with the terms of this Section 18, any such reasonable costs incurred by Landlord, including attorneys' and consultants' fees, shall be due and payable by Tenant to Landlord within thirty (30) days following Landlord's written demand therefore. 19. INDEMNITY: As a material part of the consideration rendered to Landlord, Tenant hereby waives all claims against Landlord for damages to goods, wares and merchandise, and all other personal property in, upon or about said Premises and for injuries to persons in or about said Premises, from any cause (other than due to the negligence or willful misconduct of Landlord, its agents, employees, invitees and contractors) arising at any time to the fullest extent permitted by law, and Tenant shall indemnify and hold Landlord exempt and harmless from any damage or Page 17 injury to any person, or to the goods, wares and merchandise and all other personal property of any person, arising from the use of the Premises, Building, and/or Project by Tenant, its employees, contractors, agents and invitees or from the failure of Tenant to keep the Premises in good condition and repair as herein provided, except to the extent due to the negligence or willful misconduct of Landlord, its employees, agents, invitees, or contractors. Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant, its employees, contractors, agents and invitees, Tenant will indemnify and hold Landlord harmless from any such claim or liability including Landlord's costs and expenses and reasonable attorney's fees incurred in defending such claims. 20. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be placed, in, upon or about the Premises any signs not approved by the city or other governing authority. Tenant will not place or permit to be placed upon the Premises any signs, advertisements or notices without the written consent of Landlord as to type, size, design, lettering, coloring and location, which consent will not be unreasonably withheld. Any sign placed on the Premises shall be removed by Tenant, at its sole cost, prior to the Expiration Date or promptly following the earlier termination of the lease, and Tenant shall repair, at its sole cost, any damage or injury to the Premises caused thereby, and if not so removed, then Landlord may have same so removed at Tenant's expense. 21. ATTORNEYS FEES: In the event a suit or alternative form of dispute resolution is brought for the possession of die Premises, for the recovery of any sum due hereunder, to interpret the Lease, or because of the breach of any other covenant herein; then the losing party shall pay to the prevailing party reasonable attorney's fees including the expense of expert witnesses, depositions and court testimony as part of its costs which shall be deemed to have accrued on the commencement of such action. The prevailing party shall also be entitled to recover all costs and expenses including reasonable attorney's fees incurred in enforcing any judgment or award against the other party. The foregoing provision relating to post-judgment costs is severable from all other provisions of this Lease. 22. TENANT'S DEFAULT: The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: (i) Tenant's failure to pay any rent due under this Lease by the date such rent is due, which failure continues for ten (10) days After written notice from Landlord; (ii) the abandonment of the Premises by Tenant; (iii) Tenant's failure to observe and perform any other required provision of this Lease, where such failure continues for thirty (30) days after written notice from Landlord (provided however, that if the nature of the default is such that it cannot reasonably be cured within the 30-day period, Tenant shall not be deemed in default if Tenant commences within such period to cure the default and thereafter diligently prosecutes the cure to completion); (iv) Tenant's making of any general assignment for the benefit of creditors; (v) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition Page 18 filed against Tenant, the same is dismissed after the filing); (vi) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; (vii) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days; or (viii) an uncured default by Tenant under the Adjacent Building Lease after applicable notice has been given and any applicable cure period has expired. The notice requirements set forth herein are in lieu of and not in addition to the notices required by California Code of Civil Procedure Section 1161. Any notice given by Landlord to Tenant pursuant to California Code of Civil Procedure 1161 regarding Tenant's failure to pay rent under this Lease by the date due shall provide Tenant with a period of at least ten (10) days to pay such rent or quit. A. REMEDIES: In the event of any such default by Tenant, then in addition to other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event Landlord elects to so terminate this Lease, Landlord may recover from Tenant all the following: (i) the worth at time of award of any unpaid rent which had been earned at the time of such termination; (ii) the worth at 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 for the same period that Tenant proves could have been reasonably avoided; (iii) the worth at time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (iv) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom; and (v) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted by applicable California law. The term "rent", as used herein, is defined as the minimum monthly installments of Base Monthly Rent and all other sums required to be paid by Tenant pursuant to this Lease, all such other sums being deemed as additional rent due hereunder. As used in (i) and (ii) above, "worth at the time of award" shall be computed by allowing interest at a rate equal to the discount rate of the Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used in (iii) above, "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one (1%) percent. B. RIGHT TO RE-ENTER: In the event of any such default by Tenant, Landlord shall have the right, after terminating this Lease, to re-enter the Premises and remove all persons and property. Such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant and disposed of by Landlord in any manner permitted by law. C. ABANDONMENT: If Landlord does not elect to terminate this Lease as provided in Page 19 Section 22.A or 22.B above, then the provisions of California Civil Code Section 1951.4, (Landlord may continue the lease in effect after Tenant's breach and abandonment and recover rent as it becomes due if Tenant has a right to sublet and assign, subject only to reasonable limitations) as amended from time to time, shall apply and Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. In the event that Landlord elects to so relet, rentals received by Landlord from such reletting shall be applied in the following order to: (i) the payment of any indebtedness other