-----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, HHQoZycyItNyvMfjAvdEkpiJ0wFFfeVSJpKJgfqopjxcpeYio/4I4Ioq+/vfStdJ ddZyaXFYBeW/sJVHDwaIxQ== 0000950148-02-000651.txt : 20020415 0000950148-02-000651.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950148-02-000651 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MRV COMMUNICATIONS INC CENTRAL INDEX KEY: 0000887969 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 061340090 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11174 FILM NUMBER: 02580353 BUSINESS ADDRESS: STREET 1: 20415 NORDHOFF ST CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8187730900 MAIL ADDRESS: STREET 1: 20415 NORDHOFF ST CITY: CHATSWORTH STATE: CA ZIP: 91311 10-K 1 v79412e10-k.txt 10-K UNITED STATES 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 December 31, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________ Commission file number 0-25678 MRV COMMUNICATIONS, INC. (Name of registrant as specified in its charter) Delaware (State or other jurisdiction of 06-1340090 incorporation or organization) (I.R.S. employer identification number) 20415 Nordhoff Street Chatsworth, California (Address of principal executive offices) 91311 (Zip Code) Issuer's telephone number: (818) 773-0900 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.0017 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days: $253,901,477 based on the closing sale price of $3.01 per share on March 19, 2002 as reported by The Nasdaq National Market. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 89,122,734 shares at March 18, 2002. DOCUMENTS INCORPORATED BY REFERENCE: None This Annual Report on Form 10-K contains forward-looking statements including statements regarding, among other items, our business strategy, growth strategy and anticipated trends in our business. We may make additional written or oral forward-looking statements from time to time in filings with the Securities and Exchange Commission or otherwise. When we use the words believe, expect, anticipate, project and similar expressions, this should alert you that this is a forward-looking statement. These forward-looking statements are largely based on our expectations. They are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Report, including those set forth below in Item 1 "Business - -- Risk Factors," describe factors, among others, that could contribute to or cause these differences. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Report will in fact transpire or prove to be accurate. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this introduction. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date of this Report. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. Table of Contents PART I.......................................................................................3 ITEM 1. BUSINESS....................................................................3 ITEM 2. PROPERTIES.................................................................31 ITEM 3. LEGAL PROCEEDINGS..........................................................33 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................34 PART II.....................................................................................35 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................................35 ITEM 6. SELECTED FINANCIAL DATA....................................................36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................................54 PART III....................................................................................55 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................55 ITEM 11. EXECUTIVE COMPENSATION.....................................................58 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT.............................................................62 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................63 PART IV.....................................................................................65 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,...................................65 AND REPORTS ON FORM 8-K....................................................65
2 PART I ITEM 1. BUSINESS OVERVIEW MRV Communications, Inc. creates, acquires, finances and operates companies, and through them, designs, develops, manufactures and markets products, which enable high-speed broadband communications. MRV concentrates on companies and products devoted to optical components and Internet infrastructure systems. MRV has leveraged its early experience in fiber optic technology into a number of focused operating units specializing in advanced fiber optic components, switching, routing, transaction management and wireless optical transmission systems which it has created, financed or acquired. MRV's principal operating units that constituted wholly or majority owned subsidiaries or divisions at December 31, 2001 were: - LUMINENT, INC. Luminent designs, manufactures and sells a comprehensive line of singlemode active and passive fiber optic components for high-capacity data transmission in the metropolitan and access markets. Leading network equipment manufacturers rely on Luminent to provide technical depth, responsive customer service and volume manufacturing to meet the increasing requirements for transmission capacity and speed between nationwide telecommunications networks and end users. In November 2000, Luminent completed an initial public offering of its common stock. While we originally planned to spin-off to our stockholders the remaining Luminent common stock that we owned, in September 2001 we decided not to make that distribution and instead to merge Luminent into one of our wholly-owned subsidiaries, thereby eliminating public ownership of Luminent's common stock. In that merger, which was completed on December 28, 2001, we issued 0.43 shares of our common stock in exchange for each outstanding share of Luminent common stock that we did not own prior to the merger, or an aggregate of approximately 5,160,000 of our shares, and assumed Luminent's outstanding stock options adjusted for the exchange ratio. - OPTICAL ACCESS, INC. Optical Access designs, manufactures and markets optical wireless products that enable the delivery of high-speed communications traffic to the portion of the communications network commonly known as the last mile, which extends from the end user to the service provider's central office. Optical Access' solutions to the last-mile bottleneck bypass the incumbent carrier's copper access network with a comprehensive, integrated access solution, using optical wireless technology. The building blocks of Optical Access' solution include the TereScope(TM), for optical wireless links, and the OptiSwitch(TM), for switching, provisioning and mesh enabling. At December 31, 2001, MRV owned all of the outstanding capital stock of Optical Access. On October 6, 2000, Optical Access filed a registration statement with the Securities and Exchange Commission for the initial public offering of its common stock. Market conditions prevented this offering from being completed and it was withdrawn in November 2001. - CESCOMM, INC. CEScomm (formerly Creative Electronic Systems SA or CES) is developing and providing equipment to manufacturers of cellular network infrastructure equipment and mobile operators and service providers for the third generation of wireless solutions commonly known as 3G. 3G is the generic term used for the next generation of mobile communications systems. These new systems provide enhanced services to those available today i.e., voice, text and data. CEScomm specializes in products that provide the real-time conversion of radio signals generated 3 by Internet ready mobile devices into asynchronous transfer mode, or ATM, traffic streams. At December 31, 2001, MRV owned all of the outstanding capital stock of CEScomm. O ITOUCH COMMUNICATIONS, INC. iTouch Communications, Inc. provides next-generation Internet infrastructure solutions that enable service providers and carriers to deliver and monitor, on a real-time basis, high-speed Internet services. iTouch's products combine transaction management with Internet protocol, or IP, routing and wide-area network, or WAN, technologies, which allow for faster development of feature rich high-speed data acquisition and management systems. At December 31, 2001, MRV owned all of the outstanding capital stock of iTouch. O NBASE-XYPLEX. NBase-Xyplex, a division of MRV, provides products and services, such as the Fiber Driver, to enhance network infrastructures for city carriers, service providers, cable operators and campus and enterprise networks. Its products and technologies have been utilized in metropolitan area fiber-based networks, enabling smart access to the WAN, as well as in local area network, or LAN, switching, building enterprise/corporate data networks. MRV's principal development stage companies, which MRV founded or has invested in as of December 31, 2001 were: - CHARLOTTE'S NETWORKS, INC. Charlotte's Networks is a start-up company that is developing a core router for large service providers and carriers. The Aranea core router is Charlotte's first product. The Aranea router is capable of carrying both IP packets and time-division multiplexing, or TDM, voice traffic and enables the current WAN to grow in high orders of magnitude both in processing power and rate of transmission. In addition, the router provides multi-services required by telecommunication companies for efficient and flexible transmission of voice over data networks. At December 31, 2001, MRV owned approximately 54% of the outstanding capital stock of Charlotte's Networks on a fully diluted basis. - ZUMA NETWORKS, INC. Zuma Networks is a startup company that is developing a next generation Gigabit Ethernet switch router platform. At December 31, 2001, MRV owned all of the outstanding capital stock of Zuma Networks. - OPTICAL CROSSING INC. Optical Crossing designs, develops and manufactures advanced fiber optic communication components and systems for the telecommunications industry. At December 31, 2001, MRV owned approximately 60% of the outstanding capital stock of Optical Crossing on a fully diluted basis. - REDC OPTICAL NETWORKS, INC. RedC has developed a complete line of optical modules used for operating, monitoring and protecting optical networks including: optical amplifiers, add/drop modules, protection and restoration modules and dense wave division multiplexing, or DWDM, monitoring. At December 31, 2001, MRV owned approximately 35% of the outstanding capital stock of RedC on a fully diluted basis. - HYPERCHANNEL LTD. Hyperchannel, which does business under its trademark Hyporium is an independent Internet market maker for the information technology, or IT, industry, enabling IT vendors, distributors and resellers to trade online. Hyporium offers an alternative route to market through an online trading hub and reseller web storefronts. At December 31, 2001, MRV owned approximately 40% of the outstanding capital stock of Hyperchannel on a fully diluted basis. 4 BACKGROUND MRV was organized in July 1988 as MRV Technologies, Inc., a California corporation and reincorporated in Delaware in April 1992, at which time it changed its name to MRV Communications, Inc. MRV's initial focus was in the design, manufacture and marketing of semiconductor laser diodes, light emitting diodes, or LEDs, and fiber optic transmitting and receiving modules for the transmission of large amounts of information at high speeds over long distances and LAN switching products for the computer networking industry. From 1995 to 1998, MRV made several acquisitions involving companies making networking equipment, including: - in 1995, certain of the assets and the distribution businesses of Galcom Networking, Ltd. and Ace 400 Communications Ltd, both network equipment companies located in Israel, which provided MRV with experienced personnel and technology for the networking markets; - in 1996, certain of the liabilities and assets of Fibronics Ltd. and its subsidiaries, including its technology in progress and existing technology, its marketing channels, its GigaHub family of computer networking products and other rights, relating to Fibronics' computer networking and telecommunications businesses in Germany, the United States, the United Kingdom, the Netherlands and Israel, enabling MRV to enhance the development of Fast Ethernet and Gigabit Ethernet functions, to offer a broader range of networking products and to benefit from combined distribution channels and sales in both the United States and Europe and greater product development capability; and - in 1998 of the outstanding capital stock of the entity owning the outstanding capital stock of Xyplex, Inc., a leading provider of access solutions between enterprise networks and wide area network and/or Internet service providers, or ISPs. This acquisition enabled MRV to expand its product lines with products that had WAN and remote access capabilities, permitting MRV to offer these solutions not only to MRV's own existing base of customers, but also to the customer base added by Xyplex. The acquisition of Xyplex (now known as iTouch Communications) also increased MRV's sales force, distribution channels and customer support and service capabilities. During 2000, MRV completed several strategic acquisitions. These acquisitions were made to expand MRV's product offerings, enhance its technological experience and expand MRV's manufacturing capabilities. The table below summarizes MRV's more notable acquisitions in that year.
Form of Consideration and Acquired Company Date of Acquisition Total Consideration Other Notes to Acquisition ---------------- ------------------- ------------------- -------------------------- Fiber Optic Communications, Inc. April 24, 2000 $309.7 million $48.6 million in cash and 5.4 million shares of common stock and options issued; approximately 97% of capital stock assumed; goodwill and other intangibles recorded of $261.5 million; deferred stock compensation recorded of $14.1 million Jolt Limited May 1, 2000 $57.7 million 1.9 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and other intangibles recorded of $33.7 million; deferred stock compensation recorded of $25.0 million
5
Form of Consideration and Acquired Company Date of Acquisition Total Consideration Other Notes to Acquisition ---------------- ------------------- ------------------- -------------------------- July 12, 2000 $36.1 million 1.2 million shares of common stock and Quantum Optech Inc. options issued; 100% of capital stock assumed; goodwill and other intangibles recorded of $27.8 million; deferred stock compensation recorded of $2.7 million AstroTerra Corporation July 12, 2000 $160.3 million 2.4 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and other intangibles recorded of $108.4 million; deferred stock compensation recorded of $50.0 million Optronics International Corp. July 21, 2000 $123.9 million 4.2 million shares of common stock and options issued; approximately 99% of capital stock assumed; goodwill and other intangibles recorded of $99.4 million; deferred stock compensation recorded of $13.4 million
Each of these acquisitions was accounted for using the purchase method and therefore, the results of operations of the acquired businesses have been included in MRV's consolidated financial statements from the respective dates of acquisition. Fiber Optic Communications is a Taiwanese manufacturer of passive fiber optic components for wavelength division multiplexing and has facilities in both Taiwan and the People's Republic of China. Quantum Optech is a Taiwanese manufacturer of passive fiber optic components specializing in developing and manufacturing optical thin film coating and filters for dense wavelength division multiplexing. Optronics International is a Taiwanese manufacturer of active fiber optic components focused on developing and manufacturing high temperature semiconductor lasers, transceivers and detectors for optical networks. Fiber Optic Communications, Quantum Optech and Optronics International were acquired and contributed to Luminent in September 2000, prior to Luminent's initial public offering of its common stock. AstroTerra develops and manufactures free-space optical wireless communication systems to connect data and telecommunications networks. Jolt develops and manufactures multi-port wireless optics communications equipment. These acquisitions provided strategic components and technology for Optical Access' wireless optical solution. AstroTerra and Jolt were acquired and contributed to MRV's subsidiary, Optical Access, which focuses on optical wireless products that deliver high-speed communications traffic to the so-called last mile portion of the communications network. RISK FACTORS From time to time we may make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases, and in reports to stockholders. The Private Securities Reform Act of 1995 contains a safe harbor for forward-looking statements on which the Company relies in making such disclosures. In connection with this "safe harbor" we are hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. Any such statement is qualified by reference to the following cautionary statements: 6 WE INCURRED A NET LOSS IN THE YEARS ENDED DECEMBER 31, 2000 AND 2001, PRIMARILY AS A RESULT OF THE AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES AND DEFERRED COMPENSATION CHARGES FROM RECENT ACQUISITIONS. WE EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE FORESEEABLE FUTURE. We reported a net loss of $153.0 million for the year ended December 31, 2000 and $326.4 million for the year ended December 31, 2001. A major contributing factor to the net losses was the amortization of goodwill and intangibles and deferred stock compensation related to our acquisitions of Fiber Optic Communications, Jolt, Quantum Optech, AstroTerra and Optronics and our employment arrangements with Luminent's former President and Luminent's Chief Financial Officer. We will continue to record deferred stock compensation relating to these acquisitions and the employment arrangements with these executives going forward. Effective January 1, 2002, with the adoption of SFAS 142 we will stop amortization of goodwill however we may be required to record goodwill impairment charges if the fair value of the assets acquired is less than their carrying value (see Recently Issued Accounting Standards). As a consequence of deferred stock compensation charges and potential impairment charges, we do not expect to report net income in the foreseeable future. OUR BUSINESS HAS BEEN ADVERSELY IMPACTED BY THE WORLDWIDE ECONOMIC SLOWDOWN AND RELATED UNCERTAINTIES Weaker economic conditions worldwide, particularly in the U.S. and Europe, have contributed to the current technology industry slowdown and impacted our business resulting in: - reduced demand for our products, particularly Luminent's fiber optic components; - increased risk of excess and obsolete inventories; - increased price competition for our products; - excess manufacturing capacity under current market conditions; and - higher overhead costs, as a percentage of revenues. These unfavorable economic conditions and reduced capital spending in the telecommunications industry detrimentally affected sales to service providers, network equipment companies, e-commerce and Internet businesses, and the manufacturing industry in the United States, during 2001, appear to continue to affect these industries in the first quarter of 2002 and may affect them for the balance of 2002 and thereafter. Announcements by industry participants and observers indicate there is a slowdown in industry spending and participants are seeking to reduce existing inventories and we are experiencing these reductions in our business. As a result of these factors, we recorded during the year ended December 31, 2001 consolidated charges from our subsidiary, Luminent, which include the write-off of inventory, purchase commitments, asset impairment, workforce reduction, restructuring costs and other unusual items. The aggregate charges recorded during the year ended December 31, 2001 were $49.5 million. These charges are the result of the lower demand for Luminent's products and pricing pressures stemming from the continuing downturn in the communications equipment industry generally and the optical components sector in particular. Additionally, these economic conditions are making it very difficult for MRV and our other companies, our customers and our vendors to forecast and plan future business activities. This level of uncertainty severely challenges our ability to operate profitably or to grow our businesses. In particular, it is difficult to develop and implement strategy, sustainable business models and efficient operations, and effectively manage manufacturing and supply chain relationships. We lost a key member of our management team in the terrorists attacks on the World Trade Center of September 11, 2001 and thus the 7 attacks have already had adverse consequences on our business. However, we do not know how the consequences of these attacks will additionally affect our business. It is possible that a decrease in business and consumer confidence in the economy and the stability of financial markets may lead to delays or reductions in capital expenditures by our customers and potential customers. Concerns over accounting practices of service providers and faltering growth prospects among equipment manufactures could delay the economic recovery in the telecommunications industry beyond 2002. In addition, further disruptions of the air transport system in the United States and abroad may negatively impact our ability to deliver products to customers, visit potential customers, to provide support and service to our existing customers and to obtain components in a timely fashion. If the economic or market conditions continue or further deteriorate, or if the economic downturn is exacerbated as a result of political, economic or military conditions associated with current domestic and world events, our businesses, financial condition and results of operations could be further impaired. OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE. The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. We expect that new technologies will emerge as competition and the need for higher and more cost effective transmission capacity, or bandwidth, increases. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. We have in the past experienced delays in product development and these delays may occur in the future. Therefore, to the extent customers defer or cancel orders in the expectation of a new product release or there is any delay in development or introduction of our new products or enhancements of our products, our operating results would suffer. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including: - changing product specifications and customer requirements; - difficulties in hiring and retaining necessary technical personnel; - difficulties in reallocating engineering resources and overcoming resource limitations; - difficulties with contract manufacturers; - changing market or competitive product requirements; and - unanticipated engineering complexities. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. In order to compete, we must be able to deliver products to customers that are highly reliable, operate with its existing equipment, lower the customer's costs of acquisition, installation and maintenance, and provide an overall cost-effective solution. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Any failure to respond to technological changes would significantly harm our business. 8 DEFECTS IN OUR PRODUCTS RESULTING FROM THEIR COMPLEXITY OR OTHERWISE COULD HURT OUR FINANCIAL PERFORMANCE. Complex products, such as those our companies and we offer, may contain undetected software or hardware errors when we first introduce them or when we release new versions. The occurrence of these errors in the future, and our inability to correct these errors quickly or at all, could result in the delay or loss of market acceptance of our products. It could also result in material warranty expense, diversion of engineering and other resources from our product development efforts and the loss of credibility with, and legal actions by, our customers, system integrators and end users. For instance, during late 2000, we were informed that certain Luminent transceivers sold to Cisco were experiencing field failures. Through discussions with Cisco through September 2001, Luminent's management agreed to replace the failed units, which we believe resolves this issue. We expect the ultimate replacement of these failed transceivers will cost approximately $3.6 million which we fully reserved in 2001. Any of these or other eventualities resulting from defects in our products could cause our sales to decline and have a material adverse effect on our business, operating results and financial condition. OUR OPERATING RESULTS COULD FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER. Our operating results for a particular quarter are extremely difficult to predict. Our revenue and operating results could fluctuate substantially from quarter to quarter and from year to year. This could result from any one or a combination of factors such as - the cancellation or postponement of orders, - the timing and amount of significant orders from our largest customers, - our success in developing, introducing and shipping product enhancements and new products, - the mix of products we sell, - software, hardware or other errors in the products we sell requiring replacements or increased warranty reserves, - adverse effects to our financial statements resulting from, or necessitated by, past and future acquisitions or deferred compensation charges, - new product introductions by our competitors, - pricing actions by our competitors or us, - the timing of delivery and availability of components from suppliers, - changes in material costs, and - general economic conditions. Moreover, the volume and timing of orders we receive during a quarter are difficult to forecast. From time to time, our customers encounter uncertain and changing demand for their products. Customers generally order based on their forecasts. If demand falls below these forecasts or if customers do not control inventories effectively, they may cancel or reschedule shipments previously ordered from us. Our 9 expense levels during any particular period are based, in part, on expectations of future sales. If sales in a particular quarter do not meet expectations, our operating results could be materially adversely affected. Our success is dependent, in part, on the overall growth rate of the fiber optic components and networking industry. We can give no assurance that the Internet or the industries that serve it will continue to grow or that we will achieve higher growth rates. Our business, operating results or financial condition may be adversely affected by any decreases in industry growth rates. In addition, we can give no assurance that our results in any particular period will fall within the ranges for growth forecast by market researchers. Because of these and other factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is possible that, in future periods, our results of operations may be below the expectations of public market analysts and investors. This failure to meet expectations could cause the trading price of our common stock to decline. Similarly, the failure by our competitors or customers to meet or exceed the results expected by their analysts or investors could have a ripple effect on us and cause our stock price to decline. THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND OPERATING RESULTS TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK PRICE. The timing of our revenue is difficult to predict because of the length and variability of the sales and implementation cycles for our products. We do not recognize revenue until a product has been shipped to a customer, all significant vendor obligations have been performed and collection is considered probable. Customers often view the purchase of our products as a significant and strategic decision. As a result, customers typically expend significant effort in evaluating, testing and qualifying our products and our manufacturing process. This customer evaluation and qualification process frequently results in a lengthy initial sales cycle of, depending on the products, many months or more. In addition, some of our customers require that our products be subjected to lifetime and reliability testing, which also can take months or more. While our customers are evaluating our products and before they place an order with us, we may incur substantial sales and marketing and research and development expenses to customize our products to the customer's needs. We may also expend significant management efforts, increase manufacturing capacity and order long lead-time components or materials prior to receiving an order. Even after this evaluation process, a potential customer may not purchase our products. Even after acceptance of orders, our customers often change the scheduled delivery dates of their orders. Because of the evolving nature of the optical networking and network infrastructure markets, we cannot predict the length of these sales, development or delivery cycles. As a result, these long sales cycles may cause our net sales and operating results to vary significantly and unexpectedly from quarter-to-quarter, which could cause volatility in our stock price. THE PRICES OF OUR SHARES MAY CONTINUE TO BE HIGHLY VOLATILE. Historically, the market price of our shares has been extremely volatile. The market price of our common stock is likely to continue to be highly volatile and could be significantly affected by factors such as - actual or anticipated fluctuations in our operating results, - announcements of technological innovations or new product introductions by us or our competitors, - changes of estimates of our future operating results by securities analysts, - developments with respect to patents, copyrights or proprietary rights, and 10 - general market conditions and other factors. In addition, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices for the common stocks of technology companies in particular, and that have been unrelated to the operating performance of these companies. These factors, as well as general economic and political conditions, may materially adversely affect the market price of our common stock in the future. Similarly, the failure by our competitors or customers to meet or exceed the results expected by their analysts or investors could have a ripple effect on us and cause our stock price to decline. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options. OUR STOCK PRICE MIGHT SUFFER AS A CONSEQUENCE OF OUR INVESTMENTS IN AFFILIATES. We have created several start-up companies and formed independent business units in the optical technology and Internet infrastructure areas. We account for these investments in affiliates according to the equity or cost methods as required by accounting principles generally accepted in the United States. The market value of these investments may vary materially from the amounts shown as a result of business events specific to these entities or their competitors or market conditions. Actual or perceived changes in the market value of these investments could have a material impact on our share price and in addition could contribute significantly to volatility of our share price. OUR BUSINESS IS INTENSELY COMPETITIVE AND THE EVIDENT TREND OF CONSOLIDATIONS IN OUR INDUSTRY COULD MAKE IT MORE SO. The markets for fiber optic components and networking products are intensely competitive and subject to frequent product introductions with improved price/performance characteristics, rapid technological change and the continual emergence of new industry standards. We compete and will compete with numerous types of companies including companies that have been established for many years and have considerably greater financial, marketing, technical, human and other resources, as well as greater name recognition and a larger installed customer base, than we do. This may give these competitors certain advantages, including the ability to negotiate lower prices on raw materials and components than those available to us. In addition, many of our large competitors offer customers broader product lines, which provide more comprehensive solutions than our current offerings. We expect that other companies will also enter markets in which we compete. Increased competition could result in significant price competition, reduced profit margins or loss of market share. We can give no assurance that we will be able to compete successfully with existing or future competitors or that the competitive pressures we face will not materially and adversely affect our business, operating results and financial condition. In particular, we expect that prices on many of our products will continue to decrease in the future and that the pace and magnitude of these price decreases may have an adverse impact on our results of operations or financial condition. There has been a trend toward industry consolidation for several years. We expect this trend toward industry consolidation to continue as companies attempt to strengthen or hold their market positions in an evolving industry. We believe that industry consolidation may provide stronger competitors that are better able to compete. This could have a material adverse effect on our business, operating results and financial condition. WE MAY HAVE DIFFICULTY MANAGING OUR BUSINESSES. Our growth in recent years, both internally and through the acquisitions we have made has placed a significant strain on our financial and management personnel and information systems and controls. As 11 a consequence, we must continually implement new and enhance existing financial and management information systems and controls and must add and train personnel to operate these systems effectively. Our delay or failure to implement new and enhance existing systems and controls as needed could have a material adverse effect on our results of operations and financial condition in the future. Our intention to continue to pursue a growth strategy can be expected to place even greater pressure on our existing personnel and to compound the need for increased personnel, expanded information systems, and additional financial and administrative control procedures. We can give no assurance that we will be able to successfully manage operations if they continue to expand. WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS. International sales have become an increasingly important segment of our operations. The following table sets forth the percentage of our total net revenues from sales to customers in foreign countries for the periods indicated below:
Year ended December 31, ---------------------------- 1999 2000 2001 ------ ------ ------ Percent of total revenue from foreign sales 58% 63% 67%
We have companies and offices in, and conduct a significant portion of our operations in and from, Israel. We are, therefore, directly influenced by the political and economic conditions affecting Israel. Any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a substantial downturn in the economic or financial condition of Israel could have a material adverse effect on our operations. In addition, the recent acquisition of operations in Taiwan and People's Republic of China has increased both the administrative complications we must manage and our exposure to political, economic and other conditions affecting Taiwan and People's Republic of China. Luminent has a large manufacturing facility in the People's Republic of China in which it manufactures passive fiber optic components and both Luminent and we make sales of our products in the People's Republic of China. Our total sales in the People's Republic of China amounted to approximately $2.7 million during the year ended December 31, 2000 and $10.4 million during the year ended December 31, 2001. Currently there is significant political tension between Taiwan and People's Republic of China, which could lead to hostilities. Risks we face due to international sales and the use of overseas manufacturing include: - greater difficulty in accounts receivable collection and longer collection periods; - the impact of recessions in economies outside the United States; - unexpected changes in regulatory requirements; - seasonal reductions in business activities in some parts of the world, such as during the summer months in Europe or in the winter months in Asia when the Chinese New Year is celebrated; - certification requirements; - potentially adverse tax consequences; - unanticipated cost increases; - unavailability or late delivery of equipment; 12 - trade restrictions; - limited protection of intellectual property rights; - unforeseen environmental or engineering problems; and - personnel recruitment delays. The majority of our sales are currently denominated in U.S. dollars and to date our business has not been significantly affected by currency fluctuations or inflation. However, as we conduct business in several different countries, fluctuations in currency exchange rates could cause our products to become relatively more expensive in particular countries, leading to a reduction in sales in that country. In addition, inflation or fluctuations in currency exchange rates in these countries could increase our expenses. The Single European Currency (Euro) was introduced on January 1, 1999 with complete transition to this new currency required by January 2002. We have made and expect to continue to make changes to our internal systems in order to accommodate doing business in the Euro. Any delays in our ability to be Euro-compliant could have an adverse impact on our results of operations or financial condition. Due to numerous uncertainties, we cannot reasonably estimate at this time the effects a common currency will have on pricing within the European Union and the resulting impact, if any, on our financial condition or results of operations. To date, we have not hedged against currency exchange risks. In the future, we may engage in foreign currency denominated sales or pay material amounts of expenses in foreign currencies and, in that event, may experience gains and losses due to currency fluctuations. Our operating results could be adversely affected by currency fluctuations or as a result of inflation in particular countries where material expenses are incurred. WE DEPEND ON THIRD-PARTY CONTRACT MANUFACTURERS FOR NEEDED COMPONENTS AND THEREFORE COULD FACE DELAYS HARMING OUR SALES. We outsource the board-level assembly, test and quality control of material, components, subassemblies and systems relating to our networking products to third-party contract manufacturers. Though there are a large number of contract manufacturers that we can use for outsourcing, we have elected to use a limited number of vendors for a significant portion of our board assembly requirements in order to foster consistency in quality of the products and to achieve economies of scale. These independent third-party manufacturers also provide the same services to other companies. Risks associated with the use of independent manufacturers include unavailability of or delays in obtaining adequate supplies of products and reduced control of manufacturing quality and production costs. If our contract manufacturers failed to deliver needed components timely, we could face difficulty in obtaining adequate supplies of products from other sources in the near term. We can give no assurance that our third party manufacturers will provide us with adequate supplies of quality products on a timely basis, or at all. While we could outsource with other vendors, a change in vendors may require significant lead-time and may result in shipment delays and expenses. Our inability to obtain these products on a timely basis, the loss of a vendor or a change in the terms and conditions of the outsourcing would have a material adverse effect on our business, operating results and financial condition. WE MAY LOSE SALES IF SUPPLIERS OF OTHER CRITICAL COMPONENTS FAIL TO MEET OUR NEEDS. Our companies currently purchase several key components used in the manufacture of our products from single or limited sources. We depend on these sources to meet our needs. Moreover, we depend on the quality of the products supplied to us over which we have limited control. We have 13 encountered shortages and delays in obtaining components in the past and expect to encounter shortages and delays in the future. If we cannot supply products due to a lack of components, or are unable to redesign products with other components in a timely manner, our business will be significantly harmed. We have no long-term or short-term contracts for any of our components. As a result, a supplier can discontinue supplying components to us without penalty. If a supplier discontinued supplying a component, our business may be harmed by the resulting product manufacturing and delivery delays. OUR INABILITY TO ACHIEVE ADEQUATE PRODUCTION YIELDS FOR CERTAIN COMPONENTS WE MANUFACTURE INTERNALLY COULD RESULT IN A LOSS OF SALES AND CUSTOMERS. We rely heavily on our own production capability for critical semiconductor lasers and light emitting diodes used in our products. Because we manufacture these and other key components at our own facilities and these components are not readily available from other sources, any interruption of our manufacturing processes could have a material adverse effect on our operations. Furthermore, we have a limited number of employees dedicated to the operation and maintenance of our wafer fabrication equipment, the loss of any of whom could result in our inability to effectively operate and service this equipment. Wafer fabrication is sensitive to many factors, including variations and impurities in the raw materials, the fabrication process, performance of the manufacturing equipment, defects in the masks used to print circuits on the wafer and the level of contaminants in the manufacturing environment. We can give no assurance that we will be able to maintain acceptable production yields and avoid product shipment delays. In the event adequate production yields are not achieved, resulting in product shipment delays, our business, operating results and financial condition could be materially adversely affected. FUTURE HARM COULD RESULT FROM ADDITIONAL ACQUISITIONS. An important element of our strategy is to review acquisition prospects that would complement our existing companies and products, augment our market coverage and distribution ability or enhance our technological capabilities. Future acquisitions could have a material adverse effect on our business, financial condition and results of operations because of the following: - possible charges to operations for purchased technology and restructuring similar to those incurred in connection with our acquisition of Xyplex in 1998; - potentially dilutive issuances of equity securities; - incurrence of debt and contingent liabilities; - incurrence of amortization expenses and impairment charges related to goodwill and other intangible assets and deferred compensation charges similar to those arising with the acquisitions of Fiber Optic Communications, Optronics, Quantum Optech, Jolt and AstroTerra in 2000 (see Recently Issued Accounting Standards); - difficulties assimilating the acquired operations, technologies and products; - diversion of management's attention to other business concerns; - risks of entering markets in which we have no or limited prior experience; - potential loss of key employees of acquired organizations; and - difficulties in honoring commitments made to customers by management of the acquired entity prior to the acquisition. 14 - We can give no assurance as to whether we can successfully integrate the companies, products, technologies or personnel of any business that we might acquire in the future. IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE TO COMPETE. We rely on a combination of trade secret laws and restrictions on disclosure and patents, copyrights and trademarks to protect our intellectual property rights. We cannot assure you that our pending patent applications will be approved, that any patents that may be issued will protect our intellectual property or that third parties will not challenge any issued patents. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Any of this kind of litigation, regardless of outcome, could be expensive and time consuming, and adverse determinations in any of this kind of litigation could seriously harm our business. WE ARE CURRENTLY, AND COULD IN THE FUTURE BECOME, SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS, WHICH COULD BE COSTLY AND SUBJECT US TO SIGNIFICANT LIABILITY. From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to us. We expect we will increasingly be subject to license offers and infringement claims as the number of products and competitors in our market grows and the functioning of products overlaps. In this regard: - In March 1999, we received a written notice from Lemelson Foundation Partnership in which Lemelson claimed to have patent rights in our vision and automatic identification operations, which are widely used in the manufacture of electronic assemblies. - In April 1999, we received a written notice from Rockwell Automation Technologies Corporation in which Rockwell claimed to have patent rights in certain technology related to our metal organic chemical vapor deposition, or MOCVD, processes and this claim has resulted in litigation, which Rockwell brought against us in March 2002 (see Item 3. Legal Proceedings"). - In October 1999, we received written notice from Lucent Technologies, Inc. in which Lucent claimed we have violated certain of Lucent's patents falling into the general category of communications technology, with a focus on networking functionality. - In October 1999, we received a written notice from Ortel Corporation, which has since been acquired by Lucent, in which Ortel claimed to have patent rights in certain technology related to our photodiode module products. In January 2001, we were advised that Lucent had assigned certain of its rights and claims to Agere Systems, Inc., including the claim made on the Ortel patent. To date, we have not been contacted by Agere regarding this patent claim. In July 2000, we received written notice from Nortel Networks, which claimed we violated Nortel's patent relating to technology associated with local area networks. - In May 2001, we received written notice from IBM, which claims that several of our optical components and Internet infrastructure products make use of inventions covered by certain patents claimed by IBM. We are evaluating the patents noted in the letters. Aggregate net sales potentially subject to the foregoing claims amounted to approximately 30% of our total sales during the year ended December 31, 2000 and 28% of our total sales during the year ended December 31, 2001. Others' patents, including Lemelson's, Rockwell's, Lucent's, Agere's, Nortel's and IBM's, may be determined to be valid, or some of our products may ultimately be determined to infringe the Lemelson, Rockwell, Lucent, Agere, Nortel or IBM patents, or those of other companies. 15 As was the case with Rockwell, Lemelson, Lucent, Agere, Nortel or IBM, or other companies may pursue litigation with respect to these or other claims. The results of any litigation are inherently uncertain. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to our products that could arise in the future, we could be required to obtain licenses to the infringing technology, to pay substantial damages under applicable law, to cease the manufacture, use and sale of infringing products or to expend significant resources to develop non-infringing technology. Licenses may not be available from third parties, including Lemelson, Rockwell, Lucent, Ortel, Nortel or IBM, either on commercially reasonable terms or at all. In addition, litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. Accordingly, any infringement claim or litigation against us could significantly harm our business, operating results and financial condition. IN THE FUTURE, WE MAY INITIATE CLAIMS OR LITIGATION AGAINST THIRD PARTIES FOR INFRINGEMENT OF OUR PROPRIETARY RIGHTS TO PROTECT THESE RIGHTS OR TO DETERMINE THE SCOPE AND VALIDITY OF OUR PROPRIETARY RIGHTS OR THE PROPRIETARY RIGHTS OF COMPETITORS. THESE CLAIMS COULD RESULT IN COSTLY LITIGATION AND THE DIVERSION OF OUR TECHNICAL AND MANAGEMENT PERSONNEL. Necessary licenses of third-party technology may not be available to us or may be very expensive, which could adversely affect our ability to manufacture and sell our products. From time to time we may be required to license technology from third parties to develop new products or product enhancements. We cannot assure you that third-party licenses will be available to us on commercially reasonable terms, if at all. The inability to obtain any third-party license required to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, either of which could seriously harm our ability to manufacture and sell our products. WE ARE DEPENDENT ON CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT. We are substantially dependent upon Dr. Shlomo Margalit, our Chairman of the Board of Directors and Chief Technical Officer, and Mr. Noam Lotan, our President and Chief Executive Officer. The loss of the services of either of these officers could have a material adverse effect on us. We have entered into employment agreements with Dr. Margalit and Mr. Lotan and are the beneficiary of key man life insurance policies in the amounts of $1.0 million each on their lives. However, we can give no assurance that the proceeds from these policies will be sufficient to compensate us in the event of the death of either of these individuals, and the policies are not applicable in the event that either of them becomes disabled or is otherwise unable to render services to us. OUR BUSINESS REQUIRES US TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. Our ability to develop, manufacture and market our products, run our companies and our ability to compete with our current and future competitors depends, and will depend, in large part, on our ability to attract and retain qualified personnel. Competition for executives and qualified personnel in the networking and fiber optics industries is intense, and we will be required to compete for that personnel with companies having substantially greater financial and other resources than we do. To attract executives, we have had to enter into compensation arrangements, which have resulted in substantial deferred compensation charges and adversely affected our results of operations. We may enter into similar arrangements in the future to attract qualified executives If we should be unable to attract and retain qualified personnel, our business could be materially adversely affected. We can give no assurance that we will be able to attract and retain qualified personnel. 16 ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR MANUFACTURING OPERATIONS COULD LIMIT OUR ABILITY TO EXPAND OR SUBJECT US TO SUBSTANTIAL COSTS. We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing processes. Further, we are subject to other safety, labeling and training regulations as required by local, state and federal law. Any failure by us to comply with present and future regulations could subject us to future liabilities or the suspension of production. In addition, these kinds of regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. We cannot assure you that these legal requirements will not impose on us the need for additional capital expenditures or other requirements. If we fail to obtain required permits or otherwise fail to operate within these or future legal requirements, we may be required to pay substantial penalties, suspend our operations or make costly changes to our manufacturing processes or facilities. IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS. We use rolling forecasts based on anticipated product orders to determine our component requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary components and materials. Lead times for components and materials that we order vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. For substantial increases in production levels, some suppliers may need six months or more lead-time. If we overestimate our component and material requirements, we may have excess inventory, which would increase our costs. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively impact our net sales. Current softness in demand and pricing in the communications market have necessitated a review of our inventory, facilities and headcount. As a result, we and Luminent recorded in the year ended December 31, 2001 one-time charges to write down inventory to realizable value and inventory purchase commitments of approximately $35.4 million. WE ARE AT RISK OF SECURITIES CLASS ACTION OR OTHER LITIGATION THAT COULD RESULT IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES. In the past, securities class action litigation has been brought against a company following periods of volatility in the market price of its securities. Due to the volatility and potential volatility of our stock price or the volatility of Luminent's stock price following its initial public offering, we may be the target of securities litigation in the future. Additionally, while Luminent and we informed investors that we were under no obligation to, and might not, make the distribution to our stockholders of our Luminent common stock and that we could and might eliminate public ownership of Luminent through a short-form merger with us, our decisions to abandon our distribution of Luminent's common stock to our stockholders or to eliminate public ownership of Luminent's common stock through the merger of Luminent into one of our wholly-owned subsidiaries may result in securities or other litigation. Securities or other litigation could result in substantial costs and divert management's attention and resources. DEPENDING ON OUR FUTURE ACTIVITIES OR AS A RESULT OF THE POSSIBLE SALE OF ONE OR MORE OF OUR PORTFOLIO COMPANIES, WE COULD BE FORCED TO INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER ADVERSE CONSEQUENCES IF DEEMED TO BE AN INVESTMENT COMPANY. In the past through 2000, we embarked upon a business strategy of creating, acquiring and managing companies in the optical technology and Internet infrastructure areas, with a view toward 17 creating equity growth by operating or investing in these companies and then potentially spinning them off, taking them public or selling them or our interest in them. If this strategy proved successful, we were concerned that we might incur significant costs to avoid investment company status and would suffer other adverse consequences if deemed to be an investment company under the Investment Company Act of 1940. The Investment Company Act of 1940 requires registration for companies that are engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. A company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of the value of its total assets (excluding government securities and cash items) on an unconsolidated basis, unless an exemption or safe harbor applies. Securities issued by companies other than majority-owned subsidiaries are generally counted as investment securities for purposes of the Investment Company Act. Investment companies are subject to registration under, and compliance with, the Investment Company Act unless a particular exclusion or safe harbor provision applies. If we were to be deemed an investment company, we would become subject to the requirements of the Investment Company Act. As a consequence, we would be prohibited from engaging in business or issuing our securities as we have in the past and might be subject to civil and criminal penalties for noncompliance. In addition, certain of our contracts might be voidable. As a result of the current economic slowdown in the communications industry generally and the fiber optic components industry particularly, we have abandoned plans to spin-off Luminent, one of our subsidiaries, and withdrawn the initial public offering of Optical Access, another of our subsidiaries. The economic slowdown and its consequences have caused us to reevaluate our strategy and to focus currently on holding and operating our existing businesses. This current focus makes it less likely that we would attain investment company status. However, if economic and market conditions recover to the point at which they existed prior to the fourth quarter of 2000, we may return to our prior strategy which, depending on future events, might again subject us to the potential risks associated with investment company status, including registration as an investment company. Moreover, although our portfolio of investment securities currently comprises substantially less than 40% of our total assets, fluctuations in the value of these securities or of our other assets as a result of future economic conditions or events, or, more likely, the sale of one or more of companies in exchange for the securities of the purchaser, may cause this limit to be exceeded. For example, while we have no plans to sell all or any portion of Luminent to a third party after the merger, we are periodically contacted by third parties regarding potential transactions and, depending on the proposal, could complete a sale if we determine that it would be in our best interest and those of our stockholders. In any case, where our investment securities resulting from a sale of Luminent or another of our companies or otherwise were in excess of the 40% limit unless an exclusion or safe harbor was available to us, in that case, we would have to attempt to reduce our investment securities as a percentage of our total assets. This reduction could be attempted in a number of ways, including the disposition of investment securities and the acquisition of non-investment security assets. If we were required to sell investment securities, we may sell them sooner than we otherwise would. These sales may be at depressed prices and we may never realize anticipated benefits from, or may incur losses on, these investments. We may be unable to sell some investments due to contractual or legal restrictions or the inability to locate a suitable buyer. Moreover, we may incur tax liabilities when we sell assets. We may also be unable to purchase additional investment securities that may be important to our operating strategy. If we decide to acquire non-investment security assets, we may not be able to identify and acquire suitable assets and businesses or the terms on which we are able to acquire these assets may be unfavorable. The mere existence of these issues could cause us to forego a transaction, which might otherwise have been beneficial to us. DELAWARE LAW AND OUR ABILITY TO ISSUE PREFERRED STOCK MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE. We are authorized to issue up to 1,000,000 shares of preferred stock. This preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of 18 directors without further action by stockholders. The terms of any series of preferred stock may include voting rights (including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. No preferred stock is currently outstanding. The issuance of any preferred stock could materially adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and thereby preserve control by the present management. We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibit us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder unless the business combination is approved in the manner prescribed under Section 203. These provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us, which may cause the market price of our common stock to decline. INDUSTRY BACKGROUND As e-commerce and the Internet continued to proliferate, business enterprises became increasingly reliant on communications networks and software applications as critical strategic assets. Communications networks are being expanded to deliver new services and distribute mission critical computing applications such as customer network management, transaction processing, enterprise resource planning, large enterprise databases, and sophisticated on-line connections with vendors, and the increased use of traditional applications, such as e-mail and video conferencing, to suppliers, customers and employees. Bandwidth intensive applications that contain voice, video and graphics through intranets and extranets, and growth in business-to-business e-commerce and other on-line transactions are encumbering the optical networking and internet infrastructure environment. Due to the significant growth of network users who increasingly rely on secure access for higher speed and quality of communications networks, even small network delays can result in lost revenue, decreased employee productivity and customer dissatisfaction. As a result, businesses and network service providers realize the critical nature of network and application performance and the requirement for optical networking and fiber optic equipment that increases capacity through high speed and more efficient transmission technologies. Optical networking and Internet infrastructure systems enhance the carrier and network service provider networks by handling bandwidth and providing enhanced services. Fiber optic transmission components enhance the functionality of enterprise and residential access networks by enabling high-speed transmission of voice, video and data across fiber optic cable. Network service providers and carriers rely on higher value data centric network services and accordingly began deploying next generation solutions to accommodate the data service requirements. Growth in the use and availability of wide area networks was stimulated by many factors including the need to share information between centralized repositories and remote enterprise locations, to access and use the Internet for communications and marketing and to electronically access external resources used by the enterprise. Growth was also being fueled by the increasing availability of more cost-effective WAN services such as Frame Relay and Integrated Service Digital Network, or ISDN, making it more affordable for many organizations to set up a WAN or expand an existing one. The growth in the use and availability of the Internet coupled with increasing use, power, speed and complexity of metropolitan area networks and WANs resulted in the increasing need for equipment that permits high-speed connections throughout the infrastructure of the Internet. 19 OPTICAL NETWORKING AND INTERNET INFRASTRUCTURE ENVIRONMENT The Internet has evolved into a network of hundreds of public and private networks interconnected using Internet Protocol, or IP. Industry analysts expect continued dramatic growth worldwide in Internet use and Internet traffic. As the Internet continues to grow, business enterprises are increasingly reliant on communications networks and software applications as strategic assets that are critical to business success. Communications networks are being expanded to deliver new services and distribute computing applications such as customer network management, e-mail, video, conferencing, and Voice Over Internet Protocol to suppliers, customers and employees. While consumers use the Internet for education and communication, business and service providers are realizing the critical nature of network and application performance. To meet the growth in the demand for high-speed data services, service providers are invested heavily to construct and upgrade the transmission foundation of the public network infrastructure worldwide. The public network infrastructure, which was originally built for voice traffic, is inadequate to handle data and must be upgraded. Expenditures are spread across fiber deployment, dense wavelength division multiplexing, or DWDM, products, Synchronous Optical Network, or SONET, transmission equipment, and more recently, and intelligent optical networking solutions. Advances in emerging intelligent optical networking market should fundamentally change the architecture of the public network and create a host of new opportunities in infrastructure development, service delivery and applications. Intelligent optical networking offers a solution to public network scaling and high-speed service delivery. Intelligent optical networking will eventually deliver high speed data services provisioned over wavelengths and intelligent optical light paths. The flexibility and scalability of wave service is expected to offer service providers the ability to satisfy this demand for increased bandwidth while creating competitive differentiation in their service portfolio with just-in-time provisioning capability. FIBER OPTIC ENVIRONMENT Fiber optic cable can generally carry more information at less expense and with greater signal quality than copper wire. The higher the speed of transmission, the greater the capacity and the larger the span of the network, the more essential is fiber optic transmission. Fiber has long replaced copper as the preferred technology for long distance communications and major backbone telephony and data transmissions. Due to its advantages, fiber optic technology is also increasingly used to enhance performance and capacity within enterprise networks and access networks. Demand for fiber optic transmission components is driven by four factors: - fiber applications have expanded beyond traditional telephony applications and are being deployed in enterprise network backbones to support high-speed data communications; - within access networks, fiber is rapidly expanding downstream toward end-users as access networks deploy Fiber-in-the-Loop and fiber to the curb, or FTTC architectures to support services such as fast Internet access and interactive video; - the growth of cellular communications and PCs requires fiber to be deployed both within and between cells; and - the usage of fiber in short distances increases the demand for components as more are used per mile of fiber. As the size, number and complexity of these fiber networks increases, management expects that the demand for fiber optic components will grow significantly. 20 Fiber Optic Transmission in Data Communications. As higher speed connections are implemented in LAN/WAN systems, fiber optic transmission becomes an essential element in computer networks. For transmission speeds of 100 Mbps and higher, and transmission distances of 100 meters and longer, fiber optic transmission must be deployed. Virtually all high-speed transmission standards, such as Fiber Distributed Data Interface, Asynchronous Transfer Mode, or ATM, Fast Ethernet and Gigabit Ethernet, specify fiber optic media as the most practical technology for transmission. The steady rise in high-speed connections and the growth in the span of networks, including the need to connect remote workgroups, have been driving the deployment of fiber optic cable throughout enterprise networks. Fiber Optic Transmission in Access Networks. To meet end users' increased demand for content, software and services, network operators must acquire additional bandwidth by either enhancing their existing networks or constructing new ones. Cable TV operators are increasingly seeking to provide general telecommunication services, high-speed Internet access and video-on-demand. As a result, they are now faced with the need to transmit upstream, from customer premises to the cable TV operator and to send different signals to individual end-users. Similarly, local exchange carriers are implementing new technological standards, such as SONET and fiber-intensive architectures such as FTTC to enable high-speed Internet access and the delivery of cable TV and Internet services to the home. Management believes that deployment of and upgrades to these systems will increase the demand for MRV's fiber optic components that typically are better able to endure environmental factors, such as rain, snow, heat and wind, cost-effectively. In addition, communications involving cellular and personal communication services, or PCS, represent a fast emerging market for fiber optic networks, including their usage in the backbone and landline portion of wireless networks. RECENT ECONOMIC SLOWDOWN Macroeconomic factors, such as an economic slowdown in the U.S. and abroad, have detrimentally impacted demand for communications products, thereby resulting in reduced demand for optical components and equipment. The unfavorable economic conditions and reduced capital spending has detrimentally affected sales to service providers, network equipment companies, e-commerce and Internet businesses, and the manufacturing industry in the United States during 2001 to date, and may continue to affect them for the remainder of 2002 and thereafter. Announcements by industry participants and observers indicate there is a slowdown in industry spending and participants are seeking to reduce existing inventories. For information on charges MRV has taken to its financial results as a result of these conditions, please see the discussion in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Conditions and Current Outlook." MRV'S CONCENTRATION MRV creates, acquires, finances and operates companies, and through them, designs, develops, manufactures and markets products, which enable high-speed broadband communications. MRV concentrates on companies and products devoted to optical components and network infrastructure systems. MRV has leveraged its early experience in fiber optic technology into a number of focused operating units specializing in advanced fiber optic components, switching, routing, transaction management and wireless optical transmission systems which it has created, financed or acquired. Products and product developments of MRV's wholly or majority owned subsidiaries or operating units include the following: Luminent, Inc. Luminent provides an extensive offering of active and passive singlemode fiber optic components that support a wide range of requirements for the metropolitan and access networks. It is currently shipping a variety of active and passive fiber optic components. Active components are the core 21 technology for optical networks and require electrical power to generate, boost or transform optical signals. Luminent's passive fiber optic components are used to direct, split and merge optical signals without the use of electricity. These components have become critical due to the use of fiber amplifiers, passive networks and WDM technology. Luminent provides an extensive offering of active and passive singlemode fiber optic components that support a wide range of requirements for the metropolitan and access networks. It is currently shipping a variety of active and passive fiber optic components. Active components are the core technology for optical networks and require electrical power to generate, boost or transform optical signals. Luminent's active components include: - Mixed signal, single fiber components, called duplexers and triplexers, which are capable of transmitting bi-directional digital and analog information over a single fiber; - A wide variety of transceivers, the most common fiber-optic data link. Transceivers have both a transmitter and receiver built into one unit. A transmitter converts electrical signals into optical signals and launches them into the fiber. A receiver receives the optical signal, converts it back to an electrical signal and amplifies it; - Coarse WDM subsystems, which enable communications equipment manufacturers to implement wavelength division multiplexing inside their equipment at a fraction of the cost of dense WDM; - Light emitting diodes, or LEDs, used as a light source for fiber optic transmission; - Laser diodes, which convert electrical signals to optical signals and are the most widely used light sources for optical communications systems; - Analog fiber optic links, which are used in cable television, cellular, satellite and wireless local area networks transmissions; - Photo detectors, which convert optical signals into electrical signals and receivers that include photo detectors with electrical amplifiers for greater functionality; and - Electro-optic modulators, which are used to transfer information onto a light signal without the modifying wavelength of the light and enable data to travel extended transmission distances compared to a directly modulated laser. Luminent's passive fiber optic components are used to direct, split and merge optical signals without the use of electricity. These components have become critical due to the use of fiber amplifiers, passive networks and WDM technology. Luminent's passive components include: - A wide variety of couplers, one of the most common components of any optical network, used to combine and/or split optical signals; - Isolators, which allow transmission of optical signals in one direction but block transmission in the other direction; - WDM thin film add/drop components, which enable the transmission of specific optical wavelengths and the reflection of others and allow for the removal and insertion of wavelengths in WDM systems with minimal power losses; - Optical circulators, which are used in wavelength management applications to direct optical signals to the appropriate sections of the system; 22 - Variable fiber optic attenuators, which reduce the amplitude of a signal without distorting the waveform and are used to equalize the power between different WDM channels before being amplified by a fiber amplifier; - Optical connectors, which are used to couple light either directly from a component or from another fiber; and - Adapters, which facilitate the connection of any two connectors. Optical Access, Inc. Optical Access is an optical networking and Internet infrastructure company that designs, manufactures and markets optical wireless products enabling service providers to offer high-speed broadband access within the last mile of the communications network in a cost effective and timely manner. Optical Access' products are designed to be deployed in a switched mesh architecture, which means that its products allow transmission of data between any two points on the network and enable full re-routing of traffic around a transmission link or equipment failure. In addition, its products feature a backup wireless radio frequency option, which reduces problems associated with adverse weather conditions. Optical Access offers the TereScope family of products, which provide optical wireless links, and OptiSwitch(TM) products, which enable switching, provisioning and aggregation. All of these products can be remotely managed through Optical Access' MegaVision network management system. Because each of its products can perform independently, Optical Access's customers can also purchase products separately with no performance degradation. TereScope. TereScope products are optical wireless links that utilize high-powered optics, which allow for high-speed, long distance optical wireless transmission of data. By installing its TereScope products in a mesh configuration with a minimum of two connections into each building and utilizing Optical Access' OptiSwitch(TM) switching technology, Optical Access' products enable full re-routing of traffic around a link or equipment failure. Optical Access believes that its TereScope products offer one of the first commercially available wireless optic systems with built-in auto fallback to radio frequency links. TereScope devices can be installed on a building's rooftop or side or in an office behind a window rather than a radio tower. They are constructed with a transmitter, which emits light that does not damage the human eye, and a receiver that detects light. Optical Access offers a range of TereScope products, the smallest of which looks like a security camera and the largest of which is the size of a computer monitor. The products feature a number of recently developed technologies to account for issues that have historically limited the use of optical wireless systems, including a system that enables them to compensate for misalignment due to building movements or interference caused by flying objects such as birds. In addition, TereScope products feature high power laser transmitters and large optical receivers to permit connectivity over longer distances. The TereScope ranges in list price from approximately $4,000 to $120,000, depending on data rate and maximum range, with an additional $5,000 to $10,000 for a 10 megabit per second radio frequency backup. OptiSwitch(TM). Optical Access' family of OptiSwitch(TM) products enables a mesh architecture, bandwidth distribution, provisioning and termination for all-IP networks. The OptiSwitch is designed to provide customer premise connectivity to business users, smart aggregation and to enable execution of any service level agreement by advanced features and capabilities of traffic classification and quality of service. Direct connection of the OptiSwitch(TM) ports to TereScope products allow service providers to offer a complete cost-effective metropolitan solution. The system is designed to manage optical wireless mesh topology management and subscriber management in Ethernet broadband networks. The OptiSwitch(TM) products range in price from $1,400 to $190,000, depending upon data rate and number of ports. 23 MegaVision. Optical Access' MegaVision management system provides software based graphical network management and monitoring that is fully integrated with its optical transmission and switching products. The MegaVision network management system allows service providers to provision their networks from a centralized location. With the graphical interface offered by Optical Access, the provider receives a comprehensive view of the network as well as fault isolation, configuration, performance and security management of the network. CEScomm, Inc. CEScomm is developing and providing products for manufacturers of cellular network infrastructure equipment and mobile operators and service providers for the third generation of wireless solutions commonly known as 3G. 3G is the generic term used for the next generation of mobile communications systems. These new systems provide enhanced wireless services to those available today, i.e., voice, text and data. CEScomm specializes in products that provide the real-time conversion of radio signals generated by Internet ready mobile devices into asynchronous transfer mode, or ATM, traffic streams. Its products are based on distributed architectures that cluster super computer multi-processing capabilities between the radio access network and the Internet protocol, or IP, core network. CEScomm's products make it possible for 3G mobile network operators and equipment vendors to deliver more efficient service with enhanced options. End users of CEScomm's products include leading 3G wireless network operators such as NTT DoCoMo, the cellular telephone arm of Nippon Telegraph and Telephone Corporation in Japan, and European operators using the Universal Mobile Telecommunications System, or UMTS. CEScomm sells its products to leading cellular equipment vendors, including Lucent Technologies, Nortel Networks and Ericsson. iTouch Communications, Inc. iTouch provides next-generation Internet infrastructure solutions that enable service providers and carriers to deliver and monitor, on a real-time basis, high-speed Internet services. iTouch's products utilize internet protocol, or IP, routing and wide area network, or WAN, technologies, which allow for faster development of feature rich high-speed data acquisition and management systems. iTouch's In-Reach product suite supports network element management and out-of-band management applications for large, heterogeneous communication networks. In-Reach products offer console, alarm, sensor and power management solutions and possess features ranging from simple network management protocol, or SNMP, -based discrete alarm signal collection and distribution to remote console management of routers, switches, and equipment from Sun Microsystems and other providers. Standalone and chassis-based In-Reach products enable upgrades at central sites and downloads of software to thousands of remote network elements. NBase-Xyplex. NBase-Xyplex, a division of MRV, provides products and services, such as the Fiber Driver family of products, to enhance network infrastructures for city carriers, service providers, cable operators and campus and enterprise networks. The Fiber Driver family of products focuses on providing more effective usage of fiber-optic cables for carriers, service providers, cable operators and campus and enterprise networks. The Fiber Driver product line is designed to address the growing need for connecting networks of different media and speed into today's expanding fiber optic infrastructure. The Fiber Driver family consists of over 150 different converters, repeaters, switches, distance extenders and coarse wave division multiplexer modules, all of which operate on the same modular, and scalable platform. Each module provides a different solution and together the family covers almost every 24 communication protocol. The family includes a base chassis in one, two, four and 16 slot varieties and is fully managed through any network management system based on simple network management protocol, or SNMP, including the MegaVision network management system discussed above under Optical Access. Charlotte's Networks, Inc. Charlotte's Networks is developing a core router for large service providers and carriers. The Aranea core router is Charlotte's Networks' first product. The Aranea router is capable of carrying both IP packets and time-division multiplexing, or TDM, voice traffic and enables the current WAN to grow in high orders of magnitude both in processing power and rate of transmission. The router has the ability to emulate a class 4 or 5 switch, enabling its voice traffic capability. It offers various interfaces and allows multiple Aranea machines to be clustered into a single virtual router for ultra-high speed. This feature allows construction of a machine with an aggregate bandwidth of multiple terabits per second. The Aranea can be configured to combine up to 16 port interfaces of any kind into a single dense wavelength division multiplexing link of up to 40 Gbps. The clustered machines may be managed as a single virtual router through the operating system called AROS. The Aranea is designed to meet the exact requirements of new generation telecommunication service providers in terms of bandwidth, differentiated services, scalability and reliability and is positioned to take advantage of the explosive growth predicted for the WAN or terabit router segment of the router market. Zuma Networks, Inc. Zuma is developing a next generation gigabit Ethernet switch router platform. The platform is distinguished by very high gigabit Ethernet port density in a single chassis, outstanding packet forwarding performance; a multi-processor, multi-component hardware architecture supporting carrier class survivability; and a multi-processor software architecture supporting the coupling of wire speed switch routing functions with wire speed network services in a single platform. This router, named Zuma LightReef(TM) entered beta trials in December 2000 and shipments began in April 2001. European Subsidiaries MRV maintains European subsidiaries and branch offices in France, Germany, the United Kingdom, Italy, Switzerland, Sweden, Norway and Finland, which are involved in sales, services and distribution of data networking products. The activities of these companies include system design, integration and support as well as product sales to enterprise customers and carriers, including service providers. Products sold include products manufactured by other MRV companies or divisions, as well as products manufactured by third party vendors supplied as part of network system integration and distribution services. Such specialization allows MRV to penetrate targeted vertical and regional markets. As of December 31, 2001, MRV owned approximately 80% of its European subsidiaries. OTHER KEY TECHNOLOGY INTERESTS In addition to its wholly owned and majority owned companies, MRV has significant interests in other key technology companies, including RedC Optical Networks and Hyperchannel Ltd. Optical Crossing's core experience is in free-space laser communications and semiconductor optoelectronic components. Optical Crossing has three internal product groups -- Optoelectronics Products, Optical Wireless Products and Networking Products and Services -- that address multiple aspects of optical wireless technology, from components to architectural implementation of all-optical networks. Products are currently in the prototyping and development stage. 25 RedC Optical Networks has developed a complete line of optical modules used for operating, monitoring and protecting optical networks including: optical amplifiers, add/drop modules, protection and restoration modules and DWDM monitoring. Hyperchannel, which does business under its trademark Hyporium, is an independent net market maker for the information technology, or IT, industry, enabling IT vendors, distributors and resellers to trade online. Hyporium offers an alternative route to market through an online trading hub and reseller web storefronts. SALES AND MARKETING Through the end of 2001, each of MRV and its operating company maintained its own separate sales and marketing staffs. In early 2002, with the goals of cutting costs and increasing revenue while better serving its customers, MRV centralized sales and marketing and established product-solution groups, which it formed to replace the sales and marketing organizations of its independent business units and which were folded into MRV. These product-solution groups include: Active and Passive Optical Components, Network Physical Infrastructure, Switches and Routers, Remote Device Management, and Services and Other. The sales forces of the formerly independent business units were unified, and cover two sales regions - MRV Americas and MRV International. MRV retained only the independent sales organization of Luminent. MRV and its companies have sold their products worldwide to over 500 diverse customers in a wide range of industries; primarily, data communications, telecommunications and cable. No customer accounted for more than 10% of MRV's consolidated revenues in 1999, 2000 or 2001. MRV employs various methods, such as public relations, advertising, and trade shows to build awareness of its products. Public relations activities are conducted both internally and through relationships with outside agencies. Major public relation activities are focused around new product introductions, corporate partnerships and other events of interest to the market. MRV supplements its public relations through media advertising programs and attendance at various trade shows throughout the year, both in the United States and internationally. SALES, SUPPORT AND DISTRIBUTION MRV continually seeks to augment and increase its distribution channels and sales forces to accelerate growth. Products are sold through MRV and its operating companies' direct sales forces, VARs, systems integrators, distributors, manufacturer's representatives and OEM customers. Sales and distribution divisions are organized along the following primary lines: direct sales, including OEM; domestic and international distributors; value-added resellers, or VARs, and systems integrators; and manufacturer's representatives. Direct Sales. MRV and its companies employ worldwide direct sales forces primarily to sell their products to large OEM accounts and in some cases to end users. MRV believes that a direct sales force can best serve large customers by allowing salespeople to develop strong, lasting relationships, which can meet the customers' needs effectively. Direct sales staffs are located across the United States, Europe and Israel. Domestic and International Distributors. MRV and its companies work with both domestic and international distributors. Geographic exclusivity is normally not awarded unless the distributor has demonstrated acceptable performance. Distributors must successfully complete MRV's training programs and provide system installation, technical support, sales support and follow-on service to local customers. Generally, distributors have agreements with a one-year term subject to automatic renewal unless otherwise canceled by either party. In certain cases with major distributors, the agreements are terminable 26 on 30 days' notice. MRV uses stocking distributors, which purchase its product and stock it in their warehouse for immediate delivery, and non-stocking distributors, which purchase its products after the receipt of an order. Internationally, MRV sells through numerous distributors in Asia, Africa, Europe, Australia, the Middle East, Canada and Latin America. Value-Added Resellers and Systems Integrators. MRV and its companies use a select group of VARs and system integrators in the U.S., which are generally selected for their ability to offer MRV's products in combination with related products and services, such as system design, integration and support. This specialization allows MRV and its companies to penetrate targeted vertical markets such as telecommunications and cable TV. Generally, MRV uses a two-tier distribution system to reach a broader range of customers; however VARs may purchase the product directly from one or more of MRV's companies if the volume warrants a direct relationship. Manufacturers' Representatives. To supplement MRV's direct sales efforts, manufacturer's representatives are assigned by territory in the United States and work exclusively on commission. Customer Support and Service. MRV and its companies are committed to providing strong technical support to their customers. MRV operates customer service groups, and provides support through engineering groups, sales staff, distributors, OEMs and VARs. Customer support personnel are currently located at offices in California, Massachusetts, Maryland, Germany, England, Italy and Israel. International Sales. International sales accounted for approximately 58%, 63% and 67% of MRV's consolidated net revenues in 1999, 2000 and 2001, respectively. MANUFACTURING MRV outsources the board-level assembly, test and quality control of its Internet infrastructure products to third party contract manufacturers, thereby allowing MRV to react quickly to market demand, to avoid the significant capital investment required to establish and maintain manufacturing and assembly facilities and to concentrate resources on product design and development. Final assembly, burn-in, final testing and pack-out are performed by MRV's companies and MRV and selected third-party contract manufacturers to maintain quality control. MRV's manufacturing teams are experienced in advanced manufacturing and testing, in engineering, in ongoing reliability/quality assurance and in managing third party contract manufacturer's capacity, quality standards and manufacturing process. Risks associated with the use of independent manufacturers include unavailability of or delays in obtaining adequate supplies of products and reduced control of manufacturing quality and production costs. If MRV's contract manufacturers fail to deliver products in the future on a timely basis, or at all, it would be extremely difficult for MRV to obtain adequate supplies of products from other sources on short notice. There can be no assurance that MRV's third party manufacturers will provide adequate supplies of quality products on a timely basis, or at all. While MRV could outsource with other vendors, a change in vendors may require significant time and result in shipment delays and expenses. The inability to obtain MRV's key products on a timely basis, the loss of a particular vendor or a change in the terms and conditions of the outsourcing could have a material adverse effect on MRV's business, operating results and financial condition. MRV relies extensively on MRV's and its companies own production capabilities for critical semiconductor lasers and LEDs used in MRV's products. MRV's optical transmission production process involves: - a wafer processing facility for semiconductor laser diode and LED chip manufacturing under stringent and accurate procedures using state-of-the-art wafer fabrication technology; - high precision electronic and mechanical assembly; and 27 - final assembly and testing. Relevant assembly processes include die attach, wire bond, substrate attachment and fiber coupling. MRV also conducts tests throughout MRV's manufacturing processes using commercially available and internally built testing systems that incorporate proprietary procedures. MRV and its companies perform final product tests on all of their products prior to shipment to customers. Many of the key processes used in MRV's products are proprietary; and, therefore, many of the key components of its products are designed and produced internally. Because MRV and its companies manufacture these and other key components of their products at their own facilities and they are not readily available from other sources, any interruption of the manufacturing process could have a material adverse effect on MRV's operations. Furthermore, MRV and its companies have a limited number of employees dedicated to the operation and maintenance of wafer fabrication equipment, the loss of any of whom could result in their inability to effectively operate and service that equipment. Wafer fabrication is sensitive to a wide variety of factors, including variations and impurities in the raw materials, difficulties in the fabrication process and performance of the manufacturing equipment. There can be no assurance that MRV and its companies will be able to maintain acceptable production yields and avoid product shipment delays. In the event adequate production yields are not achieved resulting in product shipment delays, MRV's business, operating results and financial condition could be materially adversely affected. While MRV believes its companies have sufficient manufacturing capacity for growth in the coming years, at various times there have been shortages of parts in the electronics industry, and certain critical components have been subject to limited allocations. Although shortages of parts and allocations have not had a material adverse effect on MRV's results of operations, there can be no assurance that any future shortages or allocations would not have that effect. MRV and its companies are subject to a variety of federal, state, and local governmental laws and regulations related to the storage, use, emission, discharge, and disposal of toxic, volatile or otherwise hazardous chemicals used in the manufacturing process. Although MRV believes that it is in material compliance and has complied with all applicable legal requirements, any failure by MRV to comply with present and future regulations could subject MRV to future liabilities or the suspension of production. There can be no assurance that environmental laws and regulations will not result in the need for additional capital equipment or other requirements. Further, these laws and regulations could restrict MRV's ability to expand operations. Any failure by MRV or its companies to obtain required permits for, control of use of, or adequately restrict the discharge, emission or release of, hazardous substances under present or future laws and regulations could subject MRV to substantial liability or could cause MRV's manufacturing operations to be suspended. That liability or suspension of manufacturing operations could have a material adverse effect on MRV's operating results. To date, these environmental laws and regulations have not had a material adverse effect on MRV's operating results. COMPETITION The communications equipment and component industry is intensely competitive. MRV and its companies compete directly with a number of established and emerging computer, communications and networking device companies. Direct competitors in optical networking and Internet infrastructure, generally include Cisco Systems, Lucent Technologies, Nortel Networks and 3Com Corporation. Direct competitors for MRV's optical wireless technology include AirFiber, Inc., fSona Communications Corporation, Canon and TeraBeam Corporation. Direct competitors in fiber optic components include Agilent Technologies, Corning Incorporated, Finisar Corporation, Fujitsu, Infineon AG, International Business Machines Corporation, JDS Uniphase Corp., Lucent Technologies, Inc., Sumitomo and Tyco International, Ltd. Many of MRV's competitors have significantly greater financial, technical, marketing, distribution and other resources and larger installed customer bases than MRV. Several of these competitors have recently introduced or announced their intentions to introduce new competitive products. Many of the larger companies with which MRV competes offer customers a broader product 28 line, which provides a more comprehensive networking solution than the products of MRV and its companies. In addition to competitors competing with products that perform similar functions, there are also several alternative network technologies. For example, in the local access market, MRV's products compete with telephone network technology known as ADSL, an acronym for asymmetric digital subscriber line. In this technology, digital signals are transmitted through existing telephone lines from the central office to the home. MRV also expects that competitive pricing pressures could result in price declines for MRV and its companies and their competitors' products. This increased competition, if not accompanied by decreasing costs, could result in reduced margins and loss of market share, which would materially and adversely affect MRV's business, operating results and financial condition. The communications industry has become increasingly concentrated in recent years as a result of consolidation. This consolidation is likely to permit MRV's various competitors to devote significantly greater resources to the development and marketing of new competitive products and the marketing of existing competitive products to their larger installed bases. MRV expects that competition will increase substantially as a result of these and other industry consolidations and alliances, as well as the emergence of new competitors. PROPRIETARY RIGHTS To date, MRV and its companies have relied principally upon copyrights and trade secrets to protect its proprietary technology. Generally, MRV enters into confidentiality agreements with its employees and key suppliers and otherwise seek to limit access to and distribution of the source code to software and other proprietary information. There can be no assurance that these steps will be adequate to prevent misappropriation of MRV's technologies or that a third party will not independently develop technology similar or superior to any MRV possesses. MRV has received notices from third parties claiming possible infringement of patents with respect to product features or manufacturing processes and one of these claims, of Rockwell Automation Technologies, has resulted in litigation that Rockwell commenced in March 2002. See Item 3. Legal Proceeds. MRV believes these kind of claims are common in the communications industry because of the large number of patents that have been filed on these subjects. MRV's policy is to discuss these claims with the claimants in an effort to demonstrate that its products and/or processes do not violate any patents. MRV is currently involved in discussions with Lucent Technologies, Nortel Networks, Ortel, Rockwell and the Lemelson Medical, Education & Research Foundation. MRV does not believe that any of MRV's or its companies' products or processes violates any of the patents asserted by these parties and further believes that it has meritorious defenses if any legal action is taken by any of these parties and plans to vigorously defend the litigation brought by Rockwell if it is unable to settle it through negotiations. However, the prosecution by one or more of these parties of litigation of a claim that results in a conclusion unfavorable to MRV could materially and adversely affect MRV's business, operating results and financial condition. In the future, litigation may be necessary to protect trade secrets and other intellectual property rights owned by MRV, to enforce any patents issued to MRV or its companies, to defend against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Any litigation of this kind could be costly and a diversion of the attention of the management involved, which could have a material adverse effect on MRV's business, operating results and financial condition. An adverse determination in that litigation could further result in the loss of MRV's proprietary rights, subject it to significant liabilities, require MRV to seek licenses from third parties or prevent MRV and its companies from manufacturing or selling their products, any of which could have a material adverse effect on MRV's business, operating results and financial condition. MRV typically has agreed to 29 indemnify its customers and key suppliers for liability incurred in connection with the infringement of a third party's intellectual property rights. EMPLOYEES As of December 31, 2001, MRV and its consolidated companies employed a total of approximately 2,227 full-time employees compared with approximately 2,600 at December 31, 2000. None of MRV's employees is represented by a union or governed by a collective bargaining agreement, and MRV believes its employee relationships are satisfactory. 30 ITEM 2. PROPERTIES MRV's principal administrative, sales and marketing, research and development and manufacturing facility is located in Chatsworth, California. The table below lists the locations, square footage and expiration dates of MRV's owned and leased facilities for MRV's major operations.
