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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ___________.
COMMISSION FILE NUMBER 0-28660
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TRITEAL CORPORATION
(Exact name of Registrant as specified in its charter)
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DELAWARE 33-0548924
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2011 PALOMAR AIRPORT ROAD
CARLSBAD, CA 92009-1431
(Address of principal executive offices)
(760) 827-5000
(Registrant's phone number, including area code)
----------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of June 19, 1997, the aggregate market value of voting stock held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on June 19, 1997) was approximately
$67,624,993. Excludes shares of Common Stock held by each executive officer and
director and by each entity that owns 5% or more of the outstanding Common
Stock. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the direction of management or policies of the Registrant, or that such
person is controlled by or under common control with the Registrant.
As of June 19, 1997, there were 10,878,908 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A in connection with the 1997
Annual Meeting of Stockholders to be held on August 27, 1997 is incorporated by
reference into Part III of this Report on Form 10-K to the extent stated herein.
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PART I
ITEM 1. BUSINESS
The following description of the Company's business contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those set forth in these forward-looking statements
as a result of a number of factors, including those set forth below under the
caption "Risk Factors" at the end of this Item 1 and elsewhere in this Report on
Form 10-K.
TriTeal Corporation develops, markets and supports open systems-based,
mission-critical desktop system software and integrated applications that enable
multi-platform deployment of client/server applications throughout an
enterprise. The Company's flagship product, the TriTeal Enterprise Desktop
("TED"), allows individual users, system administrators and developers to easily
access applications, data and network resources from a common, intuitive
operating environment across most leading platforms used in the enterprise
client/server market. TED's consistency and interoperability allow the
enterprise greater flexibility in deploying client/server hardware and in
integrating existing legacy applications, thereby enabling increased operating
efficiency and productivity. To further increase functionality in the operating
environment, TriTeal has developed follow-on products that are either sold
separately or bundled with the current release of TED. TriTeal recently
introduced its Java-based SoftNC technology, a thin-client, platform-independent
solution designed to allow simultaneous access to Java and legacy applications.
The Company provides customers with a broad range of services, including needs
assessment and analysis, application development, software integration and
training.
INDUSTRY BACKGROUND
In the mid-1980s, the development of powerful and cost-effective servers,
workstations and other client/server technologies increasingly led many large
enterprise organizations to adopt these technologies for deployment of new
mission-critical software applications. Client/server solutions were typically
developed and deployed on disparate, proprietary platforms (hardware, operating
system and desktop software) to solve specific business problems. For example, a
Hewlett-Packard proprietary vendor configuration might include PA/RISC as the
processor, HP/UX as the operating system and HP VUE as the desktop. In contrast,
a Sun Microsystems, Inc. proprietary configuration might include SPARC as the
processor, SunOS as the operating system and OpenLook as the desktop. As a
result, large enterprises typically deployed a variety of hardware platforms,
network architectures and applications that were not compatible or
interoperable. The problem of multiplicity of systems within the enterprise was
compounded as advanced new technologies became available that were not fully
compatible with existing systems. For example, the recent introduction of
Microsoft Windows NT and the increased adoption of Internet/intranet
technologies have added to the fragmentation within the enterprise. According to
Sentry Market Research, the average number of operating systems supported in the
client/server enterprise increased from four systems in 1991 to 12 systems in
1996 to a projected 13 systems by the end of 1997.
This fragmentation among computing technologies continues to present the
enterprise with a number of challenges. The cost of maintaining system
administration, training, development and support functions for each platform,
as well as the costs associated with the delivery of applications and data
across disparate platforms, can be substantial. Moreover, because the desktop
and the operating system are generally dependent on a particular hardware
platform, the end-user is typically restricted to that platform and cannot
easily access applications or data residing on other platforms in the
enterprise. In addition, with proprietary systems, the enterprise is often
restricted to a limited selection of compatible hardware components. Finally,
the desire to maintain both the substantial investments made by the enterprise
in legacy applications for specific platforms, along with the ability to perform
critical day-to-day work activities on those legacy applications, has continued
to compound the fragmentation problem.
