-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TZaqaTr2RruYnCoJLK4boTzpapBh6Aiz5+ZoB9g7kzkyiSwxi1Xz5eLRKk/iz/v4 fw9wdLhjZBG4arnhW9VdFw== 0000950135-96-001605.txt : 19960402 0000950135-96-001605.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950135-96-001605 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PICTURETEL CORP CENTRAL INDEX KEY: 0000755095 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 042835972 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09434 FILM NUMBER: 96543059 BUSINESS ADDRESS: STREET 1: 222 ROSEWOOD DR CITY: DANVERS STATE: MA ZIP: 01923 BUSINESS PHONE: 5087625000 MAIL ADDRESS: STREET 1: 222 ROSEWOOD DR CITY: DANVERS STATE: MA ZIP: 01923 FORMER COMPANY: FORMER CONFORMED NAME: PICTEL CORP DATE OF NAME CHANGE: 19870505 10-K 1 PICTURETEL CORPORATION FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-9434 ------------------------------------ PICTURETEL CORPORATION (Exact name of Registrant as specified in its Charter) DELAWARE Q-2835972 (State or other jurisdiction of incorporation or (I.R.S. Employer organization) Identification No.) 222 ROSEWOOD DRIVE DANVERS, MA 01923 (Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: (508)762-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (Title and Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes /X/ No / /. Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. / / The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant as of March 15, 1996 was $1,146,762,711. On such date, the average of the high and low price of the Common Stock was $34.76 per share. The Registrant has 32,990,872 shares of Common Stock outstanding as of March 15, 1996. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive 1996 Proxy Statement in connection with the Annual Meeting of Stockholders to be held June 17, 1996 are incorporated by reference into Part III. A list of all Exhibits to this Annual Report on Form 10-K is located at pages 40 through 42. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ITEM 1. BUSINESS PictureTel develops, manufactures, markets and services visual communications systems and collaboration software utilizing advanced video and audio compression technology which permit users to hold face-to-face meetings at a distance with the cost and convenience of the telephone. Videoconferences may be held between two locations, or, using a multipoint bridge, among multiple locations. PictureTel's compression technology permits the transmission of "full-motion" color video with integrated full-duplex audio at data rates as low as 56 Kbps. By operating over such low speed switched digital lines, Picturetel's systems have substantially reduced the cost and increased the flexibility of videoconferencing. With high-speed (e.g. at 2 to 6 Mbps) videoconferencing solutions, which operate over dedicated (nondialed) lines, the per-minute usage cost can be from 10 to 100 times higher. Flexibility is achieved because the low speed digital switched lines have become available from the long distance carriers in more and more geographic areas, thus leading to greater potential use of videoconferencing in general and the PictureTel System. The Company offers a range of products for group and personal videoconferencing applications. PictureTel sells its products through a number of telecommunication and personal computer distributors in the United States and internationally as well as through a direct sales force. In 1995 43% of its revenues were generated from sales to customers outside the United States. PictureTel is a Delaware corporation organized in 1984, with executive offices at 222 Rosewood Drive, Danvers, Massachusetts 01923 (telephone: 508-762-5000). INDUSTRY BACKGROUND The driving force behind the growth of the visual communications systems market is the desire to achieve the effectiveness of face-to-face meetings with the cost and convenience of the telephone. On a daily basis, information is routinely exchanged between workers located in the same facility through one-on-one or group meetings. Almost as frequently, information is communicated between workers in geographically separate sites by telephone or by sending or faxing written materials. Less frequently, individuals travel to a common site to meet and exchange information that cannot be transferred effectively by telephone or in writing. Face-to-face meetings maximize the exchange of information, including written, verbal and non-verbal communication. Visual communications systems, such as videoconferencing systems, can improve worker productivity and reduce costs by eliminating or reducing travel, improving the timely exchange of information between dispersed work groups and leveraging the use of scarce personnel resources located at a distance from the coworker needing their expertise. Initial generations of videoconferencing products were relatively expensive and typically required dedicated, high speed transmission facilities, trained operators and special rooms, with customized lighting and acoustics. The price and performance characteristics of these systems limited market demand to those end-users with very large visual communications requirements between geographically separate locations. Despite broad interest in videoconferencing, cost benefit analyses led most potential users to conclude that an investment in the technology could not be justified. In recent years, however, numerous factors have led to greater use of videoconferencing. These factors include the rapid growth of world-wide switched digital telephone services, the decreasing cost of these services, technological improvements in both audio and video quality and the availability of lower cost, easy to use turnkey visual communications systems. Connectivity, the ability to call any location without special equipment or arrangements, is the basis of the telephone's popularity. The proliferation of switched digital networks, which transmit digital signals (as compared to normal telephone networks, which transmit analog signals), in the United States and internationally has provided this key element of connectivity to the visual communications market. Before switched digital service was available, videoconferencing calls could only be completed over dedicated transmission lines established between two fixed locations. At the end of 1995, switched 56 Kbps digital service was available in most cities in the United States and from the United States to many foreign countries. The majority of videoconferencing systems used on switched digital networks in the United States operate at 112 Kbps (two multiplexed 56 or 64 Kbps lines). Internationally, 64 Kbps is the switched digital standard. 2 3 The majority of videoconferencing systems used on foreign switched digital networked operate at 128 Kbps (two multiplexed 64 Kbps lines). PictureTel's videoconferencing systems are fully compatible with one another whether used within the United States or internationally. The Company's products interoperate with H.320 compliant systems from other vendors. Coincident with the expansion of switched digital networks has been the dramatic decrease in the cost to use these transmission services. A one hour coast-to-coast call at 128 Kbps placed over the ISDN dial-up network costs less than a local cellular phone call. In order to transmit a video image over telephone circuits, video data signals must be reduced or "compressed" to fit the capacity of digital telephone lines, which are available in various capacities from 56 Kbps to 1.5 Mbps. As the video image signal is compressed, information is dropped and the quality of the video image decreases. The quality of the transmitted video image is a function of the data rate at which the signal is transmitted, the sophistication of the compression algorithm (which determines which information is eliminated as redundant) and the relative amount of audio accompanying the video signal. Video and audio quality have improved dramatically over the years with the introduction of more sophisticated compression algorithms by PictureTel and others. These algorithms compress 90 Mbps of information contained in a television video signal down to 112 Kbps (an 800 to 1 compression ) for transmission over switched digital networks and decompress that signal for display at the receiving end while achieving acceptable picture quality and full duplex audio transmission. In addition, proprietary advances in compression technologies have improved audio fidelity from less than telephone quality in the mid-1980's to today's systems which sound like the people are sitting in the same room as the listener. VLSI (Very Large Scale Integration) technology permits the placement of large numbers of transistors and other components onto small chips of silicon, thereby reducing significantly the size requirements for those components. With the increasing use of VLSI chip technology, the cost of videoconferencing systems has steadily decreased as components have become smaller and systems more integrated, while offering greater functionality to the user. Since the introduction of turnkey systems, videoconferencing equipment has become more convenient to purchase and use. Previously, telecommunications specialists acquired equipment from numerous vendors and integrated the various components into a custom system. Over the past eight years, videoconferencing vendors such as PictureTel have begun offering turnkey systems, which eliminate the need for procurement specialists. In addition, these systems incorporate "user friendly" features that eliminate, in most cases, the need for trained specialists in order to use the equipment. TECHNOLOGY PROPRIETARY The Company's primary technological contributions have been in the areas of video compression, audio compression, echo cancellation, automatic volume control, noise suppression, and system architecture. For definitions of technical terms see the brief glossary at the end of the "Technology" section. A standard broadcast video signal is comprised of 90 million bits of information per second. Transmission of this amount of data is costly and, in most cases, it is unnecessary to send 100% of the information in order to recreate the original picture, or an acceptable representation of it. The purpose of a video compression algorithm is to reduce the amount of information required to describe an image, including movement for objects within the image, without significant loss of accuracy. The effectiveness of an algorithm is measured by the amount of bandwidth needed to provide "acceptable" picture quality. There are further subjective measures, usually described in terms of the smoothness of the moving images and the lack of coding artifacts. Since its inception, the Company has developed increasingly sophisticated algorithms capable of compressing a video signal 800-1600 times to enable the transmission of video images over low bandwidth dial-up networks. In 1986, PictureTel introduced its first codec utilizing its proprietary algorithm, MCT, which was the first commercially available product using motion compensated discrete cosine transform video 3 4 compression technology. In 1988, PictureTel introduced HVQ, hierarchical vector quantization, a more advanced compression technique which, among other improvements, replaced the discrete cosine transform in MCT with a resolution pyramid and a vector quantizer. PictureTel's third generation algorithm, SG3, which the Company first shipped in the first quarter of 1991, further advances low bandwidth video compression technology. SG3 replaced the vector quantizer in HVQ with a more efficient vector quantizer. SG3 is also the first commercial product to incorporate background estimation, which dramatically improves picture quality in scenes where objects frequently include complex backgrounds. SG3's background estimator permits it to dedicate more bandwidth to coding moving objects by storing views of non-moving objects at the receiving end so they need not be retransmitted. The Company believes that with SG3, acceptable video and audio quality is now possible at approximately 80 Kbps, representing a 90% reduction in required bandwidth from 1985. SG3 uses the additional bandwidth beyond 80Kbps available on a 112 Kbps network to provide enhanced video and audio quality. PictureTel's latest video compression algorithm, SG4, introduced in 1995 in the Concorde 4500 platform, has several improvements over SG3. The most important are improved encoding of the motion vectors, resulting in smoother motion rendition, and the PicturePlus video enhancement system, which compensates for variations in the video quality caused by poor light conditions and camera noise. Furthermore, the SG4 compressed data is transmitted through the standard H.221 protocol, which allows multipoint conferencing with SG4 video quality through standard H.320 MCUs. The Company has devoted significant effort to audio compression and echo cancellation in order to produce a more "natural" sound in its videoconferencing systems. The Company believes that to produce audio quality which approximates that of a face-to-face meeting, systems must feature wideband audio and full-duplex operation, which, unlike half-duplex speakerphones, allow people at all ends of a video call to be heard at the same time. When conducting a videoconference at 112 Kbps, up to 28 Kbps are available for audio transmission. In 1986, audio compression technology could only produce 2.5 KHz of audio bandwidth. With advancements incorporated into HVQ, audio quality improved to 3.5 KHz, comparable to regular telephone audio quality, Proprietary advancements in SG3 improved audio quality available with the same 28 Kbps to 7.0 KHz., which is comparable to FM radio audio quality. An effective face-to-face meeting requires full-duplex audio. However, in a videoconference, the transmission of sound into microphones and out through speakers introduces the possibility of echo feedback. Commercial echo cancelers in conventional speakerphones reduce echo feedback, but are not effective for videoconferencing because of the relatively lone processing delay in codecs (approximately one second round trip) coupled with broader, audio bandwidth than normally found in a telephone. Therefore, the Company developed IDEC, its proprietary echo cancellation technology, which substantially eliminates all echo feedback and is standard in all group and personal videoconferencing system products. As the number of videoconferencing systems has expanded in the marketplace, there has been an increasing demand to link multiple locations into a single call, in much the same way that audio conference calls occur today. This demand has led to the development of video bridges, or multipoint control units ("MCU"). In a multipoint videoconference, each location is transmitting a signal to the bridge which contains both compressed audio and video information. The MCU contains audio bridging technology which permits it to parse, or "strip out" the audio signal, decode it, determine which signals represent speech, combine the multiple signals back into one signal, recode the signal and transmit it to all locations on the call. In this manner, the MCU is acting much as an audio bridge operates. Beyond this capability, however, is the need to synchronize the transmission of the audio with the video image which accompanies it and the ability to switch between various video images. Research and development in MCU technology is centered around improving the audio detection algorithms to better distinguish speech from other noise in the audio signal, improving the audio quality by increasing the audio bandwidth, developing the technology to permit multiple sites to be viewed simultaneously in separate windows in the same screen and transcoding technology which permits callers operating at different bandwidths and using different compression algorithms to participate in the same call. 4 5 STANDARDS The rate of expansion of the visual communications systems market is influenced by the establishment of standard communication protocols for visual communications. In December 1990 the ITU-T (International Telecommunications Union) (formerly CCITT) formally adopted a standard for video telecommunications (H.320) to ensure that equipment from different manufacturers will be capable of interoperating. Compatibility of codecs is particularly important for communication via switched digital networks (ISDN) because the advantage of these services is dial-up communications without regard to the type of equipment being used at the receiving end of the transmission. Since the mid-1980's the ITU-T defined the initial proposals for a new standard, T. 120, which was subsequently approved in 1995. The Company actively participated in the ITU-T discussions developing T. 120. This standard defines the exchange of data and graphical images among personal computers, videoconferencing systems and other graphical communication devices such as electronic white boards and overhead projectors. This standard is presently being included in the Company's group products and will be included in the personal system products. As technological evolution enables other networks besides ISDN to carry effective videoconferencing calls, new standards are emerging to define the protocols for them. The Company maintains a strong level of participation in the ITU-T, and has been driving such new standardization efforts, In particular, PictureTel served as the editor of the H.324 standard for POTS multimedia conferencing, initially approved by the ITU-T in November of 1995, and is a major technical contributor of the H.323 standard for LAN videoconferencing, to be approved by the ITU-T in mid 1996. The H.320 standard incorporates technology which has been developed and patented by certain codec manufacturers, including the Company and certain of its competitors. These codec manufactures have agreed with the ITU-T to grant licenses, on nonexclusive bases and nondiscriminatory, fair and reasonable terms to all manufacturers who wish to comply with the H.320 standard. Although no such licenses have yet been granted, the Company believes that it will obtain all necessary licenses at a reasonable cost. GLOSSARY ACCUNET -- the first commercially available switched digital communication network, which allowed dialed digital connection at rates of 56 and 112 Kbps, using a combination of existing telephone lines and new network equipment. CODEC -- combination of a coder and decoder. A coder uses a compression algorithm to reduce the number of bytes needed to represent an audio or video segment. A decoder recovers the original raw bytes from the compressed bytes generated by the coder. In video and audio compression, the recovery does not need to be exact; a good approximation of the original information is appropriate for practical purposes. COMPRESSION ALGORITHM -- a set of procedures (usually specified by mathematical equations and implemented in software within a particular computing architecture) that reduce the number of bytes necessary to represent some piece of information, such as a video or audio segment. COMPRESSION RATIO -- the average number of bytes at the input of codec that will produce one byte at the output of the coder. The higher the ratio the lower the necessary channel speed to transmit the information, and therefore the lower the transmission cost. DISCRETE COSINE TRANSFORM, DCT -- a mathematical transformation used in standards and some proprietary video compression algorithms. The DCT maps a set of original image sample values into frequency components that can more efficiently be compressed. ECHO CANCELLATION -- the process of removing the acoustic echo that would result from a full-duplex audio communication system. When the person at point A talks and his voice is reproduced by the loudspeaker at point B, the microphone at B would pick it up and send it back (with a delay due to the communication system) to the loudspeaker at point A. An acoustic echo canceller eliminates such a return signal. 5 6 FULL-DUPLEX -- characteristic of a communication system in which signals can be simultaneously transmitted in both directions. For example, in audio or audio/video calls, it means that people at both ends of a call can speak and be heard simultaneously. HALF DUPLEX -- characteristic of a communication system in which signals can be transmitted in both directions, but not simultaneously. For example, in an audio call, it means that only one person can speak at any given time (a typical mode of operation for inexpensive speakerphones). ISDN -- integrated services digital network, an international switched digital communication network (also leveraging existing telephone wires, similar to ACCUNET) that provides multiples of Kbps per channel, up to a maximum of 2 mbps. ISDN is available in many countries. KBPS -- kilobits per second, 1 Kbps = 1,000 bits per second. MBPS -- megabits per second, 1 Mbps = 1,000,000 bits per second. MCU -- multipoint control unit, also referred to as a bridge. A piece of equipment that is connected to multiple communication channels, making possible multipoint audio or audio/video calls (i.e. calls in which several sites can communicate). MOTION COMPENSATION, MC -- a component of most video compression algorithms. MC leads to higher compression ratios because it allows a video frame to be partially reconstructed from modifications on the previously received frame using motion estimates. QUANTIZATION -- the process for approximating a continuous variable by its nearest value from a table. VECTOR QUANTIZATION, VQ -- the process of approximating a collection of continuous values (a vector), by its nearest vector from a table. PRODUCTS The Company develops and manufactures the products listed below for the video conferencing industry. They range from high end group systems for many people, to personal systems for one-on-one videoconferencing. The Company also offers products that compliment these systems, such as multipoint bridges and various software options and peripherals. GROUP SYSTEMS The Company develops, manufactures, supports and markets two families of group videoconferencing systems: the Performance Family and the Value Family. All group videoconferencing products are comprised of five basic modules or components: an electronics module, a video module, an audio module, a user interface and a WAN interface. The electronics module or CODEC (compression/decompression) includes all the necessary functionality required for video compression, audio compression and video switching. The video module is comprised of a pan, tilt, and zoom camera (or cameras), an NTSC or PAL color display and associated video electronics. The audio module consists of a microphone, speaker(s), and associated audio electronics which facilitate echo cancellation, noise suppression, and gain control. The user interface is comprised of a keypad and menus that assist in placing a call and managing the videoconference with features such as camera control keys, camera preset keys, video source selection keys, mute and Picture-in-Picture. The WAN interface includes standard interfaces such as V.35, RS-449 or X.21, permitting communication over switched or dedicated digital networks that operate from 56 Kbps up to T1 (1.544 Mbps) and E1 (2.048 Mbps) speeds. All the Company's group systems are interoperable and collectively, the Performance and Value products, span a price/performance range from $13,000 to $53,000 providing a viable solution for both the price sensitive and performance oriented users. 6 7 PERFORMANCE GROUP SYSTEMS The Performance Family is PictureTel's premier line of products. The Performance Family supports both PictureTel's most recent proprietary compression algorithm, SG4, optimized for low bandwidth applications, and an enhanced version of the industry standard ITU-T H.320 algorithm. The Performance Family includes the S-4000EX and the Concorde 4500 products. The S-4000EX list prices range from $30,000 to $50,000+ fully configured. The Concorde 4500, introduced in April 1995, is the Company's flagship product. The standard system includes an infrared based keypad, camera and Look-At-Me-Button (LAMB), a unique device to facilitate distributed control within a videoconference call. The Concorde 4500 also comes standard with a WorldCart supporting color NTSC or PAL displays up to 32" in size and an integrated speaker system, optimized for voice, developed exclusively for PictureTel by BOSE Corporation. Both the S-4000EX and the Concorde 4500 offer 30 FPS (frames per second) performance. This feature provides "30 frames per second quality" video at bandwidths starting as low as 256 Kbps (kilobits per second) and as high as 768 Kbps. VALUE GROUP SYSTEMS The Value Family is PictureTel's answer for price sensitive users. The Value Group Systems provide inter -operability via the industry standard ITU-T H.320 algorithm and are optimized for low bandwidth applications. The Value Family includes the S-1000 and the Venue 2000 products. The S-1000, introduced in July 1993 as the first Value Family offering, addresses the needs of the price oriented buyer with list prices beginning at $13,995. The Venue 2000, PictureTel's second generation Value System, was introduced in April 1995. Its standard configuration includes an infrared keypad and camera. Other features like the LAMB are available on the Venue product as options. The Venue 2000 also offers improved video quality as bandwidth increases (up to T1 or even E1 rates). The Venue 2000 list prices range from $19,000 to over $30,000 fully configured. PERSONAL SYSTEMS In July 1993, the Company introduced the PictureTel Live PCS 100, a personal videoconferencing system designed for use with a personal computer (desktop product). The PCS 100 consists of a video board, audio board, camera, speakerphone and software. Utilizing the H. 320 standard (described under "Technology-Standards"), the PCS 100 is interoperable with all the Company's conferencing and bridging products. It also provides information sharing capabilities which allow users to simultaneously share files and applications while conducting a videoconference. The system is designed to operate in an ISAbus, 386 or above personal computer running Microsoft Windows 3.1(R). It lists for $4,995. In January 1995, the Company announced the PictureTel Live PCS 50 which complements the PCS 100. The product consists of a single audio/video board, a fixed focus camera, a speakerphone or headset and associated software. As with the PCS 100, the ITU-T H.320 compression standard is used, which provides interoperablity with all of PictureTel's other conferencing and bridging products and any H.320 compatible system from other vendors. It also provides the same information sharing capability as the PCS 100 which allows users to simultaneously share files while conducting a videoconference. The system is designed to operate on an ISA-bus, 386 or above personal computer running Microsoft Windows 3.1(R). The product's list price ranges from $2,995 to $3,495. While the PCS 100 remains the high end member of the PictureTel Live product family, offering greater flexibility in terms of network support and expansion options, the PCS 50 product line offers a more affordable solution for ISDN networks. In July 1994, the Company shipped its LiveShare collaboration software with application sharing that allows users to share files and interact on an application during a videoconference. In September 1994, the Company entered into the Local Area Network market with its LiveLAN family of products. List prices for these products start at $249. In October 1995, the Company introduced the Live 200i videoconferencing product. This product consists of an audio/video board, camera, headset, and software. It features the same interoperablity and information sharing tools as the PCS 50 and PCS 100. The system is designed to operate in a ISA-bus, 486 or 7 8 above personal computer and requires a VMC display controller. Unlike the PCS 50 and PCS 100, the Live 200i runs using Microsoft Windows 95[Registered Trademark] operating system. The product lists for $1,995. NETWORK SYSTEMS DIVISION PictureTel's Network Systems Divisions could be described as the "glue" that joins its videoconferencing systems products into a company-wide solution, commonly known as an "enterprise solution". Multipoint bridges and reservation and management systems software are the major revenue sources for the division. These products deliver functionality that is "shared" among distributed videoconferencing systems throughout a network. Multipoint bridges enable videoconferences with more than two sites. Reservation and management systems allow conference rooms, bridging resources and network facilities to be scheduled and managed in advance of upcoming meetings by anyone, right from their PC. The "Montage" Conferencing Server product line is the Company's third generation multipoint bridge. Launched in April 1995, the product line takes advantage of "off-the-shelf" bridging hardware and differentiating software features that make the products unique to the Company. Software features include the Company's proprietary compression algorithms SG4 and PT724. A range of models address conferencing networks of all sizes and applications. The smallest Montage supports four sites in a multipoint conference for about $35,000 list price. The largest Montage systems support up to 48 sites in a single conference or any combination of conferences up to a total of 48 sites. Over 2,000 sites can be in a single conference using a capability which joins multiple Montages together. A fully loaded Montage Model 570 lists for over $300,000. Each Montage system is fully upgradable so customers can take advantage of new standards-based and the Company's proprietary features as they are released. PictureTel's Teleconferencing Software System (TCSS) scheduling and reservation system is among the industry's most advanced scheduling products. TCSS utilizes a client server architecture. The database, automatic control mechanisms for other network devices, reporting systems and management capabilities are all performed by a central server. Users access the functions and capabilities through clients or a small Windows based application that is resident on their PC. The server can communicate with hundreds of clients simultaneously and process all requests for meetings and schedules of rooms, equipment, network bandwidth, and multipoint bridges. Clients connect to the server over LANs or dial up modems. TCSS can also automatically set a video conference by provisioning the proper network and dialing up phone numbers of each site to be connected. SOFTWARE The Company's Personal and Group videoconferencing systems are software based and can be upgraded by the user using standard floppy diskettes or a removable memory cartridge. The Company also sells a Developer's Toolkit, a set of software components, designed to give programmers access to major functions for set up and control of video, audio, windowing, data transfer, configuration and network communication. OPTIONS AND PERIPHERALS The group and personal system videoconferencing products are available with a number of software and hardware options. Options available on some or all products include NTSC or PAL video input standards, various network interfaces such as RS449, V. 35, RS232 or X. 21, high resolution graphics capability and data encryption for secure communications. Peripheral equipment used to supplement the systems may include document cameras for transmission of still images, additional video cameras to be placed in the conference rooms and video cassette recorders. RESEARCH AND DEVELOPMENT The Company believes that decreased size, cost and increased functionality will characterize future product generations. The Company also believes that as videoconferencing expands beyond group meetings into the personal communications segment of the market, success will be dependent on the further development of powerful VSP (video signal processing) chips and further miniaturization of systems 8 9 components such as cameras and monitors. At such time, the Company expects videoconferencing usage to expand to the desktop as part of a "multimedia" workstation, or as a personal videophone. This technology will initially augment and may eventually replace the telephone, leading to the development of the residential market with a consumer videophone. The Company is working to develop products similar to the PictureTel Live PCS 100 and 50. The Company believes that, in order to meet the power, size and cost constraints of desktop products, more powerful custom VSP (video signal processing) chips are required. The Company believes that video signal processing chips already available or under development by the Company and others will provide the basis for future generations of group and desktop videoconferencing systems. The Company spent $33,357,000, $41,243,000 and $50,431,000 on research and development, including capitalized software costs, in 1993, 1994 and 1995, respectively. The Company had 323 full-time employees in research and development at December 31, 1995. The Company has entered into joint development agreements with Compaq, Microsoft, NTT and others for product and software development that will further expand the desktop market. These companies retain non-exclusive rights under license from PictureTel to distribute the products that result from the development work. SALES, MARKETING AND CUSTOMER SUPPORT The Company and its wholly owned subsidiaries currently distribute PictureTel products worldwide by direct sales and indirect channels of distribution. As the market for videoconferencing systems expends, the Company expects to increase its reliance on joint selling and distribution through a combination of transmission carriers, telecommunication equipment distributors, personal computer distributors and resellers, and value-added resellers and has currently developed relationships with companies in each of these indirect channels. In 1995, the Company derived approximately 33% of its worldwide product revenues from direct selling activities, including co-marketing arrangements with MCI, Nynex and U.S. Sprint, and 67% from indirect channels. At December 31, 1995 and 1994, the Company had a product backlog approximately $20,400,000 and $14,100,000, respectively. Backlog consists of purchase orders for which a delivery schedule within six months has been specified by the customer. UNITED STATES Indirect Channels. To address the market below the Fortune/Service 500 (the largest businesses in the United States as published annually by Fortune magazine) and expand the Company's presence in the Fortune/Service 500 market, the Company has increased the number of telecommunication equipment distributors, regional Bell Operating Companies ("RBOCs") and value-added resellers ("VARs") who distribute the Company's products. Telecom distributors, or interconnects, act as dealers for the Company and typically distribute other communications equipment such as PBX systems, voice processing equipment and multiplexors, as well as network services to large, medium and small size companies. The RBOCs typically sell third party manufactured systems which leverage the use of their switched and dedicated network services. To expand its coverage of the Fortune /Service 500 companies, the Company has entered into distribution agreements with AT&T (soon to be known as Lucent Technologies, Inc.), Sprint, IBM, CompuCom, MCI and GTE. The Company believes that, as system prices decrease, additional applications for sales to vertical markets, such as distance learning, telemedicine and remote interviewing, will develop. VARs typically have expertise in a particular market and the Company plans to utilize this expertise to stimulate Applications Developers Program. Under this program PictureTel sells to developers, VARs, original equipment manufacturers and systems integrators its VM-4000 Video Modem and the PictureTel Developer's Tool Kit. Together these products provide the building blocks to allow developers to write applications and incorporate PictureTel's visual communications technology into unique vertical market products. With the introduction of 9 10 the PictureTel Live, PCS 100, PCS 50 and PCS 200I products, the Company continues to develop relationships with established personal computer distributors and resellers. Direct Sales Organization. The Company directly markets its videoconferencing systems principally to the Fortune/Service 500. These large companies typically have multiple locations in the United States as well as internationally and typically specify a single vendor to supply equipment on a world-wide basis. The Company believes that it is important to maintain a close working relationship with these customers in order to meet their demands for sales and support on a multinational basis. The Company maintains five regional sales and support offices and eighteen additional branch sales and support offices, located in or near Boston and Waltham, Massachusetts; New York, New York; East Rutherford, New Jersey; Stamford, Connecticut; Washington, D.C.; Chicago, Illinois; Detroit, Michigan; Minneapolis, Minnesota; Atlanta, Georgia; Dallas and Houston, Texas; Los Angeles and San Francisco, California; St. Louis, Missouri; Philadelphia, Pittsburgh, and King of Prussia, Pennsylvania; Denver, Colorado; Pompano Beach, Florida; Seattle, Washington; Phoenix, Arizona; Kansas City, Kansas; Cincinnati, Ohio. Regional offices typically include demonstration equipment as well as a number of customer and technical sales representatives and field support personnel. The Company's direct selling activities have been assisted by its co-marketing arrangements with major long distance carriers. These companies typically market the Company's products in conjunction with their sale of switched digital or dedicated network services. Under these arrangements, these companies refer potential customers to PictureTel and receive a fee in the event that PictureTel completes a sale with the end-user. INTERNATIONAL DISTRIBUTION Outside of the United States the Company relies on a network of foreign market distributors and its own foreign subsidiaries. Agreements with the Company's foreign market distributors generally provide for pricing, volume discounts, order lead times, a specific geographic territory and other terms and conditions and are typically for terms of one to three years with options to extend such terms by mutual agreement. In the third quarter of 1991 the Company established its first international subsidiary, and currently the Company has operating subsidiaries in the United Kingdom, Germany, Switzerland, Sweden, Australia and Japan, and branch offices in Canada, France, Hong Kong, People's Republic of China, and Singapore. International distributors include companies such as British Telecom (BT), Deutsche Telekom, Nippon Telephone & Telegraph (NTT), Alcatel, EGT (France Telecom), Telecom Italia, Siemens, and Mercury Communication (Cable & Wireless). These foreign units provide sales and support services locally. Sales to international distributors are usually made in U.S. dollars in order to minimize the risks associated with fluctuating foreign currency rates. Sales by the Company's operating subsidiaries to customers are generally made in the subsidiary's local currency. The Company's revenues from sales to foreign markets represent approximately 39%, 42%, and 43%, respectively, of the Company's total revenues in 1993, 1994, and 1995. Additional information with respect to the Company's international business is included in Note 11 to the Consolidated Financial Statements. CUSTOMER SUPPORT The Company believes that the quality and reliability of its systems is important to customer satisfaction and therefore has continually emphasized the reduction of the number of components and improvements in reliability in its product development activities. The Company provides a warranty for parts and labor on its products and utilized a direct field service staff in the United States and internationally to perform equipment installations, preventive maintenance and service. Warranty periods are generally one year from installation date on sales to end-users and one year from delivery date on sales to distributors. In addition, warranty periods for certain software products, repairs, and upgraded parts are 90 days upon receipt. Estimated costs related to warranty are accrued at the time of revenue recognition. Typically, repairs are performed at the customer site and involve replacement of a printed circuit board or other module. 