LOCATION SQUARE FEET DATE LEASE EXPIRES -------- ----------- ------------------ Chatsworth, CA USA 5,000 12/31/2002 Chatsworth, CA USA 17,700 2/28/2004 Chatsworth, CA USA 22,200 12/31/2005 Chatsworth, CA USA 50,000 7/1/2004 Chatsworth, CA USA 13,300 3/31/2007 Chatsworth, CA USA 20,950 1/1/2003 Chu-Pei Taiwan 15,989 Owned Copenhagen Denmark 4,112 6/30/2005 Denver, CO USA 6,770 5/31/2004 Frankfurt Germany 6,398 7/31/2011 Geneva Switzerland 29,428 12/31/2010 Gif Sur Yvette France 17,222 Owned Gothenborg Sweden 3,100 10/31/2002 Helsinki Finland 6,458 6/30/2002 Hinchu Taiwan 431 12/19/2002 Hinchu Taiwan 1,066 12/31/2002 Hinchu Taiwan 2,626 8/31/2002 Hinchu Taiwan 3,907 12/31/2002 Hinchu Taiwan 9,440 12/31/2002 Hinchu Taiwan 9,440 12/31/2002 Hinchu Taiwan 9,461 12/31/2002 Hinchu Taiwan 12,712 Owned Hinchu Taiwan 39,590 12/31/2002 Hinchu Taiwan 165,910 3/31/2016 Hinchu Taiwan 5,665 12/19/2002 Jerusalem Israel 2,433 8/28/2003 Jerusalem Israel 4,962 7/30/2003 Jerusalem Israel 6,609 8/16/2003 Littleton, MA USA 101,031 9/30/2003 London United Kingdom 5,000 1/1/2004 Malmoe Sweden 4,413 8/31/2002 Miao-Li County Taiwan 24,398 Owned Milano Italy 3,229 3/1/2007 Milano Italy 4,306 3/1/2007 Milano Italy 9,687 4/1/2004 Milano Italy 8,611 4/1/2004 Milano Italy 7,750 11/1/2006 Milano Italy 9,687 7/1/2004
31
LOCATION SQUARE FEET DATE LEASE EXPIRES -------- ----------- ------------------ Milano Italy 3,014 2/1/2003 Norrkoping Sweden 3,175 12/31/2004 Oslo Norway 7,535 12/31/2006 Paris France 4,414 2/2/2004 Pasadina, CA USA 13,663 1/14/2007 Rome Italy 1,615 1/1/2007 Rome Italy 8,181 1/1/2003 Rome Italy 2,368 12/1/2006 Rothenburg Switzerland 4,510 3/31/2003 San-Diego, CA USA 23,354 12/31/2004 Santa Barbara, CA USA 2,700 7/1/2003 Shanghai China 48,495 10/31/2047 Shanghai China 139,008 1/31/2049 Stockholm Sweden 52,205 6/30/2003 Tewksbury, MA USA 3,800 5/31/2002 Venice Italy 2,799 7/1/2004 Ventura, CA USA 46,200 8/31/2008 West Hills, CA USA 38,795 3/30/2005 Woodland Hills, CA USA 2,310 12/31/2005 Woodland Hills, CA USA 3,448 1/1/2004 Yokneam Israel 24,757 6/1/2004 Yokneam Israel 12,917 9/30/2003 Yokneam Israel 17,350 12/31/2007 Yokneam Israel 19,526 1/25/2003 Zurich Switzerland 17,147 9/30/2009
MRV believes that its facilities are sufficient to meet its current needs and that adequate additional space will be available for lease when required. 32 ITEM 3. LEGAL PROCEEDINGS MRV is involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters, which arise in the ordinary course of business. There are no matters pending that MRV currently expects to be material in relation to MRV's business, consolidated financial condition, results of operations or cash flows. On March 1, 2002, Rockwell Automation Technologies, Inc. filed a patent infringement lawsuit against MRV and two of its affiliated companies, Optronics International Corp. and Luminent, Inc. in U.S. District Court in Delaware. Several other companies that are not related to MRV were also named as defendants in the lawsuit. The lawsuit alleges that in January, 1983, a Rockwell affiliate obtained United States Letters Patent No. 4,368,098 entitled "Epitaxial Composite and Method of Making" from the U.S. Patent and Trademark Office. The patent is directed to an organo-metallic process for producing epitaxial films of Group III-V semiconductor on a single crystal substrate. This process generally is referred to as Metal Organic Chemical Vapor Deposition, or MOCVD. The rights to the patent were ultimately assigned to Rockwell. In the lawsuit, Rockwell alleges that - it gave a company it calls IQE a nonexclusive, nontransferable license to import and sell in the United States MOCVD wafers; - the license prohibited IQE from passing onto others any rights under the patent, including the right to make, use, sell or import into the United States MOCVD devices made from MOCVD wafers; and - the license required IQE to provide its customers of MOCVD wafers with written notice that the customers must obtain a license from Rockwell to use the MOCVD wafers to make, use, sell or import MOCVD devices into the United States. IQE has sued Rockwell in another action seeking declaratory relief that, among other things, IQE has not infringed the patent and that the patent is invalid and unenforceable. That action is pending. Nevertheless, Rockwell has claimed in its patent infringement lawsuit against MRV that the defendants infringed its patent by using at least some of the MOCVD wafers purchased from IQE or others and/or fabricated wafers themselves that were manufactured by a process that infringes one or more claims of Rockwell's patent to make, sell and/or import into the United States MOCVD devices such as laser diodes. Rockwell claims it has been damaged by the defendants in an unspecified amount, and seeks to recover those damages, and also seeks an increase in damages and attorneys' fees for alleged willful infringement. Rockwell has agreed to grant MRV an extension of time to file a response to the lawsuit, in order to give the parties an opportunity to try and resolve the matter. MRV is investigating the claims, and intends to vigorously defend itself if the matter cannot be resolved out of court. MRV has received notices from third parties alleging possible infringement of other patents with respect to product features or manufacturing processes. For a discussion of these notices and the claims, see Item 1. Description of Business -- Proprietary Rights earlier in this Report. 33 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 14, 2001, we held our Annual Meeting of Stockholders at which, among other things, the Company's entire board of directors was elected. The name of each director elected at the Annual Meeting, and the number of votes cast for and against (or withheld) were as follows:
Number of Votes ----------------------------- Against or Name For Withheld ---- ---------- ---------- Noam Lotan 61,481,631 2,191,010 Shlomo Margalit 61,810,130 1,862,511 Igal Shidlovsky 62,705,257 967,384 Guenter Jaensch 62,696,708 957,933 Baruch Fischer 62,705,199 967,442 Daniel Tsui 62,701,597 971,044
The other matters voted upon at the meeting and the number of votes cast for, against or withheld, including abstentions and broker non-votes, as to each matter were as follows:
PROPOSAL FOR AGAINST ABSTAIN -------- ---------- --------- ------- To approve amendments to the Company's 1997 57,026,521 6,346,225 299,895 Incentive and Nonstatutory Stock Option Plan to increase by 1,200,000 shares the number of shares of Common Stock that can be optioned and sold under the Stock Option Plan To ratify the selection of Arthur Andersen LLP 63,065,522 374,256 232,863 as independent auditors for the Company for the fiscal year ending December 31, 2001.
34 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MRV's common stock is traded in the over-the-counter market and has been included in the Nasdaq National Market since February 28, 1994 under the symbol "MRVC." The following table sets forth the high and low closing sale prices of it common stock for the periods indicated as reported by the Nasdaq National Market. The prices have been adjusted to give retroactive effect to the two-for-one stock split of MRV's common stock effected on May 11, 2000.
High Low ------ ------ 2000 First Quarter $95.25 $25.88 Second Quarter 67.25 23.44 Third Quarter 80.38 45.31 Fourth Quarter 49.25 11.06 2001 First Quarter $21.38 $6.22 Second Quarter 12.90 5.38 Third Quarter 8.79 2.43 Fourth Quarter 5.75 2.76
According to the records of MRV's transfer agent, at March 12, 2002, MRV had 3,380 stockholders of record, which, management believes, held from approximately 55,000 beneficial holders. 35 ITEM 6. SELECTED FINANCIAL DATA The following selected statement of operations data for the three years in the period ended December 31, 2001 and the balance sheet data as of December 31, 2000 and 2001 are derived from our consolidated financial statements and notes thereto, included elsewhere herein, and are audited by Arthur Andersen LLP, independent public accountants, as set forth in their report included later in this Report. The selected statement of operations data for the two years in the period ended December 31, 1997 and the balance sheet data as of December 31, 1997, 1998 and 1999 were derived from our audited financial statements, which are not included in this Report. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the notes thereto, included elsewhere in this Report.
Statements of Operations Data: Year ended December 31, ------------------------------------------------------------- 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- (in thousands, except per share data) Revenues, net $ 165,471 $ 264,075 $ 288,524 $ 319,394 $ 332,844 Cost of goods sold(1)(2)(4) 94,709 165,385 197,442 203,371 267,389 Research and development(1)(2) 13,093 25,817 35,319 74,078 94,813 Selling, general and administrative(1)(2) 26,993 53,852 67,859 124,700 150,674 Purchased technology in progress(3) -- 20,633 -- -- -- Restructuring costs(2) -- 15,671 -- -- 14,111 Amortization of goodwill and other intangibles 372 2,901 3,898 66,814 126,484 --------- --------- --------- --------- --------- Operating income (loss) 30,304 (20,184) (15,994) (149,569) (320,627) Other income (expense), net(2)(5) 1,901 4,339 322 (9,578) (22,777) --------- --------- --------- --------- --------- Income (loss) before provision for income taxes minority interests and extraordinary item 32,205 (15,845) (15,672) (159,147) (343,404) Provision (benefit for) income taxes 9,474 5,707 (2,153) (5,398) 4,475 Minority interests (146) (1,345) 610 796 11,577 Gain on purchase of minority interest, net of tax -- -- -- -- 9,949 Gain on repurchase of convertible notes, net of tax -- 2,791 -- -- -- --------- --------- --------- --------- --------- Net income (loss) $ 22,585 $ (20,106) $ (12,909) $(152,953) $(326,353) Net income (loss) per share -- Basic $ 0.48 $ (0.38) $ (0.24) $ (2.33) $ (4.27) ========= ========= ========= ========= ========= Net income (loss) per share -- Diluted $ 0.44 $ (0.38) $ (0.24) $ (2.33) $ (4.27) ========= ========= ========= ========= ========= Shares used in per share calculation -- Basic 47,340 53,064 53,920 65,669 76,369 Diluted 51,468 53,064 53,920 65,669 76,369
36
At December 31 CONSOLIDATED BALANCE -------------------------------------------------------------- SHEET DATA: 1997 1998 1999 2000 2001 ---------- ---------- ---------- ---------- ---------- Cash and cash equivalents $ 19,428 $ 20,692 $ 34,330 $ 210,080 $ 164,676 Working capital 111,559 115,318 106,425 366,752 175,966 Total assets 236,236 320,192 314,533 1,097,621 864,495 Total long-term liabilities 2,853 94,317 94,409 154,504 102,254 Stockholders' equity 189,969 174,429 166,815 781,555 584,676
(1) Includes amounts related to deferred stock compensation of: $8.3 million and $7.8 million in cost of goods sold; $13.3 million and $14.0 million in research and development expenses; and $38.4 million and $48.0 million in selling, general and administrative expenses for the years ended December 31, 2000 and 2001, respectively. (2) Includes charges of $35.4 million, $14.1 million, and $16,000 presented in cost of sales, selling, general and administrative, and other income (expense), respectively, for the year ended December 31, 2001, to write-down inventory, purchase commitments, asset impairment, workforce reduction, restructuring costs and other non-recurring items. These charges resulted from the lower demand for our products and pricing pressures stemming from the continuing downturn in the communications equipment industry generally and the optical components sector in particular. (3) Purchased technology in progress and restructuring charges were incurred as a result of acquisitions. Purchased technology in progress for the year ended December 31, 1998, was in conjunction with the Xyplex acquisition. Restructuring costs during the year ended December 31, 1998, were associated with a plan adopted by MRV in March 1998, calling for the reduction of workforce, closing of certain facilities, elimination of particular product lines, settlement of distribution agreements and other costs. (4) For the years ended December 31, 1998 and 1999, includes amounts relating to the write-down of discontinued products of $3.1 million and $13.8 million, respectively. (5) Interest expenses for the year ended December 31, 1997 was in connection with the private placement of $30.0 million principal amount of notes, the proceeds from which MRV used to finance the cash portion of the Fibronics acquisition in 1996. Interest expenses for the year ended December 31, 1998 and 1999, were connected with the private placement of $100.0 million principal amount of 5% Convertible Subordinated Notes. See Note 10 of notes to the consolidated financial statements of MRV included later in this Report. 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains forward-looking statements 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 the following and elsewhere in this Report. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report. OVERVIEW We create, acquire, finance and operate companies, and through them, design, develop, manufacture and market products, which enable high-speed broadband communications. We concentrate on companies and products devoted to optical components and network infrastructure systems. We have leveraged our early experience in fiber optic technology into a number of well-focused operating units specializing in advanced fiber optic components, switching, routing, and wireless optical transmission systems which we have created, financed or acquired. Revenues for the year ended December 31, 2001 were $332.8 million, compared to $319.4 million for the year ended December 31, 2000, an increase of 4%. However we reported a net loss of $326.4 million and $153.0 million for the years ended December 31, 2001 and 2000, respectively. A significant portion of these losses were due to the amortization of goodwill and other intangibles and deferred stock compensation related to our acquisitions in 2000 and our employment arrangements with Luminent's former President and its Chief Financial Officer. We will continue to record deferred stock compensation through 2004, relating to these acquisitions and Luminent's employment arrangements with its executives. Effective January 1, 2002, the adoption of SFAS No. 142 will stop amortization of goodwill, however, it may require us to record impairment charges (see Recently Issued Accounting Standards, below). For the year ended December 31, 2001, we recorded goodwill and other intangible impairment charges of $14.2 million as the fair value of these assets was less than their carrying value (see Amortization of Goodwill and Other Intangibles, below). As a consequence of these charges, we do not expect to report net income in the foreseeable future. See discussion of the impact on the amortization of goodwill and other intangibles due to the adoption of SFAS No. 142 on January 1, 2002 (see Recently Issued Accounting Standards, below). RECENT ACQUISITIONS During 2000, we completed several strategic acquisitions. These acquisitions were made to expand our product offerings, enhance our technological expertise and expand our manufacturing capabilities. During 2001 and 1999, we did not complete any material acquisitions. The table below summarizes the more notable acquisitions.
Form of Consideration and Acquired Company Date of Acquisition Total Consideration Other Notes to Acquisition - ---------------- ------------------- ------------------- -------------------------- Fiber Optic Communications, Inc. April 24, 2000 $309.7 million $48.6 million in cash and 5.4 million shares of common stock and options issued; approximately 97% of capital stock assumed; goodwill and other intangibles recorded of $261.5 million; deferred stock compensation recorded of $14.1 million
38
Form of Consideration and Acquired Company Date of Acquisition Total Consideration Other Notes to Acquisition - ---------------- ------------------- ------------------- -------------------------- Jolt Limited May 1, 2000 $57.7 million 1.9 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and other intangibles recorded of $33.7 million; deferred stock compensation recorded of $25.0 million Quantum Optech Inc. July 12, 2000 $36.1 million 1.2 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and other intangibles recorded of $27.8 million; deferred stock compensation recorded of $2.7 million AstroTerra Corporation July 12, 2000 $160.3 million 2.4 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and other intangibles recorded of $108.4 million; deferred stock compensation recorded of $50.0 million Optronics International Corp. July 21, 2000 $123.9 million 4.2 million shares of common stock and options issued; approximately 99% of capital stock assumed; goodwill and other intangibles recorded of $99.4 million; deferred stock compensation recorded of $13.4 million
Each of these acquisitions was accounted for using the purchase method and therefore, the results of operations of the acquired businesses have been included in our Consolidated Financial Statements from the respective dates of acquisition. Goodwill and other intangibles initially recorded from these acquisitions totaled $530.8 million. Net goodwill and other intangibles from these acquisitions totaled $367.4 million as of December 31, 2001. For the years ended December 31, 2001 and 2000, we recorded amortization of goodwill and other intangibles from these acquisitions of $102.8 million and $60.6 million, respectively. Effective January 1, 2002, we plan to implement Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (see Recently Issued Accounting Standards, below). A portion of the purchase prices paid in connection with these acquisitions represented deferred stock compensation relating to options to purchase our common stock. The fair values of these options were $105.2 million and have been recorded as deferred stock compensation. Deferred stock compensation amortization expense for the year ended December 31, 2001, relating to these stock options was $27.9 million, compared with $42.7 million for the year ended December 31, 2000. We expect to incur additional deferred stock compensation relating to these acquisitions of approximately $34.6 million, which will be fully amortized by 2004. Deferred stock compensation is being amortized using the graded method using an estimated employment period of four years. Fiber Optic Communications, Quantum Optech and Optronics International were acquired and contributed to Luminent as part of our original plan to complete an initial public offering of our fiber 39 optics components business and eventually spin-off this business to our stockholders. This plan was terminated in September 2001 when we decided not to complete the spin-off of Luminent and to effect a short form merger of Luminent with one of our wholly-owned subsidiaries and thereby eliminate public ownership of Luminent. Fiber Optic Communications develops and manufactures passive fiber optic components for wavelength division multiplexing. Quantum Optech specializes in developing and manufacturing optical thin film coating and filters for dense wavelength division multiplexing. Optronics focuses on developing and manufacturing high temperature semiconductor lasers, transceivers and detectors for optical networks. These acquisitions also provided additional manufacturing capabilities for future growth. AstroTerra and Jolt were acquired and contributed to our subsidiary, Optical Access, which focuses on optical wireless products that deliver high-speed communications traffic to the so-called last mile portion of the communications network. AstroTerra develops and manufactures free-space optical wireless communication systems to connect data and telecommunications networks. Jolt develops and manufactures multi-port wireless optics communications equipment. These acquisitions provide strategic components and technology for Optical Access' wireless optical solution. TRANSACTION WITH STOCK OF SUBSIDIARIES In November 2000, Luminent completed the initial public offering of its common stock, selling 12 million shares at $12.00 per share for net proceeds of approximately $132.3 million. Luminent designs, manufactures and sells a comprehensive line of fiber optic components that enable communications equipment manufacturers to provide optical networking equipment for the rapidly growing metropolitan and access segments of the communications networks. While we had planned to distribute all of our shares of Luminent common stock to our stockholders, unfavorable business and economic conditions in the fiber optic, data networking and telecommunications industries and the resulting adverse effects on the market prices of our common stock and Luminent common stock, caused us to determine to abandon the distribution and effect a short-form merger of Luminent into one of our wholly-owned subsidiaries, thereby eliminating public ownership of Luminent. This merger was completed on December 28, 2001. In July 2000, we and Luminent, entered into employment agreements with Luminent's former President and Chief Executive Officer and its Vice President of Finance and Chief Financial Officer. The agreements provide for annual salaries, performance bonuses and combinations of stock options to purchase shares of our common stock and Luminent's common stock. The stock options were granted to Luminent's executives at exercise prices below market value, resulting in deferred stock compensation. Deferred stock compensation expense from these stock option grants reported for the years ended December 31, 2001 and 2000, were $35.8 million and $54.2 million, respectively. We will incur additional deferred stock compensation expense of approximately $2.1 million through 2004. Luminent's President and Chief Executive Officer resigned in September 2001. Dr. Spivey's resignation was considered by the parties to be a termination other than for cause under his employment agreement entitling him to the severance benefits of his employment agreement, including payment over a one year period of an amount equal to two times the sum of his annual salary plus bonus and the vesting of all of his unvested Luminent options. Dr. Spivey's MRV and Luminent stock options are now exercisable through September 11, 2003. During the year ended December 31, 2001, we recorded a charge of $1.0 million to reflect severance and other expenses and an immediate recognition of deferred stock compensation expense of $18.9 million. In October 2000, our wholly-owned subsidiary, Optical Access, filed a registration statement with the Securities and Exchange Commission for the initial public offering of its common stock. This offering was not completed because of market conditions and in November 2001, Optical Access withdrew its registration statement. Due to the postponement of the offering prior to its withdrawal, we expensed all costs, approximately $1.1 million, of this offering in the second quarter of 2001. Optical 40 Access designs, manufactures and markets an optical wireless solution that delivers high-speed communications traffic to the portion of the communications network commonly known as the last mile, which extends from the end user to the service provider's central office. RESTRUCTURING AND ONE-TIME CHARGES In the second quarter of 2001 when Luminent's common stock was still publicly traded, Luminent's management approved and implemented a restructuring plan and other actions in order to adjust operations and administration as a result of the dramatic slowdown in the communications equipment industry generally and the optical components sector in particular. Major actions primarily involved the reduction of facilities in the U.S. and in Taiwan, the reduction of workforce, the abandonment of certain assets, the cancellation and termination of purchase commitments and the write-down of certain inventory. These actions are expected to realign Luminent's business based on current and near term growth rates. All of these actions are expected to be completed in 2002. Restructuring Charges. During the year ended December 31, 2001, Luminent recorded restructuring charges totaling $20.3 million. Costs for restructuring activities are limited to either incremental costs that directly result from the restructuring activities and provide no future revenue generating benefit, or costs incurred under contractual obligations that existed before the restructuring plan and will continue with either no future revenue generating benefit or become a penalty incurred for termination of the obligation. Luminent identified a number of assets, including leased facilities and equipment that are no longer required due to current market conditions, operations and expected growth rates. The net facility costs related to closed and abandoned facilities of approximately $2.4 million for the year ended December 31, 2001, are primarily related to future obligations under operating leases. The total lease charge is net of approximately $3.7 million in expected sublease revenue on leases that Luminent cannot terminate. In connection with these closed and abandoned facilities, Luminent recorded asset impairment charges of $10.4 million for the year ended December 31, 2001 to write-down the value of equipment, consisting of leasehold improvements and certain manufacturing equipment. Due to the specialized nature of these assets, Luminent determined that they have minimal or no future benefit and recorded a provision reflecting the net book value relating to these assets. Purchase commitments of $6.2 million, recorded in cost of sales, for the year ended December 31, 2001 are to cancel or renegotiate outstanding contracts for materials and capital assets that are no longer required due to Luminent's significantly reduced orders for optical components and sales projections over the next twelve months. Employee severance costs and related benefits of $1.3 million are associated with approximately 600 layoffs during the year ended December 31, 2001, bringing Luminent's total workforce to approximately 1,100 employees as of December 31, 2001. Affected employees came from all divisions and areas of Luminent. The majority of affected employees were in the manufacturing group. As of December 31, 2001, the restructuring provision has been reduced by cash payments of $1.2 million for the year ended December 31, 2001 and non-cash related charges of $10.4 million for the year ended December 31, 2001, resulting in an ending liability balance of $8.7 million. Luminent expects to utilize most of the remaining balance in the year ending December 31, 2002. Luminent expects that it will spend approximately $8.7 million through the next two quarters to carry out the plan, which will be paid through cash and cash equivalents and through operating cash flows. Luminent began to realize savings related to the workforce reductions in late 2001 with estimated ongoing quarterly net savings of $2.4 million. In addition, Luminent anticipates that it will realize reduced depreciation charges of approximately $384,000 per quarter through December 2004 and $163,000 per quarter through December 2005 for facility costs. These savings are expected to be realized as reductions in cost of sales, research and development and selling, general and administrative expenses. 41 A summary of the restructuring costs for the year ended December 31, 2001 consist of the following (in thousands):
Original Additional Remaining Provision Provision Utilized Balance --------- ---------- -------- --------- Exit costs Asset impairment $ 9,544 $ 897 $10,441 $ -- Closed and abandoned facilities 1,125 1,280 88 2,317 Purchase commitments 2,386 3,787 468 5,705 ------- ------- ------- ------- 13,055 5,964 10,997 8,022 Employee severance costs 1,281 -- 626 655 ------ ------- ------- ------- $14,336 $ 5,964 $11,623 $ 8,677 ======= ======= ======= =======
A summary of the restructuring costs by line item for the year ended December 31, 2001 consist of the following (in thousands):
2001 --------- Cost of sales $ 6,173 Restructuring costs 14,111 Other income (expense) 16 --------- $ 20,300 =========
One-Time Charges. As a result of the significant negative economic and industry trends impacting Luminent's expected sales over the twelve months ending June 30, 2002, Luminent also recorded a one-time $29.2 million charge to write-down the remaining book value of certain inventory related to certain transceivers, duplexors, and triplexors that are previous generation products to its realizable value during the year ended December 31, 2001. The one-time charges to write-down inventory were subsequently reduced by $8.1 million for the year ended December 31, 2001 to reflect the sale of previously written-off items. MARKET CONDITIONS AND CURRENT OUTLOOK Macroeconomic factors, such as an economic slowdown in the U.S. and abroad, have detrimentally impacted demand for optical components. The unfavorable economic conditions and reduced capital spending has detrimentally affected sales to service providers, network equipment companies, e-commerce and Internet businesses, and the manufacturing industry in the United States during 2001 to date, and may continue to affect them for the remainder of 2002 and thereafter. Announcements by industry participants and observers indicate there is a slowdown in industry spending and participants are seeking to reduce existing inventories. As a result of the slowdown in the communications industry, we recorded in our consolidated results for the year ended December 31, 2001, charges relating to Luminent's write-down of inventory, purchase commitments, asset impairment, workforce reduction, restructuring costs and other items. These charges, totaling $49.5 million, resulted from the lower demand for Luminent's products and pricing pressures stemming from the continuing downturn in the communications equipment industry generally and the optical components sector in particular. 42 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, our statements of operations data expressed as a percentage of revenues.