Historically, enterprises have developed custom software solutions in order
to achieve interoperability among disparate platforms. These solutions, however,
are costly and labor intensive to develop and implement, and require substantial
technical resources to support each of the various platforms within the
enterprise. Adding a single new application to a custom solution can require
substantial engineering efforts. Moreover, accessing applications
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running on different platforms can be extremely complex, increasing the training
required for users and reducing user productivity.
The open systems vendor community has attempted to resolve some of these
fragmentation issues through a series of initiatives, which include CDE (Common
Desktop Environment), Motif and DCE (Distributed Computing Environment)
technologies and standards. While these and other initiatives are supported by
the hardware vendors, the Company believes that the technologies and standards
are typically implemented in a proprietary manner, which is inconsistent with
the fundamental purpose of these initiatives.
The increasing fragmentation of the enterprise client/server environment,
together with recent advances in computer networking and Internet/intranet
technologies, have fueled the need for a cost-effective, easy-to-use, unified
enterprise operating environment that enables effective deployment of
mission-critical client/server applications on the wide range of platforms and
operating systems commonly used throughout an enterprise. To address this need,
the Company believes that any solution should (i) interoperate among multiple
disparate platforms and operating systems; (ii) provide users with a consistent
look and feel to minimize training and enhance productivity; (iii) offer
sophisticated features and substantial functionality based on open systems
industry standards to facilitate integration with multiple platforms and
operating systems; (iv) provide systems administrators with effective management
tools; (v) provide developers with a single set of application programming
interfaces ("APIs") to create applications; and (vi) enable enterprise customers
to adopt advanced new technologies, including Internet/intranet technologies,
while protecting valuable legacy client/server software and systems.
THE TRITEAL SOLUTION
To address the problem of fragmentation within the enterprise, TriTeal
developed its desktop system software solution, TED, and its recently introduced
SoftNC technology, which provide the following benefits:
- Interoperability. TED provides interoperability among disparate platforms
by allowing applications from various client/server platforms to display and
operate on any client platforms on which TED is supported. For example, an
application that was developed for an IBM platform can, with TED, easily be
accessed by a user on a Sun system. Additionally, a Windows desktop user can
access UNIX applications without leaving the Windows environment. Similarly, the
Company is developing products based on its SoftNC technology that are being
designed to permit interoperability across any platform that includes a Java
Virtual Machine ("JVM").
- Consistency. TED looks, behaves and provides the same capabilities in the
same manner on every platform on which it operates. TED provides the enterprise
with a common set of systems, facilities, resources, commands, APIs and a
graphical user interface across disparate computing platforms. The products the
Company is developing based on its SoftNC technology are being designed to allow
the user and the enterprise to adopt similar look-and-feel capabilities for Java
applications.
- Enterprise Cost Efficiencies. TED's interoperability and consistency allow
the enterprise customer to reduce systems administration and training costs, to
achieve increased operating efficiency and productivity throughout the
enterprise and to leverage existing hardware and software investments. The
products being developed based on the Company's SoftNC technology are being
designed to provide similar cost efficiencies.
- Open Systems Environment. The Company implements open systems standards in
its products. These standards include, among others, CDE, Motif, X11, DCE, Java,
HTML (Hypertext Mark-up Language) and HTTP (Hypertext Transfer Protocol). By
adhering to these standards, TriTeal provides users with access to numerous
standards-based legacy applications.
- Robust Features and Functions. TED provides a number of features and
functions designed to enhance and simplify a multi-platform networked
environment. For example, TED's integrated desktop features include file, style
and help managers, electronic mail and a calendar function. In addition, TED
includes a graphical workspace manager, key binding support, an integrated Web
browser, a fax application and an optional security module. The
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products being developed based on the Company's SoftNC technology are being
designed to provide robust features and functions.
THE TRITEAL STRATEGY
TriTeal's objective is to establish its desktop system software as the de
facto standard operating environment in the enterprise client/server market. To
achieve this objective, the Company has adopted the following core strategies:
Continue to Evolve Client/Server and Internet/intranet-based Solutions.