10 11 The Company offers an array of customer service and support programs, including preset inspection, installation, system maintenance and service, spares kits, customer training and a toll-free telephone line for remote customer consultation and diagnostics. In addition, it offers next day business response to service requests to all of its domestic customers who are covered by a service contract. Support outside of the United States is provided by the Company's subsidiaries and local distributors.' Revenues generated from service and support were less than 10% of total revenues during 1993, 1994 and 1995. COMPETITION The Company is engaged in an industry that, as a result of extensive research and development efforts, has new, more technologically advanced products introduced on a regular basis. If the Company is not in a position to exploit and obtain technological advancements, it products may become obsolete or priced above competitive levels. Moreover, unforeseen technical or other difficulties may interfere with the development or production of its products, or prevent or create delays in marketing such products. A number of companies, including British Telecom ("BT") Compression Laboratories, Inc. ("CLI"), NEC and GEC Plessey Telecommunications, LTD. ("GPT"), continue to dominate the high bandwidth transmission (from 384 Kbps to 2.048 Mbps) videoconferencing market. Currently, switched 56 Kbps service is the most widely available switched digital service in the United States. However, transmission carriers have begun to offer switched services at 384 Kbps and 1.5 Mbps (T-1). The Company does not believe that competition from the high bandwidth market will significantly affect its market potential because of the greater cost and limited availability of the high bandwidth services. The Company also faces competition from a number of companies with currently available or announced visual communications products designed for low bandwidth videoconferecing. Currently, three United States companies, CLI, VTEL Corporation ("VTEL"), and Intel Corporation are among the companies marketing low bandwidth full-motion video modems and complete videoconferencing systems. In addition, outside the United States, low bandwidth videoconferecing systems and video modems are available from a number of suppliers in Europe and the Far East including GPT, Philips Kommunikations Industries AG, Vista Communications Instruments, Inc., Tandberg Telecom AS, Mitsubishi Ltd., NEC, Hitachi, Ltd., Sony Corporation, Fujitsu Ltd. of Japan and Panasonic. The Company competes primarily on the basis of video and audio quality as well as on favorable features and the price of its systems. The Company believes that its products are competitive in each of these areas. Some of the companies which now offer or may be expected to offer products that compete with the Company's products, such as Intel Corporation and Sony Corporation, are substantially larger and have significantly greater financial and other resources than the Company and now market or may be expected to market a more diversified line of products than the Company's. Now that the H.320 standard has been widely established, larger companies with greater resources may manufacture less costly products which compete with the Company's products. In the personal (one-on-one) visual communications segment, the Company expects that competition will continue to intensify. The competitive landscape has shifted substantially in 1995. At the beginning of the year Intel, AT&T, and BT were the primary competitors. In late 1995, AT&T decided to exit the desktop market, leaving PictureTel and Intel as the market leaders. BT is now distributing the Company's products. Other companies who did not start 1995 as significant competitors but are now moving into position are Creative Labs, Inc. and Netscape. These lower priced desktop products generally offer fewer features and functionality than found in current video conferencing systems sold by the Company and others. In addition, competitive price reductions may adversely affect the Company's revenues and profitability. However, the Company believes that its products are competitive in this area. Previously, purchasers of videoconferencing systems must have purchased the videoconferencing systems from the same vendor to ensure the interoperability. However as a result of the adoption of the H. 320 11 12 standard products from the Company and other manufacturers are interoperable. Since 1994 all systems shipped by the Company included the H. 320 standard capability. MANUFACTURING The Company has developed a supply chain that encompasses the Company's subassemblies supplied by vendors to the delivery of finished goods to the customer. This effort has resulted in a cost effective and timely delivery of products to our customers. This strategy allows the Company to reduce costly investment in manufacturing capital, and to leverage the expertise of our vendors. The Company's manufacturing operation consists of final assembly and testing of complete videoconferecing systems. Subassemblies of large systems that support networks and room conferencing, including tested printed circuit boards, are assembled into complete systems. These final systems are tested to ensure they meet all functional requirements. Desktop hardware products are purchased in final form from various vendors. The products have been subjected to PictureTel's quality testing at the vendor site. These products are placed into inventory, and are shipped according to demand. Certain components and parts used in the Company's products are procured from a single source. The Company obtains parts only from one vendor, even where multiple sources are available, to maintain quality control and enhance the working relationship with suppliers. These purchases are made under existing contracts or purchase orders. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the Company's delivery of products and thereby adversely affect the Company's revenues and profits. PATENTS AND COPYRIGHTS The Company's principal technology consists primarily of certain advances in video and audio compression algorithms, echo cancellation and audio signal processing, implemented in software and hardware configurations for use in PictureTel products. The Company has been issued a number of United States patents relating to the above described, which expire at various dates from 2007 to 2012. The Company has a number or additional patent applications pending in various countries including the United States, Canada, Europe and Japan and may in the future file additional applications. However, there can be no assurance that its current patents (or any additional patents that may be issued in the future) provide broad protection from the development of similar product technology by competitors of the Company. In the absence of broad patent protection, and despite the Company's reliance upon its proprietary confidential information, competitors of the Company may be able to use algorithms similar to those used by the Company to design and manufacture products that are directly competitive with the Company's products. The Company also protects its copyrightable software and related technology under U.S. and other countries' copyright laws by placing appropriate copyright notices that comply with the provisions of the U.S. Copyright Act and international copyright treaties and by entering into written agreements with its licensees. EMPLOYEES At December 31, 1995, the Company had 1,182 full-time employees, of whom 562 were employed in sales, marketing and customer support, 323 in product development and engineering, 134 in manufacturing and 163 in administration and finance. The Company's continued success will depend in part on its ability to attract and retain highly skilled and motivated personnel who are in great demand throughout the industry. None of the Company's employees are represented by a labor union. The Company believes its relations with its employees to be good. 12 13 ITEM 2. PROPERTIES The Company's corporate offices and research, development and manufacturing facilities are located in two facilities in Danvers and Andover, Massachusetts, aggregating approximately 210,400 square feet and two facilities in Peabody, Massachusetts, aggregating approximately 81,500 square feet. The Danvers' lease expires in March 1997. The Andover lease agreement expires June of 1999. The Company leases 37,500 square feet of manufacturing space in Peabody under an agreement expiring in July 1996. Also in Peabody, the Company leases approximately 44,000 square feet under an agreement expiring December 1996. In October 1995 the Company entered into an agreement to lease approximately 300,000 square feet of space in Andover, Massachusetts beginning in July 1996. The Company plans to consolidate both facilities in Peabody, Massachusetts as well as the Danvers, Massachusetts facility into this new facility. This lease expires in July 2014. The Company also leases office space for its regional and branch sales and support offices in or near Boston and Waltham, Massachusetts; New York, New York; East Rutherford, New Jersey; Stamford, Connecticut; Washington, D.C.; Chicago, Illinois; Detroit, Michigan; Minneapolis, Minnesota; Atlanta, Georgia; Dallas and Houston, Texas; Los Angeles and San Francisco, California; St. Louis, Missouri; Philadelphia, Pittsburgh and King of Prussia, Pennsylvania; Denver, Colorado; Pompano Beach, Florida; Seattle, Washington; Phoenix, Arizona; Kansas City, Kansas; Cincinnati, Ohio. ITEM 3. LEGAL PROCEEDINGS In December 1993, the Company was sued by Datapoint Corporation in the United States District Court for the Northern District of Texas. Datapoint is alleging that certain of the Company's products infringe patent rights allegedly owned by Datapoint. The complaint seeks approximately $51 million in damages for alleged past infringement and an injunction against alleged future infringement. The Company believes that it has meritorious defenses to the allegations of the complaint, and continues to vigorously defend against the lawsuit. In the event the Company is found to be infringing a valid patent or patents in such proceedings, the Company could be required to pay damages for past infringement and cease the sale of products incorporating the infringing feature (or be required to take a license and pay royalties with respect to such patents). During the third quarter of 1995 the Company's motion for summary judgment was renewed and referred to a special master for decision. While there can be no assurance that the Company will prevail, the Company believes that it is unlikely that the outcome of the lawsuit would have a material adverse effect on the business or the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 14 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The following table sets forth the high and low sale prices for the Company's Common Stock for the periods indicated as reported by NASDAQ under the symbol PCTL. (All share prices were adjusted for 2:1 stock split in November 1995)
HIGH LOW ------- ------- 1994 First Quarter.......................................................... $ 9.500 $ 6.625 Second Quarter......................................................... $ 7.813 $ 5.000 Third Quarter.......................................................... $ 9.000 $ 5.875 Fourth Quarter......................................................... $12.250 $ 7.750 1995 First Quarter.......................................................... $19.125 $11.125 Second Quarter......................................................... $25.063 $17.000 Third Quarter.......................................................... $31.000 $21.188 Fourth Quarter......................................................... $43.875 $20.750 1996 First Quarter (through March 15, 1996)................................. $44.734 $30.250
As of March 15, 1996 there were approximately 2,081 holders of record of the Company's Common Stock. DIVIDEND POLICY The Company has not paid any dividends on its Common Stock since its inception and presently intends to reinvest earnings for use in its business and to finance future growth. Accordingly, the Board of Directors does not anticipate declaring any cash dividends in the foreseeable future. 14 15 ITEM 6: SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
1991 1992 1993 1994 1995 -------- -------- -------- -------- -------- Statement of Income Data: Revenues.......................... $ 78,024 $141,409 $176,252 $255,193 $346,758 Income before extraordinary credit and cumulative effect of change in accounting principle......... 4,021 8,387 7,384 4,579 19,626 Extraordinary credit, tax benefit of net operating loss and tax credit carryforwards............ 1,930 2,272 -- -- -- Cumulative effect of change in accounting principle............ -- -- 1,042 -- -- Net income........................ 5,951 10,659 8,426 4,579 19,626 Net income per common and common equivalent share(1)(2): Income before extraordinary credit and cumulative effect of change in accounting principle......... $ 0.14 $ 0.26 $ 0.24 $ 0.15 $ 0.56 Extraordinary credit.............. 0.07 0.07 -- -- -- Cumulative effect of change in accounting principle............ -- -- 0.03 -- -- -------- -------- -------- -------- -------- Net income........................ $ 0.21 $ 0.33 $ 0.27 $ 0.15 $ 0.56 ======== ======== ======== ======== ======== Weighted average shares outstanding(1)(2)............... 27,746 31,868 31,486 31,354 35,014 Balance Sheet Data: Working capital................... $109,460 $ 55,334 $ 48,399 $118,922 $139,396 Total assets...................... 144,857 165,713 187,425 216,699 288,141 Total short-term debt............. 2,038 7,643 6,651 10,452 2,840 Total long-term debt.............. 3,915 4,685 4,367 3,015 12,804 Stockholders' equity.............. 119,623 132,128 146,939 153,236 200,822
- --------------- (1) Net income per common and common equivalent share is based on the weighted average number of shares of Common Stock and dilutive Common Stock equivalents outstanding during the period. All common and common equivalent share and per share amounts have been retroactively restated to reflect the two-for-one common stock split effected by a 100% common stock dividend paid during the fourth quarter of 1995. (2) The Company has not paid dividends on its Common Stock since its inception. The Company intends to reinvest earnings for use in its business and to finance future growth. Accordingly, the Board of Directors does not anticipate declaring any cash dividends in the foreseeable future. 15 16 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of Revenues for certain items in the Company's Statement of Income for each period:
YEARS ENDED DECEMBER 31, ------------------------- 1993 1994 1995 ----- ----- ----- Revenues.......................................................... 100.0% 100.0% 100.0% Cost of sales..................................................... 44.3 50.6 50.5 Gross margin...................................................... 55.7 49.4 49.5 Selling, general and administrative............................... 34.2 32.4 29.2 Research and development.......................................... 16.6 15.0 13.3 Total operating expenses.......................................... 50.8 47.4 42.5 Operating income.................................................. 4.9 2.0 7.0 Interest income, net.............................................. 1.3 0.7 0.9 Other income, net................................................. 0.2 -- -- Income before provision for income taxes.......................... 6.4 2.7 7.9 Provision for income taxes........................................ 2.2 0.9 2.2 Net income(1)..................................................... 4.8 1.8 5.7 - --------------- (1) Includes the cumulative effect of change in accounting principle of $1,042,000, or 0.6% of revenues, for the year ended December 31, 1993.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 Revenues. The Company's revenues increased $91,565,000, or 36%, in 1995 from 1994. The increase in revenue was primarily a result of increased videoconferencing system unit shipments. This growth was partially offset by a reduction in the average selling price of videoconferencing systems resulting from a shift towards lower priced models, especially in the personal desktop products, as well as a shift in distribution channel mix with approximately 67% of revenue now coming from the indirect channels. Videoconferencing system sales accounted for approximately 85% of the Company's revenues in 1995 and 1994. Sales of group and desktop videoconferencing products accounted for 70% and 15%, respectively, of revenues for 1995, compared with 76% and 9%, respectively, for 1994. In addition, sales of bridge products accounted for approximately 7% of the Company's revenues for 1995 compared to approximately 6% for 1994. The balance of the revenues in 1995 and 1994 were primarily from maintenance services, licensing/development agreements and the sales of stand-alone codecs and video modems. The Company's revenues from sales to foreign markets were approximately $147,981,000 in 1995 compared to approximately $108,118,000 in 1994 representing 43% and 42%, respectively of total revenues. The Company expects that international revenues will continue to account for a significant portion of total revenues. Gross Margin. The Company's gross margin increased $45,561,000 or 36%, in 1995 compared to 1994. Gross margin as a percentage of revenues was 49% in 1995 and 1994. Gross margin as a percentage of revenues remained consistent primarily as a result of continued product material cost reductions and decreasing overhead costs offset by an increased percentage of volume through the indirect channels and a higher percentage of revenues coming from the Company's lower-margin videoconferencing system products. The latter two trends are expected to continue and may impact future gross margins. Selling, General and Administrative. Selling, general and administrative expenses increased $18,611,000 or 23% from 1994 and decreased as a percentage of revenues to 29% from 32%. The dollar 16 17 increase in spending resulted primarily from the worldwide marketing focus associated with expanding indirect channels and new product launches, as well as increased commission expense. In addition, the Company has provided additional sales, general and administrative personnel in order to support the Company's overall growth. Research and Development. Research and development expenses increased $7,857,000, or 21% in 1995 from 1994 and were 13% and 15%, respectively, of revenues for 1995 and 1994. Research and development expenditures, prior to the capitalization of software costs, were $50,431,000 in 1995 and $41,243,000 in 1994 or 15% and 16% of revenues, respectively. The dollar increase in expenditures primarily reflects the Company's continuing investment in new product and software development for existing and future videoconferencing products. The Company capitalized software costs of $4,247,000 in 1995 and $2,916,000 in 1994 representing 8% and 7% of research and development expenditures, respectively. Operating Income. Although gross margin as a percentage of sales has not increased over 1994, operating income as a percentage of sales increased due to a decline in operating expenses as a percentage of sales. Net Interest Income (Expense). Net interest income increased to $3,152,000 in 1995 from $1,841,000 in 1994. The increase was primarily the result of higher interest earning portfolio balances. Other Income (Expense). Other income of $87,000 in 1995 consists primarily of net gains on foreign currency transactions. Other expense of $101,000 in 1994 consists primarily of net losses on foreign currency transactions. Income Taxes. The Company's effective tax rate for 1995 and 1994 was 29% and 34% respectively, and 1995 was lower than the federal statutory rate primarily due to the change in deferred asset valuation allowance. Forward-Looking Statements. This section, as well as other portions of this document, includes certain forward-looking statements about the Company's business and new products, sales and expenses, effective tax rate and operating and capital requirements. In addition, forward-looking statements may be included in various other Company documents to be issued in the future and in various oral statements by Company representatives to security analysts and investors from time to time. Any such statements are subject to risks that could cause the actual results or needs to vary materially. These risks are discussed below in "Factors Affecting Future Results" in this document. Factors Affecting Future Results. The Company continues to seek improvement in operating results through the introduction of new products, cost reductions in existing products, and finding new channels of distribution. However, there can be no assurance that the Company will be successful in its efforts. Announcements by competitors indicate that the Company may face increased competition in group and desktop videoconferencing systems. The potential increase in competition may lead to decrease in average selling prices and declining margins in both group and desktop videoconferencing systems, which may impact the Company's growth. In addition, the Company may experience competition in the continued development of indirect channels. The Company's operating results may also be affected by delays from key suppliers and other factors such as seasonal patterns of spending by customers and changes in general economic conditions. Historically, a significant portion of the Company's shipments have been made in the last month of each quarter. As a result, a shortfall in revenue compared to expectation may not evidence itself until late in the quarter. YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993 Revenues. The Company's revenues increased $78,941,000, or 45% in 1994 from 1993. The increase in revenue was primarily a result of an increase in videoconferencing system unit shipments in 1994 from 1993. The growth was partially offset by a reduction in the average selling price of videoconferencing systems 17 18 resulting from a shift towards lower priced models, as well as a shift in distribution channel mix to a greater volume through indirect channels. Videoconferencing systems sales accounted for approximately 85% of the Company's revenues for 1994 compared to approximately 83% in 1993. In addition, the sale of bridge products accounted for approximately 6% of the Company's revenues in 1994 compared to 7% in 1993. The balance of revenues in 1994 and 1993 were primarily from maintenance services and the sales of video modems and stand-alone codecs. The Company's revenues from sales to foreign markets were approximately $108,118,000 in 1994 compared to approximately $68,636,000 in 1993, representing 42% and 39%, respectively, of total revenues. Gross Margin. The Company's gross margin increased $27,913,000, or 28%, in 1994 compared to 1993. Gross margin as a percentage of revenues declined to 49% in 1994 from 56% in 1993. The decline in gross margin as a percentage of revenues was primarily the result of a higher percentage of revenues coming from the Company's lower-margin videoconferencing system products and an increased percentage of volume through indirect channels. Selling, General and Administrative. Selling, general and administrative expenses increased $22,244,000, or 37% in 1994 from 1993 and decreased as a percentage of revenues to 32% in 1994 from 34% in 1993. The dollar increase in spending resulted primarily from the expansion of the Company's international and domestic sales force. The Company has also added marketing and administrative personnel in order to support the Company's overall growth. Research and Development. Research and development expenses increased $9,135,000, or 31%, in 1994 from 1993, and were 15% and 17%, respectively, of revenues for 1994 and 1993. Research and development expenditures, prior to capitalization of software development costs, were $41,243,000 in 1994 and $33,357,000 in 1993 or 16% and 19% of revenues, respectively. The dollar increase in expenditures primarily reflects the Company's continuing investment in new product and software development for existing and future videoconferencing products. The Company capitalized software costs of $2,916,000 in 1994 and $4,165,000 in 1993 representing 7% and 12% of research and development expenditures, respectively. Net Interest Income (Expense). Net interest income decreased to $1,841,000 in 1994 from $2,371,000 in 1993. The decrease was primarily a result of lower interest earning portfolio balances. Other Income (Expense). Other expense of $101,000 in 1994 consists primarily of net losses on foreign currency transactions. Other income of $314,000 in 1993 consists primarily of realized gains from the sale of assets and net losses on foreign currency transactions. Income Taxes. The Company's effective tax rate for 1994 and 1993 was 34% and 35%, respectively, and in 1994 was lower than the federal statutory rate primarily due to the combined effects of research and developments credits, foreign tax rates and losses for which no tax benefits were available and the change in deferred asset valuation allowance. 18 19 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995 the Company had $39,476,000 in cash and cash equivalents, $20,463,000 in short-term marketable securities and $34,084,000 in long-term marketable securities. During the year ended December 31, 1995 the Company generated $18,825,000 in net cash from operating activities. The primary use of cash during 1995 was to fund the growth in working capital items such as accounts receivable and inventories of $32,707,000 and $12,130,000, respectively, as well as additions to property and equipment of $16,251,000. Accounts receivable increased more than sales as a percentage in 1995 compared with 1994 due to increased foreign sales and sales to distributors and dealers which typically have longer collection cycles. Capital expenditures in 1996 are projected to be approximately $30,000,000 including leasehold improvements related to the newly leased property for the Company's corporate office and manufacturing facilities. The Company has available for borrowing up to $17,000,000 under its revolving credit agreement and approximately $3,400,000 available under local foreign guaranteed lines of credit to certain of its foreign subsidiaries. At December 31, 1995 there was $12,226,000 outstanding under the revolving credit agreement and $557,000 outstanding under the foreign lines of credit. At December 31, 1995, the Company had $2,861,000 outstanding and $7,000,000 available to be borrowed under various leasing lines. The Company believes that funds from operations, equipment lease financing, borrowings under its various credit agreements and existing cash, cash equivalents and marketable securities will be sufficient to meet the Company's foreseeable operating and capital requirements. 19 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
PICTURETEL CORPORATION Index to Financial Statements and Supplementary Data Financial Statements: Report of Independent Accountants....................................... page 21 Consolidated Statements of Income....................................... page 22 Consolidated Balance Sheets............................................. page 23 Consolidated Statements of Stockholders' Equity......................... page 24 Consolidated Statements of Cash Flows................................... page 25 Notes to Consolidated Financial Statements.............................. page 26 Supplementary Data: Report of Independent Accountants....................................... page 37 Schedule II Valuation and Qualifying Accounts........................... page 38
20 21 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of PICTURETEL CORPORATION: We have audited the accompanying consolidated balance sheets of PictureTel Corporation as of December 31, 1994 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PictureTel Corporation as of December 31, 1994 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the Company changed its method of accounting for income taxes in 1993. /S/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. BOSTON, MASSACHUSETTS FEBRUARY 20, 1996 21 22 PICTURETEL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 -------- -------- -------- Revenues................................................. $176,252 $255,193 $346,758 Cost of sales............................................ 78,011 129,039 175,043 -------- -------- -------- Gross margin............................................. 98,241 126,154 171,715 Operating expenses: Selling, general and administrative...................... 60,374 82,618 101,229 Research and development................................. 29,192 38,327 46,184 -------- -------- -------- Total operating expenses................................. 89,566 120,945 147,413 -------- -------- -------- Income from operations................................... 8,675 5,209 24,302 Other income (expense): Interest income.......................................... 3,375 2,826 4,123 Interest expense......................................... 1,004 985 971 Other income (expense), net.............................. 314 (101) 87 -------- -------- -------- Income before provision for income taxes and cumulative effect of change in accounting principle............... 11,360 6,949 27,541 Provision for income taxes............................... 3,976 2,370 7,915 -------- -------- -------- Income before cumulative effect of change in accounting principle.............................................. 7,384 4,579 19,626 Cumulative effect of change in accounting principle...... 1,042 -- -- -------- -------- -------- Net income............................................... $ 8,426 $ 4,579 $ 19,626 ======== ======== ======== Net income per common and common equivalent share: Income before cumulative effect of change in accounting principle.............................................. $ 0.24 $ 0.15 $ 0.56 Cumulative effect of change in accounting principle...... 0.03 -- -- -------- -------- -------- Net income............................................... $ 0.27 $ 0.15 $ 0.56 ======== ======== ======== Weighted average common and common equivalent shares outstanding............................................ 31,486 31,354 35,014 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 22 23 PICTURETEL CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, --------------------- 1994 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents.......................................... $ 24,347 $ 39,476 Marketable securities.............................................. 50,354 20,463 Accounts receivable less allowance for doubtful accounts of $1,785 and $1,791...................................................... 65,155 97,735 Inventories........................................................ 31,679 43,791 Deferred taxes, net................................................ 5,131 6,665 Other current assets............................................... 2,704 5,781 -------- -------- Total current assets............................................ 179,370 213,911 Marketable securities................................................ 3,226 34,084 Deferred taxes, net.................................................. 3,272 6,000 Property and equipment, net.......................................... 19,417 22,515 Capitalized software costs, net...................................... 4,163 5,073 Other assets......................................................... 7,251 6,558 -------- -------- Total assets....................................................... $216,699 $288,141 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings.............................................. $ 6,969 $ 557 Accounts payable................................................... 18,335 25,639 Accrued compensation and benefits.................................. 6,357 9,881 Accrued expenses................................................... 10,677 16,646 Income taxes....................................................... 922 -- Current portion of capital lease obligations....................... 3,483 2,283 Deferred revenue................................................... 13,705 19,509 -------- -------- Total current liabilities....................................... 60,448 74,515 Long-term borrowings................................................. -- 12,226 Capital lease obligations............................................ 2,860 578 Other long-term liabilities.......................................... 155 -- Commitments (Notes 6 and 7) Stockholders' equity: Preference stock, $.01 par value; 15,000,000 shares authorized; none issued............................................................. -- -- Common stock, $.01 par value; 80,000,000 shares authorized; 30,717,800 and 32,723,444 shares issued and outstanding at December 31, 1994 and 1995.................................................. 307 328 Additional paid-in capital........................................... 145,999 173,379 Retained earnings.................................................... 7,796 27,422 Cumulative translation adjustment.................................... (452) (531) Unrealized (loss) gain on marketable securities, net................. (414) 224 -------- -------- Total stockholders' equity......................................... 153,236 200,822 -------- -------- Total liabilities and stockholders' equity......................... $216,699 $288,141 -------- --------
The accompanying notes are an integral part of the consolidated financial statements. 23 24 PICTURETEL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, 1995 (DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL CUMULATIVE ---------------------- PAID-IN RETAINED UNEARNED TRANSLATION SHARES PAR VALUE CAPITAL EARNINGS COMPENSATION ADJUSTMENT --------- --------- ---------- -------- ------------ ----------- Balance, December 31, 1992...................... 30,048,482 $ 300 $137,536 $(5,209) $ (142) $(357) Exercise of employee stock options and related tax benefit................................... 249,208 3 1,585 -- -- -- Cumulative change in accounting principle....... -- -- 4,857 -- -- -- Amortization of unearned compensation........... -- -- -- -- 102 -- Foreign currency translation adjustment......... -- -- -- -- -- (162) Net income...................................... -- -- -- 8,426 -- -- ---------- ----- -------- ------- ------ ----- Balance, December 31, 1993...................... 30,297,690 303 143,978 3,217 (40) (519) Exercise of employee stock options and related tax benefit................................... 420,110 4 2,021 -- -- -- Amortization of unearned compensation........... -- -- -- -- 40 -- Foreign currency translation adjustment......... -- -- -- -- -- 67 Unrealized loss on marketable securities, net... -- -- -- -- -- -- Net income...................................... -- -- -- 4,579 -- -- ---------- ----- -------- ------- ------ ----- Balance, December 31, 1994...................... 30,717,800 307 145,999 7,796 -- (452) Exercise of employee stock options and related tax benefit................................... 1,873,650 19 26,229 -- -- -- Employee stock purchase plan shares............. 131,994 2 1,151 -- -- -- Foreign currency translation adjustment......... -- -- -- -- -- (79) Unrealized gain on marketable securities, net... -- -- -- -- -- -- Net income...................................... -- -- -- 19,626 -- -- ---------- ----- -------- ------- ------ ----- Balance, December 31, 1995...................... 32,723,444 $ 328 $173,379 $27,422 $ -- $(531) ========== ===== ======== ======= ====== ===== UNREALIZED (LOSS) GAIN ON TOTAL MARKETABLE STOCKHOLDERS' SECURITIES, NET EQUITY --------------- ------------- Balance, December 31, 1992...................... $ -- $ 132,128 Exercise of employee stock options and related tax benefit................................... -- 1,588 Cumulative change in accounting principle....... -- 4,857 Amortization of unearned compensation........... -- 102 Foreign currency translation adjustment......... -- (162) Net income...................................... -- 8,426 ----- --------- Balance, December 31, 1993...................... -- 146,939 Exercise of employee stock options and related tax benefit................................... -- 2,025 Amortization of unearned compensation........... -- 40 Foreign currency translation adjustment......... -- 67 Unrealized loss on marketable securities, net... (414) (414) Net income...................................... -- 4,579 ----- --------- Balance, December 31, 1994...................... (414) 153,236 Exercise of employee stock options and related tax benefit................................... -- 26,248 Employee stock purchase plan shares............. -- 1,153 Foreign currency translation adjustment......... -- (79) Unrealized gain on marketable securities, net... 638 638 Net income...................................... -- 19,626 ----- --------- Balance, December 31, 1995...................... $ 224 $ 200,822 ===== =========