2001 2000 1999 ---- ---- ---- Revenues, net 100% 100% 100% Cost of goods sold 80 64 68 Research and development 28 23 12 Selling, general and administrative 45 39 24 Amortization of goodwill and 38 21 1 other intangible Restructuring costs 4 -- -- ----------------------------- Operating income (loss) (96) (47) (6) Other income (expense), net (7) (3) -- ----------------------------- Income (loss) before provision (103) (50) (5) for income taxes minority interests and extraordinary item Provision (benefit) for income taxes 1 (2) (1) Minority interests 3 -- -- Gain on purchase of minority 3 -- -- interest, net of tax ---- ---- ---- Net income (loss) (98)% (48)% (4)% ==== ==== ====
The following management discussion and analysis refers to and analyzes our results of operations into two segments as defined by our management. These two segments are Operating Entities and Development Stage Enterprises including all startups activities. YEARS ENDED DECEMBER 31, 2001 AND 2000 Revenues, Net We generally recognize product revenue, net of sales discounts and allowances, when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered probable. Products are generally shipped "FOB shipping point" with no right of return. Sales with contingencies, such as right of return, rotation rights, conditional acceptance provisions and price protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. We generally warrant our products against defects in materials and workmanship for one year. The estimated costs of warranty obligations and sales returns and other allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience. Our major revenue-generating products consist of: optical passive and active components; switches and routers; remote device management; and network physical infrastructure equipment. Revenue generated through the sales of services and systems support has been insignificant. Operating Entities. Revenue for the year ended December 31, 2001 increased $13.5 million, or 4%, to $332.8 million from $319.4 million for the year ended December 31, 2000. Revenue generated through our recent acquisitions for the year ended December 31, 2001 increased $21.7 million, or 56%, to $60.3 million from $38.6 million for the prior year. Revenue from our existing business generated $272.5 million and $280.8 million for the years ended December 31, 2001 and 2000, respectively. This change represents a decrease of $8.3 million, or 3%, for the year ended December 31, 2001. Revenue generated 43 from our optical passive components increased $9.9 million, or 34%, over the prior year. This increase offsets decreases in revenue from our switch and routers, which decreased $6.1 million, or 8%. Revenue to the European Community and the Pacific Rim together increased $24.9 million, or 13%, for the current year. Development Stage Enterprises. No significant revenues were generated by these entities for the years ended December 31, 2001 and 2000. Gross Profit Gross profit is equal to our revenues less our cost of goods sold. Our cost of goods sold includes materials, direct labor and overhead. Cost of inventory is determined by the first-in, first-out method. Operating Entities. Gross profit for the year ended December 31, 2001 was $65.5 million, compared to gross profit of $116.0 million for the year ended December 31, 2000. Gross profit decreased $50.6 million, or 44%, for the year ended December 31, 2001 over the year ended December 31, 2000. Our gross margins (defined as gross profit as a percentage of revenues) are generally affected by price changes over the life of the products and the overall mix of products sold. Higher gross margins are generally expected from new products and improved production efficiencies as a result of increased utilization. Conversely, prices for existing products generally will continue to decrease over their respective life cycles. Our gross margin decreased to 20% for the year ended December 31, 2001, compared to gross margin of 36% for the year ended December 31, 2000. The decrease in gross margin was partially attributed to a write-off of inventory and other charges of $35.4 million taken by Luminent during the year ended December 31, 2001. The gross margin decreases in the current year were also affected by reductions in inventory value to record inventory at the lower of cost or market at MRV's networking and other operating subsidiaries. In addition, certain profitable, but low margin projects in Europe, contributed to the reduction in gross margin for the year ended December 31, 2001. Furthermore, our gross margin was affected by deferred compensation amortization charges of $7.8 million for the current year. Prior to Luminent's restructuring and other one-time charges of $35.4 million additional reductions in inventory at other subsidiaries of $8.3 million and deferred stock compensation amortization of $7.8 million, gross margin would have been $117.0 million, or 35%. Prior to deferred stock compensation amortization of $8.3 million for the year ended December 31, 2000, gross margin would have been $124.3 million, or 39%. Development Stage Enterprises. No significant gross margins were produced by these entities for the years ended December 31, 2000 and 2001. Research and Development Expenses (R&D) R&D expenses increased 28%, to $94.8 million for the year ended December 31, 2001 from $74.1 million in the year ended December 31, 2000. Operating Entities. R&D expenses from our operating entities were $49.1 million, or 15% of revenues, for the year ended December 31, 2001, as compared to $32.6 million, or 10% of revenues, for the year ended December 31, 2000. This represents an increase of $16.5 million, or 51%, for the year ended December 31, 2001. Excluding deferred stock compensation amortization charges of $14.0 million and $13.3 million for the years ended December 31, 2001 and 2000, respectively, R&D expenses would have increased by 82% to $35.1 million, or 11% of revenues, from $19.3 million, or 6% of revenues, for the years ended December 31, 2001 and 2000, respectively. 44 Development Stage Enterprises. R&D expenses of the development stage enterprises were $45.7 million, or 14% of revenues, for the year ended December 31, 2001, as compared to $41.5 million, or 13% of revenues, for the year ended December 31, 2000. This represents a decrease of $4.2 million, or 10% of revenues, for the year ended December 31, 2001. Selling, General and Administrative (SG&A) SG&A expenses increased 21% to $150.7 million for the year ended December 31, 2001, compared to $124.7 million for the year ended December 31, 2000. SG&A expenses were 45% of revenues for the year ended December 31, 2001 compared to 39% of revenues for the year ended December 31, 2000. Prior to Luminent's restructuring and other one-time charges of $14.1 million and deferred stock compensation amortization charges of $48.1 million for the year ended December 31, 2001 and deferred stock compensation amortization charges of $38.4 million for the year ended December 31, 2000, SG&A would have decreased 6% to $88.5 million from $86.3 million for the years ended December 31, 2001 and 2000, respectively. As a percentage of revenue, SG&A prior to Luminent's restructuring and other one-time charges and deferred stock compensation amortization expenses would have been 27% for the year ended December 31, 2001 and prior to deferred compensation amortization expenses would have been 30% for the year ended December 31, 2000. Operating Entities. SG&A expenses increased 9% over prior year to $135.7 million for the year ended December 31, 2001. SG&A expenses were 41% and 39% of our revenue for the years ended December 31, 2001 and 2000, respectively. Prior to Luminent's restructuring and other one-time charges of $14.1 million and deferred stock compensation amortization charges of $48.1 million for the year ended December 31, 2001 and deferred stock compensation amortization charges of $38.4 million for the year ended December 31, 2000, SG&A would have decreased 15% to $73.5 million for the year ended December 31, 2001, respectively, compared to $86.3 million for the year ended December 31, 2000. As a percentage of revenues, SG&A prior to Luminent's restructuring and other one-time and deferred stock compensation charges would have been 22% for the year ended December 31, 2001 compared to 27% for the year ended December 31, 2000. These decreases are mainly due to the reduction of overhead expenses. Development Stage Enterprises. The Development Stage Enterprises did not report SG&A expenses during the year ended December 31, 2000. During 2001 these companies began to develop their administrative capabilities and reported $15.0 million for the year ended December 31, 2001. Amortization Of Goodwill and Other Intangibles Operating Entities. Amortization of goodwill and other intangibles increased to $126.5 million for the year ended December 31, 2001, from $66.8 million for the year ended December 31, 2000. The increase of approximately $45.5 million was the result of the timing of our recent acquisitions, which occurred principally from April 24 to July 21, 2000, and an additional $14.2 million of impairment charges. The goodwill and other intangibles was considered impaired as the anticipated undiscounted cash flows from these assets was less than their carrying values. The remaining carrying value of goodwill and other intangibles was not impaired based on this analysis. This analysis requires us to use significant judgment and make assumptions regarding the future cash flows expected to result from the use of the assets and their eventual disposition. While we believe the carrying values are realizable based on our analysis, changes in the assumptions used in our cash flows models could have resulted in significantly different results (See Recently Issued Accounting Pronouncements, below.). Development Stage Enterprises. No amortization of goodwill and other intangibles was recorded for these entities for the years ended December 31, 2001 and 2000. 45 Other Expense, Net In June 1998, we issued $100 million principal amount of 5% convertible subordinated notes due in June 2003. The notes were offered in a 144A private placement to qualified institutional investors at the stated amount, less a selling discount of 3%. In late 1998, we repurchased $10.0 million principal amount of these notes at a discount from the stated amount. We incurred $4.5 million in interest expense relating to the Notes during the year ended December 31, 2001 and 2000. The increase in other expense from $8.8 million to $11.2 million for the year ended December 31, 2001 is primarily attributed to interest expense from our financing obligations, our share of losses from our unconsolidated subsidiaries of $7.8 millions and impairment charges of $9.2 million on our investments for the year ended December 31, 2001, partially offset by interest income and minority interest. As part of our asset realization evaluation, we determined that the carrying value of certain wireless BLECs (Building Local Exchange Carriers) and other investments, where we have less than a 20% ownership stake, were impaired. Our share of losses from our unconsolidated subsidiaries was $7.3 for the year ended December 31, 2000. Gain on Purchase of Minority Interest, Net of Tax In September 2001, we announced our intention to reacquire Luminent's 8% minority interest, established through Luminent's November 2000 initial public offering, and merge Luminent back into MRV. The merger was completed in December 2001. We exchanged 0.43 shares of MRV common stock, or 5.2 million shares, for 12.0 million shares of Luminent common stock. Our common stock had a fair value of $16.9 million, based on the average market price of our common stock five days before and after the terms were determined. Consequently, we recorded an extraordinary gain from this merger of $9.9 million, net of tax, equal to the excess minority interest reduced over the fair value paid, net of our costs incurred to effect this merger. YEARS ENDED DECEMBER 31, 2000 AND 1999 Revenues, Net Operating Entities. Revenue for the year ended December 31, 2000 increased $30.9 million or 11% to $319.4 million from $288.5 million for the year ended December 31, 1999. Revenue generated through our recent acquisitions for the year ended December 31, 2000 was $38.6 million. No acquisitions were made during the year of 1999. Revenue from our existing business was $280.8 million and $288.5 million for the years ended December 31, 2000 and 1999, respectively. This change represents a decrease of $7.7 million or 3% for the year ended December 31, 2000 due to a decrease of approximately $37.0 million or 27% due to MRV's decision to discontinue the production and sale of LAN switches and remote device management products. MRV made this decision in order to focus on the emerging carrier and service providers' market segment where the sales cycle is significantly greater than the enterprise networks market. This decrease was offset by the growth in the fiber optic components business of approximately $22.0 million due to the increase in market demand created by carrier equipment manufacturers. Our various other products substantially accounted for the remaining increase of approximately $7.0 million or 9% for the year ended December 31, 2000. Development Stage Enterprises. No significant revenues were generated by these entities for the years ended 2000 and 1999. Gross Profit Operating Entities. Gross profit for the year ended December 31, 2000 increased $24.9 million, or 27% to $116.0 million from $91.1 million for the year ended December 31, 1999. MRV's gross 46 margin (defined as gross profit as a percentage of revenues) increased to 36% for the year ended December 31, 2000 from 32% for the year ended December 31, 1999. Prior to deferred stock compensation amortization expense, MRV's gross margin would have increased to $124.3 million or 39% for the year ended December 31, 2000 compared to $91.1 million or 32% for the year ended December 31, 1999. MRV's margins increased due to a favorable shift in product mix towards higher margin product lines, such as those for third generation wireless networks and other Internet infrastructure products. Development Stage Enterprises. No significant gross profits were generated by these entities for the years ended 2000 and 1999. Research and Development (R&D) R&D expenses increased $38.8 million or 110% to $74.1 million for the year ended December 31, 2000 from $35.3 million for the year ended December 31, 1999. Operating Entities. R&D expenses of the operating entities were $32.6 million or 10% of revenues for the year ended December 31, 2000 as compared to $15.3 million or 5% of revenues for the year ended December 31, 1999. This represents an increase of $17.3 million or 113% for the year ended December 31, 2000. Prior to deferred stock compensation amortization expense of $21.6 million for the year ended December 31, 2000, R&D expenses would have been $11.0 million or 3% of revenues compared to $15.3 million or 5% of revenue. This represents a decrease of $4.3 million or 28% for the year ended December 31, 2000. Development Stage Enterprises. R&D expenses of the development stage enterprises increased by $21.5 million of 108% to $41.5 million or 13% of revenues for the year ended December 31, 2000 compared to $20.0 million or 7% of revenues for the year ended December 31, 1999. MRV's increased spending in R&D illustrates its commitment to continued product development and technological expansion. Additionally, R&D from MRV's consolidated development stage enterprises continued to increase as those enterprises strive towards bringing new products to market. Selling, General and Administrative (SG&A) Operating Entities. SG&A expenses increased $56.8 million, or 84%, to $124.7 million from $67.9 for the year ended December 31, 1999. SG&A expenses were 39% of revenue for the year ended December 31, 2000 compared to 24% of revenue for the year ended December 31, 1999. Prior to the amortization of deferred stock compensation of $30.0 million for the year ended December 31, 2000, SG&A expenses would have been $94.7 million or 30% of revenues. This represents an increase of $26.8 million or 39% for the year ended December 31, 2000 primarily as a result of MRV's recent acquisitions. MRV also increased personnel and related costs in its operating entities during the year ended December 31, 2000. Development Stage Enterprises. The development stage enterprises did not report SG&A expenses during the years of 2000 and 1999 as their activities primarily involved the research development of products and they had yet to develop administrative and selling functions. 47 Amortization of Goodwill and Other Intangibles Amortization of goodwill and other intangibles increased $62.9 million to $66.8 million from $3.9 million for the year ended December 31, 2000 and 1999, respectively. Furthermore, as MRV continues to engage in strategic acquisitions, additional goodwill and other intangibles may be recorded. Other Expenses, Net MRV incurred $4.5 million in interest expense relating to the Notes for each year ended December 31, 2000 and 1999, respectively. The increase in other expense is primarily attributed to MRV's share of losses from its unconsolidated development stage enterprises of $7.3 million for the year ended December 31, 2000. For the year ended December 31, 1999, these entities were included in MRV's consolidated statements of operations based on its ownership in those enterprises. The remaining components of other expense, principally represent interest income recognized from short-term and long-term investments. Provision (Benefit) for Income Taxes The benefit for income taxes for the year ended December 31, 2000 was $5.4 million, compared to $2.2 million for the year ended December 31, 1999. MRV's income tax expense fluctuates primarily due to the tax jurisdictions where MRV currently has operating facilities and the varying tax rates in those jurisdictions. QUARTERLY RESULTS OF OPERATIONS The following tables set forth MRV's unaudited condensed consolidated statements of operations data for each of the eight quarters ended December 31, 2001. These statements should be read in conjunction with MRV's consolidated financial statements and related notes appearing elsewhere in this prospectus. MRV has prepared this unaudited consolidated information on a basis consistent with its audited consolidated financial statements, and in the opinion of its management, it reflects all normal recurring adjustments that MRV considers necessary for a fair presentation of its financial position and operating results for the quarters presented. You should not draw any conclusions about MRV's future results from the operating results for any quarter. 48
For the three months ended ---------------------------------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, 2000 2000 2000 2000 2001 2001 2001 2001 --------- --------- --------- --------- --------- --------- --------- --------- (in thousands, except per share amounts) (unaudited) Revenues, net $ 65,072 $ 73,935 $ 82,720 $ 97,667 $ 100,104 $ 89,530 $ 69,730 $ 73,480 Cost and expenses: Cost of goods sold 42,736 45,793 47,910 66,932 66,391 88,765 57,621 54,612 Research and development 11,891 14,758 21,803 25,626 25,005 25,782 18,806 24,719 Selling, general and administrative 16,028 26,467 52,699 29,506 38,412 31,777 49,528 30,959 Restructuring expenses -- -- -- -- -- 11,934 1,724 453 Amortization of goodwill and other intangibles -- 12,055 27,348 27,411 28,139 29,028 27,218 42,099 --------- --------- --------- --------- --------- --------- --------- --------- 70,655 99,073 149,760 149,475 157,947 187,286 155,398 152,840 Operating loss (5,583) (25,138) (67,040) (51,808) (57,843) (97,756) (85,668) (79,360) Other expense, net (488) (1,190) (5,764) (2,136) (520) (2,373) (1,410) (18,474) --------- --------- --------- --------- --------- --------- --------- --------- Loss before benefit (provision) for income taxes, minority interest and extraordinary (6,071) (26,328) (72,804) (53,944) (58,363) (100,129) (87,078) (97,834) (Provision) benefit for income taxes 494 (1,377) (1,005) 7,286 2,683 939 (6,215) (1,882) Minority interest (287) (45) (570) 1,698 1,388 5,051 3,646 1,492 Gain on purchase or minority interest, net -- -- -- -- -- -- -- 9,949 of tax --------- --------- --------- --------- --------- --------- --------- --------- Net loss $ (5,864) $ (27,750) $ (74,379) $ (44,960) $ (54,292) $ (94,139) $ (89,647) $ (88,275) ========= ========= ========= ========= ========= ========= ========= ========= Basic and diluted income (loss) per share $ (0.10) $ (0.44) $ (1.06) $ (0.62) $ (0.73) $ (1.24) $ (1.16) $ (1.14) ========= ========= ========= ========= ========= ========= ========= ========= Shares used in per share calculation -- Basic and diluted 56,850 62,764 70,122 72,768 74,370 76,111 77,404 77,545 ========= ========= ========= ========= ========= ========= ========= =========
CRITICAL ACCOUNTING POLICIES In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policy," we identified the most critical accounting principles upon which our financial status depends. We determined the critical principles considering accounting principles to be related to revenue recognition, inventory valuation and impairment of intangibles and other long-lived assets. We state these accounting policies in the Footnotes to our Consolidated Financial Statements and in relevant sections in this management's discussion and analysis, including the Recently Issued Accounting Standards discussed below. RECENTLY ISSUED ACCOUNTING STANDARDS The FASB recently approved two pronouncements: SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets, which provide guidance on the accounting for business combinations to be accounted for using the purchase method. Under the new rules, goodwill will no longer be subject to amortization over its useful life. Rather, goodwill will be subject to at least an 49 annual impairment assessment. This assessment is a fundamentally different two-step approach and is based on a comparison between a reporting unit's fair value and its carrying value. Intangible assets have newly defined criteria and will be accounted for separately from goodwill and will continue to be amortized over their useful lives. We plan to adopt these pronouncements as of January 1, 2002. Upon the adoption of SFAS No. 142, we will no longer amortize goodwill and certain intangible assets. Under this new pronouncement, we will evaluate the carrying value of these assets and if necessary, we will record additional impairment charges. SFAS No. 142 represents a change in the methodology used to determine impairment in that it is more market focused. As of December 31, 2001, our common stock was trading at amounts significantly lower than our book value. As such, we anticipate recording, in the first quarter of 2002, impairment charges as a result of our depressed market valuations. Should market values dramatically improve during the first half of 2002, impairment losses, if any, could be reduced or eliminated. Furthermore, as we continue to engage in strategic acquisitions, we may record additional goodwill and other intangibles. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the obligation is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. This statement is effective on January 1, 2003 with earlier application encouraged. We are currently reviewing this statement and have not yet determined its impact, if any on our financial position, results of operations or cash flows. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. We will adopt this statement as of January 1, 2002 and are currently reviewing the statement to determine its impact, if any, on our financial position, results of operations or cash flows. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and restricted cash were $220.7 million at December 31, 2001, a decrease of $63.3 million from cash, cash equivalents and restricted cash of $284.0 million at December 31, 2000. Working capital at December 31, 2001 was $176.0 million compared to $366.8 million at December 31, 2000. Our ratio of current assets to current liabilities at December 31, 2001 was 2.0 to 1.0 compared to 4.3 to 1.0 at December 31, 2000. The decrease in working capital is substantially attributed to the cash requirements of our development stage enterprises and our consolidated net operating losses. As of December 31, 2001 and 2000, we did not have any "off-balance sheet" financing arrangements. Cash used in operating activities was $24.1 million for the year ended December 31, 2001, compared to cash used in operating activities of $29.8 million for the year ended December 31, 2000. Cash used in operating activities is a result of our net operating loss of $326.4 million, adjusted for non-cash items such as depreciation and amortization and deferred stock compensation charges, and offset by cash generated from operating assets and liabilities. Cash used in operating activities were positively affected by decreased restricted cash and cash equivalents, accounts receivables, inventories and other assets and increases in accrued liabilities and deferred revenue, partially offset by decreases in accounts payable and income taxes payable, during the period. The decrease in inventory is primarily the result of inventory write-downs taken and lower of cost or market inventory adjustments. Decreases in accounts payable are the result of dramatic slowdown in the communications equipment industry, while increases accrued liabilities are the result of growth in our non-Luminent businesses. Cash flows used in investing activities were $53.1 million for the year ended December 31, 2001, compared to cash provided by investing activities of $9.2 million for the year ended December 31, 2000. 50 Cash flows used in investing activities were the result of capital expenditures of $19.9 million and investments in unconsolidated subsidiaries of $33.6 million. Cash flows provided by investing activities for the prior period resulted from the net cash provided by the maturity of investments, offset by net cash used in for capital expenditures, purchases of investments in unconsolidated subsidiaries, and cash used for our recent acquisitions. Cash flows from financing activities were $31.9 million for the year ended December 31, 2001, compared to cash provided in financing activities of $198.5 million for the year ended December 31, 2000. Cash generated from financing activities was the result of proceeds received from the issuance of our common stock of $25.9 million and short-term borrowing of $39.0 million, offset by payments on short-term borrowings of $29.5 million, during the period. Cash flows provided by financing activities in the prior period represent the cash received through Luminent's initial public offering, borrowings on our short-term and long-term obligations, the issuance of common stock, offset by payments on our short-term and long-term obligations. On November 10, 2000, Luminent completed the initial public offering of its common stock, selling 12.0 million shares at $12 per share. Their initial public offering raised net proceeds of approximately $132.3 million. In December 2001, we reacquired the minority interest of Luminent representing approximately 8% of Luminent's outstanding common stock (See the discussion above and the Footnotes to our Consolidated Financial Statements for additional discussion). In June 1998, we issued $100 million principal amount of 5% notes due in June 2003 in a private placement raising net proceeds of $96.4 million. The notes are convertible into our common stock at a conversion price of $13.52 per share (equivalent to a conversion rate of approximately 73.94 shares per $1,000 principal amount of notes), representing an initial conversion premium of 24%, for a total of approximately 7.4 million shares of our common stock. The notes bear interest at 5% per annum, which is payable semi-annually on June 15 and December 15 of each year. The notes have a five-year term and have been callable by us since June 15, 2001. The premiums payable to call these notes are 102% of the outstanding principal amount during the 12 months ending June 14, 2002 and 101% during the 12 months ending June 14, 2003, plus accrued interest through the date of redemption. During February and March 2002, we exchanged approximately 6.5 million shares of our common stock for approximately $24.6 million of our notes. The following table illustrates our total contractual cash obligations as of December 31, 2001:
Payments due by Period - ---------------------------------------------------------------- Contractual Cash Less than After 5 Obligations TOTAL 1 Year 1 - 3 Years 4 - 5 Years Years ------------------------ -------- --------- - ----------- ----------- -------- Long-term obligations(1) $ 61,097 $ 52,226 $ 4,421 $ 3,088 $ 1,362 Convertible subordinated notes(1) 89,646 -- 89,646 -- - -- Unconditional purchase obligations 9,921 8,508 1,042 304 67 Operating leases 30,236 7,791 11,614 5,240 5,591 Investments 10,560 4,130 4,320 2,110 -- -------- - -------- -------- -------- -------- Total contractual cash obligations $201,460 $ 72,655 $111,043 $ 10,742 $ 7,020 ======== ======== ======== ======== ========
- -------------- (1) Subsequent to December 31, 2001, MRV paid $53.2 million of current maturities of long term debt and its interest rate swap and retired approximately $24.6 million of its convertible subordinated notes through the exchange of approximately 6.5 million shares of its common stock therefor. 51 Our total contractual cash obligations as of December 31, 2001 were $201.5 million, of which, $72.7 million are due during the year ending December 31, 2002. These total contractual cash obligations primarily consist of long-term financing obligations including our convertible subordinated notes, operating leases for our equipment and facilities, unconditional purchase obligations for necessary raw materials and funding commitments for certain development stage enterprises. Historically, these obligations have been satisfied through cash generated from our operations or other avenues (see discussion below) and we expect that this will continue to be the case. During February 2002, we paid $50.0 million in current maturities of long-term obligations and terminated our interest rate swap for $3.2 million. During February and March 2002, we exchanged approximately 6.5 million shares of our common stock for approximately $24.6 million. Giving pro forma effect to these payments and the shares-for-notes exchanges as if they had occurred on December 31, 2001, we reduced our total contractual cash obligations as of December 31, 2001 to $123.7 million and our short-term obligations to $20.4 million. Although these obligations were scheduled to become due in 2003, we determined that there were substantial liquidity savings realizable by satisfying these obligations during the three months ending March 31, 2002. Our remaining short-term obligations of $20.4 million consist of $7.8 million for operating leases, $8.5 million for unconditional purchase obligations and $4.1 million for funding commitments for our development stage enterprises. Our operating entities are responsible for approximately $5.9 million, or 76% of the operating leases, while our development stage enterprises are responsible for $1.9 million, or 24% of the operating leases. Our unconditional purchase obligations are to secure the necessary raw goods for production of our products. Our operating and development stage enterprises are responsible for 91% and 9% of total unconditional purchase obligations, respectively. As part of Luminent's restructure plan (see our discussion above and the Footnotes to our Consolidated Financial Statements), $6.2 million in unconditional purchase obligations have been recorded as a liability and Luminent is in negotiations to cancel or renegotiate contracts that are no longer required due to its significantly reduced orders for optical components and sale projections. The remaining purchase commitments are part of our ordinary course of business. Finally, we will continue to fund our start-up activities that are complementary to our business strategy. Our remaining long-term obligations as of March 2002 of $103.3 million consist of $73.1 million of long-term financing obligations including our $65.0 million in remaining convertible subordinated notes, $22.4 million in operating leases for our equipment and facilities, $1.4 million of unconditional purchase obligations and $6.4 million for funding commitments for certain development stage enterprises. As discussed above, subsequent December 31, 2001, we exchanged approximately approximately 6.5 million shares of our common stock for approximately $24.6 million of our notes . Our notes are due in June 2003. Should the price of our common stock exceed the conversion price of the notes, or $13.52 per share, we would not be obligated to satisfy these amounts in cash, but rather with our common stock. Our remaining long-term financing obligations consist of financing obtained for capital expenditures and product expansion. Our operating leases expire at various dates through 2049. Our operating and development stage enterprises are responsible for 78% and 22% of the long-term operating lease commitments, respectively. We believe that our cash on-hand and cash flows from operations will be sufficient to satisfy our working capital, capital expenditures and research and development requirements for at least the next 12 months. However, we may require or choose to obtain additional debt or equity financing in order to finance acquisitions or other investments in our business. We will continue to devote resources for expansion and other business requirements. Our future capital requirements will depend on many factors, including acquisitions, our rate of revenue growth, the timing and extent of spending to support development of new products and expansion of sales and marketing, the timing of new product introductions and enhancements to existing products and market acceptance of our products. Additionally, following the merger with Luminent (see Overview), we increased our liquidity based on 52 Luminent's cash, cash equivalents, restricted cash and cash equivalents and short-term investments on hand as of the consummation of the merger, or $107.7 million at December 31, 2001. MARKET RISKS Market risk represents the risk of loss that may impact our Consolidated Financial Statements through adverse changes in financial market prices and rates and inflation. Our market risk exposure results primarily from fluctuations in interest rates and foreign exchange rates. We manage our exposure to these market risks through our regular operating and financing activities and have not historically hedged these risks through the use of derivative financial instruments. The term hedge is used to mean a strategy designed to manage risks of volatility in prices or interest and foreign exchange rate movements on certain assets, liabilities or anticipated transactions and creates a relationship in which gains or losses on derivative instruments are expected to counter-balance the losses or gains on the assets, liabilities or anticipated transactions exposed to such market risks. Interest Rates. We are exposed to interest rate fluctuations on our investments, short-term borrowings and long-term obligations. Our cash and short-term investments are subject to limited interest rate risk, and are primarily maintained in money market funds and bank deposits. Our variable-rate short-term borrowings are also subject to limited interest rate risk due to their short-term maturities. Our long-term obligations were entered into with fixed and variable interest rates. In connection with our $50.0 million variable-rate term loan due in 2003, we entered into a specific hedge, an interest rate swap, to modify the interest characteristics of this instrument. The interest rate swap was used to reduce our cost of financing and the fluctuations in the aggregate interest expense. The notional amount, interest payment and maturity dates of the swap match the principal, interest payment and maturity dates of the related debt. Accordingly, any market risk or opportunity associated with this swap is offset by the opposite market impact on the related debt. In February 2002, we paid off our $50.0 million term loan and terminated our interest rate swap for $3.2 million. To date, we have not entered into any other derivative instruments, however, as we continue to monitor our risk profile, we may enter into additional hedging instruments in the future. Foreign Exchange Rates. We operate on an international basis with a portion of our revenues and expenses being incurred in currencies other than the U.S. dollar. Fluctuations in the value of these foreign currencies in which we conduct our business relative to the U.S. dollar will cause U.S. dollar translation of such currencies to vary from one period to another. We cannot predict the effect of exchange rate fluctuations upon future operating results. However, because we have expenses and revenues in each of the principal functional currencies, the exposure to our financial results to currency fluctuations is reduced. We have not historically attempted to reduce our currency risks through hedging instruments; however, we may do so in the future. Inflation. We believe that the relatively moderate rate of inflation in the United States over the past few years has not had a significant impact on our sales or operating results or on the prices of raw materials. However, in view of our recent expansion of operations in Taiwan, Israel and other countries, which have experienced substantial inflation, there can be no assurance that inflation will not have a material adverse effect on our operating results in the future. 53 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements are filed as part of this Report:
PAGE ---- Report of Independent Public Accountants............................................. F-1 Consolidated Balance Sheets as of December 31, 2001 and 2000......................... F-2 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001, 2000 and 1999........................................... F-4 Consolidated Statements of Stockholders' Equity and Comprehensive Loss for each of the three years in the period ended December 31, 2001......................... F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001, 2000 and 1999........................................... F-6 Notes to Consolidated Financial Statements........................................... F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 54 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of MRV Communications, Inc.: We have audited the accompanying consolidated balance sheets of MRV Communications, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and comprehensive loss and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 MRV Communications, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Arthur Andersen LLP Los Angeles, California February 12, 2002 F-1 MRV COMMUNICATIONS, INC. Consolidated Balance Sheets - December 31, 2001 and 2000
Assets 2001 2000 ---------- ---------- (in thousands) Current assets: Cash and cash equivalents $ 164,676 $ 210,080 Short-term investments 46,696 17,766 Restricted cash and cash equivalents 9,341 56,181 Accounts receivable, net of allowance of $14,799 in 2001 and $9,480 in 2000 55,106 62,713 Inventories 57,308 77,005 Deferred income taxes 598 31,227 Other current assets 10,044 22,750 ---------- ---------- Total current assets 343,769 477,722 Property and equipment, net 72,012 72,269 Other assets: Investments 16,937 31,734 Deferred income taxes 22,631 6,209 Goodwill and other intangibles, net 395,312 504,027 Other long-term assets 13,834 5,660 ---------- ---------- 448,714 547,630 ---------- ---------- $ 864,495 $1,097,621 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-2 MRV COMMUNICATIONS, INC. Consolidated Balance Sheets - December 31, 2001 and 2000
Liabilities and Stockholders' Equity 2001 2000 ----------- ----------- (in thousands, except par value) Current liabilities: Current portion of long-term debt $ 52,226 $ 2,937 Short-term obligations 18,679 9,104 Accounts payable 48,586 56,088 Accrued liabilities 39,035 34,894 Income taxes payable 1,914 6,477 Deferred revenue 4,165 1,470 Other current liabilities 3,198 -- ----------- ----------- Total current liabilities 167,803 110,970 Long-term liabilities: Convertible subordinated notes 89,646 89,646 Long-term debt, net of current portion 8,871 60,878 Other long-term liabilities 3,737 3,980 ----------- ----------- Total long-term liabilities 102,254 154,504 Commitments and contingencies Minority interest 9,762 50,592 Stockholders' equity: Preferred stock, $0.01 par value: Authorized - 1,000 shares; no shares issued or outstanding -- -- Common stock, $0.0017 par value: Authorized - 160,000 shares Issued - 82,824 shares in 2001 and 73,327 in 2000 Outstanding - 82,776 shares in 2001 and 73,279 in 2000 141 126 Additional paid-in capital 1,125,675 1,060,650 Deferred stock compensation, net (33,077) (100,862) Accumulated deficit (497,683) (171,330) Treasury stock, 48 shares at cost in 2001 and 2000 (133) (133) Accumulated other comprehensive loss (10,247) (6,896) ----------- ----------- Total stockholders' equity 584,676 781,555 ----------- ----------- $ 864,495 $ 1,097,621 =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 MRV COMMUNICATIONS, INC. Consolidated Statements of Operations For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999 --------- --------- --------- (in thousands, except per share amounts) Revenues, net $ 332,844 $ 319,394 $ 288,524 Costs and expenses: Cost of goods sold(1) 267,389 203,371 197,442 Research and development(1) 94,813 74,078 35,319 Selling, general and administrative(1) 150,674 124,700 67,859 Amortization of goodwill and other intangibles 126,484 66,814 3,898 Restructuring costs 14,111 -- -- --------- --------- --------- 653,471 468,963 304,518 Operating loss (320,627) (149,569) (15,994) Other income (expense): Interest expense and other (9,586) (2,829) (4,500) Interest income 6,765 551 4,822 Loss on equity method investments (19,956) (7,300) -- Minority interest 11,577 796 610 --------- --------- --------- (11,200) (8,782) 932 Loss before provision (benefit) for income taxes and extraordinary gain (331,827) (158,351) (15,062) Provision (benefit) for income taxes 4,475 (5,398) (2,153) --------- --------- --------- Loss before extraordinary gain (336,302) (152,953) (12,909) Extraordinary gain on purchase of minority interest in Luminent, Inc., net of tax 9,949 -- -- --------- --------- --------- Net loss $(326,353) $(152,953) $ (12,909) ========= ========= ========= Loss per share information: Basic and diluted loss before extraordinary gain per share $ (4.40) $ (2.33) $ (0.24) ========= ========= ========= Basic and diluted net loss per share $ (4.27) $ (2.33) $ (0.24) ========= ========= ========= Basic and diluted weighted average shares outstanding 76,369 65,669 53,920 ========= ========= =========
- ---------- (1) Includes amounts relating to deferred stock compensation expense of $7.8 million and $8.3 million, $14.0 million and $13.3 million and $48.0 million and $38.4 million presented in cost of goods sold, research and development and selling, general and administrative, respectively, for the years ended December 31, 2001 and 2000. The accompanying notes are an integral part of these consolidated financial statements. F-4 MRV COMMUNICATIONS, INC. Consolidated Statements of Stockholders' Equity and Comprehensive Loss For the years ended December 31, 2001, 2000 and 1999
Accumulated Common Additional Deferred Other -------------- Paid-in Stock Accumulated Treasury Comprehensive Shares Amount Capital Compensation Deficit Stock Loss Total ------ ------ ----------- ------------ ----------- --------- ------------- --------- (in thousands) Balance at December 31, 1998 53,278 $ 91 $ 180,653 $ -- $ (5,471) $ (133) $ (711) $ 174,429 Exercise of stock options and warrants 2,156 4 2,816 -- -- -- -- 2,820 Exercise of stock warrants by Intel Corporation 800 1 7,999 -- -- -- -- 8,000 Other -- -- -- -- 3 -- -- 3 Comprehensive loss: Translation adjustments -- -- -- -- -- -- (5,528) (5,528) Net loss -- -- -- -- (12,909) -- -- (12,909) --------- Comprehensive loss -- -- -- -- -- -- -- (18,437) ------ ------ ----------- ------------ ----------- --------- ------------- --------- Balance at December 31, 1999 56,234 96 191,468 -- (18,377) (133) (6,239) 166,815 Exercise of stock options and warrants 2,896 5 7,757 -- -- -- -- 7,762 Tax benefit from exercise of stock options -- -- 11,417 -- -- -- -- 11,417 Issuance of common stock in connection with acquisitions 14,123 25 639,172 -- -- -- -- 639,197 Issuance of common stock in connection with conversion of convertible subordinated notes 26 -- 354 -- -- -- -- 354 Effect of subsidiary equity transactions -- -- 49,679 -- -- -- -- 49,679 Deferred stock compensation -- -- 160,803 (160,803) -- -- -- -- Amortization of deferred stock compensation -- -- -- 59,941 -- -- -- 59,941 Comprehensive loss: Net loss -- -- -- -- (152,953) -- -- (152,953) Translation adjustments -- -- -- -- -- -- (657) (657) --------- Comprehensive loss (153,610) ------ ------ ----------- ------------ ----------- --------- ------------- --------- Balance at December 31, 2000 73,279 126 1,060,650 (100,862) (171,330) (133) (6,896) 781,555 Issuance of common stock in connection with acquisition 1,247 2 19,719 -- -- -- -- 19,721 Issuance of common stock in a private placement 2,529 4 19,501 -- -- -- -- 19,505 Fair value of stock options issued in exchange for investment -- -- 508 -- -- -- -- 508 Issuance of common stock for purchase of Luminent, Inc.'s minority interest 5,160 9 16,845 -- -- -- -- 16,854 Exercise of stock options and warrants 561 -- 6,406 -- -- -- -- 6,406 Deferred stock compensation -- -- 7,816 (7,816) -- -- -- -- Fair value of stock options issued to a non-employee -- -- 535 -- -- -- -- 535 Forfeited stock options -- -- (6,305) -- -- -- -- (6,305) Amortization of deferred stock compensation -- -- -- 75,601 -- -- -- 75,601 Comprehensive loss: Net loss -- -- -- -- (326,353) -- (326,353) Unrealized loss on interest rate swap -- -- -- -- -- -- (3,198) (3,198) Foreign currency translation adjustment -- -- -- -- -- -- (153) (153) --------- Comprehensive loss (329,704) ------ ------ ----------- ------------ ----------- --------- ------------- --------- Balance at December 31, 2001 82,776 $141 $ 1,125,675 $ (33,077) $(497,683) $ (133) $(10,247) $ 584,676 ====== ==== =========== ========= ========= ========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 MRV COMMUNICATIONS, INC. Consolidated Statements of Cash Flows For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999 --------- --------- -------- (in thousands) Cash flows from operating activities: Net loss $(326,353) $(152,953) $(12,909) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 140,554 77,871 12,501 Amortization of deferred stock compensation expense 69,831 59,941 -- Allowance for doubtful accounts 5,654 3,833 1,416 Deferred income taxes 15,134 (25,205) (1,302) Realized gain on investment -- (50) -- Extraordinary gain on purchase of minority interest of Luminent, Inc. (9,949) -- -- (Gain) loss on disposition of property and equipment (178) 16 -- Tax benefit from stock option exercises -- 11,417 -- Impairment loss on property and equipment 7,787 -- -- Loss on equity method investments 19,956 -- -- Minority interests' share of income (11,557) (796) (610) Changes in operating assets and liabilities, net of effects from acquisitions: Restricted cash and cash equivalents 46,840 -- -- Accounts receivable 1,953 4,949 (7,457) Inventories 19,697 (28,869) 12,075 Refundable income taxes -- 3,216 -- Other assets 4,532 (12,020) (519) Accounts payable (7,502) 28,939 3,698 Accrued liabilities 1,321 4,890 1,715 Income taxes payable (4,563) (5,154) (3,661) Deferred revenue 2,695 175 (2,920) --------- --------- -------- Net cash provided by (used in) operating activities (24,148) (29,800) 2,027 Cash flows from investing activities: Purchases of property and equipment (19,923) (23,977) (8,053) Proceeds from sale of property and equipment 453 1,520 -- Purchases of investments (33,581) (21,566) (19,242) Proceeds from maturity of investments -- 97,704 38,293 Cash used in acquisitions, net of cash received -- (44,517) (4,773) --------- --------- -------- Net cash provided by (used in) investing activities (53,051) 9,164 6,225 Cash flows from financing activities: Net proceeds from equity transaction of Luminent, Inc. -- 132,290 -- Net proceeds from issuance of common stock 25,911 7,762 10,820 Borrowings on short-term obligations 39,034 35,887 -- Payments on short-term obligations (29,459) (35,949) -- Principal payments on capital lease obligations (148) (163) 94 Borrowings on long-term debt -- 62,696 -- Payments on long-term debt (2,570) (4,002) -- Other long-term liabilities (820) -- -- --------- --------- -------- Net cash provided by financing activities 31,948 198,521 10,914 Effect of exchange rate changes on cash and cash equivalents (153) (2,135) (5,528) Net (decrease) increase in cash and cash equivalents (45,404) 175,750 13,638 Cash and cash equivalents, beginning of year 210,080 34,330 20,692 --------- --------- -------- Cash and cash equivalents, end of year $ 164,676 $ 210,080 $ 34,330 ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 MRV COMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 2001 1. Description of Business MRV Communications, Inc. (a Delaware corporation, MRV or the Company) creates, acquires, finances and operates companies, and through them, designs, develops, manufactures and markets products, which enable high-speed broadband communications. MRV concentrates on companies and products devoted to optical active and passive components, switches and routers, remote device management and network physical infrastructure equipment. MRV's strategy involves creating value for its stockholders and the other minority shareholders of its subsidiaries by helping the companies grow and access the public and private capital markets. In November 2000, Luminent, a publicly owned subsidiary, completed an initial public offering of its common stock, selling 12.0 million shares at $12.0 per share, raising net proceeds of approximately $132.3 million. As of December 31, 2000, MRV owned 92 percent of the outstanding capital stock of Luminent. In December 2001, MRV completed its acquisition of Luminent's eight percent minority interest and merged Luminent back into MRV (see Note 2, Transactions with Stock of a Subsidiary). 2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of MRV and its wholly-owned and majority owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. MRV consolidates the financial results of related development stage enterprises when it has effective control, voting control or has provided the entity's working capital. When others invest in these enterprises reducing its voting control below 50 percent, MRV discontinues consolidation and uses the equity method of accounting for these investments. Foreign Currency Translation Transactions originally denominated in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation". Increased or decreases in the resulting assets or liabilities which are denominated in a foreign currency are recorded as foreign currency gains and losses and are included in other income (expense) in determining net loss. Transaction Gains or Losses For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues, expenses and cash flows are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive loss. Revenue Recognition MRV generally recognizes product revenue, net of sales discounts, returns and allowances, when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered probable. Products are generally shipped "FOB shipping point" with no right of return. Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. MRV's major revenue-generating products consist of: passive and active optical components; switches and routers; remote device management; and network physical infrastructure equipment. Revenue generated through the sales of services and systems support has been insignificant. MRV generally warrants its products against defects in materials and workmanship for one year. The estimated cost of warranty obligations and sales returns and other allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience. F-7 Cash, Cash Equivalents and Restricted Cash MRV considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. MRV maintains cash balances and investments in highly qualified financial institutions. At various times such amounts are in excess of insured limits. In connection with MRV's its long-term debt and interest rate swap agreement (see Notes 9 and 10) as of December 31, 2000, $56.2 million in cash was restricted as the term loan and the swap expire in 2003. In February 2002, MRV repaid the long-term debt and terminated the swap, and as such, the restricted cash balance of $53.4 million has been presented in Cash and Cash Equivalents and the related long term debt has been reflected as a current liability as of December 31, 2001. Restricted cash of $9.3 million as of December 31, 2001 represents cash restricted against short-term and long-term obligations. Investments MRV accounts for its investments under the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As of December 31, 2001 and 2000, short-term investments consisted principally of U.S. Treasury Bonds, Municipal Bonds and Corporate Bonds. As defined by SFAS No. 115, MRV has classified these investments in debt securities as "held-for-maturity" investments and all investments are recorded at their amortized cost basis, which approximated their fair value at December 31, 2001 and 2000. As of December 31, 2001 and 2000, all held-for-maturity investments were short-term expiring at various dates through the following year. Inventories Inventories are stated at the lower of cost or market and consist of material, labor and overhead. Cost is determined by the first-in, first-out method. Inventories consisted of the following as of December 31, 2001 and 2000 (in thousands):
2001 2000 ------- ------- Raw materials $15,444 $36,278 Work-in-progress 19,230 17,721 Finished goods 22,634 23,006 ------- ------- $57,308 $77,005 ======= =======
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 related assets, ranging from three to thirty-three years. Maintenance and repairs are charged to expense as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. Property and equipment consisted of the following as of December 31, 2001 and 2000 (in thousands):
2001 2000 --------- --------- Property and equipment, at cost: Land $ 3,521 $ 3,559 Building 19,448 19,563 Machinery and equipment 67,713 57,369 Furniture and fixtures 12,347 12,824 Computer hardware and software 12,084 10,823 Leasehold improvements 7,870 7,221 Construction in progress 1,065 3,815 --------- --------- 124,048 115,174 Less - accumulated depreciation and amortization (52,036) (42,905) --------- --------- $ 72,012 $ 72,269 ========= =========
F-8 Goodwill and Other Intangibles Intangible assets represent intellectual property acquired, purchased intangible assets and the excess acquisition cost over the fair value of tangible and identified intangible net assets of the businesses acquired (goodwill). Purchased intangible assets include patents, assembled work forces, customer contracts and goodwill. Goodwill is amortized using the straight-line method over five years. Other intangible assets are amortized using the straight-line method over estimated useful lives ranging from one to 12 years. The components of intangible assets as of December 31, 2001 and 2000 are as follows (in thousands):
2001 2000 --------- --------- Patents $ 64,600 $ 64,600 Assembled work forces 1,790 1,790 Customer contracts 720 720 Goodwill 510,426 510,426 --------- --------- 577,536 577,536 Less - accumulated amortization (182,224) (73,509) --------- --------- $ 395,312 $ 504,027 ========= =========
Impairment of Intangibles and Other Long-Lived Assets MRV evaluates its long-term assets, such as goodwill and other intangibles and property and equipment, for impairment at the acquired business unit level whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. MRV considers events or changes such as product discontinuance, plant closures, product dispositions, a history of operating losses or other changes in circumstances to indicate that the carrying amount may not be recoverable. The carrying value of an asset is considered impaired when the anticipated undiscounted cash flow from such assets is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined using the anticipated cash flows discounted at a rate based on MRV's weighted average costs of capital, which represents the blended after-tax costs of debt and equity. For the year ended December 31, 2001, MRV determined that $14.2 million of goodwill and intangibles and $9.2 million of equity method investments were impaired. These amounts were determined to be impaired using the method discussed above. The remaining carrying values of intangibles and investments were determined to be realizable. This process and analysis requires management to use significant judgment and apply assumptions regarding the future cash flows expected to result from the use of the assets and the eventual disposition of such assets. While management believes the carrying value of its assets are realizable based on its analysis, changes in the assumptions used in its models could produce significantly different results. This analysis has been performed using the guidance prescribed in SFAS No, 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", see Note 2, Recently Issued Accounting Standards, for the anticipated impact of the adoption of SFAS No. 142. The impairment of intangibles of $14.2 million has been recorded as amortization of goodwill and other intangibles and the $9.2 million has been recorded as other income (expense) in the accompanying consolidated statements of operations for the year ended December 31, 2001. There were no impairment losses recorded for the years ended December 31, 2000 and 1999, respectively. Fair Value of Financial Instruments MRV's financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, investments, accounts receivable, accounts payable, accrued liabilities and short-term debt obligations are carried at cost, which approximates their fair market value due to the short-term nature of those instruments. The fair value of long-term debt obligations is estimated based on current interest rates available to MRV for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying values of these obligations approximate their fair values. Software Development Costs In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," development costs related to software products are expensed as incurred until the technological feasibility of the product has been established. Technological feasibility in MRV's circumstances occurs when a working model is completed. After technological feasibility is established, additional costs would be capitalized. F-9 MRV believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility, and, accordingly, no software development costs have been capitalized to date. Advertising Costs Advertising costs are charged to expense as incurred. Income Taxes Deferred income tax assets and liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the statutory marginal income tax rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. Loss Per Share Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss by the sum of the weighted average number of common shares outstanding, plus all additional common shares that would have been outstanding if potentially dilutive securities or common stock equivalents had been issued. Options to purchase 12.4 million, 7.1 million and 5.5 million shares were not included in the computation of years 2001, 2000 and 1999 diluted loss per share because such options were considered anti-dilutive. Warrants to purchase 1.5 million, 2.4 million and 3.3 million shares were not included in the computation of years 2001, 2000 and 1999 diluted loss per share because such warrants were considered anti-dilutive. Shares associated with MRV's $89.6 million outstanding convertible subordinated notes were not included in the computation of loss per share as they are anti-dilutive. The following schedule summarizes the information used to compute earnings per share (in thousands, except per share data) for each of the three years in the period ended December 31, 2001:
2001 2000 1999 --------- --------- -------- Loss before extraordinary item $(336,302) $(152,953) $(12,909) Extraordinary item - gain on purchase of minority interest, net of tax 9,949 -- -- --------- --------- -------- Net loss $(326,353) $(152,953) $(12,909) ========= ========= ======== Weighted average number of shares used to compute basic and diluted loss per share 76,369 65,669 53,920 ========= ========= ======== Basic and diluted loss per share before extraordinary item $ (4.40) $ (2.33) $ (0.24) Extraordinary gain per basic and diluted share 0.13 -- -- --------- --------- -------- Basic and diluted loss per share $ (4.27) $ (2.33) $ (0.24) ========= ========= ========
Stock-Based Compensation MRV accounts for its employee stock plan under the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." MRV accounts for option and warrant grants to non-employees using the guidance prescribed by SFAS No. 123, FASB Interpretation No. (FIN) 44, "Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB Opinion No. 25)," and Emerging Issue Task Force (EITF) No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods, or Services," whereby the fair value of such option and warrant grants are measured using the fair value at the earlier of the date at which the non-employee's performance is completed or a performance commitment is reached. Deferred stock compensation expense is being amortized using the graded vesting method over four years. Using this method, approximately 57 percent, 26 percent, 13 percent and 4 percent, respectively, of each option's compensation expense is amortized in each of the four years following the date of grant. Deferred stock compensation generated during 2001 was $7.0 million generated through acquisitions. Deferred stock F-10 compensation generated during 2000 was $148.3 million of which $94.1 million was generated through acquisitions (see Note 4) and $54.2 million was generated through stock options granted to Luminent's Chief Executive Officer and its Chief Financial Officer (see Note 13). Total deferred stock compensation expense for the years ended December 31, 2001 and 2000 was $69.8 million and $60.0 million, respectively. There was no deferred stock compensation expense incurred for the year ended December 31, 1999. Transactions with Stock of a Subsidiary At the time a subsidiary sells its stock to unrelated parties at a price in excess of its book value, the book value of MRV's investment in that subsidiary increases. If at that time, the subsidiary is not a newly-formed, non-operating entity, nor a research and development, start-up or development stage company, nor does MRV contemplate subsequent capital transactions or intend to spin-off the subsidiary to stockholders, MRV records the increase in its investment as a gain in Other Income, net in its Consolidated Statements of Operations. Otherwise, the increase in its investment is considered as additional paid-in capital, which is included in Effect of Subsidiary Equity Transactions in MRV's Consolidated Statements of Stockholders' Equity. On November 9, 2000, Luminent, a wholly-owned subsidiary of MRV, issued 12.0 million shares of its common stock for $12.0 per share, or $144.0 million, to complete its Initial Public Offering (IPO). As part of MRV's plan to spin-off Luminent to MRV stockholders, the purchase price in excess of its book value, or $49.7 million has been included in Effect of Subsidiary Equity Transactions in MRV's Consolidated Statements of Stockholders' Equity for the year ended December 31, 2000. In September 2001, MRV and Luminent jointly announced that MRV intended to acquire Luminent's eight percent minority interest (established through Luminent's November 2000 IPO), and merge Luminent back into MRV through a short-form merger. It was determined that each Luminent stockholder would receive 0.43 shares of MRV common stock in exchange for their Luminent common stock. Additionally, all stock options to purchase Luminent common stock would be converted into stock options to purchase MRV's common stock based on the same exchange ratio. The merger was completed in December 2001. MRV exchanged 5.2 million shares of common stock for 12.0 million shares of Luminent common stock. MRV's common stock had a fair value of $16.9 million, based on the average market price five days before and after the terms were determined. MRV recorded an extraordinary gain from the merger of $9.9 million, net of tax, which equals to the excess minority interest reduced by the fair value paid, net of the costs incurred to effect the merger. Recently Issued Accounting Standards In June 2001, the FASB approved two pronouncements: SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", which provide guidance on the accounting for business combinations to be accounted for using the purchase method. Under the new rules, goodwill will no longer be subject to amortization over its useful life. Rather, goodwill will be subject to at least an annual impairment assessment. This assessment is a fundamentally different two-step approach and is based on a comparison between a reporting unit's fair value and its carrying value. Certain intangible assets have newly defined criteria and will be accounted for separately from goodwill and will continue to be amortized over their useful lives. Under the new impairment assessment, fair value is more focused on market value or market capitalization. That is, fair value is determined, based on, among other factors, the current market value of MRV and its reporting units. As of December 31, 2001, MRV's common stock was trading at amounts significantly lower than its book value per share. Based on this current environment, management would anticipate recording, upon adoption of this standard during the first quarter of 2002, significant impairment losses, although, such amounts have not be determined. Should market values dramatically improve during the first half of 2002, impairment losses, if any, could be reduced or eliminated. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the obligation is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. This statement is effective on January 1, 2003 with earlier application encouraged. The Company is currently reviewing this statement and has not yet determined its impact, if any, on our financial position, results of operations or cash flows. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The F-11 Company will adopt this statement on January 1, 2002 and is currently reviewing the statement to determine its impact, if any, on the Company's financial position, results of operations or cash flows. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 3. Restructuring and One-Time Charges During the year ended December 31, 2001, the management of Luminent, a subsidiary of MRV, approved and implemented a restructuring plan and other actions in order to adjust operations and administration as a result of the dramatic slowdown in the communications equipment industry generally and the optical components sector in particular. Major actions primarily involved the reduction of facilities in the U.S. and in Taiwan, the reduction of workforce, the abandonment of certain assets, the cancellation and termination of purchase commitments and the write-down of certain inventory. These actions are expected to realign the business based on current and near-term growth rates. All of these actions are expected to be completed by the second quarter of 2002. Restructuring Charges During the year ended December 31, 2001, Luminent recorded restructuring charges totaling $20.3 million. Costs for restructuring activities are limited to either incremental costs that directly result from the restructuring activities and provide no future revenue generating benefit, or costs incurred under contractual obligations that existed before the restructuring plan and will continue with either no future revenue generating benefit or become a penalty incurred for termination of the obligation. Employee severance costs and related benefits of $1.3 million are related to approximately 600 layoffs during the year ended December 31, 2001, bringing the Luminent's total workforce to approximately 1,100 employees as of December 31, 2001. Affected employees came from all divisions and areas of Luminent. The majority of affected employees were in the manufacturing group. In addition to the costs associated with employee severance, Luminent identified a number of assets, including leased facilities and equipment that are no longer required due to current market conditions, operations and expected growth rates. The net facilities costs related to closed and abandoned facilities costs of approximately $2.4 million for the year ended December 31, 2001, are primarily related to future obligations under operating leases. The total lease charge is net of approximately $3.7 million in expected sublease revenue on leases that Luminent cannot terminate. In connection with these closed and abandoned facilities, Luminent has recorded asset impairment charges of $10.4 million for the year ended December 31, 2001, consisting of leasehold improvements and certain manufacturing equipment to write-down the value of this equipment. Due to its specialized nature, Luminent has determined that these assets have minimal or no future benefit and has recorded a provision reflecting the net book value relating to these assets. Purchase commitments of $6.2 million recorded in cost of sales, for the year ended December 31, 2001, are to cancel or renegotiate outstanding contracts for materials and capital assets that are no longer required due to Luminent's significantly reduced orders for optical components and sales projections over the next twelve months. As of December 31, 2001, the restructuring liability has been reduced by cash payments of $1.2 million for the year ended December 31, 2001, and non-cash related charges of $10.4 million for the year ended December 31, 2001, resulting in an ending liability balance of $8.7 million. Luminent expects to utilize the remaining balance by the end of the second quarter of 2002. Luminent expects that it will spend approximately $8.7 million through the next two quarters to carry out the plan, which will be paid through cash and cash equivalents and through operating cash flows. Luminent began to realize savings related to the workforce reductions in late 2001 with estimated ongoing quarterly net savings of $2.4 million. In addition, Luminent will realize reduced depreciation charges of approximately $384,000 per quarter through December 2004 and $163,000 per quarter through December 2005 for facility costs. These savings are F-12 expected to be realized as reductions in cost of sales, research and development and selling, general and administrative expenses. A summary of the restructuring costs for the year ended December 31, 2001 consist of the following (in thousands):
Original Additional Remaining Provision Provision Utilized Balance --------- ---------- -------- --------- Exit costs Asset impairment $ 9,544 $ 897 $10,441 $ -- Closed and abandoned facilities 1,125 1,280 88 2,317 Purchase commitments 2,386 3,787 468 5,705 ------- ------ ------- ------ 13,055 5,964 10,997 8,022 Employee severance costs 1,281 -- 626 655 ------- ------ ------- ------ $14,336 $5,964 $11,623 $8,677 ======= ====== ======= ======
A summary of the restructuring costs by line item for the year ended December 31, 2001 consist of the following (in thousands):
2001 -------- Cost of sales $ 6,173 Restructuring costs 14,111 Other income (expense) 16 -------- $ 20,300 ========
One-Time Charges As a result of the significant negative economic and industry trends impacting Luminent's expected sales over the next twelve months, Luminent also recorded one-time charges of $29.2 million to write-down the remaining book value of certain inventory related to certain transceivers, duplexors, and triplexors that are previous generation products to its realizable value during the year ended December 31, 2001. The one-time charges to write-down inventory were subsequently reduced by $8.1 million during the year ended December 31, 2001 to reflect the sale of previously written-off items. F-13 4. Business Acquisitions The following table presents information regarding acquisitions by MRV in each of the three years in the period ended December 31, 2001. MRV completed no material acquisitions for the years ended December 31, 2001 and 1999, excluding the acquisition of the Luminent minority interest discussed in Note 2. All of these acquisitions were accounted for under the purchase method of accounting, and the results of operations of each business have been included in the accompanying consolidated statements of operations from the date of acquisition.
Date of Total Form of Consideration and Acquired Company Acquisition Consideration Other Notes to Acquisition - ---------------- ----------- ------------- -------------------------- Year Ended December 31, 2000 - ---------------------------- Fiber Optic Communications, Inc. April 24, 2000 $309.7 million $48.6 million in cash and 5.4 million shares of common stock and options issued; approximately 97 percent of capital stock assumed; goodwill recorded of $261.5 million; deferred stock compensation recorded of $14.1 million. Jolt Limited May 1, 2000 $57.7 million 1.9 million shares of common stock and options issued; 100 percent of capital stock assumed; goodwill and intangibles recorded of $33.7 million; deferred stock compensation recorded of $25.0 million. Quantum Optech Inc. July 12, 2000 $36.1 million 1.2 million shares of common stock and options issued; 100 percent of capital stock assumed; goodwill recorded of $27.8 million; deferred stock compensation recorded of $2.7 million. AstroTerra Corporation July 12, 2000 $160.3 million 2.4 million shares of common stock and options issued; 100 percent of capital stock assumed; goodwill and intangibles recorded of $108.4 million; deferred stock compensation recorded of $50.0 million. Optronics International Corp. July 21, 2000 $123.9 million 4.2 million shares of common stock and options issued; approximately 99 percent of capital stock assumed; goodwill recorded of $99.4 million; deferred stock compensation recorded of $13.4 million. Others Various $16.5 million 507,000 shares of common stock issued; 100 percent of capital stock assumed; goodwill recorded of $14.9 million; deferred stock compensation recorded of $1.4 million.
On April 24, 2000, MRV completed the acquisition of approximately 97 percent of the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of China corporation. Fiber Optic Communications is a manufacturer of passive fiber optic components for Wavelength Division Multiplexing. Under the terms of the purchase agreement, Fiber Optic Communications shareholders received approximately $48.6 million in cash and approximately 4.7 million shares of MRV common stock and options to purchase 680,000 shares of MRV common stock for a total purchase price of approximately $309.7 million. The issuance price of the MRV common stock was approximately $53 per share, which was determined based on the average market price five days before and after the terms were agreed upon. The options to purchase MRV common stock are exercisable at $3.00 per share, have an aggregate intrinsic value of $14.1 million, and vest over a four-year period. The acquisition is being accounted for using the purchase method of accounting. The excess purchase price paid over the fair value of the net identifiable assets acquired of $261.5 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. The deferred compensation is being amortized using the graded vesting method over 4 years. F-14 On May 1, 2000, MRV completed the acquisition of all of the outstanding capital stock of Jolt Limited, an Israeli corporation. Jolt designs, manufactures and sells multi-port wireless optics communications equipment. Under the terms of the purchase agreement, shareholders received approximately 1.1 million shares of MRV common stock. In addition, the employees of Jolt received options to purchase approximately 849,000 shares of common stock of MRV. The purchase price aggregated approximately $57.7 million. The issuance price of the common stock was approximately $31 per share, which was determined based on the average market price five days before and after the terms of the acquisition were agreed upon. The options to purchase common stock are exercisable at $6 per share, have an aggregate intrinsic value of $25.0 million, and vest over an employment period of four years. The acquisition is being accounted for using the purchase method of accounting. The excess purchase price paid over the fair value of the net identifiable assets acquired of $33.7 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. The deferred compensation of approximately $25.0 million is being amortized using the graded vesting method over four years. On July 12, 2000, MRV completed the acquisition of all of the outstanding capital stock of Quantum Optech Inc., a Republic of China corporation. Quantum Optech is a manufacturer of optical thin film coating and filters for Dense Wavelength Division Multiplexing. Under the terms of the purchase agreement, Quantum Optech shareholders received approximately 1.0 million shares of MRV common stock and options to purchase approximately 160,000 shares of MRV common stock for a total purchase price of approximately $36.1 million. The issuance price of the MRV common stock was approximately $30 per share, which was determined based on the average market price five days before and after the terms were agreed upon. The options to purchase MRV common stock are exercisable at $3.00 per share, have a fair value of $4.0 million, of which unvested options have an intrinsic value of $2.7 million and vested options have a fair value of $1.3 million, and the remaining vest over a four-year period. The excess purchase price paid over the fair value of the net identifiable assets acquired of $27.8 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. The deferred compensation is being amortized using the graded vesting method over 4 years. On July 12, 2000, MRV completed the acquisition of AstroTerra, a California corporation that develops and manufactures free-space optical wireless communication systems to connect data and telecommunications networks. MRV exchanged approximately 1.6 million shares of its common stock for all of the outstanding capital stock of AstroTerra. In addition, the employees of AstroTerra received options to purchase approximately 809,000 shares of common stock of MRV. The purchase price aggregated approximately $160.3 million. The issuance price of the common stock was approximately $65 per share, which was determined based on the average market price five days before and after the terms of the agreement were agreed upon. The options to purchase common stock are exercisable at approximately $3 per share, have a fair value of approximately $50.0 million and vest over an employment period of four years. The deferred compensation is being amortized using the graded vesting method over four years. The excess purchase price paid over the fair value of the net identifiable assets acquired of $108.4 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. On July 21, 2000, MRV completed the acquisition of approximately 99 percent of the outstanding capital stock of Optronics International Corp., a Republic of China corporation. Optronics International is a manufacturer of high temperature semiconductor lasers, transceivers and detectors for optical networks. Under the terms of the purchase agreement, Optronics International shareholders received approximately 3.4 million shares of MRV common stock and options to purchase approximately 800,000 shares of MRV common stock for a total purchase price of approximately $123.9 million. The issuance price of the MRV common stock was approximately $30 per share, which was determined based on the average market price five days before and after the terms were agreed upon. The options to purchase MRV common stock are exercisable at $3.00 per share, have a fair value of $20.0 million, of which unvested options have an intrinsic value of $13.4 million and vested options have a fair value of $6.6 million, and the remaining vest over a four-year period. The acquisition is being accounted for using the purchase method of accounting. The excess purchase price paid over the fair value of the net identifiable assets acquired of $99.4 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. The deferred compensation is being amortized using the graded vesting method over 4 years. The purchase price of Fiber Optic Communications, Jolt, Quantum Optech, AstroTerra, Optronics International and Others were allocated as follows (in thousands, unaudited): Purchase price $704,241 Allocation of purchase price: Net tangible assets 51,902 Deferred stock compensation 106,602 Goodwill and other intangibles 545,737
The results of operations of these acquisitions have been included in MRV's consolidated financial statements from the date of acquisition. The following unaudited pro forma financial information presents the combined results of operations of these acquisitions as if the acquisitions had occurred as of January 1, 1999, giving effect to certain F-15 adjustments, including amortization of goodwill and other intangibles and deferred stock compensation charges. The unaudited pro forma share data assumes the shares issued in connection with these acquisitions were outstanding as of January 1, 1999 (in thousands, except per share amounts, unaudited).
December 31, ------------------------- 2000 1999 --------- --------- Pro forma revenue $ 335,486 $ 322,645 Pro forma net loss $(143,044) $(115,775) Pro forma basic and diluted net loss per share $ (1.83) $ (1.75) Pro forma basic and diluted weighted average shares outstanding 77,996 66,247
Acquisition-Related Unearned Stock Compensation During 2001 and 2000, MRV recorded acquisition-related purchase consideration of $7.1 million and $94.1 million, respectively, as unearned stock-based compensation, in accordance with FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." This amount represents the portion of the purchase consideration related to shares issued contingent on continued employment of certain employee stockholders and the intrinsic value of stock options assumed that are earned as future services are provided by employees. The compensation is being recognized over the related employment period using the graded vesting method. A total of $33.2 million and $43.7 million of expense was recognized for 2001 and 2000, respectively, relating to these acquisitions. 5. Investments in Subsidiaries The following table presents information regarding investments made by MRV in subsidiaries accounted for under the equity method of accounting or consolidated. Subsidiaries in which MRV owns greater than 50 percent ownership or exercises control have been consolidated in the accompanying consolidated financial statements.
Subsidiary Ownership % Form of Consideration(5) - ---------- ------------- ------------------------ Consolidated Subsidiaries - ------------------------- EDSLan SRL 87%(1) Purchased an additional 7 percent ownership in 2001 for approximately $1.7 million; purchased an additional 10 percent ownership in 2000 for approximately $1.5 million; purchased an additional 10 percent ownership in 1999 for approximately $1.5 million; purchased an additional 10 percent ownership in 1997 for approximately $500,000; purchased 50 percent ownership in 1996 for approximately $1.1 million. Tecnonet SRL 60%(2) Purchased an additional 10 percent ownership in 1999 for approximately $600,000; purchased 50 percent ownership in 1998 for approximately $3.1 million. RDS 75% Purchased an additional 12.5 percent in 2001 for approximately $2.0 million. Purchased an additional 12.5 percent ownership in 1999 for approximately $2.4 million; purchased 50 percent ownership in 1998 for approximately $8.0 million. Charlotte's Networks 92%(3) Issued 1.0 million shares of MRV common stock valued at approximately $61.5 million for approximately 10 percent in 2000. Equity Method Subsidiaries - -------------------------- RedC Optical 35% $5.0 million in cash and issued 150,000 shares of MRV common stock valued at approximately $11.5 million for approximately 35 percent in 2000. Others Various(4) Issued 646,000 shares of MRV common stock valued at approximately $16.7 million for ownership interest in various non-consolidated equity investments.