TriTeal's strategy is to build products that address enterprise fragmentation
issues by providing a homogeneous environment for client/server, personal
productivity and network computer applications. The Company has an ongoing
development program to continue to enhance the TED product and to develop
follow-on products that can be sold into the TED installed base. To date,
TriTeal has developed several follow-on products, which are either sold or
bundled with the current release of TED, including NTED, WINTED, LOCALTED,
TEDSECURE, TEDVISION and TEDFAX. In addition, the Company is developing
Java-based products based on its recently introduced SoftNC technology,
including SoftNC desktops for network computers, PCs and workstations.
Commitment to Open Systems Technologies and Standards. The Company believes
that open systems are important to enterprise customers that have made
substantial investments in standards-based legacy systems applications. TriTeal
intends to continue to develop and deliver products that adhere to published
specifications and accepted industry standards and to create new products and
technologies that can then be branded as compliant with industry standards. The
Company also plans to continue its active membership with organizations that
determine industry standards, such as The Open Group (formerly the Open Software
Foundation) and World Wide Web Consortium.
Penetrate Global Markets Vertically. The Company's strategy is to penetrate
vertical markets with targeted sales teams that can respond to the particular
needs of these markets. These markets include, among others, financial services,
government, telecommunications and oil and gas. Where appropriate, the Company
develops specialized product features and functions to address special needs of
vertical markets. These features and functions can then be generalized by
incorporating them into other TriTeal products for sale in other market
segments.
Leveraged Business Model. The Company's strategy is to use indirect channel
organizations, such as original equipment manufacturers ("OEMs"), value-added
resellers ("VARs") and system integrators, when appropriate, to create demand
and deliver TriTeal products and services to its customers. The Company believes
that established channel organizations offer the benefits of an installed base
of customers and worldwide sales coverage. In addition, when appropriate, the
Company intends to continue to license from third parties component technologies
as the basis for new product development. TriTeal believes that this strategy
enables it to gain time to market, mitigate risk associated with new technology
development and lower research and development costs.
Deliver Enterprise-Level Service and Support. The Company's service and
support organization offers a single point of contact to facilitate resolution
of issues across all supported platforms and maintains an engineering and
technical support staff trained in cross-platform issues to provide enterprise
technology solutions and system integrity. The Company believes that this
approach to enterprise support is a key differentiating feature as compared to
other desktop vendors. TriTeal intends to continue its investment in
infrastructure, personnel and systems to provide support to enterprise
organizations worldwide. The Company utilizes knowledge obtained through its
support organization to evolve the Company's products in response to enterprise
needs.
The Company's strategies involve substantial risk. There can be no assurance
that the Company will be successful in implementing its strategies or that its
strategies, even if implemented, will lead to successful achievement of the
Company's objectives. If the Company is unable to implement its strategies
effectively, the Company's business, results of operations and financial
condition would be materially and adversely affected.
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PRODUCTS AND TECHNOLOGIES
TriTeal currently offers the TED family of products, providing open
systems-based, mission-critical desktop system software and integrated
applications that enable multi-platform deployment of client/server applications
throughout an enterprise. The Company recently introduced its Java-based SoftNC
technology, a thin-client, platform-independent solution designed to allow
simultaneous access to Java and legacy applications. The Company also has a
number of products in development, including enhancements to TED family of
products and products based on SoftNC technology.
TED Family of Products
TED provides a common intuitive environment across multiple hardware and
operating systems. To further increase functionality in the operating
environment, TriTeal has developed follow-on products that are either sold
separately or bundled with TED. The following table describes TriTeal's current
products:
<TABLE>
<CAPTION>
PRODUCT (1) DESCRIPTION US LIST PRICE (2
----------- ----------- ----------------
<S> <C> <C>
TED
- Cross-platform CDE Consistent, easy-to-use interface for accessing - $425 per seat
- Integrated browser (TEDVISION) applications, data and network services. (including
- Netscape Navigator integration X/Open-designated CDE with value-added features documentation)
with desktop (TEDSCAPE) including key bindings, multi-screen support, graphical - $340 per seat
- Graphical Workspace workspace manager, automatic login and session save, for additional
Manager Netscape Navigator integration, featuring drag-and-drop right-to-use license
- Integrated fax capability, customizable options and navigational tool,
- Multi-screen support license keys, a version upgrade utility and support for
- Support for X Terminals, PCs alternative authentication mechanisms, including
and Macs DCE/Kerberos login. Also includes tight integration
- Pluggable Authentication with NTED product and complete integration with
Module (PAM) TEDSECURE for core desktop applications.