The accompanying notes are an integral part of the consolidated financial statements. 24 25 PICTURETEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1993 1994 1995 -------- -------- -------- Cash flows from operating activities: Net income................................................ $ 8,426 $ 4,579 $ 19,626 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................. 12,179 18,345 17,906 Deferred taxes, net....................................... (7,018) (1,162) (2,127) Cumulative effect of change in accounting principle....... (1,042) -- -- Other non-cash items...................................... (167) 53 (79) Changes in operating assets and liabilities: Accounts receivable....................................... (19,611) (16,682) (32,707) Inventories............................................... (8,306) (7,384) (12,130) Other assets.............................................. (3,830) (3,364) (2,401) Accounts payable.......................................... 4,584 7,481 7,423 Accrued compensation and benefits and accrued expenses.... 2,726 5,693 9,472 Income taxes, net......................................... 4,546 660 8,056 Deferred revenue.......................................... 2,971 5,384 5,786 -------- -------- -------- Net cash provided by (used in) operating activities......... (4,542) 13,603 18,825 Cash flows from investing activities: Purchase of marketable securities......................... (75,858) (19,014) (71,772) Proceeds from marketable securities....................... 80,616 38,182 70,902 Additions to property and equipment....................... (11,129) (14,335) (16,251) Proceeds from disposals of property and equipment......... 54 -- -- Capitalized software costs................................ (4,165) (2,916) (4,247) Purchase of intangible asset.............................. (2,006) -- -- -------- -------- -------- Net cash provided by (used in) investing activities......... (12,488) 1,917 (21,368) Cash flows from financing activities: Change in short-term borrowings........................... (2,392) 4,944 (6,412) Proceeds from long-term borrowings........................ -- -- 12,226 Proceeds from sale/leaseback of equipment................. 5,048 2,483 -- Principal payments under capital lease obligations........ (3,954) (5,533) (3,482) Proceeds from exercise of stock options................... 1,018 2,025 13,786 Proceeds from stock purchase plan......................... -- -- 1,153 -------- -------- -------- Net cash provided by (used in) financing activities......... (280) 3,919 17,271 Effect of exchange rate changes on cash..................... (206) (2,013) 401 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ (17,516) 17,426 15,129 Cash and cash equivalents at beginning of year.............. 24,437 6,921 24,347 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 6,921 $ 24,347 $ 39,476 -------- -------- -------- Interest paid............................................... $ 975 $ 938 $ 958 -------- -------- -------- Income taxes paid........................................... $ 6,471 $ 2,782 $ 2,893 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 25 26 PICTURETEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF THE BUSINESS: PictureTel Corporation (the "Company"), operates in one business segment, the development, manufacture, marketing and servicing of videoconferencing equipment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION Certain financial statement items have been reclassified to conform to the current year's format. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's non-U.S. subsidiaries, where the local currency is the functional currency, are translated using exchange rates in effect at the end of the year for assets and liabilities and average exchange rates during the year for results of operations. Related translation adjustments are reported as a separate component of stockholders' equity. FOREIGN EXCHANGE CONTRACTS The Company has entered into foreign currency forward contracts as a hedge against specific inter-company and foreign currency receivable transactions. Forward contracts involve agreements to purchase or sell foreign currencies at specific rates at future dates. The Company's hedging activities do not subject the Company to exchange rate risk because the gains and losses on these contracts offset the losses and gains on the assets, liabilities, and transactions being hedged. The contract premiums or discounts are amortized over the life of the foreign exchange contracts and are recognized in other income. At December 31, 1994 and 1995 the Company had contracts maturing through August 1996 to purchase $17,315,000 and $21,779,000, respectively, in foreign currency (British pounds, French francs, German marks, Japanese yen, Swiss francs, Swedish krona and Australian dollars). Cash flows resulting from hedging contracts are classified in the same category as the cash flows from the items being hedged. The carrying amount of the foreign currency forward contracts is the fair value which is estimated by obtaining market prices. CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company classifies all marketable securities as available for sale. They are carried at their fair value, based on quoted market prices, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Those instruments with maturities between three months and twelve months are considered to be short-term marketable securities and investments with maturities of greater than one year are classified as long-term marketable securities. At December 31, 1994 26 27 and 1995 cash equivalents and marketable securities primarily consist of U.S. government securities, corporate and municipal issues and commercial paper. The amortized cost of marketable securities is adjusted for the amortization of premiums and accretion of discounts over the life of the security. Such amortization and interest are included in interest income. Realized gains and losses are included in other income. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives: Equipment................................. 2-5 years Equipment and furniture under capital leases.................................. 3-5 years Furniture and fixtures.................... 3-5 years Estimated useful life or term of the lease, if Leasehold improvements.................... shorter
Maintenance and repairs are charged to expense as incurred. Significant improvements are capitalized and depreciated. Upon retirement or sale, the cost of the assets disposed of, and the related accumulated depreciation, are removed from the accounts and any resulting gain or loss is included in the determination of net income. RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE COSTS Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software production costs incurred subsequent to the establishment of technological feasibility are capitalized until the product is available for general release to customers. Amortization is based on the greater of (i) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (ii) the straight-line method over the remaining estimated life of the product. During the years ended December 31, 1993, 1994, and 1995, the Company capitalized approximately $4,165,000, $2,916,000, and $4,247,000, respectively, of software costs. During the years ended December 31, 1993, 1994, and 1995, the Company amortized approximately $2,081,000, $3,973,000, and $3,337,000, respectively, of software costs. OTHER ASSETS Included in other assets are intangible assets which consist primarily of intellectual property rights and non-compete agreements which are amortized over their estimated useful life, which range from eighteen to thirty-six months. Also included in other assets are prepaid royalties which are charged to cost of sales upon recognition of the related revenue. REVENUE RECOGNITION Revenue from product sales is recognized upon shipment or in accordance with contractual acceptance terms. Revenue from maintenance contracts is recognized ratably over the term of the contract. Allowances for estimated future product returns and price protection under the Company's agreements with its distributors and resellers are provided in the same period as the related revenues. 27 28 WARRANTY The Company provides a warranty for parts and labor on its products. Warranty periods are generally one year from installation date on sales to end-users and one year from delivery date on sales to distributors. In addition, warranty periods for certain software products, repairs, and upgraded parts are 90 days upon receipt. Estimated costs related to warranty are accrued at the time of revenue recognition. INCOME TAXES The Company provides for the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Pursuant to the adoption of the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the net cumulative effect of change in accounting principle was $5,899,000 of which $1,042,000 was recorded as a credit to income due to net operating loss and tax credit carryforwards and $4,857,000 was recorded as a credit to additional paid-in capital due to the tax effect of stock options. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on the weighted average number of shares of common and common equivalent shares (stock options) outstanding during the period. Fully diluted earnings per common and common equivalent share did not differ materially from primary earnings per common and common equivalent share. CONCENTRATIONS Credit Risk The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses and such losses have been within management's expectations. The Company invests its excess cash primarily in deposits with a commercial bank, U.S. government securities, corporate and municipal issues, and commercial paper, and any such losses recognized have been immaterial. Suppliers Certain components and parts used in the Company's products are procured from a single source. The Company obtains parts only from one vendor, even where multiple sources are available, to maintain quality control and enhance the working relationship with suppliers. These purchases are made under existing contracts or purchase orders. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the Company's delivery of products and thereby adversely affect the Company's revenues and profits. NEWLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 requires that an impairment loss be recognized for long-lived assets and certain identifiable intangibles when the carrying amounts of these assets may not be recoverable. The Company will adopt SFAS 121 in 1996 and does not expect the adoption to have a material impact on the Company's results of operations or financial position. 28 29 In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This statement establishes accounting and reporting standards for stock-based employee compensation plans. While the Company is reviewing the adoption and impact of SFAS 123, it expects to adopt the disclosure-only alternative and accordingly this standard will not have a material impact on the Company's results of operations or financial position. 3. INVENTORIES: Inventories consist of the following (in thousands):
DECEMBER 31, ------------------- 1994 1995 ------- ------- Purchased parts........................................................ $ 7,208 $11,492 Work in process........................................................ 2,464 3,252 Finished goods......................................................... 22,007 29,047 ------- ------- $31,679 $43,791 ======= =======
4. MARKETABLE SECURITIES: At December 31, 1994 and 1995, marketable securities can be summarized as follows (in thousands):
1994 1995 ---------------------- ---------------------- AMORTIZED CARRYING AMORTIZED CARRYING COST VALUE COST VALUE --------- -------- --------- -------- U. S. Government and its agencies................ $35,993 $35,458 $45,983 $46,252 Municipal Issues................................. 18,224 18,122 8,217 8,295 ------- ------- ------- ------- Marketable Securities............................ $54,217 $53,580 $54,200 $54,547 ======= ======= ======= =======
Unrealized holding losses of $637,000 for 1994 and unrealized holding gains of $347,000 for 1995 are included as a separate component of stockholders' equity, net of tax. Realized gains of approximately $316,000, $84,000 and $107,000 from the sales of marketable securities are included in other income for the years ended December 31, 1993, 1994 and 1995, respectively. At December 31, 1995 $20,463,000, or 36% of the Company's marketable securities have stated maturity dates within one year of the balance sheet date, the remaining securities have stated maturity dates within two years of the balance sheet date. 5. PROPERTY AND EQUIPMENT: Property and equipment consist of the following (in thousands):
DECEMBER 31, ------------------- 1994 1995 ------- ------- Equipment.............................................................. $32,884 $49,526 Equipment and furniture under capital leases........................... 11,890 7,867 Furniture and fixtures................................................. 4,507 6,166 Leasehold improvements................................................. 2,514 2,735 ------- ------- 51,795 66,294 Less: Accumulated depreciation and amortization........................ 32,378 43,779 ------- ------- $19,417 $22,515 ======= =======
29 30 At December 31, 1994 and 1995 accumulated depreciation amounted to $7,218,000 and $5,907,000 on equipment and furniture under capital leases. Depreciation expense for the years ended December 31, 1993, 1994, and 1995 was $8,938,000, $12,426,000 and $13,112,000, respectively. 6. DEBT: On September 30, 1995, the Company amended its agreement to increase the amount of its unsecured revolving credit from $12,000,000 to $17,000,000 with an expiration date of October 1, 1997. This agreement requires interest payable at either the bank's rate, the adjusted eurocurrency rate plus one and one-eighth percent per annum or the bank's money market rate, and a commitment fee of one-quarter percent per annum, payable on any unused portion. The amended agreement provides that the principal portion of the borrowings be paid by the expiration date and, unlike the original agreement, contains no demand feature. Accordingly, the borrowings under the amended agreement are classified as long term borrowings at December 31, 1995. The unsecured revolving credit agreement contains certain financial covenants including the maintenance of a certain ratio of total liabilities to tangible net worth. At December 31, 1994 and 1995 the Company was in compliance with all covenants under this credit agreement. Local lines of credit are available for short-term advances of up to $3,400,000 to certain of the Company's foreign subsidiaries. These lines are guaranteed by the Company. The agreements require interest payable ranging from the bank's base rate plus one to one and one half of a percent per annum, and facility fees of up to one eighth of one percent of the facility amount per annum. A total of $557,000 was borrowed against these local lines of credit at December 31, 1995. At December 31, 1994 and 1995 the weighted average interest rate on outstanding short-term borrowings was 6.8% and 5.9%, respectively. The carrying amount of the short-term borrowings is a reasonable estimate of the fair value because of the short maturity of those instruments. 7. COMMITMENTS: The Company has commitments under operating leases for office and manufacturing space. The facilities leases are for terms ranging from one to eighteen years. The leases usually contain provisions which allow for expansion, extension and termination. Total rent expense for operating leases was $4,027,000, $5,724,000 and $6,757,000 for the years ended December 31, 1993, 1994, and 1995, respectively. In October 1995 the Company entered into an eighteen year lease agreement for approximately 300,000 square feet of space in Andover, Massachusetts beginning in July 1996 at an annual rate of $3,000,000. The Company plans to consolidate both facilities in Peabody, Massachusetts as well as the Danvers, Massachusetts facility into this new facility. The Company is lessee under several capital lease and sale-leaseback agreements with third parties for certain equipment and furniture. The Company renegotiated its lease agreements in 1995 under which it can finance up to $7,000,000 in capital equipment. The Company has yet to utilize the available balance but does have $2,861,000 outstanding under previous lease agreements. 30 31 Future minimum lease payments under capital and operating leases with initial or remaining terms of one year of more are (in thousands):
CAPITAL OPERATING LEASES LEASES ------- --------- 1996................................................................... $ 2,375 $ 8,304 1997................................................................... 643 6,750 1998................................................................... -- 5,402 1999................................................................... -- 4,382 2000................................................................... -- 3,239 Thereafter............................................................. -- 40,500 ------- ------- Total future minimum lease payments.................................... 3,018 $68,577 ------- Less estimated executory costs included in capital lease............... 20 ------- ------- Net future minimum lease payments under capital lease.................. 2,998 Less amount representing interest...................................... 137 ------- ------- Present value of net future minimum lease payments..................... 2,861 Less current portion................................................... 2,283 ------- ------- Long-term obligation under capital leases.............................. $ 578 =======
8. CAPITAL STOCK: PREFERENCE STOCK The Company's Board of Directors is empowered to fix the terms and rights of the Preference Stock. Issuance of the Preference Stock limits the rights of the Common Stockholders. COMMON STOCK On September 28, 1995, the Board of Directors authorized a two-for-one split of the Company's outstanding Common Stock (the "Stock Split") by means of a 100% stock dividend. All Common Stock and Common Stock equivalents and per share amounts have been retroactively restated to reflect the two-for-one split. STOCKHOLDERS' RIGHTS AGREEMENT On March 25, 1992, the Board of Directors of the Company declared a dividend of one purchase right (a "Right") for every outstanding share of the Company's Common Stock. After giving effect to the split, each Right entitles the holder to purchase from the Company one two-hundredths of a share of Junior Preference Stock at a price of $90 per one two-hundredths of a share, subject to adjustment. The Rights will become exercisable on the fifteenth business day following the date of a public announcement that an acquiring person (as defined in the Rights Agreement, the definition of which provides for certain limited exclusions) has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the Company's outstanding Common Stock or on the fifteenth business day following the commencement of a tender offer or exchange offer that would result in an acquiring person owning 15% or more of the Company's outstanding Common Stock. If the Company were acquired in a merger or other business combination, or more than 25% of its assets or earning power were sold, each holder of a Right would be entitled to exercise such Right and thereby receive common stock of the acquiring company with a market value of two times the exercise price of the Right. If an acquiring person has acquired or obtained the right to acquire 15% of the Company's Common Stock, each holder of a Right, other than the acquiring person, will be entitled to receive shares of the Company's Common Stock having a market value of two times the exercise price of the Right. At any time 31 32 the Company may redeem the Rights at a redemption price of $0.005 per Right. The Rights expire March 25, 2002. EMPLOYEE STOCK PURCHASE PLAN On April 15, 1994 the Company adopted an Employee Stock Purchase Plan under which eligible employees are able to purchase shares of the Company's Common Stock at 85% of the market value at the date of the start of each six month option period or the end of such period, whichever is lower. Under the provisions of the Plan up to 1,000,000 shares are deliverable after the Stock Split. The first offering period commenced on September 1, 1994 and ended on February 28, 1995 with 72,956 shares issued at a purchase price of $6.375 per share; a second offering period commenced on March 1, 1995 and ended on August 30, 1995 with 59,038 shares issued at a purchase price of $11.635 per share. Therefore, there were a total of 131,994 shares issued under this Plan for the year ended December 31, 1995. A third offering period commenced on September 1, 1995 and ended on February 29, 1996. STOCK OPTION PLANS Under the Company's 1984 Amended and Restated Stock Option Plan, employees and other persons who are in a position to make significant contributions to the success of the Company may be granted either non-statutory or incentive stock options to purchase up to 2,094,174 shares of Common Stock after the Stock Split. The options are exercisable as stipulated by the Board of Directors (or a Committee thereof) and will expire no more than ten years from the date of the grant. The incentive option price per share will not be less than the fair market value at the date of the grant. No new options will be issued as the Plan has been terminated. On November 14, 1989, the Company's shareholders approved the PictureTel Equity Incentive Plan. As of December 31, 1995 shareholders have authorized the issuance of up to 9,000,000 shares of post Stock Split Common Stock under the Plan. The Equity Incentive Plan permits the granting of non-statutory and incentive stock options, a variety of stock and stock-based awards and related benefits, and cash performance awards, which are in addition to option grants under the 1984 Amended and Restated Stock Option Plan, to employees and other persons who are in a position to make significant contributions to the success of the Company. Effective October 23, 1992, the Board of Directors adopted the 1992 Non-Employee Directors' Stock Option Plan. As of December 31, 1995 shareholders have authorized the issuance of up to 280,000 shares of post Stock Split Common Stock under the Plan to eligible non-employee directors. Under this Plan each nonemployee director at October 23, 1992 and each non-employee director subsequently elected receives, at October 23, 1992 or the director's first election date, a non-statutory option to purchase 40,000 shares of post Stock Split Common Stock at an exercise price equal to the fair market value of the stock on the effective date of grant. All options expire ten years after the effective date of grant, and such options become exercisable over a four year period. Certain stock options and warrants were granted, in previous years, at post Stock Split prices ranging from $2.25 to $4.25 per share, which was less than fair market value at the date of grant. Generally, vesting was required over a period of four years through 1994. Unearned compensation related to these options and warrants has been recognized ratably over the vesting period. Compensation expense charged to operations related to these grants was $102,000, $40,000, and $0 in 1993, 1994, and 1995 respectively. 32 33 The following table summarizes stock option activity for 1993, 1994 and 1995:
OPTION OPTION PRICE SHARES RANGE --------- ---------------- Outstanding at December 31, 1992............................ 4,683,168 $1.125 -- $19.875 Granted................................................... 995,700 8.00 -- 12.875 Canceled.................................................. (468,624) 1.125 -- 19.875 Exercised................................................. (249,208) 1.125 -- 11.875 --------- ----------------- Outstanding at December 31, 1993............................ 4,961,036 1.125 -- 18.44 Granted................................................... 2,102,300 6.00 -- 9.75 Canceled.................................................. (779,676) 3.745 -- 12.875 Exercised................................................. (420,110) 1.125 -- 11.75 --------- ----------------- Outstanding at December 31, 1994............................ 5,863,550 1.125 -- 18.44 Granted................................................... 1,089,524 11.28 -- 35.13 Canceled.................................................. (170,613) 1.125 -- 31.815 Exercised................................................. (1,873,650) 1.125 -- 14.00 --------- ----------------- Outstanding at December 31, 1995............................ 4,908,811 $1.125 -- $ 35.13 ========= =================
At December 31, 1995 there were 1,811,854 fully exercisable stock options outstanding. In addition, there were 2,190,924 shares available for future grant. 9. INCOME TAXES: Significant items making up total net deferred tax assets are as follows (in thousands):
DECEMBER 31, ------------------- 1994 1995 ------- ------- Net operating loss and tax credit carryforwards........................ $ 8,497 $ 9,434 Inventory reserves..................................................... 3,506 2,889 Deferred revenue....................................................... 3,459 1,110 Other temporary timing differences..................................... 3,464 5,916 Valuation allowance.................................................... (10,523) (6,684) ------- ------- Total net deferred tax assets.......................................... $ 8,403 $12,665 ======= =======
The valuation allowance primarily offsets the deferred benefit of certain foreign net operating loss and federal and state tax credit carryforwards whose benefit is uncertain. The Company has recorded a deferred tax asset of approximately $4,500,000 reflecting the benefit of deductions from the exercise of stock options. This deferred tax asset has been fully reserved until it is more likely than not that the benefit from the exercise of stock options will be realized. The benefit from this $4,500,000 deferred tax asset will be recorded as a credit to additional paid-in capital when realized. 33 34 The provision for income taxes consisted of the following (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Federal income taxes: Currently payable......................................... $ 3,878 $ 1,613 $ 7,311 Deferred.................................................. (1,302) (595) (1,840) State income taxes: Currently payable......................................... 645 671 1,301 Deferred.................................................. 38 (567) (119) Foreign taxes: Currently payable......................................... 572 1,248 1,430 Deferred.................................................. 145 -- (168) ------- ------- ------- Total....................................................... $ 3,976 $ 2,370 $ 7,915 ======= ======= =======
The differences between the statutory federal income tax rate and the Company's effective income tax rate were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1993 1994 1995 ----- ----- ---- Statutory federal income tax rate.................................. 35.0% 35.0% 35.0% State income tax, net of federal tax benefit....................... 3.6 0.8 5.1 Federal and state tax credits from research and development........ (14.3) (30.1) (1.9) Foreign tax rates and losses not tax benefited..................... (5.6) (5.1) (1.0) Change in deferred asset valuation reserve......................... 15.8 31.5 (8.8) Other.............................................................. 0.5 2.0 0.3 ----- ----- ---- Effective tax rate................................................. 35.0% 34.1% 28.7% ===== ===== ====
At December 31, 1995, the Company had remaining net operating loss ("NOL") carryforwards available of approximately $5,299,000 to offset future federal taxable income. The Company also has unused federal research and development tax credits of approximately $2,813,000. The NOL and tax credit carryforwards expire at various dates through the year 2009. As a result of prior equity issuances, the Company's use of NOL carryforwards incurred prior to July 1988 is subject to certain annual limitations. At December 31, 1995 the available NOL carryforwards have an annual limitation amount of approximately $662,000 that may be used to reduce the Company's taxable income in the future. 10. EMPLOYEE BENEFIT PLANS: The Company has a defined contribution profit sharing plan, including features under Section 401(k) of the Internal Revenue Code, which will provide retirement benefits to its employees. The Plan covers substantially all employees of the Company and eligible participants may contribute up to 15% of their pay on a pretax basis subject to annual dollar limits established by the Internal Revenue Code and plan limitations. In 1993 and 1994 the Company voted to contribute approximately $175,000 and $353,000 to the Plan, respectively. In 1995 the Company agreed to provide a 50% matching contribution up to the first 3% of each participant's eligible compensation. The Company's matching contribution to the Plan was $661,000 in 1995. 34 35 11. GEOGRAPHIC DATA & MAJOR CUSTOMERS: The Company's operations involve a single industry segment-the development, manufacture, marketing and servicing of videoconferencing equipment. The Company has subsidiaries in various foreign countries which sell the Company's products in their respective geographic areas. Revenues are reflected in the geographic areas from which the sales are made. Financial information, summarized by geographic area, is as follows (in thousands):
UNITED ASIA/ STATES EUROPE PACIFIC ELIMINATIONS CONSOLIDATED -------- -------- -------- ------------ ------------ YEAR ENDED DECEMBER 31, 1995: Total revenues Unaffiliated customers............. $231,740 $ 79,010 $ 36,008 -- $346,758 Inter-company transfers............ 80,300 701 -- $(81,001) -- -------- -------- -------- -------- -------- Total........................... $312,040 $ 79,711 $ 36,008 $(81,001) $346,758 -------- -------- -------- -------- -------- Income (loss) from operations........ $ 23,131 $ (1,515) $ 1,037 $ 1,649 $ 24,302 -------- -------- -------- -------- -------- Identifiable assets.................. $193,496 $ 42,196 $ 17,434 $(26,254) $226,872 -------- -------- -------- -------- Corporate assets..................... 61,269 -------- Total assets.................... $288,141 ======== YEAR ENDED DECEMBER 31, 1994 Total revenues Unaffiliated customers............. $164,176 $ 62,876 $ 28,141 -- $255,193 Inter-company transfers............ 59,268 -- -- $(59,268) -- -------- -------- -------- -------- -------- Total........................... $223,444 $ 62,876 $ 28,141 $(59,268) $255,193 Income from operations............... $ 4,026 $ 604 $ 926 $ (347) $ 5,209 -------- -------- -------- -------- -------- Identifiable assets.................. $134,515 $ 29,919 $ 14,642 $(20,429) $158,647 -------- -------- -------- -------- Corporate assets..................... 58,052 -------- Total assets.................... $216,699 ======== YEAR ENDED DECEMBER 31, 1993 Total revenues Unaffiliated customers............. $133,669 $ 28,404 $ 14,179 -- $176,252 Inter-company transfers............ 25,524 -- -- $(25,524) -- -------- -------- -------- -------- -------- Total........................... $159,193 $ 28,404 $ 14,179 $(25,524) $176,252 ======== ======== ======== ======== ======== Income (loss) from operations........ $ 8,724 $ (1,548) $ 1,622 $ (123) $ 8,675 ======== ======== ======== ======== ======== Identifiable assets.................. $104,779 $ 21,979 $ 9,965 $(22,700) $114,023 -------- -------- -------- -------- Corporate assets..................... 73,402 -------- Total assets.................... $187,425 ========
The United States inter-company transfers primarily represent shipments of systems to international subsidiaries. The inter-company transfers of systems are made at transfer prices which approximate cost to distributors plus an appropriate mark up, and are eliminated from consolidated revenues. Corporate assets consist primarily of marketable securities. 35 36 Export sales to unaffiliated customers from the Company's United States operations were as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Europe...................................................... $10,077 $ 2,552 $ 2,693 Canada...................................................... 7,965 5,989 8,341 Asia/Pacific................................................ 5,486 4,703 13,220 Other....................................................... 2,525 3,857 8,709 ------- ------- ------- $26,053 $17,101 $32,963 ======= ======= =======
In 1993 one customer accounted for 13% of total revenues. In 1994 and 1995 no customer accounted for 10% or more of total revenues. 12. UNAUDITED INTERIM FINANCIAL INFORMATION Quarterly financial information is as follows (in thousands, except per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- -------- 1995 Revenues......................................... $74,156 $80,489 $90,098 $102,015 Gross margin..................................... 37,798 41,039 44,335 48,543 Net income....................................... 3,088 4,155 5,223 7,160 Net income per common and common equivalent share.......................................... $ 0.09 $ 0.12 $ 0.15 $ 0.20 1994 Revenues......................................... $53,748 $64,011 $63,314 $ 74,120 Gross margin..................................... 26,478 31,435 31,680 36,561 Net income....................................... 614 598 935 2,432 Net income per common and common equivalent share.......................................... $ 0.02 $ 0.02 $ 0.03 $ 0.08
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 36 37 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of PictureTel Corporation is included in Item 8 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a)2 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 20, 1996 37 38 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
CHARGED TO BALANCE AT COSTS AND BALANCE AT BEGINNING OF YEAR EXPENSES DEDUCTIONS END OF YEAR ----------------- ---------- ---------- ----------- YEAR ENDED DECEMBER 31, 1993: Accounts receivable reserves......... $1,011,000 $ 667,000 $ 301,000 $1,377,000 Inventory reserves................... $1,683,000 $2,162,000 $1,311,000 $2,534,000 Warranty reserves.................... $ 666,000 $1,644,000 $1,495,000 $ 815,000 YEAR ENDED DECEMBER 31, 1994: Accounts receivable reserves......... $1,377,000 $ 560,000 $ 152,000 $1,785,000 Inventory reserves................... $2,534,000 $2,376,000 $1,739,000 $3,171,000 Warranty reserves.................... $ 815,000 $1,541,000 $ 699,000 $1,657,000 YEAR ENDED DECEMBER 31, 1995: Accounts receivable reserves......... $1,785,000 $ 430,000 $ 424,000 $1,791,000 Inventory reserves................... $3,171,000 $3,036,000 $3,339,000 $2,868,000 Warranty reserves.................... $1,657,000 $2,181,000 $1,343,000 $2,495,000
38 39 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to this item is incorporated by reference herein to information contained in "Election of Directors" in the definitive 1996 Proxy Statement. ITEM 11: EXECUTIVE COMPENSATION Information with respect to this item is incorporated by reference herein to information contained in "Election of Directors" in the definitive 1996 Proxy Statement. (information in the 1996 Proxy Statement under "Report of the Compensation Committee" and "Performance Graph" is not incorporated by reference.) ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this time is incorporated by reference herein to information contained in "Security Ownership" in the definitive 1996 Proxy Statement. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item is incorporated by reference herein to information contained in "Certain Relationships and Related Transactions" appearing in the definitive 1996 Proxy Statement. 39 40 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS -- Report of Independent Accountants -- Consolidated Statements of Income for the Years ended December 31, 1993, 1994 and 1995 -- Consolidated Balance Sheets as of December 31, 1994 and 1995 -- Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 -- Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 -- Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES -- Report of Independent Accountants -- Schedule II -- Valuation and Qualifying Accounts -- Schedules other than those listed above have been omitted since they are either not required, not applicable, or the information is otherwise included. (B) REPORTS ON FORM 8-K None (C) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 Third Restated Certificate of Incorporation of Registrant, effective June 10, 1992(2) 3.2 By-Laws as Amended September 13, 1994(6) 4.1 Form of Common Stock Certificate (13) 4.2 Shareholders' Rights Agreement between the Company and The First National Bank of Boston as Rights Agent, dated March 25, 1992(8) 4.2.1 Form of Certificate of Designation with respect to Junior Preference Stock (9) 4.2.2 Form of Rights Certificate (10) 4.2.3 Summary of Purchase Rights (11) 4.2.4 Amendment dated January 13, 1995 to item 4.2 (14) The Company hereby agrees to furnish to the Commission upon request copies of any long-term debt instruments not filed herewith because the securities authorized under any such instrument do not exceed ten percent of total assets of the Company and its consolidated subsidiaries. 10.10 1984 Amended and Restated Stock Option Plan as amended through December 13, 1988 (3) 10.10.1 Amendment dated October 26, 1994 to item 10.10 (14) 10.11 PictureTel Corporation Equity Incentive Plan as amended October 26, 1994 (14) 10.11.1 Amendment dated June 29, 1995 to item 10.11 (20)
40 41
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.12 Employment Agreement between PictureTel Corporation and Norman E. Gaut dated July 29, 1988 (3) 10.12.1 Amendment dated January 15, 1995 to the employment agreement between PictureTel Corporation and Norman Gaut dated July 29, 1988 (15) 10.13 PictureTel Corporation 1994 Employee Stock Purchase Plan (12) 10.14 Agreement between PictureTel Corporation and Les Strauss as amended through January 15, 1995 (16) 10.15 Agreement between PictureTel Corporation and Khoa Nguyen as amended through March 6, 1995 (17) 10.16 Agreement between PictureTel Corporation and Domenic J. LaCava as amended through January 17, 1995 (18) 10.17 Agreement between PictureTel Corporation and Lawrence Bornstein as amended through January 16, 1995 (18) 10.34 Form of Indemnification Agreement for directors and officers (1) 10.44 Lease Agreement between PictureTel Corporation and Centennial Park dated April 21, 1988. (3) 10.45 401(k) Profit Sharing Retirement Plan as amended through July 1, 1994 (14) 10.47 Lease Agreement between PictureTel Corporation and 100 Minuteman Limited partnership dated October 7, 1995 (filed herewith) 10.50 Lease Agreement between PictureTel Corporation and the JMS Realty Trust dated October 22, 1990 (7) 10.51 Lease Agreement between PictureTel Corporation and Andover Mills Realty Limited Partnership dated February 10, 1994 (14) 10.54 Amended and Restated Employment Agreement between PictureTel Corporation and Brian L. Hinman dated June 1, 1990 ("Hinman Employment Agreement") (4) 10.54.1 Separation and Termination Agreement between PictureTel Corporation and Brian L. Hinman dated December 31, 1990 (5) 10.57 Non-exclusive License Agreement between PictureTel Corporation and Polycom Corporation dated January 4, 1991 (5) 10.61 Lease Agreement between PictureTel Corporation and Comdisco, Inc., dated September 16, 1991. (7) 10.62 Lease Agreement between PictureTel Corporation and BancBoston Leasing Inc., dated September 27, 1991 (7) 10.63 Lease Agreement between PictureTel Corporation and Northwoods Business Park Tower Phase IV Realty Trust, dated November 25, 1991. (7) 10.64 Distribution Agreement between PictureTel Corporation and American Telephone and Telegraph Company dated January 20, 1992 (confidential treatment requested) (7) 21.1 Subsidiaries of the Company (filed herewith) 23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith) 27.1 Financial Data Schedule as required by Item 601(c) of Regulation S-K (filed herewith). (1) Incorporated by reference to the similarly numbered exhibit to Registrant's Registration Statement on Form S-1, Registration No. 33-6368, effective August 12, 1986. (2) Incorporated by reference to Exhibit 3.1.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 27, 1992.
41 42
EXHIBIT NUMBER DESCRIPTION ------ ----------- (3) Incorporated by reference to the similarly numbered exhibit to the Registrant's Annual Report on Form 10-K for the Year ended December 31, 1988. (4) Incorporated by reference to the similarly numbered exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990. (5) Incorporated by reference to the similarly numbered exhibit to the Registrant's Registration Statement on Form S-1, No. 33-38983 effective April 9, 1991. (6) Incorporated by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K filed September 14, 1994. (7) Incorporated by reference to the similarly numbered exhibit to the Registrant's Annual Report on Form 10-K for the Year ended December 31, 1991. (8) Incorporated by reference to Exhibit 1 to the Registrant's Registration of Certain Classes of Securities on Form 8-A dated March 26, 1992. (9) Incorporated by reference to Exhibit 2 to the Registrant's Registration of Certain Classes of Securities on Form 8-A dated March 26, 1992. (10) Incorporated by reference to Exhibit 3 to the Registrant's Registration of Certain Classes of Securities on Form 8-A dated March 26, 1992. (11) Incorporated by reference to Exhibit 4 to the Registrant's Registration of Certain Classes of Securities on Form 8-A dated March 26, 1992. (12) Incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-8, No. 33-81848, effective July 22, 1994. (13) Incorporated by reference to Exhibit 4(b) of Registrant's Registration Statement on Form S-8, Registration Number 33-36315 effective August 10, 1990. (14) Incorporated by reference to the similarly numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 1994. (15) Incorporated by reference to exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 1, 1995. (16) Incorporated by reference to exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 1, 1995. (17) Incorporated by reference to exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 1, 1995. (18) Incorporated by reference to exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 1, 1995. (19) Incorporated by reference to exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 1, 1995. (20) Incorporated by reference to exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 1, 1995.