F-16 - ----------------- (1) MRV receives 97 percent of EDSLan's profits or losses from the date of each investment. (2) MRV receives 90 percent of Tecnonet's profits or losses from the date of each investment. (3) MRV's ownership on a fully diluted basis (assuming exercise of all stock options) is approximately 53 percent. (4) Represents various investments, all of which are less than 50 percent ownership and not consolidated. During 2001, MRV recorded $9.2 million in impairment losses relating to these investments (see Note 2). (5) The purchase price for each of these acquisitions is based on the common stock and cash consideration provided. The issuance prices of MRV common stock used in the calculation of the purchase price is based on the average market price five days before and after the terms were agreed upon. Income and losses from non-consolidated equity method subsidiaries are included in "Other income (expense)" in the accompanying consolidated statements of operations. MRV is obligated to provide funding to certain of these investments. As of December 31, 2001 the remaining contractual obligation is $10.6 million. 6. Accrued Liabilities Accrued liabilities as of December 31, 2001 and 2000, consisted of the following (in thousands):
2001 2000 ------- ------- Payroll and related $10,428 $16,851 Restructuring 8,677 -- Other 19,930 18,043 ------- ------- $39,035 $34,894 ======= =======
7. Income Taxes The provision (benefit) for income taxes for the three years in the period ended December 31, 2001 is as follows (in thousands):
2001 2000 1999 -------- -------- ------- Current Federal $(12,454) $ 7,344 $(2,139) State (2,196) 5,622 (413) Foreign 4,918 6,841 1,701 -------- -------- ------- (9,732) 19,807 (851) Deferred Federal 11,278 (17,354) (1,487) State 3,942 (7,137) 45 Foreign (1,013) (714) 140 -------- -------- ------- 14,207 (25,205) (1,302) -------- -------- ------- $ 4,475 $ (5,398) $(2,153) ======== ======== =======
The income tax provision (benefit) differs from the amount computed by applying the federal statutory income tax rate to income before taxes as of December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 ----- ----- ----- Income tax provision (benefit, at statutory federal rate (34%) (34%) (34%) State and local income taxes, net of federal income tax effect (6) (6) (6) Permanent differences 28 30 15 Research and development credit -- -- (6) Foreign taxes at rates different than domestic rates (2) 3 17 Change in valuation allowance 15 10 -- ----- ----- ----- 1% 3% (14%) ===== ===== =====
F-17 The components of deferred income taxes as of December 31, 2001 and 2000 are as follows (in thousands):
2001 2000 -------- -------- Allowance for doubtful accounts $ 2,239 $ 2,083 Inventory reserve 11,153 6,133 Warranty reserve 1,241 647 Deferred stock compensation -- 6,630 Net operating losses -- 29,014 Accrued liabilities 6,108 2,158 Other 549 1,463 -------- -------- 21,290 48,128 Valuation allowance (20,692) (16,901) -------- -------- Net short-term deferred income tax assets 598 31,227 Net operating losses 34,903 -- Depreciation and amortization 7,695 6,209 Investments 3,674 -- Other 6,527 -- -------- -------- 52,799 6,209 Valuation allowance (30,168) -- -------- -------- Net long-term deferred income tax assets 22,631 6,209 -------- -------- $ 23,229 $ 37,436 ======== ========
Realization of the net deferred tax assets is dependent on MRV's ability to carry losses back to prior periods or on generating sufficient taxable income during the future periods in which temporary differences will reverse. Management reviews its deferred tax assets and has provided a valuation allowance based on its assessment of the expected future benefit to be ultimately received from each asset identified. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. As of December 31, 2001, MRV had federal and state net operating loss carryforwards available of $106.4 million and $156.5 million, respectively. For the year ended December 31, 2001, MRV generated additional federal and state net operating losses of $46.4 million and $48.3 million, respectively. For federal and state income tax purposes, the net operating losses are available to offset future taxable income through 2021 and 2011, respectively. In 1995, MRV, through a subsidiary in Israel, qualified for a program under which it is eligible for a tax exemption on its income for a period of ten years from the beginning of the benefits period. This benefit is due to expire in 2006. Due to operating losses at this subsidiary, no tax benefit was received in 2001 or 2000. MRV received a tax benefit of approximately $300,000 in 1999. MRV does not provide United States federal income taxes on the undistributed earnings of its foreign operations. MRV's policy is to leave the income permanently invested in the country of origin. Such amounts will only be distributed to the United States to the extent any federal income tax can be fully offset by foreign tax credits. 8. Short-Term Obligations Short-term obligations consist of secured and unsecured lines of credit, short-term loans and notes entered into with certain financial institutions. As of December 31, 2001 and 2000, these short-term obligations totaled $18.7 million and $9.1 million, respectively. Certain assets of MRV's subsidiaries have been pledged as collateral on these borrowings. The weighted average interest rate on these obligations at December 31, 2001 and 2000 was 2.4 percent and 6.1 percent, respectively. These obligations are incurred and settled in the local currencies of the respective subsidiaries. As of December 31, 2001, MRV had approximately $9.3 million of available short-terms borrowings. F-18 9. Long-Term Debt Long-term debt consisted of the following as of December 31, 2001 and 2000 (in thousands):
2001 2000 -------- -------- Secured notes payable to financial institutions bearing interest ranging from 6.5 percent to 18.0 percent, payable in monthly and quarterly installments of principal and interest through October 2012 $ 11,097 $ 13,815 Term loan with a financial institution bearing interest at 7.0 percent as of December 31, 2001, paid in full in February 2002 50,000 50,000 -------- -------- 61,097 63,031 Less - current portion (52,226) (2,937) -------- -------- $ 8,871 $ 60,878 ======== ========
The following summarizes the required principal payments on long-term debt as of December 31, 2001 (in thousands): Year Ending December 31, 2002 $52,226 2003 2,433 2004 1,986 2005 1,653 2006 1,443 Thereafter 1,356 ------- $61,097 =======
Certain assets of MRV totaling $38,000, primarily through its foreign subsidiaries, have been pledged as collateral under these obligations. 10. Interest Rate Swap MRV entered into an interest rate swap in the second quarter of 2000 to effectively change the interest rate characteristics of its $50.0 million variable-rate term loan presented in Long-Term Debt, with the objective of fixing its overall borrowing costs. The swap was entered into concurrently with the issuance of the related debt. The notional amount, interest payment and maturity dates of the swap match the principal, interest payment and maturity dates of the related debt. Accordingly, any market risk or opportunity associated with this swap is offset by the opposite market impact on the related debt. The interest rate swap is considered to be 100 percent effective and is therefore recorded using the short-cut method. The swap is designated as a cash flow hedge and changes in fair value of the debt are generally offset by changes in fair value of the related security, resulting in negligible net impact. The gain or loss from the change in fair value of the interest rate swap as well as the offsetting change in the hedged fair value of the long-term debt are recognized in Other Comprehensive Loss. Prior to the adoption of SFAS 133, the interest rate swap related to this long-term debt was not recognized in the balance sheet, nor were the changes in the market value of the debt. The net settlements of the swap are included in Interest expense and other. For the year ended December 31, 2001, the Company recorded an unrealized loss on its interest rate swap of $3.2 million included in Other Comprehensive Loss. At December 31, 2001, the interest rate swap had a fair value of $3.2 million included in Other Current Liabilities. In February 2002, MRV paid off the Long-Term Debt of $50.0 million and terminated the swap. 11. Convertible Subordinated Notes In June 1998, MRV completed a private placement of $100.0 million principal amount five-year, convertible subordinated notes (the Notes) of which $10.0 million were redeemed in February 2002. The Notes bear interest at five percent per year, payable semi- annually, and are convertible into common stock at the option of the holders. The conversion rate is 73.94 shares of common stock per $1,000 principal amount of the Notes, equivalent to a conversion price of $13.52 per share, an initial premium above market price. The conversion rate is subject to adjustment in certain circumstances, including dividends payable in common stock, issuance of stock rights to all holders of common stock or stock splits or distributions to common stockholders in connection with a tender offer. If a change in control, as defined, occurs, the holders of the Notes have the right to require MRV to repurchase the Notes at face value along with any interest accrued. MRV has the right, after June 2001, to redeem the Notes at 102 percent of face value, and after June 2002 for 101 percent of face value. The Notes are not entitled to the benefits of any sinking fund. F-19 In connection with the private placement, MRV incurred costs of $4.0 million. These costs are being amortized using the effective interest method over five years, the life of the Notes. Amortization expense for the years ended December 31, 2001, 2000 and 1999 was $767,000, $723,000 and $681,000, respectively. 12. Commitments and Contingencies Lease Commitments The Company leases all of its facilities and certain equipment under noncancellable capital and operating lease agreements expiring in various years through 2049. The aggregate minimum annual lease payments under leases in effect on December 31, 2001 were as follows (in thousands):
Operating Leases --------- 2002 $ 8,253 2003 6,995 2004 4,619 2005 3,007 2006 2,233 Thereafter 5,675 ------- $30,782 =======
Annual rental expense under noncancellable operating lease agreements for the years ended December 31, 2001, 2000 and 1999 was $8.8 million, $4.9 million and $4.7 million, respectively. Royalty Commitment Through subsidiaries in Israel, MRV is obligated to the Office of the Chief Scientist of the Government of Israel (Chief Scientist) with respect to the government's participation in research and development expenses for certain products. Amounts received by MRV from the participation of the Chief Scientist were offset against the related research and development expenses incurred. Accordingly, MRV's royalty to the Chief Scientist is calculated at a rate of three percent to five percent of sales of such products developed with the participation up to the dollar amount of such participation. MRV received participation of $500,000 for the year ended December 31, 1999. No participation was received for the year ended December 31, 2001 and 2000. The remaining future obligation as of December 31, 2001 is approximately $913,000 million which is contingent on generating sufficient sales of this selected product line. Accounts Receivable MRV, through foreign subsidiaries, has agreements with several financial institutions to sell its receivables with recourse; in the event of customer's default, MRV must repurchase the receivables. At December 31, 2001 and 2000 the Company is contingently liable for approximately $14.8 million and $23.4 million, respectively, relating to such receivables sold with recourse. No gain or loss on the sale of these receivables has been included in the accompanying consolidated statements of operations. Litigation The Company has received notices from third party alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. The Company's policy is to discuss these notices with the senders in an effort to demonstrate that the Company's products and/or processes do not violate any patents. The Company is currently involved in such discussions with Lucent, Ortel, Rockwell and the Lemelson Foundation. The Company does not believe that any of its products or processes violate any of the patents asserted by these parties and the Company further believes that it has meritorious defenses if any legal action is taken by any of these parties. However, if one or more of these parties was to assert a claim and gain a conclusion unfavorable to the Company such claims could materially and adversely affect the business, operating results and financial condition of the Company. From time to time, MRV is a defendant in lawsuits involving matters which are routine to the nature of its business. Management is of the opinion that the ultimate resolution of all such matters will not have a material adverse effect on the accompanying consolidated financial statements. F-20 13. Stockholders' Equity Authorized Shares On May 10, 2000, the Board of Directors and stockholders of MRV approved an increase in the authorized number of shares of its $0.0017 par value common stock from 80.0 million to 160.0 million shares relating to the two-for-one stock split distributed on May 26, 2000. MRV is authorized to issue up to 1.0 million shares of its $0.01 par value preferred stock, of which none is issued or outstanding as of December 31, 2001 and 2000. Stock Split The Board of Directors authorized the splitting of MRV's common stock on a two-for-one basis for stockholders of record on May 11, 2000 and the resulting shares from the split were distributed on May 26, 2000. All references to share and per-share data for all periods presented have been adjusted to give effect to this two-for-one stock split. Stock Options MRV has various stock option and warrant plans that provide for granting options and warrants to purchase shares of MRV's common stock to employees, directors and non-employees performing consulting or advisory services for MRV. The plans provide for the granting of options, which meet the Internal Revenue Code requirements for qualification as incentive stock options, as well as nonstatutory options. Under these plans, stocks option and warrant exercise prices generally equal the fair market value of MRV's common stock at the date of grant. The options and warrants generally vest over three to five years with expiration dates ranging from six and ten years from the date of grant depending on the plan. The plans provide for the issuance of 13.4 million shares of common stock over the remaining life of the plans. In July 2000, Luminent and MRV entered into four-year employment contracts with the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of Luminent. The agreements provide for annual salaries, performance bonuses and a combination of stock options to purchase common stock of MRV and Luminent. The CEO received approximately 316,000 options to purchase shares of MRV common stock at $32.56 per share (a substantial discount) expiring in five years. The CFO received approximately 22,000 options to purchase shares of MRV common stock at $33.44 per share (a substantial discount) expiring in five years. These options are immediately exercisable, however they provide for the repurchase in the event of voluntary termination. These grants have been accounted for under APB No. 25 and the intrinsic value (fair market value less exercise price) results in additional deferred stock compensation of approximately $10.8 million that is being amortized over the four year vesting period. Furthermore, Luminent granted 4.8 million and 800,000 of its stock options to the CEO and CFO, respectively. The options are exercisable at $6.25 per share and vest over four years. These grants have been accounted for in accordance with APB No. 25 and the intrinsic value (original mid point of filing range, $14, less $6.25) resulted in aggregate deferred stock compensation of approximately $43.4 million. The deferred stock compensation is being amortized using the graded vesting method over four years. The deferred stock compensation incurred from the granting of MRV and Luminent options for a total of $54.2 million has been included in the consolidated financial statements of MRV. In September 2001, Luminent's President and Chief Executive Officer resigned. In connection with the resignation, Luminent's President and Chief Executive Officer received a severance package, as defined in the employment agreement dated July 2000, providing severance payments of approximately $1.0 million and the immediate vesting of all outstanding MRV and Luminent stock options held as of the date of resignation. The MRV and Luminent stock options are exercisable through September 11, 2003. Additionally, an immediate recognition of deferred compensation expenses of $18.9 million was recorded during year ended December 31, 2001 as a result of the acceleration of these stock options. F-21 Stock option information with respect to MRV's stock option and warrant plans is as follows (in thousands):
2001 2000 1999 --------------------- -------------------- ------------------- Wtd Avg. Wtd Avg. Wtd Avg. Shares Ex. Price Shares Ex. Price Shares Ex. Price ------ --------- ----- --------- ----- --------- Outstanding, beginning of year 7,081 $ 7.43 5,497 $ 4.37 5,323 $ 2.40 Granted 1,360 4.74 4,375 8.14 1,581 9.21 Exercised (487) 2.98 (2,791) 2.52 (1,208) 2.31 Forfeited (887) 5.65 -- -- (199) 2.63 Luminent options converted to MRV options 5,341 15.87 -- -- -- -- ------ ------- ----- ------- ----- ------ Outstanding, end of year 12,408 $ 11.07 7,081 $ 7.43 5,497 $ 4.37 ====== ======= ===== ======= ===== ====== Weighted average fair value of options granted during year $ 9.79 $ 20.79 $ 7.33 ======= ======= ======
During 2001 and 2000, MRV granted 444,000 and 3.8 million options to purchase MRV common stock with exercises that differed from the market price of the stock on the grant date. As of December 31, 2001, the weighted average exercise price and weighted average fair value of these options were $3.00 and $3.00 per share, respectively. As of December 31, 2000, the weighted average exercise price and weighted average fair value of these options were $5.67 and $21.99 per share, respectively. Information about MRV stock options outstanding at December 31, 2001 is summarized as follows (in thousands):
Weighted Average Number Outstanding Remaining Contract Number Exercisable Exercise Price as of 2001 Life as of 2001 --------------- ------------------ ------------------ ------------------ $ 2.59 - $ 3.95 5,407 7.93 2,212 $ 4.21 - $ 6.98 1,474 9.05 385 $ 9.50 - $11.06 391 8.52 93 $12.00 - $16.00 2,681 8.57 2,208 $17.63 - $33.44 2,455 7.94 712 ------ ----- 12,408 5,610 ====== =====
Accounting for Stock-Based Compensation SFAS No. 123 permits companies to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Because MRV's stock-based compensation plans have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, management believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from the plan. Therefore, as permitted, MRV applies the existing accounting rules under APB No. 25 and provides pro forma net loss and pro forma loss per share disclosures for stock-based awards made during the year as if the fair value method defined in SFAS No. 123 had been applied. Net loss and net loss per share for each of the three years in the period ended December 31, 2001 would have increased to the following pro forma amounts (in thousands, except per share data):
2001 2000 1999 --------- --------- -------- Additional compensation expense $ 24,874 $ 24,998 $ 2,888 Pro forma net loss (350,968) (177,951) (15,797) Pro forma basic and diluted net loss per sha (4.60) (2.71) (0.29)
The following assumptions were applied: (i) no expected dividend yield for all periods, (ii) expected volatility of 191 percent for 2001, 162 percent for 2000 and 64 percent for 1999, (iii) expected lives of 4 to 6 years for all years, (iv) and risk-free interest rates ranging from 3.93 percent to 6.73 percent for all years. F-22 Common Stock Purchase Warrants In connection with various public and private offerings of common stock and acquisitions MRV has issued warrants to purchase additional shares of common stock. A summary of warrant activities for the three years ended December 31, 2001 is as follows (in thousands, except exercise prices):
Number of Shares Exercise Prices ------ --------------- Balance, December 31, 1998 5,770 $0.14 to $17.50 Issued -- -- Exercised (874) 2.40 to 10.00 Canceled (1,556) 0.14 to 13.38 ------ -------------- Balance, December 31, 1999 3,340 $2.13 to $17.50 Issued -- -- Exercised (895) 2.29 to 16.25 Canceled (5) 2.13 ------ -------------- Balance, December 31, 2000 2,440 $2.13 to $17.50 Issued -- -- Exercised (74) 2.38 to 2.63 Canceled (874) 2.63 to 17.50 ------ -------------- Balance, December 31, 2001 1,492 $2.13 to $2.80 ====== ==============
In November 1996, MRV completed a private placement of 400,000 stock and 1.0 million three-year warrants to purchase common stock for a total price of $4.0 million. During 1999, prior to the expiration of the three-year warrants, 800,000 warrants were exercised at $10.00 per share, for total proceeds of $8.0 million. The remaining 200,000 warrants expired. 14. Segment Reporting and Geographical Information MRV operates under a business model that creates and manages start-up companies and independent business units. These companies fall into two segments: operating entities and development stage enterprises. Segment information is therefore being provided on this basis which differs from prior period presentations. Development stage enterprises that MRV has created or invested in are developing optical components, subsystems and networks and products for the infrastructure of the Internet. Operating entities of MRV design, manufacture and distribute optical components, optical subsystems, optical networking solutions, and Internet infrastructure products. The accounting policies of the segments are the same as those described in the summary of significant accounting polices. MRV evaluates segment performance based on revenues and operating income (loss) of each segment. As such, there are no separately identifiable segment assets nor are there any separately identifiable statements of operations data below operating income. Business segment net revenues for each of the three years in the period ended December 31, 2001 are as follows (in thousands):
2001 2000 1999 -------- -------- -------- Operating entities $332,844 $319,394 $288,524 Development stage enterprises -- -- -- -------- -------- -------- $332,844 $319,394 $288,524 ======== ======== ========
There were no inter-segment sales for the years ended December 31, 2001, 2000 and 1999. F-23 Net revenues by groups of products for each of the years in the period ended December 31, 2001 are as follows (in thousands):
2001 2000 1999 --------- --------- --------- Optical passive components $ 39,010 $ 29,148 $ 3,687 Optical active components 97,653 97,335 67,722 Switches and routers 74,675 80,784 108,000 Remote device management 18,987 19,167 28,698 Network physical infrastructure equipment 59,902 56,747 50,521 Services 18,934 20,892 23,461 Other 23,683 15,321 6,435 --------- --------- --------- $ 332,844 $ 319,394 $ 288,524 ========= ========= =========
For each of the three years in the period ended and as of December 31, 2001, MRV had no single customer that accounted for more than 10 percent of revenues or accounts receivable. MRV does not track customer revenue by region for each individual reporting segment. A summary of external revenue by region for each of the three years in the periods ended December 31, 2001 are as follows (in thousands):
2001 2000 1999 --------- --------- --------- United States $ 108,550 $ 119,190 $ 122,054 European Community 176,745 162,881 134,160 Pacific Rim 42,925 31,891 28,921 Other 4,624 5,432 3,389 --------- --------- --------- $ 332,844 $ 319,394 $ 288,524 ========= ========= =========
Business segment operating loss before other income (expense), provision (benefit) for income taxes and extraordinary item for each of the three years in the period ended December 31, 2001 are as follows (in thousands):
2001 2000 1999 --------- --------- --------- Operating entities $(274,831) $(100,759) $ 4,017 Development stage enterprises (45,796) (48,810) (20,011) --------- --------- --------- $(320,627) $(149,569) $ (15,994) ========= ========= =========
Operating loss before other income (expense), provision (benefit) for income taxes and extraordinary item for each of the three years in the periods ended December 31, 2001 are as follows (in thousands):
2001 2000 1999 --------- --------- --------- United States $(240,467) $ (69,671) $ (5,781) Foreign (80,160) (79,898) (10,213) --------- --------- --------- $(320,627) $(149,569) $ (15,994) ========= ========= =========
15. LAN Business In 1999, MRV recorded one-time charges of approximately $13.8 million primarily related to the write-down of inventories related to its LAN product lines. These charges have been included in cost of goods sold for the year ended December 31, 1999 in the accompanying consolidated statement of operations. In February 2000, MRV discontinued manufacturing and supporting its LAN product lines. 16. 401(K) Plans MRV has 401(K) savings plans (the Plans) at certain subsidiaries under which all eligible employees may participate. The Plans provide for MRV to make matching contributions to all eligible employees. In 2001 and 2000, approximately $838,000 and $731,000 respectively, was charged as expense related to these plans. F-24 17. Supplemental Statements of Cash Flow Information (in thousands)
For the Years Ended December 31 ------------------------------------ 2001 2000 1999 -------- -------- ------ Supplemental disclosure of cash flow information: Cash paid during period for interest $ 10,549 $ 3,635 $1,652 Cash paid during period for income taxes 5,323 130 4,887 Supplemental schedule of noncash investing and financing activities: Fair value of asset acquired, net of cash received $ 2,153 $ 48,611 $ -- Less: Liabilities assumed (2,153) (44,190) -- -------- -------- ------ Cash received in acquisitions $ -- $ 4,421 $ -- -------- -------- ------ Cash used in acquisitions -- 48,938 -- -------- -------- ------ Cash used in acquisitions, less cash received in acquisitions $ -- $ 44,517 $ -- Common stock issued in connection with investments in subsidiaries $ 36,575 $ 90,126 $ -- ======== ======== ====== Decrease in fair value of interest rate swap $ 3,198 $ -- $ -- ======== ======== ====== Non-cash deferred stock compensation $ 7,816 $ -- $ -- ======== ======== ====== Fair value of stock options issued in connection with investments $ 503 $ -- $ -- ======== ======== ======
F-25 18. Quarterly Financial Data (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- (in thousands, except per share amounts) Year Ended December 31, 2001 Revenues, net $ 100,104 $ 89,530 $ 69,730 $ 73,480 Costs and expenses: Costs of goods sold 66,391 88,765 57,621 54,612 Research and development 25,005 25,782 19,307 24,719 Selling, general and administrative 38,412 31,777 49,528 30,959 Restructuring charges -- 11,934 1,724 453 Amortization of goodwill and other intangibles 28,139 29,028 27,218 42,099 --------- --------- --------- --------- 157,947 187,286 155,398 152,840 Operating loss (57,843) (97,756) (85,668) (79,360) Other expense, net (520) (2,373) (1,410) (18,474) Loss before benefit (provision) for income taxes, minority interest and extraordinary gain (58,363) (100,129) (87,078) (97,834) (Provision) benefit for income taxes 2,683 939 (6,215) (1,882) Minority interest 1,388 5,051 3,646 1,492 Extraordinary gain -- -- -- 9,949 --------- --------- --------- --------- Net loss $ (54,292) $ (94,139) $ (89,647) $ (88,275) ========= ========= ========= ========= Basic and diluted earnings per share $ (0.73) $ (1.24) $ (1.16) $ (1.14) ========= ========= ========= ========= Basic and diluted weighted averages shares 74,370 76,111 77,404 77,545 ========= ========= ========= ========= Year Ended December 31, 2000 Revenues, net $ 65,072 $ 73,935 $ 82,720 $ 97,667 Costs and expenses: Cost of goods sold 42,736 45,793 47,910 66,932 Research and development 11,891 14,758 21,803 25,626 Selling, general and administrative 16,028 26,467 52,699 29,506 Amortization of goodwill and other intangibles -- 12,055 27,348 27,411 --------- --------- --------- --------- 70,655 99,073 149,760 149,475 Operating loss (5,583) (25,138) (67,040) (51,808) Other expense, net (488) (1,190) (5,764) (2,136) --------- --------- --------- --------- Loss before benefit (provision) for income taxes and minority interest (6,071) (26,328) (72,804) (53,944) Benefit (provision) for income taxes 494 (1,377) (1,005) 7,286 Minority interest (287) (45) (570) 1,698 --------- --------- --------- --------- Net loss $ (5,864) $ (27,750) $ (74,379) $ (44,960) ========= ========= ========= ========= Basic and diluted loss per share $ (0.10) $ (0.44) $ (1.06) $ (0.62) ========= ========= ========= ========= Basic and diluted weighted averages shares 56,850 62,754 70,122 72,768 ========= ========= ========= =========
F-26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company at March 19,2002 are as follows:
Name Age Position ---- --- -------- Noam Lotan(1) 50 President, Chief Executive Officer and Director Shlomo Margalit(1) 60 Chairman of the Board of Directors, Chief Technical Officer and Secretary Guy Avidan 39 President and Chief Executive Officer of Optical Access, Inc. Shay Gonen 36 Interim Chief Financial Officer Igal Shidlovsky(2)(3) 65 Director Guenter Jaensch(2)(3) 63 Director Professor Daniel Tsui(3) 63 Director Professor Baruch Fischer 51 Director
- ---------- (1) Member of the Executive Committee. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. NOAM LOTAN has been the President, Chief Executive Officer and a Director of MRV since May 1990 and became Chief Financial Officer of MRV in October 1993, in which position he served until June 1995. From March 1987 to January 1990, Mr. Lotan served as Managing Director of Fibronics (UK) Ltd., the United Kingdom subsidiary of Fibronics International Inc. (Fibronics), a manufacturer of fiber optic communication networks. MRV purchased the Fibronics business in September 1996. From January 1985 to March 1987, Mr. Lotan served as a Director of European Operations for Fibronics. Prior to that time, Mr. Lotan held a variety of sales and marketing positions with Fibronics and Hewlett-Packard. Mr. Lotan holds a Bachelor of Science degree in Electrical Engineering from the Technion, the Israel Institute of Technology, and a Masters degree in Business Administration from INSEAD (the European Institute of Business Administration, Fontainebleau, France). DR. SHLOMO MARGALIT, a founder of MRV, has been Chairman of the board of directors and Chief Technical Officer since MRV's inception in July 1988. From May 1985 to July 1988, Dr. Margalit served as a founder and Vice President of Research and Development for LaserCom, Inc. (LaserCom), a manufacturer of semiconductor lasers. From 1982 to 1985, Dr. Margalit served as a Senior Research Associate at the California Institute of Technology (Caltech), and from 1976 to 1982, a Visiting Associate at Caltech. From 1972 to 1982, Dr. Margalit served as a faculty member and Associate Professor at the Technion. During his tenure at the Technion, Dr. Margalit was awarded the Israel Defense prize for his work in developing infrared detectors for heat guided missiles and the David Ben Aharon Award for Novel Applied Research. Dr. Margalit holds a Bachelor of Science degree, a Masters degree and a Ph.D. in Electrical Engineering from the Technion. GUY AVIDAN has served as the Chief Executive Officer and President of Optical Access, Inc. MRV's optical wireless products subsidiary since September 2000. From 1995 to September 2000, Mr. Avidan served in various executive capacities for other subsidiaries of MRV, including as President of NBase- Xyplex International from January 1999 until joining Optical Access and as Managing Director of NBase-Communications, from 1995 until January 1999. Mr. Avidan holds a B.A. degree in business management, economics and accounting from Haifa University and also is licensed as a Certified Public Accountant. 55 SHAY GONEN became Interim Chief Financial Officer in September 2001 following the death of Edmund Glazer in the World Trade Center terrorist attack. Since September 1996, Mr. Gonen has served in various executive capacities for certain of MRV's subsidiaries, including as the Vice President of Finance, Chief Financial Officer and Secretary of Optical Access, Inc. from September 2000; as General Manager of European Activity for NBase-Xyplex from January 1999 to September 2000; and as Chief Operating Officer of NBase Communications from September 1996 to December 1998. Mr. Gonen served as Vice President of Operations and Finance for Silver Arrow, L.P. from April 1994 to September 1996. Mr. Gonen holds a B.S. degree in industrial engineering from the Technion, and an M.B.A. degree from Bar-Ilan University in Tel Aviv. DR. IGAL SHIDLOVSKY became a Director of MRV in May 1997. Dr. Shidlovsky serves as Managing Director of Global Technologies, an investment and consulting organization, which he founded in 1994. He has extensive management and consulting experience with international companies and start up technology companies. Dr. Shidlovsky is a Director of the Omega Point Foundation. From 1982 to 1991, Dr. Shidlovsky was a Director of Sentex Sensing Technologies. Dr. Shidlovsky held several executive positions including Vice President Corporate Development at Siemens Pacesetter, a division of Siemens AG Medical Group, Director of Strategic Planning and Technology Utilization, and Director of the Microelectronics Department at Siemens Corporate Research. From 1969 to 1982 he was with RCA Laboratories, a leading electronic R&D organization. Dr. Shidlovsky holds a Bachelor of Science degree in Chemistry from the Technion and Master and Ph.D. degrees from the Hebrew University in Israel. DR. GUENTER JAENSCH became a Director of MRV in December 1997. Dr. Jaensch serves as Managing Director of The McKenzie Companies, Inc. and McKenzie Ventures LTD. and as President of Jaensch Enterprises. Each firm is engaged in management consulting, mergers and acquisitions and investments. For over 20 years, Dr. Jaensch held several executive positions with Siemens or its subsidiaries. Among his executive positions in the United States were as President of Siemens Communications Systems, Inc.; Chairman of Siemens Corporate Research and Support, Inc.; Chairman and Chief Executive Officer of Pacesetter; and head of the cardiac management division of Siemens AG Medical Group. Dr. Jaensch also served as controller of Siemens Data Processing Group and Director of Siemens Internal Accounting and Budgeting operations. Dr. Jaensch holds a Masters degree in Business Administration and Ph.D. degree in Finance from the University of Frankfurt. He also served as an Associate Professor at the University of Frankfurt prior to joining Siemens. PROFESSOR DANIEL TSUI became a Director of MRV in December 1999. Professor Tsui is the Arthur Le Grand Doty Professor of Electrical Engineering at Princeton University and was awarded the 1998 Nobel prize in Physics for the discovery and explanation of the fractional quantum hall effect. Professor Tsui was a recipient of the American Physical Society 1984 Buckley Prize, the 1998 Benjamin Franklin Medal and was elected to the National Academy of Sciences. He is a fellow of the American Physical Society and the American Association for the Advancement of Science. He is currently engaged in research activity relating to properties of thin films and microstructures of semiconductors and solid-state physics. He received his Ph.D. in physics from the University of Chicago in 1967 and for 13 years was with Bell Laboratories before joining Princeton University, where he spent the last 16 years. PROFESSOR BARUCH FISCHER became a Director of MRV in December 1999. Professor Fischer currently serves as Dean of the Electrical Engineering Faculty at the Technion. Professor Fischer's current Research Activities include solid state devices, lasers and optical amplifiers; WDM technology; fiber gratings; all optical networks; non-linear effect in fiber, wave mixing; and optical computing, optical data storage and optical image processing. He has authored or co-authored approximately 180 papers and holds several patents in the field of optics and opto-electronics. He received his Ph.D. from Bar-Ilan University, Israel in 1980. He subsequently became a Post-Doctorate Fellow at CalTech and joined the faculty of the Technion in 1983. 56 Each director is elected for a period of one year at MRV's annual meeting of stockholders and serves until the next annual meeting and until his successor is duly elected and qualified. Officers are elected by, and serve at the discretion of, the board of directors, subject to relevant employment agreements. None of the Directors of MRV are related by blood, marriage or adoption to any of MRV's Directors or executive officers. Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Directors, executive officers and 10% or greater stockholders are required by the SEC regulations to furnish us with copies of all Section 16(a) forms they file. We believe, based solely on a review of the copies of such reports furnished to the Company, that each report required of the Company's executive officers, directors and 10% or greater stockholders was duly and timely filed during the year ended December 31, 2001, except for a Form 3 of Shay Gonen and one Form 4 by each of Noam Lotan and Shlomo Margalit. The Form 3 filed late by Mr. Gonen reported as his beneficial ownership of our shares grants to him of stock options exempt from Section 16(b) of the Exchange Act pursuant to Rule 16b-3 under the Exchange Act that occurred prior to his appointment as an executive officer of MRV. The Form 4 filed late by Mr. Lotan reported four separate sales transactions involving the sale of an aggregate of 3,150 shares during August 2001 and one transaction involving the grant to him of stock options in January 2001 that was exempt from Section 16(b) of the Exchange Act pursuant to Rule 16b-3 under the Exchange Act and, but for such sales, would have been reportable under Form 5. The Form 4 filed late by Dr. Margalit reported four separate transactions involving the sale of an aggregate of 6,400 shares during August 2001. 57 ITEM 11. EXECUTIVE COMPENSATION The members of the Board of Directors who are not employees of the Company receive cash compensation of $800 per month and $500 for each Board of Directors' meeting attended, while serving as Directors. The following table sets forth a summary of all compensation paid by the Company to its Chief Executive Officer and for each of its other executive officers whose total annual salary and bonus exceeded $100,000 (the "Named Executive Officers") during the fiscal year ended December 31, 2001:
Long-term Compensation Securities Underlying - All other Year Salary Bonus Options(#) Compensation ---- --------- -------- ------------- ------------ Noam Lotan 2001 $ 100,000 $ -- 98,000 $ -- President and Chief Executive Officer 2000 $ 100,000 $ -- -- -- 1999 $ 100,000 $ -- -- -- Shlomo Margalit 2001 $ 110,000 $ -- -- -- Chairman of the Board of Directors, 2000 $ 110,000 $ -- -- -- Chief Technical Officer and Secretary 1999 $ 110,000 $ -- -- -- Edmund Glazer(1) 2001 $ 153,462 $ -- 130,000 $ -- Vice President of Finance and 2000 $ 140,000 $ -- 40,000 -- Administration and Chief Financial Officer 1999 $ 140,000 $ -- 60,000 -- William R Spivey(2) 2001 $ 199,574(3) $ 90,000 2,064,000(4) $ 400,000(5) President and Chief Executive Officer 2000 $ 138,000 $ 90,000 316,315 $ 48,682(6) of Luminent, Inc 1999 N/A N/A N/A N/A Shay Gonen 2001 $ 128,955 $ -- 100,000 $ -- Interim Chief Financial Officer 2000 $ 104,836 $ -- -- -- 1999 $ 102,000 26,000 --
- ---------- (1) Mr. Glazer was killed in the air crash of American Airlines Flight 11 into North Tower of the World Trade Center on September 11, 2001. The table includes salary paid and options granted to Mr. Glazer's wife following his death. (2) Dr. Spivey joined Luminent in July 2000 and resigned in September 2001. (3) Consists of regular salary of $177,115, vacation pay of $19,924 and payment for personal time of $2,535. (4) In connection with the short-form merger of Luminent, which was completed on December 28, 2001, MRV agreed to assume the outstanding options to purchase shares of Luminent, adjusted for the exchange ration of 0.43 of a share of MRV common stock for each outstanding share of Luminent common stock MRV did not own prior to the merger. The options reflected in the table for Dr. Spivey for 2001 are the number of MRV shares issuable to Dr. Spivey as the result of MRV assumption of Dr. Spivey's outstanding Luminent options on December 28, 2001. (5) Consists of severance compensation paid in 2001. (6) Consists of a reimbursement of legal fees Dr. Spivey incurred in 2000 in connection with the negotiation of his employment contract. 58 OPTION GRANTS IN LAST FISCAL YEAR The following table provides certain information regarding stock option grants made to the Named Executive Officers in the year ended December 31, 2001.
Percent Potential realizable value Number of of total at assumed annual rate securities options of stock appreciation underlying granted to for option term options employees Exercise Expiration --------------------------- Name granted in 2001 price($/sh) Date 5%(1) 10%(1) - ----------------- ---------- --------- ----------- --------- ---------- ---------- Noam Lotan 18,000 1.3 $ 12.00 1/8/2007 $ 73,461 $ 166,657 80,000 5.9 $ 2.70 9/20/2007 $ 73,461 $ 166,657 Shlomo Margalit -- -- -- -- -- -- Edmund Glazer(2) 20,000 1.5 $ 12.00 9/12/2004 $ 47,231 $ 101,057 30,000 2.2 $ 5.38 9/12/2004 $ 29,561 $ 62,899 80,000 (2) $ 2.70 9/12/2004 $ 27,392 $ 56,888 William R. Spivey 2,064,000 (3) $14.534883 9/11/2003 (4) (4) Shay Gonen 100,000 7.4 $ 2.70 9/26/2007 $ 91,826 $ 208,321
- ---------- (1) The dollar amounts under these columns are the result of calculations assuming the price of MRV's common stock on the date of the grant of the option (or, in the case of Dr. Spivey, on December 28, 2001, when MRV agreed to assume outstanding Luminent options by converting them into in options to purchase MRV common stock adjusted for the 0.43 exchange ratio) increases at the hypothetical 5% and 10% rates set by the SEC for the term of the option. Neither the amounts reflected nor the rates applied are intended to forecast possible future appreciation, if any, of the Company's stock price. (2) Mr. Glazer was killed on September 11, 2001. The table includes options granted to Mr. Glazer's wife following his death. Options reflected for Mr. Glazer at December 31, 2001 are beneficially owned by his estate or wife. Options granted to Mrs. Glazer after Mr. Glazer's death are not included in the calculation of total options granted to MRV employees during 2001. (3) In connection with the short-form merger of Luminent, which was completed on December 28, 2001, MRV agreed to assume the outstanding options to purchase shares of Luminent, adjusted for the exchange ration of 0.43 of a share of MRV common stock for each outstanding share of Luminent common stock MRV did not own prior to the merger. Accordingly, these options were not part of the total options granted to MRV employees during 2001. (4) The potential realizable value of these options, calculated by assuming that the market price of MRV's common stock on December 28, 2001 (the date MRV assumed Dr. Spivey's Luminent options) appreciates at the 5% and 10% rates set by the SEC for the term of the options, minus the exercise price of these options, is less than zero. 59 FISCAL YEAR END OPTION VALUES No options were exercised by any of the Named Executive Officers during the year ended December 31, 2001. The following table provides certain information concerning MRV stock options and held by the named the Named Executive Officers at December 31, 2001.
Number of shares underlying unexercised Value of unexercised options at in-the money options at December 31, 2001 December 31, 2001(1) -------------------------- --------------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- Noam Lotan 12,000 98,000 $ 21,540 $ 137,600 Shlomo Margalit -- -- -- -- Edmund Glazer(2) 268,000 -- $ 313,510 $ -- William R. Spivey 2,380,315 -- -- -- Shay Gonen 33,500 111,500 $ 60,133 $ 194,438
- ---------- (1) Based on difference between the closing price of MRV common stock on December 31, 2001 and the exercise price. (2) Mr. Glazer was killed on September 11, 2001. The table includes options granted to Mr. Glazer's wife following his death. Options reflected for Mr. Glazer at December 31, 2001 are beneficially owned by his estate or wife. EMPLOYMENT AGREEMENTS In March 1992, MRV entered into three-year employment agreements with Mr. Lotan and Dr. Margalit. Upon expiration, these agreements automatically renew for one-year terms unless either party terminates them by giving the other three months' notice of non-renewal prior to the expiration of the current term. Pursuant to the agreements, Mr. Lotan serves as President, Chief Executive Officer and a Director of MRV and Dr. Margalit serves as Chairman of the Board of Directors, Chief Technical Officer and Secretary. Mr. Lotan and Dr. Margalit receive base annual salaries of $100,000 and $110,000, respectively, and each is entitled to receive a bonus determined and payable at the discretion of the board of directors upon the recommendation of the Compensation Committee of the Board. Recommendations with respect to bonus levels are based on achievement of specified goals, such as new product introductions, profitability levels, revenue goals, market expansion and other criteria as established by the Compensation Committee. Effective January 1, 2002, Mr. Lotan's salary was increased to $150,000 per year. In July 2000, MRV and its subsidiary, Luminent, entered into a four-year employment agreement with Dr. William R. Spivey, Luminent's former President and Chief Executive Officer. Under the agreement, Luminent agreed to pay to Dr. Spivey an annual salary of $300,000 with a bonus targeted at $75,000 for 2000 and at $150,000 for the following years as determined at the discretion of our board of directors. MRV granted Dr. Spivey an option to purchase 316,315 shares of MRV common stock exercisable at $32.56 per share for five years. Luminent granted to Dr. Spivey an option to purchase 4,800,000 shares of Luminent common stock at an exercise price of $6.25 per share. Dr. Spivey's option to purchase MRV common stock was fully exercisable as of the date of grant, and his option to purchase Luminent common stock vested in annual installments of 25%, beginning on July 11, 2000, provided, however, that in the event his employment was terminated other than for cause he was entitled to receive from the date of termination over a one year period an amount equal to two times the sum of his annual salary plus bonus and all of his unvested Luminent options will automatically vest and become exercisable. Dr. Spivey's resignation on September 12, 2001 was considered by the parties to be a 60 termination other than for cause under his employment agreement entitling him to the severance benefits of his employment agreement therefor. The salary and bonus portion of Dr. Spivey's severance compensation totals $900,000, and is payable in 24 equal installments of $37,500 each beginning on or about October 1, 2001, in accordance with the payroll cycles of Luminent and MRV and continuing through September, 2002. As a consequence of Dr. Spivey's resignation, his MRV and Luminent options are now exercisable through September 11, 2003. On December 28, 2001, MRV completed the short-form merger of Luminent. Former Luminent stockholders whose shares were converted in the merger are entitled to receive 0.43 of share of MRV common stock for each share of Luminent common stock owned at the time of the merger. In addition, MRV assumed in the merger options to purchase Luminent common stock that were outstanding and accordingly, Dr. Spivey's Luminent stock options were converted into options to purchase 2,064,000 shares of MRV common stock, exercisable at $14.534883 per share until September 11, 2003. Each officer also receives employee benefits, such as vacation, sick pay and insurance, in accordance with MRV's policies, which are applicable to all employees. MRV has obtained, and is the beneficiary of, key man life insurance policies in the amount of $1,000,000 on the lives of each of Dr. Margalit and Mr. Lotan. All benefits under these policies will be payable to MRV upon the death of an insured. COMPENSATION OF OUTSIDE DIRECTORS Outside directors, i.e., directors who are not employees of MRV, receive cash compensation of $800 per month and $500 for each board of directors' meeting attended, while serving as Directors. In January 2002, MRV granted to each outside director options to purchase 30,000 shares of its common stock at $12.00 per share and in September 2001, MRV granted to each outside director (other than Dr. Shidlovsky who was granted options to purchase 33,000 shares) options to purchase 30,000 shares of its common stock at $2.70 per share. BOARD COMMITTEES MRV's board of directors has established the Compensation Committee, the Audit Committee and the Executive Committee. The Compensation Committee reviews and recommends to the board of directors the compensation and benefits of all MRV's officers and establishes and reviews general policies relating to compensation and benefits of our employees. The Compensation Committee consists of Igal Shidlovsky and Guenter Jaensch. The Audit Committee reviews MRV internal accounting procedures and consults with and reviews the services provided by its independent accountants. The Audit Committee consists of Igal Shidlovsky, Guenter Jaensch and Daniel Tsui. The Executive Committee is empowered to take any action that the board of directors is authorized to act upon, with the exception of the issuance of stock, the sale of all or substantially all of MRV's assets and other significant corporate transactions. The Executive Committee consists of Noam Lotan and Shlomo Margalit. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee has ever been an officer or employee of MRV. None of MRV's executive officers has served or currently serves on a board of directors or on a compensation committee of any other entity that had officers who served on MRV's board of directors. 61 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of March 18, 2002, of (i) each person known by the Company to own beneficially 5% or more of the Common Stock, (ii) each current director of the Company owning Common Stock, (iii) each of the Named Executive Officers, and (iv) all current directors and executive officers as a group.
COMMON STOCK -------------------------- NAME AND ADDRESS(1) OF BENEFICIAL NUMBER OF PERCENTAGE OWNER(2) OR IDENTITY OF GROUP SHARES OWNERSHIP - ----------------------------------------------- --------- ---------- Shlomo Margalit 3,305,660 3.7% Noam Lotan 1,473,824(3) 1.7% Edmund Glazer 298,000(4) * William R. Spivey 2,380,315(5) 2.6% Shay Gonen 33,500(5) * Igal Shidlovsky 82,600(6) * Guenter Jaensch (8) 44,000(5) * Professor Daniel Tsui (9) 18,000(5) * Professor Baruch Fischer (10) 18,000(5) * All executive officers and directors as a group 4,993,584(7) 5.6%
- ---------- * Less than 1% (1) Except as noted below, the address of each of the person listed is c/o MRV Communications, Inc., 20415 Nordhoff Street, Chatsworth, California, 91311. (2) Pursuant to the rules of the Securities and Exchange Commission, shares of Common Stock that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. (3) Includes 18,000 shares issuable pursuant to stock options exercisable within 60 days of March 18, 2002. (4) Mr. Glazer, MRV's Vice President of Finance and Administration and Chief Financial Officer, was killed on September 11, 2001 in the World Trade Center terrorist attacks. The number of shares reflected in the table consist of 30,000 shares held in his estate and options exercisable by his estate within 60 days of March 18, 2002. (5) Consists of shares issuable upon exercise of stock options within 60 days of March 18, 2002. (6) Includes 74,000 shares issuable upon exercise of stock options within 60 days of March 18, 2002. (7) Includes 208,000 shares issuable upon exercise of stock options within 60 days of March 18, 2002. 62 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In July 1998, MRV and Zaffire, Inc. (formerly New Access Communications, Inc.) entered into a Securities Purchase Agreement, under which MRV purchased for $950,000 shares of the capital stock of Zaffire equal to approximately 19% of the capital stock of Zaffire then outstanding and warrants to purchase additional capital stock of Zaffire, which, if fully exercised for an aggregate of $2,050,000, MRV would own an aggregate of approximately 60% of Zaffire's capital stock (when the shares purchased upon exercise of the warrants were added to MRV's existing stake in Zaffire). The warrants were exercisable in two installments (provided the first installment was exercised) by July 1, 1999 and January 4, 1999, respectively. These warrants were fully exercised in 1999. In May 2000, MRV, along with 36 other accredited investors, and Zaffire entered into a Series C Preferred Stock Purchase Agreement under which MRV purchased for $5,000,000 shares of Series C Preferred Stock of Zaffire. At September 30, 2001, MRV had an approximate 22% ownership interest in Zaffire. Zaffire was engaged in the development of new products based on wave division multiplexing technology. In July 2001, Zaffire reached an agreement with Centerpoint Broadband Technologies, Inc., under which Centerpoint agreed to acquire Zaffire in an all stock transaction. Centerpoint develops high capacity transport systems that maximize network performance for both optical and wireless networks. These highly scalable, dynamically flexible systems allow service providers advanced levels of bandwidth efficiency, capacity and high service velocity. The Centerpoint -- Zaffire acquisition was completed in October 2001. Dr. Near Margalit was the Chairman of the Board and Chief Technical Officer of Zaffire and a principal stockholder of it and became Chief Technical Officer of Centerpoint following its acquisition of Zaffire. Dr. Near Margalit is the son of Dr. Shlomo Margalit, a principal stockholder of MRV and MRV's Chairman of the Board of Directors and Chief Technical Officer. At December 31, 2001, MRV owned less than 10% of Centerpoint. From November 9, 2001, when it completed its initial public offering, through December 28, 2001, when MRV completed a short form merger, approximately 7.7% of the outstanding capital stock of Luminent was publicly held. During this period and prior to it, divisions and subsidiaries of MRV were customers of Luminent and purchased, substantial quantities of Luminent's fiber optic components. These customers accounted for Luminent sales of $2.5 million during 1999, $4.9 million during the year ended December 31, 2000 and $5.7 million during the year ended December 31, 2001. At December 31, 2000, using cash generated from operations Luminent had repaid approximately $6.5 million to MRV for interest-free advances Luminent made to MRV to cover payroll and other operating expenses. At September 30, 2001, Luminent had incurred $6.2 million in estimated income tax liability and $1.1 million in transitional services due MRV. The transitional services related substantially to Luminent's portion of group insurance coverages. In December 2001, Luminent repaid these amounts totaling $7.3 million in full. Further, MRV repaid $4.4 million in December 2001 for product sales by Luminent to divisions and subsidiaries of MRV. Like other customers, sales by Luminent to MRV-related customers are based on purchase orders and none of MRV or its companies has any long long-term arrangements with Luminent regarding purchases. For the three years in the period ended December 31, 2000, intercompany transactions between Luminent and divisions and subsidiaries of MRV consisted of the following (in thousands):
Year ended December 31, ------------------------------------- 1998 1999 2000 -------- -------- -------- Sales to MRV and its affiliates $ 2,104 $ 2,503 $ 4,878 Operating expenses 7,218 9,512 14,213 Fair value of acquisitions -- 250 440,628 Deferred stock compensation -- -- 40,950 Net cash advances (distributions) (1,232) 1,709 1,568 -------- -------- -------- Equity of MRV Communications, Inc $ 8,090 $ 13,974 $502,237 ======== ======== ========
63 In preparation for Luminent's separation from MRV prior to its initial public offering, Luminent entered into various agreements related to interim and ongoing relationships with MRV. These agreements provided for transitional services and support in the areas of data processing and telecommunications services (such as voice telecommunications and data transmission and information technology support services) for functions including accounting, financial management, tax, payroll, stockholder and public relations, legal, procurement and other administrative functions. Services were generally cost plus 5%, but could have increased to cost plus 10% if the services extended beyond a one-year period. Subsequent to the separation date, certain of these services were discontinued, including accounting, financial management, payroll, legal, procurement and other administrative functions. The transition period varied depending on the agreement but was generally one year. All amounts paid under these agreements have been discussed above. Although the fees provided for in the agreements were intended to represent the fair market value of these services, MRV and Luminent cannot assure that these fees necessarily reflected the costs of providing these services from unrelated third parties or of Luminent providing these services internally. However, Luminent and MRV believed that purchasing these services from MRV, and providing these services to Luminent, provided an efficient means of obtaining them during the transition period. With the merger, these agreements have been terminated. . Through the completion of the short form merger of Luminent, Luminent became a wholly-owned subsidiary of MRV on December 28, 2001 and these agreements were effectively terminated on that date. Further, beginning in 2002, MRV no longer plans to report transactions between itself and its divisions and Luminent. 64 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) The financial statements filed as a part of this Report consist of the financial statements listed under Item 8. (2) The financial statements schedules filed as part of this report consist of the following: Schedule II --Valuation and Qualifying Accounts Report of Independent Public Accountants on Financial Statement Schedule (3) The following exhibits are filed as part of this Report:
EXHIBIT NO DESCRIPTION - ---------- ----------- 2.1 Agreement and Plan of Merger by and between MRV Technologies, Inc. (a California corporation) and MRV Technologies, Inc. (a Delaware corporation), as amended (incorporated by reference to Exhibit 2a filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 2.2 Certificate of Merger by and between MRV Technologies, Inc. (a California corporation) and MRV Technologies, Inc. (a Delaware corporation) (incorporated by reference to Exhibit 2b filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 3.1 Certificate of Incorporation, as amended (incorporated by referenced to Exhibit 3a filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 3.2 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on March 20, 1996 (incorporated by reference to Exhibit 3.2 of the Company's Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998). 3.3 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on July 29, 1996 (incorporated by reference to Exhibit 3.3 of the Company's Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998). 3.4 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on November 19, 1998 (incorporated by reference to Exhibit 3.4 of the Company's Form 10-K for the year ended December 31, 1998 filed March 31, 1999). 3.5 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on May 11, 2000 (incorporated by reference to Exhibit 3.5 of the Company's Form 10-K for the year ended December 31, 2000 filed April 17, 2001). 3.6 Bylaws (incorporated by reference to Exhibit 3b filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 4.1 Specimen certificate of Common Stock (incorporated by reference to Exhibit 4.5 filed as part of Registrant's Registration Statement on Form S-3 (File No. 333-64017). 10.1 Lease for premises at 8917 Fullbright Avenue, Chatsworth, CA dated August 5, 1991 (incorporated by reference to Exhibit 10a filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)).
65
EXHIBIT NO DESCRIPTION - ---------- ----------- 10.2 Key Employee Agreement between the Company and Noam Lotan dated March 23, 1993 (incorporated by reference to Exhibit 10b(1) filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.3 Letter amending Key Employee Agreement between the Company and Noam Lotan (incorporated by reference to Exhibit 10b(1)1 filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.4 Letter amending Key Employee Agreement between the Company and Noam Lotan (incorporated by reference to Exhibit 10b(1)2 filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.5 Key Employee Agreement between the Company and Shlomo Margalit (incorporated by reference to Exhibit 10b(3) filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.6 Letter amending Key Employee Agreement between the Company and Shlomo Margalit (incorporated by reference to Exhibit 10b(3)1 filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.7 Form of Letter amending Key Employee Agreement between the Company and Shlomo Margalit (incorporated by reference to Exhibit 10b(3)2 filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.8 MRV Communications Inc. Incentive Plan for Grant of Warrants to Employees Subsidiaries (incorporated by reference to Exhibit No. 10.21 of Registrant's Annual Report on Form 10-K (0-23452) for the year ended December 31, 1996 filed April 15, 1997). 10.9 Standard Industrial/Commercial Single-Tenant Lease dated October 8, 1996 between the Company and Nordhoff Development relating to the premises located at 20415 Nordhoff Street, Chatsworth, California (incorporated by reference to Exhibit No. 10.23 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 filed April 15, 1997). 10.10 American Industrial Real Estate Association, Standard Industrial/ Commercial Single-Tenant Lease - Net dated November 17, 1997 by and between Ruth G. Fisher Living Trust U/D/T dated June 28, 1990 and Registrant relating to the premises located at 8928 Fullbright Avenue, Chatsworth, California (incorporated by reference to Exhibit No. 10.35 of Registrant's Report on Form 10-K for the year ended December 31, 1997 filed April 15, 1998). 10.11 New Lease dated February 22, 1993 by and between 495 Littleton Associates and Xyplex, Inc. relating to the premises located at 295 Foster Street, Littleton, Mass, Amendments Nos. 1 through 4 thereto (incorporated by reference to Exhibit No. 10.36 of Registrant's Report on Form 10-K for the year ended December 31, 1997 filed April 15, 1998). 10.12 Fifth Amendment to Lease relating to the premises located at 295 Foster Street, Littleton, Mass. with attached Lease Guaranty of Registrant (incorporated by reference to Exhibit 10.31 of the Company's Form 10-K for the year ended December 31, 1998 filed March 31, 1999). 10.13 Indenture, dated as of June 26, 1998, between the Company and American Stock Transfer & Trust Company, as Trustee, relating to the Company's 5% Convertible Subordinated Notes Due 2003 (the "Notes") (incorporated by reference to Exhibit 4.2 of the Company's Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998) 10.14 Purchase Agreement, dated June 23, 1998, between the Company and Prudential Securities Incorporated and Bear, Stearns & Co. Inc. relating to the Notes (incorporated by reference to Exhibit 4.1 of the Company's Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998).
66
EXHIBIT NO DESCRIPTION - ---------- ----------- 10.15 Indenture, dated as of June 26, 1998, between the Company and American Stock Transfer & Trust Company, as Trustee, relating to the Notes (incorporated by reference to Exhibit 4.2 of the Company's Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.16 Registration Rights Agreement dated June 26, 1998 between the Company and Prudential Securities Incorporated and Bear, Stearns & Co. Inc. relating to the shares of Common Stock issuable upon conversion of the Notes (incorporated by reference to Exhibit 4.4 of the Company's Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998). 10.17 Underlease dated September 16, 1998 between Lowe Azure Limited, NBase Europe Gmbh and the Company relating to property at Unit 16, Campbell Court, Campbell Road, Bramley Basingstoke Hampshire, England (incorporated by reference to Exhibit 10.37 of the Company's Form 10-K for the year ended December 31, 1998 filed March 31, 1999). 10.18 Standard Industrial/Commercial Single-Tenant Lease - Net dated December 1, 1998 by and between Radar Investments, Inc. and Registrant relating to the premises located at 8943 Fullbright Avenue, Chatsworth, California (incorporated by reference to Exhibit 10.38 of the Company's Form 10-K for the year ended December 31, 1998 filed March 31, 1999). 10.19 Stock Purchase Agreement Dated February 21, 2000 relating to the sale and purchase of up to one hundred percent (100%) of the ordinary shares in the capital of Fiber Optic Communications, Inc. ("FOCI") and the sale and purchase of two million four hundred thousand of ordinary shares in the capital of MRV Communications, Inc. (incorporated by reference to Exhibit 10.33 of the Company's Form 10-K filed with the SEC on March 30, 2000). 10.20 Stock Option Agreement dated July 11, 2000 between William R. Spivey and the Registrant (incorporated by reference to Exhibit 10.4 filed with the Luminent, Inc. Registrant Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.21 Stock Option Agreement dated July 12, 2000 between Eric Blachno and the Registrant (incorporated by reference to Exhibit 10.7 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on October 5, 2000). 10.22 Escrow Agreement dated as of 21st day of February, 2000, by and among the Registrant, the Selling Shareholders of FOCI and the law firm of Baker & McKenzie, Taipei Office (incorporated by reference to Exhibit 2.1(b) of the Form 8-K of the Registrant filed with the SEC on May 9, 2000). 10.23 Addendum to Stock Purchase Agreement dated as of April 14, 2000 by and among FOCI, the Registrant and the selling shareholders of FOCI (incorporated by reference to Exhibit 2.1(c) of the Form 8-K of the Registrant filed with the SEC on May 9, 2000). 10.24 Addendum to Escrow Agreement dated as of April 14, 2000 by and among FOCI, Registrant and the selling shareholders of FOCI (incorporated by reference to Exhibit 2.1(d) of the Form 8-K of the Registrant filed with the SEC on May 9, 2000). 10.25 Addendum No. 2 to Escrow Agreement dated as of June 26, 2000 by and among FOCI, the Registrant and the selling shareholders of FOCI (incorporated by reference to Exhibit 2.1(e) of the Form 8-K/A of the Registrant filed with the SEC on July 7, 2000). 10.26 Addendum No. 2 to Stock Purchase Agreement dated as of June 26, 2000 by and among FOCI, the Registrant and the selling shareholders of FOCI (incorporated by reference to Exhibit 2.1(e) of the Form 8-K/A of the Registrant filed with the SEC on July 7, 2000).