- Mailer Enhancements
- NTED support
- Integrated TEDSECURE option
NTED
- Easy access to Windows Provides remote access to Windows applications running in Pricing based on
applications from TED native mode on a multi-user Windows NT server from a TED configuration
- Run Windows applications in workstation.
native mode
- Single application and file
management
- Interoperability between UNIX
and Windows NT
WINTED Provides advanced desktop features, file-sharing and $199.99 per seat
integrated access to UNIX and remote Windows
applications and files.
TEDSECURE Provides data-level security and controlled access to $200 per seat
shared files on an open network with the TED desktop.
</TABLE>
(1) Features listed are those included in the Company's most current
releases of the specified products, as follows: TED 4.2, NTED 2.0, WINTED 2.0
and TEDSECURE 1.0. Not all features are included in earlier releases.
(2) Based on the Company's most recent price list as of June 19, 1997.
Actual price depends on quantity purchased, among other factors.
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TriTeal Enterprise Desktop: TED. TED 4.0, introduced in August 1995, is a
fully integrated common user environment in which features and applications work
in concert. For example, drag-and-drop functionality is consistent throughout
the desktop, copy and paste works throughout each application, and window
management is consistent on all UNIX platforms. With its rich graphical display
of intuitive icons, customizable workspaces and other user-friendly features,
TED makes it easy for administrators to provide users with access to data,
applications and network services without having to use operating system
commands.
TED has been designated CDE-compliant by X/Open Co., Ltd. Standard CDE
features include a calendar manager, application manager, file manager, style
manager, mail tool, terminal emulator, print tool and help system, among others.
In addition to standard CDE features, TED includes (i) a graphical workspace
manager, which allows the user to easily control and navigate multiple
workspaces, (ii) multiple screen support, which expands the number of
applications and workspaces immediately available, and (iii) key bindings to
simplify routine operations.
TED 4.0 integrated applications include TEDFAX and TEDVISION. TEDFAX is a
powerful, easy-to-use, integrated fax software product that enables users to
compose, edit, send, receive and manage inbound and outgoing faxes directly from
their desktops. As with all TED features and applications, TEDFAX implements
drag-and-drop between the desktop, TEDFAX and other CDE clients. TEDVISION
allows the user to access the Web and other Internet/intranet services and
includes standard browser features, such as hot lists and pop-up menus.
Moreover, with TEDVISION, users can browse local and remote file systems, which
eliminates the need to access a separate application, such as a file or
application manager.
The Company has developed a version of TED 4.0 localized for the Japanese
market. In addition, the Company is developing German, French and Spanish
localizations.
TED 4.2, an upgraded version of TED, provides users with a number of
enhancements, including drag-and-drop integration between Netscape Navigator and
TED, DCE and Kerberos login authentication and support, enhancements to the
graphical workspace manager and mailer, along with additional key bindings,
license keys and a version upgrade utility.
NTED. NTED 1.0 provides TED users with easy access to Windows applications
directly from TED using familiar Windows icons. NTED delivers Windows
applications running natively on a Windows NT server to TED users, while
providing applications and file integration as well as interoperability between
the two environments. Users can then cut, copy and paste between Windows and
UNIX. In addition, applications and files from both environments can be
organized and accessed from a single application manager and file manager.
NTED 2.0, an upgraded version of NTED, makes use of the Windows NT registry
to make Windows applications transparently available to all remote users without
the need for action by a system administrator. NTED automatically makes any file
that is located in a proper share directory on the UNIX system available to
Windows applications on the Windows NT server. With the TEDFS option, NTED
allows sharing of PC and UNIX files stored on UNIX and printing of PC documents
and files on UNIX printers. NTED is sold separately as an optional module for
TED.
WINTED. WINTED 1.0 displays the TED front panel on Windows-based platforms
using a PC X server, providing full access to TED's features and
interoperability between TED and the Windows desktop.
