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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 24, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
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COMMISSION FILE NUMBER 0-27130
NETWORK APPLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0307520
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
2770 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
(408) 367-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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none none
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (no par value)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of May 31, 1998, was $984,774,626 (based on the closing price for
shares of the Registrant's common stock as reported by the Nasdaq National
Market for the last trading day prior to that date). Shares of common stock held
by each executive officer, director, and holder of 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On May 31, 1998, 33,802,814 shares of the Registrant's common stock, no par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
October 8, 1998, which will be filed with the Securities and Exchange Commission
not later than 120 days after April 24, 1998.
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This Annual Report on Form 10-K contains forward looking statements that
are accompanied by cautionary statements that identify important factors that
could cause actual results to differ materially from those in the forward
looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
Network Appliance, Inc. (the "Company" or "Network Appliance") designs,
manufactures, markets and supports high performance network data storage devices
which provide fast, simple, reliable and cost effective file service for
data-intensive network environments. The Company pioneered the concept of the
"network appliance," an extension of the industry trend towards dedicated,
specialized devices which perform a single function in the network, similar to
the adoption of the router for network communications management. The Company's
products consist of network data storage appliances or "filers" and proxy
caching solutions developed to address the specific market requirements of
data-intensive network environments as well as the World Wide Web. The Company's
filers utilize an efficient software kernel optimized to exclusively perform the
file service task. Unlike previous file server approaches, these products are
not burdened by a general purpose operating system or file system overhead. By
using a proprietary software architecture, Network Appliance is able to use
industry standard hardware components rather than specialized hardware. The
Company's filer products combine specialized proprietary software and
state-of-the-art industry standard hardware to provide a unique solution for the
NFS, Common Internet File System ("CIFS"), and HTTP server markets.
PRODUCTS
Filers -- The Company offers data access appliances or filers which cover a
broad range of needs. Current products include the NetApp(R) F210, an
entry-level appliance targeted for small workgroups and branch offices, the
NetApp F230 workgroup filer, the NetApp F520, designed to address the needs of
large departments, and the enterprise-class NetApp F630. All filers are based on
a PCI-bus architecture and come packaged in rack mountable enclosures. The
NetApp F210 and F230 filers are based on Pentium(R) processors and utilize
SCSI-based storage. The NetApp F520 and NetApp F630 are based on Digital's
Alpha(R) processor and support either SCSI or fibre channel arbitrated loop
("Fibre Channel") conventions as storage options.
All of the Company's filers include the Data ONTAP(TM) operating system and
one base or standard protocol (either NFS, CIFS or HTTP). Native multiprotocol
functionality can be easily added through licensing non-base protocols at an
additional cost.
NetApp filer list prices range from approximately $15,000 to $600,000,
depending primarily on the model purchased and the product configuration.
Data ONTAP Operating System -- Combining advanced multiprotocol file system
technology and a powerful microkernel-based design, the Network Appliance filer
software solution, Data ONTAP, delivers simultaneous file service to UNIX,
Windows and Web clients. Data ONTAP, version 5.0, supports multiple volume
server partitioning, a popular strategy for modularizing, consolidating and
administering data according to applications, data types and organizational
needs.
Proxy Caching Solutions -- NetCache(TM), the Web proxy caching software
made available through the Internet Middleware Corporation ("IMC") acquisition,
allows network administrators to replicate or cache Web content. This reduces
bandwidth costs by avoiding duplicate requests generated over the WAN, and
significantly speeds up access for users. NetCache also provides greater control
and selection of information permitted over the network. The software is
currently available for Windows NT, SPARC Solaris and Digital UNIX.
In fiscal 1998, the Company introduced a family of network cache
appliances. NetCache appliances and software allow carriers, ISPs and
corporations to reduce network traffic, significantly improve user response time
and enhance security. The NetApp C230 is a dedicated caching appliance designed
for small points of presence ("POPs") and remote offices where there are no
system administrators present. The NetApp C630, supporting access times up to
T3, is a high-performance appliance, suitable for large corporate installations
and ISP data centers.
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SALES AND MARKETING
Network Appliance has established multiple distribution channels to
accelerate market penetration of its products. The Company initially marketed
its products primarily through indirect sales channels both domestically and
internationally. In fiscal 1995, the Company shifted its emphasis domestically
to direct sales and significantly expanded its direct sales force. The Company
continues to rely primarily on indirect sales in Asia and in some portions of
Europe. Network Appliance has approximately 25 sales offices located within
North America and 6 sales offices within Europe and Asia. No customers accounted
for 10% or more of the Company's net sales in fiscal 1998, 1997 or 1996.
BACKLOG
The Company manufactures its products based upon forecast of customers'
demand. Orders are generally placed by customers on an as-needed basis and
products are typically shipped within one to four weeks following receipt of an
order. In general, customers may cancel or reschedule orders without penalty.
For these reasons, the Company does not believe "orders" constitute a firm
"backlog" and believes it is not a meaningful indicator of revenues nor material
to an understanding of its business.
CUSTOMER SERVICE AND SUPPORT
Network Appliance's customer service and support organization provides
customers with technical support, education and training. Network Appliance
believes that providing a high level of customer service and technical support
is critical to customer satisfaction and the Company's success. Warranty
coverage includes 24 hour telephone support plus advanced replacement of
defective hardware shipped on a next business day basis. For an additional
charge, the Company also offers upgraded service during the warranty period,
providing for faster on-site hardware repair. The standard hardware warranty for
most parts includes one year of part replacement for failed components. Software
support, including the repair of errors or defects, and new release updates are
provided at no extra charge for 90 days after product shipment. Support for
software is available beyond the initial period through the software
subscription program.
Post-warranty service programs include: cooperative maintenance wherein the
customer purchases replacements or extra parts and performs self-maintenance
tasks, a full-service program involving a combination of telephone-based support
and on-site advanced replacement, and a software subscription program that
includes telephone support and software upgrades. The Company charges for
service programs on an annual subscription basis, with discounts to sites with
multiple filers. On-site support is primarily provided by independent parties
both in North America and internationally.
MANUFACTURING
Network Appliance's manufacturing operations, located in Santa Clara,
California, consist of procurement of materials, commodity management, component
engineering, manufacturing engineering, product assembly, product assurance,
quality control and final test. Network Appliance relies on many suppliers for
the procurement of materials, as well as several key subcontractors for the
production of certain board level assemblies. The Company's manufacturing
strategy has been to develop close relationships with its suppliers, exchanging
critical information and implementing joint quality training programs. This
manufacturing strategy minimizes capital investment and overhead expenditures
and creates flexibility by providing the capacity for rapid expansion. During
May 1997, Network Appliance was awarded the ISO 9001 certification.
The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. The Company
procures disk drives from multiple sources. However, the Company purchases most
of its disk drives through a single supplier. The Company purchases computer
boards and microprocessors from a limited number of suppliers. The Company's
reliance on its suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, price increases,
timely delivery and component quality. This risk is particularly significant
with respect to the Company's supplier of disk drives because in order to meet
product performance requirements, the Company must obtain disk drives of
extremely high quality and capacity. In addition, there are periodic supply and
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demand issues for disk drives, microprocessors and for semiconductor memory
components, which could result in component shortages, selective supply
allocations and increased prices of such components. Although to date the
Company has been able to purchase its requirements of such components, there is
no assurance that the Company will be able to obtain its full requirements of
such components in the future or that prices of such components will not
increase. In addition, there can be no assurance that problems with respect to
yield and quality of such components and timeliness of deliveries will not
occur. Disruption or termination of the supply of these components could delay
shipments of the Company's products and could have a material adverse effect on
the Company's business, operating results, financial condition or cash flows.
Such delays could also damage relationships with current and prospective
customers.
Certain of the Company's resellers and end-users have historically
purchased minimally configured systems from the Company and have sourced
additional disk drives and memory components from other vendors. Since these
components do not undergo the Company's rigorous sourcing and testing
procedures, they may experience more failures and incompatabilities when
deployed in the Company's products. Any such higher failure rate or
incompatabilities could negatively impact the Company's reputation and, as a
result, could materially adversely affect its business, operating results,
financial condition or cash flows.
RESEARCH AND DEVELOPMENT
Since its inception, Network Appliance has made substantial investments in
research and development. Network Appliance believes that its future performance
will depend in large part on its ability to maintain and enhance its current
product line, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. The Company intends to expand its existing product offerings and
to introduce new products.
As part of the Company's ongoing development process, the Company
introduced a significant software release during fiscal 1998 -- Data ONTAP
release 5.0. The Company also initiated production shipments of its NetApp C230
and NetApp C630 NetCache appliances. In November 1997, the Company released
version 2.0 of its NetApp Windows Networking Software, featuring
SecureShare(TM). SecureShare enables true file system sharing for clients based
on different operating systems. Windows and UNIX clients are now able to access
the same files, at the same time.
The Company's future growth depends upon the success of these and other new
products, however there can be no assurance that these or other new products
will attain market acceptance. Due to the complexity of network file servers and
the difficulty in gauging the engineering effort required to produce new
products, new products are subject to significant technical risks. There can be
no assurance that new products will be introduced on a timely basis or at all.
In the past, the Company has experienced delays in the shipments of its new
products principally due to an inability to qualify component parts from disk
drive and other suppliers, resulting in delay or loss of product sales. If new
products are delayed or do not achieve market acceptance, the Company's
business, operating results, financial condition or cash flows will be
materially adversely affected.
The network file server market is characterized by rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards could render the Company's existing
products obsolete and unmarketable. The Company's future success will depend
upon its ability to develop and introduce new products (including new software
releases and enhancements) on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing new products that respond to
technological changes or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer
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requirements, the Company's business, operating results, financial condition or
cash flows will be materially adversely affected.
Network file server products like those offered by the Company may contain
undetected software errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing by the Company and
by current and potential customers, errors will not be found in new products
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results, financial condition or cash flows.
The Company's total expenses for research and development for fiscal years
1998, 1997 and 1996 were $16.6 million, $9.0 million and $4.8 million,
respectively. The Company anticipates that research and development expenses
will increase in absolute dollars in future periods.
COMPETITION
The network file server market is intensely competitive and characterized
by rapidly changing technology. The Company experiences substantial competition
from specialized network file server companies, such as Auspex Systems, Inc. The
Company also competes against traditional suppliers of UNIX-based systems that
are used as network file servers including Sun Microsystems, Digital Equipment
Corporation, Hewlett-Packard Company, EMC (indirectly through OEM relationships
with system vendors), Silicon Graphics, Inc. and IBM Corporation, among others.
In addition, certain of these large traditional suppliers of general purpose
computers may in the future offer specialized file server products which are
more directly competitive with those of the Company. The Company also encounters
competition from manufacturers of PC-based file servers utilizing Windows NT and
emerging standards. The Company's NetCache software and NetCache appliances
compete against a number of software and hardware solutions, ranging from small
start-ups to larger systems vendors.
While the Company believes that the price-performance characteristics of
its products are currently competitive, increased competition is likely to
result in price reductions, reduced gross margin and loss of market share, any
of which could materially adversely affect the Company's business, operating
results, financial condition or cash flows. Many of the Company's current and
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, promotion, sale
and support of their products than the Company. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. In addition, the Company derives a
significant portion of its sales from the resale of disk drives as components of
its filers and therefore experiences competition from disk drive resellers. The
market for the resale of disk drives is highly competitive and subject to
intense price pressures. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results, financial condition or cash flows.
The Company believes that the principal competitive factors affecting its
market include product features such as response time, scalability and ease of
use, price, multiprotocol capabilities and customer service and support.
Although the Company believes that its products currently compete favorably with
respect to these factors, there can be no assurance that the Company can
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other resources.
PROPRIETARY RIGHTS
Network Appliance's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited
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protection. The Company has registered its Network Appliance name and logo,
FAServer and NetApp trademarks. The Company will continue to evaluate the
registration of additional trademarks as appropriate. The Company generally
enters into confidentiality agreements with its employees and with its resellers
and customers. The Company currently has multiple U.S. and international patent
applications pending. There can be no assurance that the pending applications
will be approved, or that if issued, such patents will not be challenged, and if
such challenges are brought, that such patents will not be invalidated. There
can be no assurance that the Company will develop proprietary products or
technologies that are patentable, that any issued patent will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the Company's ability to do business. Litigation may be necessary to protect
the Company's proprietary technology. Any such litigation may be time-consuming
and costly. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. In addition,
the laws of some foreign countries do not protect proprietary rights to as great
an extent as do the laws of the United States. There can be no assurance that
the Company's means of protecting its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar
technology, duplicate the Company's products or design around patents issued to
the Company or other intellectual property rights of the Company.
There have also been substantial amounts of litigation in the computer
industry regarding intellectual property rights. In the first quarter of fiscal
1997, the Company settled litigation related to the alleged infringement of
third party rights and other claims, which resulted in the Company recording a
pre-tax expense of $4.3 million ($3.5 million in payments to the plaintiffs and
$0.8 million in legal fees). In addition, the Company may from time to time
receive claims that it is infringing third parties' intellectual property
rights. There can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that companies in
the file server market will increasingly be subject to infringement claims as
the number of products and competitors in the Company's industry segment grows
and the functionality of products in different industry segments overlaps. Any
such claims could be time-consuming, result in costly litigation, cause product
shipment delays, require the Company to redesign its products or require the
Company to enter into royalty or licensing agreements, any of which could have a
material adverse effect upon the Company's business, operating results,
financial condition or cash flows. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
EMPLOYEES
As of May 31, 1998, Network Appliance had a total of approximately 450
employees. Of the total, 247 were in sales and marketing, 116 in research and
development, 45 in finance and administration and 42 in operations. The
Company's future performance also depends in significant part upon the continued
service of its key technical and senior management personnel, none of whom is
bound by an employment agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
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EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of May 31, 1998,
are as follows:
NAME AGE POSITION
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Daniel J. Warmenhoven........ 47 President, Chief Executive Officer and Director
M. Helen Bradley............. 44 Vice President, Engineering
Jeffry R. Allen.............. 46 Vice President, Finance and Operations, Chief Financial
Officer, and Secretary
Thomas F. Mendoza............ 47 Senior Vice President, Worldwide Sales
Charles E. Simmons........... 49 Vice President, Marketing
Daniel J. Warmenhoven joined the Company in October 1994 as President and
Chief Executive Officer, and has been a member of the Board of Directors since
October 1994. Prior to joining the Company, Mr. Warmenhoven served in various
capacities, including President, Chief Executive Officer and Chairman of the
Board of Directors of Network Equipment Technologies, Inc., a telecommunications
company, from November 1989 to January 1994. Mr. Warmenhoven holds a B.S. degree
in electrical engineering from Princeton University.
M. Helen Bradley joined the Company as Vice President, Engineering in
September 1995. Prior to that, Ms. Bradley owned a management consulting
business from January 1995 to September 1995. She also served as Senior Vice
President, Technology Development at Openvision, a client-server applications
company, from May 1994 to January 1995. From August 1990 to April 1994, Ms.
Bradley was the Vice President, Systems Software at Sun Microsystems. Ms.
Bradley holds a B.S. degree in mathematics from the Massachusetts Institute of
Technology and an M.S. degree in computer science from the Georgia Institute of
Technology.
Jeffry R. Allen joined the Company in December 1996 as Vice President,
Finance and Operations, Chief Financial Officer and Secretary. From October 1994
to December 1996, Mr. Allen served in various capacities, including Senior Vice
President of Operations and Vice President and Controller of Bay Networks, Inc.,
a networking company. From December 1990 to October 1994, Mr. Allen held various
positions at SynOptics, the latest of which was Vice President and Controller.
Before joining SynOptics, he held various positions, from December 1973 to
November 1990, at Hewlett-Packard Company, the latest of which was Controller of
the Information Networks Group. Mr. Allen holds a B.S. degree from San Diego
State University.
Thomas F. Mendoza joined the Company in May 1994 as Vice President, North
American Sales. During fiscal 1998, Mr. Mendoza was promoted to Senior Vice
President, Worldwide Sales. From November 1993 to April 1994, Mr. Mendoza served
in various capacities including Vice President, Sales at Work Group Technology,
a product data management company. Prior to that, Mr. Mendoza served in various
capacities including Vice President of North American Sales at Auspex, a
UNIX-based network file server company, from November 1990 to October 1993. Mr.
Mendoza was previously Vice President of Western Operations at Stratus Computer,
a vendor of fault tolerant computers, from May 1982 to October 1990. Mr. Mendoza
holds a B.A. degree from the University of Notre Dame.
Charles E. Simmons joined the Company in May 1996 as Vice President,
Marketing. Prior to that, Mr. Simmons was a senior partner at Rohner &
Associates, a consulting firm, from January 1995 to May 1996. From February 1994
to October 1994, Mr. Simmons served as Vice President of Marketing at Voyant
Corporation, a developer of videoconferencing equipment. Prior to that, Mr.
Simmons was with Sun Microsystems Computer Company, a subsidiary of Sun
Microsystems, Inc., from November 1984 to February 1994, most recently as
Director of Business Strategy and Technology Marketing. Mr. Simmons received a
B.S. degree in electrical engineering from Washington University, an M.S. degree
in electrical engineering from the Massachusetts Institute of Technology and an
MBA from Santa Clara University.
OTHER FACTORS AFFECTING THE COMPANY
History of Operating Losses; Potential Fluctuations in Quarterly
Results -- The Company was organized in April 1992 and first shipped products in
June 1993. While the Company generated net income in fiscal
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1998, 1997 and 1996, it incurred significant losses in fiscal 1995 and in each
of its prior fiscal years. There can be no assurance that the Company will
remain profitable on a quarterly or annual basis.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including:
the level of competition; the size, timing and cancellation of significant
orders; product configuration and mix; market acceptance of new products and
product enhancements; new product announcements or introductions by the Company
or its competitors; deferrals of customer orders in anticipation of new products
or product enhancements; changes in pricing by the Company or its competitors;
the ability of the Company to develop, introduce and market new products and
product enhancements on a timely basis; hardware component costs; supply
constraints; the Company's success in expanding its sales and marketing
programs; technological changes in the network file server market; the mix of
sales among the Company's sales channels; levels of expenditure on research and
development; changes in Company strategy; personnel changes; general economic
trends and other factors.
Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are shipped shortly after orders are received. As
a result, product sales in any quarter are generally dependent on orders booked
and shipped in that quarter. Product sales are also difficult to forecast
because the network file server market is rapidly evolving and the Company's
sales cycle varies substantially from customer to customer. A significant
portion of the Company's revenues in any quarter may be derived from sales to a
limited number of customers. Any significant deferral of these sales could have
a material adverse effect on the Company's results of operations in any
particular quarter; and to the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
Because Company expense levels are based, in part, on its expectations as to
future sales and because a significant percentage of the Company's expenses are
fixed, if sales levels are below expectations, net income may be
disproportionately affected. Although the Company has experienced significant
revenue growth in recent periods, such growth may not be indicative of future
operating results. Period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as an indicator of
future performance. Due to all of the foregoing factors, it is possible that in
some future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's common stock would likely be materially adversely affected.
Dependence on Growth in the Network File Server Market -- All of the
Company's filer products address the network file server market. The Company's
future financial performance will depend in large part on continued growth in
the network file server market and on emerging standards in this market. There
can be no assurance that the market for network file servers will continue to
grow or that emerging standards in the network file server market will not
adversely affect the growth of the NFS and Windows NT servers. If the network
file server market fails to grow, grows more slowly than anticipated, or if
network file servers, based on emerging standards other than those adopted by
the Company, become increasingly accepted by the market, the Company's business,
operating results, financial condition or cash flows could be materially
adversely affected. During recent years, segments of the computer industry have
experienced significant economic downturns characterized by decreased product
demand, production overcapacity, price erosion, work slowdowns and layoffs. The
Company's operations may in the future experience substantial fluctuations from
period-to-period as a consequence of such industry patterns, general economic
conditions affecting the timing of orders from major customers and other factors
affecting capital spending. There can be no assurance that such factors will not
have a material adverse effect on the Company's business, operating results,
financial condition or cash flows.
International Operations -- The Company conducts business internationally.
Accordingly, the Company's future operating results could be materially
adversely affected by a variety of uncontrollable and changing factors including
regulatory, political or economic conditions in a specific country or region,
trade protection measures and other regulatory requirements and government
spending patterns.
The Company's international sales are denominated in U.S. dollars and in
foreign currencies. An increase in the value of the U.S. dollar relative to
foreign currencies could make the Company's products more
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expensive and, therefore, potentially less competitive in those markets. For
international sales denominated in foreign currencies, the Company is subject to
risks associated with currency fluctuations.
Additional risks, among others, inherent in the Company's international
business activities generally include longer accounts receivable payment cycles,
difficulties in managing international operations and potentially adverse tax
consequences. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international sales and,
consequently, the Company's business, operating results, financial condition or
cash flows.
Although operating results have not been materially adversely affected by
seasonality in the past, because of the significant seasonal effects experienced
within the industry, particularly in Europe, there can be no assurance that the
Company's future operating results will not be adversely affected by
seasonality.
The Company believes that its continued growth and profitability will
require successful expansion of its international operations and sales and
therefore the Company has committed significant resources to such expansion. In
order to successfully expand international sales in fiscal 1999 and subsequent
periods, the Company must strengthen foreign operations, hire additional
personnel and recruit additional international distributors and resellers. This
will require significant management attention and financial resources and could
materially adversely affect the Company's business, operating results, financial
condition or cash flows. To the extent that the Company is unable to effect
these additions in a timely manner, the Company's growth, if any, in
international sales will be limited, and the Company's business, operating
results, financial condition or cash flows could be materially adversely
affected. In addition, there can be no assurance that the Company will be able
to maintain or increase international market demand for the Company's products.
The Company currently sells a significant portion of its products
internationally through resellers. There can be no assurance that any of the
Company's international resellers or customers will continue to distribute or
purchase the Company's products.
Product Concentration; Changing Product Mix -- The Company derives a
substantial portion of its revenues from the sale of its network filer product
line. As a result, a reduction in the demand for filer products due to increased
competition, a general decline in the market for network file servers or other
factors would have a material adverse effect on the Company's business,
operating results, financial condition or cash flows. In fiscal 1998, the
Company introduced four new filers: the NetApp F210, NetApp F230, NetApp F520
and NetApp F630. Additional product introductions in future periods are expected
to impact the sales of existing products. If the Company is unable to introduce
new products in a timely manner, effectively manage the introduction of new
products and any related inventory transitions or if such products do not
achieve market acceptance, the Company's business, operating results, financial
condition or cash flows could be materially adversely affected.
Concentration of Sales -- Historically, a significant portion of the
Company's sales have been made to a limited number of end user customers and
resellers. In fiscal 1998, 1997 and 1996, no customers accounted for 10% or more
of net sales. The Company generally has not entered into long term volume
purchase contracts with its end user customers or resellers, and such end user
customers or resellers may have certain rights to extend or delay the shipment
of their orders. The loss of a major end user customer or reseller, the
reduction, delay or cancellation of orders or a delay in shipment of the
Company's products to such end user customer or reseller could materially
adversely affect the Company's business, operating results and financial
condition. In addition, should one or more of these resellers choose to promote
products competitive with the Company's products, the Company's business,
operating results, financial condition or cash flows could be materially
adversely affected.
Dependence Upon Key Personnel -- The Company's continued growth and success
depends to a significant extent on the continued service of senior management
and other key employees and the hiring of additional qualified employees.
Competition for highly-skilled personnel is intense in the high technology
industry. There can be no assurance that the Company will be successful in
recruiting new personnel or in retaining existing personnel. The loss of one or
more key employees or the Company's inability to attract additional qualified
employees or retain other employees could have a material adverse effect on the
Company's business, results of operations, financial condition or cash flows.
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Management of Expanding Operations -- The Company has a history of rapid
growth. The Company's future operating results will depend to a large extent on
management's ability to successfully manage expansion and growth, including but
not limited to hiring and retaining significant numbers of qualified technical,
sales and other employees, expanding international operations, forecasting
revenues, addressing new markets, controlling expenses, implementing
infrastructure and systems and managing its assets. An unexpected decline in the
growth rate of revenues without a corresponding and timely reduction in expense
growth or a failure to manage other aspects of growth could have a material
adverse effect on the Company's business, results of operations, financial
condition or cash flows.
Possible Volatility of Stock Price -- The trading price of the Company's
common stock could be subject to wide fluctuations in response to a number of
factors, including quarterly variations in operating results, announcements of
technological innovations or new products, applications or product enhancements
by the Company or its competitors, changes in financial estimates by securities
analysts and other events. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity securities
of many high technology companies and that often has been unrelated or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Company's
common stock.
Effect of Certain Charter Provisions; Anti-takeover Effects of Provisions
of the Bylaws -- The Company's Board of Directors has the authority to issue up
to 5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of the Company's bylaws
pertaining to the future elimination of cumulative voting and shareholder action
by written consent, and the requirement that shareholders may call a special
meeting of shareholders only upon a request of shareholders owning at least 50%
of the Company's common stock, could delay or make more difficult a proxy
contest involving the Company, which could adversely affect the market price of
the Company's common stock.
Year 2000 Issues -- The "Year 2000 Issue" refers to computer programs which
use two digits rather than four to define a given year and which therefore might
read a date using "00" as the year 1900 rather than the year 2000. The Company
is currently assessing the impact the Year 2000 Issue will have on its internal
information systems. The Company believes that the majority of its current
products are Year 2000 compliant and that new products are being designed to be
Year 2000 compliant. The Company is currently performing extended testing. The
Company does not anticipate that addressing the Year 2000 Issue for its internal
information systems and current and future products will have a material adverse
impact on its operations, financial results or cash flows. However, there can be
no assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The Year 2000 Issue could lower demand for the Company's products
while increasing the Company's costs. These combining factors, while not
quantified, could have a material adverse impact on the Company's business,
operating results, financial condition or cash flows.
The Company has key relationships with suppliers. If these suppliers fail
to adequately address the Year 2000 Issue for the products they provide the
Company, this could have a material adverse impact on the Company's business,
operating results, financial condition or cash flows. The Company is still
assessing the effect the Year 2000 Issue will have on its suppliers and, at this
time, cannot determine the impact it will have.
ITEM 2. PROPERTIES
Network Appliance's principal administrative, sales, marketing,
manufacturing and research and development facility is located in approximately
120,000 square feet of space in Santa Clara, California. This facility is leased
under various operating leases which expire through fiscal 2003. The Company
leases other sales offices throughout the U.S. and in Europe. The Company
believes that the existing facilities are adequate for its current needs and
that additional space will be available as needed. See additional discussion
regarding
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properties in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock commenced trading on the Nasdaq National Market
on November 21, 1995 and is traded under the symbol "NTAP." As of May 31, 1998,
there were 284 holders of record of the common stock and 6,667 beneficial
owners. The following table sets forth for the periods indicated the high and
low closing sale prices for the common stock as reported on the Nasdaq National
Market, adjusted to reflect the effect of the December 17, 1997 two-for-one
stock split.
FISCAL 1998 FISCAL 1997
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter........................................... $20.50 $14.00 $19.38 $12.13
Second Quarter.......................................... 28.31 19.88 17.59 10.88
Third Quarter........................................... 35.50 24.13 28.00 15.75
Fourth Quarter.......................................... 36.25 27.31 27.50 13.13
The Company believes that a number of factors, including, but not limited
to, quarterly variations in results of operations may cause the market price of
its common stock to fluctuate significantly. See "Item 1. Business -- Other
Factors Affecting the Company."
The Company has never paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for use in its
business and does not anticipate paying any cash dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE FISCAL YEARS ENDED APRIL 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
Net Sales....................................... $166,163 $93,333 $46,632 $14,796 $ 2,244
Income (Loss) From Operations(1)................ 32,658 3,083 6,000 (4,913) (1,955)
Net Income (Loss)(2)............................ 20,965 250 6,600 (4,764) (1,874)
Net Income (Loss) Per Share, basic(2)........... 0.65 0.01 0.37 (0.56) (0.23)
Net Income (Loss) Per Share, diluted(2)......... 0.58 0.01 0.21 (0.56) (0.23)
Total Assets.................................... 115,736 68,941 45,449 10,628 4,055
Long-Term Obligations........................... 180 232 318 11,607 4,855
Total Shareholder's Equity (Deficit)............ 86,265 54,029 39,029 (5,923) (1,324)
- ---------------
(1) Fiscal 1997 includes the purchased in-process technology and compensation
charge related to the IMC acquisition of $10,519 and the Whipsaw litigation
of $4,300. See Notes 4 and 9 of Notes to Consolidated Financial Statements.
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(2) Fiscal 1997 includes the purchased in-process technology and compensation
charge related to the IMC acquisition of $9,215 (net of taxes) and the
Whipsaw litigation of $2,795 (net of taxes). See Notes 4 and 9 of Notes to
Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The section of this Annual Report on Form 10-K titled "Item 1. Business,"
beginning on page 2, discusses risk factors in numerous places, including the
section titled "Other Factors Affecting the Company" and should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"). MD&A should also be read in conjunction with the
audited, consolidated financial statements and the notes thereto included in the
section titled "Item 8. Financial Statements and Supplementary Data."
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of income
data as a percentage of net sales for the periods indicated:
YEARS ENDED APRIL 30,
-----------------------
1998 1997 1996
----- ----- -----
Net Sales................................................... 100.0% 100.0% 100.0%
Cost of Sales............................................... 40.7 40.8 44.1
----- ----- -----
Gross margin........................................... 59.3 59.2 55.9
----- ----- -----
Operating Expenses:
Sales and marketing....................................... 25.7 26.0 27.3
Research and development.................................. 10.0 9.6 10.2
General and administrative................................ 3.9 4.4 5.5
Purchased in-process technology and related compensation
charge................................................. -- 11.3 --
Litigation settlement..................................... -- 4.6 --
----- ----- -----
Total operating expenses............................... 39.6 55.9 43.0
----- ----- -----
Income from Operations...................................... 19.7 3.3 12.9
Other Income, net........................................... 0.5 1.0 1.3
----- ----- -----
Income before Income Taxes.................................. 20.2 4.3 14.2
Provision for Income Taxes.................................. 7.6 4.0 --
----- ----- -----
Net income............................................. 12.6% 0.3% 14.2%
===== ===== =====
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales -- Net sales increased to $166.2 million in fiscal 1998 from
$93.3 million in fiscal 1997, an increase of 78.0%. The increase in net sales
was principally attributable to a higher volume of filers shipped. The increase
in unit shipments resulted primarily from the Company's expansion of its direct
sales force and the introduction of new products during June and July 1997,
particularly the enterprise-class NetApp F630, the NetApp F520 and the NetApp
F230. Net sales for fiscal 1998 were also positively impacted by a shift in
product mix toward higher-end systems, primarily due to the introduction of new
products, leading to higher average selling prices for filers than in the
previous fiscal year. Net sales also grew as a result of increased multiprotocol
system shipments, the licensing of multiprotocol software to pre-existing
customers and increased service and software subscription revenues due to a
growing installed base.
International net sales (including U.S. exports) were $37.8 million and
$16.1 million, for fiscal 1998 and 1997, respectively. The increase in
international net sales was primarily a result of European sales growth due to
increased headcount in the direct sales force over the prior fiscal year and to
the introduction of the new products in June and July 1997.
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There can be no assurance that the Company's net sales will continue to
increase in absolute dollars or at the rate at which they have grown in recent
fiscal periods.
Gross Margin -- Gross margin remained relatively flat increasing slightly
to 59.3% of net sales for fiscal 1998 compared to 59.2% of net sales for fiscal
1997. This increase in gross margin was primarily attributable to the increase
in product volume, lower costs of key components, increased manufacturing
efficiencies and by the sale of the Company's new product with cost-reduced
designs first introduced in June and July 1997. Gross margin was also favorably
impacted by the licensing of multiprotocol software and by growth in software
subscription and service revenues due to a growing installed base. Factors
contributing to gross margin growth were partially offset by the sale of 4
gigabyte drives at reduced prices in fiscal 1998.
The Company's gross margin has been and will continue to be affected by a
variety of factors, including competition, product configuration, direct versus
indirect sales, the mix and average selling prices of products, new product
introductions and enhancements and the cost of components and manufacturing
labor. In particular, the Company's gross margin varies based upon the
configuration of systems that are sold and whether they are sold directly or
through indirect channels. Highly configured systems typically generate lower
overall gross margin percentages due to greater disk drive and memory content.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and customer service
and support costs. Sales and marketing expenses increased 76.3% to $42.8 million
in fiscal 1998, compared to $24.3 million in fiscal 1997. These expenses were
25.7% and 26.0% of net revenues for fiscal 1998 and 1997, respectively. The
increase in absolute dollars was primarily related to the expansion of the
Company's sales and marketing organization, including growth in the domestic and
international direct sales forces and increased commission expenses. During the
quarter ended January 23, 1998, the Company launched an advertising campaign
which contributed to absolute dollar growth in sales and marketing expenses for
fiscal 1998. The Company expects to continue to increase its sales and marketing
expenses in an effort to expand domestic and international markets, introduce
new products, establish and expand new distribution channels and increase
product and company awareness. The Company believes that its continued growth
and profitability is dependent in part on the successful expansion of its
international operations, and therefore, has committed significant resources to
international sales.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits and prototype expenses. Research and
development expenses increased 85.6% to $16.6 million in fiscal 1998, compared
to $9.0 million in the prior fiscal year. These expenses represented 10.0% and
9.6% of net sales in fiscal 1998 and 1997, respectively, and increased as a
result of headcount growth, prototyping expenses associated with the development
of new products and ongoing support of current and future product development
and enhancement efforts. The Company believes that significant investments in
research and development will be required to remain competitive and expects that
such expenditures will continue to increase in absolute dollars.
General and Administrative -- General and administrative expenses were $6.5
million in fiscal 1998, compared to $4.1 million in fiscal 1997, an increase of
57.9%. These expenses represented 3.9% and 4.4% of net sales for such periods
and increased in absolute dollars primarily as a result of headcount growth,
increased professional services fees and an increase to the allowance for bad
debt. The Company believes that its general and administrative expenses will
increase in absolute dollars as the Company continues to build its
infrastructure.
Litigation Settlement -- See discussion in MD&A section titled "Fiscal 1997
Compared to Fiscal 1996."
Purchased In-Process Technology and Related Compensation Charge -- See
discussion in MD&A section titled "Fiscal 1997 Compared to Fiscal 1996."
Other Income, Net -- Other income, net, was $0.9 million and $1.0 million
in fiscal 1998 and 1997, respectively. Other income, net, decreased over the
corresponding period of the prior year due primarily to foreign currency
exchange losses recorded in fiscal 1998.
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Provision for Income Taxes -- The Company's effective tax rate for fiscal
1998 was 37.5% compared to 93.8% for fiscal 1997. The fiscal 1997 tax rate was
primarily affected by the one-time charge to operations of $7.4 million for the
write-off of purchased in-process research and development related to the IMC
acquisition which was not deductible for income tax purposes. Excluding the net
effect of the IMC acquisition, the fiscal 1997 effective tax rate would have
been 35%. The higher effective tax rate in fiscal 1998, compared to the fiscal
1997 effective tax rate, exclusive of the IMC acquisition, relates to increased
earnings, which reduce the impact of research and development and other tax
credits on the effective tax rate. Additionally, fiscal 1997 included a benefit
for the reversal of a valuation allowance previously provided against deferred
tax assets which did not occur in fiscal 1998. As of April 30, 1998 and 1997, a
valuation allowance was deemed unnecessary as Company management determined that
it is more likely than not that the net deferred tax asset is realizable.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales -- Net sales increased by 100% to $93.3 million in fiscal 1997
from $46.6 million in fiscal 1996. This increase was attributable to an
increased shipping volume of filers and related peripheral devices and higher
average selling prices of filers. The increase in filer shipments resulted
primarily from the Company's expansion of its domestic and international direct
sales force, growth of the Company's domestic and international indirect sales
channel, increased market acceptance of the Company's products and the
introduction of the NetApp F540. The higher average selling prices resulted
primarily from the introduction of the enterprise-class NetApp F540 and the
shipment of a greater number of units directly to end users, who generally
purchase more highly configured systems at higher average selling prices than
resellers. Net sales also increased as a result of the introduction of
multiprotocol systems and the licensing of multiprotocol software to
pre-existing customers.
Gross Margin -- Gross margin increased to 59.2% in fiscal 1997 from 55.9%
in fiscal 1996. This increase in gross margin was primarily attributable to the
increase in product volume in fiscal 1997, lower costs of key components and
increased manufacturing efficiencies. Gross margin also increased over the prior
fiscal year as a result of licensing multiprotocol software and increases in
software subscription revenue due to a larger installed base. These factors
offset the effect of increased sales of highly configured systems during fiscal
1997, which generally generate lower gross margins per system due to higher disk
drive content.