than Base Monthly Rent due hereunder from Tenant to Landlord; (ii) the payment of any cost of such reletting; (iii) the payment of the cost of any alterations and repairs to the Premises necessary to relet the Premises; and (iv) the payment of Base Monthly Rent due and unpaid hereunder. The residual rentals, if any, shall be held by Landlord and applied in payment of future Base Monthly Rent as the same may become due and payable hereunder. In the event the portion of rentals received from such reletting which is applied to the payment of rent hereunder during any month be less than the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any reasonable costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. D. NO TERMINATION: Landlord's re-entry or taking possession of the Premises pursuant to 22.13 or 22.C of this Section 22 shall not be construed as an election to terminate this Lease unless written notice of such intention is given to Tenant or unless the termination is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such default. 23. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not automatically effect a merger of the Lease with Landlord's ownership of the Premises. Instead, at me option of Landlord, Tenant's surrender may terminate all or any existing subleases or subtenancies or may operate as an assignment to Landlord of any or all such subleases or subtenancies, thereby creating a direct Landlord-Tenant relationship between Landlord and any subtenants. 24. This paragraph intentionally left blank. 25. LANDLORD IS DEFAULT: In the event of Landlord's failure to perform any of its covenants or agreements under this Lease, Tenant shall give Landlord written notice of such failure and shall give Landlord thirty (30) days to cure or commence to cure such failure prior to any claim Page 20 for breach or resultant damages, provided, however, that if the nature of the default is such that it cannot reasonably be cured within the 30-day period, Landlord shall not be deemed in default if it commences within such period to cure, and thereafter diligently prosecutes the same to completion. Further in the event that this Lease is terminated due to an uncured default by Landlord, Tenant shall also have the right to terminate the Adjacent Building Lease after written notice and expiration of any applicable cure period. Upon any such failure by Landlord, Tenant shall also give notice by registered or certified mail to any person or entity with a security interest in the Premises ("Mortgagee") that has provided Tenant with notice of its interest in the Premises, and shall provide Mortgagee a reasonable opportunity to cure such failure, including such time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effectuate a cure. Tenant agrees that each of the Mortgagees to whom this Lease has been assigned is an expressed third-party beneficiary hereof. Tenant shall not make any prepayment of rent more than one (1) month in advance without the prior written consent of Mortgagee. Tenant waives any right under California Civil Code Section 1950.7 or any other present or future law to the collection of any payment or deposit from Mortgagee or any purchaser at a foreclosure sale of Mortgagee's interest unless Mortgagee or such purchaser shall have actually received and not refunded the applicable payment or deposit. 26. NOTICES: All notices, demands, requests, or consents required to be given under this Lease shall be sent in writing by U.S. certified mail, return receipt requested, overnight delivery by a reputable carrier, or by personal delivery addressed to the party to be notified at the address for such party specified in Section 1 of this Lease, or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days prior notice to the notifying party. 27. ENTRY BY LANDLORD: Landlord (i) shall not enter the Premises without first giving twenty-four (24) hours notice to Tenant of such entry except in the case of emergency, (ii) shall be accompanied by an employee of Tenant at all times while in the Premises, (iii) shall comply with Tenant's security procedures applicable to die Premises, and (iv) shall not unreasonably interfere with Tenant's use of the Premises. Provide the foregoing conditions are satisfied, Tenant shall permit Landlord and his agents to enter into and upon the Premises at all reasonable times, and without any rent abatement (except as otherwise provided in Section 45) or reduction or any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned, for the following purposes (i) inspecting and maintaining die Premises; (ii) making repairs, alterations or additions to the Premises; (iii) to construct the Adjacent Building; and (iv) performing any obligations of Landlord under the Lease including remediation of hazardous materials if determined to be the responsibility of Landlord. If Landlord or its agents, employees or contractors are negligent in connection with or during any such entry, or if any such entry unreasonably interferes with Tenant's use of the Premises, then subject to Section 41 below, Landlord shall be liable therefor. Tenant shall permit Landlord and his agents, at any time within one hundred eighty (180) days prior to the Expiration Date (or at any time during the Lease if Tenant is in default hereunder after notice Page 21 and expiration of any applicable cure period), to place upon the Premises "For Lease" signs and exhibit the Premises to real estate brokers and prospective tenants subject to the conditions contained in this Section 27. 28. DESTRUCTION OF PREMISES: A. DESTRUCTION BY AN INSURED CASUALTY: In the event of a destruction of the Premises during the Lease Term by a casualty for which Landlord has received insurance proceeds sufficient to repair the damage or destruction, Landlord shall repair the same to the extent of such proceeds. Such destruction shall not annul or void this Lease; however, Tenant shall be entitled to a proportionate reduction of Base Monthly Rent commencing on the date of damage or destruction and continuing while repairs are being made, such proportionate reduction to be based upon the extent to which the repairs or damage interferes with Tenant's business in the Premises, as reasonably determined by Landlord. Within sixty (60) days after any damage or destruction of the Premises, Landlord shall notify Tenant in writing of Landlord's estimate of the time required to repair the damage or destruction, and if Landlord estimates that the repairs cannot be made in 180 days from the date of receipt of all governmental approvals necessary under the laws and regulations of State, Federal, County or Municipal authorities, as reasonably determined by Landlord, or if the repairs actually take longer than said 180 day period, then Tenant may terminate this Lease within fifteen (15) days of Landlord's notice or the expiration of me 180 day period as applicable. Landlord shall use reasonable efforts to promptly obtain