WINTED 2.0, an upgraded version of WINTED, is a native advanced desktop
solution for Windows NT and Windows 95 PCs and provides expanded capabilities
over WINTED 1.0. WINTED 2.0 provides advanced desktop management capabilities
and file sharing, plus optional integrated access to remote UNIX and Windows
files and applications. WinTED 2.0 also provides advanced desktop features, such
as the TriTeal Front Panel and Graphical Workspace Management.
TEDSECURE. TEDSECURE 1.0 is a data level desktop security product. Developed
in conjunction with the National Security Agency ("NSA"), TEDSECURE provides
data protection and digital signature capability that has
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been approved by the NSA for federal agencies. TEDSECURE provides cryptographic
facilities and digital signatures, which allow users to send unclassified but
sensitive data across an open network. TEDSECURE, based on technology licensed
from SPYRUS, was implemented utilizing standard United States Government
security algorithms ("FORTEZZA"). TEDSECURE is sold separately as an optional
module and is fully integrated with TED.
Java-Based SoftNC Technology and Network-Centric Computing Architecture
The Company's SoftNC technology is a thin-client, platform-independent
solution designed to allow simultaneous access to Java and legacy applications.
Written entirely in Java, SoftNC technology is designed to operate on any
hardware device that includes a JVM. While most currently available Java-based
alternatives to graphical user interfaces rely on browsers, SoftNC technology
offers a graphical user interface that delivers Java applications directly from
the desktop without the need for a browser. As a result, users have access not
only to hyper-linked data, but also to a broad set of applications, including
legacy, mainframe, UNIX and PC applications. SoftNC's infrastructure is designed
to enable a user logging onto the network from any device through a URL to
access the user's customized desktop. The user can then access resources
throughout the network via a messaging backbone of communicating desktop servers
associated with each system. SoftNC's agents are designed to provide services
such as computation, personal productivity or system resource management,
accessible from anywhere on the network.
TriTeal recently introduced its Network-Centric Computing Architecture
("NCCA"), which combines existing distributed computing technologies and
powerful agent-based applications implemented in Java. NCCA is designed to
deliver advanced functionality to any device capable of running a JVM, allowing
computing resources to be administered consistently across virtually any system
that includes a JVM without regard to application or operating system
compatibility. NCCA provides the framework for the Company's Java-based SoftNC
technology
The Company is currently developing the following products based on its
SoftNC technology:
SoftNC Desktop for Network Computers. SoftNC Desktop for Network
Computers is being developed to operate on any hardware device that includes
a JVM. In addition, it is being designed to provide full-featured desktop
functionality, including overlapping windows, menus, drag-and-drop and full
desktop scalability, while offering the benefits associated with thin-client
architecture, including legacy application integration and centralized
administration. Developers will be able to write an application once and,
without re-porting, deploy that application across multiple platforms.
SoftNC Desktop for PCs and Workstations. TriTeal is developing SoftNC
Desktop for PCs and Workstations to provide enterprise users of PCs and
workstations with the same features and functionality as SoftNC for Network
Computers.
SoftNC Desktop Server. SoftNC Desktop Server is a standards-based
server-side framework and messaging system that delivers data, applications
and resources to the user, regardless of their underlying computer platform.
The statements made in this Report on Form 10-K regarding scheduled release
dates and anticipated features of the Company's products under development and
proposed enhancements are forward-looking statements, and the actual release
dates and features of such products or enhancements could differ materially from
those projected as a result of a variety of factors, including the ability of
the Company's engineers to solve technical problems and to test products, as
well as business priorities in light of the availability of development and
other resources and other factors, including factors that may be outside the
control of the Company and factors discussed under the caption "Risk Factors"
and elsewhere in this Report on Form 10-K. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products, or that new
products and product enhancements will satisfy the requirements of the
marketplace or achieve market acceptance.
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To date, substantially all of the Company's revenues have been attributable
to sales of licenses of the TED family of products and related services. The
Company has not introduced for commercial sale any products based on, or
recognized any revenues from licenses of, its SoftNC technology. The Company
currently expects the TED family of products and related services to account for
substantially all of its revenues for the foreseeable future. As a result,
factors adversely affecting the pricing of or demand for TED products, such as
competition or technological change, could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company's
future financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced versions
of the TED family of products and related services and on the Company's ability
to develop and commercialize products based on its SoftNC technology. There can
be no assurance that the Company will continue to be successful in developing
and marketing the TED family of products and related services, or that the
Company will be successful in developing and marketing products based on the
Company's SoftNC technology.