(d) FINANCIAL STATEMENT SCHEDULE The Company hereby files as part of this Annual Report on Form 10-K the financial statement schedule listed on Item 14(a)2 as set forth above. 42 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 30, 1996 PICTURETEL CORPORATION /S/ NORMAN E. GAUT By:-------------------------------- Norman E. Gaut President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /S/ NORMAN E. GAUT Chairman of the Board, President, March 29, 1996 - ------------------------------------- Chief Executive Officer and Director Norman E. Gaut (Principal Executive Officer) /S/ DAVID B. LEVI Director March 29, 1996 - ------------------------------------- David B. Levi /S/ JAMES R. SWARTZ Director March 29, 1996 - ------------------------------------- James R. Swartz /S/ VINOD KHOSLA Director March 29, 1996 - ------------------------------------- Vinod Khosla /S/ ROBERT T. KNIGHT Director March 29, 1996 - ------------------------------------- Robert T. Knight /S/ LES B. STRAUSS Vice President, Chief Financial March 29, 1996 - ------------------------------------- Officer (Principal Financial Officer & Les B. Strauss Principal Accounting Officer)
43 EX-10.47 2 LEASE AGREEMENT 1 Exhibit 10.47 ANDOVER, MASSACHUSETTS LEASE LANDLORD: 100 MINUTEMAN LIMITED PARTNERSHIP, a Massachusetts Limited Partnership TENANT: PICTURETEL CORPORATION, a Delaware corporation DATE: October 7, 1995 2 INDEX TO CERTAIN DEFINED TERMS Term Section Page - ---- -------- ---- Affiliates 24.18(a) 63 Alterations 13 22 Bankruptcy Code Exhibit "F" base rent 1.1(e) 2 Building 1.1(d) 1 Cancellation Fee 4(b) 6 Cancellation Option 4(b) 6 Commencement Date 1(aa) 1 Condemnation 17 34 Control Affiliates 25.18(aa) 63 Cure Payments 19.5 44 Excess Refinancing Proceeds Add. #5 4 Existing Loans 2(a) Add. #4 Extension Options 1 Add. #2 Guarantor 1.1(k) 3 Hazardous Substances 25 64 Landlord's Insurance Proceeds 16.1 28 Landlord's Mortgagees 19.1 41 Landlord's Work 2 4 Laws 24.18(b) 63 LC Advances 24.17(f) 62 LC Note 24.17(f) 62 Lease Year 4 6 Letter of Credit 24.17 59 Liabilities 24.18(c) 63 Liens 13.4 23 New Termination Date 4(b) 6 No-sale Election Add. #5 2 Occupancy Date 1.1(a) 1 Operating Costs 7.1 10 Permitted Assignee 18.5(c) 40 Permitted Sublessee 18.5(c) 40 Phase 1.1(dd) 2 Premises 1.1(c) 1 Purchase Options Add. #4 Reconstruction Costs 16.5 32 Related Entities 24.18(cc) 63 Released Assignor 18.4 35 Rent 5 7 Right of Self Help 14.4 26 1776 Premises 1.1(cc) 1 1776 Easements 1.3 4 Systems and Equipment 24.18(d) 63 Superior Leases and Mortgages 24.4 50 Taxes 6.1 8 Tenant's Broker 1.1(l) 4 Tenant's Percentage 1.1(f) 2 Tenant's Property 3 5 Tenant's Work 1.1 Exh. C Transfer 18.1 33 Unamortized Costs Exhibit "H" Unpermitted Financing 19.4 43
3 LEASE THIS INDENTURE OF LEASE, dated as of October ______, 1995 is between 100 MINUTEMAN LIMITED PARTNERSHIP, a Massachusetts limited partnership ("Landlord"), and PICTURETEL CORPORATION, a Delaware corporation ("Tenant"). Landlord leases the Premises to Tenant and Tenant leases the Premises from Landlord on the following terms and conditions: BASIC LEASE PROVISIONS. 1.1 Summary. (a) Occupancy Date: With respect to each Phase, when Landlord's Work for that particular Phase is deemed to be substantially completed (as described in Article 2) or Tenant occupies that Phase, whichever is earlier. (aa) "Commencement Date": The later of: July 1, 1996; or the last Occupancy Date. (b) Term: The term of this Lease will begin on the first Occupancy Date and will end eighteen (18) Lease Years after the Commencement Date, unless extended or terminated earlier per this Lease. (c) Premises: The land located in Andover, Massachusetts, legally described in Exhibit "B," the Building, and all other improvements on the land. 4 (cc) 1776 Premises: The property adjacent to the Premises owned by 1776 Limited Partnership or its successors. (d) Building: The existing structure on the land designated as the "Building" in Exhibit "A," as it may be changed, enlarged or improved in the future pursuant to Landlord's Work or otherwise. (dd) Phase: The parties initially contemplate that Landlord's Work for the Building generally will be subdivided into four (4) different areas, each of which may have a different Occupancy Date due to the differing nature of Landlord's Work necessary to meet the requirements of the users who ultimately will occupy those different areas (e.g., the majority of administrative, financing and marketing functions in one area, the majority of engineering and research and development functions in another area, and the majority of light manufacturing functions in a third area). Each of these separate areas is called a "Phase." The parties acknowledge that these areas may change during Landlord's Work, and that performing Landlord's Work in Phases and/or getting separate Certificates of Occupancy for each Phase may be impractical or unlawful. (e) Base Rent: (see Exhibit "D"). (f) Tenant's Percentage: Tenant's Percentage for each Phase will be a fraction, expressed as a percentage, determined by dividing the rentable area of that Phase by the rentable area of the entire Building as if Landlord's Work was completed. If the rentable area of the entire Building is not known when a particular Phase is completed, then the rentable area of the Building shall be based on Landlord's reasonable determination at the time, with a retroactive adjustment when the rentable area of the Building is determined. Notwithstanding anything to contrary, the rentable area shall be determined in each case by Landlord's architect or representative in a consistent fashion, and upon the occurrence of the Occupancy Date for all of the Phases, Tenant's Percentage shall be 100%. 5 (g) Letter of Credit: (See Section 24.17). (h) Use of Premises: For general office purposes, engineering, research and development, light manufacturing, demonstration of video teleconferencing systems, training rooms, customer demonstrations, repairs, distribution and warehousing, and uses incidental thereto. (i) Notice to Tenant Prior to First Occupancy Date: PictureTel Corporation The Tower at Northwoods 222 Rosewood Drive Danvers, Massachusetts 01923 Attn: Chief Financial Officer With a Copy to: PictureTel Corporation The Tower at Northwoods 222 Rosewood Drive Danvers, Massachusetts 01923 Attn: Vice President, Human Resources 6 (j) Notice to Landlord: c/o Brickstone Properties, Inc. 300 Brickstone Square Andover, Massachusetts 01810 Attn: Martin Spagat With a Copy to: c/o U.S. Managers Realty, Inc. 433 North Camden Drive, Suite 960 Beverly Hills, CA 90210 Attn: John G. Baker, Esq. (k) Guarantor: N/A. (l) Tenant's Broker: Avalon Partners, Inc.. (m) Certain Other Defined Terms: [See Section 24.18] If there is a conflict between this summary and the rest of this Lease, the rest of this Lease will control. 1.2 Site Plan. Exhibit "A" is the general site plan of the land, the Building and the other principal improvements that are now part of the Premises. The parties acknowledge and agree that the site plan may change as a result of Landlord's Work, and so the parties agree that Landlord will have the right to substitute for Exhibit "A" another general site plan, if necessary, to depict the Premises more accurately upon such substantial completion. 7 1.3 Premises. Subject to and in accordance with the terms and limitations in this Lease (including any regarding prior notice, entry and the non-disturbance of Tenant's business), Landlord reserves the right to install, maintain, repair and replace Systems and Equipment within or serving the Building or the rest of the Premises or otherwise modify the Premises in emergencies or in order to comply with its obligations or exercise its rights under this Lease or to comply with Laws or insurance requirements or to protect health, safety or property or to provide access and parking and associated improvements for the 1776 Premises in accordance with easements to be granted to 1776 Limited Partnership (the "1776 Easements"), and in so doing Landlord will endeavor to not interrupt Tenant's uses of the Premises or the services Landlord is required to provide under this Lease more than reasonably necessary. Landlord will not otherwise have the right to materially modify the Premises unless it obtains Tenant's approval, which will not be unreasonably withheld or delayed. 8 CONSTRUCTION OF PREMISES. Landlord will perform "Landlord's Work" and Tenant will perform "Tenant's Work" (if any) as described in the Workletter attached as Exhibit "C." The good faith written certification by Landlord's architect of the substantial completion of Landlord's Work and the issuance of a temporary or final certificate of occupancy by the Town of Andover will be binding on the parties as to the date of substantial completion for each Phase. Except for Tenant delays and force majeure, Landlord will diligently attempt to substantially complete Landlord's Work on or before July 1, 1996. Landlord's Work for each Phase will be deemed substantially completed even if Landlord has not completed "punch list" or other minor items, as long as Landlord agrees to complete these items diligently. Tenant's final punch list for each Phase will be submitted to Landlord within fifteen (15) days after Landlord notifies Tenant that Landlord's Work is substantially completed. Subject to scheduling requirements for the completion of Landlord's Work, Tenant's contractors may have access to the Premises prior to the completion of Landlord's Work as described in Exhibit "C," and to the extent that conflicts with the scheduling for Landlord's Work can reasonably be avoided, Landlord and its contractors will attempt to cooperate reasonably with Tenant's contractors so that Tenant's Work can be completed in a timely manner. POSSESSION AND SURRENDER OF PREMISES. When this Lease terminates, Tenant will remove from the Premises all of its signs, movable trade fixtures and equipment, inventory and other personal property, whether owned by Tenant or its Affiliates ("Tenant's Property"). 9 Tenant's Property remaining more than five (5) business days after delivery of written notice from Landlord after such termination will be deemed abandoned and Landlord may keep, sell, destroy or dispose of it without any Liabilities to Tenant or its Affiliates. Tenant will repair all damage and surrender the Premises broom clean and in good order, condition and repair, reasonable wear and tear, damage by fire and casualty and taking by eminent domain excepted. TERM; CANCELLATION OPTION (a) This Lease is effective as of the date first set forth above, and the term begins on the first Occupancy Date for a Phase and ends eighteen (18) Lease Years after the Commencement Date, unless terminated earlier or extended in accordance with this Lease. A "Lease Year" is a period of twelve (12) consecutive calendar months during the Lease term, starting with the Commencement Date. However, the first Lease Year is the first twelve (12) full calendar months plus the partial month (if any) after the Commencement Date if the Commencement Date is not the first day of the month, and the last Lease Year may be less than twelve (12) months. In addition to the rent payable for the first Lease Year, Tenant will pay rent for the partial calendar month (if any) after the Commencement Date. Within ten (10) days after Landlord's request in each instance, Tenant will execute an agreement confirming the Occupancy Date for each Phase and/or the Commencement Date. Tenant's failure to execute such an agreement will not affect the actual Occupancy Date for a Phase or the actual Commencement Date. 10 (b) Subject to the terms hereof, and provided that Tenant is not then in default, Tenant will have the right (the "Cancellation Option") to cancel and terminate this Lease as of the end of the tenth (10th) Lease Year (the "New Termination Date") if and only if Tenant delivers to Landlord at least twelve (12) months prior to the New Termination Date: an unconditional written notice of termination; and, together with such notice, Ten Million and No/100 Dollars ($10,000,000.00) in good and clear funds as a cancellation fee (the "Cancellation Fee"). Time is of the essence, and notwithstanding anything to the contrary, if for any reason this notice and payment are not made as and when required, or if before the valid exercise of the Cancellation Option a Purchase Option or an Extension Option or the Purchase Election under Addendum #5 has been exercised or the Lease Term is extended pursuant to the specific terms in this Lease or Tenant or any of its Related Entities has entered into any agreements or exercised any rights to lease additional space in a new building or buildings, or an enlargement of the Building after completion of Landlord's Work, totalling more than 50,000 square feet to be constructed on the Premises or the 1776 Premises or to purchase or otherwise acquire all or any portion of the Premises or the 1776 Premises or any interest in Landlord, or if Tenant or any of its Related Entities leases any portion of the 1776 Premises or exercises any rights it may have to cause 1776 Limited Partnership to construct any buildings on the 1776 Premises, at Landlord's election the Cancellation Option will terminate and be null and void. Subject to the foregoing, if the Cancellation Option is validly exercised, this Lease will terminate and expire as of the New Termination Date, and Tenant will continue to pay all rent and perform all of its obligations through and until the New Termination Date. The termination of this Lease will not relieve Tenant from Liabilities for any of its defaults, nor will the termination extinguish Liabilities for any indemnities or for any other obligations that survive pursuant to the terms of this Lease. 11 (c) If Tenant or any of its Related Entities ever leases any portion of the 1776 Premises from 1776 Limited Partnership, then, if necessary, the initial term of this Lease automatically shall be deemed extended (but not shortened) so that the initial term of this Lease and the initial term of Tenant's lease with 1776 Limited Partnership will be co-terminous. RENT. (a) For each Phase, Tenant will pay the base rent as shown in Exhibit "D" in equal monthly installments in advance beginning on the later of July 1, 1996 or the Occupancy Date for that Phase, and thereafter on the first day of each month during the term (except as otherwise shown in Exhibit "D"), prorated for any portion of a month. The term "rent" includes base rent, additional rent and all other amounts to be paid by Tenant under this Lease, whether or not specifically described as rent. All rent will be paid without demand, deduction, counterclaim or offset of any type (except as may be specifically provided otherwise elsewhere in this Lease) in lawful U.S. legal tender at 433 North Camden Drive, Suite 960, Beverly Hills, California 90210, Attn: Accounting Dept., or to such other person or place as Landlord may from time to time designate. Notwithstanding the foregoing, if and for so long as there is a mortgage loan encumbering the Premises or a loan that is secured by the Letter of Credit, at the written request of Tenant Landlord and Tenant will establish a 12 collection account for the receipt and disbursement of base rent. In such event, Tenant will pay the base rent as and when required each month into this collection account, and the collection agent promptly will disburse from such amount an amount sufficient to pay debt service and any other amounts owed to the mortgage lender and the lender of the loan secured by the Letter of Credit, with the balance being disbursed first to Tenant (but only if and to the extent necessary to pay current debt service to Tenant under the LC Note per Section 24.17(f) if any amounts are then owed under the LC Note) and then to Landlord. The collection agent and the terms of this collection account will be subject to the mutual written approval of Landlord and Tenant, which approval will be based on customary terms for such agreements and will not be unreasonably withheld or delayed. (b) If Tenant provides and continues to provide the Letter of Credit in accordance with Section 24.17 and otherwise does not default under this Lease, within thirty (30) days after payment by Tenant and delivery to Landlord of an invoice therefor and reasonable evidence of Tenant's payment (but not earlier than the date that Tenant pays its first full month of base rent under this Lease), Landlord either will reimburse to Tenant, or credit against rent owed by Tenant, the actual amounts paid by Tenant to the issuer of the Letter of Credit for such issuance, up to an annual amount equal to one percent (1%) of the face amount of the Letter of Credit from time to time. 13 TAXES. 6.1 Definition of Taxes. "Taxes" means all taxes, assessments, levies, charges and fees imposed against, for or in connection with all or any portion of: the Premises; the use, ownership, leasing, occupancy, operation, management, repair, maintenance, demolition or improvement of the Premises; the amount of, or Landlord's right to receive or the receipt of, rent, profit or income from the Premises (but specifically excluding Landlord's net income taxes); improvements, utilities and services, whether because of special assessment districts or otherwise; the value of Landlord's interest in the Premises; and fixtures, equipment and other real or personal property used in connection with the Premises. Taxes also include, without limitation, license fees, sales, use, capital and value-added taxes, penalties (but only if Tenant does not pay its share of Taxes as and when required), interest and costs incurred in contesting taxes, and any charges or taxes in addition to, in substitution or in lieu of, partially or totally, any taxes or charges previously included within this definition, including taxes or charges completely unforeseen by the parties and collected from whatever source. Taxes do not include: Landlord's federal or state net income, franchise, excise, inheritance, gift or estate taxes, and any deed stamps or documentary or transfer taxes payable upon the Transfer of the Premises to any of Landlord's Control Affiliates. 6.2 Payment of Taxes. Subject to and in accordance with Article 9, starting as of the first Occupancy Date for a Phase and continuing thereafter during the term, Tenant will pay Tenant's Percentage of Taxes directly to Landlord as additional rent within fifteen (15) days after receipt of Landlord's bill. Taxes that are assessed during the term of this Lease and also cover any periods prior to or after the term of this Lease will be appropriately prorated. 14 6.3 Tenant's Taxes. Tenant will pay all taxes assessments, license fees and charges levied, assessed or imposed on Tenant, Tenant's business operations and Tenant's Property, and Tenant will indemnify and hold Landlord and its Affiliates harmless from any Liabilities in connection therewith or in connection with any non-payment thereof. 6.4 Contest. Tenant will have the right to contest the amount or validity of any Taxes with the appropriate governmental authorities, provided that: Tenant pays all Taxes when due and complies with all applicable rules, regulations and other Laws in connection with such contest; Tenant pays all costs and expenses in connection with such contest and neither Landlord nor the Premises will, as a result of such contest or any nonpayment of Taxes, become subject to any cost, loss, claim, liability, lien or encumbrance of any type. Tenant will indemnify and hold Landlord and its Affiliates harmless from any Liabilities in connection with any such contest or any nonpayment of Taxes. Landlord also will have the right to contest Taxes. A prorata share of any refund of Taxes obtained, net of all bona fide costs and expenses incurred in connection with the contest resulting in such refund, shall be refunded to Tenant in proportion to the amount of the Taxes paid by Tenant to which such refund relates. 15 OPERATING COSTS. 7.1 Definition of Operating Costs. (a) "Operating Costs" are all costs and expenses incurred in connection with the Premises and for its ownership, operation, management, maintenance, repair, restoration and replacement, including, without limitation, costs for: services, costs and utilities not otherwise directly paid or reimbursed by Tenant; materials, supplies and equipment; premiums for Landlord's insurance policies and deductibles thereunder; wages and payroll, including bonuses, fringe benefits, workers compensation and payroll taxes (but excluding the foregoing payable to Landlord's partner or chief executive charged with the operation and management of the Premises, currently Martin Spagat); professional and consulting fees; management fees at the rate of 3.5% of all scheduled base rent, Taxes and Operating Costs payable by Tenant (without giving effect to any abatements or reductions) and utilities and services payable by Tenant (other than those payable by Tenant directly to third-party providers), or at prevailing rates, whichever is greater, or if no managing agent is retained, an amount in lieu thereof not in excess of the greater of the foregoing amounts; complying with any Laws and insurance requirements; environmental matters, including, without limitation, costs of investigations, disclosures, preventive measures, remediation, disposal, audits, monitoring, maintenance and responsive actions; roadway maintenance; costs payable in connection with any easements that benefit or burden the Premises; capital expenditures (excluding those incurred for repairs or rebuilding resulting from a casualty, but including an amount thereof equal to any deductibles under Landlord's casualty insurance policies); an annual audit of Landlord's books and records relating to the Premises and the preparation of Landlord's annual financial statements (but not its tax returns); and snowplowing and landscaping. Operating Costs do not include: Taxes; depreciation of the Premises structures and improvements; Landlord's loan or ground lease payments (including principal payments); costs of negotiating and enforcing leases; brokerage commissions; costs of any items otherwise includable in Operating Costs to the extent that they are reimbursed under warranties or by insurance proceeds or condemnation awards; costs for Landlord's California corporate office; costs of Landlord's Work; and costs directly paid or specifically reimbursed by Tenant (other than by an allocation of Operating Costs). 16 (b) Subject to the other terms and conditions of this Lease, until the end of the ninth (9th) Lease Year, Operating Costs also will not include, and Landlord will be responsible at its cost for, the replacement of the Building's roof and major structural members (as opposed to the cost of the repair and maintenance thereof, which will be included as part of Operating Costs), unless such replacement is required due to the acts or omissions of Tenant or its Affiliates, in which case Tenant will be solely responsible for all costs in connection therewith. (c) If Tenant validly exercises its Cancellation Option, then the terms set forth in Section 7.1(b) above will continue until the New Termination Date. If Tenant does not validly exercise its Cancellation Option, then the costs for such replacement will be included as part of Operating Costs starting as of the beginning of the tenth (10th) Lease Year and ending as of the beginning of the seventeenth (17th) Lease Year. 17 (d) If the first Extension Option is exercised, or Tenant otherwise agrees to extend the Lease term or the Lease term is otherwise deemed to have been extended pursuant to the specific terms of this Lease, or if Tenant or any of its Related Entities has entered into any agreements or exercised any rights to lease additional space in a new building or buildings, or an enlargement of the Building after completion of Landlord's Work, totalling more than 50,000 feet to be constructed on the Premises or to purchase or otherwise acquire all or any portion of the Premises or any interest in Landlord, then the cost for such replacement will be included as part of Operating Costs for the seventeenth (17th) and eighteenth (18th) Lease Years and thereafter if this Lease is extended. If none of the events described in the preceding sentence occur, then the terms of Section 7.1(b) again will apply during the seventeenth (17th) and eighteenth (18th) Lease Years. 7.2 Payment of Operating Costs. Subject to and in accordance with Article 9, starting as of the first Occupancy Date for a Phase and continuing thereafter during the term, Tenant will pay Tenant's Percentage of Operating Costs to Landlord as additional rent within thirty (30) days after receipt of Landlord's bills. INSURANCE. 8.1 Tenant's Insurance. (a) Tenant will maintain during the term: (i) Commercial general liability insurance (Broad Form CGL, or if this insurance is not then commercially available, the closest equivalent), with contractual liability (including indemnities made by Tenant in this Lease), cross-liability endorsements (or the equivalent) and fire legal liability endorsements, and automobile liability insurance. The amount of this insurance will be at least $10 Million combined single limit for each occurrence, with a deductible not to exceed $10,000.00. If this policy includes a "general aggregate" limit, the limit will be at least two (2) times the combined single limit per occurrence. 18 (ii) "All risk" casualty insurance (or if this insurance is not then commercially available, the closest equivalent), covering all of Tenant's Property and all Alterations made by or for the benefit of Tenant (excluding Landlord's Work). This insurance will be for full replacement cost (which may be subject to standard exclusions in such policies). (iii) Employer's liability insurance of not less than $1,000,000.00, and worker's compensation insurance in statutory limits. (b) Tenant's commercial general liability policy must: name Landlord and the following parties as additional insureds: Landlord and its general partners, Landlord's Mortgagees, and the property managers; be written on an "occurrence" basis; be from insurers licensed to do business in Massachusetts and who also maintain a Best's rating of at least A+; and state with respect to both liability and casualty policies that the insurers will not cancel, fail to renew or modify the coverage without first giving Landlord at least thirty (30) days prior written notice (provided, however, that notice of modification will not be required with respect to modifications which neither reduce the policy limits or materially restrict or reduce the coverage provided by a policy). No more than once every five (5) years during the term, upon Landlord's written request the limits of Tenant's insurance policies shall be increased to amounts as reasonably determined by Landlord based upon customary practices of other prudent landlords. 19 (c) Tenant will supply copies of each paid-up policy or a certificate from the insurer certifying that the policy has been issued and complies with all of the terms of this Article. This insurance must be in effect and the policies or certificates delivered to Landlord on or before the first Occupancy Date for a Phase, or on or before the date that Tenant or its contractors or representatives first enter the Premises, whichever is earlier, and renewals provided not less than thirty (30) days before the expiration of the coverage. Landlord always may inspect and copy any of the policies. 20 8.2 Landlord's Insurance. (a) Landlord will maintain during the Lease term the following insurance policies (or if any of them are not commercially available, the closest equivalents): an "all risk" casualty insurance policy for the full replacement cost (or the highest amount not in excess thereof that is reasonably commercially available) of the Building (which may be subject to standard exclusions in such policies and to exclusion for foundations and footings), rental loss insurance providing coverage for two (2) years (or the longest period not in excess thereof that is reasonably commercially available) of base rent and estimated Taxes and Operating Costs, commercial general liability insurance (Broad Form CGL) of at least $10 Million combined single limit for each occurrence, with a deductible not to exceed $10,000.00, and other insurance policies with commercially reasonable carriers in such amounts, with such deductibles and providing protection against such perils as Landlord determines to be necessary in its reasonable discretion. All losses on all policies maintained pursuant to this Article will be settled in Landlord's name (or as otherwise designated by Landlord) and proceeds will belong and be paid to Landlord except if and to the extent specifically set forth in Addendum #3 and Addendum #4 or by reference in Addendum #5. Landlord makes no representations or warranties as to the adequacy of any insurance to protect Landlord's or Tenant's interests. Upon Tenant's written request, Landlord will provide Tenant with certificates of Landlord's insurance. 21 (b) Tenant and its Affiliates will not undertake, fail to undertake or permit any acts or omissions which will increase the cost of, violate, void or make voidable all or any portion of any insurance policies maintained by Landlord, unless Landlord gives its specific written consent and Tenant pays all increased costs to Landlord on demand. 22 8.3 Waiver of Subrogation. Landlord shall cause each casualty insurance policy required to be carried under this Lease (or actually carried by Landlord) to be written in such a manner as to provide that the insurer waives all right of recovery by way of subrogation against Tenant in connection with any loss or damage covered by that policy, even if such loss or damage may have been caused by the act, omission, negligence or strict liability of Tenant, its subtenants or assignees or any of their officers, directors, agents, employees, contractors, licensees, invitees or suppliers. Tenant shall cause each casualty insurance policy required to be carried by Tenant under this Lease (or actually carried by Tenant) to be written in such a manner as to provide that the insurer waives all right of recovery by way of subrogation against Landlord and any other additional insureds in connection with any loss or damage covered by that policy, even if such loss or damage may have been caused by the act, omission, negligence or strict liability of Landlord or the additional insureds or their respective general or limited partners, officers, directors, agents, employees, contractors, licensees, invitees, suppliers, successors or assigns and neither party shall be liable to the other for any loss or damage to the property of the other party caused by fire or any of the casualties covered by the casualty insurance policies required to be maintained under this Lease (or actually maintained) by the other party even if such loss or damage is caused by the party or any of the other persons or entities described above in this clause and even if the cost of the loss or damage is below the deductible amount on the applicable policy or policies maintained. 23 MONTHLY PAYMENT OF TAXES AND OPERATING COSTS; AUDITS. 9.1 Monthly Payments. At any time and from time to time, and subject to later change, Landlord may elect to have Tenant pay its share of Taxes and Operating Costs (or either of them) in monthly installments, in advance on the first of each month, based on amounts reasonably estimated by Landlord (as revised from time to time). If these estimated monthly payments are required, after the end of each tax fiscal year, Lease Year or other relevant periods selected by Landlord, Landlord will deliver to Tenant a statement of the actual amounts due for the period. Any additional amounts due from Tenant will be payable as additional rent within thirty (30) days (fifteen [15] days for Taxes) after receipt of Landlord's statement, and any overpayment by Tenant will be refunded by Landlord or deducted from the next monthly installments due for that particular payment category. At any time or from time to time, Landlord may deliver a bill to Tenant for Tenant's share of Taxes and Operating Costs (or either of them), and Tenant will pay the amount due to Landlord as additional rent within thirty (30) days (fifteen [15] days for Taxes) after receipt of Landlord's bill. Tenant will receive a credit for any estimated monthly payments already paid by Tenant for the period covered by that bill. 9.2 Tenant's Audit of Taxes and Operating Costs. Upon Tenant's written request in each instance, Landlord will furnish Tenant reasonable backup information for its itemized statements. During the Lease term (and after the Lease term, but within ninety (90) days after Landlord's last invoice to Tenant), 24 and upon at least fourteen (14) days' prior written notice to Landlord, not more than once in each calendar year Tenant may audit Landlord's records of Taxes and Operating Costs for the prior calendar year in order to verify the accuracy of the Taxes and Operating Costs charged to Tenant. Such audit will be conducted only during regular business hours where Landlord maintains its records (which Landlord agrees will be in Massachusetts or California) and Tenant will deliver a copy of the results of the audit to Landlord within fifteen (15) days after receipt by Tenant. All audits will be conducted at Tenant's cost and expense and no subtenant will have the right to conduct an audit, and no assignee will have the right to conduct an audit for any period when the assignee was not in possession of the Premises. 9.3 Landlord's Audit. In addition to providing the information described in Addendum #3, Landlord shall arrange for an annual audit to be made of its books and records relating to this Lease (including with respect to Net Proceeds under Addendum #3). Landlord shall deliver a copy of this annual audit to Tenant within ten (10) days after it is received in final form by Landlord. Tenant shall have the right, at its sole cost and expense, at any time during the term of this Lease and for six (6) months thereafter, to consult with Landlord's auditors regarding such audit. If the results of an annual audit made by Landlord's auditors show an underpayment or overpayment with respect to Net Proceeds, the shortfall or the excess, as applicable, will be paid or refunded within thirty (30) days after the final results of such audit have been delivered to Landlord and Tenant. 25 UTILITIES AND LANDLORD'S SERVICES. (a) Landlord will initially be responsible for bringing utility services (including electricity and hot and cold running water) to the Building to the extent provided as part of Landlord's Work in Exhibit "C." Beginning as of the Occupancy Date for each Phase, Tenant will pay when due to the furnishing parties all fees and costs associated with utilities and communication services provided to or for the benefit of Tenant or the Premises for that Phase, including, without limitation, electricity, water, sewer, gas, heat, telephone, trash and waste removal and disposal, and all other utilities and services provided, whether or not separately metered. If and to the extent that an Occupancy Date has occurred for a Phase but Landlord's Work is continuing with respect to other Phases, if necessary there shall be reasonable proration between Landlord and Tenant of utilities and services consumed for Landlord's Work, so that Landlord bears the cost for such utilities and services. If utilities and services payable by Tenant are not charged to Tenant directly by a public utility, Tenant will pay the charges therefor (as determined by meter or submeter, or if there is no meter or submeter as reasonably determined by Landlord) directly to Landlord as additional rent, either monthly when base rent is due, or within fifteen (15) days after receipt of Landlord's bill, at Landlord's option. Landlord will not be responsible for any Liabilities incurred by Tenant or Tenant's Affiliates nor may Tenant abate rent, terminate this Lease or pursue any other right or remedy against Landlord or Landlord's Affiliates, as a result of any termination or malfunction of any utilities or systems except as specifically provided otherwise in this Lease, although this will not be deemed to limit in any way Landlord's repair and maintenance obligations under Section 12.1 or its repair and/or restoration obligations under Articles 16 and 17 if and to the extent applicable. 26 (b) During the Lease term, Landlord shall provide the services ("Landlord's Services") set forth in Exhibit "G." (c) Tenant shall have access to the Premises 365 days per year, 24 hours per day, unless and to the extent that and for as long as such access is prevented by reason of casualties, emergencies, force majeure or by reason of necessary maintenance or repairs. USE OF PREMISES. Tenant will use the Premises for the purposes described in Section 1.1(h), but for no other purpose. Tenant will: (a) Not permit any objectionable or unreasonable noises, vibrations, odors or fumes in or to emanate from the Premises, nor commit or permit any waste, improper, immoral or offensive use of the Premises, any public or private nuisance or anything that disturbs the quiet enjoyment of neighboring owners or tenants. All deliveries and pickups must be conducted at reasonable times and in a reasonable manner. All trash and waste products must be stored, discharged, processed and removed in a reasonable manner and in compliance with applicable Laws and so as not to be visible to neighboring owners or tenants or create any health or fire hazard. (b) [INTENTIONALLY OMITTED] 27 (c) Not: permit any coin or token operated vending, pinball, gaming or other mechanical devices on the Premises, except for telephones and vending machines solely for use by Tenant's employees and its business invitees; permit governmental or quasi-governmental agencies to occupy the Premises; use or operate the Premises for retail sales to the general public or as a messenger, answering or employment service, doctors' offices, for banking or mortgage broker or mortgage banking purposes (but a credit union of not more than 1,800 square feet serving only Tenant's employees will not be deemed excluded by this clause), a restaurant or food-service facility (other than for Tenant's employees and its business invitees), a school or educational institution (although training and demonstration rooms for Tenant's employees and customers are permitted), or living or sleeping quarters; store, sell or distribute obscene, lewd or pornographic materials or engage in related businesses in or from the Premises; or conduct any auction, distress, fire, bankruptcy or going-out-of-business sale (except that Tenant may conduct such a sale once each calendar year in the Premises of its equipment and products, provided that each such sale is in accordance with applicable Laws and lasts no more than three (3) days). (d) Comply with: Laws and insurance requirements affecting the Premises or any use and occupancy thereof, including, without limitation, making required alterations to the Premises; and Landlord's rules and regulations and reasonable changes to those rules and regulations made by Landlord from time to time (provided that such reasonable changes are not materially more adverse to Tenant than the current rules and regulations). Tenant will, at its expense, 28 obtain and maintain all licenses, approvals and variances necessary to conduct its business and occupy the Premises (other than the initial temporary or final Certificates of Occupancy to be obtained in connection with Landlord's Work, but none of those licenses, permits or variances will be binding on or in any way affect or restrict Landlord or the Premises itself. (e) If it wishes, install exterior signage on the Building as well as a limited number of monument signs, which shall be subject to compliance with applicable Laws and Landlord's approval as to size, location, materials and design, which approval shall not be unreasonably withheld. Subject to compliance with applicable Laws, Tenant may install such interior signage as it may deem necessary or advisable. Tenant will be responsible for the maintenance and repair of its signage, and on or before the expiration of the term, it will remove its signage and repair any damage to Landlord's reasonable satisfaction. (f) During the Lease term, unless Tenant's right to possession is terminated pursuant to this Lease, Tenant and its employees will have access to the Premises twenty-four (24) hours per day, three hundred sixty-five (365) days per year, subject to emergencies, force majeure and necessary repairs, maintenance or construction. 29 MAINTENANCE AND REPAIRS. 12.1 Landlord's Obligations. Landlord will repair and maintain: the roadways, sidewalks, parking lot and loading docks of the Premises, and provide snow plowing and landscaping for the Premises; the roof, any elevators, the structural elements of the Building (including structural elements of the columns, stairwells, foundations, floors and exterior walls of the Building, but not the interior surfaces of any walls, floors or ceilings); the plumbing Systems and Equipment, but excluding any specialty plumbing Systems and Equipment for Tenant's engineering, research and development or manufacturing processes or any kitchen appliances or cafeteria equipment or installations; the base building HVAC system (but excluding any special systems, such as special computer-room cooling systems, etc.); the exterior windows and exterior glass of the Premises (except as provided in Section 12.2 below); and the base building life safety and sprinkler systems, and the base building electrical system (but excluding for example Tenant's own security system and any special or above-standard systems, such as special computer-room systems, etc.) All of the foregoing will be performed in a manner generally similar to the repair and maintenance activities customarily undertaken by prudent owners of property similar to the Building. However, subject to the terms in Section 8.3 of this Lease regarding casualties and waivers of claims for damage, Tenant will be responsible for all repairs and maintenance resulting from Tenant's Alterations or the negligent or intentional acts or omissions of Tenant or its Affiliates. Landlord will make its repairs within a reasonable time following Tenant's notification that the repairs are required and once begun will proceed diligently with such repairs. Landlord's obligations are subject to the provisions of Articles 16 and 17 and the rest of this Lease. If requested by Tenant, Landlord will provide a full-time or part-time building engineer on-site on the Premises to help supervise and perform Landlord's repair, maintenance and service obligations, and all costs for such personnel shall be deemed to part of Operating Costs. 