67
EXHIBIT NO DESCRIPTION - ---------- ----------- 10.27 Memorandum of Understanding dated as of June 26, 2000 between the Registrant and the remaining shareholders of FOCI (incorporated by reference to Exhibit 2.1(g) of the Form 8-K/A of the Registrant filed with the SEC on July 7, 2000). 10.28 Stock Purchase Agreement by and between the Registrant and the shareholders of Optronics International Corp. ("OIC") dated April 23, 2000 (incorporated by reference to Exhibit 10.19 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.29 Escrow Agreement, dated as of the 23rd day of April 2000, by and among the Registrant, the selling shareholders of OIC and the law firm of Baker & McKenzie, Taipei Office (incorporated by reference to Exhibit 10.20 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.30 Stock Purchase Agreement by and between the Registrant and the shareholders of Quantum Optech Inc. ("QOI") dated April 26, 2000 (incorporated by reference to Exhibit 10.21 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.31 Escrow and Stock Pledge Agreement dated as of April 26, 2000 by and between the Registrant and certain shareholders of QOI (incorporated by reference to Exhibit 10.22 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.32 Addendum to Stock Purchase Agreement made as of June 16th, 2000 by and among the Registrant, QOI and shareholders of QOI (incorporated by reference to Exhibit 10.23 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.33 Addendum to Escrow and Stock Pledge Agreement dated as of June 16, 2000 by and between the Registrant and certain shareholders of QOI (incorporated by reference to Exhibit 10.24 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.34 2000 MRV Communications, Inc. Stock Option plan for Employees of Optronics International Corp. (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-8 filed with the SEC on October 13, 2000 (file no. 333-47898)). 10.35 Form of Stock Option Agreement for the 2000 MRV Communications, Inc. Stock Option Plan for Employees of Optronics International Corp. (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-8 filed with the SEC on October 13, 2000 (file no. 333-47898)). 10.36 2000 MRV Communications, Inc. Stock Option Plan for Employees of AstroTerra Corporation (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-8 filed with the SEC on October 13, 2000 (file no. 333-47900)). 10.37 Form of Stock Option Agreement for the 2000 MRV Communications, Inc. Stock Option Plan for Employees of AstroTerra Corporation (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-8 filed with the SEC on October 13, 2000 (file no. 333-47900)). 10.38 1997 Incentive and Nonstatutory Stock Option Plan, as amended (incorporated by reference to Exhibit A to the Registrant's Definitive Proxy Statement filed with the SEC on November 14, 2001)
68
EXHIBIT NO DESCRIPTION - ---------- ----------- 10.39 Form of Stock Option Agreement under the 1997 Incentive and Nonstatutory Stock Option Plan (incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 filed with the SEC on September 24, 1999 (file no. 333-87735)). 10.40 Underwriting Agreement dated as of November 9, 2000 by and between the Registrant, the Registrant and Credit Suisse First Boston Corporation, acting on behalf of themselves and as the Representatives of the several Underwriters (incorporated by reference to Exhibit 10.25 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.41 Master Separation and Distribution Agreement dated as of July 25, 2000 between the Registrant and Luminent, Inc. (incorporated by reference to Exhibit 2.1 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.42 Amendment to Master Separation and Distribution Agreement dated as of September 8, 2000, between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.27 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.43 General Assignment and Assumption Agreement dated as of September 8, 2000 between the Registrant and Luminent, Inc. (incorporated by reference to Exhibit 10.28 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.44 Master Technology Ownership and License Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.29 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.45 Employee Matters Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.30 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.46 Real Estate Matters Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.31 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.47 Master Transitional Services Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.32 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.48 Master Trademark Ownership and License Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.33 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.49 Master Patent Ownership and License Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.34 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.50 Indemnification and Insurance Matters Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.35 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.51 Master Confidential Disclosure Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.36 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001).
69
EXHIBIT NO DESCRIPTION - ---------- ----------- 10.52 Tax Sharing Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.37 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.53 Resignation Agreement and General Release between Registrant and Luminent and William R. Spivey dated September 12, 2001 (incorporated by reference to Exhibit 10.62 of registrant's Post-Effective Amendment No. 4 to Registration Statement on Form S-4 filed with the SEC on December 28, 2001). 10.54 Stock Purchase Agreement dated July 7, 2000, by and among Astroterra Corporation, certain shareholders of AstroTerra Corporation and the Registrant (incorporated by reference to Exhibit 2.1(a) of the Form 8-K filed with the SEC on July 27, 2000). 10.55 Registration Rights Agreement dated July 7, 2000 by and among the Registrant and employees of Astroterra Corporation (incorporated by reference to Exhibit 2.1(b) of the Form 8-K filed with the SEC on July 27, 2000). 10.56 2001 MRV Communications, Inc. Stock Option Plan for Employees of Appointech, Inc. dated January 19, 2001 (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8 filed with the SEC on October 9, 2001). 10.57 Form of Stock Option Agreement for the 2001 MRV Communications, Inc. Stock Option Plan for Employees of Appointech, Inc. (incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-8 filed with the SEC on October 9, 2001). 10.58 Stock Option Plan for Employees of Fiber Optic Communications, Inc. dated April 25, 2000 (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8 filed with the SEC on February 9, 2001). 10.59 From of Stock Option Agreement under the Stock Option Plan for Employees of Fiber Optic Communications, Inc. (incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-8 filed with the SEC on February 9, 2001). 10.60 Stock Option Plan for Employees of Quantum Optic, Inc. dated April 26, 2000 (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8 filed with the SEC on February 9, 2001). 10.61 Form of Stock Option Agreement under the Stock Option Plan for Employees of Quantum Optic, Inc. (incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-8 filed with the SEC on February 9, 2001). 10.62 Lease Agreement dated January 30, 2001 between Abronson, Cole & Eisele, a California General Partnership and Luminent, Inc., relating to premises located at 850 Lawrence Drive (incorporated by reference to Exhibit 10.42 of Luminent, Inc.'s Form 10-Q filed with the SEC on May 15, 2001). 10.63 Lease Agreement dated July 13, 1999 between Nordhoff Industrial Complex and the Registrant, relating to premises located at 20550 Nordhoff Street (incorporated by reference to Exhibit 10.8 of Luminent, Inc.'s Registration Statement on Form S-1 filed with the SEC on July 25, 2000). 10.64 Lease Agreement dated November 11, 1997 by and among Kenneth R. Smith, Alice J. Smith and MRV Communications, Inc., relating to premises located at 8917 Fullbright Ave. (incorporated by reference to Exhibit 10.9 of Luminent, Inc.'s Registration Statement on Form S-1 filed with the SEC on July 26, 2000).
70
EXHIBIT NO DESCRIPTION - ---------- ----------- 10.65 Amendment to Lease between Nordhoff Industrial and the Registrant dated December 14, 2001 relating to premises located at 20415 Nordhoff Street. 10.66 Non-statutory Stock Option Plan for Employees of Luminent, Inc. (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8 filed with the SEC on February 1, 2002). 10.67 Form of Stock Option Agreement for Non-statutory Stock Option Plan for Employees of Luminent, Inc. (incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-8 filed with the SEC on February 1, 2002). 10.68 Lease Agreement dated March 30, 2000 between the Registrant and MEPT West Hills, LLC, relating to the premises located at 8433 Fallbrook Ave. 10.69 Lease Agreement dated August 14, 2000 between George DeRado and Luminent, Inc. relating to the premises located at 20520 Nordhoff Street. 21 Subsidiaries of Registrant 23.1 Consent of Arthur Andersen LLP to incorporation of Report on Financial Statements into registrant's Registration Statements 25 Power of Attorney (included on signature page)
(b) Reports on Form 8-K. Two reports on Form 8-K were filed during the last quarter of the period covered by this Report, as follows: (i) A report on Form 8-K dated October 1, 2001 was filed on October 1, 2001 reporting matters under Item 5. (ii). A report on Form 8-K dated October 9, 2001 was filed on October 9, 2001 reporting matters under Item 5. 71 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MRV Communications, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of MRV Communications, Inc. and subsidiaries included in this Form 10-K, and have issued our report thereon dated February 12, 2002. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule of valuation and qualifying accounts is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and it is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements, and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP Arthur Andersen LLP Los Angeles, California February 12, 2002 72 MRV COMMUNICATIONS, INC. Schedule II-- Valuation and Qualifying Accounts (in thousands)
Balance at Charge to Balance at Beginning of Costs and End of Period Expenses Write-off Period ------------ --------- --------- ---------- Allowance of doubtful accounts: Year ended December 31, 1999 $ 8,487 $ 1,416 $ (1,452) $ 8,451 Year ended December 31, 2000 $ 8,451 $ 3,833 $ (2,804) $ 9,480 Year ended December 31, 2001 $ 9,480 $ 5,654 $ (335) $14,799
Balance at Charge to Balance at Beginning of Costs and End of Period Expenses Write-off Period ------------ --------- --------- ---------- Restructuring accrual accounts: Year ended December 31, 1999 $ -- $ -- $ -- $ -- Year ended December 31, 2000 -- -- -- -- Year ended December 31, 2001 -- 20,300 (11,623) 8,677 ------- -------- -------- ------- $ -- $ 20,300 $(11,623) $ 8,677 ======= ======== ======== =======
73 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth, State of California, on March 20, 2002. MRV COMMUNICATIONS, INC. By: /s/ NOAM LOTAN ----------------------------- Noam Lotan, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Noam Lotan, Shlomo Margalit and Shay Gonen, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated.
Names Title Date ----- ----- ---- /s/ NOAM LOTAN President, Chief Executive Officer (Principal - ------------------------------- Executive Officer), and a Director March 20, 2002 Noam Lotan /s/ SHLOMO MARGALIT Chairman of the Board, Chief Technical Officer, - ------------------------------- Secretary, and a Director March 20, 2002 Shlomo Margalit /s/ SHAY GONEN Interim Chief Financial Officer - ------------------------------- (Principal Financial and Accounting Officer) March 20, 2002 Shay Gonen /s/ IGAL SHIDLOVSKY - ------------------------------- Director March 20, 2002 Igal Shidlovsky /s/ GUENTER JAENSCH - ------------------------------ Director March 20, 2002 Guenter Jaensch /s/ DANIEL TSUI - ------------------------------- Director March 20, 2002 Daniel Tsui /s/ BARUCH FISCHER - ------------------------------- Director March 20, 2002 Baruch Fischer
74 EX-10.65 3 v79412ex10-65.txt EXHIBIT 10.65 EXHIBIT 10.65 AMENDMENT TO LEASE DECEMBER 14, 2001 AMENDMENT TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET DATED OCTOBER 8, 1996 BETWEEN NORDHOFF INDUSTRIAL (INCORRECTLY IDENTIFIED IN THE ORIGINAL LEASE AS NORDHOFF DEVELOPMENT), AS LESSOR AND MRV COMMUNICATIONS, INC., AS LESSEE, FOR THE PROPERTY COMMONLY KNOWN AS 20415 NORDHOFF STREET, CHATSWORTH, CA. All of the terms and conditions of the Lease shall remain in effect except for the following: Paragraph 1.1 PARTIES: Nordhoff Industrial, A General Partnership "Lessor". Paragraph 1.2 PREMISES: 20415 Nordhoff Street, Chatsworth, an approximately 13,300 square foot industrial building. Paragraph 1.3 TERM: 5 years and 0 months commencing April 1, 2002 and ending March 31, 2007. Paragraph 1.5 BASE RENT: $11,305.00 per month "Base Rent" payable on the first day of the month commencing April, 2002. Base Rent is to be adjusted annually, see RENT ADJUSTMENTS Paragraph 54 attached hereto and made a part hereof. Paragraph 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE: The original paragraph in the Lease is deleted. Paragraph 50 CONDITION OF PROPERTY: The original paragraph in the Lease is deleted. Lessor, at Lessor's expense shall paint the exterior of the building and will be completed no later than February 28, 2002. Paragraph 51 TENANT IMPROVEMENTS: The original paragraph in the Lease is deleted. Paragraph 54 BASE RENT SCHEDULE: Base Rent is to be adjusted annually. See RENT ADJUSTMENTS Paragraph 54 attached hereto and made a part hereof. Paragraph 56 OPTION TO EXTEND: See OPTION TO EXTEND Paragraph 56 attached hereto and made a part hereof. LESSOR LESSEE NORDHOFF INDUSTRIAL MRV COMMUNICATIONS, INC. By: /s/ GERALD R. PELTON By: /s/ NOAM LOTAN ----------------------------------- ----------------------------------- Gerald R. Pelton Noam Lotan Title: General Partner Title: President and Chief Executive Officer Date: 12/20/01 Date: 12/20/01 --------------------------------- --------------------------------- [AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION LOGO] RENT ADJUSTMENT(S) STANDARD LEASE ADDENDUM DATED December 14, 2001 ---------------------- BY AND BETWEEN (LESSOR) Nordhoff Industrial -------------------------------------------------- -------------------------------------------------- (LESSEE) MRV Communications, Inc. -------------------------------------------------- -------------------------------------------------- ADDRESS OF PREMISES: 20415 Nordhoff Street, Chatsworth, CA 91311 -------------------------------------------------- -------------------------------------------------- Paragraph 54 -- A. RENT ADJUSTMENTS: The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] I. COST OF LIVING ADJUSTMENT(S) (COLA) a. On (Fill in COLA Dates): April 1, 2003 and on each April 1st --------------------------------------- thereafter - ------------------------------------------------------------------------------- the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [X] CPI W (Urban Wage Earners and Clerical Workers) or [ ] CPI U (All Urban Consumers), for (Fill in Urban Area): West Urban ---------------------------------------------------------- All Items (1982-1984 = 100), herein referred to as "CPI". b. The monthly rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 months prior to (select one): [ ] the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or [X] (Fill in Other "Base Month"): the 12th month prior to the month in which the adjustment is to take effect. The sum so calculated shall constitute the new monthly rent* hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment. *In no event shall said increase be greater than seven percent (7%) per annum or less than three percent (3%) per annum. c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties. RENT ADJUSTMENT(S) PAGE 1 OF 2 B. NOTICE: Unless specified otherwise herein, notice of any such adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease. NOTE: THESE FORMS ARE OFTEN MODIFIED TO MEET CHANGING REQUIREMENTS OF LAW AND NEEDS OF THE INDUSTRY. ALWAYS WRITE OR CALL TO MAKE SURE YOUR ARE UTILIZING THE MOST CURRENT FORM: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 S. FLOWER STREET, SUITE 600, LOS ANGELES, CALIF. 90017 RENT ADJUSTMENT(S) PAGE 2 OF 2 [AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION LOGO] OPTION(S) TO EXTEND STANDARD LEASE ADDENDUM DATED December 14, 2001 ---------------------- BY AND BETWEEN (LESSOR) Nordhoff Industrial -------------------------------------------------- -------------------------------------------------- (LESSEE) MRV Communications, Inc. -------------------------------------------------- -------------------------------------------------- ADDRESS OF PREMISES: 20415 Nordhoff Street, Chatsworth, CA 91311 -------------------------------------------------- -------------------------------------------------- Paragraph 56 A. OPTION(S) TO EXTEND: Lessor hereby grants to Lessee the option to extend the term of this Lease for one (1) additional thirty (36) month period(s) commencing when the prior term expires upon each and all of the following terms and conditions: (i) In order to exercise an option to extend, Lessee must give written notice of such election to Lessor and Lessor must receive the same at least 6 but not more than 9 months prior to the date that the option period would commence, time being of the essence. If proper notification of the exercise of an option is not given and/or received, such option shall automatically expire. Options (if there are more than one) may only be exercised consecutively. (ii) The provisions of paragraph 39, including those relating to Lessee's Default set forth in paragraph 39.4 of this Lease, are conditions of this Option. (iii) Except for the provisions of this Lease granting an option or options to extend the term, all of the terms and conditions of this Lease except where specifically modified by this option shall apply. (v) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV) a. On (Fill in MRV Adjustment Date(s)) The commencement date of the --------------------------------- option period. - ------------------------------------------------------------------------------- the Base Rent shall be adjusted to the "Market Rental Value" of the property as follows: 1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached, within thirty days, then: (a) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the Parties, or (b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration in accordance with the following provisions: PAGE 1 OF 2 (i) Within 15 days thereafter, Lessor and Lessee shall each select an [ ] appraiser [X] broker ("CONSULTANT" - check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator. (ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises is, and whether Lessor's or Lessee's submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties. (iii) If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties. (iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, ie. the one that is NOT the closest to the actual MRV. (v) Notwithstanding, the foregoing, if Lessee in its sole judgement is dissatisfied with the MRV, Lessee shall have the right to withdraw the exercise of its option within 20 days of Lessee's receipt of the final decision of the arbitrator. If Lessee so rescinds its exercise of the option, the term of the lease shall then expire on March 31, 2007. 2) Notwithstanding the foregoing, the new MRV shall not be less than the rent payable for the month immediately preceding the rent adjustment. b. Upon the establishment of each New Market Rental Value: 1) the new MRV will become the new "Base Rent" for the purpose of calculating any further Adjustments, and 2) the first month of each Market Rental Value term shall become the new "Base Month" for the purpose of calculating any further Adjustments, and the new base rent for the option term shall be increased annually as outlined in Paragraph 54. B. NOTICE: Unless specified otherwise herein, notice of any rental adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease. NOTE: THESE FORMS ARE OFTEN MODIFIED TO MEET CHANGING REQUIREMENTS OF LAW AND NEEDS OF THE INDUSTRY. ALWAYS WRITE OR CALL TO MAKE SURE YOUR ARE UTILIZING THE MOST CURRENT FORM: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 S. FLOWER STREET, SUITE 600, LOS ANGELES, CALIF. 90017 PAGE 2 OF 2 EX-10.68 4 v79412ex10-68.txt EXHIBIT 10.68 Exhibit 10.68 LEASE by and between "Landlord" MEPT WEST HILLS LLC, a Delaware limited liability company and "Tenant" MRV COMMUNICATIONS, INC., a Delaware corporation As of March 30, 2000 TABLE OF CONTENTS
Page ---- SECTION 1: DEFINITIONS................................................................. 1 1.1 Definitions........................................................... 1 1.2 Access Laws........................................................... 1 1.3 Additional Rent....................................................... 1 1.4 Base Amount Allocable to the Premises................................. 1 1.5 Base Rent............................................................. 1 1.6 Brokers............................................................... 1 1.7 Building.............................................................. 1 1.8 Business Day.......................................................... 1 1.9 Claims................................................................ 1 1.10 Commencement Date..................................................... 1 1.11 Estimated Operating Costs Allocable to the Premises................... 1 1.12 Events of Default..................................................... 1 1.13 Governmental Agency................................................... 1 1.14 Governmental Requirements............................................. 1 1.15 Intentionally Omitted................................................. 1 1.16 Hazardous Substances.................................................. 1 1.17 Land ................................................................. 2 1.18 Landlord.............................................................. 2 1.19 Landlord's Agents..................................................... 2 1.20 Lease Term............................................................ 2 1.21 Manager............................................................... 2 1.22 Manager's Address..................................................... 2 1.23 Operating Costs....................................................... 2 1.24 Operating Costs Allocable to the Premises............................. 2 1.25 Parking Rights........................................................ 2 1.26 Permitted Use......................................................... 2 1.27 Intentionally Omitted................................................. 2 1.28 Prepaid Rent.......................................................... 2 1.29 Premises.............................................................. 2 1.30 Prime Rate............................................................ 2 1.31 Project............................................................... 2 1.32 Property Taxes........................................................ 2 1.33 Punch List Work....................................................... 3 1.34 Security Deposit...................................................... 3 1.35 Substantial Completion................................................ 3 1.36 Tenant................................................................ 3 1.37 Tenant Alterations.................................................... 3 1.38 Tenant Improvement Allowance.......................................... 3 1.39 Tenant Improvements................................................... 3 1.40 Tenant's Agents....................................................... 4 1.41 Tenant's Pro Rata Share............................................... 4 1.42 Year.................................................................. 4 SECTION 2: PREMISES AND TERM........................................................... 4 2.1 Lease of Premises..................................................... 4 2.2 Lease Term............................................................ 4 2.3 Early Entry into Premises............................................. 4 2.4 Tenant Improvements................................................... 5 2.5 Commencement Date..................................................... 5 2.6 Tenant's Contribution to Tenant Improvement Costs..................... 6 2.7 Condition of Premises "AS-IS"......................................... 6 2.8 Memorandum of Commencement Date....................................... 7 2.9 Use and Conduct of Business........................................... 8
-i-
Page ---- 2.10 Compliance with Governmental Requirements and Rules and Regulations................................................. 8 2.11 Intentionally Omitted................................................. 8 2.12 Option to Renew....................................................... 8 2.12.1 Renewal Options................................................ 8 2.12.2 Notice of Exercise............................................. 9 2.12.3 Dispute Regarding Fair Market Rental Rate...................... 9 2.12.4 Conditions..................................................... 10 SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE........................................................... 10 3.1 Payment of Rental..................................................... 10 3.2 Base Rent............................................................. 10 3.3 Security Deposit...................................................... 10 3.4 Additional Rent....................................................... 11 3.4.1 Rental Adjustment for Estimated Operating Costs................. 11 3.4.2 Actual Costs.................................................... 12 3.4.3 Determination of Operating Costs................................ 12 3.4.4 End of Term..................................................... 12 3.4.5 Definitions..................................................... 12 (a) Base Amount Allocable to the Premises.................. 12 (b) Estimated Operating Costs Allocable to the Premises............................................... 13 (c) Operating Costs........................................ 13 (d) Operating Costs Allocable to the Premises.............. 15 3.4.6 Tenant's Costs.................................................. 15 3.4.8 Operating Cost Audit............................................ 16 3.5 Utilities............................................................. 16 3.6 Holdover.............................................................. 17 3.7 Late Charge........................................................... 17 3.8 Default Rate.......................................................... 17 SECTION 4: GENERAL PROVISIONS.......................................................... 18 4.1 Maintenance and Repair by Landlord.................................... 18 4.2 Maintenance and Repair by Tenant...................................... 18 4.3 Common Areas/Security................................................. 18 4.4 Tenant Alterations.................................................... 19 4.5 Tenant's Work Performance............................................. 20 4.6 Surrender of Possession............................................... 21 4.7 Removal of Property................................................... 21 4.8 Access................................................................ 21 4.9 Damage or Destruction................................................. 22 4.9.1 Restoration of Premises......................................... 22 4.9.2 Intentionally Omitted........................................... 22 4.9.3 Termination of Lease by Mortgage Holder's Election.............. 22 4.9.4 Destruction Near End of Term.................................... 23 4.9.5 Termination by Tenant........................................... 23 4.9.6 Waiver.......................................................... 23 4.10 Condemnation.......................................................... 23 4.11 Parking............................................................... 24 4.12 Indemnification....................................................... 24 4.13 Tenant Insurance...................................................... 24 4.13.1 Form of Policies............................................... 24 4.13.2 Approval of Insurer............................................ 25 4.13.3 Landlord-Obtained Insurance.................................... 25
-ii-
Page ---- 4.14 Landlord's Insurance.................................................. 25 4.15 Waiver of Subrogation................................................. 26 4.16 Assignment and Subletting by Tenant................................... 26 4.16.1 Restrictions on Transfer....................................... 26 4.16.2 Landlord Consent, Procedure.................................... 26 4.16.3 Landlord Consent, Relevant Factors............................. 27 4.16.4 Notice Regarding Landlord's Consent............................ 28 4.16.5 Restriction of Transfer of Interests in Tenant................. 28 4.16.6 Corporate Affiliate............................................ 28 4.16.7 Excess Rent.................................................... 28 4.16.8 Recapture...................................................... 28 4.17 Assignment by Landlord................................................ 29 4.18 Estoppel Certificates and Financial Statements........................ 29 4.19 Modification for Lender............................................... 30 4.20 Hazardous Substances.................................................. 30 4.21 Access Laws........................................................... 32 4.21.1 Notice to Landlord of Violation................................ 32 4.21.2 Prohibited Acts................................................ 32 4.21.3 Tenant Responsibility.......................................... 32 4.21.4 Landlord Responsibility........................................ 32 4.21.5 Indemnity of Landlord.......................................... 33 4.21.6 Inconsistent Provisions of Law................................. 33 4.22 Quiet Enjoyment....................................................... 33 4.23 Intentionally Omitted................................................. 33 4.24 Subordination......................................................... 33 4.25 Workers Compensation Immunity......................................... 33 4.26 Brokers............................................................... 33 4.27 Exculpation and Limitation of Liability............................... 33 4.28 Intentionally Omitted................................................. 34 4.29 Mechanic's Liens and Tenant's Personal Property Taxes................. 34 4.29.1 Mechanic's Liens............................................... 34 4.29.2 Personal Property Taxes........................................ 34 SECTION 5: DEFAULT AND REMEDIES......................................................... 34 5.1 Events of Default..................................................... 34 5.1.1 Events of Default............................................... 34 5.1.2 Notice of Default............................................... 35 5.1.3 Notice to Landlord Regarding Tenant Default..................... 35 5.1.4 Treatment as Unexpired Lease.................................... 35 5.2 Remedies.............................................................. 35 5.2.1 Remedies; Termination and Recovery of Possession................ 36 5.2.2 Remedies; Recover Rent as it Becomes Due........................ 37 5.2.3 Succession to Tenant Rights..................................... 37 5.2.4 Rights and Remedies Cumulative.................................. 37 5.2.5 Money Damages Upon Reletting.................................... 38 5.2.6 Remedies Nonexclusive........................................... 38 5.3 Right to Perform...................................................... 38 5.4 Landlord's Default.................................................... 38 5.5 Acceptance of Rent Without Waiving Rights............................. 38 SECTION 6: MISCELLANEOUS PROVISIONS................................................... 39 6.1 Notices............................................................... 39 6.2 Attorney's Fees and Expenses.......................................... 39
-iii-
Page ---- 6.3 No Accord and Satisfaction............................................ 39 6.4 Successors; Joint and Several Liability............................... 39 6.5 Choice of Law......................................................... 39 6.6 No Waiver of Remedies................................................. 40 6.8 Force Majeure......................................................... 40 6.9 Severability; Captions................................................ 40 6.10 Interpretation........................................................ 40 6.11 Incorporation of Prior Agreement; Amendments.......................... 41 6.12 Authority............................................................. 41 6.13 Time of Essence....................................................... 41 6.14 Survival of Obligations............................................... 41 6.15 Consent to Service.................................................... 41 6.16 Landlord's Authorized Agents.......................................... 41
EXHIBITS Exhibit A Legal Description of Land Exhibit B Drawing Showing Location of the Premises Exhibit C Work Letter and Construction Agreement Exhibit D Form of Memorandum of Commencement Date Exhibit E Rules and Regulations Exhibit F Intentionally Omitted Exhibit G Parking Area Exhibit H Environmental Questionnaire
THIS LEASE (this "Lease") is made as of March 30, 2000, by and between MEPT WEST HILLS, LLC, a Delaware limited liability company ("Landlord") and MRV COMMUNICATIONS, INC., a Delaware corporation ("Tenant"). SECTION 1: DEFINITIONS 1.1 DEFINITIONS: Each underlined term in this section shall have the meaning set forth next to that underlined term. 1.2 ACCESS LAWS: The Americans With Disabilities Act of 1990 (including the Americans with Disabilities Act Accessibility Guidelines for Building and Facilities) and all other Governmental Requirements relating to the foregoing. 1.3 ADDITIONAL RENT: Defined in Section 3.4. 1.4 BASE AMOUNT ALLOCABLE TO THE PREMISES. Defined in paragraph captioned "Additional Rent". 1.5 BASE RENT: Base Rent shall be as follows:
Lease Months Monthly Base Rent ------------ ----------------- 1-30 $75,650.25 per month 31-60 $81,469.50 per month
1.6 BROKERS: Tenant was represented in this transaction by Delphi Business Properties, a licensed real estate broker. Landlord was represented in this transaction by Trammell Crow So. Cal. Inc., a licensed real estate broker. 1.7 BUILDING: The building located on the Land within the Project commonly known as Corporate Pointe at West Hills, which Building is commonly known as Building "B" and which is stipulated by Landlord and Tenant to contain 38,795 rentable square feet. 1.8 BUSINESS DAY: Calendar days, except for Saturdays and Sundays and holidays when banks are closed in Washington, D.C. 1.9 CLAIMS: An individual and collective reference to any and all claims, demands, damages, injuries, losses, liens, liabilities, penalties, fines, lawsuits, actions, other proceedings and expenses (including attorney's fees and expenses incurred in connection with the proceeding whether at trial or on appeal). 1.10 COMMENCEMENT DATE: The earlier of (a) the date of Substantial Completion and (b) the date Tenant commences to conduct business in the Premises. 1.11 ESTIMATED OPERATING COSTS ALLOCABLE TO THE PREMISES: Defined in paragraph captioned "Additional Rent". 1.12 EVENTS OF DEFAULT: One or more of those events or states of facts defined in the paragraph captioned "Events of Default". 1.13 GOVERNMENTAL AGENCY: The United States of America, the state in which the Land is located, any county, city, district, municipality or other governmental subdivision, court or agency or quasi-governmental agency having jurisdiction over the Land and any board, agency or authority associated with any such governmental entity, including the fire department having jurisdiction over the Land. 1.14 GOVERNMENTAL REQUIREMENTS: Any and all statutes, ordinances, codes, laws, rules, regulations, orders and directives of any Governmental Agency as now or later amended. 1.15 Intentionally Omitted. 1.16 HAZARDOUS SUBSTANCES: Asbestos, PCBs, petroleum or petroleum-based chemicals or substances, urea formaldehyde or any chemical, material, element, compound, solution, mixture, substance or other matter of any kind whatsoever which is now or later defined, classified, listed, designated or regulated as hazardous, toxic or radioactive by any Governmental Agency. -1- 1.17 LAND: The land upon which the Building is located in Los Angeles County, California, as legally described in Exhibit A attached to this Lease. 1.18 LANDLORD: The entity named as the "Landlord" on the first page of this Lease, or its successors and assigns as provided in paragraph captioned "Assignment by Landlord". 1.19 LANDLORD'S AGENTS: Any and all partners, officers, agents, employees, trustees, members, investment advisors and consultants of Landlord. 1.20 LEASE TERM: Commencing on the Commencement Date, and ending sixty (60) months later, provided that, if the Commencement Date is a date other than the first day of a calendar month, the Lease Term shall be extended by the number of days remaining in the month in which the Commencement Date occurs. 1.21 MANAGER: Trammell Crow So. Cal., Inc. or its replacement as specified by written notice from Landlord to Tenant. 1.22 MANAGER'S ADDRESS: 8550 Balboa Boulevard, Suite 220, Northridge, California 91325, which address may be changed by written notice from Landlord to Tenant. 1.23 OPERATING COSTS: Defined in paragraph captioned "Additional Rent". 1.24 OPERATING COSTS ALLOCABLE TO THE PREMISES: Defined in paragraph captioned "Additional Rent". 1.25 PARKING RIGHTS: 155 non-exclusive parking stalls, subject to the provisions of Paragraph 4.11, and subject to reduction as provided therein. 1.26 PERMITTED USE: General office purposes and incidental uses consisting of the following: Warehousing light assembly, shipping and receiving, engineering and research and development (including product testing), so long as such use is consistent with Governmental Requirements and with first-class buildings of the same or similar use as the Building located in the metropolitan area in which the Building is located. 1.27 INTENTIONALLY OMITTED. 1.28 PREPAID RENT: $75,650.25 to be applied toward Base Rent for the first full calendar month of the Lease Term or to the first calendar month in which full Base Rent is due. 1.29 PREMISES: The entire Building, as depicted on the plan attached to this Lease as Exhibit B. Landlord and Tenant hereby stipulate that the Premises consist of 38,795 rentable square feet. 1.30 PRIME RATE: Defined in paragraph captioned "Default Rate". 1.31 PROJECT. The project commonly known as "Corporate Pointe at West Hills" within which the Building and Land are located, consisting of approximately 30.57 acres and, approximately 329,969 square feet of improvements, as the same may be adjusted by Landlord from time to time. 1.32 PROPERTY TAXES: (1) Any form of ad valorem real or personal property tax or assessment imposed by any Governmental Agency on the Land, Building, related improvements or any personal property owned by Landlord associated with the Building or Land; (2) any other form of tax or assessment, license fee, tax or excise on rent or any other levy, charge, expense or imposition made or required by any Governmental Agency on any interest of Landlord in the Building, Land, related improvements or personal property (excluding, however, any business license fee or business license tax); (3) any fee for services charged by any Governmental Agency for any services such as fire protection, street, sidewalk and road maintenance, refuse collection, school systems or other services provided or formerly provided to property owners and residents within the general area of the Land; (4) any governmental impositions allocable to or measured by the area of any or all of the Building, Land, related improvements or personal property, or the amount of any base rent, additional rent or other sums payable under any lease for any or all of the Building, Land, related improvements or personal property, including any tax on gross receipts or any excise tax or other charges levied by any Governmental Agency with respect to the possession, leasing, operation, maintenance, alteration, -2- repair, use or occupancy of any or all of the Land or Building, related improvements or personal property or the rent earned by any part of or interest in the Building or Land, related improvements or personal property (5) any impositions by any Governmental Agency on any transaction evidenced by a lease of any or all of the Building or Land, related improvements or personal property or charge with respect to any document to which Landlord is a party creating or transferring an interest or an estate in any or all of the Building or Land, related improvements or personal property; and (6) any increase in any of the foregoing based upon construction of improvements or change of ownership of any or all of the Land, related improvements or personal property. Property Taxes shall not include taxes on Landlord's net income or any inheritance, estate or gift taxes. Notwithstanding anything to the contrary contained in this Lease, in the event that at any time during the first thirty-six (36) months of the initial Term, any sale, refinancing, or change in ownership of the Land or the Project is consummated, and as a result thereof, and to the extent that in connection therewith, the Land or the Project is reassessed (the "Reassessment") for real estate tax purposes by the appropriate governmental authority pursuant to the terms of Proposition 13, all portions of the Tax Increase (as defined below) shall be excluded from the definition of Property Taxes. For purposes of this Section, the term "Tax Increase" shall mean that portion of the Property Taxes, as calculated immediately following the Reassessment, which is attributable solely to the Reassessment. Accordingly, the term "Tax Increase" shall not include any portion of the Property Taxes, calculated immediately following the Reassessment, which (i) is attributable to (A) the initial assessment of the value of the Real Property or the Project in effect prior to the applicable sale, refinance or change in ownership, (B) the base, shell and core of the Project or the tenant improvements located in the Project, (ii) is attributable to assessments which were pending immediately prior to the Reassessment and which are unrelated to a sale, refinance or change in ownership of the Project, which assessments were conducted during, and included in, such Reassessment, or which assessments were otherwise rendered unnecessary following the Reassessment, or (iii) is attributable to the annual inflationary increase of real estate taxes, but not in excess of two percent (2.0%) per annum. 1.33 PUNCH LIST WORK: Minor items of repair, correction, adjustment or completion as such phrase is commonly understood in the construction industry in the metropolitan area in which the Land is located. 1.34 SECURITY DEPOSIT: $81,469.50 1.35 SUBSTANTIAL COMPLETION: The date that the Tenant Improvements have been completed substantially in accordance with the Plans (as defined in Exhibit C) subject only to Punch List Work. 1.36 TENANT: The person or entity(ies) named as the "Tenant" on the first page of this Lease, its permitted successors and assigns. 1.37 TENANT ALTERATIONS: Defined in paragraph captioned "Tenant Alterations". 1.38 TENANT IMPROVEMENT ALLOWANCE: The maximum amount to be expended by Landlord pursuant to the Work Letter attached to this Lease as Exhibit C for the cost of Tenant Improvements (including architectural, engineering, permitting and space planning fees), which maximum shall not exceed Seven Hundred Seventy-five Thousand Nine Hundred and 00/100 Dollars ($775,900.00). 1.39 TENANT IMPROVEMENTS: Those alterations or improvements to the Premises which are to be constructed in accordance with and subject to the terms and conditions of the Work Letter Agreement attached hereto as Exhibit C. 1.40 TENANT'S AGENTS: Any and all officers, partners, contractors, subcontractors, consultants, licensees, agents, concessionaires, subtenants, servants, employees, customers, guests, invitees or visitors of Tenant. -3- 1.41 TENANT'S PRO RATA SHARE: is one hundred percent (100%), which percentage is the quotient of the rentable square footage of the Premises divided by the rentable square footage of the Building; however, with respect to Operating Costs which pertain to the Project as a whole, Tenant's Pro Rata Share shall equal a percentage obtained by dividing the rentable square footage of the Premises by the rentable square footage within the Project, which Pro Rata Share is currently eleven and 76/100 percent (11.76%). 1.42 YEAR: A calendar year commencing January 1 and ending December 31. SECTION 2: PREMISES AND TERM 2.1 LEASE OF PREMISES. Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, upon the terms and conditions set forth in this Lease. 2.2 LEASE TERM. The Lease Term shall be for the period stated in the definition of that term, unless earlier terminated as provided in this Lease. 2.3 EARLY ENTRY INTO PREMISES. Tenant may enter into the Premises prior to Landlord's anticipated date of Substantial Completion of the Premises, upon receipt of Landlord's consent, solely for the purpose of installing furniture, telephones, computers, photocopy equipment, and other business equipment. Such early entry will not advance the Commencement Date so long as Tenant does not commence business operations from the entire Premises, or interfere with or delay the Substantial Completion of the Tenant Improvements. All of the provisions of this Lease shall apply to Tenant during any early entry, including the indemnity contained herein, but excluding the obligation to pay Base Rent and Additional Rent unless and until Tenant has commenced business operations in any portion of the Premises, whereupon Base Rent and Additional Rent shall commence. Landlord may revoke its permission for Tenant's early entry if Tenant's activities or workers interfere with the completion of the Tenant Improvements. If Tenant is granted early entry, Landlord shall not be responsible for any loss, including theft, damage or destruction to any work or material installed or stored by Tenant at the Premises or for any injury to Tenant or Tenant's Agents. Landlord shall have the right to post appropriate notices of non-responsibility and to require Tenant to provide Landlord with evidence that Tenant has fulfilled its obligation to provide insurance pursuant to Section 4.13 of this Lease. In addition to the rights granted to Tenant in the immediately preceding paragraph, and notwithstanding anything to the contrary contained therein, Tenant may take partial possession of the Premises (i.e., the entire Premises excluding only the conference room and the bathrooms to be constructed pursuant to the Tenant Work Letter) and commence business operations therefrom upon the satisfaction of all of the following conditions: (a) the portion of the Premises so being possessed by Tenant has been substantially completed; (b) such possession is permitted by applicable Governmental Requirements and, if necessary, a partial certificate of occupancy for the portion so being possessed has been obtained (with any additional cost incurred by Landlord to obtain such partial certificate of occupancy being paid solely by Tenant); (c) Tenant's partial possession of the Premises will not and does not, in Landlord's reasonable judgment, interfere with the construction and timely completion of the remainder of the Premises (and, to the extent there exists any such interference, the same shall constitute a "Tenant Delay"); and (d) Tenant shall pay Base Rent and Additional Rent on the portion so possessed, which amount shall be calculated as a fraction of the Base Rent and Additional Rent otherwise payable under this Lease, the numerator of which shall be the rentable square footage of the portion so possessed, and the denominator of which shall be the total rentable square footage of the Premises; and (e) such -4- possession shall not advance the Commencement Date, it being understood and agreed to by Tenant that the Commencement Date will not occur until the entire Premises is substantially completed or Tenant has commenced business operations from the entire Premises, as provided in Section 2.5 below. Notwithstanding anything contained in this Lease to the contrary. Tenant's commencement of business from any portion of the Premises shall conclusively be deemed to be Tenant's Waiver of Tenant's rights under Section 2.5 below if the Premises are not substantially completed by the Target Date and/or the Outside Date (i.e., Tenant shall no longer be entitled to any credit against Base Rent to terminate this Lease pursuant to the provisions of Section 2.5). 2.4 TENANT IMPROVEMENTS. Landlord shall construct the Tenant Improvements in accordance with, and subject to the terms and conditions of, the Work Letter Agreement attached hereto as Exhibit C. 2.5 COMMENCEMENT DATE. The Commencement Date shall be the earlier of (a) the date of Substantial Completion of the Tenant Improvements in the Premises and (b) the date Tenant commences to conduct business in the Premises. Landlord shall notify Tenant in writing at least five (5) Business Days in advance of the estimated Substantial Completion. If Tenant believes that Substantial Completion has not occurred, Tenant shall notify Landlord in writing of its objections within five (5) Business Days after its receipt of the Landlord's notice described in the preceding sentence. Landlord shall have a reasonable time after its receipt of Tenant's notice in which to take such action as may be necessary to achieve Substantial Completion, and shall notify Tenant in writing when such has been completed. The conduct of business by Tenant from the Premises shall establish the Commencement Date as specified in the definition of that term and the establishment of such fact upon the commencement of the conduct of business shall occur even if Tenant disputes whether Substantial Completion has occurred or attempts to condition or qualify Tenant's acceptance of the Premises. Such commencement of the conduct of business shall further establish that the Premises are in good and satisfactory condition upon such commencement and the Commencement Date has occurred. Tenant acknowledges that no representations as to the condition of the Premises have been made by Landlord, unless such are expressly set forth in this Lease. In the event of any dispute as to whether Substantial Completion has occurred, the certificate of Landlord's architect or general contractor or the certificate of occupancy or the equivalent sign-off by the municipal building inspector shall be conclusive, except that any delay in receipt of such certificate or in Substantial Completion which is caused by Tenant or Tenant's Agents or caused by any of Tenants uncompleted work being contained in the same building permit as the Tenant Improvements shall be charged to Tenant in the amount of the daily Base Rent multiplied by the number of days of such delays. If on the Commencement Date, Punch List Work remains to be completed, Landlord and Tenant shall agree on such Punch List Work prior to occupancy by Tenant and Landlord will endeavor to promptly complete it after the Commencement Date. In no event shall Tenant's refusal or failure to agree on the nature and extent of Punch List Work or the existence of items of Punch List Work Delay or postpone the occurrence of the Commencement Date. Tenant shall make no changes to the Plans or the work reflected in the Plans without the prior written consent Of Landlord, which consent shall not be unreasonably withheld. If the estimated date of Substantial Completion changes at any time after Landlord has given notice pursuant to this Paragraph, then Landlord shall give at least five (5) Business Days advance notice of the new estimated date of Substantial Completion. If (a) Substantial Completion has not occurred by the date which is twelve (12) weeks after the Tenant Waiver Date (as defined in Section 4.5 of the Tenant -5- Work Letter) (the "Target Date"), this Lease shall remain in full force and effect and shall not be void or voidable; and (b) such delay is not due to any delays resulting from or arising out of any acts or omissions of Tenant or Tenant's Agents or any Force Majeure event (as defined below; provided, however, that for purposes of this sentence, the term "Force Majeure" shall not include any labor strikes, unless the same are caused by the acts of Tenant or Tenant's Agents), then for each day that Substantial Completion is delayed beyond the Target Date, Tenant shall receive one (1) day of Base Rent credit against Base Rent next coming due so long as Tenant has not yet commenced business operations from the Premises and Tenant is not in default beyond applicable cure periods under any of the terms or conditions of this Lease. Notwithstanding the foregoing, if Substantial Completion has not occurred by the date which is sixteen (16) weeks after the Tenant Waiver Date (the "Outside Date"), and such delay in Substantial Completion is not due in whole or in part to the acts or omissions of Tenant or Tenant's Agents or to any event of Force Majeure (provided, however, that for purposes of this sentence, the term "Force Majeure" shall not include any labor strikes, unless the same are caused by the acts of Tenant or Tenant's Agents), the Tenant shall have the right, as its sole remedy, to terminate this Lease by delivering written notice to Landlord on or before the tenth (10th) day following the Outside Date. If Tenant timely and properly exercises its right to terminate this Lease pursuant to this Section, then Landlord shall promptly return the Security Deposit and the Prepaid Rent to Tenant. If Tenant fails to deliver such notice on or before the tenth (10th) day following the Outside Date, then Tenant shall be deemed to have waived its right to terminate this Lease under this Section 2.5. 2.6 TENANT'S CONTRIBUTION TO TENANT IMPROVEMENT COSTS. If the cost of the Tenant Improvements exceeds the Tenant Improvement Allowance, Tenant shall pay to Landlord such excess in accordance with the terms of the Work Letter Agreement attached hereto as Exhibit C. All Tenant Improvements, regardless of which party constructed them, shall become the property of Landlord and shall remain upon and be surrendered with the Premises upon the expiration or earlier termination of this Lease and, provided that Tenant pays the Removal Fee (as defined below), then notwithstanding anything contained herein to the contrary, Tenant shall have no obligation to remove the same upon the expiration or earlier termination of this Lease. Upon the expiration or earlier termination of this Lease (other than a termination of this Lease by Tenant pursuant to Section 4.5 of the Tenant Work Letter), as consideration for Landlord's agreement not to require Tenant to remove the Tenant Improvements, Tenant shall pay to Landlord an amount equal to Twenty Thousand and 00/100 Dollars ($20,000.00) (the "Removal Fee") which Landlord may (but shall not be obligated to) use for the removal of some or all of the Tenant Improvements. If Tenant does not pay the Removal Fee within five (5) days after such expiration or earlier termination, Landlord may apply the Security Deposit towards the Removal Fee. 2.7 CONDITION OF PREMISES "AS-IS". Subject to the performance by Landlord of its obligations to perform (or cause to be performed) the Tenant Improvements and, except as expressly provided to the contrary, as Tenant hereby agrees that the Premises shall be taken "as is", "with all faults", without any representations or warranties, and Tenant hereby agrees and warrants that it has investigated and inspected the condition of the Premises and the suitability of same for Tenant's purposes, and Tenant does hereby waive and disclaim any objection to, cause of action based upon, or claim that its obligations hereunder should be reduced or limited because of the condition of the Premises or the Building or the suitability of same for Tenant's purposes. Except as expressly provided herein to the contrary, Tenant acknowledges that neither Landlord nor any agent nor any employee of Landlord has made any representations or warranty with respect to the Premises or the Building or with respect to the suitability of either for the -6- conduct of Tenant's business, and Tenant expressly warrants and represents that Tenant has relied solely on its own investigation and inspection of the Premises and the Building in its decision to enter into this Lease and let the Premises in an "as is" condition. The commencement of business in the Premises by Tenant shall conclusively establish that the Premises and the Building (or such portion thereof occupied by Tenant) were at such time in satisfactory condition. Notwithstanding the foregoing, Landlord hereby assigns to Tenant, on a non-exclusive basis, to the extent assignable, all warranties and guaranties relating to the construction of the Building, and Landlord shall use commercially reasonable efforts to assist Tenant, at no cost or expense to Landlord, with Tenant's enforcement of any warranties or guaranties that have been assigned to Tenant. Landlord shall use its commercially reasonable efforts to obtain at least a one year warranty from the general contractor constructing the Tenant Improvements. 2.7.1 HVAC. Notwithstanding the provisions to the contrary contained in this Lease, Landlord hereby represents that, except to the extent triggered by, arising out of or relating to any acts of omissions of Tenant or Tenant's Agents including, without limitation, the construction of any Tenant Alterations, the heating, air conditioning and ventilation systems of the Building will be free from material defects; provided, however, that if Tenant does not deliver written notice to Landlord of any material breach of the foregoing within one hundred eighty (180) days following the Commencement Date, then Tenant shall be deemed to have inspected and accepted such systems in its present condition, and the correction of any subsequently discovered defects with respect to the items set forth in this paragraph shall be the obligation of Tenant. If a breach of the foregoing exists, and Tenant timely (i.e., within one hundred eighty (180) days following the Commencement Date) delivers written notice to Landlord setting forth in reasonable detail a description of such breach, Landlord shall, as Tenant's sole and exclusive remedy, rectify the same at Landlord's expense. 2.7.2 Compliance With Covenants, Restrictions and Building Code. Notwithstanding the provisions to the contrary contained in this Lease, Landlord hereby represents that, except to the extent triggered by, arising out of or relating to any acts of omissions of Tenant or Tenant's Agents including, without limitation, the construction of any Tenant Alterations, the Premises will (as of the Commencement Date) be in compliance with applicable covenants, conditions and restrictions affecting the Project, Access Laws, Governmental Requirements and building codes in effect as of the Commencement Date; provided, however, that if Tenant does not deliver written notice to Landlord of any breach of the foregoing within six (6) months days following the Commencement Date, then Tenant shall be deemed to have inspected and accepted the Building in its present condition, and the correction of any subsequently discovered noncompliance shall be the obligation of Tenant. If a breach of the foregoing exists, and Tenant timely (i.e., within six (6) months following the Commencement Date) delivers written notice to Landlord setting forth in reasonable detail a description of such breach, Landlord shall, as Tenant's sole and exclusive remedy, rectify the same at Landlord's expense; provided, however, Landlord's obligation hereunder shall only be applicable to the extent such noncompliance (i) constitutes a breach of the foregoing representation, and (ii) is required to be rectified by a Governmental Authority with jurisdiction over the project, notwithstanding the fact that such requirement may be imposed after the six (6) month period described herein. 2.8 MEMORANDUM OF COMMENCEMENT DATE. At Landlord's election and request, Tenant shall execute a Memorandum of Commencement Date in the form -7- attached as Exhibit D. In no event shall Tenant record this Lease or the Memorandum of Commencement Date. 2.9 Use and Conduct of Business. The Premises are to be used only for the Permitted Uses, and for no other business or purpose without the prior consent of Landlord, which consent shall not be unreasonably withheld. Landlord makes no representation or warranty as to the suitability of the Premises for Tenant's intended use. Tenant shall, at its own cost and expense, obtain and maintain any and all licenses, permits, and approvals necessary or appropriate for its use, occupation and operation of the Premises. Tenant's inability to obtain or maintain any such license, permit or approval necessary or appropriate for its use, occupation or operation of the Premises shall not relieve it of its obligations under this Lease, including the obligation to pay Base Rent and Additional Rent. No act shall be done in or about the Premises that is unlawful or that will increase the existing rate of insurance on any or all of the Land or Building. Tenant shall not commit or allow to be committed or exist: (a) any waste upon the Premises, (b) any public or private nuisance, or (c) any act or condition which may disturb the quiet enjoyment of any other tenant in the Project, violate any of Landlord's contracts affecting any or all of the Land or Project, create or contribute to any work stoppage, strike, picketing, labor disruption or dispute, interfere in any way with the business of Landlord or any other tenant in the Project or with the rights or privileges of any contractors, subcontractors, licensees, agents, concessionaires, subtenants, servants, employees, customers, guests, invitees or visitors or any other persons lawfully in and upon the Land or Building, or causes any impairment or reduction of the good will or reputation of the Land or Building. Tenant shall not, without the prior consent of Landlord, use any apparatus, machinery, device or equipment in or about the Premises which will cause any increase in the normal consumption level of electric power. If any of Tenant's apparatus, machinery, equipment or devices should disturb the quiet enjoyment of any other tenant in the Project, then Tenant shall provide, at its sole cost and expense, adequate insulation or take other such action, including removing such apparatus, machinery, equipment or devices, as may be necessary to eliminate the disturbance. 2.10 COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS AND RULES AND REGULATIONS. Subject to the provisions of Section 2.7.2, Tenant shall comply with all Governmental Requirements relating to the Premises (including, without limitation, Tenant's use, occupancy and operation thereof) and all other covenants, conditions and restrictions and other matters of record, and Tenant shall observe such reasonable rules and regulations as may be adopted and published by Landlord from time to time for the safety, care and cleanliness of the Premises and the Building, and for the preservation of good order in the Building, including the Rules and Regulations attached to this Lease as Exhibit E. 2.11 Intentionally Omitted. 2.12 OPTION TO RENEW. 2.12.1 Renewal Options. Provided Tenant is not and has not been in default (beyond all applicable notice and cure periods) under this Lease and subject to the terms and conditions of this section 2.12, Tenant shall have one (1) option to renew (the "Option to Renew") the term of the Lease with respect to the entire Premises for a period of five (5) years (the "Option Term"). If the Option to Renew is exercised during any applicable cure period following an event, which with the passage of time or the giving of notice, or both, would constitute an event of default, then such exercise shall be void and of no further force or effect unless the cure is fully completed within the applicable cure period, but in no event later than the expiration or earlier termination of the Lease. Except as set forth in this section 2.12, all terms and conditions shall remain the same during the Option Term. Base Rent during each Option Term shall be the greater of (i) -8- then Fair Market Rental Rate, and (ii) the Monthly Base Rent for the last month of the immediately preceding term of the Lease. "Fair Market Rental Rate" shall mean the net effective market rental then being offered and accepted for comparable space and location in first class single story office buildings comparable in size, location and condition to the Building and location within the West Hills and Woodland Hills areas, computed as described in the remainder of this paragraph. The net effective market rental shall equal the arithmetic average of the rental rate over the term of such comparable lease less any customary concessions (including tenant improvement allowances granted by landlords under similar circumstances), provided that the value of the then existing Tenant Improvements shall be taken into account. 2.12.2 Notice of Exercise. Tenant shall give Landlord written notice of its intent to exercise the Option to Renew at least two hundred forty (240) [this number was changed because if Tenant exercises its right to rescind then Landlord has lost 40 days (30 + 10) of time to market the property - since the term of the lease will not be extended by the amount of lost time, Landlord needs to be notified earlier of Tenant's intent to exercise the option] days but not more than three hundred sixty-five (365) days prior to the expiration of the immediately preceding term. If Tenant fails to notify Landlord in writing of its intent to exercise its Option to Renew as set forth in the preceding paragraph, the Option to Renew shall terminate, and Landlord shall be free to enter into a lease with a third party. Within twenty (20) days after Landlord receives the notice described in the previous sentence, Landlord will provide Tenant with Landlord's determination of the Fair Market Rental Rate for the Option Term. Tenant shall have either (a) thirty (30) days from Landlord's notification of the proposed Base Rent to accept Landlord's determination of Base Rent for the Option Term or provide its own determination of Fair Market Rental Rate for Landlord's consideration accompanied by market information on which Tenant based its determination or (b) ten (10) days from Landlord's notification of the proposed Base Rent to rescind its notice of exercise of its Option to Renew, in which case Tenant's Option to Renew shall be null and void and Tenant shall have no further rights under this Section 2.12. If Tenant fails to deliver a rescission notice within such ten (10) day period described in clause (b) above, then Tenant will be deemed to have forever waived its right to rescind its exercise of the Option to Renew. 2.12.3 Dispute Regarding Fair Market Rental Rate. If Landlord and Tenant are unable to agree on the Fair Market Rental. Rate using their best good faith efforts within thirty (30) days from Landlord's notification of the proposed Base Rent, Landlord shall, no more than ten (10) days thereafter, select an independent M.A.I. (certified in the State of California) real estate appraiser, or real estate broker with at least seven (7) years experience in the metropolitan area of the Los Angeles, California office real estate market, who shall prepare a written appraisal or market report of the Fair Market Rental Rate using the assumptions described in paragraph 2.12.1. The report shall be completed and delivered to Tenant and Landlord within thirty (30) days from the date Landlord selects the appraiser or real estate broker. Such appraiser's/broker's determination of Fair Market Rental Rate shall be determinative unless Tenant disputes it 3s provided in the next sentence. If Tenant disputes such report Tenant shall within ten (10) days following delivery of the report, deliver to Landlord notice (a) that tenant disputes such report, and (b) of the identity of another appraiser or real estate broker selected by Tenant meeting the qualifications set forth in this paragraph. The appraiser/broker selected by Tenant shall submit his report of the Fair Market Rental Rate using the assumptions described in paragraph 2.12.1 within twenty (20) days following the delivery of Tenant's notice to Landlord disputing the initial report. If the two reports are within five percent (5%) of each other, the Fair Market Rental Rate shall be that -9- set forth in the report of Landlord's appraiser/broker. If not, then within five (5) days after the delivery of the second report, the two appraisers/brokers shall appoint a third appraiser/broker meeting the qualifications set forth in this paragraph, and the third appraiser/broker shall deliver his decision within ten (10) days following his selection and acceptance of the appraisal assignment. The third appraiser/broker shall be limited in authority to selecting, in his opinion, which of the two earlier reports determinations best reflects the Fair Market Rental Rate under the assumptions set forth in this paragraph. The third appraiser/broker must choose one of the two earlier reports, and, upon doing so, the third appraiser's/broker's determination shall be the controlling determination of the Fair Market Rental Rate. Each party shall pay the costs and fees of the appraiser/broker it selected; if a third appraiser/broker is selected, the party whose report is not selected to be the Fair Market Rental Rate by said third appraiser/broker shall pay all of said third appraiser's/broker's costs and fees. 2.12.4 Conditions. The Option to Renew shall be conditioned upon the following: (i) at the time of Tenant's notice to Landlord of its intent to exercise the Option to Renew and continuing thereafter until the commencement of the Option Term, Tenant shall have been in possession of and occupying the Premises for the conduct of its business therein and, other than to a permitted assignee that is a "Corporate Affiliate" (as defined in Section 4.16 below), there shall have been no assignment of this Lease or subletting of any portion of the Premises; and (ii) the rights contained in this section shall be personal to the originally named Tenant and any permitted Corporate Affiliate assignee and may be exercised only by the originally named Tenant or a permitted Corporate Affiliate assignee (and not any other assignee, sublessee, or other transferee of Tenant's interest in this Lease) and only if the originally named Tenant or a permitted Corporate Affiliate assignee occupies the entire Premises as of the date it exercises the Option to Renew in accordance with the terms of this section. SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE 3.1 PAYMENT OF RENTAL. Tenant agrees to pay Base Rent, Additional Rent and any other sum due under this Lease to Landlord without demand, deduction, credit, adjustment or offset of any kind or nature, in lawful money of the United States when due under this Lease, at the offices of Manager at Manager's Address, or to such other party or at such other place as Landlord may from time to time designate in writing. 