CUSTOMERS AND MARKETS
The Company's target market consists of Global 1000 customers that use
multiple client/server platforms for mission-critical applications. TriTeal has
targeted specific vertical markets, including financial services, government,
telecommunications, oil and gas, manufacturing and other industries. The Company
has licensed in excess of 100,000 seats of the TED family of products (including
predecessor products) to date.
The Company has also licensed certain of its desktop and Internet
technologies through licensing agreements and joint development and marketing
agreements to a number of companies, including AT&T, Corel Corporation,
Hewlett-Packard, IBM, Network Computing Devices ("NCD"), Novell Inc. ("Novell"),
The Santa Cruz Operation ("SCO"), Siemens Nixdorf Informationssystemse AG
("SNI"), Tektronix, Inc. ("Tektronix") and Wyse Technology, Inc., among others.
A relatively small number of customers (primarily government resellers)
account for a significant percentage of the Company's revenues. In fiscal 1997,
two of the Company's government resellers, Sylvest Management and IBM, accounted
for 37% and 36% of revenues, respectively. In fiscal 1996, sales to Logicon and
AT&T accounted for 18% and 12% of revenues, respectively, and sales to the
Company's top four customers accounted for approximately 45% of revenues. In
fiscal 1995, sales to AT&T, IBM and British Columbia Telephone accounted for
29%, 12% and 11% of revenues, respectively. The Company expects that sales of
its products to a limited number of customers will continue to account for a
high percentage of revenue for the foreseeable future. More than 30% of the
Company's revenues during fiscal 1996 and more than 80% of its revenues during
fiscal 1997 were derived indirectly through distributors from sales to
departments and agencies of the U.S. Government. The Company believes that the
success and further development of the Company's business will continue to be
dependent, in significant part, upon its ability to continue such indirect
sales. A significant reduction in the federal funds available for agencies and
departments the Company is supplying, either through agency budget cuts by
Congress or the imposition of budgetary constraints, or a determination by the
Government that funding of such agencies and departments should be reduced or
discontinued, would have a material adverse effect on the Company's results of
operations. The future success of the Company will depend on its ability to
obtain orders from new customers and successfully market its products in diverse
industries. The loss of a major customer, failure to close a major order or any
reduction, cancellation or delay in orders by such customers, or the failure of
the Company to successfully market its products in existing targeted industry
segments or new industry segments, would have a material adverse effect on the
Company's business, results of operations and financial condition. For example,
during the fourth quarter of fiscal 1997, the Company's revenues fell
substantially short of anticipated levels due primarily to a failure to close an
order from a government reseller, and there can be no assurance that delays,
cancellations or failures to close orders will not occur in the future.
Similarly, changes in government procurement practices have resulted in the
past, and may result in the future, in losses or delays in orders. In addition,
orders from government resellers and agencies of the U.S. government may subject
the Company to other risks that are not typically present in commercial
contracts, such as retroactive price adjustments and potential penalties, as
well as the risk of termination at the convenience of the government. The
occurrence of any one of these factors could have a material adverse effect on
the Company's business, results of operations and financial condition.
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The Company generally does not offer payment terms beyond 60 days; however,
the Company's sales to government resellers and agencies of the U.S. government
typically have longer payment cycles. Because the Company derives a substantial
portion of its revenues from government resellers and agencies of the U.S.
Government, the Company's largest receivables tend to have lengthy collection
cycles. At March 31, 1997, approximately 87% of the Company's outstanding trade
receivables were from government resellers and agencies of the U.S. Government.
See Note 6 of Notes to Consolidated Financial Statements. To date, the impact of
such lengthy collection cycles has not been material to the Company's working
capital requirements; however, there can be no assurance that future delays in
payment will not adversely affect the Company's ability to meet its anticipated
liquidity needs.
All of the Company's business is in the desktop system, client/server and
Internet/intranet application software markets, which are still emerging markets
that are intensely competitive, highly fragmented and subject to rapid change.