all governmental approvals and permits required for the repairs. Notwithstanding the foregoing, either Landlord or Tenant shall have the option to terminate the Lease in the event of a total destruction of the Premises or in the event of a partial destruction occurs in the last year of the Lease Term and will take more than sixty (60) days to repair; provided, however, that if the partial destruction occurs after Tenant shall have exercised its Option under Section 37 below or if Tenant exercises its Option under Section 37 within twenty days following the event of partial damage or destruction, then the last year of the Lease Term shall be deemed to be the last year of the Option Term. In no event shall Landlord be required to replace or restore Alterations, Tenant's fixtures or personal property. With respect to a destruction which Landlord is obligated to repair or may elect to repair under the terms of this Section, Tenant waives the provisions of Section 1932, and Section 1933, Subdivision 4, of the Civil Code of the State of California, and any other similarly enacted statute, and the provisions of this Section 28 shall govern in the case of such destruction. In the event that this Lease is terminated as the result of damage or destruction and any insurance proceeds are payable to Landlord, Landlord shall deliver to Tenant a portion of such insurance proceeds equal to the portion of me coos of do Tenant: Improvements paid for by Tenant ("Tenant's Contribution") that remains unamortized as of the date this Lease is terminated (calculated by amortizing Tenant's Contribution on a straight-line basis over the initial term of this Lease, or if the termination occurs after Tenant exercises its Option under Section 37 below, then Page 22 calculated by amortizing Tenant's Contribution on a straight-line basis over the term of this Lease, as so extended); provided, however, that Landlord's obligation to pay such insurance proceeds to Tenant shall be subject and subordinate to any obligation that Landlord may have to apply such insurance proceeds to any loans made to Landlord for the construction of the Building Shell which are secured by the Building Shell and the Ground Lease. B. DESTRUCTION BY AN UNINSURED CASUALTY: In the event of a destruction of the Premises during the Lease Term by a casualty for which Landlord will not received insurance proceeds sufficient to repair the damage or destruction (except for any deductible amount) and Tenant has not elected to contribute the shortfall (excluding any deductible amount payable by Landlord), the Lease shall automatically terminate unless (i) Landlord elects to rebuild, and (ii) the damage can be repaired within one hundred eighty (180) days from the date of receipt of an governmental approvals necessary under the laws and regulations of State, Federal, County or Municipal authorities, as reasonably determined by Landlord and communicated to Tenant in writing within sixty (60) days after the damage or destruction. 29. ASSIGNMENT OR SUBLEASE: A. CONSENT BY LANDLORD: Except as specifically provided in this Section 29, Tenant may not assign, sublet, hypothecate, or allow a third party to use the Premises without the express written consent of Landlord which shall not be unreasonably withheld or delayed. In the event Tenant desires to assign this Lease or any interest herein including, without limitation, a pledge, mortgage or other hypothecation, or sublet the Premises or any part thereof, Tenant shall deliver to Landlord executed counterparts of any agreement and of all ancillary agreements with the proposed assignee/subtenant and a notice containing the name and address of the proposed assignee/subtenant proposed use of the Premises, rental rate and current financial statement. At Landlord's request, Tenant shall also provide additional information reasonably required by Landlord to determine whether it will consent to the proposed assignment or sublease. Landlord shall have a ten (10) day period following receipt of all the foregoing within which to notify Tenant in writing that Landlord elects to: (i) permit Tenant to assign or sublet such space to the named assignee/subtenant on the terms and conditions set forth in the notice; or (ii) refuse consent. If Landlord should fail to notify Tenant in writing of such election within the 10-day period, Landlord shall be deemed to have elected option (ii) above. In the event Landlord elects option (i) above, Landlord's written consent to the proposed assignment or sublease shall not be unreasonably withheld, provided and upon the condition that: (i) the proposed assignee or subtenant is engaged in a business that is limited to the use expressly permitted under this Lease; (ii) the proposed assignee or subtenant is a company with sufficient financial worth and management ability to undertake the financial obligation of this Lease and Landlord has been furnished with reasonable proof thereof; (iii) the proposed assignment or sublease is in form reasonably satisfactory to Landlord; (iv) Tenant reimburses Landlord on demand for any reasonable costs that may be incurred by Landlord in Page 23 connection with said assignment or sublease, including the costs of making investigations as to the acceptability of the proposed assignee or subtenant and legal costs incurred in connection with the granting of any requested consent; and (v) Tenant shall not have advertised or publicized in any way the availability of the Premises without prior notice to Landlord. In the event all or any one of the foregoing conditions are not satisfied, Landlord shall be considered to have acted reasonably if it withholds its consent. B. ASSIGNMENT OR SUBLETTING CONSIDERATION: Any rent or other economic consideration realized by Tenant under any sublease and assignment, in excess of the rent payable hereunder and reasonable subletting and assignment costs (which shall include without limitation, all tenant improvement costs expended for the subtenant, attorney's fees and brokerage commissions), shall be divided and paid fifty percent (50%) to Landlord and fifty percent (50%) to Tenant. Tenant's obligation to pay over Landlord's portion of the consideration constitutes an obligation for additional rent hereunder. The above provisions relating to Landlord's right to terminate the Lease and relating to the allocation of bonus rent are independently negotiated terms of the Lease which constitute a material inducement for the Landlord to enter into the Lease, and are agreed by the parties to be commercially reasonable. No assignment or subletting by- Tenant shall relieve it of any obligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. C. NO RELEASE: Notwithstanding any such sublease or assignment and the acceptance of rent by Landlord from any subtenant or assignee, Tenant and any guarantor shall remain fully liable for the payment of Base Monthly Rent and additional rent due, and in become due