3.2 BASE RENT. On execution of this Lease, Tenant shall pay to Landlord the amount specified in the definition of Prepaid Rent for the month specified in the definition of that term. Tenant agrees to pay Base Rent to Landlord without demand, in advance on or before the first day of each calendar month of the Lease Term. Base Rent for any partial month at the beginning or end of the Lease Term shall be prorated. Base Rent for any partial month at the beginning of the Lease Term shall be paid by Tenant on the Commencement Date. 3.3 SECURITY DEPOSIT. On execution of this Lease, Tenant shall pay to Landlord the sum specified in the definition of the term Security Deposit, as security for the full and faithful payment of all sums due under this Lease and the full and faithful performance of every covenant and condition of this Lease to be performed by Tenant. If Tenant shall breach or default with respect to any payment obligation or other covenant or condition of this Lease, Landlord may apply all or any part of the Security Deposit to the payment of any sum in default or any damage suffered by Landlord as a result of such breach or default, and in such event, Tenant shall, upon demand by Landlord, deposit with Landlord the amount so applied so that Landlord shall have the full Security Deposit on hand at all times during the Lease Term. In the event -10- Tenant defaults on its obligations to pay Base Rent, Additional Rent or any other sum as and when due under this Lease on more than two occasions during any twelve (12) month period and Landlord has delivered notice of each such default, Landlord may, at any time thereafter require an increase in the Security Deposit by an amount equal to one hundred percent (100%) of the amount specified in the definition of the term Security Deposit and Tenant shall immediately deposit such additional amount with Landlord upon Landlord's demand. Following such increase, the definition of the term Security Deposit shall refer to the amount of the Security Deposit prior to the increase plus the increased amount. The remedy of increasing the Security Deposits for Tenant's multiple defaults shall be in addition to and not a substitute for any of Landlord's other rights and remedies under this Lease or applicable Law. Additionally, Landlord's use or application of all or any portion of the Security Deposit shall not impair any other rights or remedies provided under this Lease or under applicable law and shall not be construed as a payment of liquidated damages. If Tenant shall have fully complied with all of the covenants and conditions of this Lease, the remaining Security Deposit shall be repaid to Tenant, without interest, within thirty (30) Business Days after the expiration of this Lease. Tenant may not mortgage, assign, transfer or encumber the Security Deposit and any such act on the part of Tenant shall be without force or effect. In the event any bankruptcy, insolvency, reorganization or other creditor-debtor proceedings shall be instituted by or against Tenant, the Security Deposit shall be deemed to be applied first to the payment of Base Rent, Additional Rent and all other sums payable under this Lease to Landlord for all periods prior to the institution of such proceedings and the balance, if any, may be retained by Landlord and applied against Landlord's damages. In the event of a sale or transfer of Landlord's estate or interest in the Land and Building, Landlord shall transfer the Security Deposit to the vendee or the transferee, and Landlord shall be considered released by Tenant from all liability for the return of the Security Deposit. Tenant shall look solely to the transferee for the return of the Security Deposit, and it is agreed that all of the foregoing shall apply to every transfer or assignment made of the Security Deposit to a new transferee. No mortgagee or purchaser of any or all of the Building at any foreclosure proceeding brought under the provisions of any mortgage shall (regardless of whether the Lease is at the time in question subordinated to the lien of any mortgage) be liable to Tenant or any other person for any or all of such sum (or any other or additional security deposit or other payment made by Tenant under the provisions of this Lease), unless Landlord has actually delivered it in cash to such mortgagee or purchaser, as the case may be. In the event of any rightful and permitted assignment of Tenant's interest in this Lease, the Security Deposit shall be deemed to be held by Landlord as a deposit made by the assignee, and Landlord shall have no further liability to the assignor with respect to the return or the Security Deposit. No right or remedy available to Landlord in this Lease shall preclude or extinguish any other right to which Landlord may be entitled. It is understood that if Tenant fails to perform its obligations and to take possession of the Premises as provided in this Lease, the Prepaid Rent and the Security Deposit shall not be deemed liquidated damages. Landlord may apply such sums to reduce Landlord's damages and such application of funds shall not preclude Landlord from recovering from Tenant all additional damages incurred by Landlord. 3.4 ADDITIONAL RENT. Definitions of certain terms used in this paragraph are set forth in subparagraph 3.4.5. Tenant agrees to pay to Landlord, as additional rent as computed in this paragraph (individually and collectively the "Additional Rent"), all Operating Costs Allocable to the Premises in excess of the Base Amount Allocable to the Premises. 3.4.1 RENTAL ADJUSTMENT FOR ESTIMATED OPERATING COSTS. Landlord shall -11- furnish Tenant a written statement of Estimated Operating Costs Allocable to the Premises for each Year and the amount payable monthly by Tenant for such costs shall be computed as follows: one-twelfth (1/12) of the amount of the Estimated Operating Costs Allocable to the Premises in excess of the Base Amount Allocable to the Premises shall be Additional Rent and shall be paid monthly by Tenant for each month during such Year after the Commencement Date. If such written statement is furnished after the commencement of the Year (or as to the first Year during the Lease Term, after the Commencement Date), Tenant shall also make a retroactive lump-sum payment to Landlord equal to the monthly payment amount multiplied by the number of months during the Year (or as to the first Year during the Lease Term, after the Commencement Date) for which no payment was paid. Notwithstanding the foregoing, Landlord reserves the right, from time to time during each Year, to revise the Estimated Operating Costs Allocable to the Premises and upon notice to Tenant of such revision Tenant shall adjust its payment to Landlord under this subparagraph 3.4.1 accordingly. 3.4.2 ACTUAL COSTS. After the close of each Year, Landlord shall deliver to Tenant a written statement setting forth in reasonable detail the Operating Costs Allocable to the Premises during the preceding Year. If such Operating Costs Allocable to the Premises for any Year exceed the Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subparagraph 3.4.1 for such Year, Tenant shall pay the amount of such excess to Landlord within thirty (30) days after receipt of such statement by Tenant. If such statement shows the Operating Costs Allocable to the Premises to be less than the Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subparagraph 3.4.1, then the amount of such overpayment shall be paid by Landlord to Tenant within twenty (20) Business Days following the date of such statement or, at Landlord's option, shall be credited towards the installment(s) of Additional Rent next coming due from Tenant. 3.4.3 DETERMINATION OF OPERATING COSTS. Subject to the provisions of this Section 3.4, the determination of Operating Costs Allocable to the Premises shall be made by Landlord. 3.4.4 END OF TERM. If this Lease shall terminate on a day other than the last day of a Year, (a) Landlord shall estimate the Operating Costs Allocable to the Premises for such Year predicated on the most recent reliable information available to Landlord; (b) the amount determined under clause (a) of this sentence shall be prorated by multiplying such amount by a fraction, the numerator of which is the number of days within the Lease Term in such Year and the denominator of which is 365; (c) the Base Amount Allocable to the Premises shall be prorated in the manner described in clause (b); (d) the clause (c) amount (i.e., the prorated Base Amount Allocable to the Premises) shall be deducted from the clause (b) amount (i.e., the prorated Operating Costs Allocable to the Premises); (e) if the clause (d) amount exceeds the Estimated Operating Costs Allocable to the Premises paid by Tenant for the last Year in the Lease Term, then Tenant shall pay the excess to Landlord within ten (10) Business Days after Landlord's delivery to Tenant of a statement for such excess; and (f) if the Estimated Operating Costs Allocable to the Premises paid by Tenant for the last Year in the Lease Term exceeds the clause (d) amount, then Landlord shall refund to Tenant the excess within the ten (10) Business Day period described in clause (e) if Tenant is not then in default of any of its obligations under this Lease. Landlord's and Tenant's obligations under this paragraph shall survive the expiration or other termination of this Lease. 3.4.5 DEFINITIONS. Each underlined term in this subparagraph shall have the meaning set forth next to that underlined term: (a) BASE AMOUNT ALLOCABLE TO THE PREMISES: Subject to the provisions of Section 3.4.5(c) below, the actual -12- Operating Costs Allocable to the Premises for calendar year 2000. (b) ESTIMATED OPERATING COSTS ALLOCABLE TO THE PREMISES Subject to the provisions of Section 3.4.5(c) below, Landlord's estimate of Operating Costs Allocable to the Premises for a Year to be given by Landlord to Tenant Pursuant to subparagraph 3.4.1. (c) OPERATING COSTS. All expenses paid or incurred by Landlord in connection with the ownership, operation, maintenance and/or repair of: (i) the Building; (ii) the Project, provided that for purposes of this Lease, such expenses shall be limited to that amount of operating costs for the entire Project which is fairly and equitably allocated by Landlord, in its reasonable discretion, to the Building; and (iii) the personal property used in conjunction with such maintenance, operation, ownership and repair, including, without limitation, all expenses paid or incurred by Landlord for: (a) utilities, including electricity, water, gas, sewers, fire sprinkler charges, refuse collection, telephone charges, cable television or other electronic or microwave signal reception, steam, heat, cooling or any other service which is now or in the future considered a utility and which are not payable directly by tenants in the Project; (b) supplies; (c) cleaning and janitorial services (including window washing), landscaping and landscaping maintenance (including irrigating, trimming, mowing, fertilizing, seeding and replacing plants), snow removal and other services; (d) security services, if any; (e) insurance; (f) management fees not to exceed four percent (4%) of Rent; (g) Property Taxes, tax consultant fees and expenses, and costs of appeals of any Property Taxes; (h) services of independent contractors; (i) compensation (including employment taxes and fringe benefits) of all persons who perform duties in connection with any service, repair, maintenance, replacement or improvement or other work included in this subparagraph; (j) permit and inspection fees; (k) assessments and special assessments due to deed restrictions, declarations or owners associations or other means of allocating costs of a larger tract of which the Land is a part; (l) rental of any machinery or equipment; (m) audit fees and accounting services related to the Building, and charges for the computation of the rents and charges payable by tenants in the Project (but only to the extent the cost of such fees and services are in addition to the cost of the management fee); (n) the cost of improvements, repairs or replacements; (o) maintenance and service contracts; (p) legal fees and other expenses of legal or other dispute resolution proceedings; (q) maintenance and repair of the roof and roof membranes, (r) subject to the provisions of Section 2.7.2, costs incurred by Landlord for compliance with Access Laws, as set forth in the paragraph entitled "Access Laws"; (s) elevator service and repair, if any and (t) any other expense or charge which in accordance with generally accepted accounting and management principles would be considered an expense of maintaining, operating, owning or repairing the Building -13- and the Project. Without limiting the foregoing, Operating Costs shall include replacement of roofs and roof membranes; exterior painting; parking area resurfacing, resealing and restriping parking areas and driveways; upgrading of the HVAC systems in the Building, and other capital improvements to the Building or to the Project made either for the purpose of reducing Operating Expenses or in order to comply with the requirements of applicable law which take effect with regard to the Building after the Commencement Date or which are necessitated as a result of Tenant's particular use of the Premises or the construction of the Tenant Improvements or other improvements in the Premises; provided that, such capital improvements, whether installed before or after the Commencement Date, shall be amortized with market interest over their estimated useful lives as determined by Landlord in accordance with generally accepted accounting principles and only the amortization installments and interest attributable to the Lease Term shall be an Operating Cost under this Lease. Notwithstanding the foregoing, the following items shall not be included in Operating Expenses: (1) any payments under a ground lease or master lease relating to the Building; (2) bad debt expenses; (3) any interest, principal payments, attorneys' fees, points, fees or closing or other lender costs on financing secured by a deed of trust or mortgage on the Building; (4) expenditures which, under generally accepted accounting principles, are capitalized, except as provided in the immediately preceding paragraph; (5) all costs and expenses for which Landlord is reimbursed under an "all-risk" policy of insurance (or which would have been reimbursed if Landlord had carried insurance as herein required) or which are covered by condemnation proceeds, to the extent of the net receipts from such insurance or proceeds; (6) advertising or promotional expenses with respect to leasing space in the Building; (7) costs incurred exclusively in connection with the leasing of premises in the Building, including but not limited to, leasing commissions, real estate brokerage commissions, and attorneys' fees in connection with the negotiation and preparation of lease proposals, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with present or prospective tenants or other occupants of the Building; (8) costs incurred for or services to or within the premises of another tenant or occupant of the Building where such services are of a nature which is not Landlord's responsibility to perform pursuant to this Lease, except where Landlord may do such work both to such other premises and to the Premises; (9) costs and expenses incurred by Landlord in performing work necessary to remedy violations of code requirements concerning Building improvements where such code requirements were applicable at the time of the initial installation or construction of such improvements or -14- were otherwise required to be complied with by Landlord in the Building prior to the Commencement Date (excluding, however, costs and expenses incurred by Landlord as a result of Tenant's particular use of the Premises, or the construction of the Tenant Improvements or other improvements in the Premises; (10) the portion of any fee or charge for services paid to a party owned by or under common ownership with Landlord to the extent that the same exceeds the competitive cost for such services were they not so rendered by a party affiliated with Landlord, except that Operating Expenses may, in any event, include a management fee in an amount not to exceed four percent (4%) of Rent; (11) salaries and benefits of Landlord's personnel above the grade of project manager; (12) any compensation paid to clerks, attendants or other persons or entities in any retail business operated by Landlord; (13) costs arising from Landlord's charitable or political contributions; (14) costs, including permit, license and inspection costs, directly incurred in the installation of improvements made within the premises and exclusively for the benefit of a particular tenant of the Building, including costs of improving, decorating, painting or redecorating premises for such a tenant; (15) costs and expenses incurred in connection with the negotiation or litigation of disputes with Tenant or another tenant of claims of violation by Landlord of this Lease or any other lease in the Building, including fines, penalties, interest, damages and any legal and other professional fees; (16) all costs and expenses for repairs and maintenance for which Landlord is reimbursed directly by any tenant of any space in the Building (excluding reimbursement under an operating expense provision) or by vendor, contractor or provider of materials or services to Landlord; (17) costs attributable to enforcing leases against tenants in the Building or in litigating other disputes with tenants regarding the rights and obligations of Landlord, such as attorneys' fees, court costs, adverse judgments and similar expenses; or (18) costs incurred by Landlord in connection with the breach of any of Landlord's covenants, representations and warranties in this Lease. If less than one hundred percent (100%) of the net rentable area of the Building and the Project is occupied by tenants at all times during any Year, then Operating Costs for such Year shall include all additional costs and expenses that Landlord reasonably determines would have been incurred had one hundred percent (100%) of the Building and the Project been occupied at all times during such Year by tenants. (d) OPERATING COSTS ALLOCABLE TO THE PREMISES. The product of Tenant's Pro Rata Share times Operating Costs. 3.4.6 TENANT'S COSTS. Tenant agrees to reimburse or pay Landlord within twenty (20) Business Days after invoice from Landlord for (a) any cleaning expenses incurred by Landlord, including carpet cleaning, garbage and trash removal expenses, over and above the normal cleaning provided by Landlord, (b) any expense incurred by Landlord for usage in the Premises of heating, ventilating and air conditioning services, elevator services, electricity, water, janitorial services, or any other services or utilities over -15- and above the normal usage for the Premises and (c) any expense incurred by Landlord arising out of or relating to the usage by Tenant or Tenant's Agents of the public or common areas of the Building or the Project, or any of the equipment contained therein, which usage is over and above the normal usage for such public or common areas or equipment. Landlord reserves the right to install and activate separate metering of electricity, water or other utilities to the Premises, and Tenant agrees to reimburse or pay Landlord within twenty (20) Business Days after invoice from Landlord for all costs of such separate metering in which case the Base Amount Allocable to the Premises and the Operating Costs shall be adjusted accordingly. 3.4.7 Any sums payable under this Lease pursuant to this paragraph or otherwise shall be Additional Rent and, in the event of nonpayment of such sums, Landlord shall have the same rights and remedies with respect to such nonpayment as it has with respect to nonpayment of the Base Rent due under this Lease. The term "Rent" shall mean Base Rent, Additional Rent, and any other sums payable by Tenant under this Lease. 3.4.8 OPERATING COST AUDIT. Landlord shall maintain records concerning estimated and actual Operating Costs Allocable to the Premises for no less than twelve (12) months following the period covered by the statement or statements furnished Tenant, after which time Landlord may, provided there is not then any ongoing dispute between Landlord and Tenant concerning the same of which Tenant has notified Landlord in writing, dispose of such records. Provided that Tenant is not then in default of its obligation to pay Base Rent, Additional Rent or other payments required to be made by it under this Lease and provided that Tenant is not otherwise in default under this Lease, Tenant may, at Tenant's sole cost and expense, cause a Qualified Person (as defined below) to inspect Landlord's records. Such inspection, if any, shall be conducted no more than once each Year, during Landlord's normal business hours within sixty (60) Business Days after receipt of Landlord's written statement of Operating Costs Allocable to the Premises for the previous year, and upon Tenant first furnishing Landlord written notice of the inspection, if any, at least fifteen (15) Business Days in advance of such inspection. Any errors disclosed by the review shall be promptly corrected by Landlord; provided, however, that if Landlord disagrees with any such claimed errors, Landlord shall have the right to cause another review to be made by an auditor of Landlord's choice. In the event the results of the review of records (taking into account, if applicable, the results of any additional review caused by Landlord) reveal that Tenant has overpaid obligations for a preceding period, the amount of such overpayment shall be credited against Tenant's subsequent installment of Base Rent, Additional Rent or other payments due to Landlord under the Lease. In the event that such results show that Tenant has underpaid its obligations for a preceding period, the amount of such underpayment shall be paid by Tenant to Landlord with the next succeeding installment obligation of estimated Operating Costs Allocable to the Premises. If the actual Operating Costs Allocable to the Premises for any given Year were improperly computed and if the actual Operating Costs Allocable to the Premises are overstated by more than 5%, Landlord shall reimburse Tenant for the cost of its audit. A "Qualified Person" means an accountant or other person experienced in accounting for income and expenses of office projects, who is engaged solely by Tenant on terms which do not entail any compensation based or measured in any way upon any savings in Additional Rent or reduction in Operating Costs Allocable to the Premises achieved through the inspection process described in this subparagraph. 3.5 UTILITIES. Tenant shall contract directly and pay for all telephone used on or from the premises together with any taxes, penalties, surcharges or similar charges relating to such telephone use. Tenant acknowledges that the -16- Project currently has a utility association which administers the supply of water, gas, heat, light, power, sewer, fire sprinkler and other utilities to the Premises. Tenant shall, unless and until Landlord elects otherwise, be billed by, and shall pay directly to, the utility association providing such services to the Project, all utility charges in excess of Tenant's Pro Rata Share of such utility charges that are included in the Base Amount, together with taxes, penalties, surcharges or similar charges relating to such utilities, provided, however, Tenant shall be solely and fully responsible for the cost of all utilities in excess of those standard utilities provided by Landlord or the association pursuant to Exhibit E. All such payments shall be considered Operating Costs. Landlord shall in no event be liable for any damages directly or indirectly resulting from or arising out of the interruption or failure of utility services on or about the Premises. Tenant shall have no right to terminate this Lease nor shall Tenant be entitled to any abatement of Rent as a result of any such interruption or failure of utility services. No such interruption or failure of utility services shall be deemed to constitute a constructive eviction of Tenant. 3.6 HOLDOVER. If Landlord agrees in writing that Tenant may hold over after the expiration or earlier termination of this Lease, unless the parties hereto otherwise agree in writing as to the terms of such holding over, the holdover tenancy shall be subject to termination by Landlord or Tenant at any time upon not less than thirty (30) days' prior written notice. If Tenant holds over without the consent of Landlord, the same shall be a tenancy at will terminable at any time, and Tenant shall be liable to Landlord for, and Tenant shall indemnify, protect, defend and hold Landlord harmless from and against, any damages, liabilities, losses, costs, expenses or claims suffered or caused by such holdover, including damages and costs related to any successor tenant of the Premises to whom Landlord could not deliver possession of the Premises when promised. During any holdover tenancy, whether with or without consent, Tenant shall pay to Landlord from time to time upon demand, an amount equal to two hundred percent (200%) of the then applicable Base Rent, plus all Additional Rent and other sums payable under this Lease, and be bound by all the terms, covenants and conditions specified in this Lease, as so far applicable. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease. The preceding provisions of this Paragraph 3.6 shall not be construed as Landlord's consent to any holding over by Tenant. 3.7 LATE CHARGE. If Tenant fails to make any payment of Base Rent, Additional Rent or other amount when due under this Lease, a late charge is immediately due and payable by Tenant equal to five percent (5%) of the amount of any such payment; provided, however, the late charge shall be reduced to three percent (3%) of the amount due for the first delinquent installment of Rent during any Year (provided that such first delinquent installment is paid within ten (10) days after written notice from Landlord that such Rent is past due). Landlord and Tenant agree that this charge compensates Landlord for the administrative costs caused by the delinquency. The parties agree that Landlord's damage would be difficult to compute and the amount stated in this paragraph represents a reasonable estimate of such damage. Assessment or payment of the late charge contemplated in this paragraph shall not excuse or cure any Event of Default or breach by Tenant under this Lease or impair any other right or remedy provided under this Lease or under law. 3.8 DEFAULT RATE. Any Base Rent, Additional Rent or other sum payable under this Lease which is not paid when due shall bear interest at a rate equal to the lesser of: (a) the published prime rate of Riggs Bank N.A., or such other national banking institution designated by Landlord if such bank ceases to publish a prime rate (the "Prime Rate"), then in effect, plus four (4) percentage points, or (b) the maximum rate of interest per annum permitted by applicable law (the "Default Rate"), but the payment of such interest -17- shall not excuse or cure any Event of Default or breach by Tenant under this Lease or impair any other right or remedy provided under this Lease or under law. SECTION 4: GENERAL PROVISIONS 4.1 MAINTENANCE AND REPAIR BY LANDLORD. Subject to the paragraphs captioned "Damage or Destruction" and "Condemnation", Landlord shall maintain the roof, the structural components and the exterior of the Building and the public and common areas of the Project in reasonably good order and condition, except ordinary wear and tear, and except for damage occasioned by the act or omission of Tenant or Tenant's Agents which shall be paid for entirely by Tenant upon demand by Landlord. Additionally, Landlord shall provide those services identified on Exhibit "E," the cost of which shall constitute an Operating Cost. In the event any or all of the Project becomes in need of maintenance or repair which Landlord is required to make under this Lease, Tenant shall immediately give written notice to Landlord, and Landlord shall not be obligated in any way to commence such maintenance or repairs until a commercially reasonable time elapses after Landlord's receipt of such notice. Tenant hereby waives the benefit of Sections 1941 and 1942 of the California Civil Code and any other statute providing a right to make repairs and deduct the cost thereof from the Rent. Tenant waives any right to terminate this Lease or offset or abate Rent by reason of any failure of Landlord to make repairs to the Premises. 4.2 MAINTENANCE AND REPAIR BY TENANT. Except as is expressly set forth as Landlord's responsibility pursuant to the paragraph captioned "Maintenance and Repair by Landlord," Tenant shall at Tenant's sole cost and expense keep and maintain all portions of the Premises in good condition and repair, including interior painting, plumbing and utility fixtures and installations, carpets and floor coverings, all interior wall surfaces and coverings including tile and paneling, replacement of all broken windows (including without limitation any exterior windows), interior doors, roof penetrations and membranes in connection with any Tenant installations on the roof including satellite dishes, and interior preventative maintenance. If Tenant fails to maintain or repair the Premises in accordance with this paragraph, then Landlord may, but shall not be required to, enter the Premises upon five (5) days prior written notice to Tenant (or immediately without any notice in the case of an emergency) to perform such maintenance or repair at Tenant's sole cost and expense, unless Tenant has commenced such repair within such five (5) day period and is diligently prosecuting the same to completion. Tenant shall pay to Landlord the cost of such maintenance or repair plus a ten percent (10%) administration fee, within ten (10) Business Days of written demand from Landlord. 4.3 COMMON AREAS/SECURITY. The common areas of the Project shall be subject to Landlord's sole management and control. Without limiting the generality of the immediately preceding sentence, Landlord reserves the exclusive right as it deems necessary or desirable to install, construct, remove, maintain and operate lighting systems, facilities, improvements, equipment and signs on, in or to all parts of the common areas; change the number, size, height, layout, or locations of walks, driveways and truckways or parking areas now or later forming a part of the Land or Project; make alterations or additions to the Building or common area; close temporarily all or any portion of the common areas to make repairs, changes or to avoid public dedication; grant easements to which the Land will be subject, replat, subdivide, or make other changes to the Land; place, relocate and operate utility lines through, over or under the Land and Building; and use or permit the use of all or any portion of the roofs of the Building. Landlord has no duty or obligation to provide any security services in, on or around the Premises, Land or Building, and Tenant recognizes that security services, if -18- any, provided by Landlord will be for the sole benefit of Landlord and the protection of Landlord's property and under no circumstances shall Landlord be responsible for, and Tenant waives any rights with respect to, Landlord providing security or other protection for Tenant or Tenant's Agents or property in, on or about the Premises, Land or Building. Subject to Landlord's prior approval (which approval shall not be unreasonably withheld), Tenant may, at its sole cost and expense, install, establish and maintain security services within the Premises; provided that such security services, including, without limitation, any apparatus, facilities, equipment or people utilized in connection with the provision of such security services, comply with the Governmental Requirements and shall not cause the Building or the Project to be out of compliance with the Governmental Requirements. Notwithstanding the foregoing, any such security services installed, established or maintained by Tenant must not affect or impact any portion of the Building, Land or the Project other than the Premises and shall not in any way limit or interfere with Landlord's ability to exercise its rights as provided in the paragraph captioned "ACCESS". Tenant's rights under this subparagraph are subject to all the obligations, limitations and requirements as set forth in the paragraphs captioned "Tenant Alterations" and "Tenant's Work Performance". Landlord reserves the right to relocate parking areas and driveways and to build additional improvements in the common areas so long as Tenant's Parking Rights are maintained and Tenant's access to the Premises is not materially adversely affected. 4.4 TENANT ALTERATIONS. Tenant shall not make any alterations, additions or improvements in or to the Premises, or make changes to locks on doors, or add, disturb or in any way change any floor covering, wall covering, fixtures, plumbing or wiring (individually and collectively "Tenant Alterations"), without first obtaining the consent of Landlord which may be withheld in Landlord's reasonable discretion; provided, however, with respect to Tenant Alterations that may affect structural, exterior, mechanical or electrical aspects of the Premises, Landlord may withhold its consent in its sole and absolute discretion. Notwithstanding the foregoing, Tenant may make strictly cosmetic changes to the finish work in the Premises, not including any changes affecting the Project structure, appearance, or systems and equipment, without Landlord's consent (but nevertheless requiring at least 10 days' prior notice to Landlord and otherwise in compliance with the provisions of this Paragraph 4.4), provided that (i) the cost of any individual change does not exceed Ten Thousand Dollars ($10,000.00), (ii) the aggregate cost of any such changes does not exceed Fifty Thousand Dollars ($50,000.00) in any consecutive twelve (12) month period, and such changes do not require any structural or other substantial modifications to the Premises, and (iii) no such Tenant Alteration affects structural, exterior, mechanical or electrical aspects of the Premises. Tenant shall deliver to Landlord full and complete plans and specifications for any proposed Tenant Alterations and, if consent by Landlord is given, all such work shall be performed at Tenant's expense by Tenant (a "Permitted Alteration"). Tenant shall pay to Landlord all reasonable out-of-pocket costs incurred by Landlord for any architectural, engineering, supervisory and/or legal services in connection with any Tenant Alterations including, without limitation, Landlord's review of the Plans. Without limiting the generality of the foregoing, Landlord may require Tenant at Tenant's sole cost and expense, to obtain and provide Landlord with proof of insurance coverage and a payment and performance bond, in forms, amounts and by companies acceptable to Landlord. Should Tenant make any alterations without Landlord's prior written consent, or without satisfaction of any conditions established by Landlord, Landlord shall have the right, in addition to and without limitation of any right or remedy Landlord may have under this Lease, at law or in equity, to require Tenant to remove some or all of the Tenant Alterations at Tenant's sole cost and expense and restore the -19- Premises to the same condition existing prior to undertaking the Tenant Alterations, or, at Landlord's election, Landlord may remove such Tenant Alterations and restore the Premises at Tenant's expense. All Tenant Alterations to the Premises, regardless of which party constructed them or paid for them, shall become the property of Landlord and shall remain upon and be surrendered with the Premises upon the expiration or earlier termination of this Lease; provided, however, at Landlord's sole election Tenant shall be obligated, at its sole cost and expense, to remove all (or such portion as Landlord shall designate) of the Tenant Alterations and Tenant Improvements and repair any damage resulting from such removal and return the Premises to the same condition existing prior to the undertaking upon the expiration or earlier termination of this Lease. If Tenant fails to remove any such Tenant Alterations as required by Landlord's consent, Landlord may do so and Tenant shall pay the entire cost thereof to Landlord within ten (10) Business Days after Tenant's receipt of Landlord's written demand therefor. Tenant shall have the right, at the time it requests Landlord's consent and delivers all plans and specifications to any Tenant Alteration to make a written request that Landlord notify Tenant whether Tenant shall be obligated to remove the applicable Tenant Alteration at the end of the Lease Term, in which event Tenant shall only be obligated to remove (i) those Tenant Alterations that Landlord notified Tenant it must remove at the end of the Lease Term at the same time of and in connection with Tenant's requested approval of the Tenant Alterations, and (ii) those Tenant Alterations that Tenant did not seek or did not obtain Landlord's written consent to leave in place at the end of the Lease Term, and that Landlord requires Tenant to remove. Tenant shall reimburse Landlord, upon receipt of demand therefor, for all reasonable out of pocket costs and expenses incurred by Landlord during its review of Tenant's plans and specifications (regardless of whether Landlord approves Tenant's request) and Tenant's construction. Nothing contained in this paragraph or the paragraph captioned "Tenant's Work Performance" shall be deemed a waiver of the provisions of the paragraph captioned "Mechanic's Liens." 4.5 TENANT'S WORK PERFORMANCE. Any Tenant Alterations to be performed by Tenant under this paragraph shall be performed by contractors employed by Tenant under one or more construction contracts, in form and content approved in advance in writing by Landlord (which approval shall be subject to Landlord's discretion and may include a requirement that the prime contractor and the respective subcontractors of any tier: (a) be parties to, and bound by, a collective bargaining agreement with a labor organization affiliated with the Building and Construction Trades Council of the AFL CIO and (b) employ only members of such labor organizations to perform work within their respective jurisdictions); provided, however, that the requirements of clauses (a) and (b) above shall not apply to any Permitted Alterations. Tenant's contractors, workers and suppliers shall work in harmony with and not interfere with workers or contractors of Landlord or other tenants of Landlord. Subject to Tenant's right to use non-union labor for Permitted Alterations (provided, however, that Tenant shall not perform any Permitted Alterations using non-union labor during such times as Landlord's Agents are also performing work in the Premises), if Tenant's contractors, workers or suppliers do, in the opinion of Landlord, cause such disharmony or interference, Landlord's consent to the continuation of such work may be withdrawn upon written notice to Tenant. All Tenant Alterations shall be (1) completed in accordance with the plans and specifications approved by Landlord; (2) completed in accordance with all Governmental Requirements; (3) carried out promptly in a good and workmanlike manner; (4) of all new materials; and (5) free of defect in materials and workmanship. Tenant shall pay for all damage to the Premises, Building and Land caused by Tenant or Tenant's Agents. Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents -20- from any Claims arising as a result of the Tenant Alterations or any defective design, material or workmanship of any Tenant Alterations. 4.6 SURRENDER OF POSSESSION. Tenant shall, at the expiration or earlier termination of this Lease, surrender and deliver the Premises to Landlord in as good condition as when received by Tenant from Landlord or as later improved, reasonable use and wear excepted, and free from all tenancies or occupancies by any person. 4.7 REMOVAL OF PROPERTY. Unless otherwise agreed to in writing by Landlord, Tenant agrees that there are and shall be no trade fixtures in the Premises owned by Tenant. Upon expiration or earlier termination of this Lease, Tenant may remove its personal property, office supplies and office furniture and equipment if (a) such items are readily moveable and are not attached to the Premises; (b) such removal is completed prior to the expiration or earlier termination of this Lease; (c) Tenant is not in default of any covenant or condition of this Lease at the time of such removal; and (d) Tenant immediately repairs all damage caused by or resulting from such removal. All other property in the Premises and any Tenant Alterations (including, wall-to-wall carpeting, paneling, wall covering or lighting fixtures and apparatus) or any other article affixed to the floor, walls, ceiling or any other part of the Premises or Building, shall become the property of Landlord and shall remain upon and be surrendered with the Premises; provided, however, at Landlord's sole election, Tenant shall be obligated, at its sole cost and expense, to remove all (or such portion as Landlord shall designate) of the Tenant Alterations and repair any damage resulting from such removal. Provided that Tenant pays the Removal Fee, Tenant shall not be obligated to remove any of the Tenant Improvements. Tenant shall have the right, at the time it requests Landlord's consent and delivers all plans and specifications to any Tenant Alteration to make a written request that Landlord notify Tenant whether Tenant shall be obligated to remove the applicable Tenant Alteration at the end of the Lease Term, in which event Tenant shall only be obligated to remove (i) those Tenant Alterations that Landlord notified Tenant it must remove at the end of the Lease Term at the same time of and in connection with Tenant's requested approval of the Tenant Alterations, and (ii) those Tenant Alterations that Tenant did not seek or did not obtain Landlord's written consent to leave in place at the end of the Lease Term, and that Landlord requires Tenant to remove. Tenant waives all rights to any payment or compensation for such Tenant Alterations. If Tenant shall fail to remove any of its property of any nature from the Premises, Building or Land at the expiration or earlier termination of this Lease or when Landlord has the right of re-entry, Landlord may, at its option, remove and store such property without liability for loss of or damage to such property, such storage to be for the account and at the expense of Tenant. If Tenant fails to pay the cost of storing any such property, Landlord may, at its option, after it has been stored for a period of twenty (20) Business Days or more, sell or permit to be sold, any or all such property at public or private sale (and Landlord may become a purchaser at such sale), in such manner and at such times and places as Landlord in its sole discretion may deem proper, without notice to Tenant, and Landlord shall apply the proceeds of such sale: first, to the cost and expense of such sale, including reasonable attorney's fees actually incurred; second, to the payment of the costs or charges for storing any such property; third, to the payment of any other sums of money which may then be or later become due Landlord from Tenant under this Lease; and, fourth, the balance, if any, to Tenant. 4.8 ACCESS. Tenant shall permit Landlord and Landlord's Agents to enter into the Premises at any time on at least one (1) Business Day's notice (except in case of emergency, in which case no notice shall be required), for the purpose of inspecting the same or for the purpose of repairing, altering or improving the Premises or the Building. Nothing contained in this paragraph shall be deemed to impose any obligation upon Landlord not expressly -21- stated elsewhere in this Lease. When reasonably necessary, such as an emergency situation, Landlord may temporarily close Building or Land entrances. Building doors or other facilities, without liability to Tenant by reason of such closure and without such action by Landlord being construed as an eviction of Tenant or as relieving Tenant from the duty of observing or performing any of the provisions of this Lease. Upon one (1) Business Day's notice, Landlord shall have the right to enter the Premises at any time during the Lease Term for the purpose of showing the Premises to prospective tenants and to erect on the Premises a suitable sign indicating the Premises are available. Tenant shall give written notice to Landlord at least twenty (20) Business Days prior to vacating the Premises and shall arrange to meet with Landlord for a joint inspection of the Premises prior to vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacating the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. Landlord shall not be liable for the consequences of admitting by passkey, or refusing to admit to the Premises, Tenant or any of Tenant's Agents, or other persons claiming the right of admittance. 4.9 DAMAGE OR DESTRUCTION. 4.9.1 RESTORATION OF PREMISES. If the Premises are damaged by fire, earthquake or other casualty, Tenant shall give immediate written notice thereof to Landlord. If Landlord reasonably estimates, that the damage can be repaired in accordance with the then established Governmental Requirements within two hundred ten (210) days after Landlord is notified by Tenant of such damage and if there are sufficient insurance proceeds available to repair such damage, then Landlord shall proceed with reasonable diligence to restore the Premises to substantially the condition which existed prior to the damage and this Lease shall not terminate. If, in Landlord's reasonable estimation, the damage cannot be repaired within such 210 day period or if there are insufficient insurance proceeds available to repair such damage, Landlord may elect in its absolute discretion to either: (a) terminate this Lease or (b) restore the Premises to substantially the condition which existed prior to the damage and this Lease will continue. If Landlord restores the Premises under this paragraph, then (1) the Lease Term shall be extended for the time required to complete such restoration, (2) Tenant shall pay to Landlord, upon demand, Tenant's Pro Rata Share of any applicable deductible amount specified under Landlord's insurance and (3) Landlord shall not be required to repair or restore Tenant Improvements, Tenant Alterations, or any or all furniture, fixtures, equipment, inventory, improvements or other property which was in or about the Premises at the time of the damage and was not owned by Landlord. Except to the extent that Landlord is actually reimbursed by rental loss insurance, Base Rent, Additional Rent and any other sum due under this Lease during any reconstruction period shall not be abated. Tenant agrees to look to the provider of Tenant's insurance for coverage for the loss of Tenant's use of the Premises and any other related losses or damages incurred by Tenant during any reconstruction period. 4.9.2 INTENTIONALLY OMITTED. 4.9.3 TERMINATION OF LEASE BY MORTGAGE HOLDER'S ELECTION. Notwithstanding anything contained in this Lease to the contrary, if there is damage to the Premises, or Building and the holder of any indebtedness secured by a mortgage or deed of trust covering any such property requires that the insurance proceeds be applied to such indebtedness or the insurance proceeds are otherwise inadequate to complete the repair of the damages to the Premises, the Building or both, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) Business Days after such requirement is made by such holder. -22- 4.9.4 DESTRUCTION NEAR END OF TERM. Notwithstanding the forgoing, if the Premises, the Building or the Project are wholly or partially damaged or destroyed within the final twelve (12) months of the Term, Landlord may, at its option, elect to terminate this Lease upon written notice given to Tenant within thirty (30) days following such damage or destruction. 4.9.5 TERMINATION BY TENANT. Notwithstanding anything to the contrary set forth in this Section 4.9 above, within sixty (60) days after Landlord is notified by Tenant of such damage Landlord shall endeavor to notify Tenant of the estimated time to complete the repairs and restoration of the Premises and Project, as estimated by an independent contractor approved by Landlord (the "Landlord Response Notice"). Notwithstanding anything to the contrary set forth in the proceeding paragraph, if Landlord notifies Tenant that the estimated time to complete the repairs or restoration will exceed two hundred ten (210) days from the date Landlord is notified by Tenant of such damage or destruction, Tenant may terminate this Lease effective as of the date of such damage or destruction by delivering written notice thereof to Landlord within thirty (30) days after receipt of Landlord's Response Notice. If the Lease is not terminated as provided above, and the repairs and restoration are not completed within two hundred ten (210) days after the date that Landlord is notified by Tenant of the damage or destruction, Tenant may deliver written notice to Landlord (the "Damage Notice") stating that if the repairs and restoration are not completed within forty-five (45) days thereafter, Tenant will terminate the Lease. If the repairs and restoration are not completed within forty-five (45) days after Tenant delivers such notice to Landlord, the Lease shall terminate effective as of the date of such damage or destruction unless Tenant rescinds its Damage Notice prior to the expiration of such forty-five (45) day period. 4.9.6 WAIVER. Tenant waives the provisions of any statutes presently existing or hereafter enacted (including, without limitation, California Civil Code sections 1932 and 1933) which relate to termination of leases when the thing leased is destroyed and agrees that such event will be governed by the terms of this Lease. 4.10 CONDEMNATION. If all of the Premises, or such portions of the Building as may be required for the Tenant's reasonable use of the Premises, are taken by eminent domain or by conveyance in lieu thereof, this Lease shall automatically terminate as of the date the physical taking occurs, and all Base Rent, Additional Rent and other sums payable under this Lease shall be paid to that date. In case of taking of a part of the Premises or a portion of the Building not required for the Tenant's reasonable use of the Premises, then this Lease shall continue in full force and effect and the Base Rent shall be equitably reduced based on the proportion by which the floor area of the Premises is reduced, such reduction in Base Rent to be effective as of the date the physical taking occurs. Additional Rent and all other sums payable under this Lease shall not be abated but Tenant's Pro Rata Share may be redetermined as equitable under the circumstances. Landlord reserves all rights to damages or awards for any taking by eminent domain relating to the Premises, Building, Land and the unexpired term of this Lease. Tenant assigns to Landlord any right Tenant may have to such damages or award and Tenant shall make no claim against Landlord for damages for termination of its leasehold interest or interference with Tenant's business. Tenant shall have the right, however, to claim and recover from the condemning authority compensation for any loss to which Tenant may be entitled for Tenant's moving expenses or other relocation costs; provided that, such expenses or costs may be claimed only if they are awarded separately in the eminent domain proceedings and not as a part of the damages recoverable by Landlord. Tenant waives all rights it may have under California Code of Civil Procedure section 1265.130, or otherwise, to terminate this Lease based on a partial condemnation. -23- 4.11 PARKING. Tenant shall have the nonexclusive privilege to use parking spaces on the Land in common with other tenants of Landlord, in the area shown on Exhibit G attached hereto (the "Parking Area"). Tenant's parking privileges shall be subject to the rules and regulations relating to parking adopted by Landlord from time to time. Provided that the parking spaces provided to Tenant under this Lease shall remain within the Parking Area, Landlord shall have the right to grant designated, reserved parking stalls to other tenants in the Building. In no event shall the number of parking stalls used by Tenant and Tenant's Agents exceed the number of stalls allocated to Tenant in the definition of the Parking Rights. Landlord shall have no obligation whatsoever to monitor, secure or police the use of the parking or other common areas. Tenant acknowledge that, if the Space Plan mutually approved by Landlord and Tenant pursuant to the Tenant Work Letter provides for the construction of Tenant improvements which would eliminate one or more parking spaces in the parking area depicted on Exhibit "G", then the number of parking spaces available to Tenant as provided in Section 1.25 of this Lease will be reduced by the number of such spaces so eliminated. 4.12 INDEMNIFICATION. Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents from and against any and all Claims, arising in whole or in part out of (a) the possession, use or occupancy of the Premises or the business conducted in the Premises, (b) any act, omission or negligence of Tenant or Tenant's Agents, or (c) any breach or default under this Lease by Tenant. Neither Landlord nor Landlord's Agents shall, to the extent permitted by law, have any liability to Tenant, or to Tenant's Agents, for any Claims arising out of any cause whatsoever, including repair to any portion of the Premises; interruption in the use of the Premises or any equipment therein; any accident or damage resulting from any use or operation by Landlord, Tenant or any person or entity of heating, cooling, electrical, sewerage or plumbing equipment or apparatus; termination of this Lease by reason of damage to the Premises or Building; fire, robbery, theft, vandalism, mysterious disappearance or any other casualty; actions of any other tenant of the Building or of any other person or entity; inability to furnish any service required of Landlord as specified in this Lease; or leakage in any part of the Premises or the Building from rain, ice or snow, or from drains, pipes or plumbing fixtures in the Premises or the Building; except for Claims arising solely out of the gross negligence or willful misconduct of Landlord in failing to repair or maintain the Building as required by this Lease after notice by Tenant as required by the paragraph captioned "Maintenance and Repair by Landlord"; provided that, in no event shall Landlord be responsible for any interruption to Tenant's business or for any indirect or consequential losses suffered by Tenant or Tenant's Agents. The obligations of this paragraph shall be subject to the paragraph entitled "Waiver of Subrogation. " 4.13 TENANT INSURANCE. 4.13.1 FORM OF POLICIES. Tenant shall, throughout the Lease Term, at its own expense, keep and maintain in full force and effect the following policies, each of which shall be endorsed as needed to provide that the insurance afforded by these policies is primary and that all insurance carried by Landlord is strictly excess and secondary and shall not contribute with Tenant's liability insurance: (a) A policy of commercial general liability insurance, including a contractual liability endorsement covering Tenant's obligations under the paragraph captioned "Indemnification", insuring against claims of bodily injury and death or property damage or loss with a combined single limit at the Commencement Date of this Lease of not less than Two Million Dollars ($2,000,000.00) per occurrence, which limit shall be reasonably increased -24- during the Lease Term at Landlord's request to reflect both increases in liability exposure arising from inflation as well as from changing use of the Premises or changing legal liability standards, which policy shall be payable on an "occurrence" rather than a "claims made" basis, and, which policy identifies Landlord and Manager and, at Landlord's request. Landlord's mortgage lenders or investment advisors, as additional named insureds; (b) A policy of extended property insurance (what is commonly called "all risk") covering Tenant's Improvements and Tenant's Alterations, furniture, fixtures, equipment, inventory, and other personal property located on the Premises for one hundred percent (100%) of the current replacement value of such property; (c) Business interruption insurance in an amount sufficient to cover costs, damages, lost income, expenses, Base Rent, Additional Rent and all other sums payable under this Lease, should any or all of the Premises not be usable for a period of up to twelve (12) months; (d) A policy of worker's compensation insurance as required by law and employer's liability insurance with limits of no less than One Million Dollars ($1,000,000); and (e) A policy of comprehensive automobile liability insurance, including loading and unloading, and covering owned, non-owned and hired vehicles, with limits of no less than One Million Dollars ($1,000,000) per occurrence. 4.13.2 APPROVAL OF INSURER. All insurance policies required under this paragraph shall be with companies with a Best rating of AXII or better and each policy shall provide that it is not subject to cancellation or reduction in coverage except after thirty (30) days' written notice to Landlord. Tenant shall deliver to Landlord and, at Landlord's request Landlord's mortgage lender(s), prior to the Commencement Date and from time to time thereafter, certificates evidencing the existence and amounts of all such policies. 4.13.3 LANDLORD-OBTAINED INSURANCE. If Tenant fails to acquire or maintain any insurance or provide any certificate required by this paragraph, Landlord may, but shall not be required to, obtain such insurance or certificates and the costs associated with obtaining such insurance or certificates shall be payable by Tenant to Landlord on demand. 4.14 LANDLORD'S INSURANCE. Landlord shall, throughout the Lease Term, keep and maintain in full force and effect: (a) A policy of commercial general liability insurance, insuring against claims of bodily injury and death or property damage or loss with a combined single limit at the Commencement Date of not less than Five Million Dollars ($5,000,000.00), which policy shall be payable on an "occurrence" rather than a "claims made" basis; and (b) A policy of extended property insurance (what is commonly called "all risk") covering the Building and Landlord's personal property, if any, located on the Property in the amount of one hundred percent (100%) of the then current replacement value of such property. (c) Landlord may, but shall not be required to, maintain other types of insurance as Landlord deems appropriate, including, but not limited to, property insurance coverage for earthquakes and floods in such amounts as Landlord -25- deems appropriate. Such policies may be "blanket" policies which cover other properties owned by Landlord 4.15 WAIVER OF SUBROGATION. Notwithstanding anything in this Lease to the contrary, Landlord and Tenant hereby each waive and release the other from any and all Claims or any loss or damage that may occur to the Land, Building, Premises, or personal property located therein, by reason of fire or other casualty regardless of cause or origin, including the negligence or misconduct of Landlord, Tenant, Landlord's Agents or Tenant's Agents, but only to the extent of the insurance proceeds paid to such releasor under its policies of insurance or, if it fails to maintain the required polices, the insurance proceeds that would have been paid to such releasor if it had maintained such policies. Each party to this Lease shall promptly give to its insurance company written notice of the mutual waivers contained in this subparagraph, and shall cause its insurance policies to be properly endorsed, if necessary, to prevent the invalidation of any insurance coverages by reason of the mutual waivers contained in this subparagraph. 4.16 ASSIGNMENT AND SUBLETTING BY TENANT. 4.16.1 RESTRICTIONS ON TRANSFER. Tenant shall not have the right to assign, transfer, mortgage or encumber this Lease in whole or in part, nor sublet the whole or any part of the Premises, nor allow the occupancy of all or any part of the Premises by another, without first obtaining Landlord's consent, which consent shall not be unreasonably withheld, but may be granted or denied in accordance with this paragraph 4.16. Notwithstanding any permitted assignment or subletting, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of all sums payable under this Lease and for compliance with all of its other obligations as tenant under this Lease. Upon the occurrence of an Event of Default, if the Premises or any part of the Premises are then subject to an assignment or subletting, Landlord, in addition to any other remedies provided in this Lease or by law, may at its option collect directly from such assignee or subtenant all rents becoming due to Tenant under such assignment or sublease and apply such rents against any sums due to Landlord from Tenant under this Lease, and no such collection shall be construed to constitute a novation or release of Tenant from the further performance of Tenant's obligations under this Lease. Tenant makes an absolute assignment to Landlord of such assignments and subleases and any rent, security deposits and other sums payable under such assignments and subleases as collateral to secure the performance of the obligations of Tenant under this Lease. 4.16.2 LANDLORD CONSENT, PROCEDURE. In the event Tenant desires to assign this Lease or to sublet all or any portion of the Premises, Tenant shall give written notice of such desire to Landlord setting forth the name of the proposed subtenant or assignee, the proposed term, the nature of the proposed subtenant's or assignee's business to be conducted on the Premises, the rental rate, and any other particulars of the proposed subletting or assignment that Landlord may reasonably request. Without limiting the preceding sentence, Tenant shall also provide Landlord with: (a) such financial information as Landlord may request concerning the proposed subtenant or assignee, including recent financial statements certified as accurate and complete by a certified public accountant and by the president, managing partner or other appropriate officer of the proposed subtenant or assignee; (b) proof satisfactory to Landlord that the proposed subtenant or assignee will immediately occupy and thereafter use the entire Premises (or any sublet portion of the Premises) for the remainder of the Lease Term (or for the entire term of the sublease, if shorter) in compliance with the terms of this Lease; and (c) a copy of the proposed sublease or assignment or letter of intent. Tenant shall pay to Landlord, upon Landlord's demand therefor, Landlord's reasonable attorneys' fees incurred in the review of such documentation and in documenting Landlord's consent -26- up to a maximum amount of $2,500.00, plus an administrative fee of $350.00 for processing such proposed assignment or sublease. Receipt of such fees shall not obligate Landlord to approve the proposed or sublease. 4.16.3 LANDLORD CONSENT, RELEVANT FACTORS. In determining whether to grant or withhold consent to a proposed assignment or sublease, Landlord may consider, and weigh, any factor it deems relevant in its reasonable discretion. Without limiting what may be construed as a factor considered by Landlord, Tenant agrees that any one or more of the following will be proper and reasonable grounds for Landlord's disapproval of a proposed assignment or sublease: (a) The proposed assignee or subtenant does not, in Landlord's good faith judgment, have financial worth or creditworthiness equal to or greater than that of Tenant as of the execution date of this Lease or sufficient financial worth to insure full and timely performance under this Lease; (b) Landlord has received insufficient evidence of the financial worth or creditworthiness of the proposed assignee or subtenant to make the determination set forth in clause (b); (c) Landlord has reasonably and in good faith determined that the proposed assignee or subtenant has a reputation for disputes in contractual relations, failure to observe and perform its contractual obligations in a timely and complete manner or for negative business relations in the business community for or otherwise as a tenant of property or otherwise; (d) Landlord has received from any prior lessor of the proposed assignee or subtenant a negative report concerning such prior lessor's experience with the proposed assignee or subtenant; (e) Landlord has had prior negative leasing experience with the proposed assignee or subtenant; (f) The use of the Premises by the proposed assignee or subtenant will not be identical with the Permitted Uses; (g) In Landlord's judgment, the proposed assignee or subtenant is engaged in a business, or the Premises or any part of the Premises will be used in a manner, that is not in keeping with the then standards of the Project, or that is not compatible with the businesses of other tenants in the Project, or that is inappropriate for the Building, or that will violate any negative covenant as to use contained in any other lease of space in the Building; (h) The use of the Premises by the proposed assignee or subtenant will violate any Governmental Requirement or create a violation of Access Laws; (i) Tenant is in default of any obligation of Tenant under this Lease, or Tenant has materially defaulted with respect to a monetary obligation under this Lease on three (3) or more occasions during the twenty-four (24) months preceding the date that Tenant shall request such consent; (j) Landlord does not approve of any of the tenant improvements required for the proposed assignee or subtenant; or (k) Landlord has had contact with the proposed assignee or subtenant, in the six (6) months preceding Tenant's -27- request, regarding the leasing of space by such proposed assignee or subtenant in the Project. 4.16.4 NOTICE REGARDING LANDLORD'S CONSENT. Within fifteen (15) Business Days after Landlord's receipt of all required information to be supplied by Tenant pursuant to this paragraph, Landlord shall notify Tenant of Landlord's approval, disapproval or conditional approval of any proposed assignment or subletting or of Landlord's election to require recapture as described below. Landlord's failure to respond within such fifteen (15) Business Day period shall constitute Landlord's disapproval. Landlord shall have no obligation to respond unless and until all required information has been submitted. In the event Landlord approves of any proposed assignment or subletting, Tenant and the proposed assignee or sublessee shall execute and deliver to Landlord an assignment (or subletting) and assumption agreement in form and content satisfactory to Landlord in its sole discretion. 4.16.5 RESTRICTION OF TRANSFER OF INTERESTS IN TENANT. Any transfer, assignment or hypothecation of any of the stock or interest in, or the assets of, Tenant which is either: (a) greater than eighty percent (80%) of such stock, interest or assets, or (b) intended as a subterfuge denying Landlord the benefits of this paragraph, shall be deemed to be an assignment within the meaning and provisions of this paragraph and shall be subject to the provisions of this paragraph. The foregoing provision shall not be applicable to an initial or subsequent public offering of shares in Tenant or the trading of publicly traded securities in Tenant through a national stock exchange. 4.16.6 CORPORATE AFFILIATE. Notwithstanding the provisions of Section 4.16 to the contrary, Landlord's consent shall not be required in the event of an assignment of this Lease or a subletting of the Premises to an entity ("Corporate Affiliate") which owns, or is owned by, Tenant, (but Tenant shall be required to give Landlord at least 10 days written notice prior to any such assignment or sublease) provided that such Corporate Affiliate owns more than 20% of the outstanding shares of all classes of voting stock of Tenant or Tenant owns more than 20% of all ownership and controlling interests in such Corporate Affiliate. The term "Corporate Affiliate Assignee" shall mean a Corporate Affiliate that has been assigned, and has assumed, all of (or the relevant portions of, in the event of a sublease) Tenant's interest and obligations under this Lease and has satisfied the criteria set forth in this Section. Landlord acknowledges and agrees that Zuma, Inc. is a Corporate Affiliate, and that, concurrently or immediately after the mutual execution and delivery of this Lease by Landlord and Tenant, Tenant will be assigning its interest in and to this Lease to Zuma, Inc. (although MRV Communications, Inc. will continue to remain directly, primarily and wholly responsible and liable for the performance of all of Tenant's obligations under this Lease). 