30 12.2 Tenant's Obligations. Except for Landlord's obligations in Section 12.1, Tenant will maintain and repair the Building and the Systems and Equipment serving the Building in a first-class manner, provide its own janitorial service and keep the Building in good order and condition, including, without limitation, Tenant's Property, all doors, windows (but only to the extent of breakage or damage caused by Tenant or its Affiliates), window treatments, wall coverings, floor coverings, non-structural portions of the ceiling, floor and walls, and Tenant's Alterations (unless otherwise requested by Landlord), reasonable wear and tear and damage by fire and casualty excepted. Landlord will reasonably cooperate with Tenant to enforce any warranties that Landlord may receive in connection with any equipment that Tenant is required to maintain. 31 ALTERATIONS. 13.1 Landlord's Consent. "Alterations" means Tenant's alterations, additions, improvements, remodeling, repainting, decorations or other changes (not including the tenant improvements made as part of Landlord's Work). Tenant may make nonstructural Alterations to the interior of the Building without Landlord's consent provided that Tenant complies with this Article and the rest of this Lease and the Alterations do not: affect the windows or the exterior of the Building; increase any mezzanine areas of the Building; adversely affect the strength, structural integrity or load-bearing capacity of any portion of the Building; or adversely affect the Systems and Equipment in the Building. All other Alterations require Landlord's prior written consent, which may be withheld arbitrarily. Whether or not Landlord's consent is required, Alterations are subject to the rest of this Article. 32 13.2 Notice. Tenant will notify Landlord at least fifteen (15) days before beginning any Alterations (other than the initial Tenant's Work for each Phase). Together with Tenant's notice, or if notice is not required then prior to beginning the Alterations, Tenant will give Landlord copies of the necessary permits and approvals and, if Landlord deems it necessary in its arbitrary discretion, plans and specifications for the Alterations (but not for minor, non-structural Alterations such as wall coverings, wall hangings, built-in cabinetry, movable partitions, carpeting and painting). Landlord's review or approval of Tenant's plans and specifications is solely for Landlord's benefit and will not be considered a representation or warranty to Tenant as to safety, adequacy, efficiency, compliance with Laws or any other matter, or a waiver of any of Tenant's obligations. Except for items of Tenant's Property, and unless otherwise specifically agreed by Landlord in writing in response to Tenant's specific written request in each instance with respect to each Alteration, at the end of this Lease all Alterations will be removed and the Premises restored to its condition prior to the Alterations, unless otherwise requested in writing by Landlord prior to the end of this Lease, in which case they will be surrendered with the Premises at the end of this Lease and will be deemed to be Landlord's property (except for moveable partitions, which will remain Tenant's Property). 13.3 Compliance with Laws. Alterations will comply in all respects with this Lease and applicable Laws and insurance requirements. Alterations will be done in a first-class manner, using first quality materials, and so as not to interfere with Landlord or other tenants in the Premises, cause labor disputes, 33 disharmony or delay, or impose any Liabilities on Landlord. Alterations will be performed only by experienced, licensed and bonded contractors and subcontractors approved in writing by Landlord (except that Tenant need not obtain Landlord's approval for contractors who perform a non-structural Alteration with an aggregate cost of less than $100,000.00). Tenant will cause its contractors and subcontractors to carry workmen's compensation insurance in statutory limits, and commercial general liability insurance (Broad Form CGL, or if such insurance is not then commercially available, the closest equivalent) in an amount not less than $1,000,000.00 or such higher amount as then may be customarily demanded by prudent landlords, and such liability insurance shall contain cross-liability endorsements or the equivalent (if Landlord is to be named as an additional insured hereunder) and automobile liability insurance in the same amount, and if such work is reasonably estimated to cost more than $75,000.00 in any instance, Landlord and its general partners, Landlord's Mortgagees and the property managers shall be named as additional insureds on such policies. 34 13.4 Liens. Tenant will pay when due all claims for labor, materials and services claimed to be furnished for Tenant or Tenant's Affiliates or for their benefit and keep the Building and the Premises free from all liens, security interests and encumbrances based on or arising from such claims ("Liens"). Tenant will indemnify Landlord for, and hold Landlord harmless from, all Liens, the removal of all Liens and any related actions or proceedings, and all Liabilities incurred by Landlord in connection therewith. NOTICE IS HEREBY GIVEN TO ALL PERSONS FURNISHING LABOR OR MATERIALS TO TENANT THAT NO MECHANICS', MATERIALMENS' OR OTHER LIENS SOUGHT ON THE PREMISES WILL IN ANY MANNER AFFECT LANDLORD'S RIGHT, TITLE OR INTEREST. 35 INDEMNITY; SATISFACTION OF REMEDIES. 14.1 Indemnification. Notwithstanding Section 24.11 or any other provision of this Lease, but subject to the next sentence, Tenant will not be required to indemnify Landlord for or hold it harmless from Liabilities if and to the extent that they arise directly from Landlord's negligence or willful misconduct or the negligence or willful misconduct of Landlord's employees, agents, contractors and subcontractors (if and to the extent that those contractors and subcontractors are performing work under contracts or agreements with Landlord). Notwithstanding anything to the contrary, for all purposes in connection with this Lease and the Premises, Landlord and its employees, agents, contractors and subcontractors and their respective Affiliates never will be deemed to have been negligent or to have engaged in willful misconduct because of any failure to properly supervise Tenant or Tenant's Affiliates or to prevent, discover, disclose, correct or cure any acts or omissions of Tenant or Tenant's Affiliates. Except as otherwise specifically provided in Section 8.3, Tenant will indemnify Landlord for and hold Landlord harmless from Liabilities arising from or in connection with: acts or omissions of Tenant and its Affiliates on, about or in connection with the Premises, and/or agreements or alleged agreements involving Tenant and any third parties, and/or the conduct of Tenant's business; Tenant's breach of or default under this Lease; and claims by Tenant's Affiliates or persons other than Tenant if Landlord declines to consent to any act, event or document requiring Landlord's consent under this Lease (but, subject to the terms of this Lease, this will not prevent Tenant from bringing an action against Landlord if Landlord declines to consent if Landlord is required to consent by the terms of this Lease or if Landlord's decision not to consent is unreasonable where Landlord is required to be reasonable). 36 14.2 Damage to Persons or Property. Subject to the rest of this Section and the rest of this Lease, Landlord will be liable for injuries to persons and damages to property to the extent caused by its own negligence or willful misconduct or the negligence or willful misconduct of Landlord's employees, agents, contractors and subcontractors (if and to the extent that those contractors and subcontractors are performing work under contracts or agreements with Landlord), but Landlord will not be liable for any special, indirect, consequential, punitive or similar damages (including, without limitation, any loss of use or revenue by Tenant or any other person) under any circumstances, or for any Liabilities arising from or in connection with: acts or omissions of Tenant, any third parties, or their Affiliates, including, without limitation, burglary, vandalism, theft, or criminal or illegal activity; explosion, fire, steam, electricity, water, gas, rain, pollution, contamination, hazardous substances, motor vehicles or any casualties; breakage, cracking, leakage, malfunction, obstruction or other defects in Systems and Equipment or the roof, walls, floors, surfaces or structure, or of any services or utilities; any work, demolition, maintenance or repairs permitted under this Lease; any exercise of Landlord's rights under any Laws or under this Lease, including any entry by Landlord or its Affiliates on the Premises and/or the Building as permitted by and in accordance with this Lease; any loss of or damage to Tenant's Property; or the requirements of any Laws or any of the matters described in Section 24.5. Tenant waives all claims against Landlord in connection therewith, but the foregoing is not meant to imply that Tenant will be liable therefor, or be required to indemnify Landlord against any loss, damage or liability incurred by Landlord as a result thereof, unless such liability or indemnity is otherwise provided for by the terms of this Lease, nor to release Landlord from its repair and maintenance obligations under Section 12.1 or Landlord's obligations to repair and/or restore in Articles 16 and 17 if and to the extent applicable. Tenant also waives any Laws or rights that would permit Tenant to terminate this Lease, perform repairs or maintenance in lieu of Landlord (or on Landlord's behalf), or offset or withhold any amounts due because of damage to or destruction of the Premises, any repairs or maintenance, or for any other reason 37 (unless specifically permitted in this Lease [for example, in Section 14.4 below]). This exculpation of Landlord and all of Tenant's waivers in this Lease will apply to all of Tenant's Affiliates to the greatest extent possible. 14.3 Satisfaction of Remedies. Notwithstanding anything in this Lease or elsewhere to the contrary: Tenant will look solely to Landlord's interest in the Premises and, subject to the terms of this Lease, Landlord's interest in liability insurance proceeds, casualty insurance proceeds and eminent domain awards if and to the extent that such proceeds or awards are not paid to or retained by Landlord's Mortgagees or applied in accordance with this Lease, to satisfy any claims, rights or remedies, and Landlord and its partners and their respective Affiliates, at every level of ownership and interest, have no personal or individual liability of any type, whether for breach of this Lease or otherwise, their assets will not be subject to lien or levy of any type, nor will they be named individually in any suits, actions or proceedings of any type. 38 14.4 Tenant's Self Help. (a) Tenant shall have the right, but not the obligation, to perform an obligation that Landlord is otherwise required to perform under this Lease (the "Right of Self Help") under the circumstances set forth below: (i) If Landlord fails to perform such obligation as and when required under this Lease, such failure materially interferes with Tenant's business activities in the Premises, and such failure continues without cure for thirty (30) days after a subsequent written notice from Tenant to Landlord (but if more than thirty (30) days are reasonably required to cure, Landlord will be deemed to have cured if it promptly begins to cure within the thirty (30)-day period and then diligently completes the cure as soon as reasonably possible), and Tenant provides an additional notice to Landlord and Landlord's Mortgagees that it intends to perform such obligation and Landlord and Landlord Mortgagees fail to perform such obligation within a reasonable time after receiving Tenant's notice of its intention to so perform. (ii) If the failure to perform such obligation would result in an emergency condition if not remedied promptly (i.e., an imminent and substantial risk of significant additional property damage, or personal injury or death) and Landlord fails to perform such obligation within a reasonable period of time after receiving Tenant's notice of such emergency condition and Tenant's intention to exercise the Right of Self Help (and in such case Tenant shall exercise its Right of Self Help only if and to the extent reasonably necessary to remedy the emergency condition, and as soon as there no longer is an emergency condition, Tenant shall not have the right to continue to exercise the Right of Self Help pursuant to this Subsection (ii)). 39 (See Section 3 of Addendum #3, which addresses Tenant's recovery of the reasonable costs and expenses incurred by Tenant in exercising its Right of Self Help.) PARKING. All parking areas on the Premises shall be available to Tenant and its Affiliates (the current parking areas are shown in Exhibit "A"). Except for Tenant's share of Taxes and Operating Costs associated with the parking areas, Tenant will not be charged for parking. If necessary in Landlord's reasonable judgement to protect property, permit adequate security, prevent unauthorized use or entry, increase safety or promote the orderly or efficient flow of traffic, Landlord may: change signs, lanes and the direction of traffic within the parking areas; change, eliminate or add parking spaces or areas devoted to parking (provided that Tenant's parking is not reduced); allow parking with a validation, valet, sticker or other system; promulgate reasonable rules and regulations that do not materially adversely affect any of Tenant's parking rights; and take any other actions deemed necessary by Landlord, as long as such actions conform with this Lease. 40 DAMAGE OR DESTRUCTION. 16.1 Repairs. Subject to the rest of this Article and the rest of this Lease, Landlord will repair damage to the Premises and the Building caused by fire or other casualties to the extent insured against under standard "all risk" casualty policies. However, Landlord is not obligated to repair damage for which Landlord has no liability if and to the extent specifically so provided under other provisions of this Section or the rest of this Lease or to undertake repairs unless insurance proceeds are available, spend more than the net insurance proceeds it actually receives and is permitted to retain for any repair or replacement ("Landlord's Insurance Proceeds") (except if and to the extent that Tenant agrees in writing to advance, and in fact advances as needed, all costs in such repairs), or repair or replace any damage to Tenant's Work, Tenant's Property or any Alterations (except to the extent that damage to such Alterations is covered by Landlord's casualty insurance policy). Except as may otherwise be required by then applicable Laws or as provided in this Lease, Landlord will attempt to restore the damaged portions to their prior condition. Landlord will proceed diligently to complete repairs within a reasonable time after receiving notice of the damage, required approvals, building permits and licenses and the insurance proceeds payable on account of the damage, all of which Landlord will pursue diligently, but in no event will this diligent pursuit be deemed to require any legal action by or on behalf of Landlord, except if and to the extent that Tenant agrees in writing to advance, and in fact advances as needed, all costs in connection with such legal action and such legal action does not result in any Liabilities to Landlord. 41 16.2 Election to Terminate. Landlord has the option either to (a) repair the casualty damage, or (b) terminate this Lease by delivering written notice within ninety (90) days after the damage occurs, if: (i) the damage occurs during the last two (2) years of the term, as the term already may have been extended pursuant to this Lease, and in Landlord's reasonable determination the repairs would take more than one hundred fifty (150) days or one-third (1/3) of the remaining term, whichever is less, to complete (unless Tenant validly exercises a previously unexercised Extension Option in accordance with this Lease within thirty (30) days after receipt of written notice from Landlord that Landlord intends to terminate this Lease in accordance with this Subsection (i) or unless Tenant within such 30-day period agrees in writing to advance, and in fact advances as needed, all costs in excess of Landlord's Insurance Proceeds in order to complete such repairs); or (ii) Tenant is in default; or (iii) in Landlord's reasonable judgement the repairs would take more than two (2) years from the date of the damage to complete or cost more than the insurance proceeds that are reasonably likely to be made available as a result of such casualty (unless within thirty (30) days after receipt of written notice from Landlord that it intends to terminate this Lease in accordance with this Subsection (iii) Tenant agrees in writing to advance, and in fact advances as needed, all costs in excess of Landlord's Insurance Proceeds in order to complete such repairs; or (iv) Tenant already has exercised the Cancellation Option; or (v) if the damage occurs during the eighth (8th) or ninth (9th) Lease Year and in Landlord's reasonable determination the repairs would take more than one hundred fifty (150) days or 1/3 of the remaining period until the end of the ninth (9th) Lease Year, whichever is less, to complete, and within thirty (30) days after Landlord's written request, Tenant fails to deliver to Landlord an unconditional and irrevocable written waiver of any rights to exercise the Cancellation Option, or Tenant agrees to advance and in fact advances as needed, all costs in excess of Landlord Insurance Proceeds in order to complete such repairs. 42 Tenant also has the right to terminate this Lease for such damage if: (x) the damage denies Tenant access to the Premises, or causes more than thirty percent (30%) of Tenant's parking spaces to become unusable (and Landlord cannot replace those lost spaces reasonably promptly and in reasonable proximity to the Premises, whether by the use of valet parking, or otherwise), or causes at least 85% of the useable area of the Building to become entirely untenantable, Landlord elects or is required under this Lease to repair the damage, and except for delays for which Tenant is responsible under this Lease, Landlord fails to substantially complete the repairs it is required to make (or restore access or restore or replace parking spaces, as applicable) within two (2) years after the damage occurs, Tenant delivers its written termination notice to Landlord within fifteen (15) days after the end of Landlord's two (2)-year repair period and Landlord fails to substantially complete those repairs (or restore access or restore or replace parking spaces, as applicable) within sixty (60) days after receiving such notice. If Landlord's repairs are deemed to be substantially completed (or Landlord has restored access or restored or replaced parking spaces, as applicable) within this sixty (60)-day period, Tenant's termination notice will be null and void and this Lease will continue in existence; or (y) the damage denies Tenant access to the Premises, or causes more than thirty percent (30%) of Tenant's parking spaces to become unusable (and Landlord cannot replace those lost spaces reasonably promptly and in reasonable proximity to the Premises, whether by the use of valet parking, or otherwise) or causes at least 85% of the useable area of the Building to become entirely untenantable, Landlord 43 notifies Tenant specifically and in writing that the repairs that Landlord is required to make probably will take longer than two (2) years to substantially complete (or that Landlord cannot restore access or restore or replace parking spaces, as applicable, within two (2) years) and Tenant delivers to Landlord a written termination notice within fifteen (15) days after receiving Landlord's notice; or (z) the damage occurs during the last two (2) years of the term (as it may have been extended) and the damage denies Tenant access to the Premises, or causes more than thirty percent (30%) of Tenant's parking spaces to become unusable (and Landlord cannot restore or replace those lost spaces reasonably promptly and in reasonable proximity to the Premises, whether by the use of valet parking, or otherwise) or causes at least 85% of the useable area of the Building to become entirely untenantable, Landlord notifies Tenant specifically and in writing that the repairs that Landlord is required to make probably will take longer than one hundred fifty (150) days or one-third (1/3) of the remaining period until the expiration of the term, whichever is less, to substantially complete (or that Landlord cannot restore access or restore or replace parking spaces, as applicable, within such period) and Tenant delivers to Landlord a written termination notice within fifteen (15) days after receiving Landlord's notice. 44 16.3 Abatement of Rent. If the Building or any portion thereof is damaged by casualty so that it is untenantable for more than two (2) consecutive business days, base rent and Taxes and Operating Costs will abate in proportion to the degree to which Tenant's use of the Premises is impaired, as reasonably determined by Landlord, from the date of the damage until Landlord has substantially completed the repairs it is required to make and gives Tenant access to the Premises, or Tenant reoccupies or can reoccupy the damaged part of the Premises, whichever is earlier. The abatement of base rent, Taxes and Operating Costs will not exceed the net amount of rental loss insurance collected by Landlord for or by reason of such casualty. The abatement of base rent, Taxes and Operating Costs described above is Tenant's sole remedy and compensation in connection with any damage, destruction or repairs, except for Tenant's right to terminate as permitted in this Article, or unless Landlord willfully fails to attempt to complete with diligence the repairs it is required or elects to make. 16.4 Consequences of Termination. If this Lease is terminated per this Article 16 or Article 17 but Tenant holds over in the Premises, then despite the second to last sentence of Section 24.1, the most recent annual base rent will not be doubled, and any abatement of rent that applied prior to the termination will continue to apply to the same extent and for the same period that it would have absent the termination. However, the rest of Section 24.1 will continue to apply. Notwithstanding anything to the contrary, after a termination of this Lease per this Article 16 or Article 17: Tenant shall remove Tenant's Property from the Premises as quickly as reasonably practicable, but in any event within 45 sixty (60) days after such termination; Tenant assumes all risk of loss and/or damage to Tenant's Property from any source, and waives against Landlord and its Affiliates all Liabilities in connection therewith; Tenant shall cooperate with Landlord at Tenant's expense to minimize any interference with Landlord's activities on the Premises; and upon Landlord's request, Tenant shall immediately remove (or relocate to an unaffected part of the Building, if any, or the Premises) the items of Tenant's Property specified by Landlord if, in Landlord's good faith belief, such removal or relocation is necessary to avoid the risk of additional damage, injury or death or to comply with applicable Laws, and if Tenant does not so remove or relocate those items of Tenant's Property as so required, those items shall be deemed abandoned by Tenant and Landlord shall have all of the rights set forth in the second sentence of Article 3. 16.5 Reconstruction Costs. "Reconstruction Costs" means the costs advanced by Tenant, if any, to perform Landlord's repairs up to the same level of fit and finish that existed immediately prior to the casualty damage if and to the extent that Tenant specifically has been granted the right in this Article 16 to advance such costs. Reconstruction Costs shall not include any costs to repair or replace Tenant's Work, Tenant's Property or any Alterations, nor any advances that are subsequently repaid to Tenant (whether by insurance or otherwise). 46 CONDEMNATION. (a) If all or substantially all of the Premises is condemned, taken or appropriated by any public or quasi-public authority under the power of eminent domain, police power or otherwise, or if there is a conveyance in lieu thereof ("Condemned" or a "Condemnation"), this Lease will terminate as of the day before the Condemnation. (b) If more than twenty-five percent (25%) of the usable area of the Building is Condemned, either Landlord or Tenant may terminate this Lease as of the day prior thereto by delivering written notice to the other within fifteen (15) days after the Condemnation. Tenant also will have the right to terminate this Lease subject to the terms of and in the manner described in Section (16.2 (x), (y) and (z) if the Condemnation denies Tenant access to the Building or effectively renders the Building untenantable in the same manner, to the same extent and for the same periods as a casualty as described in those Sections, or at least thirty percent (30%) of Tenant's parking spaces are Condemned and are not restored or replaced by Landlord and the ratio of the number of Tenant's parking spaces Condemned compared to the rentable area of the Building Condemned at the same time (if any) is materially greater than the ratio of Tenant's total initial parking spaces compared to the initial rentable area of the Building, in each case effective as of the date of Condemnation. (c) If part of the Premises is Condemned and this Lease is not terminated, Landlord will make the necessary repairs so that, to the extent reasonably possible, the remaining part of the Premises will be a complete 47 architectural unit. Otherwise, Landlord's restoration will be conducted as described in Section 16.1, except that Landlord will not be required to begin repairs until a reasonable time after it receives any necessary approvals, building permits and licenses and substantially all of the proceeds of any awards granted for the Condemnation, and then will proceed diligently with the repairs. As of the date of Condemnation, base rent, Taxes and Operating Costs will abate in proportion to the area of the Building Condemned. Except for Tenant's rights to receive its share of Net Proceeds as set forth in Addendum #3, all proceeds, income, rent, awards and interest in connection with any Condemnation will belong to Landlord, whether awarded as compensation for diminution of value to the leasehold improvements, or the unexpired portion of this Lease, or otherwise. Except for Tenant's right to receive Net Proceeds as set forth in Addendum #3, Tenant waives all claims against Landlord and the condemning authority with respect thereto, and in connection with a Condemnation, but nothing in this Section prevents Tenant from bringing a separate action against the condemning authority for moving costs or for lost goodwill (as long as this separate action does not diminish Landlord's recovery). 48 ASSIGNMENT AND SUBLETTING. 18.1 Landlord's Consent Required. Tenant will not, and does not have the right or power to, voluntarily, involuntarily or by operation of any Laws, sell, convey, mortgage, subject to a security interest, license, assign, sublet or otherwise transfer or encumber all or any part of Tenant's interest in this Lease or the Premises, or allow anyone other than Tenant's employees (or employees of Tenant's current or future joint venturers or development partners who are temporarily working on joint projects with Tenant and who will not, in the aggregate, occupy more than 25,000 square feet of space in the Building) to occupy the Building or the Premises (singularly or collectively, "Transfer"), without in each instance first obtaining Landlord's prior written consent (unless Landlord's consent specifically is not required per Section 18.5(c)) and complying with this Article and any attempt to do so without this consent (which may be withheld arbitrarily unless otherwise specifically set forth in this Article) and compliance will be null and void and a default, unless otherwise specifically elected by Landlord in writing. 49 18.2 Notice. Tenant will notify Landlord in writing at least thirty (30) days before any proposed or pending Transfer (or as soon as reasonably possible in the case of the Transfer pursuant to Section 18.5 (c) if thirty (30)-day advance notice is not possible, but in any case before such a Transfer) and will deliver to Landlord such information as Landlord may reasonably request in connection with the proposed or pending Transfer and the proposed Transferee, including, without limitation, a copy of the final executed Transfer documents, current financial statements prepared or reviewed by an independent certified public accountant, a current Dun & Bradstreet report (if available) and other reasonably available financial information about and banking references for the proposed Transferee, and information as to the type of business and business history of the proposed Transferee. All of this information must be certified as true and correct by a senior, responsible officer of the party providing the information. The financial information received by Landlord from the Transferee will be treated as confidential information, unless the information is otherwise publicly available or is obtained by Landlord from other sources, and in any event Landlord may disclose it to Landlord's lenders, attorneys, accountants, prospective purchasers and their agents, to be treated by them as confidential to the same extent as by Landlord. 50 18.3 Reasonable Consent. Landlord will not unreasonably withhold or delay its consent to an assignment or sublease by Tenant. Landlord may withhold its consent to any hypothecation, assignment for security purposes or other Transfer arbitrarily and in its sole discretion. Tenant agrees that Landlord's withholding of consent to a proposed sublease or assignment will be deemed reasonable if Tenant is in default or any of the other material terms and conditions of this Article have not been complied with, or if any of the following conditions are not satisfied: (a) the subtenant or assignee will use the Building and the Premises only for the uses permitted in Section 1.1(h) and otherwise in accordance with this Lease, and the business and reputation of the subtenant or assignee are reasonably acceptable to Landlord and Landlord' Mortgagees (and Landlord's Mortgagees will not unreasonably withhold or delay their consent); (b) the subtenant or assignee is reputable and creditworthy and has the independent financial ability to perform its obligations under its assignment or sublease without undue financial burden in Landlord's reasonable judgment (which reasonable judgment shall be deemed satisfied if the subtenant or assignee has a net worth, credit rating and financial capability at least equal to Tenant's when Tenant executed this Lease), and it is not then subject to any bankruptcy or reorganization plan, proceeding or order, and no receiver is managing its affairs or assets; and (c) there will be no more than an aggregate of six (6) subleases of the Premises at any one time. These conditions are not exclusive and Landlord may consider other factors deemed to be relevant in determining if Landlord should grant or reasonably withhold its consent. 51 18.4 No Release of Tenant. Whether or not Landlord consents, no Transfer will release or alter any of the Transferor's or Tenant's Liabilities hereunder, including, without limitation, the joint and several obligations of the Transferor and Tenant to pay rent and perform all of Tenant's other obligations under this Lease, except that, provided that there is then no default by Tenant under this Lease, but notwithstanding any other provisions of this Lease to the contrary, an assignor will be released (a "Released Assignor") from further obligations under this Lease as of the date that the following conditions are satisfied: (i) There is a valid assignment of this Lease by the assignor in accordance with the terms of this Article to an assignee who has a net worth, Moody's or Standard & Poor's credit rating and financial capability at least equal to those possessed by PictureTel Corporation when PictureTel Corporation executed this Lease or equal to those possessed by the assignor just prior to the assignment (whichever are better), or the assignor validly assigns this Lease to and merges into or consolidates with a Permitted Assignee and thereby ceases to exist. PictureTel Corporation's, credit rating as of the date of its execution of this Lease is deemed to be Baa2 (Moody's) and BBB (Standard & Poor's). (ii) The assignee (including a Permitted Assignee) unconditionally assumes in writing for Landlord's benefit this Lease and all of the assignor's and Tenant's Liabilities including, without limitation, those that arose prior to the assignment, and notwithstanding any other provision of this Lease, upon such assignment and assumption the assignor shall have no further obligations under this Lease and may cease its existence without any violation of any provision of this Lease. 52 The acceptance of rent by Landlord from any person other than Tenant is not a waiver by Landlord. Consent to one Transfer will not be deemed to be consent to any subsequent Transfer. If Tenant or any Transferee defaults under this Lease, Landlord may proceed directly against the Transferee and/or against Tenant and/or against the Transferor without proceeding or exhausting its remedies against the other. After any assignment, or after sublease(s) aggregating more than fifty percent (50%) of the area of the Building with an initial term (including options) of at least seventy-five percent (75%) of the remaining term of this Lease at the time of such Transfer, Landlord may consent in its arbitrary discretion to subsequent Transfers of or amendments to this Lease without notifying Tenant or any other person, without obtaining consent thereto, and without relieving Tenant or a Transferor of its Liabilities under this Lease (as it may be amended), provided that unless Tenant or a Transferor consents in writing, Tenant or such Transferor (as applicable), will not become liable by reason of any such Transfer or amendment to the extent of any increase in Tenant's or such Transferor's (as applicable) aggregate obligations and liabilities under this Lease as set forth in such Transfer or amendments, or for increases in the scope of any indemnities owed to Landlord (e.g., an additional act or omission requiring indemnification, as opposed to an increase in the potential liability under an existing indemnity), or for any increase in the Lease term, except for: (a) Extension Options exercised pursuant to and in accordance with Addendum #2 hereto or otherwise agreed to by Tenant or Transferor (as applicable); or (b) other extensions agreed to by a Transferee, in each case 53 if such other extension is permitted in accordance with the terms of a written agreement between Tenant or the transferor and such Transferee, provided that within thirty (30) days after such extension has been entered into Tenant receives notice, or in fact otherwise becomes aware, that such extension has been entered into. Subject to the following, but notwithstanding anything else to the contrary, Tenant and a Transferor will not be relieved of any Liabilities under this Lease if and to the extent that Landlord grants or consents to any waivers under this Lease to or for the benefit of any Transferee (but if, prior to a breach by Tenant or any Transferee, Landlord waives in writing the performance by the Transferee of any obligation that Tenant otherwise would be required to perform under this Lease, that waiver also shall apply with respect to Tenant [or such Transferor, as applicable]). Landlord's waivers with respect to a Transferee will not affect the rights (if any) of Tenant or the Transferor (as applicable) against the Transferee for any breach of this Lease or any assignment, sublease or other agreement (as applicable) by the Transferee. However, all of such rights against the Transferee will be subject and subordinate to Landlord's rights under this Lease against the Transferee in the event of a default under this Lease. 54 18.5 Additional Terms. (a) Tenant will pay Landlord's reasonable attorneys' fees and other costs in connection with any request for Landlord's consent to a Transfer. This Article is binding on and will apply to every Transferee, at every level. The surrender of this Lease or its termination will not be a merger, but Landlord will have the right in its arbitrary discretion to terminate all subleases and the occupancy rights of all Transferees. Tenant will pay to Landlord as additional rent: all consideration paid or payable for or by reason of any assignment of this Lease (other than an assignment to a Permitted Assignee), and in the case of a sublease, the amount by which the sublease rent and other consideration paid or payable exceeds the base rent, Taxes and Operating Costs payable by Tenant under this Lease for the sublease term (prorated if the area subleased is less than the entire area of the Building), in each case after Tenant first recovers its bona fide, reasonable out-of-pocket costs paid to third parties unaffiliated with Tenant or the subtenant or assignee to obtain the subtenant or assignee (including without limitation, attorneys fees, brokerage commissions, new tenant improvements made solely for the subtenant or assignee), and Tenant recovers any free rent granted. At Landlord's option, Landlord may collect all or any part of this additional rent directly from the payor. Tenant will promptly deliver to Landlord copies of all executed transfer documents, all collateral agreements and all later amendment. 55 (b) An assignee will be deemed to have assumed all of Tenant's Liabilities under this lease and will be deemed to be bound by this Lease, and Tenant and the assignee will indemnify Landlord and hold it harmless from all Liabilities in connection with the assignment, although this indemnity will not affect any liability that Landlord owes to Tenant or others if and to the extent specifically set forth in the terms of this Lease, and it is also understood that Tenant's and any assignee's Liabilities and indemnities relating to the use and occupancy of the Premises will remain as set forth in this Lease and any amendments thereto. To confirm the foregoing, a prospective assignee will be required to execute and deliver to Landlord an unconditional written assumption of Tenant's Liabilities under this Lease and the indemnity described above. Tenant and the assignee will be deemed to be jointly and severally liable for all Liabilities of the Tenant under this Lease. A sublease will be deemed to be subject and subordinate to this Lease in all respects; Tenant and the subtenant will indemnify Landlord and hold it harmless from all Liabilities in connection with the sublease (although this indemnity will not affect any liability that Landlord owes to Tenant or others if and to the extent specifically set forth in the terms of this Lease, and it is understood that Tenant's Liabilities and indemnities relating to the use and occupancy of the Premises remain as set forth in this Lease and any amendments thereto); the subtenant will acquire no rights or claims against Landlord or its Affiliates; if this Lease is terminated or Landlord rightfully reenters or repossesses the Premises, Landlord may terminate the sublease, or at its option, become the sublessor under the sublease and the subtenant will attorn to Landlord, but Landlord will not be liable for Tenant's acts or omissions, subject to any existing defenses or offsets against Tenant or bound by any amendment to the sublease made without Landlord's prior written consent. Sublessees will not have the right or power to make further Transfers, and any attempt to do so will be null and void and a default unless otherwise 56 specifically elected by Landlord in writing. Tenant will make each prospective Transferee aware of the terms of this Article and will deliver to each prospective Transferee a true and correct copy of this Lease prior to any Transfer. Each document of assignment, sublease or other Transfer, at every level, must include or explicitly incorporate the terms of this Article. Landlord may require confirming and/or additional assurances and agreements for its protection from Tenant and the assignee or subtenant, each of whom agrees to give such assurances and execute such agreements, in each case consistent with the terms of this Lease. Notwithstanding anything to the contrary, except for a valid assignment or sublease to a Permitted Assignee or a Permitted Sublessee, respectively, Tenant will not, and will not have the right or power to, assign or convey to, or sublease or otherwise Transfer more than 20,000 square feet in the Building to, any then-current tenant that leases more than 20,000 square feet in any project located in Massachusetts which lies within the "Project Area" as depicted in Exhibit "K" hereto, and of which, at such time, Landlord or any of its Control Affiliates is the owner, or a general partner in the Owner, or a shareholder (in a closely held corporation) of at least forty percent (40%) of the issued and outstanding voting shares of the owner or a general partner in the owner, and Landlord may arbitrarily withhold its consent to such a Transfer. 57 (c) If Tenant is a corporation, the Transfer, directly or indirectly, by one or more transactions of more than forty percent (40%) of Tenant's capital stock (but if Tenant is a public corporation whose stock is regularly traded on a national stock exchange or in the over-the-counter market and quoted on NASDAQ, stock purchases in the ordinary course of business on the open market will not be deemed to be Transfers of stock for purposes of this Subsection (c)), or any dissolution, merger, consolidation or other reorganization of Tenant, or if Tenant becomes a subsidiary or division of another entity, or the Transfer of substantially all of Tenant's assets, will be deemed to be an assignment of this Lease. Notwithstanding anything to the contrary herein contained, an assignment or sublease by Tenant to an entity that is controlled by, controls or is under common control with Tenant, or to an entity resulting from a merger, consolidation or reorganization with Tenant, or to a purchaser of substantially all of the assets or shares of Tenant, will be deemed to be a permitted assignment or sublease, as applicable, that does not require Landlord's or Landlord's Mortgagees' consent provided that the rest of this Article is complied with, the Transferee (if an assignee) unconditionally assumes this Lease and all of Tenant's Liabilities (including, without limitation, those arising before the assignment) in writing, and the Transferee has a net worth, Moody's or Standard & Poor's credit rating, and financial capability at least equal to PictureTel Corporation's when PictureTel Corporation executed this Lease as set forth in Section 18.4(i) (and such Transferee will be a "Permitted Assignee" or a "Permitted Sublessee," as applicable). As a material inducement to Landlord, Tenant agrees that it will make each potential Transferee contemplated by this clause (including any potential purchasers or candidates for 58 merger, consolidation or reorganization) aware of this clause and the rest of this Lease, deliver a copy of this clause and the rest of this Lease to such party prior to entering into such an agreement with such party and make the written assumption described herein and the compliance with this Article a condition to the effectiveness of such an agreement. (d) An assignee pursuant to a valid assignment and assumption of this Lease in accordance with the terms of this Article shall be regarded as the Tenant under this Lease with all of the rights and Liabilities of the Tenant, except as otherwise specifically provided in this Lease, but this shall not affect the assignor's continuing liability under this Lease as set forth in Section 18.4. 