hereunder, for the performance of all the covenants, agreements, terms,, provisions and conditions contained in this Lease on the part of Tenant to be performed and for all acts and omissions of any licensee, subtenant, assignee or any other person claiming under or through any subtenant or assignee that shall be in violation of any of the terms and conditions of this Lease, and any such violation shall be deemed a violation by Tenant. Tenant shall indemnify, defend and hold Landlord harmless from and against all losses, liabilities, damages, costs and expenses (including reasonable attorney fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any real estate brokers or other persons claiming compensation in connection with the proposed assignment or sublease. D. EFFECT OF DEFAULT: In the event of Tenant's default, Tenant hereby assigns all rents due from any assignment or subletting to Landlord as security for performance of is obligations under this Lease and Landlord may collect such rents as Tenant's Attorney-in-Fact, except that Tenant may collect such rents unless a default occurs as described in Section 22 and 24 above and such default is continuing. A Lease termination due to Tenant's default shall not automatically terminate an assignment or sublease then in existence; rather at Landlord's election, such assignment or sublease shall survive the Lease termination, the assignee or subtenant shall attorn to Landlord, Page 24 and Landlord shall undertake the obligations of Tenant under the sublease or assignment; except that Landlord shall not be liable for prepaid rent, security deposits or other defaults of Tenant to the subtenant or assignee, or for any acts or omissions of Tenant, its agents, employees, contractors or invitees. E. PERMITTED TRANSFERS: Tenant may, without Landlord's prior written consent, sublet the Premises or assign the Lease to: (i) a subsidiary, affiliate, division or corporation controlled 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 Tenant's assets, provided, however, that the sublessee or assignee has a net worth sufficient to meet its obligations under this Lease ("Permitted Transferees"). For the purpose of this Lease, sale of Tenant's capital stock through any public exchange shall not be deemed an assignment, subletting, or any other transfer of the Lease or the Premises. 30. CONDEMNATION: If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and only a part thereof remains which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the day before title vests in the condemnor or purchaser ('Vesting Date") and Base Monthly Rent payable hereunder shall be adjusted so that Tenant is required to pay for the remainder of the Lease Term only such portion of Base Monthly Rent as the value of the Fort remaining after such taking bears to the value of the entire Premises prior to such taking; but in such event Tenant shall have the option to terminate this Lease as of the Vesting Date if the portion remaining; is no longer suitable for Tenant's intended use. If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, this Lease shall terminate on the Vesting Date. If part or all of the Premises be taken, all compensation awarded upon such taking shall go to Landlord, and Tenant shall have no claim thereto; but Landlord shall cooperate with Tenant, without cost to Landlord, to recover compensation for damage to or taking of any Alterations, Tenant Improvements paid for by Tenant from sources other than the Work Allowance, or for Tenant's moving costs. Tenant hereby waives the provisions of California Code of Civil Procedures Section 1261130 and any odor similarly enacted statue, and the provisions of this Section 30 shall govern in the case of such taking. 31. EFFECTS OF CONVEYANCE: As used in this Lease, the term "Landlord" is defined only as the owner for the time being of the Premises, so that in the event of any sale or other conveyance of the Premises or in the event of a master lease of the Premises, Landlord shall be entirely freed and relieved of all its covenants and obligations hereunder to the extent such obligations accrue after the date of said sale or maker lease, and only to the extent the purchaser or master lessee agrees in writing to assume the obligations of Landlord hereunder arising after said sale or master lease., and A shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale or the master tenant of the Premises, that the purchaser or Page 25 master tenant of the Premises has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. Such transferor shall transfer and deliver Tenant's security deposit to the purchaser at any such sale or the master tenant of the Premises, and thereupon the transferor shall be discharged from any further liability in reference thereto. 32. SUBORDINATION: Subject to the recognition and nondisturbance agreements described in Section 1, this Lease is subject and subordinate to ground and underlying leases, mortgages and deeds of dust (collectively "Encumbrances") which may now affect the Premises, to any covenants, conditions or restrictions of record, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance ("Holder") require that this Lease be prior and superior thereto, within seven (7) days after written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver all documents or instruments, in the reasonable form presented to Tenant, which Landlord or Holder deems necessary or desirable for such purposes. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the, Premises or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof, on the condition that the Holder delivers to Tenant a non-disturbance agreement providing that in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed of trust, the Holder agrees to recognize Tenant's rights under this Lease as long as Tenant is not then in default and continues to pay Base Monthly Rent and additional rent and observes and performs all required provisions of this Lease (in each case, after notice and the expiration of any applicable cure period). Within fifteen (15) days after Landlord's written request, Tenant shall execute any reasonable documents required by Landlord or the Holder to make this Lease subordinate to any hen of the Encumbrance provided Tenant shall have received a Nondisturbance Agreement from the Holder of the applicable Encumbrance. If Tenant fails to do so, then in addition to such. failure constituting a default by Tenant it shall be deemed that this Lease is so subordinated to such Encumbrance provided Tenant shall have received a Nondisturbance Agreement from the Holder of the applicable Encumbrance. Notwithstanding anything to the contrary in this Section, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such encumbrance. 33. 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. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such Page 26 preceding breach at the time of acceptance of such rent. No payment by Tenant or receipt by Landlord of a lesser amount than any installment of rent due shall be deemed to be other than payment on account of the amount due. No delay or omission in the exercise of any right or remedy by Landlord or Tenant shall impair such right or remedy or be construed as a waiver thereof by the non-defaulting party. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute acceptance of the surrender of the Premises by Tenant before the Expiration Date (only written notice from Landlord to Tenant of acceptance shall constitute such acceptance of surrender of the Premises). Landlord's consent to or approval of any act by Tenant which require Landlord's consent or approvals shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. 34. HOLDING OVER: Any holding over after the termination or Expiration Date with Landlord's consent, shall be construed as month-to-month tenancy, terminable on thirty (30) days written notice from either party, and Tenant shall pay as Base Monthly Rent to Landlord a rate equal to one hundred thirty three percent (133%) of the Base Monthly Rent due in the month preceding the termination or Expiration Date, plus all other amounts payable by Tenant under this Lease. Any holding over shall otherwise be on the terms and conditions herein specified, except those provisions relating to the Lease Term and any options to extend or renew, which provisions shall be of no further force and effect following the expiration of the applicable exercise period. Tenant shall indemnify, defend, and hold Landlord harmless from all loss or liability (including, without limitation, any loss or liability resulted from any claim against Landlord made by any succeeding tenant) resulting from Tenant's failure to timely surrender the Premises to Landlord and losses to Landlord due to lost opportunities to lease the Premises to succeeding tenants. 35. SUCCESSORS AND ASSIGNS: Subject to the provisions of Section 29, the covenants and conditions of this Lease shall apply to and bind the heirs, successors, executors, administrators and assigns of all parties hereto; and all parties hereto shall be jointly and severally liable hereunder. 36. ESTOPPEL CERTIFICATES: At any time during the Lease Term, Landlord or Tenant shall, within fifteen (15) days following written notice from the other, execute and deliver a written statement certifying, if true, the following: (i) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification); (ii) the date to which rent and other charges are paid in advance, if any; (iii) acknowledging that there are not, to the party's knowledge, any uncured defaults (or specifying such defaults if they are claimed); and (iv) such other information as may be reasonably requested. Any such statement may be conclusively relied upon by a third party. Tenant agrees to provide, within twenty (20) days of Landlord's request, Tenant's most recent annual report and latest quarterly reports. 37. OPTION TO EXTEND THE LEASE TERM: Page 27 A. GRANT AND EXERCISE OF OPTION: Landlord grants to Tenant, subject to the terms and conditions set forth in this Section, the option (the "Option") to extend the Lease Term for an additional term (the "Option Term") of one hundred twenty (120) months. The Option shall be exercised, if at all, by written notice to Landlord no earlier than eighteen (18) months prior to the Expiration Date but no later than twelve (12) months prior to the Expiration Date. Tenant's ability to exercise the Option is expressly conditioned on Tenant's exercise of its option to extend the Adjacent Building Lease. If Tenant exercises the Option, all of the terms, covenants and conditions of this Lease except this Section shall apply during the Option Term as though the expiration date of the Option Term. was the date originally set forth herein as the Expiration Date, provided that the terms of EXHIBIT B shall not apply to the Option Term and Tenant shall not have any obligation in connection with the Option Term to make or pay for any tenant improvements and provided, further, that Base Monthly Rent for the Premises payable by Tenant during the Option Term shall be the greater of either (i) the Base Monthly Rent applicable to the period immediately prior to the commencement of the Option Term, or (ii) ninety five percent (95%) of the Fair Market Rental as hereinafter defined. Notwithstanding anything herein to the contrary, if Tenant is in monetary or material non-monetary default under any of the terms, covenants or conditions of this Lease either at the time Tenant exercises the Option or as the commencement date of the Option Term (after notice and expiration of any applicable cure period), Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate the Option upon notice to Tenant, in which event the expiration date of this Lease shall be and remain the Expiration Date. As used herein, the term "Fair Market Rental" is defined as the rental and all other monetary payments, including any escalations and adjustments thereto (including without limitation Consumer Price Indexing) that Landlord could obtain during the Option Term from a third party desiring to lease the Premises, based upon the current use and other potential uses of the Premises under or permitted by this Lease, as determined by the rents then being obtained for new leases of space comparable in age and quality to the Premises in the locality of the Building. The parties hereto agree that in calculating the Fair Market Rental of the Premises, the value of all Tenant Improvements and Alterations paid for solely by Tenant shall not be taken into consideration. The parties further agree that the appraisers shall be instructed that the foregoing five percent (5%) discount is intended to reduce comparable rents which include (i) brokerage commissions, (ii) tenant improvement allowances, and (iii) vacancy costs, to account for the fact that Landlord will not suffer such costs in the event Tenant exercises its Option. B. DETERMINATION OF FAIR MARKET RENTAL: If Tenant exercises the Option, Landlord shall send Tenant a notice setting forth the Fair Market Rental for the Option Term within thirty (30) days following the Exercise Date. If Tenant disputes Landlord's determination of Fair Market Rental for the Option Term, Tenant shall, within thirty (30) days after the date of Landlord's notice setting forth Fair Market Rental for the Option Term, send to Landlord a notice stating that Tenant either elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease Page 28 shall terminate on the Expiration Date, or that Tenant disagrees with Landlord's determination of Fair Market Rental for the Option Term and elects to resolve the disagreement as provided in Section 37.C below. If Tenant does not send Landlord a notice as provided in the previous sentence, Landlord's determination of Fair Market Rental shall be the basis for determining the Base Monthly Rent payable by Tenant during