4.16.7 EXCESS RENT. If Landlord consents to any assignment or sublease and Tenant receives rent or any other consideration, either initially or over the term of the assignment of sublease, in excess of the Base Rent and Additional Rent (or, in the case of a sublease of a portion of the Premises, in excess of the Base Rent paid by Tenant on a square footage basis under this Lease), Tenant shall pay to Landlord ninety percent (90%) of such excess. 4.16.8 RECAPTURE. Landlord shall have the right to recapture the Premises or the applicable portion thereof (a "Recapture") by giving written notice of such Recapture to Tenant within fifteen (15) Business Days after receipt of Tenant's written request for Landlord's consent to such proposed assignment or subletting. Tenant shall have no right to retract its request for Landlord's consent to assign or sublease once such request has been made, except that Tenant shall have a one-time right, within five (5) Business Days following Landlord's delivery of a notice electing to Recapture to retract its request and thereby nullify the Recapture. Such -28- Recapture shall terminate this Lease as to the applicable space effective on the prospective effective date of assignment or subletting, which shall be the last day of a calendar month and shall not be earlier than forty-five (45) Business Days after receipt of Tenant's request hereunder. If less than the entire Premises are recaptured, Landlord and Tenant agree that this Lease shall remain in full force and effect with respect to that remaining area not recaptured by Landlord. Tenant agrees to surrender that portion of the Premises recaptured by Landlord in accordance with the terms and conditions of this Lease. Notwithstanding the first sentence of this subparagraph, Landlord shall have no right to Recapture the Premises or applicable portion thereof if Tenant's proposed assignment or sublet is to a Corporate Affiliate Assignee. 4.17 ASSIGNMENT BY LANDLORD. Landlord shall have the right to transfer and assign, in whole or in part, its rights and obligations under this Lease and in any and all of the Land or Building. If Landlord sells or transfers any or all of the Building, including the Premises, Landlord and Landlord's Agents shall, upon consummation of such sale or transfer, be released automatically from any liability relating to obligations or covenants under this Lease to be performed or observed after the date of such transfer, and in such event, Tenant agrees to look solely to Landlord's successor-in-interest with respect to such liability; provided that, as to the Security Deposit and Prepaid Rent, Landlord shall not be released from liability therefor unless Landlord has delivered (by direct transfer or credit against the purchase price) the Security Deposit or Prepaid Rent to its successor-in-interest. 4.18 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS. Tenant shall, from time to time, upon the written request of Landlord, execute, acknowledge and deliver to Landlord or its designee a written statement stating: (a) the date this Lease was executed and the date it expires; (b) the date Tenant entered into occupancy of the Premises; (c) the amount of monthly Base Rent and Additional Rent and the date to which such Base Rent and Additional Rent have been paid; and (d) certifying that (1) this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or specifying the date of the agreement so affecting this Lease); (2) Landlord is not in breach of this Lease (or, if so, a description of each such breach) and that no event, omission or condition has occurred which would result, with the giving of notice or the passage of time or both, in a breach of this Lease by Landlord; (3) this Lease represents the entire agreement between the parties with respect to the Premises; (4) all required contributions by Landlord to Tenant on account of Tenant Improvements have been received; (5) on the date of execution, there exist no defenses or offsets which the Tenant has against the enforcement of this Lease by the Landlord; (6) no Base Rent, Additional Rent or other sums payable under this Lease have been paid in advance except for Base Rent and Additional Rent for the then current month or any prepaid rent as specified on the Estoppel Certificate; (7) no security has been deposited with Landlord (or, if so, the amount of such security); (8) it is intended that any Tenant's statement may be relied upon by a prospective purchaser or mortgagee of Landlord's interest or an assignee of any such mortgagee; and (9) such other information as may be reasonably requested by Landlord. If Tenant fails to respond within five (5) Business Days of its receipt of a written request by Landlord as provided in this paragraph, such shall be a breach of this Lease and Tenant shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser, mortgagee or assignee. In addition, Tenant shall, from time to time, upon the written request of Landlord, deliver to or cause to be delivered to Landlord or its designee then current financial statements (including a statement of operations and balance sheet) certified as accurate by a certified public accountant and prepared in conformance with generally accepted accounting principles for (i) Tenant, (ii) any entity which owns a controlling -29- interest in Tenant, (iii) any entity the controlling interest of which is owned by Tenant, (iv) any successor entity to Tenant by merger or operation of law, and (v) any guarantor of this Lease. 4.19 MODIFICATION FOR LENDER. If, in connection with obtaining construction interim or permanent financing for the Building or Land, Landlord's lender, if any, shall request reasonable immaterial modifications to this Lease as a condition to such financing, Tenant will not unreasonably withhold or delay its consent to such modifications; provided that, such modifications do not increase the obligations of Tenant under this Lease or materially adversely affect Tenant's rights under this Lease. 4.20 HAZARDOUS SUBSTANCES. 4.20.1 Tenant agrees that neither Tenant, any of Tenant's Agents nor any other person will store, place, generate, manufacture, refine, handle, or locate on, in, under or around the Land or Building any Hazardous Substance, except for (i) storage, handling and use of reasonable quantities and types of cleaning fluids and office supplies in the Premises in the ordinary course and the prudent conduct of Tenant's business in the Premises, provided that, (a) the storage, handling and use of such permitted Hazardous Substances must at all times conform to all Governmental Requirements and to applicable fire, safety and insurance requirements; (b) the types and quantities of permitted Hazardous Substances which are stored in the Premises must be reasonable and appropriate to the nature and size of Tenant's operation in the Premises and reasonable and appropriate for a first-class building of the same or similar use and in the same market area as the Building; (c) no Hazardous Substance shall be spilled or disposed of on, in, under or around the Land or Building or otherwise discharged from the Premises or any area adjacent to the Land or Building; and (d) in no event will Tenant be permitted to store, handle or use on, in, under or around the Premises any Hazardous Substance which will increase the rate of fire or extended coverage insurance on the Land or Building, unless: (1) such Hazardous Substance and the expected rate increase have been specifically disclosed in writing to Landlord; (2) Tenant has agreed in writing to pay any rate increase related to each such Hazardous Substance; and (3) Landlord has approved in writing each such Hazardous Substance, which approval shall be subject to Landlord's discretion. Landlord acknowledges that it is not the intent of this Article 4 to prohibit Tenant from operating its business as described in Section 1.26 above. Tenant may operate its business according to the custom of the industry so long as the use of presence of any Hazardous Substance is strictly and properly monitored and accomplished according to all applicable Governmental Requirements. As a material inducement to Landlord to allow Tenant to use Hazardous Substances in connection with its business, Tenant has delivered to Landlord (i) the Environmental Questionnaire attached hereto as Exhibit H and (ii) a list identifying each type of Hazardous Substance to be present on the Premises and setting forth any and all governmental approvals or permits required in connection with the presence of any Hazardous Substance on the Premises ("HAZARDOUS SUBSTANCES LIST"). Tenant shall deliver to Landlord an updated Environmental Questionnaire and Hazardous Substances List at least once each calendar year and shall also deliver an updated list before any new Hazardous Substance is brought onto the Premises and on or before the date Tenant obtains any additional permits or approvals for Hazardous Substances. Landlord shall have the right to terminate this Lease in Landlord's reasonable discretion in the event that (i) any anticipated use of the Premises by Tenant involves the generation, storage, use, treatment or disposal of Hazardous Substances in a manner or for a purpose prohibited by any Governmental Agency; (ii) Tenant has been required by any lender or Governmental Agency to take remedial action in connection with Hazardous Substance -30- contaminating the Premises if the contamination resulted from Tenant's actions or use of the Premises (unless Tenant is diligently seeking compliance with such remedial action); or (iii) Tenant is subject to an enforcement order issued by any Governmental Agency in connection with the use, disposal or storage of a Hazardous Substance on the Premises (unless Tenant is diligently seeking compliance with such enforcement order); provided, however, that prior to exercising its right to terminate pursuant to this sentence, Landlord shall notify Tenant of its intention to so terminate this Lease, and Tenant shall have a period of fifteen (15) days after receipt of such notice to rectify the condition(s) described in clauses (i), (ii) and/or (iii), as applicable. If Tenant rectifies such situation to Landlord's reasonable satisfaction within such fifteen (15) day period, then this Lease shall continue in full force and effect. At any time prior to the expiration of the Lease Term and upon Landlord's reasonable belief that certain Hazardous Substances tests are advisable, Landlord shall have the right following notice (except in the event of an emergency), to enter upon the Premises at all reasonable times in order to conduct appropriate tests and to deliver to Tenant the results of such tests to attempt to demonstrate that contamination has occurred as a result of Tenant's use of the Premises. Without limiting the foregoing sentence, Landlord shall have the right to have an environmental audit of the Premises to be conducted within ninety (90) days prior to the scheduled expiration date of this Lease, or at termination of this Lease, if the Lease is terminated on a date other than the scheduled termination date. Tenant shall promptly perform any remedial action recommended by such environmental audit unless the audit reveals that the Hazardous Substances resulted from the activities of a person other than Tenant or Tenant's Agents. The costs of such audits shall be borne by Landlord unless the audit discloses the existence of Hazardous Substances in excess of action levels or governmental standards, in which case the costs of the audit shall be borne by Tenant. 4.20.2 Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents from and against any and all Claims arising out of any (a) Claims arising from Tenant's use of Hazardous Substances on the Premises or the Project and (b) breach of any provision of this paragraph, which expenses shall also include laboratory testing fees, personal injury claims, clean-up costs and environmental consultants' fees. Tenant agrees that Landlord may be irreparably harmed by Tenant's breach of this paragraph and that a specific performance action may appropriately be brought by Landlord; provided that, Landlord's election to bring or not bring any such specific performance action shall in no way limit, waive, impair or hinder Landlord's other remedies against Tenant. 4.20.3 As of the execution date of this Lease, Tenant represents and warrants to Landlord that, except as otherwise disclosed by Tenant to Landlord, Tenant has no intent to bring any Hazardous Substances on, in or under the Premises except for the type and quantities authorized in the first paragraph of the paragraph captioned "Hazardous Substances." 4.20.4 PURSUANT to HEALTH & SAFETY CODE SECTION 25395.7, Landlord hereby notifies Tenant that releases of hazardous substances to soil and groundwater have occurred beneath the Property. The Property and adjacent parcels are the subject of investigation and remedial action under the supervision of the California Regional Water Quality Control Board - Los Angeles Region ("RWQCB") and the California Department of Toxic Substances control ("DTSC") in connection with the former use and occupancy of the Property by Hughes Aircraft Company, Missile Systems Group ("Hughes"). Raytheon Missile Systems Company ("Raytheon"), as successor to Hughes, is obligated under the terms of a Consent Agreement and Order (Docket No. HWCA 89/90-001) and relevant California law to complete additional site characterization and mitigation as ordered and directed by DTSC and RWQCB. -31- 4.20.5 Landlord Representation. To Landlord's actual knowledge as of the date of the execution of this Lease, and without independent investigation and inquiry, (a) no Landlord's Hazardous Substances (defined below) have been handled in or about the Project by Landlord or any current or former tenant of Landlord, except in compliance with all applicable laws and (b) Landlord has not received any written notice of the presence of Hazardous Substances at the Premises or Building in violation of applicable laws. The term "Landlord Hazardous Substances" shall mean Hazardous Substances which are present in, on, under or about the Building or Premises as of the date of this Lease which are released or brought in, on, under or about the Building or Premises by Landlord or any agent or tenant or former tenant of Landlord. Landlord's Hazardous Substances shall specifically not include any Hazardous Substances released, disturbed, transported, stored, generated or used by Tenant or Tenant's Agents. In the event of a breach of this Section during the Term, then Landlord's sole obligation and responsibility to Tenant shall be (a) the commencement, within ninety (90) days after Landlord receives notice of such breach or discovery and verifies the accuracy of such claim, of a removal, encapsulation or other containment program reasonably elected by Landlord which is required by and complies with applicable laws, and (b) the diligent prosecution of such program to completion, at no cost to Tenant, in such a manner as will make the Premises or Building, as the case may be, in compliance with applicable laws. 4.21 ACCESS LAWS. 4.21.1 NOTICE TO LANDLORD OF VIOLATION. Tenant agrees to notify Landlord immediately if Tenant receives notification or otherwise becomes aware of: (a) any condition or situation on, in, under or around the Land or Building which may constitute a violation of any Access Laws or (b) any threatened or actual lien, action or notice that the Land or Building is not in compliance with any Access Laws. If Tenant is responsible for such condition, situation, lien, action or notice under this paragraph, Tenant's notice to Landlord shall include a statement as to the actions Tenant proposes to take in response to such condition, situation, lien, action or notice 4.21.2 PROHIBITED ACTS. Tenant shall not alter or permit any assignee or subtenant or any other person to alter the Premises in any manner which would violate any Access Laws or increase Landlord's responsibilities for compliance with Access Laws, without the prior approval of the Landlord. In connection with any such approval, Landlord may require a certificate of compliance with Access Laws from an architect, engineer or other person acceptable to Landlord. Tenant agrees to pay the reasonable fees incurred by such architect, engineer or other third party in connection with the issuance of such certificate of compliance. Landlord's consent to any proposed Tenant Alteration shall (a) not relieve Tenant of its obligations or indemnities contained in this paragraph or this Lease or (b) be construed as a warranty that such proposed alteration complies with any Access Law. 4.21.3 TENANT RESPONSIBILITY. Subject to the provisions of Section 2.7.2., Tenant shall be solely responsible for all costs and expenses relating to or incurred in connection with failure of the Premises to comply with the Access Laws. 4.21.4 LANDLORD RESPONSIBILITY. Landlord shall be responsible for all costs and expenses relating to or incurred in connection with bringing the common areas of the Project into compliance with Access Laws, unless such costs and expenses are Tenant's responsibility as provided in the preceding subparagraph. Any cost or expense paid or incurred by Landlord to bring the Project into compliance with Access Laws which is not Tenant's responsibility under the preceding subparagraphs shall be amortized over the useful economic life of the improvements (not to exceed ten (10) years) -32- using an amortization rate of twelve percent (12%) per annum and shall be an Operating Cost for purposes of this Lease. 4.21.5 INDEMNITY OF LANDLORD. Tenant agrees to indemnify, defend and hold harmless Landlord and Landlord's Agents from and against any and all Claims arising out of or relating to any failure of Tenant or Tenant's Agents to comply with Tenant's obligations under this paragraph. 4.21.6 INCONSISTENT PROVISIONS OF LAW. The provisions of this paragraph shall supersede any other provisions in this Lease regarding Access Laws, to the extent inconsistent with the provisions of any other paragraphs. 4.22 QUIET ENJOYMENT. Landlord covenants that Tenant, upon paying Base Rent, Additional Rent and all other sums payable under this Lease and performing all covenants and conditions required of Tenant under this Lease shall and may peacefully have, hold and enjoy the Premises without hindrance or molestation by Landlord, subject to the terms of this Lease, any ground lease, mortgage or deed of trust and all matters of record now or hereafter encumbering the Premises or the Project. 4.23 INTENTIONALLY OMITTED 4.24 SUBORDINATION. Tenant subordinates this Lease and all rights of Tenant under this Lease to any mortgage, deed of trust, ground lease or vendor's lien, or similar instrument which may from time to time be placed upon the Premises (and all renewals, modifications, replacements and extensions of such encumbrances), and each such mortgage, deed of trust, ground lease or lien or other instrument shall be superior to and prior to this Lease. At the request of Landlord, the holder of such mortgage or deed of trust or any ground Lessor, Tenant shall execute, acknowledge and deliver promptly in recordable form any instrument or subordination agreement that Landlord or such holder may request; provided, however, such instrument shall include a nondisturbance provision on the standard form of the applicable lender or ground lessor. Notwithstanding the foregoing, the holder or beneficiary of such mortgage, deed of trust, ground lease, vendor's lien or similar instrument shall have the right to subordinate or cause to be subordinated any such mortgage, deed of trust, ground lease, vendor's lien or similar instrument to this Lease. Tenant further covenants and agrees that if the lender or ground lessor acquires the Premises as a purchaser at any foreclosure sale or otherwise, Tenant shall recognize and attorn to such party as landlord under this Lease, and shall make all payments required hereunder to such new landlord without deduction or set-off and, upon the request of such purchaser or other successor, execute, deliver and acknowledge documents confirming such attornment. Tenant waives the provisions of any law or regulation, now or hereafter in effect, which may give or purport to give Tenant any right to terminate or otherwise adversely affect this Lease or the obligations of Tenant hereunder in the event that any such foreclosure or termination or other proceeding is prosecuted or completed. 4.25 WORKERS COMPENSATION IMMUNITY. If and to the extent that Tenant is obligated to indemnify, defend or hold harmless Landlord or Landlord's Agents from any Claims arising from its use of the Premises or any act or failure to act by Tenant or Tenant's Agents or otherwise, Tenant expressly waives, to and in favor of Landlord and Landlord's Agents, its statutory workers compensation act employers immunity relative to any injury to an employee or employees of Tenant. 4.26 BROKERS. Each party to this Lease shall indemnify, defend and hold harmless the other party from and against any and all Claims asserted against such other party by any real estate broker, finder or intermediary relating to any act of the indemnifying party in connection with this Lease. 4.27 EXCULPATION AND LIMITATION OF LIABILITY. Landlord has executed this Lease by its trustee signing solely in a representative capacity. Notwithstanding anything contained in this Lease to the contrary, Tenant confirms that the -33- covenants of Landlord are made and intended, not as personal covenants of the trustee, or for the purpose of binding the trustee personally, but solely in the exercise of the representative powers conferred upon the trustee by its principal. Liability with respect to the entry and performance of this Lease by or on behalf of Landlord, however it may arise, shall be asserted and enforced only against Landlord's estate and equity interest in the Building. Neither Landlord nor any of Landlord's Agents shall have any personal liability in the event of any claim against Landlord arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Premises. Further, in no event whatsoever shall any Landlord's Agent have any liability or responsibility whatsoever arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Premises. Any and all personal liability, if any, beyond that which may be asserted under this paragraph, is expressly waived and released by Tenant and by all persons claiming by, through or under Tenant. 4.28 INTENTIONALLY OMITTED. 4:29 MECHANIC'S LIENS AND TENANT'S PERSONAL PROPERTY TAXES. 4.29.1 MECHANIC'S LIENS. Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord or Tenant in the Premises or to charge the rentals payable under this Lease for any Claims in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant shall pay, bond over (in a manner and with a company reasonably acceptable to Landlord) or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Premises and Tenant shall indemnify, defend and hold harmless Landlord from any and all Claims arising out of any such asserted Claims. Tenant agrees to give Landlord immediate written notice of any such Claim. Tenant shall notify Landlord in writing at least ten (10) Business Days in advance of any work to be done on, in, or about the Premises. In the event of such scheduled work, whether Landlord received notice from Tenant or not, Landlord shall have the right, at any time and from time to time, to enter the Premises to post notices of non-responsibility in such locations as Landlord deems appropriate. Notwithstanding anything in this Lease to the contrary, Landlord shall not be required to notify Tenant in advance of entering the Premises for the purpose of posting the notices of non-responsibility. 4.29.2 PERSONAL PROPERTY TAXES. Tenant shall be liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and Landlord elects to pay them or if the assessed value of Landlord's property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, Tenant shall reimburse Landlord for the sums so paid by Landlord, upon demand by Landlord. SECTION 5: DEFAULT AND REMEDIES 5.1 EVENTS OF DEFAULT. 5.1.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant ("Event of Default"): (a) vacation or abandonment of all or any portion of the Premises; -34- (b) failure by Tenant to make any payment of Base Rent Additional Rent or any other sum payable by Tenant under this Lease within five (5) days from its due date; (c) failure by Tenant to observe or perform any covenant or condition of this Lease, other than the making of payments, where such failure shall continue for a period of thirty (30) days after written notice from Landlord; provided however, that if the nature of Tenant's obligation is such that more than thirty (30) days are required for performance, then Tenant shall not be in default if Tenant commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion within ninety (90) days after such written notice from Landlord; (d) (1) the making by Tenant of any general assignment or general arrangement for the benefit of creditors; (2) the filing by or against Tenant of a petition in bankruptcy, including reorganization or arrangement, unless, in the case of a petition filed against Tenant, unless the same is dismissed within twenty (20) Business Days; (3) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located in the Premises or of Tenant's interest in this Lease; (4) any execution, levy, attachment or other process of law against any property of Tenant or Tenant's interest in this Lease, unless the same is dismissed within twenty (20) Business Days; (5) adjudication that Tenant is bankrupt; (6) the making by Tenant of a transfer in fraud of creditors; or (7) the failure of Tenant to generally pay its debts as they become due; (e) any information furnished by or on behalf of Tenant to Landlord in connection with the entry of this Lease is determined to have been materially false, misleading or incomplete when made; or (f) any assignment, subletting or other transfer for which the prior consent of Landlord is required under this Lease and has not been obtained. 5.1.2 NOTICE OF DEFAULT. When this Lease requires service of a notice, that notice shall replace rather than supplement any equivalent or similar statutory notice, including any notices required by Code of Civil Procedure section 1161 or any similar or successor statute. When a statute requires service of a notice in a particular manner, service of that notice (or a similar notice required by this Lease) in the manner required by paragraph 6.1 shall replace and satisfy the statutory service-of-notice procedures, including those required by Code of Civil Procedure section 1162 or any similar or successor statute. 5.1.3 NOTICE TO LANDLORD REGARDING TENANT DEFAULT. Tenant shall notify Landlord promptly of any Event of Default or any facts, conditions of events which, with the giving of notice or passage of time or both, would constitute an Event of Default. 5.1.4 TREATMENT AS UNEXPIRED LEASE. If a petition in bankruptcy is filed by or against Tenant, and if this Lease is treated as an "unexpired lease" under applicable bankruptcy law in such proceeding, then Tenant agrees that Tenant shall not attempt nor cause any trustee to attempt to extend the applicable time period within which this Lease must be assumed or rejected. 5.2 REMEDIES. If any Event of Default occurs, Landlord may at any time after such occurrence, with or without notice or demand except as stated in this paragraph, and without limiting Landlord in the exercise of any right or -35- remedy at law which Landlord may have by reason of such Event of Default exercise the rights and remedies, ether singularly or in combination as are specified or described in the subparagraphs of this paragraph. 5.2.1 REMEDIES: TERMINATION AND RECOVERY OF POSSESSION. Landlord may terminate this Lease and recover possession of the Premises in which case Tenant shall immediately surrender possession of the Premises to Landlord and, in addition to any other rights and remedies Landlord may have at law and in equity, Landlord shall have the following rights: (a) To re-enter the Premises then or at any time thereafter, and remove all persons and property and possess the Premises, without prejudice to any other remedies Landlord may have by reason of Tenant's default or of such termination, and Tenant shall have no further claim hereunder. (b) To recover all damages incurred by Landlord by reason of the default, including without limitation (i) the worth at the time of the award of the payments, including interest, owed by Tenant to Landlord under this Lease that were earned or accrued but unpaid at the time of termination; (ii) the worth at the time of the award of the amount by which the payments owed by Tenant to Landlord under the Lease that would have been earned or accrued after the date of termination until the time of the award exceeds the amount of the loss of payments owed by Tenant to Landlord under this Lease for the same period that Tenant affirmatively proves could have been reasonably avoided; (iii) the worth at the time of the award of the amount by which the payments owed by Tenant to Landlord for the balance of the Term after the time of the award exceeds the amount of the loss of payments owed by Tenant for the same period that Tenant proves could have been reasonably avoided; (iv) all costs incurred by Landlord in retaking possession of the Premises and restoring them to good order and condition; (v) all costs, including without limitation brokerage commissions, advertising costs and restoration and remodeling costs, incurred by Landlord in reletting the Premises; plus (vi) any other amount, including without limitation attorneys' fees and audit expenses, 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. "The worth at the time of the award," as used in clauses (i) and (ii) of this paragraph, is to be determined by computing interest as to each unpaid payment owed by Tenant to Landlord under the Lease, at the highest interest rate permitted by law. "The worth at the time of the award," as referred to in clause (iii) of this paragraph, is to be determined by discounting such amount, as of the time of award, by the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%). (c) To remove, at Tenant's sole risk, any and all personal property in the Premises and place such in a public or private warehouse or elsewhere at the sole cost and expense and in the name of Tenant. Any such warehouser shall have all of the rights and remedies provided by law against Tenant as owner of such property -36- If Tenant shall not pay the cost of such storage within thirty (30) days following Landlord's demand, Landlord may, subject to the provisions of applicable law, sell any or all such property at a public or private sale in such manner and at such times and places as Landlord deems proper, without notice to or demand upon Tenant. Tenant waives all claims for damages caused by Landlord's removal, storage or sale of the property and shall indemnify and hold Landlord free and harmless from and against any and all loss, cost and damage, including without limitation court costs and attorneys' fees. Tenant hereby irrevocably appoints Landlord as Tenants attorney-in-fact, coupled with an interest, with all rights and powers necessary to effectuate the provisions of this subparagraph 5.2. 5.2.2 REMEDIES: RECOVER RENT AS IT BECOMES DUE. Landlord may elect, in its absolute discretion, to maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event, Landlord may enforce all of Landlord's rights and remedies under this Lease, including the right to recover rent as it becomes due hereunder, and, at Landlord's election, to re-enter and relet the Premises on such terms and conditions as Landlord deems appropriate. Without limiting the generality of the foregoing, Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations). Landlord may execute any lease made pursuant hereto in its own name, and Tenant shall have no right to collect any such rent or other proceeds. Landlord's re-entry and/or reletting of the Premises, or any other acts, shall not be deemed an acceptance of surrender of the Premises or Tenant's interest therein, a termination of this Lease or a waiver or release of Tenant's obligations hereunder. Landlord shall have the same rights with respect to Tenant's improvements and personal property as under Section 5.2.1 above, even though such re-entry and/or reletting do not constitute acceptance of surrender of the Premises or termination of this Lease. 5.2.3 SUCCESSION TO TENANT RIGHTS. Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, Landlord may: (a) Terminate any sublease, license, concession, or other consensual arrangement for possession entered into by Tenant and affecting the Premises. (b) Choose to succeed to Tenant's interest in such an arrangement. If Landlord elects to succeed to Tenant's interest in such an arrangement, Tenant shall, as of the date of notice by Landlord of that election, have no further right to, or interest in, the rent or other consideration receivable under that arrangement. 5.2.4 RIGHTS AND REMEDIES CUMULATIVE. None of the foregoing remedial actions, singly or in combination, shall be construed as an election by Landlord to terminate this Lease unless Landlord has in fact given Tenant written notice that this Lease is terminated: an act by Landlord to maintain or preserve the Premises; any efforts by Landlord to relet the Premises; any repairs or alterations made by Landlord to the Premises; re-entry, repossession or reletting of the Premises by Landlord pursuant to this paragraph; or the appointment of a receiver, upon the initiative of Landlord, to protect Landlord's interest under this Lease. If Landlord takes any of the foregoing remedial action without terminating this Lease, Landlord may nevertheless at any time after taking any such remedial action terminate this Lease by written notice to Tenant. -37- 5.2.5 MONEY DAMAGES UPON RELETTING. If Landlord relets the Premises, Landlord shall apply the revenue from such reletting as follows: first, to the payment of any indebtedness other than Base Rent, Additional Rent or any other sums payable under this Lease by Tenant to Landlord; second, to the payment of any cost of reletting (including finders' fees and leasing commissions); third, to the payment of the cost of any alterations improvements, maintenance and repairs to the Premises; and fourth, to the payment of Base Rent, Additional Rent and other sums due and payable and unpaid under this Lease. Landlord shall hold and apply the residue, if any, to payment of future Base Rent, Additional Rent and other sums payable under this Lease as the same become due, and shall deliver the eventual balance, if any, to Tenant. Should revenue from letting during any month after application pursuant to the foregoing provisions, be less than the sum of the Base Rent, Additional Rent and other sums payable under this Lease and Landlord's expenditures for the Premises during such month. Tenant shall be obligated to pay such deficiency to Landlord as and when such deficiency arises. 5.2.6 REMEDIES NONEXCLUSIVE. Pursuit of any of the foregoing remedies shall not preclude Landlord's pursuit of any of the other remedies provided in this Lease or by law (all such remedies being, cumulative), nor shall pursuit by Landlord of any remedy provided in this Lease constitute a forfeiture or waiver of any Base Rent, Additional Rent or other sum payable under this Lease or of any damages accruing to Landlord by reason of the violation of any of the covenants or conditions contained in this Lease. 5.3 RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money, other than Base Rent or Additional Rent, required to be paid by it under this Lease or shall fail to perform any other act on its part to be performed under this Lease, and such failure shall continue for ten (10) Business Days after notice of such failure by Landlord, or such shorter time if reasonable under the circumstances, Landlord may, but shall not be obligated to, and without waiving or releasing Tenant from any obligations of Tenant, make such payment or perform such other act on Tenant's part to be made or performed as provided in this Lease. Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the nonpayment of sums due under this paragraph as in the case of default by Tenant in the payment of Base Rent. 5.4 LANDLORD'S DEFAULT. Landlord shall not be in default under this Lease unless Landlord fails to perform obligations required of Landlord within twenty (20) Business Days after written notice is delivered by Tenant to Landlord and to the holder of any mortgages or deeds of trust (collectively, "Lender") covering the Premises whose name and address shall have theretofore been furnished to Tenant in writing, specifying the obligation which Landlord has failed to perform; provided, however, that if the nature of Landlord's obligation is such that more than twenty (20) Business Days are required for performance, then Landlord shall not be in default if Landlord or Lender commences performance within such twenty (20) Business Day period and thereafter diligently prosecutes the same to completion. All obligations of Landlord hereunder shall be construed as covenants, not conditions. In the event of any default, breach or violation of Tenant's rights under this Lease by Landlord Tenant's exclusive remedies shall be an action for specific performance or an action for actual damages. Tenant hereby waives the benefit of any laws granting it the right to perform Landlord's obligation, a lien upon the property of Landlord and/or upon Rent due Landlord, or the right to terminate this Lease or withhold Rent on account of any Landlord default. 5.5 ACCEPTANCE OF RENT WITHOUT WAIVING RIGHTS. Under the paragraph captioned "No Waiver of Remedies", Landlord may accept Tenant's payments without waiving any rights under this Lease, including rights under a previously served notice of default. If Landlord accepts partial -38- payments which cumulatively are less than the sum owed after serving a notice of default, Landlord may nevertheless commence and pursue an action to enforce rights and remedies under the previously serviced notice of default without giving Tenant any further notice or demand. SECTION 6: MISCELLANEOUS PROVISIONS 6.1 NOTICES. Any notice, approval, consent, request or written communication required or permitted to be delivered under this Lease shall be: (a) in writing; (b) transmitted by personal delivery, facsimile, a nationally recognized overnight courier service, United States Postal Service in the manner described below; and (c) deemed to be delivered on the earlier of the date received or four (4) Business Days after having been deposited in the United States Postal Service, postage prepaid. Such writings shall be addressed to Landlord or Tenant, as the case may be, at the respective designated addresses set forth opposite their signatures, or at such other address(es) as they may, after the execution date of this Lease, specify by written notice delivered in accordance with this paragraph, with copies to the persons at the addresses, if any, designated opposite each party's signature. Those notices which contain a notice of breach or default or a demand for performance may be sent by any of the methods described in clause (b) above, but if transmitted by personal delivery or electronic means, shall also be sent concurrently by certified or registered mail, return receipt requested. 6.2 ATTORNEY'S FEES AND EXPENSES. In the event either party requires the services of an attorney in connection with enforcing the terms of this Lease, or in the event suit is brought for the recovery of Base Rent, Additional Rent or any other sums payable under this Lease or for the breach of any covenant or condition of this Lease, or for the restitution of the Premises to Landlord or the eviction of Tenant during the Lease Term or after the expiration or earlier termination of this Lease, the prevailing party shall be entitled to a reasonable sum for attorney's and paralegal's fees incurred at the trial or appellate levels and for all costs and expenses associated with such levels. The prevailing party shall be determined under Civil Code section 1717(b)(1) or any successor statute. 6.3 NO ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of an amount less than the Base Rent or Additional Rent or any other sum due and payable under this Lease shall be deemed to be other than a payment on account of the Base Rent, Additional Rent or other such sum, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, nor preclude Landlord's right to recover the balance of any amount payable or Landlord's right to pursue any other remedy provided in this Lease or at law. 6.4 SUCCESSORS; JOINT AND SEVERAL LIABILITY. Except as provided in the paragraph captioned "Exculpation and Limitation of Liability" and subject to the paragraph captioned "Assignment and Subletting by Landlord," all of the covenants and conditions contained in this Lease shall apply to and be binding upon Landlord and Tenant and their respective heirs, executors, administrators, successors and assigns. In the event that more than one person, partnership, company, corporation or other entity is included in the term "Tenant," then each such person, partnership, company, corporation or other entity shall be jointly and severally liable for all obligations of Tenant under this Lease. 6.5 CHOICE OF LAW. This Lease shall be construed and governed by the laws of the state of California. Tenant consents to Landlord's choice of venue for any legal proceeding brought by Landlord or Tenant to enforce the terms of this Lease. -39- 6.6 NO WAIVER OF REMEDIES. The waiver by Landlord of any covenant of condition contained in this Lease shall not be deemed to be a waiver of any subsequent breach of such covenant or condition nor shall any custom or practice which may develop between the parties in the administration of this Lease be construed to waive or lessen the rights of Landlord to insist on the strict performance by Tenant of all of the covenants and conditions of this Lease. No act or thing done by Landlord or Landlord's Agents during the Lease Term shall be deemed an acceptance or a surrender of the Premises and no agreement to accept a surrender of the Premises shall be valid unless made in writing and signed by Landlord. The mention in this Lease of any particular remedy shall not preclude Landlord from any other remedy it might have, either under this Lease or at law, nor shall the waiver of or redress for any violation of any covenant or condition in this Lease or in any of the rules or regulations attached to this Lease or later adopted by Landlord, prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of Base Rent, Additional Rent or any other sum payable under this Lease with knowledge of a breach of any covenant or condition in this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the rules and regulations attached to this Lease or later adopted, against Tenant or any other tenant in the Building, shall not be deemed a waiver. Any waiver by Landlord must be in writing and signed by Landlord to be effective. 6.7 OFFER TO LEASE. The submission of this Lease to Tenant or its broker or other agent does not constitute an offer to Tenant to lease the Premises. This Lease shall have no force or effect until: (a) it is executed and delivered by Tenant to Landlord; and (b) it is executed and delivered by Landlord to Tenant. 6.8 FORCE MAJEURE. Subject to the provisions of Section 4.9, in the event that either party shall be delayed, hindered in or prevented from the performance of any act or obligation required under this Lease by reason of acts of God, strikes, lockouts, labor troubles or disputes, inability to procure or shortage of materials or labor, failure of power or utilities, delay in transportation, fire, vandalism, accident, flood, severe weather, other casualty, Governmental Requirements (including mandated changes in the Plans or the Tenant Improvements resulting from changes in pertinent Governmental Requirements or interpretations thereof), riot, insurrection, civil commotion, sabotage, explosion, war, natural or local emergency, acts or omissions of others, including Tenant, or other reasons of a similar or dissimilar nature not solely the fault of, or under the exclusive control of, Landlord, then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for the period equivalent to the period of such delay. Notwithstanding the foregoing, this Section 6.8 shall not be applicable with respect to monetary obligations. 6.9 SEVERABILITY; CAPTIONS. If any clause or provision of this Lease is determined to be illegal, invalid, or unenforceable under present or future laws, the remainder of this Lease shall not be affected by such determination, and in lieu of each clause or provision that is determined to be illegal, invalid or unenforceable, there be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. Headings or captions in this Lease are added as a matter of convenience only and in no way define, limit or otherwise affect the construction or interpretation of this Lease. 6.10 INTERPRETATION. Whenever a provision of this Lease uses the term (a) "include" or "including", that term shall not be limiting but shall be construed as illustrative, (b) "covenant," that term shall include any covenant, agreement, term or provision, and (c) "at law," that term shall mean at law or in equity, or both. This Lease shall be given a fair and -40- reasonable interpretation of the words contained in it without any weight being given to whether a provision was drafted by one party or its counsel. 6.11 INCORPORATION OF PRIOR AGREEMENT; AMENDMENTS. This Lease contains all of the agreements of the parties to this Lease with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties to this Lease or their respective successors in interest. 6.12 AUTHORITY. If Tenant is a partnership, company, corporation or other entity, each individual executing this Lease on behalf of Tenant represents and warrants to Landlord that he or she is duly authorized to so execute and deliver this Lease and that all partnership, company, corporation or other entity actions and consents required for execution of this Lease have been given, granted or obtained. If Tenant is a partnership, company, corporation or other business organization, it shall, within ten (10) Business Days after demand by Landlord, deliver to Landlord satisfactory evidence of the due authorization of this Lease and the authority of the person executing this Lease on its behalf. 6.13 TIME OF ESSENCE. Time is of the essence with respect to the performance of every covenant and condition of this Lease. 6.14 SURVIVAL OF OBLIGATIONS. Notwithstanding anything contained in this Lease to the contrary or the expiration or earlier termination of this Lease, any and all obligations of either party accruing prior to the expiration or termination of this Lease shall survive the expiration or earlier termination of this Lease, and either party shall promptly perform all such obligations whether or not this Lease has expired or terminated. Such obligations shall include any and all indemnity obligations set forth in this Lease. 6.15 CONSENT TO SERVICE. Tenant irrevocably consents to the service of process of any action or proceeding at the address of the Premises. Nothing in this paragraph shall affect the right to serve process in any other manner permitted by law. 6.16 LANDLORD'S AUTHORIZED AGENTS. Notwithstanding anything contained in the Lease to the contrary, including without limitation, the definition of Landlord's Agents, only officers of Riggs Bank N.A., are authorized to amend, renew or terminate this Lease, or to compromise any of Landlord's claims under this Lease or to bind Landlord in any manner. Without limiting the effect of the previous sentence, no property manager or broker shall be considered an authorized agent of Landlord to amend, renew or terminate this Lease or to compromise any of Landlord's claims under this Lease or to bind Landlord in any manner. 6.17 WAIVER OF JURY TRIAL. LANDLORD AND TENANT BY PLACING THEIR INITIALS AT THE END OF THIS PARAGRAPH HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY OF ANY CONTRACT OR TORT CLAIM, COUNTERCLAIM, CROSS-COMPLAINT, OR CAUSE OF ACTION IN ANY ACTION, PROCEEDING, COUNTERCLAIM, OR HEARING BROUGHT BY EITHER PARTY AGAINST THE OTHER ON ANY MATTER ARISING OUT OF OR RELATING IN ANY WAY TO THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, OR TENANT'S USE OR OCCUPANCY OF THE PREMISES, INCLUDING ANY CLAIM OF INJURY OR DAMAGE OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY CURRENT OR FUTURE LAW, STATUTE, REGULATION, CODE OR ORDINANCE. [SIGNATURE PAGE FOLLOWS] -41- IN WITNESS WHEREOF, this Lease has been executed the day and year first above set forth. Designated Address for Landlord: LANDLORD: c/o Riggs Trust Group MEPT WEST HILLS, LLC, Attn: Patrick O. Mayberry a Delaware limited liability company 808 17th Street, N.W. By: Riggs & Company, a division of Washington, DC 20006 Riggs Bank, N.A., as Trustee of Facsimile: 202-835-6887 the Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18, its sole member By: /s/ MARY ANNE MARTINS ------------------------------------ Name: Mary Anne Martins ---------------------------------- Its: Managing Director ----------------------------------- By: ------------------------------------ Name: ---------------------------------- Its: ---------------------------------- with copy to Manager at: 8550 Balboa Boulevard, Suite 220 Northridge, CA 91325 Attn: Property Manager Facsimile: (818) 893-5092 Designated Address for Tenant: TENANT: MRV Communications, Inc., a Delaware - ------------------------------- corporation - ------------------------------- - ------------------------------- Facsimile: By: /s/ NOAM LOTAN --------------------- ------------------------------------ Name: Noam Lotan ---------------------------------- Its: CEO ---------------------------------- By: /s/ SHLOMO MARGALIT ------------------------------------ Name: Shlomo Margalit ----------------------------------- Its: Chairman of Board ----------------------------------- -42- LANDLORD ACKNOWLEDGMENT ) DISTRICT OF COLUMBIA ) ss. ) On this 11th day of April, 2000, before me personally appeared Mary Anne Martins, to me known to be a Managing Director, of Riggs & Company, a division of Riggs Bank N.A., the Trustee of the Multi-Employer Property Trust, the national banking association that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said national banking association as trustee, for the uses and purposes therein mentioned, and on oath stated that she was authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ DENISE HART-GAMBLE ---------------------------------------- Name: Denise Hart-Gamble ------------------------------------ NOTARY PUBLIC in and for the District of Columbia, residing at Riggs Bank N.A. My appointment expires: March 31, 2003 -43- [COMPLETE APPROPRIATE ACKNOWLEDGMENT FOR TENANT] TENANT ACKNOWLEDGMENT (INDIVIDUAL) State of California ) ) ss. County of Los Angeles ) On this 31st day of March, 2000, before me, a Notary Public in and for the state of California, personally Noam Lotan & Sholomo Margalit, to me known to be the individual(s) described in and who executed the within and foregoing instrument, and acknowledged that s/he/they signed the same as his/her/their free and voluntary act and deed, for the uses and purposes therein mentioned. WITNESS my hand and official seal hereto affixed the day and year first as above written. /s/ SARAH L. ROGERS ----------------------------------------- Name: [NOTARY PUBLIC SEAL] Sarah L. Rogers SARAH L. ROGERS ----------------------------------------- Commission # 1218080 NOTARY PUBLIC Notary Public - California Los Angeles County residing at . My appointment My Comm. Expires May 30, 2003 ------------ expires: May 30, 2003. [NOTARIAL SEAL] ------------ -44- TENANT ACKNOWLEDGMENT (PARTNERSHIP) __________________) ) ss. __________________) On this _______ day of _______________________, 2000, before me, a Notary Public in and for the _______________ of _______________ personally appeared ___________________________, the ____________________________________ of _______________________________, a _____________________________________ partnership, the partnership that executed the within and foregoing instrument and acknowledged said instrument to be the free and voluntary act and deed of said partnership for the uses and purposes therein mentioned, and on oath stated that s/he/they was/were authorized to execute said instrument. WITNESS my hand and official seal hereto affixed the day and year first as above written. __________________________________________ Name:_____________________________________ NOTARY PUBLIC in and for the District of Columbia, residing at ________________. My appointment expires: ___________________. [NOTARIAL SEAL] -45- TENANT ACKNOWLEDGMENT (CORPORATION) _________________________________ ) ) SS. _________________________________ ) On this ________ day of ____________, 2000, before me, a Notary Public in and for the ________ of _________________________________________________ _______________________, personally appeared _______________________________ _______________________, the ________________________ of ____________________ _________________________________, the _______________________________________ corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that s/he/they was/were authorized to execute said instrument. WITNESS my hand and official seal hereto affixed the day and year first as above written. ---------------------------------------- Name: ----------------------------------- NOTARY PUBLIC in and for the District of Columbia, residing at ___________. My appoint expires: ___________________. [NOTARIAL SEAL] -46- EXHIBIT A to Lease LEGAL DESCRIPTION OF LAND (To be attached by Landlord) -1- EXHIBIT B to Lease DRAWING SHOWING LOCATION OF THE PREMISES -1- EXHIBIT "B" EXHIBIT C to Lease WORK LETTER AND CONSTRUCTION AGREEMENT (Landlord to Construct Improvements) 1. TENANT'S IMPROVEMENTS. Except as set forth herein and in the Lease Tenant accepts the Premises and existing improvements therein in their "as is" condition. Landlord shall furnish and install within the Premises those items of general construction, but not personal property or trade fixtures (the "Tenant Improvements"), shown on the plans and specifications attached to this Lease as Exhibit C or, if the foregoing is not applicable, as finally approved by Landlord and Tenant, pursuant to Paragraph 2 below. All Tenant improvements shall be constructed pursuant to this Work Letter and shall be performed by Landlord's general contractor utilizing those subcontractors selected by Landlord in accordance with this Work Letter. Such general contractors and all subcontractors shall satisfy those union labor requirements set forth in the Lease in the paragraph captioned "Tenant's Work Performance". 2. PLANS AND SPECIFICATIONS FOR IMPROVEMENTS. 2.1 Landlord shall retain Ware-Malcolmb to prepare the plans and specifications described hereinafter for the Tenant Improvements. The plans and specifications shall be subject to Tenant and Landlord's approval, which approval shall not be unreasonably delayed. 2.2 Landlord and Tenant agree that the parties have approved the Space Plan for the Premises dated March 30, 2000 attached hereto as Schedule I (the "Space Plan"). 2.3 Based upon the Space Plan, Landlord shall cause the Architect to prepare detailed plans and specifications for the Tenant Improvements ("PLANS") within ten (10) business days after the execution and delivery of this Lease by Landlord and Tenant. Landlord shall then forward the Plans to Tenant for Tenant's approval. Tenant shall approve or reasonably disapprove any draft of the Plans within three (3) business days after Tenant's receipt thereof; provided, however, that (i) Tenant shall not be entitled to disapprove any portion, component or aspect of the Plans which are consistent with the Space Plan unless Tenant agrees to pay for the additional cost resulting from such change in the Plans as part of the Excess Cost of Tenant Improvements pursuant to Section 4.2 below, and (ii) any disapproval of the Plans by Tenant shall be accompanied by a detailed written explanation of the reasons for Tenant's disapproval. Failure of Tenant to reasonably disapprove any draft of the Plans within said three (3) business day period shall be deemed to constitute Tenant's approval thereof. The Plans as approved by Landlord and Tenant, may be referred to herein as the "APPROVED PLANS". Tenant shall make no changes or modifications to the Space Plan or the Approved Plans without the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion if such change or modification would directly or indirectly delay the Substantial Completion or increase the cost of designing or constructing the Tenant Improvements. Tenant shall cooperate with Landlord to provide information requested by Landlord or Landlord's Agents in connection with the preparation of the Plans. Tenant shall provide such information within three (3) business days after requested by Landlord or Landlord's Agents. Tenant's failure to so provide such information within such three (3) business day period shall be deemed a Tenant Delay. 3. BUILDING SHELL CHANGES. If the Plans or any amendment thereof or supplement thereto shall require changes in the Building shell, the cost of the -1- Building shell work caused by such Plans, amendment or supplement, shall be charged against Tenant. If Building shell work is permitted by Landlord, the cost thereof shall include all architectural and/or engineering fees and expenses in connection therewith, as well as compensation to Landlord for the costs of any delays which arise from such changes (which delays shall also constitute Tenant Delay). 4. LEASEHOLD IMPROVEMENT APPROVAL AND COST. 4.1 Upon Landlord and Tenant's approval of the Plans, Landlord shall submit the Approved Plans to competitively bid them to not less than three (3) general contractors. Copies of such bids shall be delivered to Tenant, and Tenant shall have input (but no approval rights) in the selection of the general contractor; provided, however, that Landlord shall, using its good faith judgment, ultimately be entitled to select the general contractor. Landlord shall have three (3) business days after receipt of all bids to select the general contractor; provided, however, that if all such bids are not received within fourteen (14) days after Landlord's submission of the Approved Plans to such contractor (as the same may be extended due to the acts of Tenant or Tenant's agents), then the twelve (12) week and sixteen (16) week periods described in Section 2.5 of the Lease shall commence upon the seventh (7th) business day after the expiration of such fourteen (14) day period (as the same may be extended due to the acts of Tenant or Tenant's agents). Tenant acknowledges that, if Landlord has submitted the Approved Plans to bid as provided herein, but has not received bids from all three (3) general contractors within fourteen (14) days after Landlord has submitted the same to bid (as the same may be extended due to the acts of Tenant or Tenant's agents), then Landlord shall be entitled to select the general contractor from the bids received upon the expiration of such fourteen (14) day period (as the same may be extended due to the acts of Tenant or Tenant's agents). Landlord's general contractor (who shall have been selected by Landlord from the competitive bids) will be entitled to a contractor's fee and general conditions fee (not to exceed the current market rate for such fees). Upon receipt of the general contractor's cost of construction, Landlord shall provide Tenant with a detailed breakdown of the cost of furnishing and installing the Tenant Improvements, including, without limitation: the cost of constructing improvements; the cost of preparing engineering plans; governmental agency plan check, permit and other fees; sales and use taxes; Title 24 fees; all other costs to be expended by Tenant in the construction of the Tenant Improvements; and a Landlord's administration fee of five percent (5%) of the cost of the Tenant Improvements (collectively, the "Cost of Tenant Improvements"). The Cost of Tenant Improvements may include expenses and "soft costs" incurred by Tenant, such as the fees of Tenant's architect. Tenant shall approve in writing the estimated cost of Tenant Improvements' Section, Tenant's sole remedy shall be to terminate the Lease in accordance with Section 4.5 below. No construction of Tenant Improvements shall commence until such approval is received by Landlord. At Landlord's election, any delay by Tenant in giving such approval shall constitute Tenant Delay. 4.2 Landlord shall establish an allowance (the "Tenant Improvement Allowance") of Seven Hundred Seventy-five Thousand Nine Hundred and 00/100 Dollars ($775,900.00) which Tenant Improvement Allowance shall be used by Landlord solely for the design and installation of the Tenant Improvements. Tenant shall have the right to use the Tenant Improvement Allowance for any improvements described in the Approved Plans. However, in no event shall more than Three and 00/100 Dollars ($3.00) per usable square foot of the Tenant Improvement Allowance be used for the purpose of acquiring and installing telecommunications cabling, built-in or movable furniture or data/computer networking, and in no event shall more than One and 00/100 Dollars ($1.00) per usable square foot of the Tenant Improvement Allowance be used for moving -2- costs. Except as provided in this Section, in no event shall the Tenant Improvement Allowance be used to pay for costs of Tenant's furniture or other personal property, which shall be paid for by Tenant at its sole cost and expense. If the Cost of Tenant Improvements (including the portion used for moving costs and for acquiring and installing telecommunications cabling, built-in or movable furniture or data/computer networking) is less than the Tenant Improvement Allowance, Landlord shall retain such excess portion of the Tenant Improvement Allowance as its sole and separate property and Tenant shall have no rights or claims to it whatsoever, nor shall Tenant be entitled to any credit as a result of such excess. Notwithstanding anything to the contrary contained in this Work Letter and Construction Agreement, and subject to the provisions of Section 4.5 below, if the Cost of Tenant Improvements exceed the Tenant Improvement Allowance ("Excess Cost of Tenant Improvements"), prior to commencement of construction, Tenant shall deposit with Landlord, in cash, the amount of such Excess Cost of Tenant Improvements to be disbursed by Landlord following full disbursement of the Tenant Improvement Allowance, and the balance, if any, to be returned to Tenant, without interest, following completion of the Tenant Improvements. 4.3 If the Cost of Tenant Improvements increases due to the requirements of any governmental agency subsequent to Landlord's approval of the bids pursuant to Paragraph 4.1, or for any other reason not the fault of Landlord, Tenant shall pay to Landlord the amount of any such increase within ten (10) Business Days after receipt of notice of such cost increases. 4.4 Subject to the terms of the Lease paragraph captioned "Removal of Property", all of the Tenant Improvements, whether or not the cost thereof is covered by the Tenant Improvement Allowance, shall become the property of Landlord upon expiration or earlier termination of the Lease and shall remain on the Premises at all times during the Term. 4.5 If the estimated Cost of Tenant Improvements (but only those estimated Costs of Tenant Improvements which are consistent with the scope of work for the Tenant Improvements as set forth on the Space Plan exceeds the Tenant Improvement Allowance, Tenant shall have the right, upon written notice (the "Termination Notice") given to Landlord within three (3) business days after Landlord selects the general contractor pursuant to 4.1 above, terminate this Lease; provided, however, that, as a condition to Tenant's right to so terminate this Lease, Tenant shall pay to Landlord a termination fee equal to (a) all reasonable attorneys fees and costs incurred by Landlord in connection with the negotiation, preparation and execution of this Lease (not to exceed $13,500) and (b) all costs and expenses incurred by Landlord in connection with the preparation and performance of design work, architectural plans and drawings and engineering fees and costs relating to the Tenant Improvements (not to exceed $45,600) [collectively, the "Termination Fee"]. In no event shall the Termination Fee include any brokerage commissions. The Termination Fee shall be paid to Landlord by Landlord's application of the Security Deposit, with any remaining balance, if any, payable by Tenant within ten (10) days after Landlord's submission of the amount of the Termination Fee to Tenant (supported by a reasonably detailed statement thereof), and this Lease shall not be terminated until Landlord's receipt of the entire Termination Fee. Upon Landlord's timely and proper termination hereunder, Landlord shall promptly return the unapplied portion of the Security Deposit and the Prepaid Rent to Tenant. If Tenant fails to deliver the Termination Notice to Landlord within the three business day period described above, Tenant shall be deemed to have forever waived its right to terminate this Lease in accordance with this Section 4.5. The date on which Tenant shall be deemed to have waived its right to terminate this Lease pursuant to this Section 4.5 shall be referred to as the "Tenant Waiver Date". -3- 5. TENANT CHANGES. Tenant may request a change, addition or alteration in the Tenant Improvements as shown by the Approved Plans after Tenant's final approval of such Approved Plans (a "Change Order") by delivery of a written request to Landlord for its approval and for the general contractor's determination of (i) the increase on the cost of work to implement the Change Order, and (ii) the estimated delay, if any, in the construction of the Tenant Improvements occasioned by the Change Order. Tenant's architect shall complete all working drawings necessary to show the change, addition or alteration, and a Change Order in form satisfactory to Landlord. Following its approval of the Change Order and any delays in construction occasioned by the Change Order, Landlord shall deliver to Tenant its written approval of the Change Order and authorization to proceed with the work as shown by the Change Order, conditioned upon payment by Tenant to Landlord, in advance and in full, of any cost increase occasioned thereby. Landlord may decline any proposed Change Order if the change is inconsistent with the provisions of any of paragraphs 1 through 4 above. Any delay caused by work stoppage pending Landlord's approval of a Change Order of payment by Tenant of any cost increase shall constitute Tenant Delay. If Landlord fails to disapprove a Change Order within five (5) days after Landlord's receipt thereof, the Change Order shall be deemed approved. 6. CONSTRUCTION OF TENANT IMPROVEMENTS. 6.1 Landlord shall construct the Tenant Improvements in substantial accordance with the Plans in a good and workmanlike manner. Unless specifically noted to the contrary on the Plans, the Tenant Improvements shall be constructed using Project-standard specifications and materials as determined by Landlord. Upon approval by Tenant of the Plans and Cost of the Tenant Improvements, the general contractor shall proceed to secure a building permit and commence construction. 6.2 The construction of Tenant Improvements shall be subject to the following: (i) As part of the Cost of the Tenant Improvements to be paid by Tenant (subject to Landlord's contribution of the Tenant Improvement Allowance), Tenant shall reimburse Landlord for all costs directly or indirectly related to the Tenant Improvements, including, without limitation: costs of site services, facilities and utilities (such as trash removal, use of vertical transportation, electrical service, etc.); costs of remedying deficient or faulty work or inadequate clean-up done by Tenant or its contractor(s); and costs incurred by reason of delays caused by such work. (ii) All Tenant Improvements shall be installed only under the supervision of Landlord or its designated agent, and Tenant shall pay to Landlord an administration fee in the amount of five percent (5%) as described in Paragraph 4 above, which cost may be paid out of the Tenant Improvement Allowance. 6.3 "Tenant Delay" shall include, without limitation, any delay in the completion of construction of Tenant Improvements resulting from (i) Tenant's failure to comply with the provisions of this Work Letter and Construction Agreement or the Lease, including without limitation Tenant's failure to meet any time deadlines established herein, (ii) any additional time as reasonably determined by Landlord required for ordering, receiving, fabricating and/or installing items of materials or other components of the construction of Tenant Improvements, including, without limitation, millwork, which are not used in the construction of Tenant Improvements in accordance with Landlord's building standards and which causes a delay in the Substantial Completion of the Tenant Improvements beyond the time when such improvements would otherwise be completed if constructed in accordance with the standards used in the remainder of the Building, (iii) delay in -4- work caused by submission by Tenant of a request for any Change Order following Landlord's approval of the Plans, (iv) any additional time, as reasonably determined by Landlord, required for implementation of any Change Order with respect to the Tenant Improvements, (v) any changes in the Building Shell (provided that Landlord has notified Tenant at the time Landlord approves the Approved Plans for any Change Order thereto] that the same will constitute a Tenant Delay) or (vi) any other delay arising from the act or omission of Tenant or Tenant's Agents if there shall be any Tenant Delay, then Landlord may require Tenant to commence the payment of Rent under the Lease based upon when Substantial Completion would have occurred but for the Tenant Delay, or if not previously required by Landlord, Tenant shall pay such Rent to Landlord prior to Tenant occupying the Premises. Landlord shall not be liable for, and Tenant waives all claims against Landlord for, any defaults of the general contractor and all subcontractors and suppliers relating to construction of the Tenant Improvements. In the event of any such default, Tenant shall look solely to the general contractor or the subcontractors or suppliers. 