Sales and Marketing -- Sales and marketing expenses increased 90.6% to
$24.3 million in fiscal 1997 from $12.7 million in fiscal 1996. These expenses
were 26.0% and 27.3% of net sales in fiscal 1997 and 1996, respectively. The
increase in absolute dollars was primarily related to the expansion of the
Company's sales and marketing organization, particularly the increase in the
direct sales force, and increased commission expenses related to higher sales
volumes.
Research and Development -- Research and development expenses increased
88.3% to $9.0 million in fiscal 1997 from $4.8 million in fiscal 1996. These
expenses represented 9.6% and 10.2% of net sales in fiscal 1997 and 1996,
respectively, and increased in absolute dollars primarily as a result of
increased headcount, prototyping expenses associated with the development of new
products and the support of the current and future product development and
enhancement efforts.
General and Administrative -- General and administrative expenses were $4.1
million in fiscal 1997, compared to $2.6 million in fiscal 1996, an increase of
60.4%. These expenses represented 4.4% and 5.5%, respectively, of net sales for
such periods. In fiscal 1997, the Company continued its investments in
additional staffing, facilities expansion and related occupancy costs necessary
to manage and support the Company's growth. Professional fees also increased
from fiscal 1996 to fiscal 1997. The growth in professional fees was primarily
related to increases in general legal fees, investor relation activities and
accounting related services.
Purchased In-Process Technology and Related Compensation Charge -- On March
17, 1997, the Company acquired all outstanding shares and options to purchase
shares of IMC common stock by issuing 374,046 shares of the Company's common
stock and options to purchase shares of the Company's common stock. In
connection with the acquisition, intangible assets of $8.4 million were
acquired, of which $7.4 million
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was reflected as a one-time charge to operations for the write-off of in-process
research and development that had not reached technological feasibility and, in
management's opinion, had no probable alternative future use. The remaining
intangible assets of $1.0 million, consisting of existing technology and
goodwill, are included in other assets in the accompanying consolidated balance
sheets and are being amortized over their estimated useful lives of five years.
Certain key employees of IMC who continued as employees of the Company were
also granted vested options to purchase shares of the Company's common stock at
a discount to the market price of the Company's common stock immediately
preceding the acquisition. In connection with the granting of these options, the
Company recorded a compensation charge of $3.2 million in the fourth quarter of
fiscal 1997.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of IMC from the date of acquisition forward have been
included in the Company's consolidated financial statements. IMC results of
operations included in the Company's consolidated financial statements for
fiscal 1997 were not significant. See Note 4 of Notes to Consolidated Financial
Statements for pro forma financial information.
Litigation Settlement -- In July 1994, the Company and certain of its
former employees were named as defendants in a lawsuit which alleged that one of
the Company's founders, who left the Company in March 1995, misappropriated
confidential information prior to the Company's founding in April 1992. In
August 1996, the Company entered into a settlement with the plaintiff which
resulted in a charge to earnings of $4.3 million in the first quarter of fiscal
1997, which included a $3.5 million payment to the plaintiffs and $0.8 million
of legal fees. As the payment released the Company from all liabilities
associated with the case, the Company has no future obligations to the
plaintiffs. The Company denies any wrongdoing on its part or on the part of the
founder.
Other Income, Net -- Other income, net, was $1.0 million and $0.6 million
in fiscal 1997 and 1996, respectively. In both of these periods, other income,
net, represented less than 2% of net sales. Other income, net, increased in
fiscal 1997 due primarily to interest income earned over four quarters of fiscal
1997 on the net proceeds of $25.7 million from the Company's November 1995
initial public offering ("IPO") compared to interest earnings on IPO proceeds
over two quarters for fiscal 1996.
Provision for Income Taxes -- The fiscal 1997 income tax provision was $3.8
million (effective rate of 93.8%). The fiscal 1997 tax rate was primarily
affected by the one-time charge to operations of $7.4 million for the write-off
of purchased in-process research and development related to the IMC acquisition
which was not deductible for income tax purposes. Excluding the net effect of
the IMC acquisition, the effective tax rate would have been 35%. As of April 30,
1997, a valuation allowance was deemed unnecessary as Company management
determined that it is more likely than not that the net deferred tax asset is
realizable.
In fiscal 1996, the Company's federal and state income tax liabilities were
offset by the realization of a portion of its net deferred tax assets. The
Company recognized a benefit for its net deferred tax assets to the extent that
they were recoverable through tax refunds in the event of future net operating
losses. The Company recorded a valuation allowance for the balance of its net
deferred tax assets as a result of uncertainty regarding realization of the
assets, including the limited operating history of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998, compared to the April 30, 1997 balances, the
Company's cash, cash equivalents and short-term investments increased by $19.7
million to $48.1 million. Working capital increased by $27.7 million to $69.6
million, impacted primarily by increases in accounts receivable, cash and cash
equivalents and short-term investments, partially offset by increases in
accounts payable, deferred revenue, accrued compensation and benefits and other
accrued liabilities. The Company generated cash from operating activities
totaling $22.7 million and $6.3 million in fiscal 1998 and fiscal 1997,
respectively. Net cash provided by operating activities in fiscal 1998
principally related to net income of $21.0 million, depreciation and
amortization which are non-cash expenses and increases in current liabilities,
partially offset by increases in accounts receivable, prepaid expenses and other
and deferred income taxes.
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The Company used $8.0 million and $7.1 million of cash during fiscal 1998
and 1997, respectively, to purchase property and equipment. In addition, the
Company used $3.9 million in both fiscal 1998 and fiscal 1997 for net short-term
investment purchases. Financing activities provided $6.9 million and $1.7
million during fiscal 1998 and 1997, respectively. The increase in cash provided
by financing activities in fiscal 1998 compared to the prior fiscal year was due
to an increased quantity of stock options exercised at a higher average exercise
price.
In June 1998, the Company executed an agreement to acquire 5.9 acres of
land in Sunnyvale, California and the accompanying 127,000 square foot building.
Under terms of the agreement, the Company paid $5.0 million of the $33.8 million
purchase price as a nonrefundable deposit. The agreement allows the Company to
assign its rights and obligations to a third-party entity should the Company
decide to enter into an operating lease. It is the Company's intent to assign
its rights and obligations to a third-party entity and enter into an operating
lease, provided the Company can obtain satisfactory leasing terms.
In June 1998, the Company signed a 25-year operating lease requiring annual
lease payments of $3,084, commencing in October 1999, for a 6.2 acre plot in
Sunnyvale, California. In connection with executing the operating lease
agreement, the Company also signed an option agreement to purchase the 6.2 acres
of land. Under terms of the option agreement, the Company paid a $4.5 million
refundable deposit. The option allows the Company to purchase the land, within a
90-day period, commencing in December 1999 at a purchase price of $23.7 million
and its rights and obligations under this agreement may be assigned to third
parties. It is the Company's intent to assign its purchase option to a
third-party entity and to enter into an operating lease with the third-party
entity, provided the Company can obtain satisfactory leasing terms.
In July 1998, the Company negotiated a $5.0 million unsecured revolving
credit facility with a domestic commercial bank. Under terms of the credit
facility which expires in July 1999, the Company must maintain various financial
covenants. Any borrowings under this agreement bear interest at either LIBOR
plus 1% or at the Lender's "prime" lending rate, such rate determined at the
discretion of the Company. As of July 17, 1998, there were no borrowings under
the credit facility.
Excluding the commitments related to the aforementioned properties which
the Company intends to assign to a third party and then establish operating
leases, the Company currently has no significant commitments other than
commitments under operating leases. The Company believes that its existing
liquidity and capital resources, including the $5.0 million line of credit, are
sufficient to fund its operations for at least the next twelve months.
YEAR 2000 ISSUE
The "Year 2000 Issue" refers to computer programs which use two digits
rather than four to define a given year and which therefore might read a date
using "00" as the year 1900 rather than the year 2000. The Company is currently
assessing the impact the Year 2000 Issue will have on its internal information
systems. The Company believes that the majority of its current products are Year
2000 compliant and that new products are being designed to the Year 2000
compliant. The Company is currently performing extended testing. The Company
does not anticipate that addressing the Year 2000 Issue for its internal
information systems and current and future products will have a material adverse
impact on its operations, financial results or cash flows. However, there can be
no assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The Year 2000 Issue could lower demand for the Company's products
while increasing the Company's costs. These combining factors, while not
quantified, could have a material adverse impact on the Company's business,
operating results, financial condition and cash flows.
The Company has key relationships with certain suppliers. If these
suppliers fail to adequately address the Year 2000 Issue for the products they
provide the Company, this could have a material adverse impact on the Company's
business, operating results, financial condition or cash flows. The Company is
still assessing the effect the Year 2000 Issue will have on its suppliers and,
at this time, cannot determine the impact it will have.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
statements of financial accounting standards ("SFAS"). SFAS No. 130, "Reporting
Comprehensive Income", requires that an enterprise report, by major components
and as a single total, the change in its net assets from nonowner sources during
the period. SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information", establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. The Company has not yet
identified its SFAS No. 131 reporting segments. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows. Both statements are effective for the Company's fiscal
year 1999.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition."
This statement provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SOP No. 97-2 is
effective for transactions entered into during the Company's fiscal year 1999
and thereafter. The Company does not expect that the adoption of this statement
will materially impact the Company's financial position, results of operations
or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Network Appliance, Inc.:
We have audited the accompanying consolidated balance sheets of Network
Appliance, Inc. and its subsidiaries as of April 30, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity (deficit) and
cash flows for each of the three years in the period ended April 30, 1998. Our
audits also included the financial statement schedule listed in Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Network
Appliance, Inc. and its subsidiaries as of April 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
May 8, 1998 (July 17, 1998 as to Note 11)
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NETWORK APPLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
APRIL 30,
-------------------
1998 1997
-------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 37,315 $21,520
Short-term investments.................................... 10,800 6,916
Accounts receivable, net of allowances of $811 in 1998 and
$330 in 1997........................................... 34,313 13,911
Inventories............................................... 8,707 9,920
Prepaid expenses and other................................ 2,524 1,253
Deferred taxes............................................ 5,280 3,100
-------- -------
Total current assets.............................. 98,939 56,620
-------- -------
PROPERTY AND EQUIPMENT, NET................................. 12,217 9,238
OTHER ASSETS................................................ 4,580 3,083
-------- -------
$115,736 $68,941
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.................. $ 17 $ 21
Accounts payable.......................................... 10,024 4,394
Income taxes payable...................................... 1,782 1,023
Accrued compensation and related benefits................. 8,485 4,666
Other accrued liabilities................................. 4,201 2,280
Deferred revenue.......................................... 4,799 2,317
-------- -------
Total current liabilities......................... 29,308 14,701
-------- -------
LONG-TERM OBLIGATIONS....................................... 163 211
COMMITMENTS AND CONTINGENCIES (NOTES 3 AND 11)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000 shares authorized;
shares outstanding: none in 1998 and 1997.............. -- --
Common stock, no par value; 110,000 shares authorized;
shares outstanding: 33,648 in 1998 and 32,832 in
1997................................................... 66,422 54,707
Deferred stock compensation............................... (498) (54)
Retained earnings (accumulated deficit)................... 20,341 (624)
-------- -------
Total shareholders' equity........................ 86,265 54,029
-------- -------
$115,736 $68,941
======== =======
See notes to consolidated financial statements.
18
19
NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED APRIL 30,
------------------------------
1998 1997 1996
-------- ------- -------
NET SALES................................................... $166,163 $93,333 $46,632
COST OF SALES............................................... 67,549 38,061 20,557
-------- ------- -------
Gross margin...................................... 98,614 55,272 26,075
-------- ------- -------
OPERATING EXPENSES:
Sales and marketing....................................... 42,779 24,268 12,735
Research and development.................................. 16,649 8,968 4,762
General and administrative................................ 6,528 4,134 2,578
Purchased in-process technology and related compensation
charge................................................. -- 10,519 --
Litigation settlement..................................... -- 4,300 --
-------- ------- -------
Total operating expenses.......................... 65,956 52,189 20,075
-------- ------- -------
INCOME FROM OPERATIONS...................................... 32,658 3,083 6,000
OTHER INCOME (EXPENSE):
Interest income........................................... 1,097 1,048 668
Interest and other expense................................ (208) (88) (68)
-------- ------- -------
Total other income................................ 889 960 600
-------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 33,547 4,043 6,600
PROVISION FOR INCOME TAXES.................................. 12,582 3,793 --
-------- ------- -------
NET INCOME.................................................. $ 20,965 $ 250 $ 6,600
======== ======= =======
NET INCOME PER SHARE:
Basic..................................................... $ 0.65 $ 0.01 $ 0.37
======== ======= =======
Diluted................................................... $ 0.58 $ 0.01 $ 0.21
======== ======= =======
SHARES USED IN PER SHARE CALCULATION:
Basic..................................................... 32,457 30,489 17,997
======== ======= =======
Diluted................................................... 35,951 34,402 31,468
======== ======= =======
See notes to consolidated financial statements.
19
20
NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
SERIES A
CONVERTIBLE RETAINED
PREFERRED STOCK COMMON STOCK DEFERRED EARNINGS
---------------- ---------------- STOCK (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT) TOTAL
------ ------- ------ ------- ------------ ------------ -------
BALANCES, APRIL 30, 1995...... 2,374 $ 1,340 10,132 $ 211 -- $(7,474) $(5,923)
Exercise of stock options..... -- -- 2,875 274 -- -- 274
Exercise of warrants.......... -- -- 719 708 -- -- 708
Issuance of common stock in
connection with the
Company's initial public
offering.................... -- -- 4,310 25,714 -- -- 25,714
Repurchase of common stock.... -- -- (429) (68) -- -- (68)
Conversion of Series A
preferred stock into common
stock....................... (2,374) (1,340) 2,374 1,340 -- -- --
Conversion of Series B and C
preferred stock into common
stock....................... -- -- 12,299 11,354 -- -- 11,354
Deferred stock compensation... -- -- -- 515 (515) -- --
Amortization of deferred stock
compensation................ -- -- -- -- 132 -- 132
Income tax benefit from
employee stock
transactions................ -- -- -- 238 -- -- 238
Net income.................... -- -- -- -- -- 6,600 6,600
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1996...... -- -- 32,280 40,286 (383) (874) 39,029
Issuance of common stock...... -- -- 583 1,730 -- -- 1,730
Repurchase of common stock.... -- -- (376) (52) -- -- (52)
Amortization of deferred stock
compensation................ -- -- -- -- 85 -- 85
Reversal of deferred stock
compensation due to employee
termination................. -- -- -- (244) 244 -- --
Income tax benefit from
employee stock
transactions................ -- -- -- 2,487 -- -- 2,487
Common stock issued for IMC
acquisition................. -- -- 345 7,350 -- -- 7,350
Compensation charge for IMC
acquisition................. -- -- -- 3,150 -- -- 3,150
Net income.................... -- -- -- -- -- 250 250
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1997...... -- -- 32,832 54,707 (54) (624) 54,029
Issuance of common stock...... -- -- 827 6,937 -- -- 6,937
Repurchase of common stock.... -- -- (11) (1) -- -- (1)
Deferred stock compensation... -- -- -- 714 (714) -- --
Amortization of deferred stock
compensation................ -- -- -- -- 270 -- 270
Income tax benefit from
employee stock
transactions................ -- -- -- 4,065 -- -- 4,065
Net income.................... -- -- -- -- -- 20,965 20,965
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1998...... -- -- 33,648 $66,422 $(498) $20,341 $86,265
====== ======= ====== ======= ===== ======= =======
See notes to consolidated financial statements.
20
21
NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED APRIL 30,
-------------------------------
1998 1997 1996
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 20,965 $ 250 $ 6,600
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................. 5,548 2,866 1,386
Purchased in-process technology and related compensation
charge................................................. -- 10,519 --
Provision for doubtful accounts........................... 481 -- 110
Deferred income taxes..................................... (1,749) (2,794) (2,100)
Deferred rent............................................. (36) (69) 87
Changes in assets and liabilities:
Accounts receivable.................................... (20,883) (8,573) (2,270)
Inventories............................................ 1,213 (5,095) (1,181)
Prepaid expenses and other............................. (1,484) (1,031) (525)
Accounts payable....................................... 5,626 2,295 (1,415)
Accrued compensation and related benefits.............. 3,819 2,636 1,065
Income taxes payable................................... 4,823 3,010 500
Other accrued liabilities.............................. 1,921 338 876
Deferred revenue....................................... 2,482 1,917 370
-------- -------- -------
Net cash provided by operating activities......... 22,726 6,269 3,503
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (7,971) (7,124) (4,281)
Redemptions of short-term investments..................... 11,166 13,836 --
Purchases of short-term investments....................... (15,050) (17,770) (2,982)
Other assets.............................................. (2,000) -- --
Cash acquired from IMC purchase........................... -- 11 --
-------- -------- -------
Net cash used in investing activities............. (13,855) (11,047) (7,263)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. -- -- 1,250
Repayments of long-term obligations....................... (12) (17) (1,272)
Payments for repurchase of common stock................... (1) (52) (68)
Proceeds from sale of common stock, net................... 6,937 1,730 26,696
-------- -------- -------
Net cash provided by financing activities......... 6,924 1,661 26,606
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 15,795 (3,117) 22,846
CASH AND CASH EQUIVALENTS:
Beginning of year......................................... 21,520 24,637 1,791
-------- -------- -------
End of year............................................... $ 37,315 $ 21,520 $24,637
======== ======== =======
See notes to consolidated financial statements.
21
22
NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
1. THE COMPANY
Network Appliance, Inc., incorporated in the state of California in April
1992, and its subsidiaries (the "Company") operate in a single industry segment
and are involved in the design, manufacturing, marketing and support of high
performance network data storage devices which provide fast, simple, reliable
and cost-effective file service for data-intensive network environments.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year -- Although the Company operates on a 52-week or 53-week year
ending on the last Friday in April, for presentation purposes the Company has
indicated in the accompanying consolidated financial statements that its fiscal
year end is April 30. Fiscal 1998, 1997 and 1996 were 52-week years. Fiscal 1999
will be a 53-week fiscal year.
Basis of Presentation -- The consolidated financial statements include the
Company and its wholly-owned subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation. Certain amounts from prior years
have been reclassified to conform to current-year presentation. These
reclassifications did not change previously reported total assets, liabilities,
shareholders' equity or net income.
Cash and Cash Equivalents -- The Company considers all highly liquid debt
investments with original maturities of three months or less to be cash
equivalents.
Short-term Investments -- The Company's short-term investments consist of
securities with original maturities ranging between three and six months. All of
the Company's investments are classified as available-for-sale, and are stated
at amortized cost, which approximates fair market value. Short-term investments
consist of $10,800 and $6,916 of municipal securities as of April 30, 1998, and
April 30, 1997, respectively. No short-term investments were sold during any of
the periods presented.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Inventories consist of the following:
APRIL 30,
----------------
1998 1997
------ ------
Purchased components....................................... $4,494 $6,775
Work in process............................................ 1,889 1,524
Finished goods............................................. 2,324 1,621
------ ------
$8,707 $9,920
====== ======
Property and Equipment -- Property and equipment is stated at cost and is
depreciated on a straight-line basis over estimated useful lives which range
from two to five years. Leasehold improvements are amortized over their
estimated useful lives or the life of the lease, whichever is shorter. Property
and equipment consists of the following:
APRIL 30,
------------------
1998 1997
------- -------
Computers, related equipment and purchased software...... $16,979 $11,011
Furniture and fixtures................................... 1,962 1,221
Leasehold improvements................................... 2,782 1,520
------- -------
21,723 13,752
Accumulated depreciation and amortization................ (9,506) (4,514)
------- -------
$12,217 $ 9,238
======= =======
22
23
Revenue Recognition -- The Company recognizes revenue and records estimated
product return and warranty reserves upon shipment if no material obligations
remain outstanding and the collectibility of receivables is deemed to be
probable. Service and software subscription revenues are recognized over the
terms of the related contractual periods. Combined service and software
subscription revenues were less than 10% of net sales for all of the periods
presented.
Advertising Costs -- Advertising costs are charged to operations when
incurred. Advertising expenses for fiscal 1998, 1997 and 1996 were aproximately
$1,000, $100 and $25, respectively.
Software Development Costs -- The Company capitalizes eligible computer
software development costs, which include software enhancement costs, upon the
establishment of technological feasibility, which occurs upon the completion of
a working model. Software development costs capitalized have not been
significant.
Foreign Currency Translation -- The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the year,
nonmonetary assets and liabilities are translated at historical rates and net
sales and expenses are translated at average exchange rates in effect during the
period. Transaction gains and losses, which are included in other income
(expense) in the accompanying consolidated statements of income, have not been
significant.
Certain Significant Risks and Uncertainties -- The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and 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. Such management estimates include the
allowance for doubtful accounts receivable, inventory reserves, various accruals
and warranty reserves. Actual results could differ from those estimates.
The Company is subject to certain risks, including without limitation risks
relating to history of operating losses, fluctuating operating results, customer
and market acceptance of new products, dependence on new products, rapid
technological change, litigation, dependence on growth in the network file
server market, expansion of international operations, product concentration,
changing product mix, competition, recent management additions, management of
expanding operations, dependence on high-quality components, dependence on
proprietary technology, intellectual property rights, dependence on key
personnel, volatility of stock price, shares eligible for future sale, effect of
certain anti-takeover provisions and dilution and the Year 2000 Issue.
Concentration of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments and accounts receivable. Cash, cash
equivalents and short-term investments consist primarily of municipal
securities, cash accounts held at various banks and a money market fund held at
a single financial institution. The Company sells its products primarily to
large organizations in different industries and geographies. Credit risk is
further mitigated by the Company's credit evaluation process and limited payment
terms. The Company does not require collateral or other security to support
accounts receivable. The Company maintains an allowance for potential credit
losses.
Net Income Per Share -- The Company has adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
effective in the third quarter of fiscal 1998. SFAS 128 requires the
presentation of basic and diluted net income per share. Basic net income per
share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for that period. Diluted
net income per share is computed giving effect to all dilutive potential shares
that were outstanding during the period. Dilutive potential common shares
consist of incremental common shares subject to repurchase, common shares
issuable upon exercise of stock options and warrants and convertible preferred
stock. All prior-period net income (loss) per-share amounts have been restated
to comply with SFAS 128 as well as the two-for-one stock split (See Note 5).
23
24
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations for the periods presented:
YEARS ENDED APRIL 30,
-----------------------------
1998 1997 1996
------- ------- -------
NET INCOME (NUMERATOR):
Net Income, basic and diluted....................... $20,965 $ 250 $ 6,600
======= ======= =======
SHARES (DENOMINATOR):
Weighted average common shares outstanding.......... 33,200 32,329 20,948
Weighted average common shares outstanding subject
to repurchase.................................... (743) (1,840) (2,951)
------- ------- -------
Shares used in basic computation.................... 32,457 30,489 17,997
Weighted average common shares outstanding subject
to repurchase.................................... 743 1,840 2,951
Common shares issuable upon exercise of stock
options and warrants............................. 2,751 2,073 2,269
Convertible preferred stock......................... -- -- 8,251
------- ------- -------
Shares used in diluted computation.................. 35,951 34,402 31,468
======= ======= =======
NET INCOME PER SHARE:
Basic............................................... $ 0.65 $ 0.01 $ 0.37
======= ======= =======
Diluted............................................. $ 0.58 $ 0.01 $ 0.21
======= ======= =======
Statements of Cash Flows -- Supplemental cash flow and noncash investing
and financing activities are as follows:
YEARS ENDED APRIL 30,
---------------------------
1998 1997 1996
------ ------ -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid......................................... $ -- $ -- $ 60
Income taxes paid..................................... 9,402 3,809 1,362
NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred stock compensation........................... 714 (244) 515
Conversion of preferred stock into common stock....... -- -- 12,694
Income tax benefit from employee stock transactions... 4,065 2,487 238
Common stock issued for IMC acquisition............... -- 7,350 --
Deferred stock compensation charge for IMC
acquisition........................................ -- 3,150 --
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."
Accounting for Long-Lived Assets -- Effective May 1, 1996, the Company
adopted Financial Accounting Standards Board Statement No. 121 ("SFAS 121")
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which requires the Company to review the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to those
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The adoption of SFAS 121 had no
impact on the Company's financial condition or results of operations.
Recently Issued Accounting Standards -- In June 1997, the Financial
Accounting Standards Board issued two new statements of financial accounting
standards ("SFAS"). SFAS No. 130, "Reporting Comprehensive Income", requires
that an enterprise report, by major components and as a single total, the change
in its net assets from nonowner sources during the period. SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and change in its net assets from nonowner sources during the period. SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information",
establishes annual and interim reporting standards for
24
25
major customers. The Company has not yet identified its SFAS No. 131 reporting
segments. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. Both
statements are effective for the Company's fiscal year 1999.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition".
This statement provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SOP No. 97-2 is
effective for transactions entered into during the Company's fiscal year 1999
and thereafter. The Company does not expect that the adoption of this statement
will materially impact the Company's financial position, results of operations
or cash flows.
3. COMMITMENTS
The Company leases its main facility under operating leases that expire
through fiscal 2003. Sales offices of the Company are also leased under
operating leases which expire through fiscal 2013. The Company is responsible
for certain maintenance costs, taxes and insurance under the leases. Future
minimum annual lease payments as of April 30, 1998, are as follows:
YEARS ENDING APRIL 30,
----------------------
1999............................................. $ 4,249
2000............................................. 3,323
2001............................................. 1,049
2002............................................. 886
2003............................................. 707
Thereafter....................................... 2,185
-------
Total lease payments............................... $12,399
=======
Rent expense was $4,278, $1,195 and $755 for the years ended April 30,
1998, 1997 and 1996, respectively. Rent expense under certain Company facility
leases is recognized on a straight-line basis over the term of the lease. The
difference between the amounts paid and the amounts expensed is classified as
long-term obligations in the accompanying consolidated balance sheets.
The total of minimum rental payments to be received through 1999 under
non-cancelable subleases is $1,268 as of April 30, 1998.
4. ACQUISITION
On March 17, 1997, the Company acquired all outstanding shares and options
to purchase shares of IMC common stock by issuing 374 shares of the Company's
common stock and options to purchase shares of the Company's common stock. The
purchase price related to the common stock and options to purchase shares of the
Company's common stock was $7,350. IMC was founded in 1996 to develop and
commercialize Internet/intranet proxy caching software.
Certain key employees of IMC who continued as employees of the Company were
also granted vested options to purchase shares of the Company's common stock at
a discount to the market price of the Company's common stock immediately
preceding the acquisition. In connection with the granting of discounted options
to purchase shares of the Company's common stock, the Company recorded a
compensation expense of $3,150 in the fourth quarter of fiscal 1997. The Company
also recorded a deferred income tax benefit of $1,304, primarily related to the
compensation charge.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of IMC from the date of acquisition forward have been
included in the Company's consolidated financial statements. In connection with
the acquisition, intangible assets of $8,362 were acquired, of which $7,369 was
reflected as a one-time charge to operations for the write-off of purchased
in-process research and development that had not reached technological
feasibility and, in management's opinion, had no probable alternative future
use. The
25
26
$10,519 combined one-time charge for purchased in-process technology and
compensation expense has been reflected in the Company's fiscal 1997
consolidated statement of income within operating expenses. The remaining
intangible assets of $993, consisting of existing technology and goodwill, are
included in other assets in the accompanying consolidated balance sheets and are
being amortized over their estimated useful lives of five years.
In connection with the acquisition, net assets acquired were as follows:
Current assets.............................................. $ 21
Property and equipment, net................................. 46
Intangible assets, including purchased in-process
technology................................................ 8,362
Current liabilities assumed................................. (1,079)
-------
Net assets acquired......................................... $ 7,350
=======
The following unaudited pro forma information shows the results of
operations for the two fiscal years ended April 30, 1997 as if the IMC
acquisition had occurred at the beginning of each period presented and at the
purchase price established in March 1997. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma results for fiscal 1997
combine the Company's results of operations for the fiscal year ended April 30,
1997 with the results of IMC for the period from inception (May 6, 1996) through
the date of acquisition and include the $10,519 charge for purchased in-process
technology and the related compensation charge, as well as the related tax
benefits, and the straight-line amortization of intangible assets over a period
of five years. The pro forma results for fiscal 1996 reflect the Company's
actual results of operations for that year less the amortization of intangible
assets related to the acquisition:
YEARS ENDED APRIL 30,
----------------------
1997 1996
-------- --------
Net Sales.............................................. $93,552 $46,632
Net Income (Loss)...................................... (390) 6,401
Net Income (Loss) per Share, Basic..................... (0.01) 0.35
Net Income (Loss) per Share, Diluted................... (0.01) 0.20
5. SHAREHOLDERS' EQUITY
Initial Public Offering -- In November 1995, the Company completed its
initial public offering of 4,310 shares of its common stock. Net proceeds from
the offering were $25,714. In conjunction with the offering, all outstanding
shares of preferred stock automatically converted into common stock. In
addition, the Company issued 362 shares of common stock upon the exercise of
Series A preferred warrants, and 357 shares of common stock upon the exercise of
Series C preferred warrants. The Company received total proceeds of $708 from
the exercise of these warrants.
Preferred Stock -- The Company's Board of Directors has the authority to
issue up to 5,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders.
Stock Split -- On November 11, 1997, the Board of Directors approved a
two-for-one stock split of the Company's common stock which was effective
December 18, 1997. Share and per share data for all periods presented herein
have been adjusted to give effect to the split.
Stock Option Plans -- The Company adopted the 1993 Stock Option/Stock
Issuance Plan (the "1993 Plan") in April 1993. In September 1995, the Company
adopted the 1995 Stock Incentive Plan (the "1995 Plan"). The 1995 Plan replaced
the 1993 Plan, and provides for the grant of options and the issuance of common
stock under terms substantially the same as those provided under the 1993 Plan,
except that the 1995 Plan does not allow for the exercise of options prior to
vesting. Accordingly, all options and shares issued
26
27
under the 1993 Plan were incorporated into the 1995 Plan upon the effectiveness
of the Company's initial public offering.
Under the 1995 Plan, the Board of Directors may grant to employees,
directors and consultants options to purchase shares of the Company's common
stock. The exercise price for an incentive stock option and a nonqualified stock
option cannot be less than 100% and 85%, respectively, of the fair market value
of the Company's common stock as determined by the Board of Directors on the
date of grant. Options granted under the 1995 Plan generally vest at a rate of
25% on the first anniversary of the vesting commencement date and then ratably
over the following 36 months. Options expire as determined by the Board of
Directors, but not more than ten years after the date of grant.
In April 1997, the Board of Directors adopted the Special Non-Officer Stock
Option Plan (the "Non-Officer Plan")which provides for the grant of options and
the issuance of common stock under terms substantially the same as those
provided under the 1995 Plan, except that the Non-Officer Plan allows only for
the issuance of nonqualified options to non-officer employees. A summary of the
combined activity under the Company's stock option plans and agreements is as
follows:
SHARES OUTSTANDING OPTIONS
AVAILABLE ---------------------
FOR NUMBER WEIGHTED
GRANT OF SHARES AVERAGE
--------- --------- --------
Balances, April 30, 1995.............................. 336 2,777 $ 0.07
Shares reserved for plan............................ 6,500 -- --
Options granted (weighted average fair value of
$1.60)........................................... (3,586) 3,586 4.23
Options exercised................................... -- (2,875) 0.11
Options canceled.................................... 295 (295) 1.01
------ ------
Balances, April 30, 1996 (196 options exercisable).... 3,545 3,193 4.63
Shares reserved for IMC acquisition................. 258 -- --
Options granted (weighted average fair value of
$6.59)........................................... (3,338) 3,338 14.84
Options exercised................................... -- (418) 1.65
Options canceled.................................... 474 (474) 5.35
------ ------
Balances, April 30, 1997 (1,997 options
exercisable)........................................ 939 5,639 10.83
Shares reserved for plan............................ 4,000 -- --
Options granted (weighted average fair value of
$9.12)........................................... (2,724) 2,724 23.51
Options exercised................................... -- (620) 8.46
Options canceled.................................... 574 (574) 13.81
------ ------
Balances, April 30, 1998 (2,506 options
exercisable)........................................ 2,789 7,169 $15.58
====== ======
Options for the purchase of 1,873 shares of common stock were vested as of
April 30, 1998. Unvested common shares issued under the 1993 Plan of 310 as of
April 30, 1998 are subject to repurchase by the Company.
27
28
Additional information regarding options outstanding as of April 30, 1998
is as follows:
OPTIONS OUTSTANDING
----------------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
NUMBER REMAINING WEIGHTED
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICES APRIL 30, 1998 (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- ----------- --------------
$ 0.05 - $ 0.07 181 6.15 $ 0.06 181 $ 0.06
0.10 - 0.14 127 6.95 0.13 111 0.13
1.00 - 1.50 181 7.38 1.33 162 1.32
2.25 - 3.00 115 7.32 2.64 115 2.64
3.60 - 4.05 674 7.46 3.83 674 3.83
5.50 - 5.90 410 8.17 5.68 258 5.55
10.88 - 15.75 2,303 8.58 13.90 715 13.57
17.00 - 25.38 2,183 9.02 20.42 290 18.95
25.63 - 33.58 995 9.69 29.78 -- 0.00
----- -----
$ 0.05 - $33.58 7,169 8.60 $15.58 2,506 $ 7.88
===== =====
Employee Stock Purchase Plan -- Under the Employee Stock Purchase Plan,
employees are entitled to purchase shares of the Company's common stock at 85%
of the fair market value at certain specified dates. Of the 700 shares
authorized to be issued under this plan, 335 shares were available for issuance
at April 30, 1998 and 201 and 164 shares were issued in fiscal 1998 and 1997,
respectively, at a weighted average price of $8.41 and $6.33, respectively.
Pro Forma Information -- As discussed in Note 2, the Company continues to
account for its stock-based awards using the intrinsic value method in
accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees" and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements with the exception of $270, $85 and $132 in fiscal 1998, 1997 and
1996, respectively, which consists of the amortization of deferred stock
compensation related to the granting of nonqualified stock options at exercise
prices below market.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income and net income per share had the Company adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradeable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions:
YEARS ENDED APRIL 30,
-----------------------
1998 1997 1996
----- ----- -----
Expected life (in years).................................... 2.94 2.90 3.01
Risk-free interest rate..................................... 6.00% 6.06% 5.89%
Volatility.................................................. 50% 50% 50%
Expected dividend........................................... -- -- --
28
29
The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the fiscal 1998, 1997 and 1996 awards had been amortized to expense
over the vesting period of the awards, pro forma net income (loss) and net
income (loss) per share would have been as follows:
YEARS ENDED APRIL 30,
---------------------------
1998 1997 1996
------ ------- ------
Net income (loss)....................................... $8,677 $(4,661) $5,824
Net income (loss) per share, basic...................... 0.27 (0.15) 0.32
Net income (loss) per share, diluted.................... 0.24 (0.15) 0.19
However, the impact of outstanding non-vested stock options granted prior
to fiscal 1996 has been excluded from the pro forma calculations; accordingly,
the fiscal 1998, 1997 and 1996 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
Deferred Stock Compensation -- In May 1995, the Company issued stock
options for the purchase of 1,063 shares of common stock at $0.14 per share. The
Company recognized $515 of deferred compensation in May 1995 equal to the
difference between the option price as determined by the Board of Directors and
$0.63 (the deemed fair value for financial reporting purposes) for each option.
The Company is amortizing the deferred compensation expense ratably over the
four-year period in which the options vest.
In fiscal 1998, the Company recorded $714 of deferred compensation,
primarily related to the grant of stock options to certain highly compensated
employees. Under terms of the 1995 Stock Option Plan, highly compensated
employees as defined by Company's management are eligible to contribute between
$15 to $75 in annual salary for the rights to be granted nonqualified stock
options. The discount from fair market value which is equal to the amount of
salary contributed has been recorded as deferred compensation expense. The
Company is amortizing the deferred compensation expense ratably over a one-year
period.
6. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan ("Savings
Plan"). Employees meeting the eligibility requirements, as defined, may
contribute specified percentages of their salaries. The Company contributed $202
and $119 for fiscal 1998 and 1997, respectively. The Company did not make any
contributions to the Savings Plan in fiscal 1996.
7. INCOME TAXES
The provision for income taxes consists of the following:
YEARS ENDED APRIL 30,
-----------------------------
1998 1997 1996
------- ------- -------
CURRENT:
Federal............................................. $12,132 $ 5,062 $ 1,880
State............................................... 2,199 1,525 220
------- ------- -------
Total current....................................... 14,331 6,587 2,100
------- ------- -------
DEFERRED:
Federal............................................. (1,597) (2,394) (1,880)
State............................................... (152) (400) (220)
------- ------- -------
Total deferred...................................... (1,749) (2,794) (2,100)
------- ------- -------
Provision for income taxes.................. $12,582 $ 3,793 $ --
======= ======= =======
Deferred income taxes result from differences in the timing of certain
expense items for tax and financial reporting purposes.