the Option Term. If Tenant elects to resolve the disagreement as provided in Section 37.C and such procedures are not concluded prior to the commencement date of the Option Term, Tenant shall pay to Landlord as Base Monthly Rent the Fair Market Rental as determined by Landlord in the manner provided above. If the 'air Market Rental as finally determined pursuant to Section 37.C is greater than, Landlord's determination, Tenant shall pay Landlord the difference between the amount paid by Tenant and the Fair Market Rental as so determined in Section 37.C within thirty (30) days after such determination. If the Fair Market Rental as finally determined in Section 37.C is less than Landlord's determination, the difference between the amount paid by Tenant and the Fair Market Rental as so determined in Section 37.C shall be credited against the next installments of rent due from Tenant to Landlord hereunder. C. RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any disagreement regarding Fair Market Rental shall be resolved as follows: 1. Within thirty (30) days after Tenant's response to Landlord's notice setting form the Fair Market Rental, Landlord and Tenant shall meet at least two (2) times at a mutually agreeable time and place, in an attempt to resolve the disagreement. 2. If within me 30-day period referred to above, Landlord and Tenant cannot reach agreement as to Fair Market Rental, each party shall select one appraiser to determine Fair Market Rental. Each such appraiser shall arrive at a determination of Fair Market Rental and submit their conclusions to Landlord and Tenant within thirty (30) days after the expiration of the 30-day consultation period described above. 3. If only one appraisal is submitted within the requisite time period, it shall be deemed as Fair Market Rental. If both appraisals are submitted within such time period and the two appraisals so submitted differ by less than ten percent (10%), the average of the two shall be deemed as Fair Market Rental. If the two appraisals differ by more than 10%, the appraisers shall immediately select a third appraiser who shall, within thirty (30) days after his selection, make and submit to Landlord and Tenant a determination of Fair Market Rental. This third appraisal will then be averaged with the closer of the two previous appraisals and the result shall be Fair Market Rental. 4. All appraisers specified pursuant to this Section shall be members of the American Institute of Real Estate Appraisers with not less than ten (10) years experience appraising office and industrial properties in the Santa Clara Valley. Each party shall pay the cost of the appraiser selected by such party and one-half of the cost of the third appraiser. Page 29 38. OPTIONS: In the event Tenant has multiple options to extend this Lease, a later option to extend the Lease cannot be exercised unless the prior option has been so exercised. 39. QUIET ENJOYMENT: Upon Tenant's faithful and timely performance of all the terms and covenants of the Lease and except as otherwise provided in this Lease, Tenant shall quietly have and hold the Premises for the Lease Term and any extensions thereof. 40. BROKERS: Landlord and Tenant represent they have not utilized or contacted a real estate broker or finder with respect to this Lease other than BT Commercial and each party agrees to indemnify, defend and hold the other harmless against any claim, cost, liability or cause of action asserted by any odor broker or finder. 41. LANDLORD'S LIABILITY: If Tenant recovers a money judgment against Landlord arising in connection with this Lease, the judgment shall be satisfied only out of (i) all rents and profits from the Parcel, (ii) Landlord's interest in the Parcel, and (iii) Landlord's insurance and interest in any insurance proceeds and neither Landlord nor any of its partners, officers, directors, agents, trustees, shareholders or employees shall be liable personally for any deficiency. Tenant expressly waives all rights to proceed against the individual partners or the officers, directors or shareholders of any corporate partner, except to the extent of their interest in said limited partnership. 42. AUTHORITY OF PARTIES: Tenant represents and warrants that it is duly formed and in good standing, and is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. Landlord represents and warrants that it is duly formed and in good standing, and is duly authorized to execute and deliver this Lease on behalf of said partnership, and that this Lease is binding upon said partnership in accordance with its terms. At Landlord's request, Tenant shall provide Landlord with corporate resolutions or other proof in a form acceptable to Landlord, authorizing the execution of the Lease. 43. TRANSPORTATION DEMAND MANAGEMENT PROGRAMS: Should a government agency or municipality require Landlord or Tenant to institute a TDM (Transportation Demand Management) program, Tenant agrees to pay the cost or expenses associated with such TDM programs which are required for the Premises. 44. DISPUTE RESOLUTION: Except for the Tenant's failure to timely pay Base Monthly Rent, any controversy, dispute, or claim of whatever nature arising out of, in connection with, or in relation to the interpretation, performance or breach of this Lease, including any claim based on Page 30 contract, tort, or statute, shall be resolved at the request of any party to this agreement through a two-step dispute resolution process administered by JAMS or another judicial and mediation service mutually acceptable to the parties involving first mediation, followed, if necessary, by final and binding arbitration administered by and in accordance with the then-existing rules and practice of the judicial and mediation service selected, and judgment upon any award rendered by the arbitrators) may be entered by any State or Federal Court having jurisdiction thereof. 45. INTERFERENCE WITH USE OF PREMISES: If the Premises should become unsuitable for Tenant's use as a consequence of (i) the presence of any Hazardous Material which does not result from Tenant's use, storage or disposal of such material in violation of applicable Law, or (ii) as the result of a cessation of utilities not caused by Tenant or from a casualty, which persists for seventy two (72) consecutive hours or which is caused by Landlord, ('Interfering Event") then Tenant shall be entitled to an abatement of rent to the extent of the interference with Tenant's use of the Premises occasioned thereby from the date of the Interfering Event, and, if such interference cannot be corrected or the damage resulting therefrom repaired so that the Premises will be reasonably suitable for Tenant's intended use within one hundred eighty (180) days following the occurrence of the Interfering Event, then Tenant shall be entitled to terminate this Lease by delivery of written notice to the other within five (5) days following the expiration of such one hundred eighty (180) day period. 