The Company's future financial performance will depend in large part on
continued growth in the number of organizations adopting client/server computing
environments, the continued use by these organizations of a variety of
incompatible computing technologies and commercial acceptance of the Company's
products as a desktop system software solution to address these problems of
fragmentation. There can be no assurance that the desktop system software,
client/server or Internet/intranet markets will maintain their current level of
growth, or that they will continue to be heterogeneous or that the Company's
principal product, TED, will be widely adopted. If the desktop system software,
client/server or Internet/intranet markets fail to grow or grow more slowly or
if the enterprise becomes more homogeneous than the Company currently
anticipates, or if the Company's products are not widely adopted, the Company's
business, results of operations and financial condition would be materially and
adversely affected. The Company has spent, and intends to continue to spend,
significant resources educating potential customers about the benefits of its
products. However, there can be no assurance that such expenditures will enable
the Company's products to achieve any additional degree of market acceptance.
Certain of the Company's products and products in development are intended
for use with the Internet/intranet. The success of the Company's products and
products in development, if commercially released, may depend, in part, on their
compatibility with the Internet. The commercial market for products and services
designed for use with the Internet/intranet has only recently began to
experience rapid growth, and there can be no assurance that this growth pattern
will continue. To the extent that the Internet continues to experience rapid
growth in the level of use and the number of users, there can be no assurance
that the Internet infrastructure will be able to support the demands of such
growth or will not otherwise lose its utility due to delays in the development
and adoption of new standards and protocols required to handle increased levels
of activity or due to increased government regulation. There can be no assurance
that the Company will be able to successfully compete in the market for
Internet-related products and services without substantial modification or
customization of the Company's products or services or the introduction of new
products and services.
Because a large portion of the Company's revenues are currently derived from
enterprises that support UNIX operating systems, a significant decline in the
UNIX operating systems market would have a material adverse effect on the
Company's business, results of operations and financial condition. Similarly,
widespread adoption of other desktop system software and operating environments,
such as Windows NT, Web-based operating environments or other technologies,
could create a more homogeneous environment throughout an enterprise, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
MARKETING AND SALES
The Company markets and sells its products in the United States, Canada,
Europe and Pacific Rim countries through its direct sales force, OEMs, system
integrators and VARs. As of March 31, 1997, the Company employed 42 individuals
in its sales and marketing organization. The Company's direct sales staff is
based at the Company's corporate headquarters in Carlsbad, California, and at
field sales offices in the metropolitan areas of San Diego, Dallas, Boston, New
York, Chapel Hill, North Carolina, Washington, D.C. and London. To support its
sales force, the Company conducts comprehensive marketing programs, which
include seminars, trade shows, other industry
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events, direct mail, public relations and advertising.
The Company's direct sales force is responsible for creating demand for the
Company's products. Sales leads are generated through direct calls to known
prospects, direct mail, seminars, advertising, telemarketing and requests for
proposals from prospects. The Company's field sales force conducts presentations
and demonstrations of the Company's products to management and users at the
prospect site as part of the Company's direct sales effort. Fully functional
evaluation units are provided to prospects as requested. The Company's field
engineers assist prospects in technical matters pertaining to the evaluation
software. The Company plans to expand its direct sales force. There can be no
assurance that such internal expansion will be successfully completed, that the
cost of such expansion will not exceed the revenues generated or that the
Company's sales and marketing organization will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of the Company's current or potential competitors. The
Company's inability to effectively manage the expansion of its direct sales
force could have a material adverse effect on the Company's business, results of
operations and financial condition.
The licensing of the Company's products by its customers typically involves
a significant technical evaluation and commitment of capital and other
resources, and is often subject to the delays frequently associated with
customers' internal procedures to approve large capital expenditures and to test
and accept new technologies that affect key operations, particularly with
respect to government sales. For these and other reasons, the sales cycle
associated with the licensing of the Company's products is typically lengthy and
subject to a number of significant risks that are beyond the Company's control.
There can be no assurance that the Company will not experience these and
additional future delays in sales of the Company's products because of the
lengthy sales cycle and the large size of many customers' orders. If revenues
forecasted from a specific customer for a particular quarter are not realized in
that quarter, the Company's operating results for that quarter could be
materially and adversely affected.