29
30
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
YEARS ENDED APRIL 30,
----------------------------
1998 1997 1996
------- ------ -------
Tax computed at federal statutory rate................. $11,741 $1,415 $ 2,310
State income taxes, net of federal benefit............. 1,482 764 405
Non-deductible acquisition charges related to the IMC
acquisition.......................................... -- 2,904 --
Research and experimentation credit.................... (555) (410) (50)
Investment tax credit.................................. -- -- (150)
Benefit of foreign sales corporation................... (489) (105) --
Tax exempt interest.................................... (281) (184) --
Change in valuation allowance.......................... -- (673) (2,510)
Business meal exclusion................................ 100 45 --
Other.................................................. 584 37 (5)
------- ------ -------
Provision for income taxes............................. $12,582 $3,793 $ --
======= ====== =======
The income tax benefits associated with dispositions from employee stock
transactions reduced taxes currently payable by $4,291, $2,487 and $238,
respectively, for fiscal 1998, 1997 and 1996.
Income before income taxes is as follows:
YEARS ENDED APRIL 30,
---------------------------
1998 1997 1996
------- ------ ------
Domestic................................................ $33,175 $3,983 $6,580
Foreign................................................. 372 60 20
------- ------ ------
Total......................................... $33,547 $4,043 $6,600
======= ====== ======
Current net deferred tax assets are $5,280 and $3,100, as of April 30, 1998
and April 30, 1997, respectively. Non-current net deferred tax assets at April
30, 1998 and 1997 of $1,363 and $1,794, respectively, are included in other
assets within the accompanying consolidated balance sheets. The components of
the Company's net deferred tax assets are as follows:
APRIL 30,
----------------
1998 1997
------ ------
Reserves and accruals not currently deductible for tax
purposes............................................... $4,599 $2,662
Tax benefit of options issued in IMC acquisition.......... 1,074 1,304
Net operating loss carryforwards.......................... 236 116
Depreciation.............................................. 197 369
Deferred rent............................................. 66 80
Capitalized research and development costs................ -- 142
Other..................................................... 471 221
------ ------
Deferred tax assets............................... $6,643 $4,894
====== ======
As of April 30, 1998, the Company had federal net operating loss
carryforwards of approximately $674 available to offset future taxable income.
These carryforwards expire in fiscal 2010.
8. OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company operates primarily in one industry segment: the design,
manufacturing and marketing of high-performance network data storage devices.
30
31
The Company's European operations primarily consist of sales by its
subsidiaries in the United Kingdom, France, Germany and Italy to either
unaffiliated European customers or to independent distributors.
YEARS ENDED APRIL 30,
---------------------
1998 1997
--------- --------
NET SALES:
North America............................................... $138,379 $83,342
Europe...................................................... 27,784 9,991
-------- -------
Total net sales................................... $166,163 $93,333
======== =======
OPERATING INCOME:
North America............................................... $ 32,285 $ 3,023
Europe...................................................... 373 60
-------- -------
Total operating income............................ $ 32,658 $ 3,083
======== =======
IDENTIFIABLE ASSETS:
North America............................................... $105,601 $66,019
Europe...................................................... 10,135 2,922
-------- -------
Total assets...................................... $115,736 $68,941
======== =======
North America revenues include export sales to Asia which amounted to less
than 10% of total net sales for all periods presented. Sales, operating income
and identifiable assets of the Company's foreign operations were less than 10%
of the comparable amounts on a consolidated basis in fiscal 1996.
No customer accounted for 10% or more of net sales in fiscal 1998, 1997 or
in fiscal 1996.
9. LITIGATION
The computer industry is characterized by frequent litigation regarding
intellectual property rights. During fiscal 1995 a lawsuit of this nature was
filed against the Company and two of its shareholders (the "Whipsaw
Litigation"). During the first quarter of fiscal 1997, the Company settled the
Whipsaw litigation and recorded a pre-tax expense of $4,300 ($3,500 in payments
to the plaintiffs and $800 in legal fees). In connection with the settlement,
the Whipsaw group released the Company from all liabilities.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED APRIL 30, 1998
----------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
Net sales................................... $33,420 $38,401 $43,984 $50,358
Gross margin................................ 19,850 22,655 26,104 30,005
Net income.................................. 4,221 4,885 5,555 6,304
Net income per share, basic................. 0.13 0.15 0.17 0.19
Net income per share, diluted............... 0.12 0.14 0.15 0.17
YEAR ENDED APRIL 30, 1997
----------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
Net sales................................... $18,460 $21,048 $24,845 $28,980
Gross margin................................ 10,867 12,466 14,729 17,210
Net income (loss)(1)........................ (491) 2,780 3,380 (5,419)
Net income (loss) per share, basic(1)....... (0.02) 0.09 0.11 (0.17)
Net income (loss) per share, diluted(1)..... (0.02) 0.08 0.10 (0.17)
- ---------------
(1) The first quarter of fiscal 1997 includes the Whipsaw Litigation of $2,795
(net of taxes). See Note 9. The fourth quarter of fiscal 1997 includes the
purchased in-process technology and compensation charge related to the IMC
acquisition of $9,215 (net of taxes). See Note 4.
31
32
11. SUBSEQUENT EVENTS
In June 1998, the Company executed an agreement to acquire 5.9 acres of
land in Sunnyvale, California and the accompanying 127,000 square foot building.
Under terms of the agreement, the Company paid $5,000 of the $33,750 purchase
price as a nonrefundable deposit. The agreement allows the Company to assign its
rights and obligations to a third-party entity should the Company decide to
enter into an operating lease. It is the Company's intent to assign its rights
and obligations to a third-party entity and enter into an operating lease,
provided the Company can obtain satisfactory leasing terms.
In June 1998, the Company signed a 25-year operating lease requiring annual
lease payments of $3,084, commencing in October 1999, for a 6.2 acre plot in
Sunnyvale, California. In connection with executing the operating lease
agreement, the Company also signed an option agreement to purchase the 6.2 acres
of land. Under terms of the option agreement, the Company paid a $4,500
refundable deposit. The option allows the Company to purchase the land, within a
90-day period, commencing in December 1999 at a purchase price of $23,745 and
its rights and obligations under this agreement may be assigned to third
parties. It is the Company's intent to assign its purchase option to a
third-party entity and to enter into an operating lease with the third-party
entity, provided the Company can obtain satisfactory leasing terms.
In July 1998, the Company negotiated a $5,000 unsecured revolving credit
facility with a domestic commercial bank. Under terms of the credit facility
which expires in July 1999, the Company must maintain various financial
covenants. Any borrowings under this agreement bear interest at either LIBOR
plus 1% or at the Lender's "prime" lending rate, such rate determined at the
discretion of the Company. As of July 17, 1998, there were no borrowings under
the credit facility.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's
executive officers is incorporated herein by reference from the information
under Item 1 of Part I of this Report under the section entitled "Executive
Officers". The information required by this Item with respect to the Company's
directors is incorporated herein by reference from the information provided
under the heading "Election of Directors" of the Proxy Statement which will be
filed with the Commission. The information required by Item 405 of Regulation
S-K is incorporated herein by reference from the information provided under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of executive officers and directors
of the Company is incorporated by reference from the information under the
heading "Executive Compensation and Related Information" in the Company's Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the information under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement.
32
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference from the information under the caption "Employment
Contracts, Termination of Employment and Change-In-Control Agreements" in the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Annual Report on Form 10-K.
1. The following consolidated financial statements of Network Appliance,
Inc. are filed as part of this Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets -- April 30, 1998 and 1997
Consolidated Statements of Income for the years ended April 30, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended April 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended April 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule.
The following financial statement schedule of the Company is filed in
Part IV, Item 14(d) of this Annual Report on Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is
not present in amounts sufficient to require submission of the schedule
or because the information required is included in the consolidated
financial statements or notes thereto.
3. Exhibits.
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1(1) -- Agreement and Plan of Reorganization, dated as of March 17,
1997, between the Registrant and IMC, a California
corporation
2.2(1) -- Agreement of Merger between the Registrant and IMC as filed
with the California Secretary of State on March 17, 1997
3.1(2) -- Restated Articles of Incorporation of the Company
3.2(3) -- Bylaws of the Company
3.3(8) -- Amendment to the Restated Articles of Incorporation of the
Company, filed December 18, 1997
4.1(3) -- Reference is made to Exhibits 3.1 and 3.2
4.2(3) -- Specimen Common Stock certificate
4.3(3) -- Amended and Restated Investors' Rights Agreement, dated
September 23, 1994, among the Company and the investors and
the founders named therein, as amended
4.4(3) -- Amended and Restated Shareholders Agreement, dated September
23, 1994, among the Company and the employee holders and the
Preferred Stock investors named therein
4.5(3) -- Forms of Warrants to Purchase Shares of Series A and Series
C Preferred Stock
33
34
EXHIBIT
NO. DESCRIPTION
------- -----------
10.1(3), (4) -- Distributor Agreement, dated June 1, 1993, by and among the
Company, Itochu Corporation and CTC Supply Sales
10.2(3) -- Forms of Indemnification Agreements entered into between the
Company and its directors and officers
10.3(3) -- The Company's 1993 Stock Option/Stock Issuance Plan
10.4(3) -- The Company's 1993 Stock Incentive Plan
10.5(3) -- The Company's Employee Stock Purchase Plan
10.6(3) -- Series C Preferred Stock and Common Stock and Warrant to
Purchase Series C Preferred Stock Purchase Agreement, dated
September 23, 1994, among the Company and the purchasers
named therein
10.7(3) -- Office lease dated October 21, 1993, between the Company and
Vanni Business Park General Partnership ("Vanni") and Office
Lease Agreement, dated October 20, 1994, between the Company
and Vanni
10.8(3) -- Agreement dated June 19, 1995, between the Company and
Imperial Bank, as amended, Promissory Note issued thereunder
and ancillary documents
10.9(3) -- Settlement Agreement and General Release, dated June 28,
1995, between the Company and Michael Malcolm
10.10(3) -- Security and Loan Agreement, Credit Terms and Conditions and
General Security Agreement between the Company and Imperial
Bank, dated August 31, 1994, as amended
10.11(5) -- Facility sublease, dated August 9, 1996, by and between S3,
Inc. and the Registrant
10.12(6) -- The Company's Amended 1995 Stock Incentive Plan
10.13(6) -- The Company's Special Non-Officer Stock Option Plan
10.14(7) -- Facility lease, dated August 18, 1997, by and between the
McCandless -- San Tomas No. 2 and the Registrant
10.15 -- Agreement of Purchase and Sale, dated June 11, 1998, by and
between 495 Java Drive Associates, L.P. and the Registrant
10.16 -- Operating lease agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.17 -- Purchase Option Agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.18 -- Line of credit agreement dated July 10, 1998, between the
Company and Wells Fargo Bank, National Association
16.1(3) -- Letter Regarding Change in Independent Auditors
21.1 -- Subsidiaries of the Company
23.1 -- Independent Auditors' Consent
24.1 -- Power of Attorney (see signature page)
27.1 -- Financial Data Schedule
27.2 -- Restated Financial Data Schedules
27.3 -- Restated Financial Data Schedules
27.4 -- Restated Financial Data Schedules
- ---------------
(1) Previously filed as an exhibit with the Company's Form 8-K dated March 17,
1997.
(2) Previously filed as an exhibit with the Company's Annual Report on Form 10-K
dated July 25, 1996.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-97864).
34
35
(4) Confidential treatment requested as to certain portions of these exhibits.
(5) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 7, 1997.
(6) Previously filed as an exhibit with the Company's Annual Report on Form 10-K
dated July 23, 1997.
(7) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated December 5, 1997.
(8) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 6, 1998.
(b) Reports on Form 8-K.
None.
35
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on July 21, 1998.
NETWORK APPLIANCE, INC.
By: /s/ DANIEL J. WARMENHOVEN
------------------------------------
Daniel J. Warmenhoven
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Daniel J. Warmenhoven and Jeffry R. Allen, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
---------- ----- ----
/s/ DANIEL J. WARMENHOVEN President and Chief Executive July 21, 1998
- -------------------------------------------------------- Officer, Director (Principal
(Daniel J. Warmenhoven) Executive Officer)
/s/ DONALD T. VALENTINE Chairman of the Board, Director July 21, 1998
- --------------------------------------------------------
(Donald T. Valentine)
/s/ JEFFRY R. ALLEN Vice President Finance and July 21, 1998
- -------------------------------------------------------- Operations and Chief Financial
(Jeffry R. Allen) Officer (Principal Financial
and Accounting Officer)
/s/ CAROL A. BARTZ Director July 21, 1998
- --------------------------------------------------------
(Carol A. Bartz)
/s/ LARRY R. CARTER Director July 21, 1998
- --------------------------------------------------------
(Larry R. Carter)
/s/ MICHAEL R. HALLMAN Director July 21, 1998
- --------------------------------------------------------
(Michael R. Hallman)
/s/ ROBERT T. WALL Director July 21, 1998
- --------------------------------------------------------
(Robert T. Wall)
36
37
NETWORK APPLIANCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
Allowance for doubtful account:
1998........................................ $ 330 $ 550 $ 69 $ 811
1997........................................ 330 -- -- 330
1996........................................ 220 110 -- 330
Excess and obsolescence inventory reserve:
1998........................................ $3,016 $1,302 $1,333 $2,985
1997........................................ 1,043 2,551 578 3,016
1996........................................ 345 698 -- 1,043
37
38
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
10.15 -- Agreement of Purchase and Sale, dated June 11, 1998, by and
between 495 Java Drive Associates, L.P. and the Registrant
10.16 -- Operating lease agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.17 -- Purchase Option Agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.18 -- Line of credit agreement dated July 10, 1998, between the
Company and Wells Fargo Bank, National Association
21.1 -- Subsidiaries of the Company
23.1 -- Independent Auditors' Consent
24.1 -- Power of Attorney (see signature page)
27.1 -- Financial Data Schedule
27.2 -- Restated Financial Data Schedules
27.3 -- Restated Financial Data Schedules
27.4 -- Restated Financial Data Schedules
38
1
EXHIBIT 10.15
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT OF PURCHASE AND SALE ("Agreement") is entered into
as of June 11, 1998, by and between Network Appliance, Inc., a Delaware
Corporation ("Buyer"), and 495 Java Drive Associates, L.P., a California Limited
Partnership ("Seller") and constitutes (i) a contract of purchase and sale
between the parties and (ii) escrow instructions to Escrow Agent (as hereinafter
defined).
THE PARTIES ENTER INTO THIS AGREEMENT on the basis of the following
facts, understandings and intentions:
A. Seller owns and desires to sell to Buyer real property comprised of
approximately 5.86 acres, located at 495 Java Drive, Sunnyvale, California, as
more particularly described on EXHIBIT A attached hereto ("Land") and the
Improvements (defined below) being constructed by Seller, together with Seller's
interest in (i) all rights, privileges, easements and right-of-ways appurtenant
thereto, (ii) all warranties in connection with the Improvements, (iii) to the
extent assignable, all entitlements, permits and other intangible property used
in connection therewith, and (iv) to the extent assignable, all contract rights,
related to the ownership, use and operation thereof (collectively, including
such Land and Improvements, the "Property"), and Buyer desires to purchase the
Property from Seller, on all of the terms, covenants and conditions provided
herein.
B. For purposes of this Agreement, the following terms shall have the
meanings given below:
1. "Execution Date" shall mean the date set forth at the
beginning hereof.
2. "Business Day" shall mean any day other than a
Saturday, Sunday or day on which banks in the state of California are authorized
to be closed for business.
3. "Close of Escrow" shall mean the consummation of the
purchase of the Property by Buyer or Buyer's assignee from Seller and the
recordation of Seller's Grant Deed in accordance with the terms and provisions
of this Agreement.
4. "Closing Date" shall mean a date which is the earlier
of (i) twenty (20) business days following the date the Improvements are
substantially completed in accordance with the Work Letter or (ii) a date
selected by Buyer, but not before January 1, 1999, with written notice thereof
to Seller at least thirty (30) days in advance. Seller shall provide Buyer with
at least thirty (30) days written notice of the date Seller expects to
substantially complete the Improvements and written notice of the date such
Improvements are substantially complete.
5. "Escrow Agent" shall mean First American Title
Insurance Company, 1636 North First Street, San Jose, California 95112.
2
6. "Title Company" shall mean First American Title
Insurance Company, 1636 North First Street, San Jose, California 95112.
7. "Improvements" shall mean a four story building
consisting of approximately One Hundred Twenty-Six Thousand Seven Hundred Sixty
(126,760) square feet referred to in the Work Letter.
8. "Work Letter" shall mean that certain Work Letter
attached hereto as EXHIBIT B. Capitalized terms used herein and defined in the
Work Letter shall have the meaning given in the Work Letter.
9. "Lot Line Adjustment" shall mean adjustment of the
property line between the Property and the adjoining property at 475 Java Drive
in order to accommodate a common driveway as shown on Seller's Plans (as defined
in the Work Letter).
10. "CC&R's" shall mean covenants, conditions and
restrictions for the purpose for operating the Property and the adjoining
property at 475 Java Drive in a manner that allows a common driveway
substantially in conformance with the Declaration Of Covenants, Conditions And
Restrictions And Cross-Access Parking Agreement For 500 East Middlefield Road
and 401 Ellis Street, Mountain View, California dated December 12, 1997 and
recorded as Document No. 13979683 of the Santa Clara County, California records,
with appropriate revisions to adapt such document to the Property.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and agreements
of the parties as herein set forth, the parties hereto agree as follows:
1. Purchase. Seller agrees to sell the Property to Buyer, and
Buyer agrees to purchase the Property from Seller, on all of the terms,
covenants and conditions provided herein.
2. Deposit.
(a) Deposit. Within seven (7) Business Days following the
Execution Date, Buyer shall deposit with Escrow Agent the sum of Five Million
Dollars ($5,000,000.00) in cash ("Deposit") as a deposit on account of the
Purchase Price (as defined in Section 4). The Deposit shall be nonrefundable,
except as provided in Section 3(b) below.
(b) Interest Bearing Account. Escrow Agent shall deposit
the Deposit in an interest bearing account, pursuant to investment instructions
from Buyer. All interest earned on the Deposit shall be for the account of
Buyer.
3. Liquidated Damages/Default.
(a) Buyer's Default. IN THE EVENT THAT THE SALE OF THE
PROPERTY DOES NOT CLOSE AS A CONSEQUENCE OF A DEFAULT BY BUYER, AND IF SELLER IS
NOT IN DEFAULT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND HAS PERFORMED ALL
OBLIGATIONS OF SELLER TO BE
3
PERFORMED HEREUNDER AS OF THE TIME OF BUYER'S DEFAULT, SELLER SHALL BE ENTITLED
EITHER TO (i) RETAIN THE AMOUNT OF THE DEPOSIT AS LIQUIDATED DAMAGES, OR (ii)
SPECIFIC PERFORMANCE OF BUYER'S OBLIGATION TO PURCHASE THE PROPERTY; PROVIDED,
HOWEVER, IN THE EVENT SELLER ELECTS TO SEEK SPECIFIC PERFORMANCE AND IS
UNSUCCESSFUL IN OBTAINING SPECIFIC PERFORMANCE SELLER SHALL BE ENTITLED TO
RETAIN THE AMOUNT OF THE DEPOSIT AS LIQUIDATED DAMAGES. THE PARTIES AGREE THAT
SELLER'S ACTUAL DAMAGES WOULD BE DIFFICULT OR IMPOSSIBLE TO DETERMINE IF BUYER
DEFAULTS, AND THE AMOUNT OF THE DEPOSIT (AND ACCRUED INTEREST THEREON) IS THE
BEST ESTIMATE OF THE AMOUNT OF DAMAGES SELLER WOULD SUFFER. THE PARTIES
ACKNOWLEDGE THAT THE SUM REPRESENTED BY BUYER'S DEPOSIT (AND INTEREST ACCRUED
THEREON) CONSTITUTES A REASONABLE ESTIMATE OF SELLER'S DAMAGES UNDER THE
PROVISIONS OF SECTION 1671 OF THE CALIFORNIA CIVIL CODE.
(b) Seller's Default. IF SELLER REFUSES OR FAILS TO CONVEY
THE PROPERTY PURSUANT TO THIS AGREEMENT FOR ANY REASON EXCEPT A DEFAULT BY BUYER
HEREUNDER, BUYER, AS ITS SOLE AND EXCLUSIVE REMEDY (EXCEPT AS PROVIDED IN
SECTION 6(f) BELOW), SHALL BE ENTITLED EITHER TO (i) TERMINATE THIS AGREEMENT
AND RECOVER THE DEPOSIT AND IF APPLICABLE THE LIQUIDATED DAMAGES COMPUTED
PURSUANT TO SECTION 6(e) BELOW, OR (ii) SPECIFIC PERFORMANCE OF SELLER'S
OBLIGATION TO CONVEY THE PROPERTY, PROVIDED THAT NO SUCH ACTION FOR SPECIFIC
PERFORMANCE SHALL SEEK TO REQUIRE SELLER TO DO ANY OF THE FOLLOWING: (A) CHANGE
THE CONDITION OF THE PROPERTY OR RESTORE THE SAME AFTER ANY CASUALTY (EXCEPT AS
EXPRESSLY PROVIDED IN SECTION 12), OR (B) EXPEND MONEY OR POST A BOND TO REMOVE
A TITLE ENCUMBRANCE OR DEFECT (EXCEPT LINES OR ENCUMBRANCES CREATED BY SELLER)
OR CORRECT ANY MATTER SHOWN ON A SURVEY OF THE PROPERTY. IN THE EVENT BUYER
SEEKS SPECIFIC PERFORMANCE AND IS UNSUCCESSFUL IN OBTAINING SPECIFIC
PERFORMANCE, BUYER SHALL BE ENTITLED TO TERMINATE THIS AGREEMENT AND RECOVER THE
DEPOSIT. BUYER SHALL BE DEEMED TO HAVE ELECTED TO TERMINATE THIS AGREEMENT IF
BUYER FAILS TO DELIVER TO SELLER WRITTEN NOTICE OF ITS INTENT TO ASSERT A CAUSE
OF ACTION FOR SPECIFIC PERFORMANCE WITHIN THIRTY (30) DAYS FOLLOWING THE
SCHEDULED CLOSING DATE OR, HAVING GIVEN SUCH NOTICE, FAILS TO FILE A LAWSUIT
ASSERTING SUCH CAUSE OF ACTION IN THE PROPER COURT WITHIN SIXTY (60) DAYS
FOLLOWING THE SCHEDULED CLOSING DATE. THE PARTIES WITNESS THEIR AGREEMENT TO
THIS LIQUIDATED DAMAGES PROVISION AND THIS LIMITATION OF REMEDIES PROVISION BY
THEIR EXECUTION BELOW:
BUYER: NETWORK APPLIANCE, INC.
a Delaware Corporation
By: /s/ CHRIS CARLTON
--------------------
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Its: Vice President
-----------------------
By:
------------------------
Its:
-----------------------
SELLER: 495 Java Drive Associates, L.P.
a California Limited Partnership
By M-D Venture, Inc.,
a California Corporation,
its general partner
By: /s/ STEVE DOSTART
------------------------------
Steve Dostart, Vice President
(c) Cure Period for Default. Prior to termination of this
Agreement by either party for default, the party alleging default shall give the
defaulting party written notice thereof, and the defaulting party shall have ten
(10) days from receipt of such notice to cure such default.
4. Purchase Price. Buyer shall pay Seller a purchase price
("Purchase Price") for the Property of Thirty-Three Million Seven Hundred Fifty
Thousand Dollars ($33,750,000.00), payable at the Close of Escrow, as follows:
(a) Application of the Deposit; and
(b) Paying the remainder in cash ("Cash Payment").
The Purchase Price shall be subject to adjustment pursuant to Section 6 below.
5. Conditions Precedent. At or before Close of Escrow the
following conditions precedent ("Conditions Precedent") shall be either
satisfied or waived by Buyer as a condition to Buyer's obligation to proceed
with the purchase of the Property:
(a) Title. The term "Conditions of Title" shall refer to
those exceptions to title (including, without limitation, Title Company's
standard printed exceptions to title with respect to an ALTA Owner's Extended
Form policy of title insurance (an "ALTA Policy") listed on EXHIBIT C
incorporated herein by reference, the lien for real property taxes not
delinquent, any current assessments (subject to Seller's obligation to pay
delinquent assessments or credit same to the Purchase Price at closing), the
effect of the Lot Line Adjustment and the CC&R's and any other encumbrances or
matters of title caused or approved in writing by Buyer. On the Closing Date,
Title Company shall be unconditionally committed to issue (a) an American Land
Title Association ("ALTA") Extended Title Policy Form B (1970) for the Property
("ALTA Title Policy"), with a liability limit in the amount of the Purchase
Price and insuring fee title vested in Buyer, and (b) endorsements to the ALTA
Title Policy (i) to provide Buyer with assurance that the Property is the same
as shown on the Survey, (ii) to
5
provide Buyer with assurance that the Property is contiguous with the property
known as 475 Java Drive, and (iii) such other endorsements as Buyer may
reasonably request, including without limitation zoning, tax parcel, access, and
owner's comprehensive (ALTA 100, modified for owner, or equivalent) endorsements
(collectively, the "Endorsements"); provided, however, the availability of such
Endorsements shall not be a Condition Precedent to Buyer's obligation hereunder.
Buyer shall take title to the Property subject to the Conditions of Title.
(b) Survey. Buyer has approved a certified ALTA survey of
the Property prepared by Kier & Wright dated April 15, 1998 ("Survey"). Any
revisions (including certification to Buyer) to the ALTA survey previously
provided to Buyer by Seller which are requested by Buyer shall be at Buyer's
sole cost and expense. At Close of Escrow Seller shall deliver to Buyer the
Survey.
(c) Property Documents. Buyer has reviewed and approved
all of the reports listed on EXHIBIT D attached hereto and incorporation herein
("Property Documents"). As of the Close of Escrow there shall have been no
material adverse change in the physical condition of the Property as described
in the Property Documents which would materially, adversely affect Buyer's use
and occupancy of the Property and Seller shall deliver to Buyer its certificate
representing and warranting that (except as described in such certificate) (i)
there has been no such material adverse change in such physical condition
between the Execution Date and the Close of Escrow, (ii) all Improvements
completed by Seller prior to the Closing Date have been built in accordance with
the Seller Plans and in compliance with all applicable laws and the CC&Rs, (iii)
all asbestos containing building materials contained in the improvements located
on the Land as of the date the Land was acquired by the Seller have been removed
and transported to a suitable disposal site, in compliance with law and any
contracts concerning the removal, transportation, or disposal of asbestos
located at or on the Land had been fully performed as of the Closing Date and
(iv) there are no agreements which would be binding upon the Property or the
Buyer following Close of Escrow except as expressly contemplated by this
Agreement. ("Seller's Closing Certificate").
(d) Completion of Improvements. Seller shall have
substantially completed the Improvements in accordance with the Work Letter.
(e) Seller's Performance. Seller shall have performed all
of its obligations under this Agreement.
6. Completion of Improvements.
(a) Completion of Improvements. Seller shall be obligated
to complete the Improvements in accordance with the Work Letter.
(b) Milestones. The parties have set forth certain events
which must occur prior to or during construction of the Improvements (each, a
"Milestone"), which must be accomplished by Seller on or before certain
prescribed dates or Buyer shall have the right to terminate this Agreement and
pursue certain remedies described in Section 6(e) below. The Milestones to which
Buyer and Seller have agreed are as follows:
6
(1) Construction of the foundation for the building (included
within the Improvements) shall have commenced no later than
June 10, 1998; and
(2) The Improvements shall have been substantially completed
(as defined in the Work Letter) in accordance with Seller's
Plans, except for landscaping, on or before June 17, 1999.
The Milestone dates set forth above shall be extended as follows: (A) One day
for each day of delay caused by Buyer Delays (as defined in the Work Letter),
(B) One day for each day of Force Majeure Events (as defined in the Work
Letter), however, the maximum number of days that any such Milestone can be
extended for such Force Majeure Delays shall be limited to a total of sixty (60)
days except that no such limit shall apply in the event Seller's Plans are
changed in response to a request by Buyer under circumstances where Seller has
informed Buyer in writing that Seller believes such change is material and would
not be acceptable to Seller if Seller were building the Improvements on a
speculative basis rather than for Buyer, and (C)
By the amount of time required to complete any arbitration process
resulting from disputes between Seller and Buyer arising prior to the Milestone,
to the extent the arbitration process (and the issue being arbitrated) actually
causes a delay in achieving such Milestones. The aggregate extension of the
Milestone dates provided for herein shall be referred to as the "Milestone
Extension Period". The parties acknowledge that Seller has satisfied the
Milestone set forth in clause (i) above.
(c) Changes requested by Buyer. Buyer has reviewed and
approved the Seller Plans (as defined in the Work Letter) for construction of
the Improvements. Buyer shall have the right to submit written requests for
changes to the existing plans for the Improvements which changes shall be
subject to Seller's written consent. Seller shall not unreasonably withhold it's
consent to such changes so long as (i) such changes do not extend the time
period for substantial completion of the Improvements by more than ninety (90)
days as reasonably determined by Seller (Buyer acknowledges that the date
contemplated for substantial completion of the Improvements as of the date
hereof without giving effect to any Milestone Extension Period or any requests
by Buyer hereunder is March 17, 1999), and (ii) Buyer approves in writing
Seller's estimated adjustment to the Purchase Price caused by such changes.
(d) Adjustment to Purchase Price.
(1) If any changes requested by Buyer and approved by
Seller pursuant to this Section 6 increase or decrease the cost of constructing
the Improvements the Purchase Price shall be adjusted accordingly. Such costs
shall include but not be limited to Seller's carrying costs (including real
property taxes, cost of financing on all costs associated with the Property at a
rate of Comerica Bank's Prime Rate plus 1%, etc.) and hard and soft costs;
provided, however, such costs shall not include any mark-up charged by Seller.
(2) In the event that the Close of Escrow occurs
prior to completion of the Improvements, Seller shall be obligated to complete
the Improvements following Close of Escrow. In such event the Purchase Price
shall be reduced by the Interest Savings. The "Interest Savings" shall mean the
amount of interest that Seller would have paid to Comerica Bank between the
Closing Date and the date estimated (as of the closing date) for
7
substantial completion of the Improvements based upon the loan balance as of the
Closing Date and Seller's best available interest rate pursuant to its loan from
Comerica Bank. Buyer and Seller shall execute such additional documents and
instruments as may be necessary to accomplish the purposes of this
sub-paragraph, including but limited to, an agreement allowing Seller access to
the Property for the purposes of completion of the Improvements, appropriate
requirements for insurance to be carried by Buyer as owner of the Property, etc.
(e) Right to Terminate. If any Milestone set forth in
Section 6(b) is not achieved by Seller, Buyer shall have the right to terminate
this Agreement by written notice to Seller at any time within ten (10) business
days after Seller's failure to achieve the particular Milestone; provided,
however, if the conditions described in Section 6(f) are met Buyer shall have
the right to elect the remedies described in Section 6(f). If Buyer exercises
its termination right, Buyer shall be entitled to the remedies provided in this
Section 6(e), which shall be Buyer's sole and exclusive remedies with respect to
Seller's failure to achieve any Milestone. If Buyer exercises a termination
right pursuant to this Section 6(e) and Seller believes that the Milestone was
achieved by the appropriate date (as extended by the Milestone Extension
Period), the parties agree to submit the dispute concerning Seller's failure to
achieve that particular Milestone, and Buyer's resulting right to terminate the
Lease, to binding arbitration pursuant to the provisions of Section 16.
Notwithstanding any other provision of this Agreement or the Work Letter, if
Seller fails to achieve any Milestone Buyer's sole and exclusive remedies shall
be to either (i) elect to proceed under Section 6(f) if the conditions set forth
therein have occurred, or (ii) terminate this Agreement and receive the Deposit
and damages from Seller (which shall be paid within thirty (30) days of the date
of Buyer's notice of termination, or, if the parties resort to arbitration
pursuant to the provision set forth above, then within thirty (30) days of
Buyer's prevailing on said termination in arbitration) in the following amounts
(all clauses referenced are in Paragraph 6(b)): $250,000, as liquidated damages
for failure of Seller to achieve the Milestone described in clause (1); and
$500,000, as liquidated damages for failure of Seller to achieve the Milestone
described in clause (2). Seller and Buyer acknowledge and agree that if Seller
fails to achieve the Milestone described in clause (1) or (2) and Buyer elects
to terminate this Agreement pursuant to this paragraph as a result thereof, the
damages which Buyer will suffer are difficult, if not impossible to calculate,
and that the above-described liquidated damages are a fair and reasonable
estimate of the damages that Buyer would suffer with respect to a failure to
achieve the Milestone described in clause (1) or (2).
(f) Buyer's Self Help Remedy. Notwithstanding the above,
in the event that all of the following are true: (i) Seller has failed to
achieve a Milestone set forth in Section 6(b), and (ii) Buyer is not in a
continuing default under this Agreement, then Buyer shall have the right to
substantially complete the Improvements and offset its actual out of pocket
costs and expenses incurred in connection therewith against the Purchase Price.
7. No Incumbrance or Transfer. Except as provided herein, Seller shall
not incumber, lease, transfer, assign or sell all or any portion, or interest
in, the Property, or enter into any agreement or contract effecting or relating
to the Property without Buyer's prior written consent, which consent may be
withheld in Buyer's sole discretion. Seller shall be entitled to encumber the
Property for the purpose of securing one or more construction loans. Seller may
also implement the Lot Line Adjustment, record the CC&R's and execute such other
contracts (but not contracts or encumbrances that will be binding upon Buyer or
the Property after the
8
Close of Escrow) as may be necessary or advisable in connection with performing
its obligations hereunder including completion of the Improvements.
8. Escrow.
(a) Escrow. Within two (2) Business Days of the Execution Date, Seller
shall establish an escrow ("Escrow") with the Escrow Agent for the close of this
transaction. An executed copy of this Agreement shall be deposited with the
Escrow Agent by Buyer and this Agreement, together with Seller's Additional
Escrow Instructions (as hereinafter defined), if any, and Buyer's Additional
Escrow Instructions (as hereinafter defined), if any, shall constitute Escrow
Agent's escrow instructions for closing Escrow. Escrow shall close ("Close of
Escrow") on or before the Closing Date.
(b) Seller. On or prior to the Closing Date Seller shall deposit the
following into Escrow:
(i) Grant Deed. A duly executed and acknowledged Grant
Deed in usual form setting forth all exceptions to title created or suffered by
Seller which are not to be removed at or prior to Closing;
(ii) Non-Foreign Person Certificates. Duly executed
non-foreign person certificates ("Non-Foreign Person Certificates") in usual
form sufficient to relieve Buyer of any withholding requirements pursuant to the
provisions of Section 1445 of the Internal Revenue Code of 1986 as amended (the
"Code") and Section 18805 of the California Revenue and Taxation Code and a
California Form 590-RE certifying that Seller has a permanent place of business
or is qualified to do business in the State of California;
(iii) Assignment of Intangible Property. An assignment, in
a form reasonably approved by Buyer and Seller, of all Seller's rights, title,
and interest to any and all plans, permits, approvals, entitlements and other
intangible property relating to the Property (the "Assignment of Intangibles");
(iv) Assignment of Warranties. An assignment by Seller, in
a form reasonably approved by Buyer and Seller, of all Seller's rights, title
and interest under the Warranties (the "Assignment of Warranties");
(v) Closing Certificate. Seller's Closing Certificate, in
a form reasonably approved by Buyer and Seller; and
(vi) Additional Escrow Instructions and Documents. Such
additional escrow instructions ("Seller's Additional Escrow Instructions") and
documents as Escrow Agent may reasonably require of Seller to close the sale of
the Property in accordance with this Agreement, which instructions shall not be
inconsistent with the terms of this Agreement.
(c) Buyer. On or prior to the Closing Date Buyer shall deposit the
following into Escrow:
9
(i) Cash Payment. The Cash Payment;
(ii) Additional Cash. Additional cash in the amount
necessary to pay Buyer's share of closing costs and prorations, as hereinafter
set forth;
(iii) Release and Assumption. The Release and Assumption
provided for in Section 11(g); and
(iv) Additional Escrow Instructions and Documents. Such
additional escrow instructions ("Buyer's Additional Escrow Instructions") and
documents as Escrow Agent may reasonably require of Buyer to close the sale of
the Property in accordance with this Agreement.
9. Close of Escrow.
(a) Time. When the Escrow Holder has confirmed that Title Company is in
a position to issue an ALTA Extended Policy (Form B-1970) insuring title to the
Property as being vested in Buyer in accordance with Section 5(a) and all
documents and funds required hereby have been deposited with Escrow Agent,
Escrow Agent shall cause Close of Escrow to occur as provided below.
(b) Procedure. Escrow Agent shall close Escrow as follows:
(i) Record the following documents in the order set forth
below:
(1) The Grant Deed.