46. EXISTING VICTORIAN HOME: Not applicable 47. MISCELLANEOUS PROVISIONS: A. RENT: All monetary sums due from Tenant to Landlord under this Lease, including, without limitation those referred to as "additional rent", shall be deemed as rent. B. MANAGEMENT FEE: During the Lease Term commencing two months following the Commencement Date, Tenant shall pay Landlord a fee of two percent (2%) of the Base Monthly Rent to reimburse Landlord for property management costs related to the Project. C. PERFORMANCE BY LANDLORD: If Tenant fails to perform any obligation required under this Lease or by law or governmental regulation, Landlord in its sole discretion may, after giving Tenant at leak thirty (30) days prior written notice, without waiving any rights or remedies and without releasing Tenant from its obligations hereunder, perform such obligation, in which event Tenant shall pay Landlord as additional rent all sums paid by Landlord in connection with such substitute performance, including interest as provided in Section 47.D below within ten (10) days of Landlord's written notice for such payment. D. INTEREST: All sums due hereunder, if not paid by Tenant or Landlord within thirty Page 31 (30) days after they are due, shall bear interest at the maximum rate the parties are permitted to contract for under California law, accruing from the date due until the date paid. E. RIGHTS AND REMEDIES: All rights and remedies hereunder are cumulative and not alternative to the extent permitted by law, and are in addition to all other rights and remedies in law and in equity. F. SURVIVAL OF INDEMNITIES: All indemnification, defense, and hold harmless obligations of Landlord and Tenant under this Lease shall survive the expiration or sooner termination of the Lease. G. SEVERABILITY: If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction, the remainder of the Lease shall not be invalidated thereby but shall be enforceable in accordance with its terms omitting the invalid or unenforceable term. H. CHOICE OF LAW: This Lease shall be governed by and construed in accordance with California law. Venue shall be Santa Clara County. I. TIME: Time is of the essence hereunder. J. ENTIRE AGREEMENT: This Lease contains all of the agreements and conditions made between the parties hereto and may not be modified orally or in any other manner other than by written agreement signed by all parties hereto or their respective successors in interest. This Lease supersedes and revokes all previous negotiations letters of intent, lease proposals, brochures, agreements, representations, promises, warranties, and understandings, whether oral or in writing, between the parties or their respective representatives or any other person purporting to represent Landlord or Tenant. K. REPRESENTATIONS: Except as expressly provided in this Lease, Tenant acknowledges that neither Landlord nor any of its employees or agents have made any agreements, representations, warranties or promises with respect to the Premises or with respect to present or future rents, expenses, operations, tenancies or any other matter. Except as herein expressly set forth herein, Tenant relied on no statement of Landlord or its employees or agents for that purpose. L. NO PRESUMPTION AGAINST DRAFTER: Landlord and Tenant understand, agree and acknowledge that this Lease has been freely negotiated by both parties; and that in any controversy, dispute, or contest over the meaning, interpretation, validity, or enforceability of this Lease or any of its terms or conditions, there shall be no inference, presumption, or conclusion drawn whatsoever against either party by virtue of that party having drafted this Lease or any portion thereof. Page 32 M. HEADINGS: The headings or titles to the Sections of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. N. EXHIBITS: All exhibits referred to are attached to this Lease and incorporated by reference. 48. CROSS-DEFAULT. If this Lease is terminated as the result of a default by Landlord or Tenant or the exercise by Landlord or Tenant of any right to terminate given to Landlord or Tenant under this Lease (other than a right to terminate exercised by Landlord or Tenant with respect to damage to or destruction of the Premises), then subject to the provisions of Section 28.A concerning the payment by Landlord to Tenant of the unamortized cost of the Tenant Improvements paid for by Tenant, the non-defaulting party may elect to terminate the Adjacent Lease by giving written notice of such termination to the other party concurrently with, or within ten (10) business days after, the termination of this Lease. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and year first above written. LANDLORD: SOBRATO INTERESTS III TENANT: CENTIGRAM COMMUNICATIONS CORP. a California Limited Partnership a Delaware Corporation By: /s/ Signature unreadable By: /s/ Signature unreadable ---------------------------------- ---------------------------------- Its: General Partner Its: President & CEO Page 33 EXHIBIT "A" - PREMISES, BUILDING & PROJECT IMAGE NOT SHOWN Page 34 EXHIBIT "B" - SHELL PLANS AND SPECIFICATIONS (SHEET REFERENCES TO BE ATTACHED) ARCHITECTURAL DRAWINGS SHEET NO. SHEET NAME A0.1 Project Information and Notes A1.0 Site Plan A2.0A Building One - First Level Floor Plan A2.1A Building One - Second Level Floor Plan A2.2A Building One - Third Level Floor Plan A2.3A Building One - Fourth Level Floor Plan A2.4A Building One - Roof Plan A2.5B Building Two - First Level Floor- PI, A2.6B Building Two - Second Level Floor Plan A2.7B Building Two - Third Level Floor Plan A2.8B Building Two - Fourth Level Floor Plan A2.9B Building Two - Roof Plan A3.0A Building One - North and South Exterior E A3.1A Building One - East and West Exterior Elevations A3.2B Building Two East and West Exterior Elevations., A3.3B Building Two - North and South Exterior Elevations, A4.0 Wall Sections A4.1 Wall Sections A4.2 Wall Sections A4.3 Wall Sections A6.0 Detail Stair Floor Plans A6.1 Stair Details A6.2 Stair Sections and Details CIVIL DRAWINGS C-1 Topographical Survey C-2 Preliminary Grading Plan Page 35 STRUCTURAL DRAWINGS S1 Horn House Foundation Plans and Details S2.0 Building One Foundation Plan S2.l Building One - Second Floor Framing Plan S2.2 Building One - Third Floor Framing Plan S2.3 Building One - Fourth Floor Framing Plan S3.1 Building One - Braced Frame Elevations S3.2 Typical Structural Details S6.1 Wall Sections S6.2 Wall Sections S6.3 Wall Sections S6.4 Wall Sections S3.1 Panel Elevations S3.2 Panel Elevations S3.3 Panel Elevations S4.0 Foundation Details ELECTRICAL DRAWINGS SE.1 Site Electrical Plan E.1a Building One - First Level Power Plan El.b Building Two - First Level Power Plan E2.a Building One - Second Level Power Plan E2.b Building Two - Second Level Power Plan LANDSCAPE DRAWINGS L1.1 General Landscape Notes and Legend L1.2 Plant List and Planting Notes L2.1 Irrigation