59 MORTGAGEE PROTECTION; UNPERMITTED FINANCING; LANDLORD'S LOAN DEFAULTS. 19.1 Subordination and Attornment. This Lease is subordinate to all Superior Leases and Mortgages (defined in Section 24.4), and Tenant will attorn to each person or entity that succeeds to Landlord's interest under this Lease, provided that such person or entity agrees in writing not to disturb Tenant's rights under this Lease as long as Tenant is not in default. This Section is self-operative, but if requested to confirm a subordination and/or attornment or non-disturbance, Tenant will execute subordination and/or attornment and/or non-disturbance agreements furnished by Landlord or Landlord's lessor or mortgagee under any of the Superior Leases and Mortgages (a "Landlord's Mortgagee") within twenty (20) days after request and provided that such Agreements materially substantively conform to typical institutional forms of agreements then in use and do not result in a material adverse change in any of the material terms of this Lease, or materially substantively conform to the forms attached as Exhibit "J" hereto, and provided that any subordination agreements shall provide that the lender shall agree to concurrently deliver to Tenant any notices of Landlord's default delivered to Landlord and to accept from Tenant a cure of such defaults (if and to the extent that such defaults are curable by Tenant) within the cure periods for such defaults granted to Landlord under such loans. However, if Landlord or Landlord's Mortgagee elects in writing, this Lease will be superior to the Superior Leases and Mortgages specified, regardless of the date of recording, and Tenant will execute an agreement confirming this election on request. 60 19.2 Mortgagee's Liability. The obligations and Liabilities of Landlord, Landlord's Mortgagees or their successors under this Lease will exist only if and for so long as each of these respective parties owns fee title to the Premises or is the lessee under a ground lease of the Premises. Tenant will be liable to Landlord's Mortgagees or their successors if any of those parties become the owner of the Premises for any payment of base rent made more than thirty (30) days in advance of the due date for such payment as set forth in this Lease. Landlord's Mortgagees and their successors will not be liable for: (a) acts or omissions of prior owners; (b) the return of any security deposit not delivered to them; or (c) amendments to this Lease made without their consent (if their consent is required under a Superior Lease or Mortgage). 19.3 Mortgagee's Right to Cure. No act or omission (if any) which otherwise entitles Tenant under the terms of this Lease or by any Laws to be released from any Lease obligations or to terminate this Lease will result in such a release or termination unless Tenant first gives written notice of the act or omission to Landlord and Landlord's Mortgagees and those parties then fail to correct or cure the act or omission within a reasonable time thereafter (which will not be less than sixty [60] days and which, in any case, will be long enough to allow the Landlord's Mortgagees sufficient time within which to complete such a correction or cure in a commercially reasonable and diligent manner). Nothing in this Section or the rest of this Lease obligates Landlord's Mortgagees to correct or cure any act or omission or is meant to imply that Tenant has the right to terminate this Lease or be released from its obligations except as may otherwise be permitted in this Lease (although if Landlord or Landlord's Mortgagees fail to cure as set forth above, then nothing in this clause shall prevent Tenant from exercising any of its rights and remedies as specifically set forth in this Lease). Landlord will (and upon Tenant's written request shall), and/or Landlord's Mortgagees may, give notice to Tenant in writing of the identity of any mortgagee of the Premises and Tenant may rely on such notice(s) in complying with this Article. 61 19.4 Unpermitted Financing. So long as Tenant is not in default and is entitled to continue to receive a share of Net Proceeds in accordance with Addendum #3 and/or to exercise a Purchase Option in accordance with Addendum #4, Landlord agrees not to use the Premises or any portion thereof to secure any indebtedness other than: (a) The initial acquisition, construction/development, and/or permanent financing in connection with the Premises and any additional advances thereunder and any extensions, renewals, consolidations, replacements or modifications thereof, so long as the proceeds thereof are used for the purposes set forth in Subsection (b) below; or (b) Financing, the proceeds of which are: used to repay all or part of the financing described in Subsection (a) above; or used to benefit the Premises or pay any Liabilities in connection therewith or as required under this Lease; or are included in Cash Proceeds; or used to pay for any development fees, management fees or fees in lieu thereof payable to Landlord or its Affiliates pursuant to this Lease or in connection with Landlord's Work or in connection with the construction of any additional buildings on the Premises or the enlargement of or other modification of the Building or the rest of the Premises. 62 In any case, any such permitted financing that is placed on the Premises on or before the end of the eighteenth (18th) Lease Year shall, by its terms, be amortized and repaid entirely on or before the end of the Lease term (as it may have been extended prior to the date that such financing encumbers the Premises, and assuming no early terminations of the term), unless Tenant consents thereto or Landlord agrees to reduce the cash portion of the purchase price of the third (3rd) Purchase Option under Addendum #4 by the outstanding principal balance of such financing as of the end of such Lease term (assuming no early terminations thereof). Secured financing that is prohibited pursuant to this Section 19.4 is called the "Unpermitted Financing." 19.5 Landlord's Loan Defaults. If either: (a) Landlord defaults under any loans the lender of which is the beneficiary under the Letter of Credit, and as a result of Landlord's default such lender/beneficiary draws under the Letter of Credit (not including any draws of the type described in Sections 24.17(b) or (e)), and Landlord's default did not arise as a result of Tenant's breach of its obligations under this Lease (e.g., Tenant's failure to pay rent in full when due hereunder) and at the time of Landlord's default Tenant is not in default under this Lease; or (b) Landlord defaults under any mortgage loan secured by the Premises or any portion thereof and the Letter of Credit is not drawn as a result thereof, and Landlord's default did not arise as a result of Tenant's breach of its obligations under this Lease and at the time of Landlord's default Tenant is not in default under this Lease (e.g., Tenant's failure to pay rent in full when due hereunder), and Tenant exercises its rights to cure Landlord's default; or 63 (c) The beneficiary of the Letter of Credit draws under the Letter of Credit and such draws are deemed to be LC Advances under Section 24.17(f); THEN, if and to the extent that Landlord does not reimburse Tenant for the amounts drawn under the Letter of Credit as set forth in Subsection (a) above and/or the amounts paid by Tenant to the mortgagee to cure Landlord's default as set forth in Subsection (b) above and/or pay to Tenant as and when required amounts due under the LC Note (including for purposes of this Section only amounts, if any, that remain due under the LC Note after funds from a permanent loan have been received by Landlord and used to prepay Tenant as provided under the LC Note) as described in Section 24.17(f) (collectively, the "Cure Payments"), notwithstanding anything to the contrary in this Lease: (i) as described in Section 3 of Addendum #3, Net Proceeds first will be distributed to Tenant to repay the unrepaid Cure Payments; and (ii) if there are any unrepaid Cure Payments as of the date that the loan secured by the Letter of Credit and the mortgage loan and any refinancing thereof are fully paid, Tenant may offset against base rent an amount equal to the difference between the monthly base rent due from Tenant, less the monthly debt service (multiplied by 1.2) due to any then-existing Landlord's Mortgagees, until the Cure Payments have been repaid in full. For purposes of this Section, Landlord's default under the applicable loan(s) shall be deemed to be a breach of Landlord's obligations under the 64 applicable loan(s) which is not cured within applicable notice and cure periods under such loans. Such loans shall provide that: (A) the lender(s) shall deliver notices of such defaults to Tenant concurrently with delivery to Landlord; and (B) that the lender(s) will accept a cure of such defaults by Tenant (if and to the extent that such defaults are curable by Tenant) within the cure periods for such defaults granted to Landlord under such loans. ESTOPPEL CERTIFICATES; FINANCIAL STATEMENTS. (a) Tenant will from time to time, within twenty (20) days after written request by Landlord (which request will be made in accordance with Section 24.16), execute and deliver an estoppel certificate in form satisfactory to Landlord or its designees which will certify (except as may be truthfully and accurately noted to the contrary by Tenant therein) such information that is available to Tenant concerning this Lease or Tenant or its Affiliates as Landlord or its designees may request. Tenant understands that Landlord's timely receipt of these Estoppel certificates may be critical and Tenant agrees that if it fails to execute and deliver estoppel certificates as required, Landlord's good faith representations concerning the matters covered by the estoppel certificate will conclusively be presumed to be correct and binding on Tenant and its Affiliates. 65 (b) Within ninety (90) days after the end of each fiscal year of Tenant that falls within the term of this Lease, Tenant will prepare and/or obtain, at no cost or expense to Landlord, annual audited financial statements for Tenant and any assignee of this Lease and any sublessee of more than 60,000 square feet in the Building (including, without limitation, a balance sheet, income statement and statement of sources and uses of funds) prepared in accordance with generally accepted accounting principles and signed by an independent certified public accountant (the "Financial Statements"). Within ten (10) days after Landlord's written request from time to time, Tenant shall deliver to Landlord copies of the most recent annual and quarterly Financial Statements, whether or not audited (provided, however, that for so long as Tenant and/or the assignee and/or the sublessee is a public company, such public company shall not be required to release its Financial Statements to Landlord until it releases them or is permitted to release them to the public, whichever is earlier). 66 DEFAULT. The occurrence of one or more of the following events will be a default by Tenant under this Lease: (a) [INTENTIONALLY OMITTED]; (b) the failure to pay rent or any other required amount within ten (10) days after written notice that the payment is due, but even if Tenant has not paid in full within the first ten (10)-day period, Tenant will not be in default unless it fails to pay in full within ten (10) days after an additional written notice that payment is due (except that no such additional notice will be required if Tenant has failed to pay rent when due more than twice in any twelve (12)-month period); (c) as provided in Articles 23 and 25; (d) a Transfer or attempted Transfer in violation of Article 18; (e) the failure to maintain its required insurance policies (unless such insurance policies are not generally offered by responsible insurance companies, in which case Tenant must maintain the closest form of policy then generally offered by responsible insurance companies, and in which case Landlord's insurance obligations will be similarly modified); or (f) the failure to observe or perform any other obligation, term or condition within the time period specified in this Lease and if such failure continues for an additional five (5) days after the expiration of such prior period and the delivery of a subsequent written notice; if no time period is specified, it will be a default if this failure continues for thirty (30) days after written notice from Landlord to Tenant, but if more than thirty (30) days are reasonably required to cure, Tenant will not be in default if Tenant promptly begins to cure within the thirty (30)-day period and then diligently completes the cure as soon as possible but within seventy-five (75) days after the notice of default is given, or such longer period as may be otherwise permitted in this Lease. 67 REMEDIES FOR DEFAULT. 22.1 General. If Tenant defaults, Landlord may at any time thereafter, with or without notice or demand, do any or all of the following in its arbitrary discretion: (a) give Tenant written notice stating that the Lease is terminated, effective on the giving of notice or on a date stated in the notice, as Landlord may elect, in which event this Lease will terminate without further action; (b) in any manner permitted by law or this lease, and with or without notice, and with or without terminating this Lease, terminate Tenant's right of possession and enter and repossess the Premises, and expel Tenant and Tenant's Affiliates, and remove their property and effects, without being guilty of trespass; and (c) pursue any other right or remedy now or hereafter available to Landlord under this Lease or at law or in equity. 22.2 Tenant's Obligations. If Tenant defaults: (a) All rent due at the time of the default will be paid immediately and Tenant also will pay such costs as Landlord may incur for attorneys' fees and reasonable costs, inspection fees, brokerage fees, putting the Premises in good order, condition and repair (fire and casualty excepted), but not including costs to improve the Premises for a new tenant, and, in addition, Tenant specifically agrees to pay an amount equal to the amount (if any) set forth in Exhibit "H" hereto applicable to the month in which the default occurs (the "Unamortized Costs"). 68 (b) Landlord may, at its sole option and in its arbitrary discretion, re-let all or any portion of the Premises on terms satisfactory to Landlord in its arbitrary discretion, either in its own name or otherwise, for a term or terms which may, at Landlord's option, be more or less than the balance of the term of this Lease and pursuant to one or more leases, and Landlord may grant concessions, tenant allowances and/or free rent, among other things. (c) Unless and until Landlord elects to accelerate the rent due pursuant to Section 22.2(e) and Tenant pays all the amounts due thereunder, whether or not the Premises are re-let, Tenant will pay punctually to Landlord all of the rent and other sums and perform all of Tenant's obligations for the entire Lease term (assuming the original expiration date, as extended) in the same manner and at the same time as if this Lease had not been terminated. 69 (d) If Landlord re-lets the Premises, the date that the new tenant begins to pay base rent to Landlord will be referred to as the "New Rent Payment Date." Subject to the rest of this Subsection, Tenant will be entitled to a credit (the "Credit") against the amounts owed by Tenant in an amount equal to: (a) the total rent stream payable by the new tenant to Landlord only for the period starting on the New Rent Payment Date and ending on the original expiration date of this Lease, as it may have been extended by Tenant prior to the default (and if the amounts owed by Tenant to Landlord have been accelerated pursuant to Subsection (e) below, then the total rent stream owed by the new tenant will be discounted to the date of such acceleration or the New Rent Payment Date, whichever is later, at the prime rate then charged by the Bank of Boston on such date); less (b) the costs and expenses incurred by Landlord to relet the Premises to such new Tenant (including, without limitation, marketing fees, brokerage fees, legal fees and the costs to repair and improve the Premises for such new tenant). The Credit to be received by Tenant will never exceed the amounts actually owed by Tenant to Landlord and Landlord will not be required to pay any amounts to Tenant by reason of the Credit. Neither the Credit nor any other credit will be given to Tenant for any rent received or projected to be received from any reletting for any period after the original expiration date of this Lease, as it may have been extended by Tenant prior to the default. 70 (e) At Landlord's option, Landlord may, by written notice to Tenant at any time after Tenant's default, elect to recover, and Tenant will thereupon pay, as liquidated damages, an amount equal to the total rent stream which would have accrued to Landlord under this Lease for the remainder of the Lease term as accelerated (assuming the original expiration date, as extended) if the default had not occurred, discounted to the date of Landlord's election at the then prime rate charged by the Bank of Boston, plus all of the unpaid expenses described in Sections 22.2(a) (except for the Unamortized Costs) and 22.2(f). (f) No action of Landlord in connection with any re-letting, or failure to re-let or collect rent under such re-letting, will operate or be construed to release or reduce Tenant's Liabilities hereunder. Without limiting any of the foregoing provisions, and in addition to any other amounts that Tenant is otherwise obligated to pay, Tenant agrees that Landlord may recover from Tenant all costs and expenses, including reasonable attorneys' fees and costs, incurred by Landlord in enforcing this Lease from and after Tenant's default. (g) Any amount drawn under the Letter of Credit pursuant to Section 24.17(c) or any amount of the cash security deposit applied by Landlord pursuant to Section 24.17(c) shall be credited against amounts owed by Tenant to Landlord under this Section 22.2, whether for base rent, additional rent, Unamortized Costs or liquidated damages, but among them as specified by Landlord. 22.3 Redemption. Tenant waives any and all rights of redemption granted by or under any Laws if Tenant is evicted or dispossessed for any default by Tenant, or if Landlord obtains possession of the Premises by reason of any default by Tenant. 22.4 Performance by Landlord. If Tenant fails to perform any of its obligations under this Lease, Landlord, without waiving or curing the default or failure, may, bud will not be obligated to, perform Tenant's obligations for the 71 account and at the expense of Tenant. Landlord will attempt to provide Tenant with oral or written notice before performing Tenant's obligations, but if Landlord believes that such actions are necessary due to an emergency or to prevent damage or injury or protect health, safety or property, Landlord need not give notice before performing Tenant's obligations. Tenant will pay on demand all reasonable costs and expenses incurred by Landlord in connection with Landlord's performance of Tenant's obligations. 22.5 Post-Judgment Interest. The amount of any judgment obtained by Landlord against Tenant in any legal proceeding arising out of Tenant's default under this Lease will bear interest until paid at the Bank of Boston's (or its successor's) prime rate plus three percent (3%), or the maximum rate permitted by law, whichever is less. Notwithstanding anything to the contrary contained in any Laws, with respect to any damages that are certain or ascertainable by calculation, interest will accrue from the day that the right to the damages vests in Landlord, and in the case of any unliquidated claim, interest will accrue from the day the claim arose. [SEE EXHIBIT "F"] 72 GENERAL PROVISIONS. 24.1 Holding Over. Tenant will not hold over in the Premises after the end of the Lease term without the express prior written consent of Landlord, which may be withheld arbitrarily. However, provided that Tenant is not in default, Tenant may extend the Lease Term on the same terms and conditions provided that Tenant delivers an unconditional extension notice to Landlord at least six (6) months before the end of the term (or any extensions thereof) and specifies in that notice the length of extension period, which cannot be more than three (3) months. If Tenant validly exercises this extension right, the term will be deemed extended for the period specified in Tenant's notice (but not for more than three (3) months), and such extension will be part of the Lease term and will not be considered a holding over by Tenant, but there will be no further extension rights. This extension right is applicable only at the end of the Lease term, as extended. Landlord will diligently attempt to include in its lease with any succeeding or prospective tenant provisions disclaiming liability for consequential damages (i.e., damages for lost business or revenue, as opposed to actual damages or penalties) to any such tenant, and/or provisions limiting such succeeding or prospective tenant's remedies solely to the termination of the Lease, as a result of Landlord's failure to substantially complete and deliver space to such tenant as required, but Tenant will indemnify Landlord for, and hold Landlord harmless from, any and all Liabilities arising out of or in connection with any holding over, including, without limitation, any claims made by any succeeding or prospective tenant and any loss of rent suffered by Landlord. If, despite this express agreement, any tenancy is created by Tenant's 73 holding over, except as specifically set forth in the next sentence the tenancy will be a tenancy at will terminable immediately at Landlord's sole option on written notice to Tenant, but otherwise subject to the terms of this Lease, except that the most recent annual base rent will be doubled (except as specifically set forth in Section 16.4). Nothing in this Article or elsewhere in this Lease permits Tenant to hold over or in any way limits Landlord's other rights and remedies if Tenant holds over (except as specifically set forth in 16.4). 74 24.2 Entry By Landlord. Landlord and its designated representatives at all times shall have the right to enter the Premises, and Landlord will retain (or be given by Tenant) keys to unlock all the doors to or within the Building, excluding doors to Tenant's vaults and files. Landlord in good faith will attempt to give Tenant reasonable advance (which will not require more than twenty-four (24) hours prior) written notice to Tenant or to a responsible officer of Tenant or Tenant's designated facilities manager, or oral notice to a responsible officer of Tenant or Tenant's designated facilities manager, prior to entering the Building and not to unreasonably disturb the conduct of Tenant's business by such entry, but Landlord need not give prior notice and will have the right to use any means necessary to enter the Building if Landlord believes there is an emergency or that entry is necessary to prevent damage or injury or protect health, safety or property. Entry to the Premises or the Building and the exercise of Landlord's rights in accordance with this Lease will not, under any circumstances, be deemed to be a default, a forcible or unlawful entry into or a detainer of the Premises or the Building or an eviction of Tenant from the Premises or the Building or any portion thereof, nor will it subject Landlord to any Liabilities or entitle Tenant to any compensation, abatement of rent or other rights and remedies. 75 24.3 Brokers. Tenant represents and warrants that it has had no dealings with any agent, broker, finder or other person who is or might be entitled to a commission or other fee from Landlord in connection with this or any related transaction, except for Tenant's Broker. Landlord will incur Liabilities for brokerage commissions or other compensation to Tenant's Broker only pursuant to a written agreement (if any) executed and delivered by Landlord and Tenant's Broker. 24.4 Quiet Enjoyment. So long as Tenant pays all rent and pays and performs its other Liabilities as and when required, Tenant may quietly enjoy the Premises without hindrance or molestation by Landlord or any person lawfully claiming through or under Landlord, subject to the terms of this Lease and the terms of any Superior Leases and Mortgages and other agreements or matters of record or to which this Lease is subordinate. As used in this Lease, the term "Superior Leases and Mortgages" means all present and future ground leases, underlying leases, mortgages, deeds of trust or other encumbrances, and the documents and agreements in connection therewith, and all renewals, modifications, consolidations, replacements or extensions thereof and advances made thereunder, affecting all or any portion of the Premises, but not including any of the same securing or relating to an Unpermitted Financing. 76 24.5 Security. Tenant is solely responsible for providing security for the Premises and Tenant's personnel within the Premises. Without limiting the generality of this Section, Tenant agrees that: (a) Landlord may, but will not be required to, supply security personnel and systems for the Building or the Premises or Tenant's personnel, and remove or restrain unauthorized persons and prevent unauthorized acts; (b) Landlord will incur no Liabilities for failing to provide security personnel or systems or, if provided, for acts, omissions or malfunctions of the security personnel or systems (although this is not meant to imply that Tenant will have liability therefor or be required to indemnify Landlord therefor, unless Tenant is otherwise liable therefor or required to indemnify Landlord therefor pursuant to the other terms of this Lease); and (c) Landlord and its Affiliates make no representations or warranties of any kind in connection with the security or safety of the Premises or the Building. Subject to the terms and conditions in this Lease, Tenant will have the right to install a security system for the Building at Tenant's sole cost and expense. Tenant will keep Landlord fully apprised and give to Landlord's designated representatives the means necessary to bypass the security system and enter the Building in the event of an emergency. 24.6 Obligations; Successors; Recordation. If Tenant consists of more than one person or entity, the obligations and liabilities of those persons or entities are joint and several. Time is of the essence of this Lease. Subject to the restrictions in Article 18 or elsewhere in this Lease, this Lease inures to the benefit of and binds Landlord, Tenant and their respective successors and assigns and anyone who acquires an interest in this Lease, or in the case of Landlord anyone who acquires title to the Premises. Tenant will not record this Lease, but each party agrees on the written request of the other, to execute a notice of lease in recordable form and in customary form reasonably satisfactory to Landlord's attorney. 77 24.7 Late Charges. If any rent or other amounts payable by Tenant are not received within five (5) days after the due date more than twice in any calendar year, Tenant will pay to Landlord on demand a late charge equal to five percent (5%) of the overdue amount, and if not received within ten (10) days after the due date, the amounts also will bear interest from the due date until paid at the interest rate in Section 22.5. Notwithstanding the previous sentence, for the first and second times in any calendar year that any rent or other amounts payable by Tenant are not received within five (5) days after the due date, if Landlord accordingly incurs late charges from one or more of its lenders, then Tenant shall pay such late charges up to a maximum of five percent (5%) of the amount overdue from Tenant. Collection of these late charges and interest will not: be a waiver or cure of Tenant's default or failure to perform; be deemed to be liquidated damages, an invalid penalty or an election of remedies; or prevent Landlord from exercising any other rights and remedies. 24.8 Accord and Satisfaction. Payment by Tenant or acceptance by Landlord of less than the full amount of rent due is not a waiver (unless such acceptance is accompanied by a written waiver signed by Landlord specifying that such acceptance is a waiver and specifying the amount being waived), but will be deemed to be on account of amounts next due, and no endorsements or statements on any check or any letter accompanying any check or payment will be deemed an accord and satisfaction or binding on Landlord. Landlord may accept the check or payment without prejudice to any of Landlord's rights and remedies, including, without limitation, the right to recover the full amount due. 78 24.9 Prior Agreements; Amendments; Waiver. This Lease is an integrated document and contains all of the agreements of the parties with respect to any matter covered or mentioned in this Lease, and supersedes all prior agreements or understandings, except for an Agency Agreement between the parties, dated of even date herewith. This Lease may not be amended except by an agreement in writing signed by Landlord and Tenant. All waivers must be in writing, specify the act or omission waived and be signed by the party charged with the waiver. No other alleged waivers will be effective, including, without limitation, Landlord's acceptance of rent (except as specifically provided otherwise in Section 24.8), collection of a late charge or application of a security deposit. Landlord's waiver of any specific act, omission, term or condition will not be a waiver of any other or subsequent act, omission, term or condition. 24.10 Representations; Inability to Perform. Except as may be specifically set forth as representations and warranties in this Lease, Landlord and its Affiliates have not made, and Tenant is not relying on, any representations or warranties of any kind, express or implied, with respect to the Premises or this transaction. Landlord will not be in default nor incur any Liabilities if it does not fulfill any of its obligations, or is delayed in doing so, because of accidents, breakage, strike, labor troubles, war, sabotage, governmental regulations or controls, inability to obtain materials or services, acts of God, or any other cause, whether similar or dissimilar, beyond Landlord's reasonable control, but will not be deemed to limit in any way Landlord's repair and maintenance obligations under Section 12.1 or its repair and/or restoration obligations under Articles 16 and 17, except to the extent that such repair, maintenance or restoration activities are affected by such events or causes. 79 24.11 Legal Proceedings. In any action or proceeding involving or relating in any way to this Lease, the court or other person or entity having jurisdiction in such action or proceeding will award to the party in whose favor judgment is entered the actual attorneys' fees and costs incurred. Subject to Article 14, Tenant also will indemnify Landlord for, and hold Landlord harmless from and against, all Liabilities incurred by Landlord if Landlord becomes or is made a party to any proceeding or action: (a) brought against any person or entity (other than a permitted Assignee under Section 18.5(c) or any assignee pursuant to an assignment that caused the assignor to become a Released Assignor) holding any interest under this Lease or using the Premises by license of or agreement with Tenant (provided that Tenant's indemnity obligations in this case will not exceed the indemnity obligations that Tenant would have had under Article 14 if Tenant "stood in the shoes" of such other person or entity and the action or proceeding was brought against Tenant); or (b) brought by any person or entity (other than an assignee under a valid assignment of this Lease if and to the same extent that Tenant would have had the right to bring such action or proceeding against Landlord under the same circumstances) holding any interest under this Lease or using the Premises by license of or agreement with Tenant; or (c) necessary to protect Landlord's interest under this Lease in a proceeding under the Bankruptcy Code or in connection with the matters described or contemplated in Exhibit "F" hereto. Unless prohibited by law, Tenant waives the right to trial by jury in all actions involving or related to this Lease, the Premises or 80 any collateral or subsequent agreements between the parties, and any right to impose a counterclaim in any proceeding brought for possession of the Premises as a result of Tenant's default (although this waiver of counterclaim will not be deemed to prohibit Tenant from bringing any claims in a separate non-consolidated action). Tenant also submits to and agrees not to contest the sole and exclusive jurisdiction of the state and federal courts located in Massachusetts to adjudicate all matters in connection with this Lease or involving Landlord or Landlord's Affiliates in any way, and Tenant agrees that it will bring all suits and actions only in such Massachusetts courts and not to seek a change of venue. In any circumstance where a party is obligated to indemnify or hold harmless the other party under this Lease, that obligation also will include the obligation to protect the other party and defend it with counsel acceptable to the other party or, at the other party's election, the other party may employ its own counsel and the indemnifying party will pay when due all attorneys' fees and costs. These obligations to indemnify, hold harmless, protect and defend will survive the expiration or termination of this Lease. 24.12 Ownership; Invalidity; Remedies; Choice of Law. As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Premises. Upon each conveyance (whether voluntary or involuntary) of fee title, the conveying party will be relieved of all Liabilities and obligations contained in or derived from this Lease or arising out of any act, occurrence or omission occurring after the date of such conveyance. Landlord may Transfer all or any portion of its interests in this Lease or the Premises without affecting Tenant's obligations and Liabilities under this Lease. Tenant has no right, title or interest in the name of the Building or of the Premises, and may use these names only to identify its location. Any provision of this Lease which is invalid, void or illegal will not affect, impair or invalidate any of the other provisions and the other provisions will remain in full force and effect. Landlord's rights and remedies are cumulative and not exclusive. This Lease is governed by the laws of Massachusetts applicable to transactions to be performed wholly therein. 81 24.13 Triple Net Lease; Consent. The parties acknowledge and agree that this is intended to be, to the fullest extent possible, a "triple net" lease, and all costs and expenses in connection with the Premises in addition to the base rent are intended to be paid or reimbursed by Tenant unless otherwise stated in this Lease (but this shall not be deemed to affect Landlord's obligations to pay portions of the Net Proceeds to Tenant to the extent set forth in Addendum #3). Notwithstanding anything to the contrary, Landlord will not be required under any circumstances to agree to any amendments, modifications, waivers, increases or decreases in any of the terms of this Lease or any of the rights and obligations of the parties hereunder, whether or not such agreement would be reasonable under the circumstances. In any dispute involving Landlord's withholding of consent or approval or its exercise of judgement, the sole right and remedy of Tenant and its Affiliates is declaratory relief (i.e., that such consent or approval should be granted), and Tenant and its Affiliates waive all other rights and remedies, including, without limitation, claims for damages. 82 24.14 Presumptions; Exhibits; Submission. This Lease will be construed without regard to any presumption or other rule requiring construction or interpretation for or against the party drafting the document. The titles to the Articles and Sections of this Lease are not a part of this Lease and will have no effect on its construction or interpretation. Whenever required by the context of this Lease, the singular includes the plural and the plural includes the singular, and the masculine, feminine and neuter genders each include the others, and the word "person" includes individuals, corporations, partnerships or other entities. All exhibits, addenda and riders attached to this Lease are incorporated in this Lease by this reference. The submission of this Lease to Tenant or its broker, agent or attorney for review or signature is not an offer to Tenant to lease the Premises or the grant of an option to lease to Premises. This Lease will not be binding unless and until it is executed and delivered by both Landlord and Tenant. 24.15 Cooperation. If Landlord finds it necessary to enter the Building to perform its obligations or exercise its rights under this Lease, Tenant will cooperate reasonably with Landlord, and this cooperation will include moving machinery, equipment or Alterations within the Building and allowing Landlord sufficient space within the Premises to enable Landlord to perform any work that Landlord has the right or is required to perform under this Lease. 83 24.16 Notices. Unless otherwise specifically stated in this Lease, all notices, demands or communications required or permitted under this Lease (the "Notices") will be in writing and personally delivered (by messenger or recognized national overnight carrier), or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant prior to the first Occupancy Date will be delivered to the address for Tenant in Section 1.1 or to such other address as may be specified by Tenant to Landlord in writing. Thereafter, Notices to Tenant will be delivered to the address of the Premises or to such other address as may be specified by Tenant to Landlord in writing. Notices to Landlord will be delivered to the addresses for Landlord in Section 1.1 or to such other address as may be specified by Landlord to Tenant in writing. Notices will be effective on the earlier of: delivery; or, if mailed, four (4) days after they are mailed in accordance with this Section. 84 24.17 Letter of Credit. (a) Upon the execution and delivery of this Lease, Tenant will obtain and deliver to Landlord an irrevocable, unconditional standby letter of credit in accordance with the terms and conditions of this Section (the "Letter of Credit"). The Letter of Credit will be in the amount of $10 Million, will be issued initially by Bank of Boston or Chemical Bank and subsequently by any issuer that meets the criteria in Section 24.17(e), will name Landlord (or, at Landlord's request, a lender to Landlord) as the beneficiary thereof and will have an initial term of at least one (1) year and, with renewals, an aggregate term (as renewed) as set forth below. The terms of the Letter of Credit shall be as set forth in this Section 24.17 and in form reasonably acceptable to the beneficiary thereof. The beneficiary shall have the right to draw under the Letter of Credit on one or more occasions from time to time during its term and in accordance with the terms hereof simply upon presentation to the issuer of a sight draft executed by the beneficiary or its authorized representative and without further condition, and the issuer shall pay upon presentation of such draft without deduction or offset of any type. The Letter of Credit shall be assignable in whole but not in part. Provided that Tenant is not in default and is entitled to continue to receive a share of Net Proceeds in accordance with Addendum #3 and/or to exercise a Purchase Option in accordance with Addendum #4, Landlord agrees not to request that any of its lenders be named as a beneficiary under the Letter of Credit with respect to any Unpermitted Financing supplied by such lenders. 