(ii) Deliver to Seller the following:
(1) The Cash Payment and the Deposit;
(2) The Release and Assumption; and
(3) A conformed copy of the Grant Deed.
(iii) Deliver to Buyer the following:
(1) An ALTA Policy in accordance with
Section 5(a);
(2) The Non-Foreign Person Certificates; and
(3) Conformed copies of the Grant Deed,
Assignment of Warranties, Seller's Closing Certificates and Assignment of
Intangibles, and the originals of such documents following their recordation.
(c) Closing Costs and Prorations.
10
(i) Closing Costs. Seller shall pay the cost for a basic
CLTA owner's policy; Buyer shall pay all additional costs for the Title Policy
and all Endorsements. Seller shall pay county transfer taxes and one-half of the
escrow fees applicable to the sale. Buyer shall pay one-half of the escrow fees
and all recording fees attributable to the conveyance documents, and Seller
shall pay recording fees attributable to the release of any liens on the
Property. All other costs and charges of the escrow for the sale shall be paid
in accordance with custom.
(ii) Prorations. Real estate taxes and all other expenses
normal to the operation and maintenance of the Property, shall be prorated as of
12:01 a.m. on the Closing Date.
(iii) Escrow Cancellation Costs. Notwithstanding the
provisions of subsection (i) above, if Escrow fails to close due to Seller's
default, Seller shall pay all Escrow cancellation charges. If Escrow fails to
close due to Buyer's default, Buyer shall pay all Escrow cancellation charges.
If Escrow fails to close for any reason other than the foregoing, Buyer and
Seller shall each pay one-half (1/2) of any Escrow cancellation charges. "Escrow
cancellation charges" means all fees, charges, and expenses incurred by Escrow
Agent, including all expenses incurred in connection with issuance of the
Preliminary Report and other title matters.
10. Brokers. Each of Buyer and Seller represents to the other party
that, other than Cornish & Carey representing Buyer and CPS, representing Seller
("Brokers"), such party has not engaged any broker or finder in connection with
any of the transactions contemplated by this Agreement. Buyer shall indemnify,
defend and hold Seller harmless from and against any loss, cost or expense,
including, but not limited to, attorneys' fees and court costs, resulting from
any claim against Seller for any fee or commission by any broker or finder
claiming by or through Buyer, other than the Brokers. Seller shall indemnify,
defend and hold Buyer harmless from and against any loss, cost or expense,
including, but not limited to, attorneys' fees and court costs, resulting from
any claim for a fee or commission by any broker or finder claiming by or through
Seller. Seller shall be responsible for the payment of any fees or commissions
payable to the Brokers in connection with the transaction contemplated by this
Agreement in accordance with Seller's written agreements with such brokers. The
covenants contained herein shall survive the Close of Escrow.
11. Seller's Representations, Warranties and Covenants.
(a) Seller's Representations and Warranties. Seller hereby makes the
following representations and warranties to Buyer which representations and
warranties shall survive the Close of Escrow for a period of twelve (12) months
(at which time these representations and warranties shall expire):
(i) Litigation; Government Action. Except as disclosed to
Buyer in writing, there is no claim, litigation, notice that the Property is in
violation of law, or governmental investigation presently pending with respect
to which Seller has been served with process or other notice thereof or, to the
best of Seller's knowledge, otherwise pending or threatened, against or relating
to the Property.
11
(ii) Condemnation. There is presently no pending
condemnation of the Property or any part thereof with respect to which Seller
has been served with process or other notice thereof nor, to the best of
Seller's knowledge, is any such condemnation otherwise pending or contemplated.
(iii) Leases. There are no leases or other occupancy
agreements relating to the Property.
(iv) Hazardous Materials.
(1) For purposes hereof, "Hazardous
Materials" shall mean any and all asbestos, radioactive material, hazardous
waste, toxic substance or related material, including but not limited to those
materials and substances defined as "hazardous substances", "hazardous
materials", "hazardous wastes" or "toxic substances" in any California or
federal law or regulation.
(2) Seller has not released or discharged,
or caused to be released or discharged, upon the Property any Hazardous
Materials, and to the best of Seller's knowledge, except as disclosed in the
Property Documents, there are no Hazardous Materials present on, in, or under
the Property.
(3) To the best of Seller's knowledge, the
Property Documents are all of the documents and reports in Seller's possession
pertaining to Hazardous Materials on or at the Property.
(v) Property Documents. There are no other documents or
reports in Seller's possession or under Seller's control other than the Property
Documents, describing the condition of the Property concerning the presence of
Hazardous Materials, the geotechnical condition of the soils or other like
physical condition of the Property as of the Execution Date; provided, however,
the improvements demolished and removed by Seller contained asbestos. Seller
acknowledges and agrees that the demolition and removal of the existing
improvements including the asbestos containing materials therein and all costs
in connection therewith is the sole responsibility of Seller.
(b) Organization and Authority. Seller is a California limited
partnership validly existing and in good standing under the laws of California.
Seller and has full power to enter into this Agreement and is duly qualified to
transact business in California. The execution, delivery, and performance of
this Agreement have been duly authorized and approved by all requisite action
and the consummation of the transactions contemplated hereby will be duly
authorized and approved by all requisite action of Seller and no other
authorizations or approvals, whether of governmental bodies or otherwise, will
be necessary in order to enable Seller enter into or to comply with the terms of
this Agreement.
(c) Binding Effect of Documents. This Agreement and the other documents
to be executed by Seller hereunder, upon execution and delivery thereof by
Seller, will have been duly entered into by Seller, and will constitute legal,
valid and binding obligations of Seller. Neither this Agreement nor anything
provided to be done under this Agreement
12
violates or shall violate any contract, document, understanding, agreement, or
instrument to which Seller is a party or by which it is bound.
(d) "Best Knowledge" Definition. For purposes of this Section 11, the
term "to the best of Seller's knowledge" shall mean the current actual knowledge
of John Mozart and Steve Dostart after usual inquiry in connection with the
operation of the Property. Seller represents that John Mozart and Steve Dostart
are the representatives of Seller with supervisory responsibilities concerning
the Property who would, in the ordinary course of their responsibilities,
receive notice from persons or entities of any of the matters described in the
representations and warranties in this Section 11.
(e) "As-Is" Condition; Release and Assumption. If Seller breaches any
representation, warranty, or covenant hereunder prior to Closing and Buyer
closes escrow with knowledge thereof, Buyer shall be deemed to waive such
breach. Except as expressly provided in this Agreement and in Seller's Closing
Certificate, Seller makes no representations or warranties of any kind, express
or implied, written or oral, as to the physical condition of the Property; the
uses of the Property or any limitations thereon, including, without limitation,
zoning, environmental or other laws, regulations or governmental requirements;
the utilities or other physical equipment and fixtures on the Property, the
costs of operating the Property or any other aspect of the economic operations
on the Property; the possibility of future assessments of charges being levied
against the Property or imposed as a condition to development or construction;
or the condition of the soils or groundwater of the Property. Except as provided
herein, Buyer specifically acknowledges that it is acquiring the Property in an
"as-is" condition (as such term is most broadly construed), in reliance upon its
own inspection and investigation of the Property. Except as expressly provided
herein, Seller makes no representation or warranties with respect to the
condition of title to the Property, and Buyer agrees that it will rely solely on
its policy of title insurance. At closing, and as a condition to Seller's
obligations hereunder, Buyer shall, pursuant to a form of Release and Assumption
("Release and Assumption") prepared by Seller and delivered to Buyer for
approval by Buyer within ten (10) days after the Execution Date, (1) release
Seller from any and all claims, liability or causes of action (except for the
express representations and warranties herein and in Seller's Closing
Certificate to the extent the same survive closing) in connection with the
Property and (2) assume all of Seller's obligations under any and all laws and
regulations pertaining to the Property (except (i) those occurring prior to the
Close of Escrow, or (ii) for Seller's obligations in connection with completion
of the Improvements, if the Improvements are not completed as of the Closing
Date).
12. Loss by Fire or Other Casualty; Condemnation.
(a) Condemnation and General Casualty. Buyer shall be
bound to purchase the Property for the full Purchase Price as required by the
terms hereof, without regard to the occurrence or effect of any damage to or
destruction of any improvements or condemnation of any portion of the Property.
In the event of a casualty Buyer may elect to purchase the Property pursuant to
the terms of this sub-paragraph (a) or to require Seller to repair and complete
the Improvements pursuant to sub-paragraph (c). Such election shall be made by
written notice given within thirty (30) days following the casualty. If Buyer
elects to proceed pursuant to this sub-paragraph (a), the Purchase Price shall
be credited by the amount of any insurance proceeds or condemnation awards
(excluding proceeds or awards payable in respect of
13
carrying costs or other costs born by Seller and not subject to adjustment of
the Purchase Price as provided herein) collected by Seller as a result of any
such damage or destruction or condemnation less any monies actually expended by
Seller to repair any damage, plus any deductible amounts attributable to such
damage or destruction, or such proceeds shall be assigned to Buyer if not then
collected.
(b) Seller Cooperation. If Seller assigns the proceeds of
any insurance policy to Buyer pursuant to Section 12(a), Seller shall cooperate
with Buyer in presenting and prosecuting the claim with Seller's insurance
carriers, shall follow Buyer's instructions with respect thereto (except to the
extent Seller is advised by counsel that following a particular instruction
would expose Seller to liability, or to the extent Seller would incur additional
cost to follow such instruction which is not paid by Buyer), and will not settle
any such claim without Buyer's written approval.
(c) Insurance. Seller shall purchase and keep in force a
policy or policies of fire and property damage insurance (including coverage for
flood and earthquake, if available) covering loss or damage to the Property
(including the improvements) in the amount of the full replacement value thereof
including comprehensive builder's risk/course of construction insurance. In the
event of a casualty and election by Buyer (pursuant to sub-paragraph (a) above)
to require Seller to repair and complete the Improvements, Seller shall be
obligated to repair and complete the Improvements pursuant to the terms and
conditions hereof subject to extension of all of the dates for performance and
the closing date for the delay caused by the casualty. In such event there shall
be no adjustment to the Purchase Price for increase costs sustained by Seller
(whether or not such costs are covered by insurance) in connection with or
caused by the casualty. Notwithstanding anything to the contrary herein, in the
event of a casualty under circumstances where the cost of completion of the
Improvements exceeds the Available Funds by an amount in excess of $1,000,000,
Seller may terminate this agreement unless Buyer elects to pay such excess. The
term "Available Funds" shall mean the sum of (i) insurance proceeds, (ii)
deductibles in respect of the casualty loss and (iii) the amount of the cost of
the Improvements which Buyer had not yet disbursed (and for which Buyer had not
incurred liability) as of the date of the casualty.
13. Successors and Assigns. The terms, covenants, and conditions herein
contained shall be binding upon and inure to the benefit of the successors and
assigns of the parties hereto. Buyer may assign it's rights under this Agreement
to a financing entity in connection with a synthetic lease transaction without
the need for Seller's prior written consent but no such assignment shall relieve
the assignor from primary liability for its obligations hereunder. Prior to the
acquisition of the Property, Buyer intends to assign Buyer's interest under this
Agreement to an entity (the "Lessor"), who will then lease all of the acquired
portions of the property to Buyer, as tenant ("Tenant"), pursuant to a synthetic
lease ("Lease") to be executed by Lessor and Tenant, pursuant to which Tenant
shall have the right to construct certain improvements thereon, pursuant to
plans and specifications approved by Lessor and Tenant. The parties acknowledge
that (a) Tenant is intended to be the ultimate occupant and user of the Real
Property, and (b) the improvements to be constructed thereon are being designed
for Tenant's benefit and to Tenant's specifications. Therefore, the parties
acknowledge that Tenant is an intended third party beneficiary of all of
Seller's covenant, representations, warranties and obligations under this
Agreement.
14
14. Entire Agreement. This Agreement contains all of the covenants,
conditions and agreements between the parties and shall supersede all prior
correspondence, agreements, and understandings, both oral and written. No
provisions of this Agreement may be amended or modified in any manner except by
an agreement in writing duly executed by the parties hereto.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California as applied to agreements
among California residents which are entered into and performed entirely within
California.
16. Attorneys' Fees; Arbitration.
(a) Attorneys' Fees. In the event of any litigation or
arbitration regarding the rights and obligations under this Agreement, the
prevailing party shall be entitled to recover, in addition to damages,
injunctive or other relief, reasonable attorneys' fees expert witness fees, and
court costs.
(b) Arbitration of Disputes. ANY CONTROVERSY OR CLAIM
ARISING OUT OF THIS AGREEMENT SHALL BE SETTLED BY ARBITRATION IN ACCORDANCE WITH
THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION FOR THE ARBITRATION OF
COMMERCIAL DISPUTES, AND JUDGMENT ON THE AWARD RENDERED BY THE ARBITRATOR(S) MAY
BE ENTERED IN ANY COURT HAVING JURISDICTION. THE PREVAILING PARTY IN SUCH
ARBITRATION SHALL BE ENTITLED TO ATTORNEYS' FEES AND COSTS.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO
HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF
DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW
AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED
IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP
YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE
SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE
TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED
TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR
AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT
DISPUTES ARISING OUT OF THIS AGREEMENT TO NEUTRAL ARBITRATION.
CONSENT TO NEUTRAL ARBITRATION BY:
______________ (SELLER): __________________(BUYER).
17. Notices. All notices required or permitted to be given pursuant to
the terms hereof shall be in writing and either delivered by hand delivery,
professional courier service
15
which provides written evidence of delivery or deposited in the United States
mail, registered or certified, postage prepaid and addressed as follows:
To Seller: 495 Java Drive Associates, L.P.
c/o Mozart Development Company
1068 East Meadow Circle
Palo Alto, California 94303
Attn: John Mozart and Steve Dostart
Tel. (415) 493-9000
FAX (415) 493-9050
With a copy to: Ellman, Burke, Hoffman & Johnson
One Ecker Building, Suite 200
San Francisco, California 94105
Attn: Jeffrey W. Johnson, Esq.
Tel. (415) 777-2727
FAX (415) 495-7587
To Buyer: Network Appliance Inc.
2770 San Tomas Expressway
Santa Clara, California 95051
Attn: Chris Carlton
Tel. (408) 367-3200
FAX (408) 367-3151
With a copy to: Network Appliance Inc.
2770 San tomas Expressway
Santa Clara, California 95051
Attn: Fran Bellet, Esq.
Tel. (408) 367-3200
FAX (408) 367-3151
The foregoing addresses may be changed by written notice to the other party as
provided herein. Notices shall be deemed delivered and received, in the case of
personal delivery or delivery by courier as aforesaid, on the day physically
delivered to the indicated addressee, and in the case of delivery by United
States mail, three (3) Business Days after deposit in the United States mail as
aforesaid.
18. Exhibits. All exhibits are attached hereto and incorporated herein
by this reference.
19. Authority. Each person executing this Agreement on behalf of a
party to this Agreement hereby represents and warrants that he or she has
authority to execute this Agreement on behalf of such party.
16
20. Headings. Headings at the beginning of any paragraph or Section of
this Agreement are solely for the convenience of the parties and are not a part
of this Agreement or to be used in the interpretation hereof.
21. Survival. The representations, warranties and covenants of the
parties hereto shall survive the Close of Escrow, or the termination of the
Agreement if the Close of Escrow does not occur, subject to the express
limitations on survivability contained in this Agreement.
22. Waiver. No waiver by Buyer or Seller of a breach of any of the
terms, covenants, or conditions of this Agreement by the other party shall be
construed or held to be a waiver of any succeeding or preceding breach of the
same or any other term, covenant or condition herein contained. No waiver of any
default by Buyer or Seller hereunder shall be implied from any omission by the
other party to take any action on account of such default if such default
persists or is repeated, and no express waiver shall affect a default other than
as specified in such waiver. The consent or approval by Buyer or Seller to or of
any act by the other party requiring the consent or approval of the first party
shall not be deemed to waive or render unnecessary such party's consent or
approval to or of any subsequent similar acts by the other party.
23. Confidentiality. Buyer and Seller shall both maintain this
Agreement in the terms and conditions of confidence except as required by law
and except as required in connection with the performance of each of the
obligations of Buyer and Seller hereunder. Notwithstanding anything to the
contrary herein, the provisions of this Section 23 shall be separate and
severable from all of the other provisions of this Agreement. A breach or
alleged breach of the provisions of this Section 23 shall not be grounds for
termination of this Agreement or otherwise excuse the performance of any other
obligations hereunder. The maximum damages recoverable for a breach of the terms
of this Section 23 shall be Twenty-Five Thousand Dollars ($25,000.00).
24. Withdrawal from Market. During the period that this Agreement is in
effect Seller shall withdraw the Property from the market and shall not except
any back-up offers for the sell or lease of all or any portion of the Property.
25. Severability. If any phrase, clause, sentence, paragraph, section,
article, or other portion of this Agreement shall become illegal, null or void
or against public policy, for any reason, or shall be held by any court of
competent jurisdiction to be illegal, null or void or against public policy, the
remaining portions of this Agreement shall not be affected thereby and shall
remain in force and effect to the fullest extent permissible by law. Buyer and
Seller acknowledge and agree that Buyer and Seller have simultaneously executed
a Lease and an Option Agreement for the property adjoining the Property at 475
Java Drive ("Separate Transaction"). The parties agree that for all purposes
hereunder the Separate Transaction is separate and independent of any and all
rights and obligations of the parties hereunder.
17
26. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the dates set forth next to their respective signatures below.
BUYER: Network Appliance, Inc.,
a Delaware corporation
By: /s/ CHRIS CARLTON
------------------------------
Its: Vice President
-----------------------------
SELLER:
495 Java Drive Associates, L.P.
a California Limited Partnership
By M-D Venture, Inc.,
a California Corporation,
its general partner
By: /s/ STEVE DOSTART
------------------------------
Steve Dostart, Vice President
18
EXHIBIT A
[Description of Property]
19
EXHIBIT "A"
MAP OF PROJECT (INCLUDING BUILDING)
[SITE PLAN WITH BUILDING OUTLINED AND CROSSHATCHED]
20
EXHIBIT "A-1"
DESCRIPTION OF LAND
[PARCEL MAP AND LEGAL DESCRIPTION HERE FROM TITLE REPORT]
21
EXHIBIT "B"
[FORM OF CC&Rs TO BE ATTACHED]
22
EXHIBIT "C"
[INTENTIONALLY DELETED]
23
WORK LETTER
1. Obligations of Seller and Buyer. Seller shall furnish and
install the Improvements provided for in Paragraph 2 below at Seller's expense.
The quantities, character and manner of installation of all of the foregoing
work shall be subject to the limitations imposed by any applicable regulations,
laws, ordinances, codes and rules.
2. Improvements. Seller shall furnish an industrial shell
building which exterior and site shall substantially comply with the, "Base
Building Improvement Plans" described on Schedule 1 hereto, excepting that the
sitework shall be revised to be in substantial conformance with the site plan
defined in Schedule 2 hereto and excepting those items included on the Base
Building Improvement Plans for informational purposes only (eg. restroom
locations, shaft locations, elevators, extra stairwells, etc.) noted on the
plans as N.I.C. and as further specified below
("Improvements"). However, in the event of a conflict between the (a) Base
Building Improvement Plans and (b) the items listed in (i) through (viii) below
and the Exclusions listed in Paragraph 3, then the latter shall control.
(i) floor - hard trowel, smooth concrete, level (at a
specification not to exceed a slope of 1/8" in 10 feet) and ready for
installation of floor covering (excluding standard floor preparation and
waterproofing); underslab waterproofing shall include 2" sand layer over gravel
with visqueen vapor barrier ;
(ii) ceiling/roof - (a) structural steel members, (b) exposed
corrugated metal deck, (c) building sprinkler system to include main floor shut
off valves, primary loop;
(iii) exterior walls - (a) exposed metal studs and/or aluminum
window system members, empty framing cavity, and the backside of exterior
sheeting and fireproofed columns (if required by code), (b) completed window
assembly with painted metal window frames;
(iv) electrical/utilities - small electrical transformer for
site lighting, all other utilities (including telephone lines and sanitary
sewer) stubbed into shell, and conduit (excluding cabling) installed to the 475
Java Drive property line 495 Java Drive;
(v) elevator - two (2) elevator pits;
(vi) stairs - one (1) building staircase (minimal level
required to obtain shell building permit);
(vii) live load - slab and upper floor decks shall be designed
to support a live load of eighty (80) pounds per square foot and a partition
load of twenty (20) pounds per square foot for a total of one hundred (100)
pounds per square foot;
(viii) site work - parking, parking lot lighting (in
compliance with applicable code requirements) striping, curb cuts, ramps,
sidewalks (if required by the City of Sunnyvale),
24
underground storm drains, and main entries to the Building to be in compliance
with the applicable ADA requirements;
(ix) roof screens - roof screens as noted on the Base Building
Improvement Plans.
3. Exclusions from Base Building Improvements. Specific
exclusions from Improvements include, but are not limited to, (a) sprinklers
beyond those required for shell permit, (b) window coverings, (c) fire alarms or
security systems, (d) interior walls, (e) HVAC systems, (f) electrical service
in the Building, (g) restrooms, (h) elevator, (i) lobby, (j) electrical,
telephone, janitorial and similar closets, (k) building cabling, (l) building
signage, (m) insulation.
4. Seller's Plans. Seller shall provide Buyer with necessary
base "design build" drawings, specifications, and CAD diskettes (to the extent
available) for the Buildings no later than July 1, 1998 ("Seller's Plans").
Seller's Plans shall be substantially in accordance with the plans described on
Schedule 1 (which have been approved by Buyer), together with and including the
specifications described for the Improvements in Paragraph 2 of this Work
Letter, but shall specifically exclude any improvements to the interior of the
Building, or items noted in Paragraph 3 as specific exclusions from the
Improvements. Seller shall have the right to change Seller's Plans after
submission to Buyer as needed to satisfy any requirements of the City of
Sunnyvale; provided, however, Seller shall provide Buyer prior written notice of
any such changes and notice of meetings with the City of Sunnyvale to be
attended by Buyer, which Seller shall be entitled to attend. Any additional time
required to accommodate Buyer's involvement in such meetings shall constitute a
Buyer Delay pursuant to Section 7 below to the extent it actually delays
construction.
Excepting changes required by the City of Sunnyvale, any
changes in Seller's Plans initiated by Seller shall be subject to Buyer's review
and approval, which shall not be unreasonably withheld, conditioned or delayed.
Buyer must notify Seller in writing of any disapproval with respect to any
submitted plans and specification within three (3) business days, unless the
revisions include new detailed mechanical, electrical and plumbing drawings or
substantial revisions thereto, in which case, Buyer shall have five (5) business
days to notify Seller in writing of any disapproval or unless the plans and
specifications are the final complete set of plans and specifications which
Seller intends to submit to the applicable authorities to obtain its building
permit and other applicable governmental licenses, in which case Buyer shall
have seven (7) business days to notify Seller in writing of any disapproval. Any
written notice containing Buyer's disapproval, shall also include the specific
reasons for disapproval. If Buyer fails to notify Seller of any disapproval
within the applicable time periods provided above, Buyer shall be deemed to have
approved the submitted revised plans and specifications.
5. Change Orders. Any changes requested by Buyer that
necessitate revisions or changes in Seller's Plans or the design or construction
of the Improvements or delay the commencement or completion of Improvements,
shall be subject to the prior written approval of
25
Seller subject to the standard for approval and Purchase Price adjustment
provided for in Section 6(c) and 6(d), respectively, in the Purchase Agreement;
any such changes approved by Seller shall be a "Change Order" hereunder. Before
any such design and/or construction changes are made, Buyer shall pay to Seller
the full costs to be incurred by Seller in connection with such Change Order if,
and to the extent, the aggregate cost of all Change Orders exceeds $3,000,000.
Any such Change Order funded by Seller shall be a basis for adjustment of the
Purchase Price pursuant to Section 6(d) of the Agreement to which this Work
Letter is attached as an exhibit. Seller and Buyer shall hold weekly
construction meetings during the development of the Project and shall cooperate
in good faith during the weekly meetings to review and agree upon Change Orders.
In those instances in which proposed revisions to Seller's Plans result from a
Change Order, Seller shall cause the Seller's contractor, if applicable, to
determine the additional cost or savings from such Change Order, and Seller
shall promptly so notify Buyer. The additional costs or savings resulting from
such Change Orders (and the time impact of said Change Order, if any) shall be
supported by detailed trade cost breakdowns prepared by Seller's Contractor.
Buyer shall, within five (5) business days after such notification by Seller,
inform Seller in writing whether or not Buyer desires to proceed with such
Change Order. In the event that Buyer fails to inform Seller within such five
(5) day period that Buyer desires to proceed with such Change Order, Seller
shall not make any changes(s) to the Improvements included in such Change Order.
If Buyer informs Seller within such five (5) day period that Buyer does wish to
proceed with the proposed Change Order, the proposed Change Order shall be
incorporated in the Improvements if applicable thereto and Seller's contractor
shall proceed with the work covered by the Change Order and Buyer shall be
responsible for all costs and expenses incurred in connection therewith as
aforesaid. The Seller shall pass through to Buyer the Seller's contractor's
percentage mark-up (which shall not be greater than the mark-up charged to
Seller) for overhead and profit (which shall include all charges for general
conditions) for Change Orders to the Improvements without additional mark-up
from Seller. All Change Orders shall be in writing and shall be on such AIA form
as required by Seller and/or Seller's contractor. Buyer shall evidence in
writing it's approval of such Change Order prior to Seller's approval of same.
6. Substantial Completion. For purposes of this Work Letter
and the Purchase Agreement, the Improvements shall be deemed "substantially
complete" at such time as (i) Seller has completed work in accordance with
Seller's Plans and in compliance with all legal requirements applicable to the
Improvements at the time the permits where obtained for the construction thereof
subject to completion and correction of items on Seller's architect's punch
list, and landscaping, (ii) Seller has assured Buyer access to the Building
(e.g. all concrete/asphalt paving and hard scape work is complete), and (iii)
Seller is diligently prosecuting the completion of landscaping. Upon Buyer's
request, if a certificate of shell completion or similar certification is
available from the City of Sunnyvale in connection with the Improvements,
without incurring any additional cost or causing delays to the Improvements or
Buyer Improvements, Seller shall use commercially reasonable efforts to obtain
such certification after completion of the Improvements and deliver a copy to
Buyer.
7. Buyer Delays. If substantial completion of the Improvements
is delayed due to any of the following (collectively, "Buyer Delays"), then the
delay shall be included in the Milestone Delay Extension and the Purchase Price
shall be subject to adjustment pursuant to
26
Section 6(d) of the Purchase Agreement: (i) Buyer's failure to timely submit any
items required by this Work Letter, including, without limitation, the space
plan, supporting drawings and specifications and pallet of interior colors and
finishes; (b) Buyer's requested changes to the Improvements pursuant to any
Change Order(s); or (c) Buyer's failure to comply with Seller's contractor's
schedule. No Buyer Delay shall be deemed to have occurred unless and until
Seller has given written notice to Buyer specifying the action or inaction which
Seller contends constitutes a Buyer Delay. If such action or inaction is not
cured within one (1) business day after Buyer's receipt of such notice, then a
Buyer Delay, as set forth in such notice, shall be deemed to have occurred
commencing as of the date Buyer received such notice and continuing for the
number of days the substantial completion of the Improvements was in fact
delayed as a direct result of such action or inaction.
8. Seller Delay. The term "Seller Delay" as used in this Lease
or this Work Letter shall mean the extent of any delay in the design or
construction of the Buyer Improvements which is due to the following: (1) delay
in the giving of authorizations or approvals by Seller beyond the time periods
provided for herein or in the Lease; (2) delay attributable to the refusal of
Seller, its agents or contractors to permit Buyer, its agents or contractors,
access to and use of the Building and any Building facilities or services after
the Initial Buyer Work Date; (3) delay attributable to Seller giving Buyer
incorrect or incomplete Building requirements or Seller Plans, or revisions made
to such Seller Plans subsequent to the delivery of such items to Buyer; and (4)
failure of Seller to deliver Seller's Plans to Buyer on or before July 1, 1998.
No Seller Delay shall be deemed to have occurred unless and until Buyer has
given written notice to Seller specifying the action or inaction which Buyer
contends constitutes a Seller Delay. If such action or inaction is not cured
within one (1) business day after Seller's receipt of such notice, then a Seller
Delay, as set forth in such notice, shall be deemed to have occurred commencing
as of the date Seller received such notice and continuing for the number of days
the substantial completion of the Buyer Improvements was in fact delayed as a
direct result of such action or inaction.
9. Force Majeure Events. The term "Force Majeure Events," as
used in the Lease or this Work Letter shall mean any delay in the completion of
the Improvements which is attributable to any: (1) actual delay or failure to
perform by the applicable party attributable to any strike, lockout or other
labor or industrial disturbance (whether or not on the part of employees of
either party hereto), civil disturbance, future order claiming jurisdiction, act
of the public enemy, war, riot, sabotage, blockade, embargo, inability to secure
customary materials, supplies, or labor through ordinary sources by reason or
regulation or order of any governmental or regulatory body; (2) delay
attributable to lightning, earthquake, fire, storm, hurricane, tornado, flood,
washout, rain, severe weather, explosion, or any other similar industry-wide or
area-wide cause beyond the reasonable control of the party from whom performance
is required, or any of its contractors or other representatives. Except as
specifically limited in this Work Letter, any prevention, delay or stoppage due
to any Force Majeure Event shall excuse the performance of the party affected
for a period of time equal to any such prevention, delay or stoppages (except
the obligations of either party to pay money, other than rent, pursuant to this
Lease). No Force Majeure Event shall be deemed to have occurred unless and until
the party claiming such Force Majeure Event has provided written notice to the
other party specifying the action or inaction
27
that such notifying party contends constitutes a Force Majeure Event within five
(5) business days of the occurrence of such event.
10. Billing. Buyer shall pay to Seller all amounts payable by
Buyer within thirty (30) days after billing by Seller. Bills may be rendered
during the progress of the work so as to enable Seller to pay its general
contractor, architect or engineers without advancing Seller's funds for changes
to the Base Building Improvements, though such progress billings shall only be
based on the extent to which the work is completed.
11. Insurance. During the course of construction, Seller shall
require its contractors and architects to obtain and maintain in force Broad
Form Comprehensive General Liability insurance (including, without limitation,
insurance against completed operations liability for losses occurring within
three (3) years after the completion of the Work) with coverage for explosion,
collapse, and underground damage, against claims arising out of bodily injury,
personal injury, or death and from damage to or destruction of property of
others, including, without limitation, loss of use thereof, and including,
without limitation, the liability of Seller or the applicable contractor or
architect arising out of the activities of all subcontractors, and each of them,
with a combined single limit of not less than One Million Dollars ($1,000,000)
for any one accident and/or occurrence and/or series of accidents or occurrences
arising out of any one event. Such insurance shall include Broad Form Property
Damage and Independent Contractors Coverage. Such insurance shall be primary and
not subject to any contribution from any insurance carried by Seller.
12. Buyer's Improvements. In the event that Buyer wishes to
commence constructing additional improvements within the Improvements to be
constructed by Seller ("Buyer's Improvements") prior to substantial completion
of the Improvements by Seller, the terms and conditions of this paragraph 12
shall apply. Buyer shall use Devcon Construction as its general contractor for
the Buyer Improvements or some other contractor with an equivalent reputation
and bonding capability reasonably approved by Seller ("Buyer's Contractor").
Buyer shall direct and authorize Buyer's Contractor to keep Seller fully
informed of the construction process for the Buyer Improvements and to provide
Seller with access to all documentation and other information in Buyer's
Contractor's possession or control regarding construction of the Buyer
Improvements, provided that Seller shall not be obligated to monitor or inspect
construction of the Buyer Improvements or any information in connection
therewith.
All Buyer Improvements shall be constructed by Buyer's
Contractor. Installation of all Buyer Improvements shall be coordinated with
Seller's contractor's schedule for the Base Building Improvements, and shall be
handled in such a manner as to maintain harmonious labor relations and not
interfere with or delay the work of Seller's contractors. In addition, at
Seller's request all Buyer Improvements shall be constructed using union labor.
All Buyer Improvements furnished and installed by Buyer shall not cause Seller's
contractor to be dependent upon Buyer's work in order for Seller's contractor to
complete his work. Buyer's contractors, subcontractors and labor shall be
subject to approval by Seller which approval shall not be unreasonably withheld
or delayed and shall be subject to the reasonable administrative supervision of
Buyer's general contractor and reasonable rules of the site. Buyer shall give
28
Seller full access and entry to the Premises in order to complete the Base
Building Improvements. Buyer shall not be charged any fee for Seller's review of
the plans, drawings and specifications or any oversight of the construction of
the Buyer Improvements.
Buyer shall keep the Property free and clear of all lien
claims arising in connection with Buyer's Improvements. Any delay experienced by
Seller as the result of Buyer's construction of Buyer's Improvements shall
constitute a Buyer's Delay (subject to the notice and cure provisions of section
7 above) for the purposes of this work letter. In the event the Purchase
Agreement is terminated by Buyer pursuant to the terms and conditions thereof,
except due to Seller's intentional breach at the election of Seller, Buyer shall
immediately remove any and all of Buyer's Improvements that Seller reasonably
determines to be of no value or of negative value in connection with the use of
the Property by Seller; provided, however, at any time prior to commencement of
construction of Buyer's Improvements, Buyer may submit to Seller its plans and
specifications for Buyer's Improvements and request that Seller designate in
writing within fifteen (15) days from receipt of such written request, which
portion of the proposed Buyer's Improvements meet the foregoing standard
requiring removal. Seller shall have no obligation to pay Buyer for any of
Buyer's Improvements in the event of termination of the Agreement for any reason
whatsoever.
29
EXHIBIT D-1(A)
BASE BUILDING IMPROVEMENT PLANS
[Plan index to be attached from submittal set]
30
EXHIBIT D-1(b)
REVISED SITE PLAN
[Plan index to be attached from submittal set]
31
EXHIBIT D-2
APPROVED BUYER PLAN GUIDELINES
[To be forthcoming pursuant to the terms outlined below. Typically, the easiest
manner to do this is for Buyer to attach a conceptual, softline plan that would
be pre-approved]
Seller and Buyer shall endeavor to agree upon parameters concerning the contents
of this Exhibit. However, the parties have no obligation to so agree. In the
event that Buyer believes that the parties are unable to agree upon such
parameters, Buyer shall have the option to terminate the Lease by providing
Seller written notice of its election to do so within two (2) weeks of the
execution date of the Lease.
32
EXHIBIT E
ESTOPPEL CERTIFICATE
[Date]
Network Appliance, Inc.
[Address]
Attn: [corporate officer]
Re: Acknowledgment of Initial Buyer Work Date under the Lease Agreement
by and between 495 Java Drive Associates, L.P., and Network Appliance,
Inc., dated as of ______________, 1998 (the "Lease")
Dear [name]:
This letter will confirm that for all purposes of the Lease,
the Initial Buyer Work Date (as defined in Paragraph 3(a) of the Lease) is
_______________, 199_.
Please acknowledge your acceptance of this letter by signing
and returning a copy to the undersigned.
Very truly yours,
495 Java Drive Associates, L.P.,
a California limited partnership
By: M-D Ventures, Inc.,
a California corporation
Its General Partner
By: ___________________
Its: __________________
Accepted and Agreed:
Network Appliance, Inc.,
a Delaware corporation
By: ___________________________
Its: __________________________
Dated: ________________________
33
EXHIBIT "F"
[INTENTIONALLY DELETED]
34
EXHIBIT "G"
[INTENTIONALLY DELETED]
35
EXHIBIT "H"
ESTOPPEL CERTIFICATE
(CONSTRUCTION LENDER)
[TO FOLLOW FROM LENDER, SUBJECT TO BUYER'S REASONABLE REQUIREMENTS]
36
EXHIBIT "H"
FORM OF BUYER ESTOPPEL CERTIFICATE
(ONGOING)
TO: __________________________ , OR ASSIGNEE ("LENDER"), AND/OR WHOM ELSE IT MAY
CONCERN:
THIS IS TO CERTIFY THAT:
1. The undersigned is the lessee ("Buyer") under that certain lease dated
______________, 19____ , ("Lease"), by and between ___________________
________________ as lessor ("Seller") and ____________________________
as Buyer, covering those certain premises commonly known and designated
as __________________ ("Premises").
2. The Lease has not been modified, changed, altered, assigned,
supplemented or amended in any respect (except as indicated below; if
none, state "none"). The Lease is not in default and is valid and in
full force and effect on the date hereof. The Lease is the only Lease
or agreement between the Buyer and the Seller affecting or relating to
the Premises. The Lease represents the entire agreement between the
Seller and the Buyer with respect to the Premises ________________.
3. The Buyer is not entitled to, and has made no agreement(s) with the
Seller or its agents or employees concerning free rent, partial rent,
rebate of rent payments, credit or offset or deduction in rent, or any
other type of rental concession, including, without limitation, lease
support payments or lease buy-outs (except as expressly provided in the
Lease or as indicated below; if none, state "none").