Site Plan L4.1 Planing Site Plan L6.1 Landscape Details L7.1 Fountain Plan, Notes and Details EXHIBIT "C" - BUILDING SHELL DEFINITION The Building Shell shall be a four -story steel frame structure with 90% of the perimeter containing glass. The Building Shell shall include the following items: 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 building structure. (b) Five inch (5") thick concrete slab on grade with below grade vapor barrier and welded wire mesh and any other reinforcing or structural connections that may be necessary or required as specified by structural engineer. (c) Complete structural framing system comprised of rolled steel or pipe columns, light weight braced-frame steel structure with corrugated metal deck and concrete toping over and open web bar joist and girder floor support system, all members fireproofed as required by code. Floor support system shall provide for a minimum of 120 pounds per square foot live load. (d) Tinted high performance glass with Robertson composite metal panels including required caulking and sealants. Four (4) exterior double doors, door closers and locking devices as necessary. (e) Four (4) ply built up roofing with cap sheet by Owens-Corning, John Manville, or equal and all flashings over a rigid insulated corrugated metal deck roof system. (f) Exterior painting of any concrete with Tex-Coat or Kel-Tex textural paint, all caulking of exterior concrete joints in preparation for painting. (g) Two (2) steel fire stairs at perimeter of building. One ship ladder to roof of building with roof hatch. (h) Mechanical roof screen. (i) Loading area with grade level access with hydraulic scissors lift external of building. (j) penetrations of the roof and floor for the mechanical ducting and for the elevators (elevator penetrations to accommodate two hydraulic passenger elevators at the core and one freight elevator near the dock area) (k) Riser for Building sprinkler system (no sprinkler grid or drops) Page 36 2. 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, landscape irrigation, storm drainage, utility service laterals, curbs, gutters, sidewalks, specialty paving (if required, i.e. reinforced roadway section to truck doors), retaining walls, planters, trash enclosure, parking lot and landscape lighting and other exterior lighting per code. Landscape design to include screen dining patio (no furniture) and three flag poles with bases. (b) Paving sections for automobile and truck access shall be according to the Geologic Soils Report (c) All parking lot striping to include handicap spaces and signage. (d) Underground site storm drainage system shall be connected to the city storm system main. 3. PLUMBING (a) Underground sanitary sewer laterals connected to the city sewer main in the street and stubbed to the core of the building. (b) Domestic water mains connected to the city water main in the street and stubbed to the building. (c) Roof drain leaders and downspouts piped and connected to the site storm drainage system. (d) Gas lines connected to the city or public utility mains and run to gas meters adjacent to, and in close proximity to the building. Meter supplied by utility company. 4. ELECTRICAL (a) A primary electrical raceway service from the street to the building, including underground conduit wire feeders, and transformer pads. Transformer supplied by utility company. Underground conduits and secondary feeders from transformer pads into the building. (b) 4" Underground conduit from the street to the building for telephone trunk lines by Pacific Telephone. Page 37 (c) An electrically operated landscape irrigation system, with controller, that is a complete and functioning system. (e) Underground conduit from the building to the main fire protection system post indicator valve (PIV) for installation of supervisory alarm wiring. (f) Telephone and data conduits between the Building and the Adjacent Building All other costs shall be deemed Tenant Improvements. Page 38 EXHIBIT "D" - TENANT IMPROVEMENT PLANS AND SPECIFICATIONS (SHEET REFERENCES TO BE ATTACHED) Page 39 EX-11.1 7 EX-11.1 EXHIBIT 11.1 CENTIGRAM COMMUNICATIONS CORPORATION STATEMENT OF COMPUTATION OF EARNINGS PER SHARE FOR THE YEARS ENDED NOVEMBER 2, 1996 AND OCTOBER 28, 1995, THE MONTH ENDED OCTOBER 29, 1994, AND YEAR ENDED OCTOBER 1, 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
MONTH ENDED OCTOBER 29, YEAR 1996 YEAR 1995 1994 YEAR 1994 --------- --------- ------------- --------- Net income (loss).................................................... $ 1,000 $ (4,134) $ (1,890) $ 7,745 --------- --------- ------------- --------- --------- --------- ------------- --------- Computation of common and common equivalent shares outstanding: Common stock....................................................... 6,824 6,560 6,379 6,147 Options and warrants............................................... 157 -- -- 411 --------- --------- ------------- --------- Common and common equivalent shares used in computing per share amounts............................................................. 6,981 6,560 6,379 6,558 --------- --------- ------------- --------- --------- --------- ------------- --------- Net income (loss) per share.......................................... $ 0.14 $ (0.63) $ (0.30) $ 1.18 --------- --------- ------------- --------- --------- --------- ------------- ---------
Fully diluted computation not presented since such amount differs by less than 3% of the net income per share amounts shown above EX-21.1 8 EX-21.1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF REGISTRANT Centigram Asia Limited Centigram Australasia Pty Limited Centigram Communications (Barbados), Inc. Centigram Europe B.V. Centigram UK Limited EX-23.1 9 EX-23-1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 33-43726, 33-98484, 333-4215, and 333-4217) pertaining to the Amended and Restated 1987 Stock Option Plan, the 1991 Employee Stock Purchase Plan, and the 1995 Nonstatutory Stock Option Plan of Centigram Communications Corporation of our report dated November 26, 1996, except for the second paragraph of "Commitments and Contingencies" and the note "Subsequent Events" as to which the date is December 20, 1996, with respect to the consolidated financial statements and schedule of Centigram Communications Corporation included in the Annual Report (Form 10-K) for the year ended November 2, 1996. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP San Jose, California January 23, 1997 EX-27.1 10 EX-27-1
5 This schedule contains summary financial information extracted from the Company's 10-K for the year and is qualified in its entirety by reference to such financial statements. 1,000 YEAR NOV-02-1996 OCT-29-1995 NOV-02-1996 12,668 29,408 29,796 2,055 11,467 85,816 36,917 21,668 104,009 20,519 0 0 0 7 83,405 104,009 104,324 104,324 42,516 42,516 62,986 0 76 1,053 53 1,000 0 0 0 1,000 .14 .14
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