85 (b) Until and unless the Letter of Credit is drawn upon, starting as of July 1, 1997, and on each July 1 thereafter (or, if a permanent first mortgage loan on the Premises has not funded before July 1, 1996, then starting as of October 15, 1997, and each October 15 thereafter), the face amount of the Letter of Credit shall be reduced based on a direct reduction loan amortization schedule, assuming an interest rate equal to the interest rate (but not any "default" or "penalty" rate) under the then existing first mortgage loan on the Premises, provided by the beneficiary whose loan is secured by the Letter of Credit which will have the effect of reducing the Letter of Credit to zero over the aggregate term of the Letter of Credit. However, subject to the foregoing but notwithstanding anything else to the contrary, even if the Letter of Credit has been drawn upon, if and to the extent that those amounts are repaid to Tenant, Tenant shall thereupon cause the face amount, and the amount that may again be drawn, under the Letter of Credit to be increased by an amount equal to the amount so repaid. (For example, if $2 Million were to be drawn under the Letter of Credit pursuant to Section 24.17(f), and if that $2 Million were then repaid, the face amount and the amount that could be drawn under the Letter of Credit again would be $10 Million.) Tenant shall cause the Letter of Credit to be renewed continuously on the same terms as described above for successive one (1)-year terms (or longer terms) so that the Letter of Credit is continuously maintained for a term expiring at the end of the tenth (10th) Lease Year. Each succeeding Letter of Credit shall be effective on or before the date that the then-existing Letter of Credit expires. Tenant's failure to deliver these renewals of the Letter of Credit to the beneficiary at least twenty (20) days 86 prior to each expiration date shall not in and of itself be a default under this Lease, but at the beneficiary's option, and notwithstanding anything to the contrary, the beneficiary shall have the immediate right thereon and thereafter to draw under the Letter of Credit for all or any portion thereof, and the cash proceeds thereof shall be held and, if necessary, applied, by the beneficiary in the same manner as set forth in Subsection (d) below. (c) The Letter of Credit is security for the timely payment and performance of all of Tenant's Liabilities in connection with this Lease, including, without limitation, Tenant's obligation to pay base rent, additional rent and, if applicable, the Cancellation Fee, any amounts due under any Addendum hereto, and the Unamortized Costs if Tenant defaults, and the obligations under Landlord's loan(s) from its lender(s). If Tenant defaults under this Lease or there is a default under such loan(s) or if otherwise permitted under the loan documents, the beneficiary may, but shall not be obligated to, draw under the Letter of Credit on one or more occasions, and the beneficiary's draw(s) under or failure to draw down all or any portion of the Letter of Credit in any particular instance will not be deemed to be a waiver or election of any rights and remedies of any type, a limitation on Landlord's or the beneficiary's right to damages, a payment of liquidated damages or an accord or satisfaction. 87 (d) Until and unless the Letter of Credit is drawn upon, Tenant may, at any time, substitute for the Letter of Credit cash in an amount equal to the then-current face amount of the Letter of Credit. If Tenant does so substitute cash, then the amount thereof will be deemed to be a security deposit hereunder, and will be deemed to be security for the same obligations and Liabilities as are set forth in Section 24.17(c). Landlord (and/or the beneficiary under the former Letter of Credit) will have the right to apply all or any portion of that security deposit in the same manner and subject to the same terms as are set forth in Section 24.17(c), and until and unless the security deposit is applied in accordance with this Lease, the amount of that security deposit shall reduce in the manner and at the times set forth in the first sentence of Section 24.17(b). Until applied, the cash security deposit shall be kept in a separate, interest-bearing account or in another form of investment reasonably acceptable to Tenant and the secured party, and until and unless it is applied, interest earned thereon shall be payable annually to Tenant, and the security deposit shall be used for no other purpose other than as security for the payment and performance of the obligations and Liabilities as set forth in Section 24.17(c). 88 (e) Tenant shall cause the Letter of Credit to be replaced by a Letter of Credit issued by another recognized bank located and in good standing in the United States that meets the financial criterion described below and is otherwise reasonably acceptable to the beneficiary: (i) on demand by the beneficiary if the issuer ever fails to meet the financial criterion described below; or (ii) if Tenant wishes to replace the Letter of Credit with a Letter of Credit issued by another bank. The financial criterion referred to above is the requirement that the issuer will maintain ratings from Moody's and Standard & Poor's at least equal to those enjoyed by the initial issuer of the Letter of Credit on the date that the Letter of Credit is issued. The beneficiary shall have the immediate right thereon and thereafter to draw under the Letter of Credit for all or any portion thereof if the Letter of Credit is not replaced as and when required by an issuer meeting the financial criterion referred to above, and the cash proceeds thereof shall be held and, if necessary, applied, by the beneficiary in the same manner as set forth in Subsection (d) above. (f) In addition to the other circumstances set forth in this Lease pursuant to which the beneficiary of the Letter of Credit may draw thereunder, the beneficiary may draw under the Letter of Credit as set forth in Section 8.15 of that certain Construction Loan Agreement between Landlord and Mellon Bank which provides financing for the Premises. A copy of that Section 8.15 is attached hereto as Exhibit "M." 89 Any amounts drawn by the beneficiary under the Letter of Credit (not including draws of the type described in Sections 24.17(b) and (e), or draws resulting from Tenant's default under this Lease or any other agreements between Tenant and the beneficiary or Landlord's default under a loan arising as a result of Tenant's breach of its obligations under this Lease) shall be referred to as the "LC Advances," and shall be treated as a loan made by Tenant to Landlord, which shall be repayable on the terms set forth in a promissory note executed by Landlord in favor of Tenant in the form attached as Exhibit "L" hereto (the "LC Note"). 24.18 Other Defined Terms. (a) "Affiliates" means: a party's internal partners, and the directors, officers, agents, employees, parent, subsidiaries, invitees, customers, licensees, concessionaires, contractors, subcontractors, successors, assigns, subtenants, and representatives of the party or its internal partners. (aa) "Control Affiliates" means a party's internal partners, and the directors, officers, employees, parent, subsidiaries, successors or assigns of the party or its internal partners, or an entity in which any of them owns at least 20% of the outstanding interests or voting shares. (b) "Laws" means: laws, codes, decisions, ordinances, rules, regulations, any CC&R's or deed restrictions (or the equivalent) to which the Premises may be subject, licenses, permits, and directives of governmental and quasi-governmental officers, including, without limitation, those relating to building and safety, fire prevention, health, energy conservation, Hazardous Substances and environmental protection. 90 (c) "Liabilities" means: obligations, costs, damages, claims, injuries, liens, liabilities and judgments, including, without limitation, attorneys' fees and costs (whether or not suit is commenced or judgment entered). (cc) "Related Entities" means a party's successors, assigns, parent or subsidiaries, or any person that controls, is controlled by or is under common control with that party, and the successors or assigns of such person. (d) "Systems and Equipment" means: all HVAC, plumbing, mechanical, electrical, lighting, water, gas, sewer, safety, sanitary and any other utility or service facilities, systems and equipment, and all pipes, ducts, poles, stacks, chases, conduits and wires. (e) "Default," when applied to Tenant, and whether or not used with an initial capital, will have the meaning set forth in Section 21. 24.19 No Partnership. Notwithstanding anything to the contrary, neither this Lease nor the performance of any of the terms and conditions thereof are intended to create or imply, nor shall they create or imply, any partnership, joint venture, trust, fiduciary relationship or agency relationship between Landlord and Tenant (or any of their respective Affiliates). HAZARDOUS SUBSTANCES. Without limiting the generality of any portion of this Lease, Tenant and its Affiliates will: (a) Not store, handle, transport, use, process, generate, discharge or dispose of any hazardous, toxic, corrosive, dangerous, explosive, flammable or noxious substances, gasses or waste, whether now or hereafter defined under any Laws or otherwise (collectively, "hazardous substances"), from, in or about the Building or the rest of the Premises, or create any release of any hazardous substances, nor permit any of the foregoing to occur, except for customary and reasonable amounts of office supplies and other supplies reasonably used in the conduct of Tenant's permitted research and development, light manufacturing and warehousing activities which may contain or consist of reasonable amounts of hazardous substances, and then only strictly in accordance with applicable Laws. If any of the foregoing prohibited activities occur, or if Landlord in good faith believes that any of the foregoing prohibited activities have occurred or are likely to occur or that Tenant and its Affiliates are not complying fully with the requirements of this Article, in addition to any other rights and remedies of Landlord, Tenant and its Affiliates immediately will cease the acts or omissions and in addition to any other rights and remedies (all of which are cumulative), at Landlord's request Tenant will take such actions as may be required by Laws and as Landlord may in good faith direct to cure or prevent the problem. Tenant and its Affiliates will comply fully with all Laws and insurance requirements in connection with or related to hazardous substances, whether now or hereafter existing, including, without limitation, CERCLA, SARA, RCRA, TSCA, CWA, Chapter 21E of Massachusetts General Laws and any other Laws promulgated by the EPA, OSHA or Commonwealth of Massachusetts. -89- 91 (b) Immediately pay, and indemnify Landlord and its Affiliates for and hold them harmless from, all Liabilities in connection with or arising directly or indirectly from any breach by Tenant or its Affiliates of their obligations in this Article, including, without limitation, Liabilities to any lenders and the costs of any of the following, whether required by Landlord, any lenders, applicable Laws or insurance requirements or otherwise: any "response actions" or "responses"; any surveys, "audits", inspections, tests, reports or procedures deemed necessary or desirable by Landlord or governmental or quasi-governmental authorities to determine the existence or scope of any hazardous substances or Tenant's compliance with this Article, and any actions recommended to be taken in connection therewith; compliance with any applicable Laws and insurance requirements; any requirements, directives or plans for the prevention, containment, processing, storage, clean-up or disposal of hazardous substances; the release and discharge of any resulting liens; and any other injury or damage. On the expiration or earlier termination of this Lease, Tenant will leave the Building and the Premises free of hazardous substances stored, handled, transported, used, processed, generated, discharged or disposed of in, on, from or about the Building, or the Premises by Tenant or its Affiliates. -90- 92 (c) Immediately deliver to Landlord copies of any notices, information, reports, and communications of any type received or given in connection with hazardous substances, including, without limitation, notices of violation and settlement actions from or with governmental or quasi-governmental authorities. Tenant's failure to comply with the requirements of this Article will be a material default under this Lease, but if the failure was not intentional, then if Tenant immediately begins to cure the failure and diligently begins and completes all required remediation, disposal and other responsive actions in accordance with the Lease and applicable Laws and guidelines and all necessary repairs to the Building or the Premises, Tenant will be deemed to have cured the default (although Tenant's indemnity obligations and other Liabilities still will remain). All of Tenant's obligations and Liabilities under this Article will survive the expiration or earlier termination of this Lease. -91- 93 IN WITNESS WHEREOF, intending to be legally bound, each party has executed this Lease as a sealed instrument as of the date first set forth above. "LANDLORD" Executed: , 1995 ------------ 100 MINUTEMAN LIMITED PARTNERSHIP, a Massachusetts limited partnership By: NIUNA-MINUTEMAN, INC., a WITNESS: general partner By: - ---------------------------- ---------------------------- Name Printed: John Kusmiersky, President "TENANT" Executed: , 1995 ----------- PICTURETEL CORPORATION, a Delaware corporation WITNESS: By: - ---------------------------- --------------------------------- Name Printed: (Signature) ------------------------------------- Name Printed, Vice President ------------------------------------- Authorized Signature WITNESS: By: - ---------------------------- --------------------------------- Name Printed: (Signature) ------------------------------------- Name Printed, Secretary ------------------------------------- Authorized Signature 94 EXHIBIT "A" INITIAL PREMISES SITE PLAN [SITE PLAN OF PREMISES TO BE ATTACHED] 95 EXHIBIT "B" LEGAL DESCRIPTION EXHIBIT "B" 96 EXHIBIT "C" WORKLETTER 1. General Conditions. 1.1 Landlord will construct Landlord's Work in accordance with applicable Laws in effect at the time, except that Landlord makes no agreements, representations or warranties concerning compliance with the Americans with Disabilities Act or any rules, regulations, guidelines or additional legislation issued in connection therewith. (The previous sentence is not meant to change the obligations of the parties pursuant to Section 11(d).) Landlord conclusively shall be deemed to have complied with all applicable Laws in effect at the time with respect to Landlord's Work for each Phase when and if Landlord obtains a Certificate of Occupancy for that Phase or for the entire Building. Subject to Section 2(a), Tenant and its contractors may have access to the Building for the EXHIBIT "C" - 1 - 97 purpose of preparing the Building for Tenant's occupancy before Landlord's Work has been substantially completed, but only with Landlord's prior written approval. After any entry by Tenant or its contractors, all of Tenant's Lease obligations will be immediately effective except for the obligation to pay base rent, Taxes and Operating Costs. All construction, materials, services, licenses, approvals, costs, installations and equipment to or for the Premises other than Landlord's Work are called "Tenant's Work," and will be performed by Tenant at Tenant's sole cost and in a good and workmanlike manner and subject to the rest of the terms of this Lease. Subject to Section 2(a), Tenant will not interfere in any way with Landlord's Work, whether in connection with Tenant's Work or otherwise. If Landlord's Work is delayed or made more expensive due to: any act or omission of Tenant or its Affiliates (including, without limitation, any delay of or failure to complete Tenant's Work [subject to Section 2(a)], any requested or required changes to Exhibit "C" agreed to by Landlord, or any failure or delay in submitting the information in Exhibit "CC" or other plans, specifications, drawings, requirements, information or approvals, or changes or inaccuracies in any of the foregoing that are or are supposed to be submitted by or on behalf of or approved by Tenant); or the inclusion in Exhibit "C" or other Tenant specifications of "long lead" items or services that cannot reasonably be obtained in sufficient time to be incorporated in Landlord's Work in the normal course of Landlord's construction schedule (and Tenant's failure to delete or substitute for those items or services), then Tenant will be responsible for the delays and additional cost, Landlord's Work for each Phase will be deemed substantially completed when it would have been completed but for the delays (and at minimum any delays will be subtracted from the date of actual substantial completion in determining when substantial completion will be deemed to have occurred), and Tenant will pay any additional cost to Landlord as additional rent within fifteen (15) days after receipt of Landlord's bill. Furthermore, if a delay for which Tenant is responsible results in an increased interest rate on Landlord's loans, then Tenant will pay as additional rent the increased amounts payable by Landlord as and when Landlord is obligated to pay such amounts. Within ten (10) days after Landlord's request, Tenant will execute and deliver to Landlord a certificate confirming the date of substantial completion of Landlord's Work for each Phase. Tenant's certificate is for purposes of confirmation only and will not affect the actual date of substantial completion for that Phase. EXHIBIT "C" -2- 98 1.2 Landlord intends that: Gilbane Building Company (or an affiliated entity) will act as the construction manager, or in an equivalent capacity, with respect to Landlord's Work; and that Gilbane Building Company (or an affiliated entity) will guaranty the maximum price for Landlord's Work. With respect to Landlord's Work, at least the "major trades" will be competitively bid to subcontractors, and Landlord will award those subcontracts to the lowest bidder, except that Landlord may award a subcontract to any of the bidding subcontractors if: (a) the lowest bidder takes exception to the bid documents; or (b) the initial bid or subsequent revised bid of the subcontractor chosen by Landlord is within 5% of the lowest responsive and timely bid received. 1.3 Notwithstanding anything to the contrary, Landlord's Work will not include, and Landlord will not be responsible for, any labor or services in connection with Tenant's security or alarm systems, and Tenant's data, telecommunications, audio, visual, computer, cafeteria or fitness-related equipment or installations or any piping, wiring, cabling or conduits associated with any of the foregoing or any hookups thereof. EXHIBIT "C" -3- 99 1.4 The rest of this Workletter is attached and is incorporated herein by this reference. EXHIBIT "C" -4- 100 EXHIBIT "CC" PICTURETEL INITIAL INFORMATION 1. PictureTel will deliver the following information (to the extent applicable in each instance) to Landlord on or about the dates set forth in Section 2 below: detailed floor plans/layouts for the Building, including the size and location of all offices, conference rooms, demonstration rooms, laboratories and other areas, prepared to 1/8" scale, with architectural features included (e.g., high wall versus low wall); equipment loads, BTU requirements, amperage requirements, and similar requirements for engineering laboratories, demonstration rooms and any other special requirements; PictureTel's choices and specifications for hardware, floor and wall finishes, all special finishes, special lighting, raised flooring and other design elements and other information and specifications sufficient to enable Landlord to produce final plans, drawings and specifications for Landlord's Work. 2. The relevant information for each of the Phases (which for these purposes are defined in Exhibit "C" (Workletter)) will be delivered by the following dates: Phase I - August 31, 1995; Phase II - September 30, 1995; and Phase III - October 31, 1995: EXHIBIT "CC" -1- 101 3. The goal of Landlord's design team is to produce GMP pricing documents on or about October 1, 1995. Therefore, in addition to the information to be delivered for each of the Phases as described above, Tenant will direct its professionals to deliver to Landlord's design team design documents on a weekly basis or otherwise as often as practicable, and to deliver sufficient information for all of the Phases to Landlord's design team in sufficient time so that Landlord's design team can reasonably attempt to meet the October 1, 1995 target date. EXHIBIT "CC" -2- 102 EXHIBIT "D" BASE RENT 1. Subject to Paragraph 2 below, for each Phase, starting on the later of July 1, 1996 or the Occupancy Date for that Phase, the annual base rent for that Phase shall be Tenant's Percentage of Three Million and No/100 Dollars ($3,000,000.00), which will be payable in equal monthly installments in advance as set forth in Section 5(a) of the Lease. If Tenant's Percentage is retroactively adjusted as set forth in Section 1.1(f), then if any amounts are owed by Tenant they shall be paid within fifteen (15) days after such adjustment, and if any amounts are owed by Landlord they shall be paid within fifteen (15) days after such adjustment, or, at Landlord's election, the amounts owed to Tenant shall be credited against the next rental payments due from Tenant. 2. AS OF THE COMMENCEMENT DATE, THE ANNUAL BASE RENT FOR THE PREMISES WILL BE THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) PER ANNUM, WHICH WILL BE PAYABLE IN EQUAL MONTHLY INSTALLMENTS IN ADVANCE AS SET FORTH IN SECTION 5(a) OF THE LEASE. 3. Base rent payable for any other space leased by Tenant from Landlord shall be in addition to and at rates different from the base rent set forth above, unless otherwise specifically agreed in writing by Landlord and Tenant. EXHIBIT "D" - 1 - 103 [SEE SECTION 5(b) OF THE LEASE FOR POSSIBLE RENT CREDITS IN CONNECTION WITH THE LETTER OF CREDIT.] EXHIBIT "D" - 2 - 104 EXHIBIT "E" RULES AND REGULATIONS 1. Any person whose presence on the Premises at any time shall, in the reasonable judgment of the Landlord, be prejudicial to the safety, character, reputation and interests of the Premises may be denied access to the Premises or may be ejected therefrom. In case of invasion, riot, public excitement or other commotion the Landlord may prevent all access to the Premises or the Building during the continuance of the same, by closing the doors or otherwise, for the safety of Tenant or protection of property. The Landlord shall in no way be liable to Tenant or its Affiliates for damages or loss arising from the admission, exclusion or ejection of any person to or from the Premises under the provisions of this rule, as long as Landlord acts reasonably under the circumstances as they appear to Landlord at the time. 2. No awnings or other projections over or around the windows shall be installed by Tenant, and all window blinds used or installed by Tenant or its Affiliates shall be of the same type in order to provide a uniform exterior appearance. 3. Tenant shall not encumber or obstruct, or permit the encumbrance or obstruction of, or store or place any materials, outside of the Building, or in any entrances, corridors, elevators, fire exits or stairways of the of the Building so as to create any unsafe or unlawful condition. EXHIBIT "E" - 1 - 105 4. Nothing shall be done or permitted by Tenant which would impair or interfere with any of the Systems or Equipment or the proper and economic servicing of the Building or the Premises, nor shall there be installed by Tenant any Systems or Equipment or other equipment of any kind which, in Landlord's reasonable judgment, could result in such impairment or interference. No dangerous, inflammable, combustible or explosive object or material shall be brought into the Building or onto the Premises by Tenant or with the permission of Tenant, except strictly in accordance with this Lease. 5. Whenever Tenant shall submit to Landlord any plan, agreement or other document for Landlord's consent or approval, Tenant agrees to pay Landlord as additional rent, on demand, a processing fee in a sum equal to the reasonable fees payable to any architects, contractors, engineers and attorneys engaged by Landlord to review said plan, agreement or document, and costs, expenses or fees required to be paid by Landlord to or at the direction of Landlord's Mortgagees in order to secure approval of said plan, agreement or document, if and to the extent that their approval is required. 6. No acids, vapors, hazardous or other materials shall be discharged or permitted to be discharged into the waste lines, ducts, vents or flues which may damage them or any other portions of the Building or the Premises. The water and wash closets and other plumbing fixtures in or serving the Building shall not be used for any purpose other than the purpose for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other foreign substances shall be deposited therein. All damage resulting from any misuse of the fixtures shall be borne by Tenant, if it shall have caused the same, subject to Section 8.3 of the Lease. EXHIBIT "E" - 2 - 106 7. Landlord shall have the right to prohibit any advertising by Tenant which impairs the reputation of the Building or the Premises, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 8. All third party movers used by Tenant shall be appropriately licensed and shall maintain reasonable insurance coverage (proof of such coverage shall be delivered to Landlord prior to movers providing service in, on or to the Premises. 9. The Premises shall not be used for lodging or sleeping or for any immoral or illegal purposes. EXHIBIT "E" - 3 - 107 EXHIBIT "F" BANKRUPTCY PROVISIONS This Article is incorporated into the Lease as Article 23: 23. BANKRUPTCY OR INSOLVENCY. 23.1 Tenant's Interest Not Transferable. Neither Tenant's interest in this Lease nor any estate hereby created in Tenant nor any interest herein or therein will pass to any trustee or receiver or assignee for the benefit of creditors or otherwise by operation of law except as may specifically be provided pursuant to the Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"). 23.2 Default and Termination. If: (a) Tenant or Tenant's Guarantor, if any, or its executors, administrators, or assigns, will generally not pay its debts within a reasonable and customary time after they become due or will admit in writing its inability to pay its debts, or will make a general assignment for the benefit of creditors; or (b) Tenant or Tenant's Guarantor, if any, will commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or EXHIBIT "F" - 1 - 108 (c) Tenant or Tenant's Guarantor, if any, will take any corporate, partnership or other action to authorize or in furtherance of any of the actions set forth above in subsection (a) or (b); or (d) Any case, proceeding or other action against Tenant or Tenant's Guarantor, if any, will be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action remains undismissed or unstayed for a period of sixty (60) days, then it will be a default hereunder and this Lease and all rights of Tenant hereunder will automatically cease and terminate as if the date of such event were the original expiration date of this Lease and Tenant will vacate and surrender the Premises but will remain liable as herein provided. EXHIBIT "F" - 2 - 109 23.3 Rights and Obligations Under the Bankruptcy Code. (a) Upon the filing of a petition by or against Tenant under the Bankruptcy Code, Tenant, as debtor and as debtor in possession, and any trustee who may be appointed agree as follows: (i) to perform all obligations of Tenant under this Lease, including, but not limited to, the covenants regarding the operations and uses of the Premises until such time as this Lease is either rejected or assumed by order of the United States Bankruptcy Court; (ii) to pay monthly in advance on the first day of each month as reasonable compensation for use and occupancy of the Premises an amount equal to all base rent and other rent otherwise due pursuant to this Lease; (iii) to reject or assume this Lease within sixty (60) days of the filing of a petition under any Chapter of the Bankruptcy Code or under any Law relating to bankruptcy, insolvency, reorganization or relief of debtors (any such rejection being deemed an automatic termination of this Lease); (iv) to give Landlord at least thirty (30) days prior written notice of any proceeding relating to any assumption of this Lease; (v) to give at least thirty (30) days prior written notice of any abandonment of the Premises (any such abandonment being deemed a rejection and automatic termination of this Lease), unless the Bankruptcy Court has otherwise extended the period for acceptance or rejection; (vi) to do all other things of benefit to Landlord otherwise required under the Bankruptcy Code or under any Law relating to bankruptcy, insolvency, reorganization or relief of debtors; (vii) to be deemed to have rejected this Lease in the event of the failure to comply with any of the above; and (viii) to have consented to the entry of an order by an appropriate United States Bankruptcy Court providing all of the above, except that if and to the extent that any of the above provisions, if enforced, would violate the Bankruptcy Code then in existence, then such provisions shall be conformed to the Bankruptcy Code then in existence. EXHIBIT "F" - 3 - 110 (b) No default under this Lease by Tenant, either prior to or subsequent to the filing of such petition, will be deemed to have been waived unless expressly done so in writing by Landlord. (c) Included within and in addition to any other conditions or obligations imposed upon Tenant or its successor in the event of assumption and/or assignment are the following: (i) the cure of any monetary defaults and the reimbursement of pecuniary loss by the time of the entry of the order approving such assumption and/or assignment (pecuniary loss will include, without limitation, any attorneys' fees and costs and expert witness fees incurred by Landlord in protecting its rights under this Lease, including representation of Landlord in any proceeding commenced under the Bankruptcy Code or under any Law relating to bankruptcy, insolvency, reorganization or relief of debtor); (ii) the deposit of an additional sum equal to three (3) months' base rent; (iii) the use of the Premises only as set forth in this Lease; (iv) the reorganized debtor or assignee of such debtor in possession or of Tenant's trustee demonstrates in writing that EXHIBIT "F" - 4 - 111 it has sufficient background including, but not limited to, substantial experience in operating businesses in the manner contemplated in this Lease and meet all other reasonable criteria of Landlord as did Tenant upon execution of this Lease; (v) meet all other criteria of 11 U.S.C. Section 365(b)(3); and (v) the prior written consent of any mortgagee to which this Lease has been assigned as collateral security; and (vi) the Premises at all times remains a single unit and no Alterations or physical changes of any kind may be made unless in compliance with the applicable provisions of this Lease, except that if and to the extent that any of the above provisions, if enforced, would violate the Bankruptcy Code then in existence, then such provisions shall be conformed to the Bankruptcy Code then in existence. (d) Any person or entity to whom this Lease is assigned pursuant to the provisions of the Bankruptcy Code will be deemed without further act or deed to have assumed all of the obligations arising under this Lease on or after the date of such assignment. Any such assignee will upon demand execute and deliver to Landlord an instrument confirming such assumption. 23.4 Construction. The terms of this Article will be in addition to, but not exclusive of, any rights or remedies of Landlord in Article 22 and elsewhere in this Lease or otherwise available at law or in equity, and will not be deemed to limit Landlord, except as may be required by law. EXHIBIT "F" - 5 - 112 EXHIBIT "G" LANDLORD'S SERVICES In addition to Landlord's obligations in Article 12 and the rest of this Lease, Landlord shall furnish (as part of Operating Costs) the following services during the term of the Lease and any renewals: I. Outside Maintenance: A. All parking areas and access ways will be plowed of snow and ice and sanded as reasonably required and practicable. All paths and walkways will be shoveled of snow and sanded as reasonably required and practicable. B. All landscaped areas and exterior grounds shall be kept in a neat appearance. C. Lighting of all parking areas and roadways. II. Miscellaneous Services: A. Render pest control services as reasonably required. B. Wash exterior windows at least once per year. III. Janitorial Services: None, Tenant responsible for all Janitorial Services. IV. Trash: Tenant will have access to trash compactor(s) (or the equivalent) for standard office-usage trash disposal. Landlord provides hauling from compactor. EXHIBIT "G" - 6 - 113 Landlord will provide or hire the personnel necessary to provide the services set forth herein, including, if necessary, on-site personnel (and the costs related to all of such personnel shall be part of Operating Costs). EXHIBIT "G" - 7 - 114 EXHIBIT "I" [INTENTIONALLY OMITTED] 115 ADDENDUM #1 ROOFTOP COMMUNICATIONS EQUIPMENT Subject to the following and the rest of this Article and this Lease, Tenant may install satellite dishes and other communications equipment and antennas of reasonable size on the roof of the Building in a mutually agreeable location, or in another mutually agreeably location. Notwithstanding anything to the contrary, Tenant will be responsible for all Liabilities in connection with these satellite dishes and antennas and associated Systems and Equipment, including, without limitation, installation, removal, operation, maintenance, insurance, taxes and other costs and fees, and any necessary alterations or improvements to the Building or the rest of the Premises. Tenant also will be solely responsible for securing all federal, state and local permits in connection with the installation and operation of these satellite dishes and antennas prior to installation and for complying with all applicable Laws. If these satellite dishes and antennas are on a roof, Tenant will secure from the membrane roofing manufacturer certification that the installation is compatible with all design requirements and that this installation will not void the existing roof warranty. This certification must be delivered to Landlord before installation begins. Tenant also will use only a manufacturer-authorized roofing contractor for any work that requires the penetration of the existing membrane roofing system. Upon the expiration or earlier termination of this Lease, Tenant, at its expense, will remove these satellite dishes or antennas and all ADDENDUM #1 - 2 - 116 associated Systems and Equipment and repair all damage. Notwithstanding anything to the contrary, Landlord will have no Liabilities in connection with these satellite dishes or antennas and associated Systems and Equipment, and Tenant will indemnify Landlord for and hold it free and harmless from all Liabilities arising out of or in connection with these satellite dishes or antennas and all associated Systems and Equipment. ADDENDUM #1 - 3 - 117 ADDENDUM #2 EXTENSION OPTIONS 1. Grant of Extension Options. Landlord grants to Tenant seven (7) options (the "Extension Options") to extend the Lease term for additional terms of ten (10) years each on the same terms and conditions as this Lease, except that there will be no further right to extend and except as set forth below. Except as specifically set forth in Section 4 below, the Extension Options can be exercised only by Tenant delivering unconditional written notice of exercise to Landlord on or before the later of: two (2) years before the expiration of the then-current term; or fifteen (15) days after Landlord's written notice to Tenant of Tenant's failure to exercise, which notice may be given at any time after two (2) years before the expiration of the then-current term. If for any reason Landlord does not actually receive Tenant's unconditional written notice of exercise when required, at Landlord's election the Extension Options will lapse and become null and void and there will be no further right to extend the Lease term. If Tenant does not validly exercise an Extension Option, that Extension Option and all subsequent Extension Options shall, at Landlord's election, lapse and become null and void. The Extension Options are personal to the Tenant originally named in this Lease and may not be exercised by anyone else (except for an assignee pursuant to a valid assignment of this Lease, and then only if prior to the date for exercise set forth in this Lease the assignor and the ADDENDUM #2 - 1 - 118 assignee deliver to Landlord a jointly executed and unconditional written notice stating that the specific Extension Option may be exercised by the assignee; provided that notwithstanding anything to the contrary, if there is a valid assignment of this Lease then thereafter only the assignee will have the right to exercise any Extension Options and such exercise shall be subject to the terms above). The Extension Options are granted to and may be exercised by Tenant on the express condition that, at the time of the exercise and at all times before the beginning of each Extension Option period, Tenant is not in default (and has not committed acts which would constitute a default with the passage of time or the giving of notice). TIME IS ABSOLUTELY OF THE ESSENCE. 2. No Additional Work. Landlord will not be required to perform or pay for any work or other improvement to the Premises, and subject to the other terms of this Lease Tenant will accept the Premises in its then "as is" condition in all respects. The annual base rent for each Lease Year of each Extension Option period will be as set forth in Exhibit "D." 3. Cancellation. Tenant shall not have the right or power to exercise any Extension Options if it first has exercised the Cancellation Option or if this Lease has otherwise expired or been terminated pursuant to its terms, and Tenant shall not have the right to exercise the Cancellation Option if it first has exercised any of the Extension Options. ADDENDUM #2 - 2 - 119 4. Special Extension Option. If pursuant to Addendum #4 Tenant exercises the third (3rd) Purchase Option at the end of the sixteenth (16th) Lease Year and thereafter Landlord fails to close on the sale of the Premises to Tenant due to Landlord's default under Addendum #4, or if Landlord commences any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or similar official for it or for all or any substantial part of its property, or any such case, proceeding or action is commenced against Landlord and is not stayed or dismissed before the closing and Landlord fails to close as a result thereof (the "Landlord Bankruptcy"), THEN, the Extension Options granted to Tenant in accordance with this Addendum #2 shall be exercisable by Tenant in accordance with this Addendum #2, except that Tenant may exercise the first (1st) Extension Option by giving Landlord written notice thereof in accordance with Section 1 above within thirty (30) days after the earlier of the scheduled closing date or the date of the Landlord Bankruptcy, but in any case prior to the expiration of the initial Lease term, and otherwise in accordance with this Addendum. Exercise of the first (1st) Extension Option by Tenant as provided in this Section 4 shall in no manner affect or extinguish the rights and obligations of Landlord and Tenant under or in connection with Tenant's exercise of the third (3rd) Purchase Option. ADDENDUM #2 - 3 - 120 ADDENDUM #3 NET PROCEEDS 1. Cash Proceeds. "Cash Proceeds" means: all cash proceeds actually received by or on behalf of Landlord that Landlord is permitted to retain (for example, if Landlord must refund an overpayment to Tenant or a third party, the amount refunded will not be deemed to be "retained" by Landlord nor shall it be a part of Cash Proceeds hereunder) from the sale, leasing (including base rent and additional rent), assignment, subleasing, initial financing (including, without limitation, the initial financing secured by the Premises and any financing secured by the Letter of Credit, but subject, however, to Addendum #7), refinancing, encumbrance, Condemnation or other disposition of all or any portion of the Premises or any interest therein (including any additional buildings constructed on the Premises), and any casualty and rental insurance proceeds received by or on behalf of Landlord that Landlord is permitted to retain in connection with all or any portion of the Premises, any loans, advances or capital contributions made to Landlord, indemnities paid by Tenant to Landlord and any interest or investment income received by Landlord on such cash proceeds. Notwithstanding the foregoing, Cash Proceeds do not include any amounts paid to or receivable by Landlord for, as a result of or in connection with: an exercise of the Cancellation Option or any Purchase Options; Tenant's defaults, or any judgments, settlements or awards paid by Tenant or its Affiliates; amounts drawn ADDENDUM #3 - 1 - 121 under the Letter of Credit or the application(s) of any cash security deposit, or any late charges or interest payable by Tenant; the Transfer of any interest in Landlord or in any of its partners or other Control Affiliates; or development fees, management fees or fees in lieu thereof payable to Landlord or its Affiliates pursuant to this Lease or in connection with Landlord's Work or in connection with the construction of any additional buildings on the Premises or the enlargement or other modification of the Building or the rest of the Premises; or any Excess Refinancing Proceeds as described in Section 3 of Addendum #5; or any Net Proceeds distributed or distributable to Landlord pursuant to Section 3 below. 