_______________________________________________________________.
4. The Buyer has accepted the Premises, and opened for business in the
Premises on _____________________, 19__. The Lease term began
_____________________, 19__. The termination date of the present term
of the Lease, excluding unexercised renewals, is ___________________,
19__.
5. The Buyer has paid rent for the Premises for the period up to and
including ______ , 19__ . The fixed minimum rent and any additional
rent (including the Buyer's share of tax increases and cost of living
increases) payable by the Buyer presently is $__ per month. No such
rent has been paid more than one (1) month in advance of its due date,
except as indicated below (if none, state "none"). The Buyer's security
deposit is
$___________________.
6. To the best of Buyer's knowledge (which means the current, actual
knowledge of the signatory for Buyer, who is the person responsible at
Buyer for applicable matters): (i) no
37
event has occurred and no condition exists which, with the giving
notice or the lapse of time or both, will constitute a default under
the Lease; and (ii) the Buyer has no existing defenses or offsets
against the enforcement of this Lease by the Seller.
7. The Buyer has received or will receive payment or credit for Buyer
improvement work in the total amount of $_______________ (or if other
than cash, describe below; if none, state "none"). Except as noted
below, all conditions under this Lease to be performed by the Seller
have been satisfied. ___________________________________.
8. Except as provided in the Lease, the Buyer has no outstanding options
or rights of first refusal to purchase the Premises or any part thereof
or all or any part of the real property of which the Premises are a
part.
9. No actions, whether voluntary or otherwise, are pending against the
Buyer or any general partner of the Buyer under the bankruptcy laws of
the United States or any state thereof.
10. The Buyer has not sublet the Premises to any sublessee and has not
assigned any of its rights under the Lease, except as indicated below
(if none, state "none"). No one except the Buyer and its employees
occupies the Premises. ________________________________ .
11. The address for notices to be sent to the Buyer is as set forth in the
Lease.
12. To the best of Buyer's knowledge, Buyer's and Buyer's sublessee's and
assignee's use, maintenance or operation of the Premises complies with,
and will at all times comply with, all applicable federal, state,
county or local statutes, laws, rules and regulations of any
governmental authorities relating to environmental, health or safety
matters (being hereinafter collectively referred to as the
Environmental Laws).
13. The Premises have not been used and the Buyer does not plan to use the
Premises for any activities which, directly or indirectly, involve the
use, generation, treatment, storage, transportation or disposal of any
petroleum product or any toxic or hazardous chemical, material,
substance, pollutant or waste except as permitted by the lease.
14. Buyer has not received any notices, written or oral, of violation of
any Environmental Law or of any allegation which, if true, would
contradict anything contained herein and there are no writs,
injunctions, decrees, orders or judgements outstanding, no lawsuits,
claims, proceedings or investigations pending or threatened, relating
to Buyer's or Buyer's sublessee's or assignee's use, maintenance or
operation of the Premises, nor is Buyer aware of a basis for any such
proceeding.
15. (INCLUDE THIS PARAGRAPH FOR LOAN TRANSACTIONS.) The Buyer acknowledges
that all the interest of the Seller in and to the Lease is being duly
assigned to Lender, and that pursuant to the terms thereof, all rent
payments under the Lease shall
38
continue to be paid to the Seller in accordance with the terms of the
Lease unless and until the Buyer is notified otherwise in writing by
Lender or its successors or assigns. Buyer is hereby authorized and
directed by Seller to comply with any written direction of Lender
concerning payment of Rent and no such compliance will give rise to any
default by Buyer under the Lease.
It is particularly noted that:
(a) Under the provisions of this assignment, the Lease cannot
be terminated (except as expressly provided in the Lease) or
modified in any of its terms, or consent be given to the
release of any party having liability thereon, without the
prior written consent of Lender or it successors or assigns,
and without such consent, no rent may be collected or accepted
more than one (1) month in advance.
(b) The interest of the Seller in the Lease has been assigned
to Lender for the purposes specified in the assignment.
Lender, or its successors or assigns, assumes no duty,
liability or obligation whatsoever under the Lease or any
extension or renewal thereof.
(c) Any notices sent to Lender or its affiliates should be
sent by registered mail and addressed as follows:
_____________________________ .
16. Buyer agrees to give any Mortgagee and/or Trust Deed Holders
("Mortgagee"), by registered mail, a copy of any notice of default
served upon the Seller, and Lender shall have the cure rights expressly
provided in Paragraph 21 of the Lease.
17. This certification is made to induce Lender to make certain fundings,
knowing that Lender relies upon the truth of this certification in
disbursing said funds.
18. The undersigned is authorized to execute this Buyer Estoppel
Certificate on behalf of the Buyer.
DATED THIS DAY OF _______, 19_________.
(BUYER)
BY:_________________________
ITS:
DATE:
39
THE UNDERSIGNED HEREBY CERTIFIES THAT THE CERTIFICATIONS SET FORTH ABOVE ARE
TRUE AS OF THE DATE HEREOF.
(OWNER/SELLER)
BY:__________________________
ITS:
DATE:
40
EXHIBIT "I"
[PREAPPROVED FORM OF SNDA AGREEMENT TO BE ATTACHED]
41
EXHIBIT "J"
RULES AND REGULATIONS
1. Sidewalks, exits, entrances, elevators, escalators and
stairways shall not be obstructed by Buyer or used by Buyer for any purpose
other than for ingress to and egress from the Premises. Buyer, and Buyer's
employees or invitees, shall not go upon the roof of the Building, except as
authorized by Seller or pursuant to Paragraph 46 of the Lease.
2. All curtains, draperies, blinds, shutters, shades, screens
or other coverings, awnings, hangings or decorations shall be attached to, hung
or placed in, or used in connection with, any exterior window, door or patio on
the Premises, if any, shall be subject to Seller's approval, which shall not be
unreasonably withheld.
3. If Buyer shall alter any lock or access device or install a
new or additional lock or access device, Buyer shall in each case furnish Seller
with a key for any such lock to the extent Seller would be entitled to such key
under the Lease.
4. Upon the termination of the tenancy, Buyer shall deliver to
Seller all the keys or access devices for the Building, offices, rooms and
toilet rooms which Buyer shall have had made.
5. 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 thrown
therein, and the expense of any breakage, stoppage or damage resulting from the
violation of this rule by Buyer or Buyer's employees or invitees shall be borne
by Buyer.
6. Animals or birds shall not be brought or kept in or about
the Premises or the Building, other than seeing-eye dogs or other such animals
that assist handicapped individuals.
7. Buyer shall not install any radio or television antenna,
loudspeaker or any other device on the exterior walls or the roof of the
Building except as expressly permitted by the Lease.
8. Buyer shall not lay linoleum, tile, carpet or any other
floor covering so that the same shall be affixed to the floor of the Premises in
any manner except as approved in writing by Seller. The expense of repairing any
damage resulting from a violation of this rule by Buyer or Buyer's contractors,
employees or invitees or the removal of any floor covering shall be borne by
Buyer.
42
9. Buyer 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 law. Buyer may hang pictures on walls in the Premises.
Any damage to the walls caused by molley bolts, double sided tape, or like
hanging materials, will be repaired by Buyer.
10. Buyer shall store all trash and garbage within the
interior of the Premises or in the appropriate trash collection areas outside of
the Premises. No material shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of in the ordinary
and customary manner of removing and disposing of trash and garbage in the
jurisdiction in which the Premises is located, without violation of any law or
ordinance governing such disposal.
11. Buyer shall comply with all safety, fire protection and
evacuation procedures and regulations established by any governmental agency.
12. Buyer 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, unless caused by the
gross negligence or willful misconduct of Seller, its agents, servants, or
employees ("Seller Parties").
13. Buyer shall be responsible for the observance of all of
the foregoing Rules and Regulations by Buyer's employees, agents, clients,
customers, invitees and guests.
14. Unless otherwise defined, terms used in these Rules and
Regulations shall have the same meaning as in the Lease.
43
EXHIBIT K
REQUIRED CONDITION OF PREMISES UPON SURRENDER
Upon termination of the Lease, the Premises shall be returned
to Seller with all Building Systems and elevator, fire and gas systems in good
working order and maintained with any necessary repairs completed in the
reasonable opinion of Seller's subcontractor, and all operating manuals and
maintenance records with respect to such systems shall be delivered to Seller.
All space in the Premises shall be clean and well-maintained with walls freshly
painted as necessary (or touched-up, if acceptable to Seller in its reasonable
discretion), and carpet shampooed and presentable for re-leasing. Any damaged or
unpresentable carpet shall be replaced. All window coverings shall be cleaned
and any damaged coverings repaired or replaced. Any damaged ceiling tiles shall
be replaced and all light fixtures shall be fully operational and clean. All
doors shall be presentable and damaged doors repaired or replaced. Bathrooms
shall be freshly mopped and all tile surfaces cleaned. Any damaged bathroom
partitions or fixtures shall be repaired or replaced. The exterior and interior
of all windows shall be washed and all interior partition glass shall be
cleaned. If Buyer is obligated to remove or restore any Buyer Improvements or
Alterations upon termination or expiration of the Lease pursuant to Paragraph
8(d) or (e) of the Lease or Paragraph 6 of the Work Letter, the affected area
will be returned to Seller in the form of open office space in the condition
described above.
44
EXHIBIT "L"
[INTENTIONALLY DELETED]
45
EXHIBIT "M"
FORM OF LETTER OF CREDIT
[TO BE PROVIDED BY BUYER FOR REVIEW BY SELLER PRIOR TO LEASE EXECUTION]
46
EXHIBIT "N"
BUYER'S HAZARDOUS SUBSTANCES DISCLOSURES
[TO BE PROVIDED BY BUYER FOR SELLER'S REVIEW PRIOR TO LEASE EXECUTION]
47
ADDENDUM TO AGREEMENT OF PURCHASE AND SALE
Notwithstanding anything to the contrary in the Agreement of
Purchase and Sale between Network Appliance, Inc. ("Buyer") and 495 Java Drive
Associates, L.P. ("Seller"), (i) Buyer warrants that it has authority to
execute, deliver and perform the Agreement of Purchase and Sale and (ii) Seller
shall be entitled to terminate the Agreement of Purchase and Sale at any time
after July 10, 1998 if, prior to such termination Buyer has failed to deliver to
Seller its Board of Directors Resolution certified by the Secretary or Assistant
Secretary of Buyer authorizing the transactions contemplated by the Agreement of
Purchase and Sale. Upon such termination Seller shall return Buyer's Deposit.
BUYER:
NETWORK APPLIANCE, INC.
By: /s/ CHRIS CARLTON
---------------------------
Its: Vice President
---------------------
SELLER:
495 JAVA DRIVE ASSOCIATES, L.P.
By M-D Ventures, Inc.
By: /s/ JEFFREY JOHNSON
---------------------------
Its: Attorney-in-fact
---------------------
48
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is executed as of June 15, 1998
by and between Network Appliance, Inc., a Delaware Corporation ("Network") and
495 Java Drive Associates, L.P., a California limited partnership ("Java").
1. Recitals.
a. Java owns the property located at 495 Java Drive,
Sunnyvale, California ("Property").
b. Java is in the process of constructing a four story
building consisting of approximately One Hundred Twenty-Six Thousand Seven
Hundred Sixty (126,760) square feet ("Improvements"). The Improvements are being
constructed by Devcon Construction Company ("Devcon").
c. Network and Java have executed that certain Agreement
Of Purchase And Sale dated as of June 11, 1998 for the purchase by Network of
the Property ("Purchase Agreement").
d. The capitalized terms not otherwise defined herein
shall have the meanings given in the Purchase Agreement.
e. Network wishes to review the plans and specifications
for the Improvements to consider changes therein. Under the terms and conditions
of the Purchase Agreement the additional costs of changes are to be borne by
Network. In order to minimize the additional costs associated with such changes
Network has determined that it would be to its advantage to cause Devcon to stop
construction as of the date hereof and to do only such construction as Network
shall authorize.
f. Java is willing to allow Network to stop the Devcon
construction and limit its construction to only those portions of the work
authorized by Network in accordance herewith if, and only if, Network
indemnifies Java on the terms and conditions of this Indemnity Agreement for the
costs associated therewith.
2. Devcon Construction. Java shall instruct Devcon to stop
construction as of June 16, 1998 and to limit its construction to only the
portions of work authorized by Network (collectively "Stop Work Notice") until
the earlier of (i) written notice delivered by Network to Java notifying Java
that it wishes to withdraw the Stop Work Notice or (ii) written notice by Java
delivered to Network that it has withdrawn the Stop Work Notice following
termination of the Purchase Agreement or after September 14, 1998.
3. Indemnification. Network shall be obligated to pay Java the
following costs and expenses associated with the Stop Work Notice:
(a) All increased costs of construction of the Improvements
49
charged by Devcon in connection with the Stop Work Notice as
evidenced by appropriate invoices and supporting information
supplied by Devcon. Java agrees to cooperate with Network in
reviewing and approving such charges.
(b) The sum of $2,323 per day for the period that substantial
completion of the Improvements is delayed by the effect of the
Stop Work Notice as determined by Devcon and reasonably
approved by Java. Unless and until substantial completion of
the Improvements occurs it shall be presumed that the number
of days of delay caused by the Stop Work Notice shall be the
number of days from June 16, 1998 until the day proceeding the
date Devcon commences pouring foundations (ie the same stage
of construction that existed on June 16, 1998) ("Presumed
Delay Period"). If the purchase and sale contemplated by the
Purchase Agreement fails to occur for any reason whatsoever,
the number of days of delay shall be the Presumed Delay
Period. If the purchase and sale contemplated by the Purchase
Agreement is completed the number of days of delay for the
computation required by this sub-paragraph (b) shall be the
lesser of (i) the Presumed Delay Period or (ii) the number of
days beyond March 17, 1999 that substantial completion of the
Improvements (as defined in the Purchase Agreement) occurs.
4. Payment. Unless and until the Purchase Agreement is
terminated or the Closing Date arrives and Close of Escrow is not completed on
the Closing Date the amounts that Network is obligated to pay pursuant to this
Indemnification Agreement shall be treated as a Change Order under the Purchase
Agreement and credited to the first $3,000,000 of Change Orders to be financed
by Java and which are to result in an adjustment to the Purchase Price at Close
of Escrow. In the event the Purchase Agreement is terminated for any reason
whatsoever and/or the Closing Date arrives and Network fails to purchase the
Property for any reason whatsoever, the amounts payable by Network to Java
hereunder shall be due and payable within ten (10) days written notice given
pursuant to the notice procedure set forth in the Purchase Agreement.
5. Attorneys fees; Arbitration. In the event of any litigation
or arbitration regarding the rights and obligations under this Agreement the
prevailing party shall be entitled to recover, in addition to damages,
reasonably attorney's fees, expert witness fees and court costs. Any controversy
or claim arising out of this Agreement shall be settled by arbitration in
accordance with the rules of the American Arbitration Association for the
arbitration of commercial disputes, and judgement on the award rendered by the
Arbitrator(s) may be entered in any court having jurisdiction. the prevailing
party in such arbitration shall be entitled to attorney's fees and costs.
6. Separate and Independent Obligations. The obligations of
Network are entirely separate and independent of any and all of the rights and
obligations of the parties under the Purchase Agreement or any other agreement
between the parties hereto.
50
IN WITNESS WHEREOF the parties hereto have executed this
Indemnity Agreement as of the date and year set forth above.
Network Appliance, Inc.,
a Delaware Corporation
/s/ CHRIS CARLTON
-----------------------------
by: Chris Carlton
--------------------------
its: Vice President
-------------------------
495 Java Drive Associates, L.P.,
M-D Venture, Inc., a California
Corporation, its General Partner
/s/ JEFFREY JOHNSON
-----------------------------
by: Jeffrey Johnson
-------------------------
its: Attorney-in-fact
-------------------------
1
EXHIBIT 10.16
LEASE BETWEEN
475 Java Drive Associates, L.P.,
a California Limited Partnership
("LESSOR")
AND
NETWORK APPLIANCE, INC.,
a Delaware Corporation
("LESSEE")
June 11, 1998
2
LEASE
THIS LEASE is made and entered into as of June 11, 1998, by
and between 475 Java Drive Associates, L.P., a California Limited Partnership
("Lessor") and Network Appliance, Inc., a Delaware Corporation ("Lessee").
RECITALS
A. Lessor owns that certain real property located in the City
of Sunnyvale, County of Santa Clara, State of California, and more particularly
described in Exhibit A attached hereto. The land described in Exhibit A together
with the Improvements (as defined below) thereon, is herein referred to as the
"Premises."
B. Lessee desires to lease the Premises from Lessor, and
Lessor has agreed to lease the Premises to Lessee on the terms and conditions
set forth in this Lease and for the purposes provided herein.
NOW, THEREFORE, in consideration of the rents to be paid
hereunder and of the agreements, covenants and conditions contained herein, the
parties hereby agree as follows:
ARTICLE 1. BASIC LEASE INFORMATION
The following is a summary of basic lease information. Each
term or item in this Article 1 shall be deemed to incorporate all of the
provisions set forth below pertaining to such term or item and to the extent
there is any conflict between the provisions of this Article 1 and any more
specific provision of this Lease, the more specific provision shall control.
Lessor: 475 Java Drive Associates, L.P.,
a California Limited Partnership
Address of Lessor: c/o The Mozart Development Company
1068 East Meadow Circle
Palo Alto, CA 94303
Lessee: NETWORK APPLIANCE, INC.,
a Delaware Corporation
Address of Lessee: 2770 San Tomas Expressway
Santa Clara, California 95051
Commencement Date (Article 5): October 1, 1999
Term (Article 5): 25 years
Use (Article 11): Lessee may use the Premises for general office, administration
and research and development (including a cafeteria for its employees).
3
Base Monthly Rental as of Commencement Date (Article 7): Two Hundred Fifty Seven
Thousand Dollars ($257,000) per month.
Use (Article 11): Office, administration, research, development, light
manufacturing and industrial operations, and/or any lawful purpose
ARTICLE 2. DEFINITIONS
As used in this Lease, the following terms shall have the
following meanings, applicable, as appropriate, to both the singular and plural
forms of the terms herein defined:
"Additional Rental" is as defined in Article 8.
"Affiliate" means (i) the legal representative, successor or
assignee of, or any trustee of a trust for the benefit of, Lessee; (ii) any
entity of which a majority of the voting or economic interest is owned by Lessee
or one or more of the persons referred to in the preceding clause; (iii) any
partnership in which Lessee or a person referred to in the preceding clauses is
a partner; (iv) any person who is an officer, director, trustee, stockholder
(10% or more) or partner of Lessee or any person referred to in the preceding
clauses; or (v) any person directly or indirectly controlling, or under direct
or indirect common control with, any person referred to in any of the preceding
clauses. For purposes of this definition, "control" means owning directly or
indirectly ten percent (10%) or more of the beneficial interest in such entity
or the direct or indirect power to control the management policies of such
person or entity, whether through ownership, by contract or otherwise.
"Alterations" means any additional improvements, alterations,
remodeling, demolition, or reconstruction of or to the Initial Improvements or
construction of improvements different than the Initial Improvements after the
completion of the initial construction of the Initial Improvements.
"Applicable Laws" means all applicable covenants, conditions
and restrictions recorded against and applicable to the Premises and all
applicable laws, codes, ordinances, orders, rules, regulations and requirements,
including, without limitation, all Environmental Requirements, of all Federal,
state, county, municipal and other governmental authorities and the departments,
commissions, boards, bureaus, instrumentalities, and officers thereof, and all
orders, rules and regulations of the Pacific Fire Rating Bureau, and the
American Insurance Association (formerly the National Board of Fire
Underwriters) or any other body exercising similar functions relating to or
affecting the Premises, the Improvements now or hereafter located on the
Premises or the use, operation or occupancy of the Premises for the purposes
permitted hereunder, whether now existing or hereafter enacted.
"Appropriation" means any taking by exercise of right of
condemnation (direct or inverse) or eminent domain, or requisitioning by
military or other public authority for any purpose arising out of a temporary
emergency or other temporary circumstance or sale under threat of condemnation.
"Appropriated" means having been subject to such taking and "Appropriating"
means exercising such taking authority.
4
"Award" means the amount paid by the Appropriating authority
as a result of an Appropriation.
"Base Monthly Rental" means the amount stated in the Basic
Lease Information, payable in accordance with Article 7.
"Basic Lease Information" means the information contained in
Article 1.
"Bonded Contracts" is as defined in Section 13.5(b).
"City" means the City of Sunnyvale.
"Commencement Date" is as stated in the Basic Lease
Information.
"CPI" means the Consumer Price Index published by the U.S.
Department of Labor, Bureau of Labor Statistics (San Francisco-Oakland Bay Area,
All Urban Consumers, All Items), or if such index is no longer published, a
successor or substitute index designated by Lessor, published by a governmental
agency and reflecting changes in consumer prices in the San Francisco Bay Area.
"Environmental Audit" is as defined in Section 20.5.
"Environmental Claims" means all claims, demands, judgments,
damages, penalties, fines, liabilities (including strict liability),
encumbrances, liens, costs, and expenses of investigation and defense of any
claim, including, without limitation, reasonable attorneys' fees and
disbursements and consultants' fees, any of which are incurred at any time as a
result of a Hazardous Substance Occurrence, including, without limitation:
(i) Claims for personal injury, or injury to property or
natural resources occurring upon or off of the Premises;
(ii) Fees incurred for the services of attorneys, consultants,
contractors, experts, laboratories and all other costs incurred in connection
with the investigation or remediation of Hazardous Substances or violation of
Environmental Requirements, including, but not limited to, preparation of
feasibility studies or reports, or the performance of any cleanup, remediation,
removal, response, abatement, containment, closure, restoration or monitoring
work required by any federal, state or local governmental agency or political
subdivision, or reasonably necessary to make full economic use of the Premises
or any other property or otherwise expended in connection with such conditions,
and including without limitation any attorneys' fees, costs and expenses
incurred in enforcing this Lease or collecting any sums due hereunder; and
(iii) Liability to any third person or governmental agency to
indemnify such person or agency for costs expended in connection with the items
referenced in subsection (ii) above.
"Environmental Requirements" means all applicable present and
future statutes, regulations, rules, ordinances, codes, licenses, permits,
orders, approvals, plans, authorizations,
5
concessions, franchises, and similar items, and all amendments thereto, of all
governmental agencies, departments, commissions, boards, bureaus or
instrumentalities of the United States, California, and political subdivisions
thereof, and all applicable judicial, administrative and regulatory decrees,
judgments, and orders relating to the protection of human health or the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act (42 U.S.C. section 9601 et seq.) and
the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.) and
including, without limitation: (i) all requirements pertaining to reporting,
licensing, permitting, investigation and remediation of emissions, discharges,
releases, or threatened releases of Hazardous Substances, whether solid, liquid,
or gaseous in nature, into the air, surface water, groundwater, or land, or
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of Hazardous Substances, and (ii) all
requirements pertaining to the health and safety of employees or the public.
"Expiration Date" is as stated in the Basic Lease Information.
"Event of Default" is as defined in Article 28.
"Full Insurable Replacement Value" is as defined in Section
21.1.
"Hazardous Substance" means any substance:
(i) the presence of which requires investigation or
remediation under any Environmental Requirement;
(ii) which is or becomes defined as a "hazardous waste,"
"hazardous substance," "pollutant," or "contaminant" under any Environmental
Requirement;
(iii) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is
or becomes regulated under any Environmental Requirement;
(iv) the presence of which on the Premises causes or threatens
to cause a nuisance upon the Premises or to surrounding properties or poses or
threatens to pose a hazard to the health or safety of persons on or about the
Premises;
(v) the presence of which on adjacent properties could
constitute a trespass by Lessee;
(vi) without limitation of the foregoing, which contains
gasoline, diesel fuel or other petroleum hydrocarbons;
(vii) without limitation of the foregoing, which contains
polychlorinated biphenals (PCBs), asbestos or urea formaldehyde foam insulation;
or
(viii) without limitation of the foregoing, radon gas.
6
"Hazardous Substance Occurrence" means any use, treatment,
keeping, storage, sale, release, disposal, migration or discharge of any
Hazardous Substance from, on, about, under or into the Premises, or the
exacerbation through the acts of Lessee or its subtenants of any previously
existing Hazardous Substance condition, that occurs during the, excluding any
Hazardous Substance Occurrence caused by Lessor or its Affiliates or originating
on property owned by Lessor or its Affiliates.
"Impositions" is as defined in Section 8.1.
"Improvements" means all landscaping, buildings and other
structures and improvements, and fixtures thereto, constructed, planted, or
installed on the Premises, including, without limitation, the Initial
Improvements to be constructed by Lessee in accordance herewith and all
subsequent Alterations.
"Initial Improvements" means the initial improvements
constructed by Lessee.
"Interest Rate" means the lesser of (i) the rate of interest
charged by Bank of America at its offices in San Francisco as its prime or
reference rate, plus 2%, or (ii) the highest rate permitted under Applicable
Laws, compounded monthly.
"Lease Year" shall mean each successive twelve month period
commencing on October 1 and ending on September 30.
"Leasehold Mortgage" is as defined in Article 26.
"Premises" is as defined in Recital A.
"Supplemental Audit" is as defined in Section 20.5.
"Term" is as defined in Article 5.
"Termination Date" shall mean the Expiration Date or such
earlier date as this Lease is terminated pursuant to any provision hereof.
"Transfer" is as defined in Section 24.1.
ARTICLE 3. LEASE OF PREMISES; RESERVATION OF RIGHTS
Lessor hereby leases and demises to Lessee, and Lessee hereby
hires from Lessor, the Premises;
Subject to all zoning and governmental regulations now or
hereafter in effect, and all liens, encumbrances, restrictions, rights and
conditions of law or of record or otherwise known to Lessee or ascertainable by
inspection or a survey; and
7
ARTICLE 4. DEMOLITION; NO OTHER ALTERATION BY LESSOR; ACCEPTANCE OF PREMISES
Section 4.1 Lessor's Obligation To Demolish Existing Building. Prior to
the Commencement Date, Lessor shall cause the existing improvement to be
demolished and removed from the Premise in accordance with the specifications
described on EXHIBIT B attached hereto and incorporated herein by reference.
Lessor shall indemnify, defend and hold Lessee harmless from and against any
cost, claim, loss or liability directly or indirectly in connection with such
demolition. Lessor shall take no action which alters the physical condition of
the Premises except for the demolition described in the preceding sentence.
Section 4.2 Lessee's Due Diligence. Prior to entering into this Lease,
Lessee has made a thorough, independent examination of the Premises and all
matters relevant to Lessee's decision to enter into this Lease, and Lessee is
thoroughly familiar with all aspects of the Premises and is satisfied that they
are in an acceptable condition and meet Lessee's needs. Without in any way
limiting the generality of the foregoing, Lessee's inspection and review has
included, to the extent that Lessee in its sole discretion has deemed necessary
or appropriate:
(a) All matters relating to title, together with all municipal
and other legal requirements such as taxes, assessments, zoning, use permit
requirements and building codes;
(b) The physical condition of the Premises, including the
soils and groundwater and the presence or absence of Hazardous Substances on,
under or in the vicinity of the Premises and all other physical and functional
aspects of the Premises;
(c) All easements and access rights;
(d) Lessee's ability to obtain appropriate licenses and
satisfy all licensing requirements under Applicable Laws;
(e) The economics of the business Lessee intends to conduct on
the Premises, including without limitation, market conditions and financial
viability; and
(f) Lessee's ability to finance the construction of the
Improvements.
8
Section 4.3 Acceptance of the Premises. Subject to the obligations of Lessor
pursuant to Section 4.1, Lessee specifically agrees to take the Premises in its
condition as of the Commencement Date and acknowledges that in entering into
this Lease, Lessee does not rely on, and Lessor does not make, any express or
implied representations or warranties as to any matters including, without
limitation, the suitability of the soil or subsoil, any characteristics of the
Premises or improvements thereon, the suitability of the Premises for the
intended use, the economic feasibility of the business Lessee intends to conduct
on the Premises, title to the Premises, Hazardous Substances on or in the
vicinity of the Premises, or any other matter. Lessee has satisfied itself as to
such suitability and other pertinent matters by Lessee's own inquiries and tests
into all matters relevant in determining whether to enter into this Lease.
Subject to the obligations of Lessor pursuant to Section 4.1, Lessee accepts the
Premises in its condition as of the Commencement Date, and hereby expressly
agrees that if any remedial or restoration work is required in order to conform
the Premises to the requirements of Applicable Laws, Lessee shall assume sole
responsibility for any such work.
ARTICLE 5. TERM
The term of this Lease (the "Term") shall be for the period
stated in the Basic Lease Information, commencing on the Commencement Date and
expiring on the Expiration Date (subject to extension pursuant to Article 6) or
on such earlier date as this Lease may be terminated as hereinafter provided. In
the event the demolition to be completed by Lessor pursuant to Section 4.1 is
not completed as of October 1, 1999 the Commencement Date shall be extended to
the date of completion of such work.
ARTICLE 6. OPTIONS TO EXTEND TERM
Lessee shall have no right to extend the Term.
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ARTICLE 7. BASE MONTHLY RENTAL
Section 7.1 Base Monthly Rental. Commencing upon the Commencement Date and
continuing throughout the term, Lessee shall pay to Lessor, at Lessor's address
stated in the Basic lease Information, or to such other person or at such other
place as Lessor may from time to time designate by notice to Lessee, without
prior notice or demand, Base Monthly Rental in the amount stated in the Basic
Lease Information, which amount shall be adjusted as provided below.
ARTICLE 8. ADDITIONAL RENTAL
Section 8.1 Impositions. In addition to the Base Monthly Rental and all other
amounts and charges due hereunder, as part of the consideration for this Lease
and as additional rental hereunder, commencing October 1, 1999, Lessee covenants
and agrees to bear, discharge and pay to the relevant authority or entity, in
lawful money of the United States, without offset or deduction, as the same
become due, before delinquency, all taxes, assessments, rates, charges, license
fees, municipal liens, levies, excises or imposts, whether general or special,
or ordinary or extraordinary, of every name, nature and kind whatsoever,
including all governmental charges of whatsoever name, nature or kind that may
be levied, assessed, charged or imposed or may be or become a lien or charge
upon the Premises or any part thereof; or upon the rent or income of Lessee; or
upon the use or occupancy of the Premises; or this transaction or any document
creating or transferring an estate or interest in the Premises; upon any of the
buildings or improvements that are or are hereafter placed, built or newly
constructed upon the Premises; or upon the leasehold of Lessee or upon the
estate hereby created.
If at any time during the Term, under any Applicable Laws, any
tax is levied or assessed against Lessor directly, in substitution in whole or
in part for real property taxes, Lessee covenants and agrees to pay and
discharge such tax.
All of the foregoing taxes, assessments and other charges are
herein referred to as "Impositions."
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Section 8.2 Right to Contest. Lessee shall have the right to contest, by
appropriate proceedings, the amount or validity, in whole or in part, of any
Imposition, provided that Lessee shall not postpone or defer payment of such
Imposition but shall pay such Imposition in accordance with Section 8.1
notwithstanding such contest. Lessor shall have no obligation to join in any
such proceedings. Lessee shall indemnify and defend Lessor against and save
Lessor harmless, in accordance with Article 22 hereof, from and against any and
all claims, demands, losses, costs, liabilities, damages, penalties and
expenses, including, without limitation, reasonable attorneys' fees and
expenses, arising from or in connection with any such proceedings.
Section 8.3 Proration. Any Imposition relating to a fiscal period of any taxing
authority, only a part of which period is included within the Term, shall be
prorated as between Lessor and Lessee so that Lessor shall pay the portion
thereof attributable to any period prior to the commencement of and subsequent
to the lapse of the Term, and Lessee shall pay the portion thereof attributable
to any period during the Term. Lessee, however, shall pay all personal property
taxes, without proration, that relate to a fiscal year in which the Term hereof
shall commence or terminate.
Section 8.4 Assessment Proceedings. If at any time during the Term any
governmental authority shall undertake to create an improvement or special
assessment district the proposed boundaries of which shall include the Premises,
Lessee shall be entitled to appear in any proceeding relating thereto and to
exercise all rights of a landowner to have the Premises excluded from the
proposed improvement or special assessment district or to determine the degree
of benefit to the Premises resulting therefrom.
Section 8.5 Additional Rental. All of the above charges and all other charges
and amounts required to be paid by Lessee under this Lease shall be additional
rent ("Additional Rental"). All such Additional Rental that is payable to Lessor
shall be payable at the place where the Base Monthly Rental is payable.
ARTICLE 9. NET LEASE; NO COUNTERCLAIM OR ABATEMENT
The Base Monthly Rental and Additional Rental due to Lessor
hereunder shall be absolutely net to Lessor and shall be paid without assertion
of any counterclaim, setoff, deduction or defense and without abatement,
suspension, deferment or reduction. Under no circumstances or conditions,
whether now existing or hereafter arising, and whether or not beyond the present
contemplation of the parties, shall Lessor be expected or required to make any
payment of any kind whatsoever with respect to the Premises or be under any
obligation or liability hereunder except as expressly set forth in this Lease.
Except as otherwise expressly provided herein, this Lease
shall continue in full force and effect, and the obligations of Lessee hereunder
shall not be released, discharged or otherwise affected, by reason, of: (a) any
damage to or destruction of the Premises or any portion thereof or any
improvements thereon, or any taking thereof in eminent domain; (b) any
restriction or prevention of or interference with any use of the Premises or the
improvements or any part thereof; (c) any bankruptcy, insolvency,
reorganization, composition, adjustment, dissolution, liquidation or other
proceeding relating to Lessor, Lessee or any constituent partner
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of Lessee or any sublessee, licensee or concessionaire or any action taken with
respect to this Lease by an trustee or receiver, or by any court, in any
proceeding; (d) any claim that Lessee or any other person has or might have
against Lessor; (e) any failure on the part of Lessor to perform or comply with
any of the terms hereof or of any other agreement with Lessee or any other
person; (f) any failure on the part of any sublessee, licensee, concessionaire,
or other person to perform or comply with any of the terms of any sublease or
other agreement between Lessee and any such person; (g) any termination of any
sublease, license or concession, whether voluntary or by operation of law; or
(h) any other occurrence whatsoever, whether similar or dissimilar to the
foregoing, in each case whether or not Lessee shall have notice or knowledge of
any of the foregoing.
The obligations of Lessee hereunder shall be separate and
independent covenants and agreements. Lessee hereby waives, to the full extent
permitted by applicable law, all rights now or hereafter conferred by statute,
including without limitation the provisions of Civil Code Sections 1932 and
1933, to quit, terminate or surrender this Lease or the Premises or any part
thereof, or to any abatement, suspension, deferment, diminution or reduction of
any rent hereunder.
ARTICLE 10. OPTION TO PURCHASE.
Lessor hereby grants to Lessee the option to purchase the
Premises pursuant to the terms and conditions of that certain Option Agreement
dated of even date herewith.
ARTICLE 11. USE OF PREMISES
Subject to all provisions and limitations contained herein,
the Premises and all buildings and improvements at any time located thereon
shall at all times be used and operated for the purposes stated in the Basic
Lease Information and for no other purpose. The parties hereby acknowledge and
agree that Lessee's covenant that the Premises shall be used solely for the
purposes stated in the Basic Lease Information and for no other purpose is
material consideration for Lessor's agreement to enter into this Lease. The
parties further acknowledge and agree that any violation of said covenant shall
constitute a material breach of this Lease and entitle Lessor to exercise any
and all of its rights and remedies under this Lease or otherwise at law or in
equity.
Without limitation of the foregoing, or any other provision of
this Lease, in no event shall the Premises be used for any purpose that in any
manner causes, creates, or results in a nuisance; any purpose or use that is of
a nature to involve substantial hazard, such as the manufacture or use of
explosives, chemicals or products that may explode, or any purpose or use that
otherwise may harm the health or welfare of persons or the physical environment;
or any discharge of Hazardous Substances on the Premises, including but not
limited to the disposing or discharging of such substances into or under the
Premises.
ARTICLE 12. LIMITATION ON EFFECT OF APPROVALS
Lessor shall have no obligation to review, comment upon,
approve, inspect or take any other action with respect to the Premises, the
Improvements, or the design or construction thereof, or any other matter, are
specifically for the benefit of Lessor and no other
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party. No review, comment, approval or inspection, right or exercise of any
right to perform Lessee's obligations, or similar actions required or permitted
by, of, or to Lessor hereunder, or actions or omissions of Lessor's employees,
agents and trustees, or other circumstances shall give or be deemed to give
Lessor any liability, responsibility or obligation for, in connection with, or
with respect to, the design, construction, maintenance or operation of the
Premises or any Improvements, or the removal and/or remediation of any Hazardous
Substances on, in or from the Premises, nor shall any such approval, actions,
information or circumstances relieve or be deemed to relieve Lessee of the sole
obligation and responsibility for the design, construction, maintenance and
operation of the Premises and Improvements and the removal and/or remediation of
Hazardous Substances required under this Lease, if any.