7. MISCELLANEOUS. 7.1 Any default of Tenant in this Work Letter and Construction Agreement shall constitute a default of Tenant under the Lease, and Landlord's remedies shall be as set forth therein. All provisions of the Lease are fully incorporated in this Exhibit "C" as though set forth herein at length. 7.2 Tenant shall designate one (1) construction representative authorized to act for Tenant upon whom Landlord can rely, and who shall consult with Landlord and Landlord's contractors, employees and agents in connection with the construction of the Tenant Improvements. 7.3 Landlord hereby assigns to Tenant on a non-exclusive basis all warranties and guaranties by the contractor who constructs the Tenant Improvements relating to the Tenant Improvements, and Tenant hereby waives all claims against Landlord relating to, or arising out of the construction of, the Tenant Improvements. LANDLORD: TENANT: MEPT WEST HILLS, LLC, MRV Communications, Inc., a a Delaware limited liability company Delaware corporation By: Riggs & Company, a division of Riggs Bank, N.A., as Trustee of By: /s/ NOAM LOTAN the Multi-Employer Property ---------------------------------- Trust, a trust organized under Name: Noam Lotan 12 C.F.R. Section 9.18, its sole -------------------------------- member Its: President and CEO --------------------------------- By: By: /s/ SHLOMO MARGALIT ----------------------------- ---------------------------------- Name: Name: Shlomo Margalit --------------------------- -------------------------------- Its: Its: Chairman ---------------------------- --------------------------------- By: ----------------------------- Name: --------------------------- Its: ---------------------------- SCHEDULE 1 SPACE PLAN [FLOOR PLAN] -6- EXHIBIT D to Lease FORM OF MEMORANDUM OF COMMENCEMENT DATE MEPT West Hills, LLC, as Landlord, and MRV Communications, Inc., a Delaware corporation as Tenant, executed that certain Lease dated as of March 30, 2000 (the "Lease"). The Lease contemplates that upon satisfaction of certain conditions Landlord and Tenant will agree and stipulate as to certain provisions of the Lease. All such conditions precedent to that stipulation have been satisfied. Landlord and Tenant agree as follows: 1. The Commencement Date of the Lease is August 4, 2000. 2. The Termination Date of the Lease is August 3, 2005. 3. The Premises consist of 38,795 rentable square feet. 4. Base Rent is as follows: 8/4/00 through 8/31/00; $68,329.26 per month 9/1/00 through 1/31/03; $75,650.25 per month 2/1/03 through 8/3/05; $81,469.50 per month ______ through ______; $__________ per month 5. Tenant's Pro Rata Share is 11.76 percent (11.76%). IN WITNESS WHEREOF, the parties have caused this Memorandum to be duly executed as of 9/13, 2000. LANDLORD: TENANT: MEPT WEST HILLS, LLC, a Delaware MRV Communications, Inc., a limited liability company Delaware corporation By: RIGGS & COMPANY, a division of By: /s/ NOAM LOTAN Riggs Bank N.A., as Trustee of the ---------------------------------- Multi-Employer Property Trust, a Name: Noam Lotan trust organized under 12 C.F.R. ---------------------------------- Section 9.18 Its: CEO ---------------------------------- By: _________________________________ Name: _______________________________ Its: ________________________________ -1- EXHIBIT D to Lease FORM OF MEMORANDUM OF COMMENCEMENT DATE MEPT West Hills, LLC, as Landlord, and MRV Communications, Inc., a Delaware corporation as Tenant, executed that certain Lease dated as of ____________________, 2000 (the "Lease"). The Lease contemplates that upon satisfaction of certain conditions Landlord and Tenant will agree and stipulate as to certain provisions of the Lease. All such conditions precedent to that stipulation have been satisfied. Landlord and Tenant agree as follows: 1. The Commencement Date of the Lease is _______________________. 2. The Termination Date of the Lease is ____________________________. 3. The Premises consist of _________________________ rentable square feet. 4. Base Rent is as follows: ______________ through ____________; $__________ per month ______________ through ____________; $__________ per month ______________ through ____________; $__________ per month ______________ through ____________; $__________ per month 5. Tenant's Pro Rata Share is _______________ percent (_______%). IN WITNESS WHEREOF, the parties have caused this Memorandum to be duly executed as of _________, 2000. LANDLORD: TENANT: MEPT WEST HILLS, LLC, a Delaware limited MRV Communications, Inc., a liability company Delaware corporation By: RIGGS & COMPANY, a division of Riggs Bank N.A., as Trustee of the By: Multi-Employer Property Trust, a trust _______________________ organized under 12 C.F.R. Section Name: 9.18 _______________________ Its: By: ___________________________ _______________________ Name: _________________________ Its: __________________________ -1- EXHIBIT E to Lease RULES AND REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building or Land without the prior written consent of the Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rate. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, Tenant shall immediately discontinue such use. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalk, halls, passages, exits, entrances, elevators, escalators, or stairways of the Building. The halls, passages, exits, entrances, elevators, escalators and stairways are not open to the general public. Landlord shall in all cases retain the right to control and prevent access to such areas of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Land, Building and the Building's tenants; provided that, nothing in this Lease contained shall be construed to prevent such access to persons with whom any Tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. Tenant shall not go upon the roof of the Building. 4. The directory of the Building will be provided exclusively for the display of the name and location of tenants only, and Landlord reserves the right to exclude any other names therefrom. 5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Cleaning and janitorial services shall be provided five (5) days per week. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Premises, however occurring, or for any damage to any Tenant's property by the janitor, any of Landlord's Agents or any other person. 6. Landlord will furnish Tenant, free of charge, two (2) keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 7. Except on holidays, HVAC service shall be provided to the Premises Monday through Friday from 8:00 a.m. to 10:00 p.m. and Saturday and Sunday from 9:00 a.m. to 4:00 p.m. 8. If Tenant requires telegraphic, telephonic, computer circuits, burglar alarm or similar services, it shall first obtain, and comply with, -1- Landlord's instructions for their installation, and shall pay the entire cost of such installation(s). 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by Governmental Requirements. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space in the Building or to any other tenant in the Project, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities permitted by the Lease. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors or vibrations nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord. 12. Tenant shall not waste any utility provided by Landlord and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice. 13. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 14. Intentionally Omitted. 15. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and electricity, gas or air outlets before Tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. Intentionally Omitted. 17. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be deposited in them. The expenses of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by Tenant if it or its employees or invitees shall have caused it. 18. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Building. Tenant shall not use the Premises for any -2- business or activity other than that specifically provided for in the Lease. 19. Tenant shall not install, without Landlord's prior written consent which consent may be granted or withheld in Landlord's sole and absolute discretion, any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 20. Except as provided in the Tenant Work Letter, Tenant shall not mark, drive nails, screws or drill into the partitions, woodwork or plaster or in any way deface the Premises. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. 21. Intentionally Omitted. 22. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in the Building or Land are prohibited and Tenant shall cooperate to prevent the same. 23. Landlord reserves the right to exclude or expel from the Building and Land any person who, in Landlord's judgment, is intoxicated, under the influence of liquor or drugs or in violation of any of these Rules and Regulations. 24. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 25. The Premises shall not be used for lodging or any improper or immoral or objectionable purpose. No cooking shall be done or permitted by Tenant, except that use by Tenant of Underwriters' Laboratory approved equipment for microwaving, brewing coffee, tea, hot chocolate and similar beverages shall be permitted; provided that such equipment and its use is in accordance with all Governmental Requirements. 26. Tenant shall not use in the Premises or in the public halls of the Building any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 27. Without the prior written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 28. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 29. Tenant assumes any and all responsibility for protecting the Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 30. The requirements of tenant will be attended to only upon appropriate application to the Manager of the Building by an authorized individual. Employees of Landlord are not required to perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord is required to admit Tenant to any space other than the Premises without specific instructions from Landlord. 31. Tenant shall not park its vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building or Land. -3- Tenant shall not leave vehicles in the parking areas overnight nor park any vehicles in the Building parking areas other than automobiles, motorcycles, motor driven or nonmotor driven bicycles or four wheeled trucks. 32. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other person, nor prevent Landlord from thereafter revoking such waiver and enforcing any such Rules and Regulations against any or all of the tenants of the Building. 33. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the covenants and conditions of any lease of Premises in the Building. If any provision of these Rules and Regulations conflicts with any provision of the Lease, the terms of the Lease shall prevail. 34. Landlord reserves the right to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, the care and cleanliness of the Building and Land and the preservation of good order in the Building. Tenant agrees to abide by all the Rules and Regulations stated in this exhibit and any additional rules and regulations which are so made by Landlord. 35. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant and Tenant's Agents. -1- Exhibit G to Lease Parking Area -2- Exhibit "G" Parking Area Exhibit H Environmental Questionnaire -3- EXHIBIT "F" ENVIRONMENTAL QUESTIONNAIRE FOR OFFICE USE ONLY: Proposed Lease Commencement Date: March 31, 2000 Marketing Director: ______ Original Renewal Expansion - --------------------------------------------------------- PRE-LEASING ENVIRONMENTAL EXPOSURE QUESTIONNAIRE (To be completed prior to Lease Approval) Property Address: As described in attached lease 8433 Fallbrook Avenue "Bldg. B at Corporate Pointe" West Hills, CA Proposed Tenant: MRV Communications Inc./Zuma Networks Inc. (Include full legal name of proposed tenant and any d/b/a) Current Address: _8943 Fullbright Avenue, Chatsworth, CA 91311 ______________ Description of Proposed Use of Property: General office purposes and incidental use consisting of the following; warehousing, light assembly, shipping and receiving, engineering and research development (including project testing) - ---------------------------------- PLEASE ANSWER THE FOLLOWING QUESTIONS ACCURATELY AND FULLY, ATTACHING ADDITIONAL PAGES IF NECESSARY. YOUR RESPONSES TO THIS QUESTIONNAIRE, INCLUDING ANY AND ALL ATTACHMENTS, SHALL BE INCORPORATED AS REPRESENTATIONS AND WARRANTIES IN THE LEASE WHEN EXECUTED, AND INCORRECT, MISLEADING OR MATERIALLY INCOMPLETE RESPONSES SHALL BE DEEMED A BREACH OF SAID LEASE. 1. Will any of the following chemicals, petroleum products or hazardous materials be made, used, placed, or stored on the property in quantities greater than the minimum quantity listed in column (1) below? If yes, please mark column(s) (2), (3), and/or (4) as applicable. (1) (2) (3) (4) (5) Minimum Categories of Chemicals Quantity Made Used Placed Stored ----------------------- -------- ---- ---- ------ ------ Solvents, Degreasers 1 Gallon ____ ____ ______ ______ Paint Thinners/Remover 1 Gallon ____ ____ ______ ______ Paint 5 Gallons ____ ____ ______ ______ Oil (New) 5 Gallons ____ ____ ______ ______ Gasoline 1 Gallon ____ ____ ______ ______ Antifreeze 5 Gallons ____ ____ ______ ______ Other Automotive Fluids 1 Gallon ____ ____ ______ ______ Diesel Fuel 5 Gallons ____ ____ ______ ______ Heavy (Toxic) Metal Containing Compounds 1 Pound ____ ____ ______ ______ Liquid Plastics/Activators 1 Gallon ____ ____ ______ ______ Flammable Gases 20 Cu Ft ____ ____ ______ ______ Toxic Gases 20 Cu Ft ____ ____ ______ ______ Acids 1 Gl/5 Lb ____ ____ ______ ______ Bases (soda, ash, lye, etc.) 1 Gl/5 Lb ____ ____ ______ ______ Other Flammable Materials 1 Gl/5 Lb ____ ____ ______ ______ Other Corrosive Materials 1 Gl/5 Lb ____ ____ ______ ______ Other Toxic Materials 1 Gl/5 Lb ____ ____ ______ ______ Other Reactive Materials 1 Gl/5 Lb ____ ____ ______ ______ Liquid Hazardous Waste 1 Gallon ____ ____ ______ ______ Solid Hazardous Waste 1 Pound ____ ____ ______ ______ 1.1 If required for your operations, please provide Landlord a copy of your Hazardous Material Business Management Plan. 1.2 Do your operations require H-occupancy storage or other Yes No special construction? ___ NO If yes, please explain: _________________________________ _________________________________ 2. Will any of the following structures be used on the property? If yes, describe the contents of each. ____ ____ Feature Contents Underground Tank ____________________________________ NO ____ Above-ground Tank ____________________________________ NO ____ Clarifier ____________________________________ NO ____ Sump ____________________________________ NO ____ Trench ____________________________________ NO ____ Waste Pile ____________________________________ NO ____ Chemical Piping ____________________________________ NO ____ Floor Drain ____________________________________ NO ____ Other Nitrogen Containers of 22PSI, 148 LTR will be used YES ____ ____________________________________ ____ ____ 2.1 Please describe plans for secondary containment and leak monitoring. __________________________________________________ __________________________________________________ 3. Will any hazardous wastes or liquid wastes be generated NO ____ by on site operations or brought on to the property? If yes, complete the following: 3.1 Identify each such hazardous waste or liquid waste: __________________________________________________ __________________________________________________ 3.2 Describe onsite storage, including secondary containment, and/or treatment. __________________________________________________ __________________________________________________ 3.3 Describe yours plans for disposal of hazardous wastes or liquid waste including off-site disposal. __________________________________________________ __________________________________________________ 4. Will operations results in any wastewater discharges to NO ____ the sewer? Will operations result in any wastewater discharges to locations other than the sewer (including storm drain)? If yes, describe each wastewater stream and plans for handling wastewater discharges: __________________________________________________ __________________________________________________ 4.1 Have you performed any testing or analysis of NO ____ wastewater discharges or other wastewater effluent from your current facility? If yes, attach the results of any such testing or analysis. 4.2 Will your operations require any stormwater discharge NO ____ permits? -2- If yes, describe: _________________________________ _________________________________ 5. Will activities on the property require warnings to be NO ____ given to workers or visitors on the Leased Premises or the surrounding community? If yes, please describe how you will provide such communications or warnings: ______________________________ __________________________________________________________ 6. Will operations result in any air emissions (including dust)? NO ____ If yes, describe: __________________________________________________________ __________________________________________________________ 6.1 Will permits from the Southern Coast Air Quality NO ____ Management District be required? 7. Will operations result in air emissions which include NO ____ hazardous or toxic air pollutants? 7.1 If yes, will any public notice or disclosure be required? ____ ____ 8. Will operations be subject to Risk Management & Preview NO ____ Planning requirements or other risk reduction requirements? 9. Will your operations involve any on-site vehicle or equipment NO ____ maintenance, repair or cleaning, including but not limited to oil changes, oil filter changes, brake pad replacement, battery changes, radiator flushing, radiator fluid replacement, and equipment, and equipment wash down and cleaning? If yes, describe all such maintenance: __________________________________________________________ __________________________________________________________ 9.1 Will these on-site vehicles or equipment use batteries? ____ ____ If yes, describe battery storage method: ____________ _____________________________________________________ 10. Will your operations include a machine shop? NO ____ If yes, describe all operation: __________________________________________________________ __________________________________________________________ 11. Will your operations include any metal plating or metal NO ____ fabrication: If yes, describe: __________________________________________________________ __________________________________________________________ 12. Will your operations include the use of solvents? NO ____ If yes, describe: __________________________________________________________ __________________________________________________________ -3- 13. Has your present facility or operation ever been the NO ____ subject of an environmental investigation, an environmental enforcement action, or permit revocation proceeding? If yes describe: __________________________________________________________ __________________________________________________________ 14. Have you ever been identified as a potentially responsible NO ____ party for any environmental cleanup, compliance or abatement proceeding? If yes, describe: __________________________________________________________ __________________________________________________________ 15. Have you ever received a notice of violation or notice to NO ____ comply from any environmental regulatory agency within the past five years? If yes, describe: __________________________________________________________ __________________________________________________________ 16. Have you had any complaints from neighbors relating to noise, NO ____ odor, air emissions, or dust at your present facility? If yes, describe: __________________________________________________________ __________________________________________________________ 16.1 Have you had any complaints relating to hazardous NO ____ materials handling, storage, treatment or disposal from neighbors at your present facility? If yes, describe: _____________________________________________________ _____________________________________________________ 17. Will the proposed use of the property require the filing of any environmental reports or other documents to any agencies? 18. Attach copies of all Material Safety Data Sheets ("MSDS") for all chemicals you intend to use, sore, or handle on the property. 19. Has an Environmental Audit been conducted at your present NO ____ facility? (If yes, attach a copy of any report prepared in connection with any such audit.) 20. Please provide the Landlord your Emergency Response Plan and any contingency or emergency plans for the property in case of an accidental release of hazardous materials. -4- 21. Identify the name, title and qualifications/experience of person responsible for your environmental health and safety program: Name: ____________________________________________________________________ Title: ___________________________________________________________________ Qualifications/experience: _______________________________________________ __________________________________________________________________________ __________________________________________________________________________ 22. Name and telephone number of person to contact for additional information: Name: RAYMOND WEBSTER __________________________________________________________________________ Title: VICE PRESIDENT CORPORATE DEVELOPMENT __________________________________________________________________________ Telephone Number: 818-993-9862 Ext. 270 __________________________________________________________________________ 23. Please provide any additional information/comments concerning your environmental compliance program and environmental compliance history: __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ The undersigned hereby certifies that the information above is correct and complete. MRV Communications/Zuma Networks /s/ NOAM LOTAN - ------------------------------------------- Name of Proposed Tenant Name: Moti Weizman Title: General Manager Date: March 31, 2000 EX-10.69 5 v79412ex10-69.txt EXHIBIT 10.69 EXHIBIT 10.69 [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS) 1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, August 14, 2000, is made by and between George DeRado ("LESSOR") and Luminent, Inc., a Delaware Corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 20520 Nordhoff Street, Chatsworth, CA. 91311, located in the County of Los Angeles, State of California, and generally described as (describe briefly the nature of the property and, if applicable, the "PROJECT", if the property is located within a Project) that certain concrete tilt up industrial facility comprising roughly 22,200 square feet on approximately 59,260 square feet of industrially zoned land ("PREMISES"). (See also Paragraph 2) 1.3 TERM: Five (5) years and Five (5) months ("ORIGINAL TERM") commencing August 1, 2000 ("COMMENCEMENT DATE") and ending December 31, 2005 ("EXPIRATION DATE"). (See also Paragraph 3) See attached Addendum for Paragraph 57. 1.4 EARLY POSSESSION: August 1, 2000 ("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3) 1.5 BASE RENT: $15,540.00 per month ("BASE RENT"), payable on the First day of each month commencing January 1, 2001. (See also Paragraph 4) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $15,540.00 as Base Rent for the period January 1 through January 31, 2001. 1.7 SECURITY DEPOSIT: $15,540.00 ("SECURITY DEPOSIT"). (See also Paragraph 5) 1.8 AGREED USE: Engineering, manufacture, storage and distribution of electrical products and office uses (See also Paragraph 6) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated herein. (See also Paragraph 8) 1.10 REAL ESTATE BROKERS: (See also Paragraph 15) (a) REPRESENTATION: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction (check applicable boxes): [X] Capital Commercial attn: Tim Foutz represents Lessor exclusively ("LESSOR'S BROKER"); [X] Delphi Business Properties attn: Scott Caswell represents Lessee exclusively ("LESSEE'S BROKER"); or [ ] _________________________ represents both Lessor and Lessee ("DUAL AGENCY"). (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of ----*% of the total Base Rent for the brokerage services rendered by said Broker). * Payment to Brokers is per a separate listing agreement. 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by _______________________________________________________________ _________________________________________ ("GUARANTOR"). (See also Paragraph 37) 1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 7.4(a) (b); 9.1(b); 9.3; 9.5; 12.1(b); 14; 32; and 49 through 59, and Exhibit "A" all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean and free of debris on August 1, 2000, the Early Possession Date. "Start Date" shall be defined as January 1, 2001. As of the August 1, 2000 (unless otherwise provided in the Lease), Lessor warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "BUILDING") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii), (iii) thirty (30) days as to the remaining systems and other elements of the Building except as set forth in Paragraph 53, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) PAGE 1 OF 11 so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 ACKNOWLEDGEMENTS. Subject to Lessor's obligations under Paragraph 53, Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use; (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises; and (c) neither Lessor, Lessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises; and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including, but not limited to, the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. 4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("RENT"). 4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) PAGE 2 OF 11 a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT. (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to August 1, 2000 or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. 7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity. (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility feed to the perimeter of the Building, and (ix) any other equipment, if reasonably required by Lessor, herein defined as "Basic Elements". (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other PAGE 3 OF 11 than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (SEE ADDENDUM FOR FURTHER CLARIFICATION). (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. See Addendum for further clarification. (b) REMOVAL. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. See Addendum for further clarification. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake) including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's PAGE 4 OF 11 loss of Rent from the date of any such loss. Such insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. 8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days PAGE 5 OF 11 following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "COMMENCE" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of general, special, ordinary or extraordinary, Ad Valorem real estate taxes or assessments or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises. 10.2 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All monies paid to Lessor under this Paragraph may be intermingled with other monies of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, at the option of Lessor, be treated as an additional Security Deposit. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (See Addendum) (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than twenty-five percent (25%) of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. PAGE 6 OF 11 (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease; (ii) release Lessee of any obligations hereunder; or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee not to exceed $1,000 as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "BREACH" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of five (5) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph 13.1 (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor; (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty; (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the guaranty; or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If three (3) times during a calendar year any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding PAGE 7 OF 11 sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of Rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. The "Inducement Recapture" amount shall be limited to $58,000.00. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent (10%) of each such overdue amount. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The interest ("INTEREST") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 BREACH BY LESSOR. (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "CONDEMNATION"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the Premises, or more than twenty-five percent (25%) of the land area portion of the Premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. (See Addendum for clarification) 15. BROKERS' FEE. 15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Each Broker shall be a third party beneficiary of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts due as and for commissions pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within ten (10) days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker. 15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. ESTOPPEL CERTIFICATES. (a) Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "ESTOPPEL CERTIFICATE" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's Rent has been paid in advance. PAGE 8 OF 11 Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including, but not limited to, Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. DAYS. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lessor's Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor; or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, PAGE 9 OF 11 the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. See Attached Addendum for further clarification. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. See Addendum Paragraph 56. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including, but not limited to, architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including, but not limited to, consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. GUARANTOR. 37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. OPTIONS. 39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within thirty (30) days after request, deliver to the other Party satisfactory evidence of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. PAGE 10 OF 11 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [X] IS [ ] IS NOT attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ________________________________________________________________________________ ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. ________________________________________________________________________________ The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Ventura, CA. 93006 Executed at: Chatsworth, CA. 91311 on: August 16, 2000 on: August 15, 2000 By LESSOR: By LESSEE: Mr. George DeRado Mr. Eric Blachno _____________________________________ _______________________________________ _____________________________________ _______________________________________ By: /s/ GEORGE DERADO By: /s/ ERIC BLACHNO Name Printed: George DeRado Name Printed: Eric Blachno Title: Owner Title: Chief Financial Officer By:__________________________________ By: WILLIAM R. SPIVEY Name Printed:________________________ Name Printed: Dr. William Spivey Title:_______________________________ Title: President Address: Accutech @ P.O. Box 6930, Address: 20550 Nordhoff Street, Ventura, CA. 93006-6930 Chatsworth, CA. 91311 Telephone: (805) 644-7100 x.326 Telephone: (818) 773-9044 Facsimile: (805) 650-3900 Facsimile: (818) 407-5865 Federal ID No. ###-##-#### Federal ID No. 95-4978130 NOTE: These forms are often modified to meet the changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213) 687-8616 PAGE 11 of 11 REVISED ADDENDUM No. I TO STANDARD INDUSTRIAL/ COMMERCIAL SINGLE-TENANT LEASE - NET DATED AUGUST 14, 2000 BY AND BETWEEN GEORGE DE RADO, AS LESSOR AND LUMINENT, INC. AS LESSEE This Addendum to Lease ("Lease Addendum") is made and entered into by and between GEORGE DE RADO ("Lessor"), and LUMINENT, INC. a Delaware Corporation ("Lessee"), and is dated as of the date set forth on the first page of the Lease between Lessor and Lessee ("Lease") to which this Addendum is attached. The promises, covenants, agreements and declarations made and set forth herein are intended to and shall have the same force and effect as if set forth at length in the body of the Lease. To the extent that the provisions of this Addendum are inconsistent with the terms and conditions of the Lease, the terms and conditions hereof shall control. 7.4 (a) OWNERSHIP. The following language shall be added to the Paragraph 7.4 (a). Lessee shall not be required to remove any alterations, additions, trade fixtures or utility installation placed upon the Premises by Lessee, unless as a condition to Lessor's consent for such alterations, additions, trade fixtures or utility installation, Lessor requires that Lessee remove such alterations, additions, trade fixtures or utility installation, at the expiration of the Lease 7.4 (b) REMOVAL. The following language shall be added to the Paragraph 7.4 (b). Lessee shall not be required to remove any alterations, additions, trade fixtures or utility installation placed upon the Premises by Lessee, unless as a condition to Lessor's consent for such alterations, additions, trade fixtures or utility installation, Lessor requires that Lessee remove such alterations, additions, trade fixtures or utility installation, at the expiration of the Lease 9.1 (b). PREMISES TOTAL DESTRUCTION. The following language replaces the language contained in Paragraph 9.1(b) of the Lease: (b) "Premises Total Destruction" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired within six (6) months or less from the date of the damage or destruction. Within thirty (30) days following the date of the damage or destruction, Lessor shall select a general contractor ("Lessor's Contractor") who shall, by written notice to Lessor and Lessee (a "Determination Notice"), determine whether or not the repair of such damage or destruction can be completed within six (6) months from the date of the damage or destruction. If Lessee elects not to accept such determination by Lessor's Contractor, Lessee shall, at Lessee's sole expense, select another general contractor ("Lessee's Contractor") who shall, within ten (10) days after receipt by Lessee of such Determination Notice, by written notice to Lessor and Lessee, determine whether or not 1 the repair of such damage or destruction can be completed within six (6) months from the date of the damage or destruction. Should Lessor's Contractor and Lessee's Contractor fail to agree upon whether such damage or destruction can be repaired within six (6) months from the date of the damage or destruction, then the matter shall be resolved by binding arbitration in accordance with the Rules of the American Arbitration Association. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. The following language replaces the first two sentences of Paragraph 9.3 of the Lease: If a Premises Partial Damage occurs that is not an Insured Loss, (i) if the total cost of repairing such damage is reasonably determined by Lessor to be equal to or less than $100,000, then Lessor shall repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and/or Utility Installations), and (ii) if the total cost of repairing such damage is reasonably determined by Lessor to be greater than $100,000, then Lessor may either (A) repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and/or Utility Installations) as soon as is reasonably possible at Lessor's expense, in which event the Lease shall remain in full force and effect, or (B) terminate the Lease by giving written notice to Lessee (a "Termination Notice") within thirty (30) days after the date that Lessor becomes aware of the occurrence of such damage, such termination to be effective ninety (90) days after the date of such notice; provided, however, that the Lease shall not so terminate if Lessee, by written notice to Lessor within thirty (30) days after receipt of such Termination Notice, elects to repair such damage at Lessee's sole expense. 9.5 DAMAGE NEAR END OF TERM. The following language replaces the language contained in the first sentence of Paragraph 9.5 of the Lease: If at any time during the last (6) months of the Original Term (as the same may be extended by any Extension Option) there is damage for which the cost of repairs is reasonably estimated by an impartial general contractor selected by Lessor to exceed $50,000, whether or not an Insured Loss, Lessor or Lessee may, by written notice to the other party within thirty (30) days after the date of occurrence of such damage, terminate this Lease effective thirty (30) days following the date of occurrence of such damage. 12.1(b) ASSIGNMENT AND SUBLETTING - LESSOR'S CONSENT REQUIRED. The following is added as a new Paragraph 12.1 (b) of the Lease: (b) Lessee shall have the right, without Lessor's consent, to assign or sublease the Lease to an entity (an "Affiliate")) controlling, under common control with, or controlled by Lessee, including an entity resulting from a merger or consolidation by Lessee, provided that in the event of an assignment the Affiliate also assumes in writing Lessee's obligations under this Lease, without relieving Lessee of any liability under the Lease. Notwithstanding the provisions of Paragraphs 12.1 (b) and (c) the Net Worth of the Lessee or assignee shall be equal to or greater than the Net Worth of Lessee at the Commencement Date. Lessor's consent shall not be required for an initial public offering of Lessee's stock. On or after any such public offering, the transactions, or series of transactions, set forth in Paragraph 12(c) (which shall include, without limitation, 2 distributions or transfers of Lessee's stock) shall thereafter be permitted, without regard to the Net Worth of Lessee, and no consent of Lessor shall be required thereto, provided that 1) in the event of a sale or acquisition, Lessee shall not be released from its obligations hereunder, and 2) the event of a merger where Lessee is not the surviving entity, such surviving entity shall have a Net Worth equal to or greater than that of Lessee as of the date of execution of this Lease. 14. CONDEMNATION. The following language replaces the fourth sentence of Paragraph 14 of the Lease: Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be compensation for diminution in value of the Premises, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any portion of such condemnation award specifically attributable to (i) Lessee's loss of business goodwill and/or Trade Fixtures, and (ii) if this Lease is terminated pursuant to the provisions of Paragraph 14 of the Lease, Lessee's reasonable relocation expenses and any excess of the market value of the Premises for the remainder of the Original Term (as the same may be extended by an Extension Option) over the present value as of the date of such termination of the Base Rent payable for the remainder of the Original Term (as the same may be extended by an Extension Option). 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. The following language replaces the language contained in Paragraph 32 of the Lease: Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergence, and otherwise, upon 24 hours' prior notice to Lessee, for the purpose of showing same to prospective purchasers, lenders, or lessees, and making alterations, repairs, improvements and additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessor. Lessor may at any time place a commercially standard, free-standing or wall mounted "For Sale" sign at a location to be selected by mutual agreement of Lessor and Lessee. Lessor may at any time during the last six (6) months of the Original Term (as the same may be extended by an Extension Option) place on commercially standard, free-standing "For Lease" sign at a location to be selected by Lessor. Lessee may at any time place one commercially standard, free-standing "For Sublease" sign at a location to be selected by mutual agreement of Lessor and Lessee near the perimeter of the Premises. 49. ARBITRATION AGREEMENT. (See attached American Industrial Real Estate Association - Standard Lease Addendum). 50. (PRIOR/EARLY OCCUPANCY BY LESSEE). Lessor waives the payment of Base Rent from the date of formal Lease execution through and including the 31st day of December, 2000. The purpose of such prior/early occupancy shall be for the purpose of Lessee constructing Lessee's tenant improvements and installing furniture, fixtures and equipment. This possession shall be subject to all of the terms, covenants and conditions of this Lease (including the tax, insurance, utility, and maintenance obligations of Lessee Paragraphs 3.2 and 13.3) other than the payment of the base rent from the date of such possession through and including December 31, 2000. 3 51. BASE RENT. (COMMENCING JANUARY 1, 2000) 51.1 Notwithstanding any contrary provision hereof, the monthly Base Rental under Paragraph 1.5 and this Paragraph 51 of the Lease shall be payable in accordance with the following schedule: (a) The Base Rent for the months of January 1, 2001 through December 31, 2001 shall be Fifteen Thousand Five Hundred Forty and NO/100 Dollars ($15,540.00) per month ("Base Rent"). (b) Thereafter, the Base Rent for each of the following twelve month period(s) shall be subject to adjustment, upward only, the same percentage proportion that the Consumer Price Index of the Bureau of Labor Statistics of the U. S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles-Riverside-Orange County, California ("All Items, 1982/84 = 100) ("Index") for the month of October, which is three (3) months prior to the month in which the adjustment(s) is to take effect, shall increase over the Index for the calendar month of October of the prior year. Notwithstanding the foregoing, in no event shall the annually Adjusted Base Rent be less than three percent (3%) per annum nor greater than five percent (5%) per annum over the Base Rent for the immediate prior period. The sum so calculated shall constitute the new monthly Base Rent hereunder. Should the Bureau of Labor Statistics discontinue the publication of the Index or publish the same less frequently, or alter the same in some other manner, Lessor shall adopt a substitute index or procedure which reasonably reflects and monitors consumer prices. 52. MANUFACTURING PROCESS: Lessee's manufacturing process (which includes the use of Liquid Nitrogen) as described in Exhibit "A" attached hereto is hereby approved. 53. CONDITION OF THE PREMISES: (PRIOR TO JANUARY 1, 2000). (a) At Lease execution, Lessor shall deliver the Premises to Lessee in a clean, broom-swept condition. (b) After Lease execution and prior to January 1, 2001 Lessor shall complete the following items at Lessor's sole cost and expense: i) Lessor shall have Advanced Heating and Air Conditioning inspect all existing HVAC units. Lessor shall complete all work as recommended by Advanced Heating and Air Conditioning. Upon completion of said work all units shall be in good working condition. Lessor shall not be liable for the balancing of the HVAC system. Lessor shall provide a six (6) month warranty from January 1, 2001 regarding the condition of the existing HVAC, lighting, plumbing and electrical systems and other such elements. Any modifications to the existing systems, by Lessee, shall not be covered under this six (6) month warranty. This warranty shall expire and be null and void as of June 30, 2001. ii) Lessor, at Lessor's sole cost and expense, shall have Channel Roofing inspect the existing roof and membrane. Said roofing inspector shall make recommendations as to delivering the roof and membrane in a watertight condition. Channel Roofing shall perform all noted recommendations. Lessor warrants that the roof and membrane shall be watertight and free of leaks for a period of one (1) year from the date of completion of Channel Roofings' work. Any and all warranties applicable to the roof and membrane shall be assigned to Lessee. iii) Lessor, at Lessor's sole cost and expense shall have MJM Paving inspect the Premises and prepare a report as to the current condition of the existing parking lot and loading areas. Lessor 4 shall instruct MJM Paving to perform the work so outlined in the parking lot report. Copies of all inspection reports shall be delivered to Lessee prior to the Commencement of any work. 54. TENANT IMPROVEMENTS. Notwithstanding any contrary provision hereof of the printed Lease form, the following shall apply: (a) LESSOR CONTRIBUTION: All Tenant Improvements, as defined below, shall be completed by Lessee's contractor. Lessor shall contribute a sum of Fifty Eight ($58,000.00). This sum shall be payable upon Building Department's Final Inspection, and unconditional labor & material releases from all material suppliers, subcontractors/General Contractor. (i) As used herein, the term Tenant Improvements means: the actual hard and soft costs and charges for material and labor and contractor's profit incurred in connection with a portion of the Improvements to be constructed by Lessee. (ii) There shall be no profit, overhead and supervision fee, or general conditions cost, including with respect to review and approval of Lessee's plans and specifications, charged by Lessor and/or its contractors, if any, with respect to the leasehold improvements or alterations to be installed in the Premises at any time during the term of this Lease by Lessee. (b) LESSEE'S SUBMISSION AND APPROVAL PROCESS: (i) Any alterations, improvements, additions, or Utility Installations made by Lessee during the term of this Lease or Option Term shall be done in a good and workmanlike manner and of good and sufficient materials, and Lessee shall, within thirty (30) days after completion of such alteration, improvements, addition or Utility Installation, provide Lessor with as-built plans and specifications for same. (ii) Any alterations, improvements, additions, or Utility Installations in or about the Premises shall be conditioned upon Lessee acquiring a permit, if required, to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. (iii) For any additions, alterations, improvements, or Utility Installations requiring Lessor's prior written consent: Lessee shall: (aa) Deleted. (bb) Employ a California licensed architect, contractor and structural engineer in connection with any proposed construction. (cc) Be fully responsible for the acts of Lessee's consultants, employees, contractors, subcontractors, invitees and agents, and cause them to fully comply with any applicable terms of this Lease and documents referred to by this Lease and Addendum and all applicable laws, rules and regulations. (dd) Deleted. 5 (ee) Cause to be obtained an applicable building permit for any and all construction and modifications, and construct the additions and alterations and perform the construction work in accordance with all applicable laws, including without limitation the Americans With Disabilities Act. c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, or any interest therein. Lessee shall give Lessor not less than thirty (30) day's notice prior to commencement of any work in the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. 55. MAINTENANCE AND REPAIRS. 55.1 PARKING LOT MAINTENANCE. Subject to Paragraph 53 (b) (iii), a) As additional terms and conditions to Paragraph 7.1(a) and (b) and notwithstanding any contrary provision thereof, during the Original Term and Option Term, if duly exercised, Lessee agrees that the parking lot maintenance shall be contracted for by Lessee and the cost of the maintenance and repair shall be that of the Lessee and b) Lessee shall maintain the parking areas of the Premises as needed including asphalt patching and the replacement of broken concrete wheel stops. Notwithstanding the foregoing, Lessee shall also be solely responsible for the cost of repairs caused by gross negligent or willful act of Lessee or its invitees. 55.2 LANDSCAPE SERVICE CONTRACT AND MAINTENANCE. As additional terms and conditions to Paragraph 7.1 (a) and (b) and notwithstanding any contrary provision thereof, during the Original Term and Option Term, if duly exercised, Lessee shall maintain all exterior landscaping for the Premises. 55.3 AIR-CONDITIONING SERVICE CONTRACT AND MAINTENANCE. As additional terms and conditions to Paragraph 7.1 (a) and (b) notwithstanding any provision therein to the contrary and subject to the provisions under Paragraph 53 (b) (i), Lessee shall maintain during the Original Term and Option Term, if duly exercised, a regular full-service air conditioning maintenance Service Contract with a qualified air conditioning contractor. The Service Contract shall include the changing of filters at the intervals recommended by the equipment manufacturer or maintenance contractor, and the other regular maintenance recommended in the service manual written by the original equipment manufacturer. The Service Contract shall also provide for the waterproofing of the HVAC equipment and related ductwork. 56. SIGN RIGHTS. Lessee shall have the right to install its identification sign on either the exterior of the Premises or on the front monument, subject to the prior written approval by Lessor and subject to Lessee's agreement to remove such sign and make the repairs occasioned by such removal at the termination of this Lease. Lessee agrees by its execution hereof that, in the event it shall install any sign on the exterior of the Premises, or in any landscaped area adjacent to the Premises, it shall remove such sign at the termination of this Lease and shall make any and all repairs to the building exterior and/or landscaping occasioned by such removal, at its sole cost and expense, not later than ten (10) days after the termination of this Lease. 6 Such repairs shall include, but not be limited to, the filling of holes and/or cracks and the painting of portions of the building exterior which, in the reasonable opinion of Lessor, must be repainted in order for the removal of such sign to leave no visible effect. 57. OPTION TO EXTEND. Lessor hereby grants to Lessee one (1) option to extend the term of this Lease for the subject Premises for the period described below commencing when the prior term expires upon each and all of the following terms and conditions. 57.1. EXTENSION TERM. Lessor hereby grants to Lessee one (1) option to extend the term of this Lease for the entire Premises for a term of five (5) additional years, (the "Option Term"). 57.2 NOTICE. If Lessee desires to extend the term of the Lease for the Option Term, Lessee shall give to Lessor written notice thereof by a date which is no sooner than nine (9) months nor later than five (5) months prior to the expiration date of the original Term of this Lease or of the Option Term. If that written notice is not timely given and received, the option to extend set forth in this Section 57 shall automatically terminate or if Lessee is in default of the terms and conditions of said Lease; then all Option's shall become null and void. 57.3 SAME TERMS AS LEASE. All terms and conditions of this Lease, except where specifically modified by this option, shall apply. 57.4 BASE RENT OPTION TERM. If Lessee shall exercise its option to extend the term of this Lease for said additional period of five (5) years, the monthly Base Rental to be paid hereunder shall be subject to an upward adjustment. (i) The Option Rate for the five (5) year term shall be subject to adjustment, upward only, in the same percentage proportion as that of the Consumer Price Index, Bureau of Labor Statistics of the U. S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles-Riverside-Orange County, California ("All Items, 1982/84 = 100) ("Index") for the month of October, which is three (3) months prior to the month in which the Option To Extend is to take effect, shall increase over the Index for the calendar month of October of the prior year. Notwithstanding the foregoing, in no event shall the Adjusted Base Rent payable for the first twelve months of the option term be adjusted upward less than three (3%) percent per annum or greater than six (6%) percent per annum over the Base Rental for the immediate prior period. The sum so calculated shall constitute the new monthly Base Rent hereunder. Should the Bureau of Labor Statistics discontinue the publication of the Index or publish the same less frequently, or alter the same in some other manner, Lessor shall adopt a substitute index or procedure which reasonably reflects and monitors consumer prices. (ii) Cost of Living Adjustments shall be every twelve (12) months, for the option term, subject to adjustment, upward only, in the same percentage proportion as that of the Consumer Price Index, Bureau of Labor Statistics of the U. S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles-Riverside-Orange County, California ("All Items, 1982/84 = 100) ("Index") for the month of October, which is three (3) months prior to the month in which the adjustment(s) is to take effect, shall increase over the Index for the calendar month of October of the prior year. Notwithstanding the foregoing, in 7 no event shall the Adjusted Base Rent payable for the first twelve months of the option term be adjusted upward less than three (3%) percent per annum or greater than six (6%) percent per annum over the Base Rental for the immediate prior period. The sum so calculated shall constitute the new monthly Base Rent hereunder. Should the Bureau of Labor Statistics discontinue the publication of the Index or publish the same less frequently, or alter the same in some other manner, Lessor shall adopt a substitute index or procedure which reasonably reflects and monitors consumer prices. 58. APPROVAL BY BOARD OF DIRECTORS. Intentionally Omitted. 59. SUBMISSION OF LEASE DOCUMENTATION. Lessee acknowledges, understands and agrees that Lessor's submission of an unexecuted copy of the Lease to Lessee shall not be deemed a binding contractual obligation to lease the Premises upon the terms and conditions of the Lease, or otherwise, until and unless Lessor duly executes and delivers to Lessee an executed original of the Lease. Lessor may entertain other offers for the Premises and shall have no obligations to lease the Premises to Lessee until and unless the Lease is duly executed in writing by Lessor and Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND ATTACHED ADDENDUM AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE AND ATTACHED ADDENDUM, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE AND ATTACHED ADDENDUM ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. Read and approved: George DeRado Luminent, Inc. a Delaware Corporation By: /s/ GEORGE DERADO By: /s/ ERIC BLACHNO ------------------------------------- --------------------------------- Printed Name: George DeRado Printed Name: Eric Blachno --------------------------- ----------------------- Title: Owner Title: C.F.O. ---------------------------------- ------------------------------ Dated: August 16, 2000 Dated: August 16, 2000 ---------------------------------- ------------------------------ Read and approved: Luminent, Inc. a Delaware Corporation By: /s/ WILLIAM R. SPIVEY --------------------------------- Printed Name: Dr. William Spivey ----------------------- Title: President ------------------------------ Dated: August , 2000 ------------------------------ [AIR LOGO] ARBITRATION AGREEMENT Standard Lease Addendum DATED August 14, 2000 -------------------------------------------------------- BY AND BETWEEN (LESSOR) George DeRado -------------------------------------- -------------------------------------- (LESSEE) Luminent, Inc., a Delaware Corporation -------------------------------------- -------------------------------------- ADDRESS OF PREMISES 20520 Nordhoff Street ------------------------------------------ Chatsworth, CA 91311 ------------------------------------------ Paragraph 49 ----- A. ARBITRATION OF DISPUTES: Except as provided In Paragraph B below, the Parties agree to resolve any and all claims, disputes or disagreements arising under this Lease, including, but not limited to any matter relating to Lessor's failure to approve an assignment, sublease or other transfer of Lessee's Interest In the Lease under Paragraph 12 of this Lease, any other defaults by Lessor, or any defaults by Lessee by and through arbitration as provided below and irrevocably waive any and all rights to the contrary. The Parties agree to at all times conduct themselves in strict, full, complete and timely accordance with the terms hereof and that any attempt to circumvent the terms of this Arbitration Agreement shall be absolutely null and void and of no force or effect whatsoever. B. DISPUTES EXCLUDED FROM ARBITRATION: The following claims, disputes or disagreements under this Lease are expressly excluded from the arbitration procedures set forth herein: 1. Disputes for which a different resolution determination is specifically set forth In this Lease, 2. All claims by either party which (a) seek anything other than enforcement or determination of rights under this Lease, or (b) are primarily founded upon matters of fraud, willful misconduct, bad faith or any other allegations of tortious action, and seek the award of punitive or exemplary damages, 3. Claims relating to (a) Lessor's exercise of any unlawful detainer rights pursuant to applicable law or (b) rights or remedies used by Lessor to gain possession of the Premises or terminate Lessee's right of possession to the Premises, all of which disputes shall be resolved by suit filed in the applicable court of jurisdiction, the decision of which court shall be subject to appeal pursuant to applicable law and 4. All claims arising under Paragraph 39 of this Lease, which disputes shall be resolved by the specific dispute resolution procedure provided in Paragraph 39 to the extent that such disputes concern solely the determination of rent. C. APPOINTMENT OF AN ARBITRATOR: All disputes subject to this Arbitration Agreement, shall be determined by binding arbitration before: [ ] a retired judge of the applicable court of jurisdiction (e.g., the Superior Court of the State of California) affiliated with Judicial Arbitration & Mediation Services, Inc. ("JAMS"), [X] the American Arbitration Association ("AAA") under its commercial arbitration rules, [ ] ________________________________________________________________________________ _____________________________________, or as may be otherwise mutually agreed by Lessor and Lessee (the "Arbitrator"). Such arbitration shall be initiated by the Parties, or either of them, within ten (10) days after either party sends written notice (the "Arbitration Notice") of a demand to arbitrate by registered or certified mail to the other party and to the Arbitrator. The Arbitration Notice shall contain a description of the subject matter of the arbitration, the dispute with respect thereto, the amount involved, if any, and the remedy or determination sought. If the Parties have agreed to use JAMS they may agree on a retired judge from the JAMS panel. If they are unable to agree within ten days, JAMS will provide a list of three available judges and each party may strike one. The remaining judge (or if there are two, the one selected by JAMS) will serve as the Arbitrator. If the Parties have elected to utilize AAA or some other organization, the Arbitrator shall be selected in accordance with said organization's rules. In the event the Arbitrator is not selected as provided for above for any reason, the party initiating arbitration shall apply to the appropriate Court for the appointment of a qualified retired judge to act as the Arbitrator. D. ARBITRATION PROCEDURE: 1. PRE-HEARING ACTIONS. The Arbitrator shall schedule a pre-hearing conference to resolve procedural matters, arrange for the exchange of information, obtain stipulations, and narrow the issues. The Parties will submit proposed discovery schedules to the Arbitrator at the pre-hearing conference. The scope and duration of discovery will be within the sole discretion of the Arbitrator. The Arbitrator shall have the discretion to order a pre-hearing exchange of information by the Parties, including, without limitation, production of requested documents, exchange of summaries of testimony of proposed witnesses, and examination by deposition of parties and third-party witnesses. This discretion shall be exercised in favor of discovery reasonable under the circumstances. The Arbitrator shall issue subpoenas and subpoenas duces tecum as provided for in the applicable statutory or case law (e.g., in California Code of Civil Procedure Section 1282.6). 2. THE DECISION. The arbitration shall be conducted in the city or county within which the Premises are located at a reasonably convenient site. Any Party may be represented by counsel or other authorized representative. In rendering a decision(s), the Arbitrator shall determine the rights and obligations of the Parties according to the substantive laws and the terms and provisions of this Lease. The Arbitrator's decision shall be based on the evidence introduced at the hearing, including all logical and reasonable inferences therefrom. The Arbitrator may make any determination and/or grant any remedy or relief that is just and equitable. The decision must be based on, and accompanied by, a written statement of decision explaining the factual and legal basis for the decision as to each of the principal controverted issues. The decision shall be conclusive and binding, and it may thereafter be confirmed as a judgment by the court of applicable jurisdiction, subject only to challenge on the grounds set forth in the applicable statutory or case law (e.g., in California Code of Civil Procedure Section 1286.2). The validity and enforceability of the Arbitrator's decision is to be determined exclusively by the court of appropriate jurisdiction pursuant to the provisions of this Lease. The Arbitrator may award costs, including without limitation, Arbitrator's fees and costs, attorneys' fees, and expert and witness costs, to the prevailing party, if any, as determined by the Arbitrator in his discretion. Where a matter which has been submitted to arbitration involves a dispute as to whether or not a particular act or omission (other than failure to Page 1 of 2 pay money) constitutes a Default, the time to commence or cease such action shall be tolled from the ????? at the Notice of Arbitration is served through and until the date the Arbitrator renders his or her decision. Provided, however, that this provision shall NOT apply in the event that the Arbitrator determines that the Arbitration Notice was prepared in bad faith. Whenever a dispute arises between the Parties concerning whether or not the failure to make a payment of money constitutes a default, the service of an Arbitration Notice shall NOT toll the time period in which to pay the money. The Party allegedly obligated to pay the money may, however, elect to pay the money "under protest" by accompanying said payment with a written statement setting forth the reasons for such protest. If thereafter, the Arbitrator determines that the Party who received said money was not entitled to such payment, said money shall be promptly returned to the Party who paid such money under protest together with interest thereon as defined in Paragraph 13.5. If a Party makes a payment "under protest" but no Notice of Arbitration is filed within thirty days, then such protest shall be deemed waived. (See also Paragraph 43) NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call us to make sure you are utilizing the most current form: American Industrial Real Estate Association, 700 South Flower Street, Suite 600, Los Angeles, CA 90017, Telephone No.: (213) 687-8777. Fax No.: (213) 687-8616. Page 2 of 2 EXHIBIT A [LUMINENT LOGO] SEMICONDUCTOR DEVICE MANUFACTURING PLANS 20520 NORDHOFF STREET The majority of the Luminent facility at 20520 Nordhoff Street will be used for engineering and light assembly of electronic components for telecommunications. A small portion of the facility is planned for semiconductor device manufacturing. These devices will include light emitting diodes (LEDs), laser diodes, and other optoelectronic devices. The manufacturing steps will include cleaning, etching, patterning, and thin film deposition. Although some hazards are involved in semiconductor manufacturing, steps will be taken to ensure a high level of safety to protect employees, the facility, surrounding areas, and the environment. Below is a brief list of the planned hazardous materials to be used in this facility. We will have our plans and construction review by the Los Angeles City Building and Safety Department as well as the Los Angeles City Fire Department. We already have permits or applications for other Luminent facilities with the Los Angeles City Fire Department for the Certified Unified Program Agency (CUPA) for Hazardous Material Operations as well as the South Coast Air Quality Management District. - -------------------------------------------------------------------------------- Tentative List of Hazardous Materials to be Used (estimated amounts indicated in parentheses) Organic Solvents Disposal Method: pick up by disposal service Partial List: acetone (10 gal), methanol (10 gal), trichloroethylene (1 gal), photoresist (10 gal), other organic solvents (20 gal) Acids, Bases, and Other Liquids Disposal Method: on-site neutralization; pick-up by disposal service Partial List: hydrochloric acid (10 gal), hydrofluoric acid (1 gal), hydrogen peroxide (2 gal), ammonium hydroxide (5 gal), sulfuric acid (10 gal), other liquids (15 gal) Gases and Related Materials General Gases Disposal Method: scrubbing as needed Partial List: oxygen (2 cylinders), silane (1 cylinder), methane (1 cylinder), nitrogen (2 cylinders), ammonia (1 cylinder), hydrogen (1 cylinder), other compressed gases (5 cylinders) Liquid Nitrogen Estimated Amount on Site: 400 gallons Disposal Method: release /s/ CASPER REAVES ----------------------------------- prepared by Casper Reaves, Ph.D. 16 August 2000 EX-21 6 v79412ex21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES The following are the Company's subsidiaries at December 31, 2001:
Name Jurisdiction of Organization - ---- ---------------------------- Appointech, Inc. Republic of China AstroTerra Corporation California Broadband Highway, Inc. Delaware Cescomm USA, Inc. Delaware Cescomm, Inc. Delaware Charlotte's Web Ltd. Israel Charlotte's Networks, Inc. Delaware Cimi Networks, Inc. Delaware EDSLAN SRL Italy Elcoma AG Switzerland Fiber Optic Communications, Inc. Republic of China FIOPTEC Inc. Cayman Islands FOCI Optronic Components, Inc. Republic of China FOCI USA, Inc. California Giga Solutions SA France Hyperchannel Ltd. United Kingdom Interdata S.A. France ITouch Communications, Inc. Delaware ITouch USA, Inc. Delaware iTouch, Inc. Massachusetts J3Tel SA France Jolt Ltd. Israel Luminent, Inc. Delaware MRV Appointech, Inc. Delaware Multiport Corp. Massachusetts NBase Communications, Inc. Maryland NBase Communications, Ltd. Israel NBase Europe GmbH Germany NBase Fibronics Ltd. Israel Optical Access, Inc. Delaware Optical Crossing, Inc. Delaware Optronics International Corp. Republic of China Pedrena Enterprises B.V. Netherlands Quantum Optech (Singapore) Pte Ltd. Singapore Quantum Optech Incorporation Republic of China RDS AB Sweden RedC Optical Networks Inc. Delaware RedC Optical Networks Ltd. Israel Shanghai FOCI Fiber Optic Communications Equipment, Inc. Cayman Islands Tecnonet S.R.L. Italy Turn Key Communication AG Switzerland Yuam-Tai Enterprises Ple, Ltd. Singapore Zuma Networks, Inc. Delaware
EX-23.1 7 v79412ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 12, 2002 included in the Form 10-K of MRV Communications, Inc. for the year ended December 31, 2001 into the following Registration Statements of MRV Communications, Inc.: (i) Form S-8 File No. 33-96458 (ii) Form S-8 File No. 333-87743 (iii) Form S-8 File No. 333-87741 (iv) Form S-8 File No. 333-87739 (v) Form S-8 File No. 333-87735 (vi) Form S-8 File No. 333-87733 (vii) Form S-8 File No. 333-87731 (viii) Form S-3 File No. 333-86163 (ix) Form S-3 File No. 333-17537 (x) Form S-3 File No. 333-64017 (xi) Form S-3 File No. 333-39560 (xii) Form S-8 File No. 333-42306 (xiii) Form S-3 File No. 333-44534 (xiv) Form S-4 File No. 333-44536 (xv) Form S-8 File No. 333-44540 (xvi) Form S-8 File No. 333-47896 (xvii) Form S-8 File No. 333-47898 (xviii) Form S-8 File No. 333-47900 (xix) Form S-8 File No. 333-55328 (xx) Form S-8 File No. 333-55334 (xxi) Form S-8 File No. 333-71180 (xxii) Form S-3 File No. 333-71178 (xxiii) Form S-8 File No. 333-81954 (xxiv) Form S-8 File No. 333-81958 (xxv) Form S-8 File No. 333-81950 (xxvi) Form S-8 File No. 333-81956
/s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Los Angeles, California March 19, 2002 -----END PRIVACY-ENHANCED MESSAGE-----