2. Costs. "Costs" means: all bona fide costs and expenses of any type paid by Landlord or its Affiliates, or reasonably anticipated by Landlord to be payable by Landlord or its Affiliates, for, as a result of or in connection with all or any portion of the Premises or any interest therein or any ownership, operation, management, maintenance, repair, restoration, replacement, improvement, leasing (other than the payment of Net Proceeds hereunder), financing, refinancing or Transfer by Landlord thereof (whether or not included as part of Operating Costs, but not including any sale or conveyance to any of Landlord's Control Affiliates), or the establishment and maintenance of Landlord's existence in good standing as an entity, or any rights or Liabilities in connection with any of the foregoing, including, without limitation, costs and expenses for: the acquisition, sale or other disposition of all or any portion ADDENDUM #3 - 2 - 122 of the Premises and any rights appurtenant thereto (including, without limitation, all costs for due diligence, investigations, remedial work, closing costs, escrow and title fees, legal fees, professional fees and commissions); Landlord's Work and all other labor, services and materials supplied to or for the benefit of the Premises (including any additional buildings constructed on the Premises) and/or Tenant under or in connection with this Lease (including, without limitation, costs for designers, architects, engineers, draftsmen, supervision, permits and approvals, development fees (other than those payable to Landlord or its Affiliates which are excluded from Cash Proceeds as set forth in Section 1 above), fees, profit and savings payable to construction managers, contractors and subcontractors, and all other reasonably related "hard" and "soft" costs); financing, refinancing and encumbrance of the Premises or any interest therein (including, without limitation, payment of all principal, interest, fees, commissions, appraisals, escrow and title fees, other closing costs, interest rate hedges, "caps" or "floors," and other costs in connection therewith and other amounts owed under any of the loan documents); the repayment of all bona fide capital contributions, loans or advances made by Landlord or its partners or their respective Affiliates (including, without limitation, the repayment of such amounts and commercially reasonable interest on such loans and a commercially reasonable rate of return on such contributions or advances, which in any case will be at least equal to the Bank of Boston's (or its successor's) prime rate plus one percent (1%), or the maximum rate permitted by law, whichever ADDENDUM #3 - 3 - 123 is less, and commercially reasonable closing costs, commissions and/or loan fees or similar fees in order to obtain such loans, contributions or advances); the payment and performance of all of Landlord's Liabilities and the exercise of Landlord's rights under or in connection with this Lease or the Premises or agreements in connection therewith (including, without limitation, costs for Taxes, Operating Costs, amounts in connection with Hazardous Substances and environmental protection, compliance will all Laws, indemnity and defense costs, and other costs in connection therewith and other amounts owed under any of the loan documents); attorneys' fees and other costs in connection with the defense or prosection of any litigation, proceedings, claims or counterclaims or as otherwise deemed necessary by Landlord; the payment and performance of all of Landlord's liabilities under or in connection with Tenant's existing leases at the Tower of Northwoods in Danvers, Massachusetts, judgments, claims, awards or settlements, whether due to the fault of Landlord or its partners or otherwise; an amount per calendar year equal to forty percent (40%) of an amount (the "Tax Payments") equal to: Landlord's taxable income (if any) in the prior calendar year (other than the taxable income resulting solely from the sale or the conveyance of the Premises) less the amounts paid to Landlord for that prior calendar year pursuant to this Subclause of this Section 2, and if in any year the Tax Payments are not fully paid, then the unpaid Tax Payments shall cumulate and be paid as Costs as soon as there are sufficient Cash Proceeds; the preparation of Landlord's annual audited financial statements and any other ADDENDUM #3 - 4 - 124 information to be provided by Landlord under this Lease (including audits of Net Proceeds) and tax returns; corporate or partnership license fees, filing fees, business and franchise taxes and fees, and similar charges; and reserves deemed reasonably necessary by Landlord in connection with any of the foregoing. Unless otherwise specifically agreed and set forth in this Lease (e.g., with respect to the interest rate on loans or the return on capital, or with respect to management fees or fees in lieu thereof, or budgeted development fees), amounts payable as Costs by Landlord to any of its Affiliates for services rendered shall not exceed the prevailing rates that would be payable to unaffiliated third parties in an arms-length transaction. Costs do not include any of the above amounts which are directly paid by Tenant or which are funded by insurance. 3. Payment of Net Proceeds. "Net Proceeds" means, from time to time, an amount equal to the positive amount, if any, obtained by taking an amount equal to the current amount of Cash Proceeds and deducting therefrom an amount equal to the current amount of Costs. Prior to any distribution of Net Proceeds to Landlord or any of its Control Affiliates, Landlord first will pay to Tenant Net Proceeds in amount equal to: the unrepaid Reconstruction Costs (if any) until the Reconstruction Costs have been repaid in full; and the unrepaid Cure Payments (if any) until the unrepaid Cure Payments have been repaid in full; and the reasonable costs and expenses incurred by Tenant in good faith to third parties in validly exercising its Right of Self Help as set forth in Section 14.4, but ADDENDUM #3 - 5 - 125 excluding therefrom any of such costs and expenses that otherwise would qualify as Operating Costs under Article 7. Thereafter, Landlord will pay to Tenant one-half (1/2) of all Net Proceeds available for distribution at the same times as Net Proceeds are distributed by Landlord to its Control Affiliates. These payments to Tenant will be deemed to be a reduction in Tenant's rent already paid from time to time under this Lease (although they may not be credited, offset or deducted against Tenant's current or future rent payments owed). Payments of Net Proceeds to Tenant during any year shall be subject to an annual reconciliation for that year (which shall occur after the end of that year), and any amounts overpaid to Tenant or owed by Landlord shall be adjusted in cash between the parties within thirty (30) days after such annual reconciliation is delivered. Upon Tenant's written request in each instance, Landlord will furnish to Tenant reasonable backup information for its annual reconciliations, including copies of Landlord's most recent financial statements. Within ninety (90) days after delivery of each of Landlord's annual reconciliations, and upon at least fourteen (14) days' prior written notice to Landlord, not more than once in each calendar year Tenant may audit Landlord's books and records applicable to the period after the last annual reconciliation in order to verify the accuracy of Landlord's calculation of Net Proceeds. Such audit will be conducted only during regular business hours where Landlord maintains its books and records (which Landlord agrees will be in Massachusetts or California) and Tenant will deliver a copy of the audit to Landlord within fifteen (15) days after receipt by Tenant. All audits will be conducted at Tenant's cost and expense and shall be conducted only by Tenant or its designated professional representatives. ADDENDUM #3 - 6 - 126 4. Termination of Rights. Notwithstanding anything to the contrary, as of the date of the first occurrence of any or all of the following, at Landlord's election all of Tenant's rights and Landlord's obligations under or in connection with this Addendum will terminate and lapse completely, except that the entity that is the Landlord immediately prior to the occurrence of any or all of the following shall remain obligated to pay to Tenant (or at such entity's election credit against amounts owed by Tenant to such entity) Tenant's share of undistributed Net Proceeds (if any) existing as of the date of such occurrence: (a) The termination or expiration of this Lease in accordance with its terms, by reason of the exercise of Tenant's Cancellation Option or otherwise. (b) A default by Tenant under this Lease. (c) The closing of any Purchase Option or, unless the No-sale Election first has been validly elected, another bona fide sale or other conveyance by Landlord of all or any portion of the Premises, or any interest therein (which shall not be deemed to include an interest in Landlord), which sale or conveyance is not prohibited under this Lease, but Tenant's rights and ADDENDUM #3 - 7 - 127 Landlord's obligations with respect to Net Proceeds shall continue with respect to the portions of the Premises or interests therein, if any, still retained by Landlord and with respect to any Net Proceeds received by Landlord in connection with such sale or other conveyance (except with respect to a sale pursuant to a Purchase Option). 5. Unaffected Parties. Notwithstanding anything to the contrary, Tenant's rights and Landlord's obligations under this Addendum will not be binding on and will not affect or otherwise apply in any way to: (a) Any party that, in a bona fide transaction, purchases or otherwise acquires all or any portion of the Premises or any interest therein, or its successors, assigns and purchasers, or their respective Affiliates (unless the No-sale Election first has been validly elected or unless any such sale or conveyance is prohibited under this Lease); or (b) Landlord's Mortgagees, whether or not they take title to or acquire all or any portion of the Premises or any interest therein, and their successors, assigns and purchasers, or their respective Affiliates. ADDENDUM #3 - 8 - 128 6. Personal Rights. Notwithstanding anything to the contrary, the rights granted to Tenant under or in connection with this Addendum are granted to and may be exercised only by the Tenant originally named in this Lease, and they may not be exercised by anyone else (other than by an assignee to whom such rights have been entirely assigned pursuant to a valid assignment of this Lease, if at the time of such assignment the assignor and the assignee deliver to Landlord a jointly executed written notice stating unconditionally that the assignee has the right to exercise such rights), and Tenant shall not, and shall not have the right or power to, otherwise assign or Transfer any of these rights. If at the time of a valid assignment the assignor and the assignee deliver to Landlord a jointly executed written notice directing Landlord to pay a portion of the Net Proceeds otherwise payable to the assignee instead to the assignor, then Landlord will continue to pay that portion of the Net Proceeds to the assignor until and unless Landlord receives from the assignor and the assignee a jointly executed written notice changing such direction to Landlord and then Landlord shall pay in accordance with the new direction. ADDENDUM #3 - 9 - 129 ADDENDUM #4 PURCHASE OPTIONS 1. Grant and Exercise. Provided that this Lease is in full force and effect, and subject to the terms hereof, Landlord grants to Tenant three (3) options (the "Purchase Options") to purchase the Premises from Landlord, which Purchase Options must be exercised during the following periods: (a) The first (1st) Purchase Option can be exercised only during the first month of the fifth (5th) Lease Year. (b) The second (2nd) Purchase Option can be exercised only during the first month of the tenth (10th) Lease Year. (c) The third (3rd) Purchase Option can be exercised only during the last month of the sixteenth (16th) Lease Year. The Purchase Options can be exercised only by Tenant delivering unconditional written notice of exercise to Landlord as and when required together with a cashier's check or the wire transfer of funds to Landlord in an amount equal to five percent (5%) of the total purchase price under the applicable Purchase Option. These funds shall be placed by Landlord into a separate interest-bearing account or other mutually agreeable investment instrument and these funds and all interest earned thereon collectively are called the "Deposit." When and if the ADDENDUM #4 - 1 - 130 closing under the applicable Purchase Option occurs, the Deposit shall be credited against the cash portion of the purchase price payable by Tenant thereunder. If the Deposit is in excess of the cash portion of the purchase price payable by Tenant, the excess shall be returned to Tenant as of the closing. If for any reason Landlord does not actually receive this unconditional written notice of exercise and the Deposit as and when required, at Landlord's option the applicable Purchase Option will lapse and become null and void. At Landlord's election, the Purchase Options and all of Tenant's rights and Landlord's obligations under this Addendum and Addendum #5 shall lapse and become null and void if: (i) Tenant defaults under the rest of this Lease at any time prior to the exercise of a Purchase Option or any closing thereunder; or (ii) Tenant defaults under this Addendum, or defaults in connection with any closing under, or fails to close as required after the exercise of, a Purchase Option (a "Purchase Option Default"). If Tenant commits a Purchase Option Default Tenant also shall waive as against Landlord and its Affiliates all Liabilities and defaults (if any) of or by any of them under this Lease that directly arise from or in connection with the Purchase Option Default, and Landlord shall retain the Deposit as its sole and liquidated damages for the ADDENDUM #4 - 2 - 131 Purchase Option Default, and if Tenant commits more than one Purchase Option Default, at Landlord's election the Purchase Options and all of Tenant's rights and Landlord's obligations under this Addendum and Addendum #5 shall lapse and become null and void. (A Purchase Option Default is not the same as a default described in Section 4(c) of this Addendum.) ADDENDUM #4 - 3 - 132 2. Purchase Price. (a) The cash portion of the purchase price for the Premises shall be payable by cashier's check or wire transfer of immediately available funds to or at the direction of Landlord and will be payable in full on or before the scheduled closing date. In addition to the cash portion of the purchase price, as of the closing Tenant shall either repay in full all mortgage loan(s) secured by the Premises, and any other loan secured by the Letter of Credit (if separate from such mortgage loan(s)), other than those that are Unpermitted Financing (the "Existing Loans") (including, without limitation, any prepayment or "breakage" fees or similar charges) or assume the Existing Loans, and in any case Tenant will cause the lender(s) to release Landlord and its Affiliates as of the closing from all Liabilities in connection with the Existing Loans and Tenant shall indemnify and hold Landlord and its Affiliates harmless from all further Liabilities in connection with the Existing Loans. In addition to the purchase price, Tenant shall pay all closing costs of any type (other than Landlord's attorneys' fees and costs), including, without limitation, commissions (if any) and the costs of deed stamps and documentary and transfer taxes and fees, surveys, title insurance, escrows, recording and other similar fees and costs. Base rent will be prorated between the parties as of the closing date, but there will be no other prorations or adjustments. ADDENDUM #4 - 4 - 133 (b) The cash portion of the purchase price for the Premises shall be never be less than zero, but otherwise shall be equal to the following amounts: (i) For the first (1st) Purchase Option, an amount equal to: (x) ten (10) times the "Current Base Rent Amount" (defined below); less (y) the "Existing Mortgage Balance" (as defined below). The "Current Base Rent Amount" means the scheduled annual base rent payable under this Lease as of the date of closing, without any deductions, offsets or abatements of any type, and including, without limitation, scheduled annual base rent payable in connection with any other space leased or agreed to be leased from Landlord in a new building or new buildings, or an enlargement of the Building, on the Premises. If an agreement has been entered into to lease such other space or a right to lease such other space has been exercised prior to closing but the full base rent applicable thereto has not commenced or cannot be accurately determined as of the closing, then the scheduled annual base rent applicable to that Expansion Option shall be reasonably estimated by Landlord. (As a hypothetical example, if the scheduled annual base rent at the closing is $3,000,000.00, this amount would be $30,000,000.00.) The "Existing Mortgage Balance" means the outstanding principal balance (not including any prepayment or "breakage" fees or similar charges) as of the closing date under an exercised Purchase Option of any Existing Loans. ADDENDUM #4 - 5 - 134 (ii) For the second (2nd) Purchase Option, an amount equal to: (x) eight and one-half (8 1/2) times the Current Base Rent Amount; less (y) the Existing Mortgage Balance; and less (z) the purchase price paid by Tenant to 1776 Limited Partnership if Tenant has previously purchased the 1776 Premises from 1776 Limited Partnership. (iii) For the third (3rd) Purchase Option, an amount equal to: (x) five (5) times the Current Base Rent Amount; less (y) if the No-sale Election first has been validly elected, one-half (1/2) of any Excess Refinancing Proceeds distributed to Landlord or its Control Affiliates; and less (z) the outstanding principal balance of any Unpermitted Financing secured by the Premises (and Tenant shall then either repay in full or assume such Unpermitted Financing, and if and to the extent that the deduction of such outstanding principal balance otherwise would reduce the Purchase Price below zero, Landlord shall pay to Tenant at the Closing cash an amount equal to the amount by which the Purchase Price otherwise would have been reduced below zero). As a hypothetical example, if the second (2nd) Purchase Option is validly exercised, the Current Base Rent Amount is $3,000,000.00, and as of the closing the Existing Mortgage Balance is $17,000,000.00, then the cash portion of the purchase price payable to Landlord would be only $8,500,000.00 and Tenant would repay or assume the existing $17,000,000.00 mortgage loan secured by the Premises, for a total purchase price of $25,500,000.00. ADDENDUM #4 - 6 - 135 3. Closing. The closing under an exercised Purchase Option will occur at a location in Massachusetts and on a date specified by Landlord pursuant to written notice to Tenant, which date will be: during the last four (4) months of the fifth (5th) Lease Year (for the first (1st Purchase Option); during the last four (4) months of the tenth (10th) Lease Year (for the second (2nd) Purchase Option); and during the ninth (9th), tenth (10th) and eleventh (11th) months of the last Lease Year of the initial Lease term (for the third (3rd) Purchase Option). At the closing, Landlord will execute and deliver to Tenant a Massachusetts Quitclaim Deed (which will be subject to all matters of record and all title and survey exceptions), an affidavit of Landlord stating Landlord's U.S. taxpayer identification number and that Landlord is not a "foreign person" within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended or Landlord shall provide the necessary forms if Landlord is a "foreign person"), and a blanket assignment to Tenant of all third party guaranties, warranties, permits, certificates, consents and approvals pertaining to the Premises that are assignable by Landlord, to the extent assignable at no cost or Liabilities to Landlord (unless Tenant advances such costs and discharges such Liabilities, in which case they shall be assigned to the extent assignable by Landlord). ADDENDUM #4 - 7 - 136 4. Additional Terms. (a) Tenant specifically acknowledges and agrees that Landlord will sell and Tenant will purchase the Premises on an "as is with all faults" basis, subject to all exceptions to and defects of title, whether or not of record (but subject also to Tenant's rights and Landlord's obligations as set forth below), and that Tenant will not rely on nor will Landlord or any of its Affiliates be deemed to have made, any representations or warranties of any kind, express or implied including, without limitation, those in connection with the physical condition of the Premises (including, without limitation, any matters involving Hazardous Substances or compliance with any Laws), or the nature of title to the Premises, or the advisability of Tenant's purchase of the Premises). However, until and unless Tenant otherwise agrees in writing or defaults Landlord will not voluntarily execute any documents affecting title that materially adversely affect Tenant's operations or that render title to the Premises unmarketable (but easements, dedications or other documents for utilities or curb cuts, or as otherwise may be needed to comply with applicable Laws or to enable Landlord to meet its obligations under this Lease or in connection with the construction of any new building(s) or the enlargement of the Building per this Lease, will not be deemed to be violations of this restriction). If this restriction is violated after the exercise of a Purchase Option, Tenant shall have the right to terminate that Purchase Option without liability and receive the Deposit back. Notwithstanding the foregoing, even if ADDENDUM # 4 -8- 137 Tenant has validly exercised a Purchase Option, Tenant shall have the right to terminate that Purchase Option without liability (except for Landlord's out-of-pocket costs) and shall not be required to close the purchase if, after the exercise of the Purchase Option but prior to closing, there is a casualty that causes damage of the type and to the extent described in Section 16.2(b)(x) such that Tenant otherwise would have the right to terminate this Lease, and in the reasonable judgement of a qualified independent contractor hired by Landlord it will take more than two (2) years from the date of the damage to restore access or restore or replace the destroyed parking spaces or substantially complete the repairs that Landlord would have been required to make, and Tenant notifies Landlord of its intent to terminate within thirty (30) days after receiving the notice from Landlord's contractor, which shall be provided as soon as reasonably practicable after the damage occurs. If these circumstances occur, the closing date shall be extended as necessary to accommodate this thirty (30)-day period. If Tenant does not so terminate, or if Tenant is not permitted to so terminate as a result of a casualty, as of the closing Landlord will assign to Tenant all casualty insurance proceeds otherwise payable to Landlord on account of the damage and all rights and claims in connection therewith (other than those which Landlord was entitled to receive for the period and/or for the work and services performed prior to the closing). Notwithstanding anything to the contrary, if Landlord is in the process of repairing or rebuilding casualty damage and Tenant subsequently validly exercises a Purchase Option: Landlord will continue the ADDENDUM # 4 -9- 138 process of repairing or rebuilding as otherwise required in this Lease until the closing date under the Purchase Option; Tenant will be deemed to have waived its right to terminate this Lease under Article 16, and its right to terminate the Purchase Option in connection with that casualty or any repairs or rebuilding in connection therewith; Landlord will assign to Tenant as of the closing all casualty insurance proceeds otherwise payable to Landlord on account of the damage and all rights and claims in connection therewith (other than those which Landlord was entitled to receive for the period and/or for the work and services performed prior to the closing), and Landlord shall assign to Tenant and Tenant shall assume all rights and Liabilities of Landlord under the contracts entered into in connection with the repair or rebuilding to the extent assignable and Tenant shall indemnify Landlord and its Affiliates for and hold them harmless from all Liabilities in connection therewith; and Landlord shall be obligated to continue to repair or rebuild after the closing date only if and to the extent actually agreed to by Landlord and Tenant in good faith and in writing at the time. (b) As of the closing, Tenant and its Affiliates will be deemed to have released and discharged Landlord and its Affiliates from, and to have waived, all Liabilities of any type, known or unknown, including, without limitation, Liabilities under or in connection with this Lease and/or the Premises (except as set forth in the last sentence of Subsection (c) below). As a condition to closing, Landlord may require that Landlord's Mortgagees release Landlord and its Affiliates from Liabilities under or in connection with any Superior Leases or Mortgages. From and after the closing, Tenant shall indemnify, defend and hold Landlord free and harmless from all Liabilities under or in connection with this Lease and/or the Premises and/or the purchase thereof (except as set forth in the last sentence of Subsection (c) below). ADDENDUM # 4 -10- 139 (c) Time is of the essence in this Addendum. If Tenant defaults hereunder after the closing under a Purchase Option or Tenant or Landlord defaults under any of the documents delivered by it in connection therewith, in addition to any rights and remedies available to each of the respective parties, each party shall have all rights and remedies at law and in equity, all of which are cumulative and not exclusive, including, without limitation, the right to require specific performance. The exercise of a Purchase Option or any closing as a result thereof shall not relieve Tenant or Landlord from any Liabilities for any defaults under this Lease, nor will they extinguish Liabilities for any indemnities or other obligations that survive pursuant to the terms of the rest of this Lease or this Addendum. (d) Notwithstanding anything to the contrary, as of the date of the first occurrence of any of the following, at Landlord's election all of Tenant's rights and Landlord's obligations under or in connection with this Addendum will lapse and become null and void upon: ADDENDUM # 4 -11- 140 (i) The exercise of Tenant's Cancellation Option or the expiration of the Lease term (as validly extended) or termination of this Lease in accordance with its terms prior to the exercise of a Purchase Option or any closing thereunder; or (ii) The bona fide purchase or other acquisition of all or substantially all of the Premises by any person or entity (including, without limitation, Tenant or its Affiliates) other than by any of Landlord's Control Affiliates prior to the exercise of a Purchase Option and other than any sale or conveyance which is prohibited under this Lease. (e) Notwithstanding anything to the contrary, Tenant's rights and Landlord's obligations under or in connection with this Addendum will not be binding on and will not affect or otherwise apply in any way to Landlord's Mortgagees or their successors, assigns and purchasers, or their respective Affiliates, whether or not they take title to or acquire all or substantially all of the Premises. ADDENDUM #4 -12- 141 5. Personal Rights. Notwithstanding anything to contrary, the Purchase Options are granted only to and may be exercised only by the Tenant originally named in this Lease, and they may not be exercised by anyone else (other than by an assignee to whom the right to exercise a Purchase Option has been assigned pursuant to a valid assignment of this Lease, if at the time of such assignment the assignor and the assignee deliver to Landlord a jointly executed written notice stating unconditionally that the assignee has the right to exercise such Purchase Option) and Tenant shall not, and shall not have the right or power to, otherwise assign or otherwise Transfer any of the Purchase Options or any rights in connection therewith. Tenant may assign this Lease without granting to the assignee the right to exercise any or all of the Purchase Options, and in such event Tenant will retain the rights to exercise any Purchase Options whose exercise rights have not been validly assigned as set forth in this Addendum, if and only if Tenant has not become a Released Assignor in connection with its assignment of this Lease. ADDENDUM # 4 -13- 142 ADDENDUM #5 RIGHT OF FIRST OFFER TO PURCHASE 1. Grant of Rights. (a) Subject to the terms of this Addendum, before Landlord sells or conveys the Premises during the first eighteen (18) Lease Years (other than pursuant to a sale or conveyance to any of Landlord's Control Affiliates) Landlord shall notify Tenant in writing (the "Offer Notice") of the purchase price and the terms of payment thereof (e.g., all cash, or cash and purchase money financing or assumption of debt) that Landlord intends to accept for the Premises (the "Offer Price"). (b) Within ninety (90) days after delivery of the Offer Notice, Tenant shall notify Landlord in writing that it unconditionally elects one of the three (3) following alternatives: (i) To purchase the Premises for the applicable Offer Price and otherwise on the terms of this Addendum. (Tenant's election of the alternative described in this Subsection (i) is referred to as the "Purchase Election.") (ii) To cause Landlord not to sell the Property during the first eighteen (18) Lease Years . (Tenant's election of the alternative described in this Subsection (ii) is referred to as the "No-sale Election.") ADDENDUM # 5 -1- 143 (iii) To permit Landlord to sell or convey the Premises in accordance with Addendum and to continue to lease the Premises on the terms of this Lease. (Tenant's election of the alternative described in this Subsection (iii) is called the "Existing Lease Election.") (b) TIME IS ABSOLUTELY OF THE ESSENCE. If for any reason Landlord does not actually receive Tenant's unconditional written notice of election as and when required, Tenant shall be deemed to have elected the No-sale Election. At Landlord's election, all of Tenant's rights and Landlord's obligations under or in connection with this Addendum and Addendum #4 shall lapse and become null and void if Tenant defaults hereunder or under the rest of this Lease at any time prior to the exercise of its rights hereunder or any closing hereunder, or if Tenant defaults in connection with any closing hereunder or fails to close as required after its election of the Purchase Election (an "Offer Default"). Any amounts payable under this Addendum in connection with the Purchase Election are deemed to be amounts payable under the Lease, and any default hereunder will be deemed to be a default under the Lease and in such case Landlord shall be entitled to all rights and remedies hereunder and under the rest of the Lease, including, without limitation, the right to require specific performance from Tenant. If Tenant commits an Offer Default, Tenant also shall indemnify and hold Landlord harmless from and against all Liabilities incurred by Landlord that arise from or in connection with the Offer Default. ADDENDUM # 5 -2- 144 2. Purchase Election. If Tenant validly exercises the Purchase Election, then Landlord shall sell and Tenant shall purchase the Premises and the following terms and conditions of Addendum #4 are incorporated herein and shall apply with respect to this Addendum and such sale and purchase as if it were the sale and purchase under an exercised Purchase Option: Section 2(a) (except that the applicable purchase price and the terms of the payment thereof shall be as set forth in the Offer Price, or if there is an outstanding mortgage or mortgages on the Premises at such time Tenant shall assume the mortgage(s) and the cash portion of the Offer Price shall be deemed reduced by the outstanding principal balance of the mortgage(s) assumed); Section 3 (except that the closing date will be a date specified by Landlord that will be at least three (3) months but no more than six (6) months after Tenant's notice of election; and Sections 4(a), (b), (c) and (e). 3. No-sale Election. If Tenant validly elects the No-sale Election, then: (a) Until and unless Tenant otherwise agrees in writing, or Tenant defaults under this Lease or Tenant's rights under this Addendum #5 terminate, or the 18th Lease Year expires (whichever is earliest), Landlord will not sell or convey the Premises except to one of Landlord's Control Affiliates or to Tenant or one of its Related Entities or pursuant to the exercise of a Purchase Option; and ADDENDUM # 5 -3- 145 (b) Notwithstanding anything to the contrary, all "Excess Refinancing Proceeds" (defined below) shall belong solely to Landlord and no portion thereof shall be deemed to be part of Cash Proceeds pursuant to Addendum #3 or otherwise payable or distributable to Tenant. However, if Tenant validly exercises the third (3rd) Purchase Option in accordance with Addendum #4, then Tenant shall receive the credit against the purchase price payable by Tenant as described in Section 2(b) (iii) of Addendum #4. "Excess Refinancing Proceeds" means all of the net proceeds actually distributed to Landlord that are directly traceable to and result from excess proceeds from mortgage refinancings first encumbering the Premises after the No-sale Election if and to the extent that the disbursed principal balance of each such refinancing exceeds: the outstanding principal balance and all accrued and unpaid interest and other charges (including, without limitation, prepayment and "breakage" fees and similar charges) under loan(s) that were repaid by such refinancing; plus any other Liabilities and reserves therefor that were paid with the proceeds of such refinancing. There shall not be deemed to be any Excess Refinancing Proceeds arising from the funding of the financing described in Section 19.4(a). ADDENDUM # 5 -4- 146 4. Existing Lease Election. (a) If Tenant validly elects (or is deemed to have elected) the Existing Lease Election, then for the next twelve (12) months after Tenant's election, Landlord may not sell or convey the Premises (other than pursuant to a sale or conveyance to any of Landlord's Control Affiliates) for a purchase price which is less than ninety-seven percent (97%) of the applicable Offer Price without first delivering to Tenant a new Offer Notice with an Offer Price equal to such new, lower purchase price. If Landlord delivers such a new Offer Notice, then Tenant shall have the right to elect either the Purchase Election or the No-sale Election or the Existing Lease Election in accordance with the procedures established in Section 1 above, except that Tenant will have forty-five (45) days, and not ninety (90) days, within which to respond to Landlord's new Offer Notice. If within twelve (12) months after Tenant validly elects the Existing Lease Election in accordance with this Section 3 Landlord has not executed a binding agreement to sell or convey the Premises for a purchase price which is equal to or greater than ninety-seven percent (97%) of the new, lower Offer Price, or if Landlord has entered into such a binding agreement within the twelve (12)-month period but fails to close thereunder, then the terms and conditions in Section 1 above again will apply. ADDENDUM # 5 -5- 147 (b) If Tenant validly elects the Existing Lease Election, then Tenant will have the right, upon written request to Landlord, to participate reasonably and in good faith with Landlord in the negotiations conducted by Landlord to sell or convey the Premises, which negotiations will be subject to Landlord's control and direction. Tenant acknowledges and agrees that the manner and substance of these negotiations are critical to Landlord, and so Tenant will support Landlord's negotiating positions (provided that, unless Tenant otherwise agrees, such negotiating positions do not attempt to change Tenant's rights and obligations under this Lease) and will not attempt to delay, obstruct or hinder these negotiations. Landlord will have the right at any time and in its sole discretion to suspend, terminate or continue such negotiations and, subject to Subsection (a) above, Articles 6 and 7 of this Addendum and the parenthetical in the preceding sentence, to accept or reject terms offered by prospective buyers and to execute documents and agreements, binding or otherwise, in connection with a sale or conveyance of the Premises. Tenant shall have not have the right or power nor shall it attempt to bind Landlord in connection with a sale or conveyance of the Premises or to deal directly or negotiate alone with any prospective buyer or its agents without Landlord's prior written consent. 5. Termination of Rights. Notwithstanding anything to contrary, at Landlord's election all of Tenant's rights and Landlord's obligations under or in connection with this Addendum will lapse and become null and void upon: ADDENDUM # 5 -6- 148 (a) The exercise of the Cancellation Option, or the termination or expiration of the Lease term in accordance with its terms, prior to the exercise of Tenant's rights hereunder or any closing hereunder; or (b) Unless the No-sale Election first has been validly elected, the bona fide purchase or other acquisition of all or substantially all of the Premises other than by any of Landlord's Control Affiliates prior to the valid exercise of the Purchase Election hereunder and other than any sale or conveyance which is prohibited under this Lease; or (c) As set forth in Section 9 below; or (d) At the end of the eighteenth (18th) Lease Year. 6. No Sale to Direct Competitors. Unless and until Tenant's rights under this Addendum have lapsed or terminated, Landlord shall not sell or convey the Premises to: AT&T, Intel or Compression Laboratories, Inc. 7. Restrictions on Landlord's Sale Rights. Until and unless Tenant defaults hereunder or the rest of the Lease, Landlord agrees that it will not sell or convey the Premises to anyone other than Tenant or any of its Control Affiliates or any of Landlord's Control Affiliates: for the first five (5) Lease ADDENDUM # 5 -7- 149 Years; or other than for cash or cash equivalents (which will be deemed to include, without limitation, purchase money financing and/or the purchaser assuming or taking subject to debt); or if Tenant has validly elected the No-Sale Election. 8. Unaffected Parties. Notwithstanding anything to the contrary, Tenant's rights and Landlord's obligations under or in connection with this Addendum will not be binding on and will not affect or otherwise apply in any way to Landlord's Mortgagees or their successors, assigns and purchasers or their respective Affiliates, whether or not they take title to or acquire all or substantially all of the Premises. 9. Personal Rights. Notwithstanding anything to contrary, the rights of Tenant in this Addendum are granted only to and may be exercised only by the Tenant originally named in this Lease, and they may not be exercised by anyone else (other than by an assignee to whom such rights have been entirely assigned pursuant to a valid assignment of this Lease pursuant to which Tenant has become a Released Assignor, if at the time of such assignment the assignor and the assignee deliver to Landlord a jointly executed written notice stating unconditionally that the assignee has the right to exercise such rights) and Tenant shall not, and shall not have the right or power to, otherwise assign or otherwise Transfer any of its rights under or in connection this Addendum. Tenant may assign this Lease without granting to the assignee the rights of ADDENDUM # 5 -8- 150 Tenant under this Addendum, and in such event: Tenant will retain those rights if and only if Tenant has not become a Released Assignor in connection with its valid assignment of this Lease; and Tenant no longer will have the right thereafter to exercise the No-sale Election, and if Tenant fails to make its written election as and when required it will be deemed to have elected the Existing Lease Election. ADDENDUM # 5 -9- 151 ADDENDUM #7 BUDGET SAVINGS 1. Total Project Costs. "Total Project Costs" means all costs and expenses of any type incurred or payable by Landlord or its Affiliates that arise from or in connection with the acquisition of the Premises, the initial financing (including without limitation any mortgage loans, loans secured by the Letter of Credit and any permanent financing) of or for the Premises, Landlord's Work, or any Liabilities of Landlord arising as a result of or in connection with Tenant's existing leases at The Tower at Northwoods in Danvers, Massachusetts, including, without limitation, costs and expenses for: the purchase price for the Premises and any rights appurtenant thereto (including, without limitation, all costs for due diligence, investigations, remedial work, closing costs, escrow and title fees, legal fees, professional fees and commissions); all labor, services and materials, designers, architects, engineers, draftsman, supervision, permits and approvals, development fees, and other fees, profit and savings payable to construction managers, contractors and subcontractors, and all other "hard" and "soft" costs in connection with Landlord's Work; all loan fees, commissions, appraisals, escrow and title fees, other closing costs, interest rate hedges, "caps" or "floors," interest and principal (if any) during the construction period and other costs in connection with the initial financing of the Premises; and other Liabilities arising out of or in connection with any of the foregoing or as set forth in Schedule "7AAA" to this Addendum. (The parties acknowledge and agree that Schedule "7AAA" is for illustrative purposes only, and is not binding in any way on the parties nor is it a representation and warranty by Landlord of any type, express or implied.) 2. Application of Savings. If and to the extent that the total amount that Landlord is able to draw down and retain under the initial financing of the Premises exceeds the Total Project Costs (after the Total Project Costs are finally determined), then those excess proceeds shall be used by Landlord for any or all of the following uses: as an interest reserve; to purchase interest rate protection for floating rate financing (including, without limitation, for hedges, swaps, caps or floors); or to reduce the principal balance of any financing, or capital contributions or advances made by or on behalf of Landlord or its Control Affiliates. ADDENDUM #7 - 1 - EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY
STATE OR OTHER JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION OR ORGANIZATION ------------------ ------------------------------ PictureTel Securities Corporation............ Massachusetts PictureTel International Corporation......... Delaware PictureTel UK Limited........................ United Kingdom PictureTel Japan, Inc........................ Japan PictureTel GmbH.............................. Germany PictureTel Switzerland Limited............... Switzerland PictureTel FSC Limited....................... United States Virgin Islands PictureTel Scandinavia AB.................... Sweden PictureTel Australia Pty Limited............. Australia PictureTel Technology Corporation............ Delaware
All the subsidiaries are wholly owned by the Company and may do business under their own name as well as PictureTel Corporation. 44 EX-23.1 4 CONSENT OF COOPERS & LYBRNAD, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of PictureTel Corporation on Form S-8 (File Nos. 33-7477, 33-19024, 33-31161, 33-36315, 33-44719, 33-49814, 33-81848) of our reports dated February 20, 1996, on our audits of the consolidated financial statements and financial statement schedule of PictureTel Corporation as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which reports are included in this Annual Report on Form 10-K. /S/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 29, 1996 45 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURETEL'S BALANCE SHEET & INCOME STATEMENT FOR THE PERIOD ENDED 12/31/95, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 12/31/95 10-K FILING. 1000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 39,476 54,547 99,526 (1,791) 43,791 12,446 66,294 (43,779) 288,141 74,515 0 328 0 0 200,494 288,141 346,758 346,758 175,043 175,043 147,413 0 971 27,541 7,915 19,626 0 0 0 19,626 0.56 0.56
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