ARTICLE 13. INITIAL CONSTRUCTION AND ALTERATIONS
Section 13.1 Construction of Initial Improvements. Lessee hereby is granted
permission, at Lessee's sole cost and expense, to design, develop and construct
upon the Premises the Initial Improvements.
Section 13.2 Alterations. Lessee shall have the right to make Alterations.
Section 13.3 Permits and Approvals. Lessee shall be solely responsible for
obtaining, at its sole cost and expense, any approvals that may be required
pursuant to that certain Declaration of Protected Covenants, of Moffet
Industrial Park No. 2 recorded in the Santa Clara official records on December
23, 1971, and the approval of the City (and any other governmental agencies with
jurisdiction) for any general plan amendment, rezoning, variance, conditional
use permit, building, electrical and plumbing permits, environmental impact
analysis and mitigations imposed thereby, or other governmental action necessary
to permit the development, construction and operation of the Improvements
(including any Alterations) in accordance with this Lease. Lessor, at no cost or
expense to itself, shall cooperate with Lessee to the extent reasonably required
to obtain the approval of the City for the Initial Improvements and any proposed
Alterations. Lessee shall reimburse Lessor for any out-of-pocket expenses
reasonably incurred by Lessor in connection with such cooperation.
Section 13.4 Design. The exterior design of the Improvements, including without
limitation, the site plan, landscaping plan and materials, colors, and
elevations, shall be subject to the approval of the City. Lessee shall provide
copies of such plans from time-to-time to Lessor.
Section 13.5 Prerequisites to Commencement of Construction. In addition to all
other requirements set forth herein, before commencing the construction of the
Initial Improvements or any Alterations and before any building materials have
been delivered to the Premises by Lessee or under Lessee's authority, Lessee
shall:
(a) Procure or cause to be procured the insurance coverage
described below in the limits hereinafter provided, and provide Lessor with
certified copies of all such insurance or, with the written approval of Lessor,
certificates of such insurance in form satisfactory to Lessor. All such
insurance shall comply with any requirements of Articles 14 and 21.
(b) Obtain the approval of Lessor of the general contractor in
respect of any Bonded Contracts, which approval shall not be unreasonably
withheld or delayed. Lessor hereby
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approves Devcon Construction Company, and Lessor shall approve any other
contractor with an equivalent reputation and bonding capacity. If Lessor fails
to approve the general contractor, Lessee shall provide Lessor with performance
and payment bonds naming Lessor as an additional obligee, which shall cover
payment of all obligations arising under the Bonded Contracts in connection with
the construction of the Initial Improvements or any subsequent Alterations, as
the case may be, and guaranteeing the completion of such construction, and
payment in full of all claims for labor performed and materials supplied for
such construction. The bonds shall be issued by a responsible surety company,
licensed to do business in California, in an amount not less than the amount of
the Bonded Contracts and shall remain in effect until the entire cost of the
work shall have been paid in full. As used herein, the term "Bonded Contracts"
means the general contract and any construction contract separate from the
general contract that is for $100,000 or more. The bonds shall state that they
are conditioned to secure the completion of the work under the Bonded Contracts,
free from all liens and claims of contractors, subcontractors, mechanics,
laborers, and material suppliers; and that the construction work shall be
completed in accordance with the terms of the respective Bonded Contract by the
contractor thereunder, or, on its default, the surety.
(c) During the course of construction, to the extent not
covered by property insurance maintained by Lessee pursuant to Article 21,
maintain or caused to be maintained a comprehensive "all risk" builder's risk
insurance, including vandalism and malicious mischief, covering all improvements
in place on the Premises, all materials and equipment stored at the Premises and
furnished under contract, and all materials and equipment that are in the
process of fabrication at the premises of any third party or that have been
placed in due course of transit to the Premises when such fabrication or transit
is at the risk of, or when title to or an insurable interest in such materials
or equipment has passed to, Lessee or its construction manager, contractors or
subcontractors (excluding any contractors', subcontractors' and construction
managers' tools and equipment, and property owned by the employees of the
construction manager, any contractor or any subcontractor), such insurance to be
written on a completed value basis in an amount not less than the full estimated
replacement value of the Initial Improvements or such Alterations, as
applicable.
(d) Cause the contractor to procure and maintain comprehensive
liability insurance covering Lessee, Lessor and each construction manager,
contractor and subcontractor engaged in any work on the Premises, which
insurance may be effected by endorsement, if obtainable, on the policy required
to be carried pursuant to Article 21, including insurance for completed
operations, elevators, owner's, construction manager's and contractor's
protective liability, products completed operations for three (3) years after
the date of acceptance of the work by Lessee, broad form blanket contractual
liability, broad form property damage and full form personal injury (including
but not limited to bodily injury), covering the performance of all work at or
from the Premises by Lessee, its construction manager, contractors and
subcontractors, and in a liability amount not less than the amount at the time
carried by prudent owners of comparable construction projects in the Santa Clara
valley, but in any event not less than Ten Million Dollars ($10,000,000)
combined single limit, which policy shall contain a cross-liability clause or
separation of insureds provision, an endorsement deleting the property damage
exclusion as to explosion, underground, and collapse hazards, and an endorsement
providing incidental malpractice coverage, and shall include thereunder for the
mutual benefit of
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Lessor and Lessee, bodily injury liability and property damage liability
automobile insurance on any non-owned, hired or leased automotive equipment used
in the construction of any work.
(e) Cause the contractor to procure and maintain Worker's
Compensation Insurance in the amounts and coverages required under workers'
compensation, disability and similar employee benefit laws applicable to the
Premises, and Employer's Liability Insurance with limits not less than Ten
Million Dollars ($10,000,000) or such higher amounts as may be required by law.
Section 13.6 General Construction Requirements.
(a) All construction and other work shall be done at Lessee's
sole cost and expense and in a prudent and first class manner and with first
class materials. Lessee shall construct the Initial Improvements and all
Alterations in strict accordance with all Applicable Laws, and with plans and
specifications that are in accordance with the provisions of this Article 13 and
all other provisions of this Lease.
(b) Lessee shall construct all improvements within setbacks
required by Applicable Laws or the provisions of this Lease.
(c) Prior to the commencement of any construction, alteration,
addition, improvements, repair or landscaping in excess of One Thousand Dollars
($1,000), Lessor shall have the right to post in a conspicuous location on the
Premises as well as to record with the County of Santa Clara, a Notice of
Lessor's Nonresponsibility. Lessee covenants and agrees to give Lessor at least
ten (10) days prior written notice of the commencement of any such construction,
alteration, addition, improvement, repair or landscaping in order that Lessor
shall have sufficient time to post such notice.
Section 13.7 Construction Completion Procedures.
(a) On completion of the construction of the Initial
Improvements or any Alterations during the Term, Lessee shall file for
recordation, or cause to be filed for recordation, a notice of completion.
(b) On completion of construction of the Initial Improvements
or any Alterations, Lessee shall deliver to Lessor evidence satisfactory to
Lessor of payment of all costs, expenses, liabilities and liens arising out of
or in any way connected with such construction (except for liens that are
contested in the manner provided herein).
ARTICLE 14. OWNERSHIP OF IMPROVEMENTS
All Improvements constructed, installed or placed by Lessee on
the Premises shall be the property of Lessee during, and only during, the Term
and no longer. During the Term, the Improvements shall not be conveyed,
transferred or assigned unless such conveyance, transfer or assignment shall be
to a person, corporation or other entity to whom this Lease is being transferred
or assigned simultaneously therewith in compliance with the provisions of (but
without limitation of the restrictions set forth in) Article 24, and at all such
times the holder of the leasehold interest of Lessee under this Lease shall be
the owner of the Improvements. Any
15
attempted conveyance, transfer or assignment of the Improvements, whether
voluntarily or by operation of law or otherwise, to any person, corporation or
other entity shall be void and of no effect whatever except a conveyance,
transfer or assignment to a person, corporation or other entity to whom this
Lease is being transferred or assigned simultaneously therewith in compliance
with the provisions of (but without limitation of the restrictions set forth in)
Article 24. Notwithstanding the foregoing, Lessee may from time to time replace
items of personal property and fixtures provided that the replacements for such
items are of equivalent or better value and quality, and such items are free
from any liens and encumbrances except as permitted hereunder. Upon any
termination of this Lease, whether by reason of the expiration of the Term
hereof, or pursuant to any provision hereof, or by reason of any other cause
whatsoever, all of Lessee's right, title and interest in the Improvements shall
cease and terminate and title to the Improvements shall vest in Lessor unless
Lessor makes the election to require demolition pursuant to Article 30. Lessee
shall surrender the Improvements to Lessor as provided in Article 30 hereof. No
further deed or other instrument shall be necessary to confirm the vesting in
Lessor of title to the Improvements. However, upon any termination of this
Lease, Lessee, upon request of Lessor, shall execute, acknowledge and deliver to
Lessor a quitclaim deed and quitclaim bill of sale confirming that all of
Lessee's rights, title and interest in the Improvements has expired and that
title thereto has vested in Lessor.
ARTICLE 15. MAINTENANCE AND REPAIRS; NO WASTE
Section 15.1 Maintenance and Repairs. During the Term, Lessee shall, at its own
cost and expense and without any cost or expense to Lessor, keep and maintain
the Premises and the Improvements and all appurtenant facilities, including
without limitation the grounds, soils, groundwater, sidewalks, parking and
landscaped areas, and all furniture, fixtures and equipment, in good condition
and repair and shall allow no nuisances to exist or be maintained thereon.
Lessor shall not be obligated to make to the Premises or the
Improvements any repairs, replacements or renewals of any kind, nature or
description whatsoever and Lessee hereby expressly waives any right to terminate
this Lease and any right to make repairs at Lessor's expense under Sections
1932(1), 1941 and 1942 of the California Civil Code, or any amendments thereof
or any similar law, statute or ordinance now or hereafter in effect.
Section 15.2 No Waste. Lessee shall not commit or permit waste upon the
Premises.
ARTICLE 16. UTILITIES AND SERVICES
Lessee shall be solely responsible for, shall make all
arrangements for, and shall pay for all utilities and services furnished to or
used at the Premises, including without limitation, gas, electricity, other
power, water, telephone, cable and other communication services, security
services, sewage, sewage service fees, trash collection, and any taxes or
impositions thereon. All service lines of such utilities shall be installed
beneath the surface of the Premises and connected and maintained at no cost or
expense to Lessor. Lessor grants to Lessee the right to grant to public
entities, public service corporations, or public utilities, for the purpose of
serving only the Premises, rights-of-way, or easements on or over the Premises
for poles or conduits or both for telephone, electricity, water, sanitary, or
storm sewers or both, and for other utilities and municipal or special district
services.
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ARTICLE 17. MECHANICS' AND OTHER LIENS
Section 17.1 No Liens. Lessee covenants and agrees to keep Lessor's Interest in
the Premises free and clear of and from any and all mechanics', material
supplier's and other liens for work or labor done, services performed,
materials, appliances, or power contributed, used or furnished, to be used in or
about the Premises for or in connection with any operations of Lessee, any
alteration, improvement or repairs or additions that Lessee may make or permit
or cause to be made, or any work or construction by, for or permitted by Lessee
on or about the Premises, and at all times promptly and fully to pay and
discharge any and all claims upon which any such lien may or could be based, and
to save and hold Lessor and Lessor's Interest in the Premises free and harmless
of and from any and all such liens and claims of liens and suits or other
proceedings pertaining thereto.
Section 17.2 No Affect on Lessor's Interests. No mechanics' or material
suppliers' liens or mortgages, deeds of trust, or other liens of any character
whatsoever created or suffered by Lessee shall in any way, or to any extent,
affect the interest, right or title of Lessor in and to the Premises or the
Improvements.
Section 17.3 Lessor's Right to Cause Release of Liens. If Lessee shall
not within ten (10) days following the imposition of any such lien which is not
being contested by Lessee in accordance with Article 18 below, cause the lien to
be released of record by payment or posting of a proper bond, Lessor shall have
the right but not the obligation to cause the same to be released by such means
as Lessor shall deem appropriate and the amount paid by Lessor together with all
expenses incurred by Lessor in connection therewith (including without
limitation reasonable attorneys' fees and expense), plus interest at the
Interest Rate from the date of payment by Lessor, shall be Additional Rental,
immediately due and payable by Lessee to Lessor upon demand.
ARTICLE 18. RIGHT TO CONTEST LIENS
Lessee shall have the right to contest, in good faith, the
amount or validity of any lien of the nature described in Section 17.1 above,
provided that Lessee shall give Lessor written notice of Lessee's intention to
do so within ten (10) days after the recording of such lien, and provided
further, that Lessee shall, at its expense, defend itself and Lessor against the
same and shall pay and satisfy any adverse judgment that may be rendered thereon
before the enforcement thereof against the Premises.
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ARTICLE 19. COMPLIANCE WITH LAWS; INSURANCE REQUIREMENTS
Section 19.1 Compliance with Applicable Laws. Lessee, at Lessee's cost and
expense, shall comply with all Applicable Laws. Any work or installations made
or performed by or on behalf of Lessee or any person or entity claiming through
or under Lessee in order to conform the Premises to Applicable Laws shall be
subject to and performed in compliance with the provisions of Article 13. Lessee
shall give Lessor immediate written notice of any violation of Applicable Laws
known to Lessee and, at its sole cost and expense, Lessee shall immediately
rectify any such violation. Without in any way limiting the generality of the
foregoing obligation of Lessee, Lessee shall be solely responsible for
compliance with, and shall make or cause to be made all such improvements and
alterations to the Premises (including, without limitation, removing such
barriers and providing such alternative services) as shall be required by, the
Americans with Disabilities Act (42 USC section 12101 et seq.), as the same may
be amended from time to time, and any similar or successor laws, and with any
rules or regulations promulgated thereunder. Lessee's liability shall be primary
and Lessee shall indemnify Lessor in accordance with Article 22 in the event of
any failure or alleged failure of Lessee to comply or to cause the Improvements
to comply with said laws and rules and regulations.
Section 19.2 Compliance with Insurance Requirements. Lessee shall not do
anything, or permit anything to be done, in or about the Premises that would:
(i) invalidate or be in conflict with the provisions of any fire or other
insurance policies covering the Premises or any property located therein, or
(ii) result in a refusal by insurance companies of good standing to insure the
Premises or any such property in amounts required hereunder. Lessee, at Lessee's
expense, shall comply with all rules, orders, regulations or requirements of the
American Insurance Association (formerly the National Board of Fire
Underwriters) and with any similar body that shall hereafter perform the
function of such Association.
ARTICLE 20. HAZARDOUS SUBSTANCES
Section 20.1 Lessee Indemnity. Except for Lessor's obligations pursuant to
Section 4.1 above, Lessee releases Lessor from any liability for, waives all
claims against Lessor and shall indemnify, defend and hold harmless Lessor, its
employees, partners, agents, subsidiaries and affiliate organizations against
any and all claims, suits, loss, costs (including costs of investigation, clean
up, monitoring, restoration and reasonably attorney fees), damage or liability,
whether foreseeable or unforeseeable, by reason of property damage (including
diminution in the value of the property of Lessor), personal injury or death
directly arising from or related to Hazardous Substances released, manufactured,
discharged, disposed, used or stored on, in, or under the Land or Premises
during the initial Term and any extensions of this Lease by Lessee or its
employees, agents or contractors. The provisions of this Lessee Indemnity
regarding Hazardous Substances shall survive the termination of the Lease.
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Section 20.2 Lessor Indemnity. Lessor releases Lessee from any liability for,
waives all claims against Lessee and shall indemnify, defend and hold harmless
Lessee, its officers, employees, and agents to the extent of Lessor's interest
in the Project, against any and all actions by any governmental agency for clean
up of Hazardous Substances on or under the Land (including, without limitation,
any groundwater contamination) including costs of legal proceedings,
investigation, clean up, monitoring, and restoration, including reasonable
attorney fees and Lessor also releases Lessee from any liability for, waives all
claims against Lessee and shall indemnify, defend and hold harmless Lessee, its
officers, employees and agents from and against any and all liability and
actions for damages to property instituted by any third parties, if, and to the
extent, in either case, arising from the presence of Hazardous Substances on, in
or under the Land or Premises, except to the extent caused by the release,
disposal, use or storage of Hazardous Substances in, on or about the Premises by
Lessee, its employees, agents, sublessees, assignees, or contractors. The
provisions of this Lessor Indemnity regarding Hazardous Substances shall survive
the termination of the Lease.
Section 20.3 Lessee Covenants. Lessee has informed Lessor that, except for very
immaterial amounts of toxic materials incidental to office use (e.g. copier
toner, typical janitorial cleaning materials, petroleum products in cars),
Lessee will not use any Hazardous Substances within the Project and shall comply
with any applicable Laws to the extent that it does. Lessee shall immediately
notify Lessor if and when Lessee learns or has reason to believe there has been
any release of Hazardous Substances in, on or about the Project during the Term.
Section 20.4 Right to Remediate. Should Lessee fail to perform or observe any of
its obligations or agreements pertaining to Hazardous Substances or
Environmental Requirements, then Lessor shall have the right, but not the duty,
without limitation of any other rights of Lessor hereunder, to enter the
Premises personally or through its agents, consultants or contractors and
perform the same. Lessee agrees to indemnify Lessor for the costs thereof and
liabilities therefrom as set forth above in this Section 20.
ARTICLE 21. INSURANCE
Section 21.1 Required Insurance. At all times during the Term and at its sole
cost and expense, Lessee shall obtain and keep in force for the benefit of
Lessee and Lessor the following insurance:
(a) Fire and casualty insurance on all Improvements. The
amount of such insurance shall be the Full Insurable Replacement Value. All such
policies shall specify that proceeds shall be payable whether or not any
improvements are actually rebuilt. Each such policy shall include an endorsement
protecting the named and additional insureds against becoming a co-insured under
the policy. Lessee hereby waives as against Lessor any and all claims and
demands, of whatever nature, for damages, loss or injury to the Improvements and
to the property of Lessee in, upon or about the Premises caused by or resulting
from fire and/or other perils, construction defects and/or other events or
happenings.
"Full Insurable Replacement Value" means 100% of the actual
costs to replace the Improvements (without deduction for depreciation but with
standard exclusions such as foundations, excavations, paving and landscaping, as
applicable to specific perils), including the
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costs of demolition and debris removal and including materials and equipment not
in place but in transit to or delivered to the Premises. The Full Insurable
Replacement Value initially shall be determined at Lessee's expense by an
appraiser or one of the insurers, selected by Lessee and acceptable to Lessor.
Lessor or Lessee may at any time, but not more frequently than once in any
twelve (12) month period, by written notice to the other, require the Full
Insurable Replacement Value to be redetermined, at Lessee's expense, by an
appraiser or one of the insurers, selected by Lessee and reasonably acceptable
to Lessor. Lessee shall maintain coverage at the current Full Insurable
Replacement Value throughout the Term.
(b) Insurance against loss of rental from the Premises, under
a rental value insurance policy, or against loss from business interruption
under a business interruption policy, covering risk of loss due to causes
insured against under subsection (a), in an amount not less than twelve months
of projected rental income from the Premises.
(c) Worker's Compensation Insurance in the amounts and
coverages required under worker's compensation, disability and similar employee
benefit laws applicable to the Premises, with all elective employment covered on
a voluntary basis where permissible, and Employer's Liability Insurance with
limits not less than $500,000 or such higher amounts as may be required by law.
(d) Comprehensive general liability through one or more
primary and umbrella liability policies against claims, including but not
limited to, bodily injury and property damage occurring on the Premises or the
streets, curbs or sidewalks adjoining the Premises, with such limits as may be
reasonably required by Lessor from time to time, but in any event not less than
Ten Million Dollars ($10,000,000), combined single limit and annual aggregate
for the Premises. Such insurance shall insure the performance by Lessee of the
indemnity agreements contained in this Lease. If any governmental agency or
department requires insurance or bonds with respect to any proposed or actual
use, storage, treatment or disposal of Hazardous Substances by Lessee or any
sublessee, tenant, or licensee of Lessee, Lessee shall be responsible for such
insurance and bonds and shall pay all premiums and charges connected therewith;
provided, however, that this provision shall not and shall not be deemed to
modify the provisions of Article 20 hereof.
Such insurance shall (i) delete any employee exclusion on
personal injury coverage; (ii) include employees as additional insureds; (iii)
provide for blanket contractual coverage, including liability assumed by and the
obligations of Lessee under Article 22 for personal injury, death and/or
property damage; (iv) provide Products and Completed Operations and Independent
Contractors coverage and Broad Form Property Damage liability coverage without
exclusions for collapse, explosion, demolition, underground coverage and
excavating, including blasting; (v) provide aircraft liability coverage, if
applicable, and automobile liability coverage for owned, non-owned and hired
vehicles; (vi) provide liability coverage on all mobile equipment used by
Lessee; and (vii) include a cross liability endorsement (or provision)
permitting recovery with respect to claims of one insured against another. Such
insurance shall insure against any and all claims for bodily injury, including
death resulting therefrom, and damage to or destruction of property of any kind
whatsoever and to whomever belonging and arising from Lessee's operations
hereunder and whether such operations are performed by Lessee or any of its
contractors, subcontractors, or by any other person.
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(e) An environmental impairment liability policy with such
limits as may be appropriate given the nature of Lessee's operations on the
Premises.
(f) All other insurance that Lessee is required to maintain
under Applicable Laws.
Section 21.2 Policy Form and General.
(a) All of the insurance policies required under this Lease,
including without limitation, under the provisions of Article 13 and this
Article 21, and all renewals thereof shall be issued by one or more companies of
recognized responsibility, authorized to do business in California with a
financial rating of at least a Class A--VII (or its equivalent successor)
status, as rated in the most recent edition throughout the Term of Best's
Insurance reports (or its successor, or, if there is no equivalent successor
rating, otherwise reasonably acceptable to Lessor). Any loss adjustment or
disposition of insurance proceeds by the insurer shall require the written
consent of Lessor for losses in excess of One Hundred Thousand Dollars
($100,000.00). All property insurance hereunder shall name Lessor as an
additional insured and all liability insurance shall name as additional insureds
Lessor, and its directors, trustees, officers, agents, and employees, and such
other parties as Lessor reasonably may request. Any deductibles or self
insurance retention for any of the foregoing insurance must be agreed to in
advance in writing by Lessor, which consent shall not be unreasonably withheld
or delayed; all deductibles and self insurance retention shall be paid by
Lessee. All insurance of Lessee shall be primary coverage.
(b) Each policy of property insurance and all other policies
of insurance required by the provisions of this Lease, shall be made expressly
subject to the provisions of this Article 21 and shall provide that Lessee's
insurers shall waive any right of subrogation against Lessor. All policies
provided for herein expressly shall provide that such policies shall not be
canceled, terminated or altered without thirty (30) days' prior written notice
to Lessor. Each policy, or a certificate of the policy executed by the insurance
company evidencing that the required insurance coverage is in full force and
effect, shall be deposited with Lessor on or before the date of this Lease,
shall be maintained throughout the Term, and shall be renewed, not less than
thirty (30) days before the expiration of the term of the policy. Except for
specific provisions described herein, no policy shall contain any provisions for
exclusions from liability and no exclusion shall be permitted in any event if it
conflicts with any coverage required hereby, and, in addition, no policy shall
contain any exclusion from liability for personal injury or sickness, disease or
death or which in any way impairs coverage under the contractual liability
coverage described above.
(c) If either party shall at any time deem the limits of any
of the insurance described in this Lease then carried or required to be carried
to be either excessive or insufficient, or if Lessee shall determine that any
form, scope, or type of insurance required hereunder is not generally available
in the marketplace at reasonable cost, the parties shall endeavor to agree upon
the proper and reasonable limits and terms for such insurance then to be carried
and such insurance shall thereafter be carried with the limits and terms thus
agreed upon until further change pursuant to the provisions of this subsection.
If the parties shall be unable to agree on the proper and reasonable limits and
terms for such insurance, then such limits and terms shall be determined
pursuant to the provisions of Article 37. The decision of the appraiser
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as to such limits and terms for such insurance then to be carried shall be
binding upon the parties and such insurance shall be carried with the limits and
terms as thus determined until such limits shall again be changed pursuant to
the provisions of this subsection. The expenses of such determination shall be
borne equally between Lessor and Lessee.
ARTICLE 22. INDEMNITY AND RELEASE
Lessee shall indemnify, protect, defend and save and hold
harmless Lessor and the Premises from and against, and reimburse Lessor for, any
and all claims, demands, losses, damages, costs, liabilities, causes of action
and expenses, including, without limitation, reasonable attorneys' fees and
expenses, incurred in connection with or arising, in whole or in part, in any
way out of this Lease, any default by Lessee in the observance or performance of
any of the terms, covenants or conditions of this Lease on Lessee's part to be
observed or performed, the use, occupancy or manner of use or occupancy of the
Premises by Lessee or any sublessee, licensee, or any other person or entity,
the conduct or management of any work or thing done in or on the Premises, the
design, construction, maintenance, or condition of any Improvements, the
condition of the Premises, any actual or alleged acts, omissions, or negligence
of Lessee or of the sublessees, contractors, agents, servants, employees,
visitors or licensees of Lessee, in, on or about the Premises or other of
Lessor's lands, and any accident or other occurrence on the Premises from any
cause whatsoever, except to the extent caused solely by the gross negligence or
willful misconduct of Lessor.
In case any claim, action or proceeding be brought, made or
initiated against Lessor relating to any of the above described events, acts,
omissions, occurrences, or conditions, Lessee, upon notice from Lessor, shall at
its sole cost and expense, resist, or defend such claim, action or proceeding by
attorneys approved by Lessor.
Lessor shall not be responsible for, and Lessee hereby waives
any and all claims and causes of action whatsoever of any kind or nature against
Lessor for, any injury, loss, damage or liability to any person or property in
or about the Premises or in any way connected with the Premises or this Lease,
from any cause whatsoever (other than caused solely by the gross negligence or
willful misconduct of Lessor).
The provisions of this Article 22 shall survive any
termination of this Lease. The provisions of Article 21 (Insurance) shall not
limit in any way Lessee's obligations under this Article 22.
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ARTICLE 23. APPROPRIATION, DAMAGE OR DESTRUCTION
Section 23.1 No Termination, No Affect on Rental Obligation. No Appropriation
nor any loss or damage by fire or other cause resulting in either partial or
total destruction of the Premises, the Improvements or any other property on the
Premises shall,
Section 23.2 Determination of Award. The amount of the Award due to Lessor and
Lessee as a result of Appropriation shall be separately determined by the court
having jurisdiction of such proceedings based on the following: Lessor shall be
entitled to that portion of the Award attributable to the value of the fee
interest in the Premises (or portion thereof subject to Appropriation, in case
of a partial Appropriation) subject to this Lease, and to the value of Lessor's
reversionary interest in the Improvements (or portion thereof subject to
Appropriation, in case of a partial Appropriation), as determined by the court;
Lessee shall be entitled to that portion of the Award attributable to the value
of Lessee's leasehold interest in the Premises (or portion thereof subject to
Appropriation, in case of a partial Appropriation) and to the value of Lessee's
interest in the Improvements (or portion thereof subject to Appropriation, in
case of a partial Appropriation), as determined by the court.
ARTICLE 24. ASSIGNMENT
Section 24.1 Assignment. Prior to completion of construction of the Initial
Improvements, any assignment by Lessee of its leasehold estate shall not release
Lessee from its obligations hereunder and such assignments shall be subject to
the consent of Lessor, provided, however, Lessee shall have the right to assign
its interest hereunder to a financing entity in connection with a synthetic
lease transaction without the prior written consent of Lessor.
Section 24.2 Assumption in Writing. No assignment by Lessee shall become
effective unless and until the assignee executes and delivers to Lessor a
written form of assignment in which the assignee assumes and agrees to perform
and observe all covenants and conditions to be performed and observed by Lessee
under this Lease for the period from and after the date of the assignment.
ARTICLE 25. SUBLETTING
Section 25.1 Conditions to Subletting. Lessee may enter into Subleases in
respect of the Premises without Lessor's consent. No Sublease shall relieve
Lessee from the performance of any of its obligations under this Lease. No
Sublease shall extend beyond the Term of this Lease. Each Sublease shall be
subject to and subordinate to the terms, covenants and conditions of this Lease
and the rights of Lessor hereunder.
ARTICLE 26. LEASEHOLD MORTGAGES
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Section 26.1 Leasehold Mortgage. Notwithstanding the provisions of Article 24
regarding Transfer of this Lease, but subject to the provisions of this Article
26, Lessee shall have the right at any time and from time to time to encumber
the entire (but not less than the entire) leasehold estate created by this Lease
and Lessee's interest in the Improvements by a mortgage, deed of trust or other
security instrument (any such mortgage, deed of trust, or other security
instrument that satisfies the requirements of this Article 26 being herein
referred to as a "Leasehold Mortgage") to secure repayment of one or more loans
(and associated obligations) made to Lessee.
Lessee shall deliver to Lessor promptly after execution by
Lessee a true and verified copy of any Leasehold Mortgage, and any amendment,
modification or extension thereof, together with the name and address of the
owners and holder thereof.
In no event shall any interest of Lessor in the Premises,
including without limitation, Lessor's fee interest in the Premises or
reversionary interest in the Improvements or interest under this Lease, be
subject or subordinate to any lien or encumbrance of any mortgage, deed of trust
or other security instrument.
Section 26.2 Agreement Regarding the Leasehold Mortgage. During the continuance
of any Leasehold Mortgage until such time as the lien of any Leasehold Mortgage
has been extinguished, and if a true and verified copy of such Leasehold
Mortgage shall have been delivered to Lessor together with a written notice of
the name and address of the holder thereof:
(a) Lessor shall not agree to any termination nor accept any
surrender of this Lease (except upon the expiration of the Term or termination
pursuant to Article 23 hereof and as otherwise provided below with respect to
termination upon an Event of Default), nor shall any material amendment or
modification of this Lease be binding upon the holder of a Leasehold Mortgage
("Lender") or any purchaser in foreclosure from the Lender, unless the Lender
has given its prior written consent to such amendment or modification.
(b) The Lender shall have the right, but not the obligation,
at any time prior to termination of this Lease and without payment of any
penalty, to pay all of the Base Monthly Rental and Additional Rental due
hereunder, to provide any insurance and make any other payments, to make any
repairs and improvements and do any other act or thing required of Lessee
hereunder, and to do any act or thing which may be necessary and proper to be
done in the performance and observance of the covenants, conditions and
agreements hereof to prevent the termination of this Lease. All payments so made
and all things so done and performed by the Lender shall be as effective to
prevent a termination of this Lease as the same would have been if made, done
and performed by Lessee instead of by the Lender.
(c) Should any Event of Default under this Lease occur, the
Lender shall have thirty (30) days after receipt of notice from Lessor setting
forth the nature of such Event of Default, and, if the default is such that
possession of the Premises is necessary to remedy the default, a reasonable time
after the expiration of such thirty (30) day period, within which to remedy such
default, provided that (i) the Lender shall have fully cured any default in the
payment of any monetary obligations of Lessee under this Lease within such
thirty (30) day period and shall continue to pay currently such monetary
obligations as and when the same are
24
due, and (ii) the Lender shall have acquired Lessee's leasehold estate created
hereby or given Lessor written notice that the Lender intends to take action to
acquire Lessee's leasehold estate and commenced foreclosure or other appropriate
proceedings in the nature thereof within such thirty (30) day period or prior
thereto, and shall thereafter diligently and continuously prosecute such
proceedings to completion.
(d) An Event of Default under this Lease which in the nature
thereof cannot be remedied by the Lender shall be deemed to be remedied if (i)
within thirty (30) days after receiving written notice from Lessor of such Event
of Default, the Lender shall have acquired Lessee's leasehold estate created
hereby or given Lessor written notice that the Lender intends to take action to
acquire Lessee's leasehold estate and commenced foreclosure or other appropriate
proceedings in the nature thereof, (ii) the Lender shall diligently and
continuously prosecute any such proceedings to completion, (iii) the Lender
shall have fully cured any default in the payment of any monetary obligations of
Lessee under this Lease within such thirty (30) day period and shall thereafter
continue to faithfully perform all such monetary obligations, and (iv) after
gaining possession of the Premises, the Lender shall perform all of the
obligations of Lessee hereunder as and when the same are due and cure any
defaults that are curable by the Lender but that require possession of the
Premises to cure, such cure to be effected within thirty (30) days after gaining
possession, or such longer period of time as is reasonably necessary to effect
such cure using all due diligence.
(e) If the Lender is prohibited by any process or injunction
issued by any court or by reason of any action by any court having jurisdiction
of any bankruptcy or insolvency proceedings involving Lessee from commencing or
prosecuting foreclosure or other appropriate proceedings in the nature thereof,
the times specified in subsections (c) and (d) above for commencing or
prosecuting such foreclosure or other proceedings shall be extended for the
period of such prohibition; provided that the Lender shall have fully cured any
default in the payment of any monetary obligations of Lessee under this Lease
and shall continue to pay currently such monetary obligations as and when the
same fall due, and provided further that the Lender shall diligently attempt to
remove any such prohibition.
(f) Lessor shall mail to the Lender a duplicate copy by
certified mail of any and all notices that Lessor may from time to time give to
or serve upon Lessee pursuant to the provisions of this Lease.
(g) Foreclosure of a Leasehold Mortgage or any sale
thereunder, whether by judicial proceedings or by virtue of any power of sale
contained in the Leasehold Mortgage, or any conveyance of the leasehold estate
created hereby from Lessee to the Lender by virtue or in lieu of foreclosure or
other appropriate proceedings in the nature thereof, shall not require the
consent of Lessor or constitute a breach of any provision of or a default under
this Lease and upon such foreclosure, sale or conveyance, Lessor shall recognize
the Lender, or any other foreclosure sale purchaser or recipient of any deed in
lieu, as Lessee hereunder; provided, (i) the Lender shall have fully complied
with the provisions of this Article 26 applicable prior to gaining possession of
the Premises and the Lender or foreclosure sale purchaser or deed in lieu
recipient, as the case may be, who is to become the Lessee hereunder shall
comply with the provisions of this Article 26 applicable after gaining
possession of the Premises; (ii) the Lender, or foreclosure sale purchaser or
deed in lieu recipient, as the case may be, who is to become the
25
Lessee hereunder shall be responsible for taking such actions as shall be
necessary to obtain possession of the Premises; and (iii) the Lender, or
foreclosure sale purchaser or deed in lieu recipient, as the case may be, who is
to become the Lessee hereunder shall execute, acknowledge and deliver to Lessor
an instrument in recordable form pursuant to which the Lender or foreclosure
sale purchaser or deed in lieu recipient, as the case may be, expressly assumes
all obligations of the Lessee under this Lease which arise from and after the
date of foreclosure or deed in lieu thereof. If there are two or more Leasehold
Mortgages or foreclosure sale purchasers (whether of the same or different
Leasehold Mortgages), Lessor shall have no duty or obligation whatsoever to
determine the relative priorities of such Leasehold Mortgages or the rights of
the different holders thereof and/or foreclosure sale purchasers. If the Lender
or foreclosure sale purchaser becomes Lessee under this Lease, or under any new
lease obtained pursuant to subsection (h) below, the Lender or foreclosure sale
purchaser shall not be personally liable for the obligations of the Lessee under
this Lease accruing after the period of time that the Lender is the Lessee
hereunder or thereunder.
(h) In the event of (a) any rejection of this Lease by Lessee
in any bankruptcy proceeding, or (b) such other termination of this Lease by
reason of a condition which (i) is not known or ascertainable by the parties on
the effective date of the Lender's Leasehold Mortgage, (ii) results from any
applicable state or federal law enacted after the effective date of such
Leasehold Mortgage, and (iii) which would work an inequitable forfeiture upon
the Lender due to the non-curable nature of such condition, Lessor shall,
subject to the terms and conditions of this subsection (h), upon written request
by the Lender to Lessor made within sixty (60) days after such termination,
execute and deliver a new lease of the Premises to the Lender for the remainder
of the term of this Lease with the same covenants, conditions and agreements
(except for any requirements which have been satisfied by Lessee prior to
termination) as are contained herein; provided, however, that Lessor's execution
and delivery of such new lease of the Premises shall be made without
representation or warranty of any kind or nature whatsoever, either express or
implied, including without limitation, any representation or warranty regarding
title to the Premises or the priority of such new lease and Lessor's obligations
and liability under such new lease shall not be greater than if this Lease had
not terminated and the Lender had become the Lessee hereunder. Lessor's delivery
of any Improvements to the Lender pursuant to such new lease shall be made
without representation or warranty of any kind or nature whatsoever, either
express or implied; and the Lender shall take any Improvements "as is" in their
then current condition. Upon execution and delivery of such new lease, the
Lender, at its sole cost and expense, shall be responsible for taking such
action as shall be necessary to cancel and discharge this Lease and to remove
the Lessee named herein and any other occupant from the Premises. Lessor's
obligation to enter into such new lease of the Premises with the Lender shall be
conditioned as follows: (x) the Lender shall have complied with the provisions
of this Article 26 applicable prior to the gaining of possession and shall
comply with the provisions of this Article 26 applicable after gaining
possession of the Premises; (y) if more than one holder of a Leasehold Mortgage
claims to be the Lender and requests such new lease, Lessor shall have no duty
or obligation whatsoever to determine the relative priority of such Leasehold
Mortgages, and in the event of any dispute between or among the holders thereof,
Lessor shall have no obligation to enter into any such new lease if such dispute
is not resolved to the sole satisfaction of Lessor within ninety (90) days after
the date of termination of this Lease; and (z) the Lender shall pay all costs
and expenses of Lessor, including without limitation, reasonable attorneys'
fees, real property transfer taxes and any escrow fees and recording charges,
incurred in
26
connection with the preparation and execution of such new lease and any
conveyances related thereto.
ARTICLE 27. LESSOR'S RIGHT OF INSPECTION
Lessor shall be entitled, at all reasonable times with advance
written notice to go upon the Premises and the Improvements for the purposes of
(a) inspecting the same, (b) inspecting the performance by Lessee of the terms,
covenants, agreements and conditions of this Lease, (c) posting and keeping
posted thereon Notices of Non-Responsibility for any construction, alteration or
repair thereof, as required or permitted by any law or ordinance, and (d) any
other lawful purposes; provided, however, Lessor's rights hereunder shall not
entitle Lessor to access to the demised premises of any subtenant occupying the
Improvements without the written consent of such subtenant, which consent shall
not be unreasonably withheld.
ARTICLE 28. EVENT OF DEFAULT AND LESSOR'S REMEDIES
Section 28.1 Events of Default. The occurrence of any of the following shall be
an Event of Default on the part of Lessee hereunder:
(a) Failure to pay any part of the Base Monthly Rental or
Additional Rental, herein reserved, or any other sums of money that Lessee is
required to pay hereunder at the times or in the manner herein provided, when
such failure shall continue for a period of ten (10) days after written notice
thereof from Lessor to Lessee. No such notice shall be deemed a forfeiture or a
termination of this Lease unless Lessor expressly so elects in such notice.
(b) Failure to perform any express or implied nonmonetary
provision of this Lease when, except in the case of any provision which by its
terms provides for no grace period, such failure shall continue for a period of
thirty (30) days, or such other period as is expressly set forth herein, after
written notice thereof from Lessor to Lessee; provided that if the nature of the
default is such that more than thirty (30) days are reasonably required for its
cure, then an Event of Default shall not be deemed to have occurred if Lessee
shall commence such cure within said thirty (30) day period and thereafter
diligently and continuously prosecute such cure to completion and cure. No such
notice shall be deemed a forfeiture or a termination of this Lease unless Lessor
expressly so elects in such notice.
(c) The abandonment of the Premises.
(d) Lessee shall admit in writing its inability to pay its
debts generally as they become due, file a petition in bankruptcy, insolvency,
reorganization, readjustment of debt, dissolution or liquidation under any law
or statute of any government or any subdivision thereof either now or hereafter
in effect, make an assignment for the benefit of its creditors, consent to or
acquiesce in the appointment of a receiver of itself or of the whole or any
substantial part of the Premises.
(e) A court of competent jurisdiction shall enter an order,
judgment or decree appointing a receiver of Lessee or of the whole or any
substantial part of the Premises and such order, judgment or decree shall not be
vacated, set aside or stayed within forty-five (45) days
27
after the date of entry of such order, judgment, or decree, or a stay thereof
shall be thereafter set aside.
(f) A court of competent jurisdiction shall enter an order,
judgment or decree approving a petition filed against Lessee under any
bankruptcy, insolvency, reorganization, readjustment of debt, dissolution or
liquidation law or statute of the Federal government or any state government or
any subdivision of either now or hereafter in effect, and such order, judgment
or decree shall not be vacated, set aside or stayed within forty-five (45) days
from the date of entry of such order, judgment or decree, or a stay thereof
shall be thereafter set aside.
Section 28.2 Lessor's Remedies. Upon the occurrence of an Event of Default,
Lessor shall have the following rights and remedies:
(a) The right to terminate this Lease, in which event Lessee
shall immediately surrender possession of the Premises in accordance with
Article 30, and pay to Lessor all Base Monthly Rental, Additional Rental and
other charges and amounts due from Lessee hereunder to the date of termination.
(b) The rights and remedies described in California Civil Code
Section 1951.2, including without limitation, the right to recover the worth at
the time of award of the amount by which the Base Monthly Rental, Additional
Rental and other charges payable hereunder for the balance of the Term after the
time of award exceed the amount of such rental loss for the same period that
Lessee proves could be reasonably avoided, as computed pursuant to subdivision
(b) of said Section 1951.2, and the right to recover any amount necessary to
compensate Lessor for all the detriment proximately caused by Lessee's failure
to perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom which, without limiting the
generality of the foregoing, includes unpaid taxes and assessments, any costs or
expenses incurred by Lessor in recovering possession of the Premises,
maintaining or preserving the Premises after such default, preparing the
Premises for reletting to a new lessee, any repairs or alterations to the
Premises for such reletting, leasing commissions, architect's fees and any other
costs necessary or appropriate either to relet the Premises or to adapt them to
another beneficial use by Lessor and such amounts in addition to or in lieu of
the foregoing as may be permitted from time to time by applicable California
law.
(c) The rights and remedies described in California Civil Code
Section 1951.4 that allow Lessor to continue this Lease in effect and to enforce
all of its rights and remedies under this Lease, including the right to recover
Base Monthly Rental, and Additional Rental as they become due, for so long as
Lessor does not terminate Lessee's right to possession. Acts of maintenance or
preservation, efforts to relet the Premises or the appointment of a receiver
upon Lessor's initiative to protect its interest under this Lease shall not
constitute a termination of Lessee's right to possession.
(d) The right and power to enter and to sublet the Premises,
to collect rents from all subtenants and to provide or arrange for the provision
of all services and fulfill all obligations of Lessee under the subleases and
Lessor is hereby authorized on behalf of Lessee, but shall have absolutely no
obligation, to provide such services and fulfill such obligations and to incur
all such expenses and costs as Lessor deems necessary in connection therewith.
Lessee
28
shall be liable immediately to Lessor for all costs and expenses Lessor incurs
in collecting such rents and arranging for or providing such services or
fulfilling such obligations. Lessor is hereby authorized, but not obligated, to
relet the Premises or any part thereof on behalf of Lessee, to incur such
expenses as may be necessary to effect a relet and make said relet for such term
or terms, upon such conditions and at such rental as Lessor in its sole
discretion may deem proper. Lessee shall be liable immediately to Lessor for all
reasonable costs Lessor incurs in reletting the Premises including, without
limitation, brokers' commissions, expenses of remodeling the Premises required
by the reletting, and other costs. If Lessor relets the Premises or any portion
thereof, such reletting shall not relieve Lessee of any obligation hereunder,
except that Lessor shall apply the rent or other proceeds actually collected by
it as a result of such reletting against any amounts due from Lessee hereunder
to the extent that such rent or other proceeds compensate Lessor for the
nonperformance of any obligation of Lessee hereunder. Such payments by Lessee
shall be due at such times as are provided elsewhere in this Lease, and Lessor
need not wait until the termination of this Lease, by expiration of the Term
hereof or otherwise, to recover them by legal action or in any other manner.
Lessor may execute any lease made pursuant hereto in its own name, and the
lessee thereunder shall be under no obligation to see to the application by
Lessor of any rent or other proceeds, nor shall Lessee have any right to collect
any such rent or other proceeds. Lessor shall not by any reentry or other act be
deemed to have accepted any surrender by Lessee of the Premises or Lessee's
interest therein, or be deemed to have otherwise terminated this Lease, or to
have relieved Lessee of any obligation hereunder, unless Lessor shall have given
Lessee express written notice of Lessor's election to do so as set forth herein.
(e) The right to have a receiver appointed upon application by
Lessor to take possession of the Premises and to collect the rents or profits
therefrom and to exercise all other rights and remedies pursuant to Section
28.2(d).
(f) The right to enjoin, and any other remedy or right now or
hereafter available to a lessor against a defaulting lessee under the laws of
the State of California or the equitable powers of its courts, and not otherwise
specifically reserved herein.
ARTICLE 29. LESSOR'S RIGHT TO CURE DEFAULTS.
If Lessee shall fail or neglect to do or perform any act or
thing herein provided by it to be done or performed and such failure shall not
be cured within any applicable grace period provided in Article 28, then Lessor
shall have the right, but shall have no obligation, to pay any Imposition
payable by Lessee hereunder, discharge any lien, take out, pay for and maintain
any insurance required under Article 21, or do or perform or cause to be done or
performed any such other act or thing (entering upon the Premises for such
purposes, if Lessor shall so elect), and Lessor shall not be or be held liable
or in any way responsible for any loss, disturbance, inconvenience, annoyance or
damage resulting to Lessee on account thereof, and Lessee shall repay to Lessor
upon demand the entire reasonable cost and expense thereof, including, without
limitation, compensation to the agents, consultants and contractors of Lessor
and reasonable attorneys' fees and expenses. Lessor may act upon shorter notice
or no notice at all if necessary in Lessor's judgment to meet an emergency
situation or governmental or municipal time limitation or otherwise to protect
Lessor's interest in the Premises. Lessor shall not be required to inquire into
the correctness of the amount or validity of any Imposition or lien that may be
29
paid by Lessor, and Lessor shall be duly protected in paying the amount of any
such Imposition or lien claimed, and, in such event, Lessor shall also have the
full authority, in Lessor's sole judgment and discretion and without prior
notice to or approval by Lessee, to settle or compromise any such lien or
Imposition. Any act or thing done by Lessor pursuant to the provisions of this
Article 30 shall not be or be construed as a waiver of any default by Lessee, or
as a waiver of any term, covenant, agreement or condition herein contained or of
the performance thereof. All amounts payable by Lessee to Lessor under any of
the provisions of this Lease, if not paid when the same become due as in this
Lease provided, shall bear interest at the Interest Rate.
ARTICLE 30. SURRENDER OF THE PREMISES
Upon the termination of this Lease, whether at the expiration
of the Term as stated in Article 5 hereof or prior thereto pursuant to any
provision hereof, Lessee shall surrender to Lessor the Premises in good order
and repair, reasonable wear and tear and acts of God casualties excepted. Within
ninety (90) days following the termination of this Lease, Lessor may elect to
require Lessee to demolish the buildings located on the Property. Lessor may
make such election by delivering written notice to Lessee within such 90-day
period. In the event Lessor makes such election, Lessee shall diligently proceed
to demolish the buildings and complete such demolition within a reasonable time,
at no cost to Lessor. Unless Lessor gives written notice of its election to
require Lessee to demolish the improvements in accordance with the foregoing,
all Improvements shall automatically and without further act by Lessor or
Lessee, become the property of Lessor.
Any personal property of Lessee that remains on the Premises
after the Termination Date may, at the option of Lessor, be deemed to have been
abandoned by Lessee and may either be retained by Lessor as its property or
disposed of, without accountability, in such manner as Lessor may determine in
its sole discretion.
ARTICLE 31. REPRESENTATIONS AND WARRANTIES OF LESSEE
Lessee hereby represents and warrants to Lessor as follows:
(a) Lessee is a corporation, partnership, or limited liability
company duly formed and validly existing under the laws of the state of
identified in the Basic Lease Information and is qualified to do business under
the laws of the State of California. Lessee has full corporate power and
authority to enter into and perform its obligations under this Lease and to
develop, construct and operate the Premises as contemplated by this Lease.
(b) Lessee has taken all necessary action to authorize the
execution, delivery and performance of this Lease and this Lease constitutes the
legal, valid, and binding obligation of Lessee.
(c) Lessee has the right, power, legal capacity and authority
to enter into and perform its obligations under this Lease and no approvals or
consents of any person are required in connection with the execution and
performance of this Lease. The execution and performance of this Lease will not
result in or constitute any default or event that with notice or the lapse of
30
time or both, would be a default, breach or violation of the organizational
instruments governing Lessee or any agreement or any order or decree of any
court or other governmental authority to which Lessee is a party or to which it
is subject.
ARTICLE 32. NO WAIVER BY LESSOR
No failure by Lessor to insist upon the strict performance of
any term, covenant, agreement, provision, condition or limitation of this Lease
or to exercise any right or remedy upon a breach thereof, and no acceptance by
Lessor of full or partial rent during the continuance of any such breach, shall
constitute a waiver of any such breach or of such term, covenant, agreement,
provision, condition or limitation. No term, covenant, agreement, provision,
condition or limitation of this Lease and no breach thereof may be waived,
altered or modified except by a written instrument executed by Lessor. No waiver
of any breach shall affect or alter this Lease but each and every term,
covenant, agreement, provision, condition and limitation of this Lease shall
continue in full force and effect with respect to any other then existing or
subsequent breach.
ARTICLE 33. NO PARTNERSHIP
It is expressly understood that neither Lessee nor Lessor is
or becomes, in any way or for any purpose, a partner of the other in the conduct
of its business, or otherwise, or joint venturer or a member of a joint
enterprise with the other, or agent of the other by reason of this Lease or
otherwise. Lessee is and shall be an independent contractor with respect to the
Lease and Premises.
ARTICLE 34. NO DEDICATION
This Lease shall not be, nor be deemed or construed to be, a
dedication to the public of the Premises, the areas in which the Premises are
located or the Improvements, or any portion thereof.
ARTICLE 35. NO THIRD PARTY BENEFICIARIES
This Lease shall not confer nor be deemed nor construed to
confer upon any person or entity, other than the parties hereto, any right or
interest, including, without limiting the generality of the foregoing, any third
party beneficiary status or any right to enforce any provision of this Lease.
ARTICLE 36. NOTICES
Any notice, consent or other communication required or
permitted under this Lease shall be in writing and shall be delivered by hand,
sent by air courier, sent by prepaid registered or certified mail with return
receipt requested, or sent by facsimile, and shall be deemed to have been given
on the earliest of (i) receipt, (ii) one business day after delivery to an air
courier for overnight expedited delivery service, or (iii) five (5) business
days after the date deposited in the United States mail, registered or
certified, with postage prepaid and return receipt requested (provided that such
return receipt must indicate receipt at the address specified) or on the day of
its transmission by facsimile if transmitted during the business hours of the
place
31
of receipt, otherwise on the next business day. All notices shall be addressed
as appropriate to the following addresses (or to such other or further addresses
as the parties may designate by notice given in accordance with this section):
If to Lessor:
475 Java Drive Associates, L.P.
c/o The Mozart Development Company
1068 East Meadow Circle
Palo Alto, CA 94303
Tel.: ( ) -
If to Lessee:
Network Appliance Inc.
2770 San Tomas Expressway
Santa Clara, California 95051
Attn: Chris Carlton
Tel. (408) 367-3200
ARTICLE 37. HOLDING OVER
This Lease shall terminate upon the Termination Date and any
holding over by Lessee after the Termination Date shall not constitute a renewal
of this Lease or give Lessee any rights hereunder or in or to the Premises.
ARTICLE 38. MEMORANDUM
This Lease shall not be recorded. However, at the request of
either party, the parties hereto shall execute and acknowledge a memorandum
hereof (including Lessee's options under Article 10) in recordable form that
Lessor shall file for recording in the Official Records of Santa Clara County.
ARTICLE 39. ESTOPPEL CERTIFICATE
Each of the parties hereto agrees, at any time and from time
to time upon not less than twenty (20) days' prior written request by the other
party (which request must specify that response is required within twenty (20)
days), to execute, acknowledge and deliver to the party making such request, or
to any other Person specified by the requesting party, an estoppel certificate
stating: (a) whether this Lease is in full force and effect and whether such
party has any existing defenses or offsets against the enforcement of this
Lease; (b) whether this Lease has been assigned, modified, supplemented or
amended, and, if so, identifying and describing any such assignment,
modification, supplement or amendment; (c) the date to which Rent has been paid;
(d) whether the party to whom the request is directed knows of any default or
failure to perform conditions on the part of the other party hereunder, and if
so, specifying the nature thereof; and (e) that this Lease, as it may have been
modified, supplemented or amended, represents the entire agreement between the
parties as to this leasing.
32
The failure of either party to issue such a certificate to the
requesting party or other specified Person within said twenty (20) day period
shall constitute an acknowledgment by the party to whom such request is directed
that this Lease is unmodified and in full force and effect and shall constitute,
as to any Person entitled to rely upon such certificate, a waiver of any
defaults that may exist prior to the date of such request. Such certificate
shall act as a waiver of any claim by the party furnishing such certificate to
the extent such claim is based upon facts which are contrary to those asserted
in the certificate but only to the extent the claim is asserted against a bona
fide encumbrancer or purchaser for value without knowledge of facts contrary to
those contained in the certificate and who has acted in reasonable reliance upon
the certificate. Such certificate shall in no event subject the party furnishing
it to any liability whatsoever, notwithstanding the negligent or inadvertent
failure of such party to disclose correct or relevant information.
33
ARTICLE 40. GENERAL PROVISIONS
Section 40.1 Severability. In case any one or more of the provisions of this
Lease shall for any reason be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Lease, and this Lease shall be construed as if such
invalid, illegal or unenforceable provisions had not been contained herein.
Section 40.2 Headings. Article, Section and subsection headings in this Lease
are for convenience only and are not to be construed as a part of this Lease or
in any way limiting or amplifying the provisions hereof.
Section 40.3 Lease Construed as a Whole. The language in all parts of this Lease
shall in all cases be construed as a whole according to its fair meaning and not
strictly for or against either Lessor or Lessee. The parties acknowledge that
each party and its counsel have reviewed this Lease and participated in its
drafting and therefore that the rule of construction that any ambiguities are to
be resolved against the drafting party shall not be employed nor applied in the
interpretation of this Lease.
Section 40.4 Meaning of Terms. Whenever the context so requires, the neuter
gender shall include the masculine and the feminine, and the singular shall
include the plural, and vice versa. Any reference to a specific sum of money,
shall mean that amount of lawful money of the United States of America that
(except where the specific provision by its terms provides for adjustment to
reflect inflation) is the equivalent in value on the date such determination is
to be made under the relevant provision of this Lease, to the stated amount in
U.S. Dollars in the year of the Commencement Date: i.e. the stated amount
increased by the percentage increase equal to the cumulative percentage increase
in the CPI from January 1 of the year of the Commencement Date, to the date of
determination.
Section 40.5 Attorneys' Fees. In the event of any action or proceeding at law or
in equity between Lessor and Lessee to enforce or interpret any provision of
this Lease or to protect or establish any right or remedy of either party
hereunder, the party not prevailing in such action or proceeding shall pay to
the prevailing party all costs and expenses, including without limitation,
reasonable attorneys' fees and expenses (including attorneys' fees and expenses
of in-house attorneys), incurred therein by such prevailing party and if such
prevailing party shall recover judgment in any such action or proceeding, such
costs, expenses and attorneys' fees shall be included in and as a part of such
judgment.
Section 40.6 Binding Agreement. The terms, covenants and agreements contained in
this Lease shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns.
34
Section 40.7 Entire Agreement. This instrument, together with the exhibits
hereto, all of which are incorporated herein by reference, constitutes the
entire agreement between Lessor and Lessee with respect to the subject matter
hereof and supersedes all prior offers, negotiations, oral and written. This
Lease may not be amended or modified in any respect whatsoever except by an
instrument in writing signed by Lessor and Lessee.
Section 40.8 Quiet Enjoyment. Lessor agrees that Lessee, upon paying the Base
Monthly Rental, Additional Rental and all other sums due hereunder and upon
keeping and observing all of the covenants, agreement and provisions of this
Lease on its part to be observed and kept, shall, subject to the exceptions and
reservations referred to in Article 3, lawfully and quietly hold, occupy and
enjoy the Premises during the Term without hindrance or molestation by anyone
claiming by, through, or under Lessor.
Section 40.9 Termination Not Merger. The voluntary sale or other surrender of
this Lease by Lessee to Lessor, or a mutual cancellation thereof, or the
termination thereof by Lessor pursuant to any provision contained herein, shall
not work a merger, but at the option of Lessor shall either terminate any or all
existing subleases or subtenancies hereunder, or operate as an assignment to
Lessor of any or all of such subleases or subtenancies.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease
by proper persons thereunto duly authorized as of the date first above written.
LESSOR: /s/ STEVE DOSTART
--------------------------------
475 Java Drive Associates, L.P.,
a California Limited Partnership
By: M-D Ventures, Inc.,
its General Partner
By: /s/
------------------------------
Its: Vice President
------------------------
LESSEE: NETWORK APPLIANCE, INC.,
a Delaware Corporation
By: /s/ CHRIS CARLTON
------------------------------
Its: Vice President
------------------------
35
Exhibit A
[Description of Premises]
36
TABLE OF CONTENTS
1
EXHIBIT 10.17
OPTION AGREEMENT
THIS OPTION AGREEMENT ("Agreement") is entered into as of June 11,
1998, by and between Network Appliance, Inc., a Delaware Corporation
("Optionee"), and 475 Java Drive Associates, L.P., a California Limited
Partnership ("Owner") and upon exercise by Optionee as provided herein shall
constitute (i) a contract of purchase and sale between the parties and (ii)
escrow instructions to Escrow Agent (as hereinafter defined).
THE PARTIES ENTER INTO THIS AGREEMENT on the basis of the following
facts, understandings and intentions:
A. Owner owns and desires to grant to Optionee an option to purchase
and Optionee wishes to acquire an option to purchase real property comprised of
approximately 6.217 acres, located at 475 Java Drive, Sunnyvale, California, as
more particularly described on EXHIBIT A attached hereto ("Land") together with
Owner's interest in (i) all rights, privileges, easements and right-of-ways
appurtenant thereto, (ii) to the extent assignable, all entitlements, permits
and other intangible property used in connection therewith, and (iii) to the
extent assignable, all contract rights, related to the ownership, use and
operation thereof (collectively, including such Land and Improvements, the
"Property"), and Optionee desires to purchase the Property from Owner, on all of
the terms, covenants and conditions provided herein.
B. For purposes of this Agreement, the following terms shall have the
meanings given below:
1. "Execution Date" shall mean the date set forth at the
beginning hereof.
2. "Business Day" shall mean any day other than a
Saturday, Sunday or day on which banks in the state of California are authorized
to be closed for business.
3. "Close of Escrow" shall mean the consummation of the
purchase of the Property by Optionee or Optionee's assignee from Owner and the
recordation of Owner's Grant Deed in accordance with the terms and provisions of
this Agreement.
4. "Closing Date" shall mean a date which is the later of
(i) thirty (30) days following the exercise of the Option by Optionee or (ii)
January 10, 2000, but in no event later than March 30, 2000 (extended by the
number of days beyond October 1, 1999 that it takes Owner to complete the
demolition required pursuant to Section 4.1 of the Ground Lease).
5. "Escrow Agent" shall mean First American Title
Insurance Company, 1636 North First Street, San Jose, California 95112.
6. "Title Company" shall mean First American Title
Insurance Company, 1636 North First Street, San Jose, California 95112.
7. "Exercise Window" shall mean the period commencing at
12:01 a.m. December 1, 1999 (extended by the number of days beyond October 1,
1999 that it takes
2
Owner to complete the demolition required pursuant to Section 4.1 of the Ground
Lease) and ending 11:59 p.m. ninety (90) days thereafter.
8. "Ground Lease" shall mean that certain lease between
Owner as Lessor and Optionee as Lessee.
9. "Lot Line Adjustment" shall mean adjustment of the
property line between the Property and the adjoining property at 495 Java Drive
in order to accommodate a common driveway as shown on Owner's Plans (as defined
in the Work Letter).
10. "CC&R's" shall mean covenants, conditions and
restrictions for the purpose for operating the Property and the adjoining
property at 495 Java Drive in a manner that allows a common driveway
substantially in conformance with the Declaration Of Covenants, Conditions And
Restrictions And Cross-Access Parking Agreement For 500 East Middlefield Road
and 401 Ellis Street, Mountain View, California dated December 12, 1997 and
recorded as Document No. 13979683 of the Santa Clara County, California records,
with appropriate revisions to adapt such document to the Property.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and agreements
of the parties as herein set forth, the parties hereto agree as follows:
1. Option; Option Payment.
(a) Option. Owner hereby grants to Optionee an option
("Option") to purchase the Property from Owner, on all of the terms, covenants
and conditions provided herein.
(b) Option Payment. Upon execution of this Agreement
Optionee shall pay, as option consideration, the sum of $4,500,000 to Owner
("Option Payment"); provided, however, if Optionee does not pay the Option
Payment upon execution, Optionee must pay the Option Payment within seven (7)
Business Days and failure to pay by said date shall entitle Owner to either (i)
terminate this Agreement and the Ground Lease or (ii) file suit for payment of
the Option Payment. The Option Payment shall be deposited with the Escrow Agent
upon execution of this Agreement pursuant to escrow instructions approved by
Owner and Optionee. The escrow instructions shall provide that the Escrow Agent
shall deposit the Option Payment in an interest bearing account, pursuant to
investment instructions from Optionee and approved by Owner. All interest earned
on the Option Payment shall be for the account of Optionee. The escrow
instructions shall also provide that the Option Payment shall be released to
Owner upon the earlier of (i) exercise of Optionee's option hereunder, in which
case such Option Payment shall be applied toward the Purchase Price, or (ii) the
expiration of the Option without exercise by Optionee.
2. Exercise of Option. Optionee shall be entitled to exercise
the Option at any time during the Exercise Window by delivering written notice
of its unconditional election to exercise the Option to Owner ("Exercise
Notice"), which Exercise Notice, in order to be effective, must be delivered to
Owner during, and prior to the expiration of, the Exercise Window. Upon the
effective exercise of the Option in accordance with the foregoing this Agreement
shall be a bilateral agreement requiring Owner to sell the Property to Optionee
and
3
Optionee to purchase the Property from Owner through the Close of Escrow on the
Closing Date on the terms and conditions of this Agreement.
3. Purchase Price. Optionee shall pay Owner a purchase price
("Purchase Price") for the Property of Twenty-Three Million Seven Hundred
Forty-Five Thousand Dollars ($23,745,000.00), payable at the Close of Escrow in
cash ("Cash Payment")
4. Conditions Precedent. At or before Close of Escrow the
following conditions precedent ("Conditions Precedent") shall be either
satisfied or waived by Optionee as a condition to Optionee's obligation to
proceed with the purchase of the Property:
(a) Title. The term "Conditions of Title" shall refer to
those exceptions to title (including, without limitation, Title Company's
standard printed exceptions to title with respect to an ALTA Owner's Extended
Form policy of title insurance (an "ALTA Policy") listed on EXHIBIT B
incorporated herein by reference, the lien for real property taxes not
delinquent, any current assessments (subject to Owner's obligation to pay
delinquent assessments or credit same to the Purchase Price at closing), the
effect of the Lot Line Adjustment and the CC&R's, the effect of the Ground Lease
and any improvements constructed by Lessee thereunder, and any other
encumbrances or matters of title caused or approved in writing by Optionee. On
the Closing Date, Title Company shall be unconditionally committed to issue (a)
an American Land Title Association ("ALTA") Extended Title Policy Form B (1970)
for the Property ("ALTA Title Policy"), with a liability limit in the amount of
the Purchase Price and insuring fee title vested in Optionee, and (b)
endorsements to the ALTA Title Policy (i) to provide Optionee with assurance
that the Property is the same as shown on the Survey, (ii) to provide Optionee
with assurance that the Property is contiguous with the property known as 495
Java Drive, and (iii) such other endorsements as Optionee may reasonably
request, including without limitation zoning, tax parcel, access, and owner's
comprehensive (ALTA 100, modified for owner, or equivalent) endorsements
(collectively, the "Endorsements"); provided, however, the availability of such
Endorsements shall not be a Condition Precedent to Optionee's obligation
hereunder. Optionee shall take title to the Property subject to the Conditions
of Title.
(b) Survey. Optionee has approved a certified ALTA survey
of the Property prepared by Kier & Wright dated April 15, 1998 ("Survey"). Any
revisions (including certification to Optionee) to the ALTA survey previously
provided to Optionee by Owner which are requested by Optionee shall be at
Optionee's sole cost and expense. At Close of Escrow Owner shall deliver to
Optionee the Survey.
(c) Property Documents. Optionee has reviewed and approved
all of the reports listed on EXHIBIT C attached hereto and incorporation herein
("Property Documents"). As of the Close of Escrow there shall have been no
material adverse change in the physical condition of the Property as described
in the Property Documents which would materially, adversely effect Optionee's
use and occupancy of the Property except for conditions caused by or otherwise
the responsibility of Lessee under the Ground Lease and Owner shall deliver to
Optionee its certificate representing and warranting (i) to the best of Owner's
knowledge that there has been no such material adverse change between the
Execution Date and the Close of Escrow and (ii) except as described in such
certificate there are no agreements that would be
4
binding upon Optionee or the Property following Close of Escrow except as
contemplated by this Agreement.("Owner's Closing Certificate").
(d) Completion of Demolition. Owner shall have completed
the demolition of existing improvements in accordance with the specifications
described in the Ground Lease and Owner shall deliver to Optionee its
representation and warranty that it has completed such demolition in accordance
with such specifications.
(e) Owner's Performance. Owner shall have performed all of
its obligations under this Agreement.
5. No Incumbrance or Transfer. Except for the Ground Lease and as
provided herein, Owner shall not incumber, lease, transfer, assign or sell all
or any portion, or interest in, the Property, or enter into any agreement or
contract effecting or relating to the Property without Optionee's prior written
consent, which consent may be withheld in Optionee's sole discretion. Owner
shall be entitled to encumber the Property for the purpose of securing one or
more construction loans. Owner may also implement the Lot Line Adjustment,
record the CC&R's and execute such other contracts (but not contracts or
encumbrances that will be binding upon Optionee or the Property after the Close
of Escrow) as may be necessary or advisable in connection with performing its
obligations hereunder including demolition of the existing improvements.
6. Escrow.
(a) Escrow. Within two (2) Business Days after Optionee's Exercise
Notice, Owner shall establish an escrow ("Escrow") with the Escrow Agent for the
close of this transaction. An executed copy of this Agreement shall be deposited
with the Escrow Agent by Optionee and this Agreement, together with Owner's
Additional Escrow Instructions (as hereinafter defined), if any, and Optionee's
Additional Escrow Instructions (as hereinafter defined), if any, shall
constitute Escrow Agent's escrow instructions for closing Escrow. Escrow shall
close ("Close of Escrow") on or before the Closing Date.
(b) Owner. On or prior to the Closing Date Owner shall deposit the
following into Escrow:
(i) Grant Deed. A duly executed and acknowledged Grant
Deed in usual form setting forth all exceptions to title created or suffered by
Owner which are not to be removed at or prior to Closing;
(ii) Non-Foreign Person Certificates. Duly executed
non-foreign person certificates ("Non-Foreign Person Certificates") in usual
form sufficient to relieve Optionee of any withholding requirements pursuant to
the provisions of Section 1445 of the Internal Revenue Code of 1986 as amended
(the "Code") and Section 18805 of the California Revenue and Taxation Code and a
California Form 590-RE certifying that Owner has a permanent place of business
or is qualified to do business in the State of California;
5
(iii) Assignment of Intangible Property. An assignment, in
a form reasonably approved by Optionee and Owner, of all Owner's rights, title,
and interest to any and all plans, permits, approvals, entitlements and other
intangible property relating to the Property (the "Assignment of Intangibles");
(iv) Assignment of Ground Lease. An assignment and
assumption in a form reasonably approved by Optionee pursuant to which Owner
shall assign to Optionee all of its rights as Lessor under the Ground Lease
accruing from and after the Closing Date and Optionee assumes all of Owners
obligations as Lessor under the Ground Lease arising after the Closing Date
(including but not limited to the obligations of Lessor under Article 40 of the
Ground Lease pertaining to the environmental conditions of the Property), except
for Lessor's obligation to demolish the existing improvement pursuant to Section
4.1 of the Ground Lease and to indemnify Lessee in connection with that work
("Assignment and Assumption").
(v) Closing Certificate. Owner's Closing Certificate, in a
form reasonably approved by Optionee and Owner; and
(vi) Additional Escrow Instructions and Documents. Such
additional escrow instructions ("Owner's Additional Escrow Instructions") and
documents as Escrow Agent may reasonably require of Owner to close the sale of
the Property in accordance with this Agreement, which instructions shall not be
inconsistent with the terms of this Agreement.
(c) Optionee. On or prior to the Closing Date Optionee shall deposit
the following into Escrow:
(i) Cash Payment. The Cash Payment;
(ii) Additional Cash. Additional cash in the amount
necessary to pay Optionee's share of closing costs and prorations, as
hereinafter set forth;
(iii) Release and Assumption. The Release and Assumption
provided for in Section 9(e);
(iv) Assignment and Assumption. The Assignment and
Assumption executed by Optionee; and
(v) Additional Escrow Instructions and Documents. Such
additional escrow instructions ("Optionee's Additional Escrow Instructions") and
documents as Escrow Agent may reasonably require of Optionee to close the sale
of the Property in accordance with this Agreement.
7. Close of Escrow.
(a) Time. When the Escrow Holder has confirmed that Title Company is in
a position to issue an ALTA Extended Policy (Form B-1970) insuring title to the
Property as being vested in Optionee in accordance with Section 5(a) and all
documents and funds required hereby
6
have been deposited with Escrow Agent, Escrow Agent shall cause Close of Escrow
to occur as provided below.
(b) Procedure. Escrow Agent shall close Escrow as follows:
(i) Record the following documents in the order set forth
below:
(1) The Grant Deed.
(ii) Deliver to Owner the following:
(1) The Cash Payment and the Deposit;
(2) The Release and Assumption;
(3) The Assignment and Assumption; and
(4) A conformed copy of the Grant Deed.
(iii) Deliver to Optionee the following:
(1) An ALTA Policy in accordance with
Section 5(a); and
(2) The Non-Foreign Person Certificates; and
(3) Conformed copies of the Grant Deed,
Assignment and Assumption, Owner's Closing Certificates and Assignment of
Intangibles, and the originals of such documents following their recordation.
(c) Closing Costs and Prorations.
(i) Closing Costs. Owner shall pay the cost for a basic CLTA owner's
policy; Optionee shall pay all additional costs for the Title Policy and all
Endorsements. Owner shall pay county transfer taxes and one-half of the escrow
fees applicable to the sale. Optionee shall pay one-half of the escrow fees and
all recording fees attributable to the conveyance documents, and Owner shall pay
recording fees attributable to the release of any liens on the Property. All
other costs and charges of the escrow for the sale shall be paid in accordance
with custom.
(ii) Prorations. Real estate taxes and all other expenses normal to the
operation and maintenance of the Property are paid by Lessee under the Ground
Lease and are not pro rated. Base Monthly Rental under the Ground Lease shall be
prorated as of 12:01 a.m. on the Closing Date.
(iii) Escrow Cancellation Costs. Notwithstanding the provisions of
subsection (i) above, if Escrow fails to close due to Owner's default, Owner
shall pay all Escrow cancellation charges. If Escrow fails to close due to
Optionee's default, Optionee shall pay all Escrow cancellation charges. If
Escrow fails to close for any reason other than the
7
foregoing, Optionee and Owner shall each pay one-half (1/2) of any Escrow
cancellation charges. "Escrow cancellation charges" means all fees, charges, and
expenses incurred by Escrow Agent, including all expenses incurred in connection
with issuance of the Preliminary Report and other title matters.
8. Brokers. Each of Optionee and Owner represents to the other party
that, other than Cornish & Carey representing Optionee and CPS representing
Owner ("Brokers") in connection with the Ground Lease, such party has not
engaged any broker or finder in connection with any of the transactions
contemplated by this Agreement. Optionee shall indemnify, defend and hold Owner
harmless from and against any loss, cost or expense, including, but not limited
to, attorneys' fees and court costs, resulting from any claim against Owner for
any fee or commission by any broker or finder claiming by or through Optionee,
other than the Brokers in connection with the Ground Lease. Owner shall
indemnify, defend and hold Optionee harmless from and against any loss, cost or
expense, including, but not limited to, attorneys' fees and court costs,
resulting from any claim for a fee or commission by any broker or finder
claiming by or through Owner. Owner shall be responsible for the payment of any
fees or commissions payable to the Brokers in connection with the Ground Lease
transaction in accordance with Owner's written agreements with such brokers. The
covenants contained herein shall survive the Close of Escrow.
9. Owner's Representations, Warranties and Covenants.
(a) Owner's Representations and Warranties. Owner hereby
makes the following representations and warranties to Optionee, which
representations and warranties shall survive the Close of Escrow for a period of
twelve (12) months (at which time these representations and warranties shall
expire):
(i) Litigation; Government Action. Except as disclosed to
Optionee in writing, there is no claim, litigation, notice that the Property is
in violation of law, or governmental investigation presently pending with
respect to which Owner has been served with process or other notice thereof or,
to the best of Owner's knowledge (as defined below), otherwise pending or
threatened, against or relating to the Property.
(ii) Condemnation. There is presently no pending
condemnation of the Property or any part thereof with respect to which Owner has
been served with process or other notice thereof nor, to the best of Owner's
knowledge, is any such condemnation otherwise pending or contemplated.
(iii) Leases. There are no leases or other occupancy
agreements relating to the Property other than the Ground Lease.
(iv) Hazardous Materials.
(1) For purposes hereof, "Hazardous
Materials" shall mean any and all asbestos, radioactive material, hazardous
waste, toxic substance or related material, including but not limited to those
materials and substances defined as "hazardous substances", "hazardous
materials", "hazardous wastes" or "toxic substances" in any California or
federal law or regulation.
8
(2) Owner has not released or discharged, or
caused to be released or discharged, upon the Property any Hazardous Materials,
and to the best of Owner's knowledge, except as disclosed in the Property
Documents, there are no Hazardous Materials present on, in, or under the
Property.
(3) To the best of Owner's knowledge, the
Property Documents are all of the documents and reports in Owner's possession
pertaining to Hazardous Materials on or at the Property.
(v) Property Documents. To the best of Owner's knowledge
there are no other documents or reports in Owner's possession or under Owner's
control other than the Property Documents, describing the condition of the
Property concerning the presence of Hazardous Materials, the geotechnical
condition of the soils or other like physical condition of the Property as of
the Execution Date; provided, however, the existing improvements to be
demolished and removed by Owner contain asbestos. Owner acknowledges and agrees
that the demolition and removal of the existing improvements including the
asbestos containing materials therein and all costs in connection therewith is
the sole responsibility of Owner.
(b) Organization and Authority. Owner is a California
limited partnership validly existing and in good standing under the laws of
California. Owner and has full power to enter into this Agreement and is duly
qualified to transact business in California. The execution, delivery, and
performance of this Agreement have been duly authorized and approved by all
requisite action and the consummation of the transactions contemplated hereby
will be duly authorized and approved by all requisite action of Owner and no
other authorizations or approvals, whether of governmental bodies or otherwise,
will be necessary in order to enable Owner enter into or to comply with the
terms of this Agreement.
(c) Binding Effect of Documents. This Agreement and the
other documents to be executed by Owner hereunder, upon execution and delivery
thereof by Owner, will have been duly entered into by Owner, and will constitute
legal, valid and binding obligations of Owner. Neither this Agreement nor
anything provided to be done under this Agreement violates or shall violate any
contract, document, understanding, agreement, or instrument to which Owner is a
party or by which it is bound.
(d) "Best Knowledge" Definition. For purposes of this
Section 11, the term "to the best of Owner's knowledge" shall mean the current
actual knowledge of John Mozart and Steve Dostart after usual inquiry in
connection with the operation of the Property. Owner represents that John Mozart
and Steve Dostart are the representatives of Owner with supervisory
responsibilities concerning the Property who would, in the ordinary course of
their responsibilities, receive notice from persons or entities of any of the
matters described in the representations and warranties in this Section 11.
(e) "As-Is" Condition; Release and Assumption. If Owner
breaches any representation, warranty, or covenant hereunder prior to Closing
and Optionee closes escrow with knowledge thereof, Optionee shall be deemed to
waive such breach. Except as expressly provided in this Agreement and in Owner's
Closing Certificate, Owner makes no representations or warranties of any kind,
express or implied, written or oral, as to the physical condition of the
9
Property; the uses of the Property or any limitations thereon, including,
without limitation, zoning, environmental or other laws, regulations or
governmental requirements; the utilities or other physical equipment and
fixtures on the Property, the costs of operating the Property or any other
aspect of the economic operations on the Property; the possibility of future
assessments of charges being levied against the Property or imposed as a
condition to development or construction; or the condition of the soils or
groundwater of the Property. Except as provided herein, Optionee specifically
acknowledges that it is acquiring the Property in an "as-is" condition (as such
term is most broadly construed), in reliance upon its own inspection and
investigation of the Property. Except as expressly provided herein, Owner makes
no representation or warranties with respect to the condition of title to the
Property, and Optionee agrees that it will rely solely on its policy of title
insurance. At closing, and as a condition to Owner's obligations hereunder,
Optionee shall, pursuant to a form of Release and Assumption ("Release and
Assumption") prepared by Owner and delivered to Optionee for approval by
Optionee within ten (10) days after the Execution Date, (1) release Owner from
any and all claims, liability or causes of action (except for the express
representations and warranties herein and in Owner's Closing Certificate to the
extent the same survive closing) in connection with the Property and (2) assume
all of Owner's obligations under any and all laws and regulations pertaining to
the Property (except those accruing prior to Close of Escrow).
10. Loss by Fire or Other Casualty; Condemnation.
(a) Condemnation and General Casualty. Optionee shall be
bound to purchase the Property for the full Purchase Price as required by the
terms hereof, without regard to the occurrence or effect of any damage to or
destruction of any improvements or condemnation of any portion of the Property;
provided, however, at Closing the Purchase Price shall be credited by the amount
of any insurance proceeds or condemnation awards collected by Owner (excluding
proceeds or awards payable directly or indirectly, in respect of any delay in
the receipt of the Purchase Price by Owner) as a result of any such damage or
destruction or condemnation less any monies actually expended by Owner to repair
any damage, plus any deductible amounts attributable to such damage or
destruction, or such proceeds shall be assigned to Optionee if not then
collected.
(b) Owner Cooperation. If Owner assigns the proceeds of
any insurance policy to Optionee pursuant to Section 10(a), Owner shall
cooperate with Optionee in presenting and prosecuting the claim with Owner's
insurance carriers, shall follow Optionee's instructions with respect thereto
(except to the extent Owner is advised by counsel that following a particular
instruction would expose Owner to liability, or to the extent Owner would incur
additional cost to follow such instruction which is not paid by Optionee), and
will not settle any such claim without Optionee's written approval.
11. Successors and Assigns. The terms, covenants, and conditions herein
contained shall be binding upon and inure to the benefit of the successors and
assigns of the parties hereto. Optionee may assign it's rights under this
Agreement to a financing entity in connection with a synthetic lease transaction
without the need for Owner's prior written consent. But no such assignment shall
relieve the assignor from primary liability for its obligations hereunder. Prior
to the acquisition of the Property, Optionee intends to assign Optionee's
interest under this Agreement to an entity (the "Lessor"), who will then lease
all of the acquired portions of the
10
property to Optionee, as tenant ("Tenant"), pursuant to a synthetic lease
("Lease") to be executed by Lessor and Tenant, pursuant to which Tenant shall
have the right to construct certain improvements thereon, pursuant to plans and
specifications approved by Lessor and Tenant. The parties acknowledge that (a)
Tenant is intended to be the ultimate occupant and user of the Real Property,
and (b) the improvements to be constructed thereon are being designed for
Tenant's benefit and to Tenant's specifications. Therefore, the parties
acknowledge that Tenant is an intended third party beneficiary of all of Owner's
covenant, representations, warranties and obligations under this Agreement.
12. Entire Agreement. This Agreement contains all of the covenants,
conditions and agreements between the parties and shall supersede all prior
correspondence, agreements, and understandings, both oral and written. No
provisions of this Agreement may be amended or modified in any manner except by
an agreement in writing duly executed by the parties hereto.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California as applied to agreements
among California residents which are entered into and performed entirely within
California.
14. Attorneys' Fees; Arbitration.
(a) Attorneys' Fees. In the event of any litigation or
arbitration regarding the rights and obligations under this Agreement, the
prevailing party shall be entitled to recover, in addition to damages,
injunctive or other relief, reasonable attorneys' fees expert witness fees, and
court costs.
(b) Arbitration of Disputes. ANY CONTROVERSY OR CLAIM
ARISING OUT OF THIS AGREEMENT SHALL BE SETTLED BY ARBITRATION IN ACCORDANCE WITH
THE RULES OF THE AMERICAN
ARBITRATION ASSOCIATION FOR THE ARBITRATION OF COMMERCIAL DISPUTES, AND JUDGMENT
ON THE AWARD RENDERED BY THE ARBITRATOR(S) MAY BE ENTERED IN ANY COURT HAVING
JURISDICTION. THE PREVAILING PARTY IN SUCH ARBITRATION SHALL BE ENTITLED TO
ATTORNEYS' FEES AND COSTS.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO
HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF
DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW
AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED
IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP
YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE
SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE
TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED
TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR
AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.
11
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT
DISPUTES ARISING OUT OF THIS AGREEMENT TO NEUTRAL ARBITRATION.
CONSENT TO NEUTRAL ARBITRATION BY:
______________ (OWNER): __________________(OPTIONEE).
15. Notices. All notices required or permitted to be given pursuant to
the terms hereof shall be in writing and either delivered by hand delivery,
professional courier service which provides written evidence of delivery or
deposited in the United States mail, registered or certified, postage prepaid
and addressed as follows:
To Owner: 495 Java Drive Associates, L.P.
c/o Mozart Development Company
1068 East Meadow Circle
Palo Alto, California 94303
Attn: John Mozart and Steve Dostart
Tel. (415) 493-9000
FAX (415) 493-9050
With a copy to: Ellman, Burke, Hoffman & Johnson
One Ecker Building, Suite 200
San Francisco, California 94105
Attn: Jeffrey W. Johnson, Esq.
Tel. (415) 777-2727
FAX (415) 495-7587
To Optionee: Network Appliance Inc.
2770 San Tomas Expressway
Santa Clara, California 95051
Attn: Chris Carlton
Tel. (408) 367-3200
FAX (408) 367-3151
With a copy to: Network Appliance Inc.
2770 San tomas Expressway
Santa Clara, California 95051
Attn: Fran Bellet, Esq.
Tel. (408) 367-3200
FAX (408) 367-3151
The foregoing addresses may be changed by written notice to the other party as
provided herein. Notices shall be deemed delivered and received, in the case of
personal delivery or delivery by courier as aforesaid, on the day physically
delivered to the indicated addressee, and in the case of delivery by United
States mail, three (3) Business Days after deposit in the United States mail as
aforesaid.
12
16. Exhibits. All exhibits are attached hereto and incorporated herein
by this reference.
17. Authority. Each person executing this Agreement on behalf of a
party to this Agreement hereby represents and warrants that he or she has
authority to execute this Agreement on behalf of such party.
18. Tax Deferred Exchange. Optionee shall cooperation with Owner in
connection with implementing the purchase and sale of the Property as a tax
deferred exchange pursuant to Section 1031 of the Internal Revenue Code,
provided, however, Optionee shall not be obligated to take title to any other
property or incur any costs, liability, or delay in connection therewith.
19. Headings. Headings at the beginning of any paragraph or Section of
this Agreement are solely for the convenience of the parties and are not a part
of this Agreement or to be used in the interpretation hereof.
20. Survival. The representations, warranties and covenants of the
parties hereto shall survive the Close of Escrow, or the termination of the
Agreement if the Close of Escrow does not occur, subject to the express
limitations on survivability contained in this Agreement.
21. Waiver. No waiver by Optionee or Owner of a breach of any of the
terms, covenants, or conditions of this Agreement by the other party shall be
construed or held to be a waiver of any succeeding or preceding breach of the
same or any other term, covenant or condition herein contained. No waiver of any
default by Optionee or Owner hereunder shall be implied from any omission by the
other party to take any action on account of such default if such default
persists or is repeated, and no express waiver shall affect a default other than
as specified in such waiver. The consent or approval by Optionee or Owner to or
of any act by the other party requiring the consent or approval of the first
party shall not be deemed to waive or render unnecessary such party's consent or
approval to or of any subsequent similar acts by the other party.
22. Confidentiality. Optionee and Owner shall both maintain this
Agreement in the terms and conditions of confidence except as required by law
and except as required in connection with the performance of each of the
obligations of Optionee and Owner hereunder. Notwithstanding anything to the
contrary herein, the provisions of this Section 23 shall be separate and
severable from all of the other provisions of this Agreement. A breach or
alleged breach of the provisions of this Section 23 shall not be grounds for
termination of this Agreement or otherwise excuse the performance of any other
obligations hereunder. The maximum damages recoverable for a breach of the terms
of this Section 23 shall be Twenty-Five Thousand Dollars ($25,000.00).
23. Withdrawal from Market. During the period that this Agreement is in
effect Owner shall withdraw the Property from the market and shall not except
any back-up offers for the sell or lease of all or any portion of the Property.
24. Severability. If any phrase, clause, sentence, paragraph, section,
article, or other portion of this Agreement shall become illegal, null or void
or against public policy, for
13
any reason, or shall be held by any court of competent jurisdiction to be
illegal, null or void or against public policy, the remaining portions of this
Agreement shall not be affected thereby and shall remain in force and effect to
the fullest extent permissible by law. Optionee and Owner acknowledge and agree
that Optionee and Owner have simultaneously executed a Purchase Agreement for
the property adjoining the Property at 495 Java Drive ("Separate Transaction").
The parties agree that for all purposes hereunder the Separate Transaction is
separate and independent of any and all rights and obligations of the parties
hereunder.
25. Time. Time is of the essence of this Agreement.
26. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the dates set forth next to their respective signatures below.
OPTIONEE: Network Appliance, Inc.,
a Delaware corporation
By: /s/ CHRIS CARLTON
------------------------------
Its: Vice President
-----------------------------
OWNER:
475 Java Drive Associates, L.P.
a California Limited Partnership
By M-D Venture, Inc.,
a California Corporation,
its general partner
By: /s/ STEVE DOSTART
------------------------------
Steve Dostart, Vice President
14
EXHIBIT A
[Description of Property]
15
ADDENDUM TO LEASE AND OPTION AGREEMENT
Notwithstanding anything to the contrary in the Lease and
Option Agreement between Network Appliance, Inc. ("Network") and 475 Java Drive
Associates, L.P. ("475"), (i) Network warrants that it has authority to execute,
deliver and perform the Lease and Option Agreement and (ii) 475 shall be
entitled to terminate the Lease and Option Agreement at any time after July 10,
1998 if, prior to such termination Network has failed to deliver to 475 its
Board of Directors Resolution certified by the Secretary or Assistant Secretary
of Network authorizing the transactions contemplated by the Lease and Option
Agreement. Upon such termination 475 shall return Network's Option Payment.
NETWORK:
NETWORK APPLIANCE, INC.
By____________________________
Its______________________
475:
475 JAVA DRIVE ASSOCIATES, L.P.
By M-D Ventures, Inc.
By____________________________
Its______________________
1
EXHIBIT 10.18
July 10, 1998
Network Appliance, Inc.
2770 San Tomas Expressway
Santa Clara, CA 95051
Gentlemen:
This letter is to confirm that Wells Fargo Bank, National Association
("Bank"), subject to all terms and conditions contained herein, has agreed to
make available to Network Appliance, Inc. ("Borrower") a revolving line of
credit under which Bank will make advances to Borrower from time to time up to
and including July 10, 1999, not to exceed at any time the maximum principal
amount of Five Million Dollars ($5,000,000.00) ("Line of Credit"), the proceeds
of which shall be used to finance Borrower's working capital requirements.
I. CREDIT TERMS:
1. LINE OF CREDIT:
(a) Line of Credit Note. Borrower's obligation to repay advances under
the Line of Credit shall be evidenced by a promissory note substantially in the
form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which
are incorporated herein by this reference.
(b) Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue standby
and/or sight commercial letters of credit for the account of Borrower to finance
(each, a "Letter of Credit" and collectively, "Letters of Credit"); provided
however, that the form and substance of each Letter of Credit shall be subject
to approval by Bank, in its sole discretion; and provided further, that the
aggregate undrawn amount of all outstanding Letters of Credit shall not at any
time exceed Five Million Dollars ($5,000,000.00). No Letter of Credit shall have
an expiration date more than ninety (90) days beyond the maturity date of the
Line of Credit. The undrawn amount of all Letters of Credit shall be reserved
under the Line of Credit and shall not be available for borrowings thereunder.
Each Letter of Credit shall be subject to the additional terms and conditions of
the
2
Network Appliance, Inc.
July 10, 1998
Page 2
Letter of Credit Agreement and related documents, if any, required by Bank in
connection with the issuance thereof. Each draft paid by Bank under a Letter of
Credit shall be deemed an advance under the Line of Credit and shall be repaid
by Borrower in accordance with the terms and conditions of this letter
applicable to such advances; provided however, that if advances under the Line
of Credit are not available, for any reason, at the time any draft is paid by
Bank, then Borrower shall immediately pay to Bank the full amount of such draft,
together with interest thereon from the date such amount is paid by Bank to the
date such amount is fully repaid by Borrower, at the rate of interest applicable
to advances under the Line of Credit. In such event Borrower agrees that Bank,
in its sole discretion, may debit any demand deposit account maintained by
Borrower with Bank for the amount of any such draft.
(c) Borrowing and Repayment. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above.
II. INTEREST/FEES:
1.(a) Interest. The outstanding principal balance of the Line of Credit
shall bear interest at the rate of interest set forth in the Line of Credit
Note.
(b) Computation and Payment. Interest shall be computed on the basis
of a 360-day year, actual days elapsed. Interest shall be payable at the times
and place set forth in the Line of Credit Note.
(c) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to
fifteen one-hundredths percent (0.15%) per annum (computed on the basis of a
360-day year, actual days elapsed) on the average daily unused amount of the
Line of Credit, which fee shall be calculated on a calendar quarter basis by
Bank and shall be due and payable by Borrower in arrears within ten (10) days
after each billing is sent by Bank.
(d) Collection of Payments. Borrower authorizes Bank to collect all
interest and fees due under the Line of Credit by charging Borrower's demand
deposit account number 4311-790562 with Bank, or any other demand deposit
account maintained by
3
Network Appliance, Inc.
July 10, 1998
Page 3
Borrower with Bank, for the full amount thereof. Should there be insufficient
funds in any such demand deposit account to pay all such sums when due, the full
amount of such deficiency shall be immediately due and payable by Borrower.
III. REPRESENTATIONS AND WARRANTIES:
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this letter
and shall continue in full force and effect until the full and final payment,
and satisfaction and discharge, of all obligations of Borrower to Bank subject
to this letter.
1. Legal Status. Borrower is a corporation, duly organized and existing
and in good standing under the laws of the state of California, and is qualified
or licensed to do business in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
2. Authorization and Validity. This letter, the Line of Credit Note,
and each other document, contract or instrument deemed necessary by Bank to
evidence any extension of credit to Borrower pursuant to the terms and
conditions hereof, or now or at any time hereafter required by or delivered to
Bank in connection with this letter (collectively, the "Loan Documents") have
been duly authorized, and upon their execution and delivery in accordance with
the provisions hereof will constitute legal, valid and binding agreements and
obligations of Borrower or the party which executes the same, enforceable in
accordance with their respective terms.
3. No Violation. The execution, delivery and performance by Borrower of
each of the Loan Documents do not violate any provision of any law or
regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in a breach of or constitute a default under any
contract, obligation, indenture or other instrument to which Borrower is a party
or by which Borrower may be bound.
4. Litigation. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings by
or before any governmental authority, arbitrator, court or administrative agency
which could have a material adverse effect on the financial condition or
operation of Borrower other than those disclosed by Borrower to Bank in writing
prior to the date hereof.
4
Network Appliance, Inc.
July 10, 1998
Page 4
5. Correctness of Financial Statement. The financial statement of
Borrower dated January 23, 1998, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date of
such financial statement there has been no material adverse change in the
financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.
6. Income Tax Returns. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.
7. No Subordination. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower's obligations
subject to this letter to any other obligation of Borrower.
8. Permits, Franchises. Borrower possesses, and will hereafter possess,
all permits, consents, approvals, franchises and licenses required and all
rights to trademarks, trade names, patents and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
9. ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974, as
amended or recodified from time to time ("ERISA"); Borrower has not violated any
provision of any defined employee pension benefit plan (as defined in ERISA)
maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event,
as defined in ERISA, has occurred and is continuing with respect to any Plan
initiated by Borrower; Borrower has met its minimum funding requirements under
ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.
10. Other Obligations. Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or
5
Network Appliance, Inc.
July 10, 1998
Page 5
any other material lease, commitment, contract, instrument or obligation.
11. Environmental Matters. Except as disclosed by Borrower to Bank in
writing prior to the date hereof, Borrower is in compliance in all material
respects with all applicable federal or state environmental, hazardous waste,
health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.
IV. CONDITIONS:
1. Conditions of Initial Extension of Credit. The obligation of Bank to
extend any credit contemplated by this letter is subject to fulfillment to
Bank's satisfaction of all of the following conditions:
(a) Documentation. Bank shall have received each of the Loan Documents,
duly executed and in form and substance satisfactory to Bank.
(b) Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market value
of any collateral required hereunder or a substantial or material portion of the
assets of Borrower.
2. Conditions of Each Extension of Credit. The obligation of Bank to
make each extension of credit requested by Borrower hereunder shall be subject
to the fulfillment to Bank's satisfaction of each of the following conditions:
(a) Compliance. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this letter and on
6
Network Appliance, Inc.
July 10, 1998
Page 6
the date of each extension of credit by Bank pursuant hereto, with the same
effect as though such representations and warranties had been made on and as of
each such date, and on each such date, no default hereunder, and no condition,
event or act which with the giving of notice or the passage of time or both
would constitute such a default, shall have occurred and be continuing or shall
exist.
(b) Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
V. COVENANTS:
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in
writing:
1. Punctual Payment. Punctually pay all principal, interest, fees or
other liabilities due under any of the Loan Documents at the times and place and
in the manner specified therein.
2. Accounting Records. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and inspect the
properties of Borrower.
3. Financial Statements. Provide to Bank all of the following, in form
and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal
year, an audited financial statement of Borrower, prepared by a certified public
accountant acceptable to Bank, to include a balance sheet and income statement;
(b) not later than 60 days after and as of the end of each fiscal
quarter, a unaudited financial statement of Borrower, prepared by Borrower, to
include a balance sheet and income statement;
7
Network Appliance, Inc.
July 10, 1998
Page 7
(c) from time to time such other information as Bank may reasonably
request.
4. Compliance. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all laws, rules, regulations and orders
of a governmental agency applicable to Borrower and/or its business.
5. Insurance. Maintain and keep in force insurance of the types and in
amounts customarily carried in lines of business similar to that of Borrower,
including but not limited to fire, extended coverage, public liability, flood,
property damage and workers' compensation, with all such insurance carried with
companies and in amounts satisfactory to Bank, and deliver to Bank from time to
time at Bank's request schedules setting forth all insurance then in effect.
6. Facilities. Keep all properties useful or necessary to Borrower's
business in good repair and condition, and from time to time make necessary
repairs, renewals and replacements thereto so that such properties shall be
fully and efficiently preserved and maintained.
7. Taxes and Other Liabilities. Pay and discharge when due any and all
indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except (a) such as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event that Borrower is obligated to make such payment.
8. Financial Condition. Maintain Borrower's financial condition as
follows using generally accepted accounting principles consistently applied and
used consistently with prior practices (except to the extent modified by the
definitions herein):
(a) Tangible Net Worth not at any time less than $57,000,000.00, with
"Tangible Net Worth" defined as the aggregate of total stockholders' equity plus
subordinated debt less any intangible assets.
8
Network Appliance, Inc.
July 10, 1998
Page 8
(b) Total Liabilities divided by Tangible Net Worth not at any time
greater than 0.75 to 1.0, with "Total Liabilities" defined as the aggregate of
current liabilities and non-current liabilities less subordinated debt, and with
"Tangible Net Worth" as defined above.
(c) Quick Ratio not at any time less than 1.5 to 1.0, with "Quick
Ratio" defined as the aggregate of unrestricted cash, unrestricted marketable
securities and receivables convertible into cash divided by total current
liabilities.
(d) Net income after taxes not less than $1.00 on an annual basis,
determined as of each fiscal year end, and pre-tax profit not less than $1.00 on
a quarterly basis, determined as of each fiscal quarter end; irrespective of the
profitability requirement noted above, Borrower may post one quarterly pre-tax
loss per fiscal year as an exclusive result of acquisition related non-cash
write-offs and associated cash expenses (such as legal, accounting, or M&A
advising fees).
9. Capital Expenditures. Not make any additional investment in fixed
assets in any fiscal year in excess of an aggregate of $20,000,000.00.
10. Other Indebtedness. Not create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower to Bank, and (b) any
other liabilities of Borrower existing as of, and disclosed to Bank prior to,
the date hereof, (c) to the extent not included in clause (b), indebtedness
incurred in the ordinary course of business for the purpose of purchasing
inventory, equipment and/or real estate not to exceed $10,000,000.00 outstanding
at any time, and (d) subordinated indebtedness pursuant to subordination
agreements in form and content acceptable to Bank; and (e) extensions,
modifications, refinancings and refundings of the foregoing, so long as the
maximum principal amount is not increased.
11. Merger, Consolidation, Transfer of Assets. Not merge into or
consolidate with any other entity; unless Borrower is the surviving entity and
remains in compliance of all provisions of this Agreement, nor make any
substantial change in the nature of Borrower's business as conducted as of the
date hereof; nor sell, lease, transfer or otherwise dispose of all or a
substantial or material portion of Borrower's assets except in the ordinary
course of its business.
9
Network Appliance, Inc.
July 10, 1998
Page 9
12. Loans, Advances, Investments. Not make any loans or advances to or
investments in any person or entity, except (a) any of the foregoing existing as
of, and disclosed to Bank prior to, the date hereof, (b) loans to employees for
travel advances, relocation loans and other loans in the ordinary course of
business, (c) investments in accordance with Borrower's investment policy, as in
effect from time to time, (d) existing investments in subsidiaries and joint
ventures which have been disclosed to Bank in writing prior to the date hereof,
and new investments in subsidiaries and joint ventures in amounts up to an
aggregated of $10,000,000.00 (e) loans to employees, officers, directors to
finance or refinance the purchase of equity securities of Borrower.
13. Dividends, Distributions. Not declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding.
14. Pledge of Assets. Not mortgage, pledge, grant or permit to exist a
security interest in, or lien upon, all or any portion of Borrower's assets now
owned or hereafter acquired, except (a) purchase money security interests in
real property, inventory or equipment securing indebtedness permitted under
Section V.10(b) and (c), (b) any of the foregoing in favor of Bank, (c) liens
for taxes, assessments or other governmental charges which are not due and which
remain payable without penalty or which are being contested in good faith,
provided that adequate reserves therefor have been established, which reserves
in accordance with generally accepted accounting principles, consistently
applied, (d) liens in connection with insurance or compensation funds, pensions,
social security obligations, bids, tender, leases, statutory obligations, surety
and appeal bonds and other liens arising in the ordinary course of Borrower's
business, including mechanics and materialman's which do not adversely affect
Borrower's business operations, (e) liens reflected in Borrower's financial
statements dated January 23, 1998, previously submitted to Bank, (f) liens
(otherwise permitted in this section) on assets that existed at the time such
assets were acquired by Borrower or any of its subsidiaries, and (g) liens on
deposit accounts in the nature of set off rights, banker's liens or other
customary rights.
15. Year 2000 Compliance. Perform all acts reasonably necessary to
ensure that (a) Borrower and any business in which Borrower holds a substantial
interest, and (b) all customers, suppliers and vendors that are material to
Borrower's business, become Year 2000 Compliant in a timely manner. Such acts
shall
10
Network Appliance, Inc.
July 10, 1998
Page 10
include, without limitation, performing a comprehensive review and assessment of
all of Borrower's systems and adopting a detailed plan, with itemized budget,
for the remediation, monitoring and testing of such systems. As used herein,
"Year 2000 Compliant" shall mean, in regard to any entity, that all software,
hardware, firmware, equipment, goods or systems utilized by or material to the
business operations or financial condition of such entity, will properly perform
date sensitive functions before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Bank such certifications or other evidence
of Borrower's compliance with the terms hereof as Bank may from time to time
require.
VI. DEFAULT, REMEDIES:
1. Default, Remedies. Upon the violation of any term or condition of
any of the Loan Documents, or upon the occurrence of any default or defined
event of default under any of the Loan Documents: (a) all indebtedness of
Borrower under each of the Loan Documents, any term thereof to the contrary
notwithstanding, shall at Bank's option and without notice become immediately
due and payable without presentment, demand, protest or notice of dishonor, all
of which are expressly waived by Borrower; (b) the obligation, if any, of Bank
to extend any further credit under any of the Loan Documents shall immediately
cease and terminate; and (c) Bank shall have all rights, powers and remedies
available under each of the Loan Documents, or accorded by law, including
without limitation the right to resort to any or all security for any credit
extended by Bank to Borrower under any of the Loan Documents and to exercise any
or all of the rights of a beneficiary or secured party pursuant to the
applicable law. All rights, powers and remedies of Bank may be exercised at any
time by Bank and from time to time after the occurrence of any such breach or
default, are cumulative and not exclusive, and shall be in addition to any other
rights, powers or remedies provided by law or equity.
2. No Waiver. No delay, failure or discontinuance of Bank in exercising
any right, power or remedy under any of the Loan Documents shall affect or
operate as a waiver of such right, power or remedy; nor shall any single or
partial exercise of any such right, power or remedy preclude, waive or otherwise
affect any other or further exercise thereof or the exercise of any other right,
power or remedy. Any waiver, permit, consent or approval of any kind by Bank of
any breach of or default under any of the Loan Documents must be in writing and
shall be effective only to the extent set forth in such writing.
11
Network Appliance, Inc.
July 10, 1998
Page 11
VII. MISCELLANEOUS:
1. Notices. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
letter must be in writing delivered to each party at its address first set forth
above, or to such other address as any party may designate by written notice to
all other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
2. Costs, Expenses and Attorneys' Fees. Borrower shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
letter and the other Loan Documents, Bank's continued administration hereof and
thereof, and the preparation of amendments and waivers hereto and thereto, (b)
the enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents, and (c) the prosecution or
defense of any action in any way related to any of the Loan Documents, including
without limitation, any action for declaratory relief, whether incurred at the
trial or appellate level, in an arbitration proceeding or otherwise, and
including any of the foregoing incurred in connection with any bankruptcy
proceeding (including without limitation, any adversary proceeding, contested
matter or motion brought by Bank or any other person) relating to any Borrower
or any other person or entity.
3. Successors, Assignment. This letter shall be binding upon and inure
to the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided however, that Borrower may not
assign or transfer its interest hereunder without Bank's prior written consent.
Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, Bank's rights and
benefits under each of the Loan Documents. In connection therewith Bank may
disclose all documents and information which Bank now has or hereafter may
acquire relating to any credit extended by Bank to Borrower, Borrower or its
business, or any collateral required hereunder.
12
Network Appliance, Inc.
July 10, 1998
Page 12
4. Entire Agreement; Amendment. This letter and the other Loan
Documents constitute the entire agreement between Borrower and Bank with respect
to any extension of credit by Bank subject hereto and supersede all prior
negotiations, communications, discussions and correspondence concerning the
subject matter hereof. This letter may be amended or modified only in writing
signed by each party hereto.
5. No Third Party Beneficiaries. This letter is made and entered into
for the sole protection and benefit of the parties hereto and their respective
permitted successors and assigns, and no other person or entity shall be a third
party beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this letter or any other of the Loan Documents to which it is
not a party.
6. Severability of Provisions. If any provision of this letter shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
letter.
7. Governing Law. This letter shall be governed by and construed in
accordance with the laws of the State of California.
8. Arbitration.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this letter. A "Dispute" shall mean any action, dispute, claim
or controversy of any kind, whether in contract or tort, statutory or common
law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who fails
or refuses to submit to arbitration following a lawful demand by any other party
shall bear all costs and expenses incurred by such other party in compelling
arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon
13
Network Appliance, Inc.
July 10, 1998
Page 13
in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted
to arbitration shall be resolved in accordance with the Federal Arbitration Act
(Title 9 of the United States Code), notwithstanding any conflicting choice of
law provision in any of the Loan Documents. The arbitration shall be conducted
at a location in California selected by the AAA or other administrator. If there
is any inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation applicable
to any Dispute shall apply to any arbitration proceeding. All discovery
activities shall be expressly limited to matters directly relevant to the
Dispute being arbitrated. Judgment upon any award rendered in an arbitration may
be entered in any court having jurisdiction; provided however, that nothing
contained herein shall be deemed to be a waiver by any party that is a bank of
the protections afforded to it under 12 U.S.C. Section 91 or any similar
applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees
14
Network Appliance, Inc.
July 10, 1998
Page 14
and expenses). By submission to a single arbitrator, each party expressly waives
any right or claim to recover more than $5,000,000. Any Dispute in which the
amount in controversy exceeds $5,000,000 shall be decided by majority vote of a
panel of three arbitrators; provided however, that all three arbitrators must
actively participate in all hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures.
15
Network Appliance, Inc.
July 10, 1998
Page 15
Judgment upon the decision rendered by a referee shall be entered in the court
in which such proceeding was commenced in accordance with California Code of
Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Bank's commitment to extend any credit to
Borrower pursuant to the terms of this letter shall terminate on August 10,
1998, unless this letter is acknowledged by Borrower and returned to Bank on or
before that date.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: __________________________
Gus Martin
Vice President
Acknowledged and accepted as of _______________:
NETWORK APPLIANCE, INC.
By: __________________________
Title: _______________________
1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
SUBSIDIARIES:
Network Appliance Ltd. (U.K.)
Network Appliance Corporation France
Network Appliance Srl. (Italy)
Network Appliance GmbH (Germany)
Network Appliance FSC Incorporated
Network Appliance KK (Japan)
Network Appliance Ltd. (Ireland)
Network Appliance GmbH (Switzerland)
Network Appliance BV (Netherlands)
1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders of Network Appliance, Inc.:
We consent to the incorporation by reference in Registration Statement Nos.
33-99638, 333-25277 and 333-40307 on Form S-8 of our report dated May 8, 1998
(July 17, 1998 as to Note 11), appearing in this Annual Report on Form 10-K of
Network Appliance, Inc. for the year ended April 30, 1998.
DELOITTE & TOUCHE LLP
San Jose, California
July 17, 1998
5
1,000
YEAR
APR-24-1998
APR-26-1997
APR-24-1998
37,315
10,800
34,313
811
8,707
98,939
21,723
9,506
115,736
29,308
0
0
0
65,924
20,341
115,736
166,163
166,163
67,549
67,549
65,956
0
0
33,547
12,582
20,965
0
0
0
20,965
.65
.58
5
1,000
YEAR YEAR
APR-25-1997 APR-26-1996
APR-27-1996 MAY-01-1995
APR-25-1997 APR-26-1996
21,520 24,637
6,916 2,982
13,911 5,330
330 330
9,920 4,825
56,620 40,402
13,752 6,582
4,514 1,733
68,941 45,449
14,701 6,121
0 0
0 0
0 0
54,653 39,903
(624) 0
68,941 45,449
93,333 46,632
93,333 46,632
38,061 20,557
38,061 20,557
52,189 20,075
0 110
0 (600)
4,043 6,600
3,793 0
250 6,600
0 0
0 0
0 0
250 6,600
.01 .37
.01 .21
5
1,000
3-MOS 6-MOS
APR-24-1998 APR-24-1998
APR-26-1997 APR-26-1997
JUL-25-1997 OCT-24-1997
25,578 28,520
4,850 5,250
16,852 23,113
296 421
12,719 11,718
63,855 73,361
15,161 17,014
5,543 6,783
76,492 86,598
16,891 20,479
0 0
0 0
0 0
55,814 57,457
3,597 8,482
76,492 86,598
33,420 71,821
33,420 71,821
13,570 29,316
13,570 29,316
13,264 28,332
0 125
0 0
6,754 14,570
2,533 5,464
4,221 9,106
0 0
0 0
0 0
4,221 9,106
.13 .28
.12 .26
5
1,000
3-MOS 6-MOS 9-MOS
APR-25-1997 APR-25-1997 APR-25-1997
APR-27-1996 APR-27-1996 APR-27-1996
JUL-26-1996 OCT-25-1996 JAN-24-1997
21,758 15,244 20,938
6,350 8,850 6,850
6,751 10,866 12,336
330 0 0
6,993 8,318 9,585
44,891 46,314 53,007
5,704 5,841 6,148
0 0 0
50,803 52,345 59,357
11,475 10,225 12,833
0 0 0
0 40,448 0
0 0 0
40,416 0 41,495
(1,365) 1,416 4,796
50,803 52,345 59,357
18,460 39,508 64,353
18,460 39,508 64,353
7,593 16,176 26,292
7,593 16,176 26,292
11,913 20,361 30,131
0 0 0
0 0 0
(755) 3,523 8,723
(264) 1,233 3,053
(491) 2,290 5,670
0 0 0
0 0 0
0 0 0
(491) 2,290 5,670
(.02) .08 .19
(.02) .07 .16