The Company's strategy is to leverage sales and marketing through its
indirect channel relationships, which include OEMs, VARs and system integrators,
that distribute or resell the Company's products in their respective markets.
The Company has entered into several OEM reseller agreements pursuant to which
the reseller provides either TED or a modified version of TED to its customers.
The Company has established OEM relationships with AT&T, Hummingbird, IBM, NCD,
SCO, Silicon Graphics, Inc., SNI and Tektronix in connection with the TED family
of products. These relationships have been established to help create and
fulfill demand and support end-user sites. The Company is currently pursuing
strategic OEM relationships in connection with its SoftNC technology. The
Company typically selects channel entities on the basis of their industry
expertise, supported customer base and system integration capabilities. The
Company has entered into agreements with VARs and system integrators in
connection with the TED family of products, including Logicon, Shell Services
Corporation, Stornet and Worldwide Technologies. Certain of these entities have
received advanced training and certification through the Company to ensure
appropriate skills and knowledge with respect to the Company's products. The
Company's sales representatives work with these channel entities in activities
such as educational and sales seminars, local or regional user conferences and
industry trade shows. The Company may, in the future, seek to establish
strategic VAR and system integrator relationships in connection with its SoftNC
technology.
There can be no assurance that the Company will be able to continue to
successfully manage its relationships with indirect channel entities or that any
OEM, VAR or system integrator will continue to market or to purchase the TED
family of products or that the Company will be successful in establishing
strategic relationships in connection with its SoftNC technology or products.
The failure by the Company to maintain these relationships or the failure to
establish new relationships in the future could have a material adverse effect
on the Company's business, results of operations and financial condition. There
can be no assurance that these events will not occur in the future. To the
extent that average selling prices through indirect channel relationships
decline relative to the Company's direct sales in the future, the Company's
average selling prices and gross margins may be materially and adversely
affected.
In addition, the Company's agreements with indirect channel entities
typically do not restrict such entities from distributing competing products
and, in many cases, may be terminated by either party without cause.
Furthermore, in some cases the Company has granted exclusive distribution rights
that are limited by territory and in duration,
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and such agreements typically do not require any minimum purchase volumes;
therefore, there can be no assurance that these relationships will produce
significant revenues in the future. Consequently, the Company may be adversely
affected should any indirect channel entity fail to adequately penetrate its
market segment. Failure to recruit, manage or retain important indirect channel
entities, or to manage conflict within the channel, could materially and
adversely affect the business, results of operations and financial condition of
the Company.
Although, to date, the Company has not made a significant percentage of its
sales internationally, a significant portion of the Company's customer base are
large multinational companies. To meet the needs of such companies, both
domestically and internationally, the Company must directly or indirectly
provide worldwide sales and product support services. In April 1997, the Company
relocated the European headquarters of its European subsidiary, TriTeal B.V.,
from the Netherlands to the United Kingdom and closed the Netherlands facility.
The European operations are responsible for generating and fulfilling customer
demand and supporting indirect channel activities. In addition, the Company's
marketing department supports European activities from the Company's
headquarters in Carlsbad, California. The Company intends to enter additional
markets and to continue to expand its international operations and direct and
indirect sales and marketing activities worldwide, which will require
significant management and financial resources, and could adversely affect the
Company's business, results of operations and financial condition. The Company
has committed and intends to continue to commit significant time and financial
resources to developing international sales and support channels. Total export
sales for the years ended March 31, 1997, 1996 and 1995 were approximately
$510,000, $1.3 million, and $50,000, respectively. See Note 6 of Notes to
Consolidated Financial Statements. To the extent that the Company is unable to
expand its international sales organization in a timely manner, the Company's
growth, if any, in international sales will be limited, and the Company's
business, results of operations and financial condition could be materially and
adversely affected.
The Company has a Master Distribution Agreement with Ryoyo Electro
Corporation ("Ryoyo") under which Ryoyo distributes the localized version of TED
throughout Japan and functions as the Company's sole representative for Japan.
The Company has an agreement with Pacific Advantage, Ltd. under which Pacific
Advantage, Ltd. will serve as the Company's manufacturer's representative to
service the markets of the Pacific Rim outside of Japan.
There can be no assurance that the Company will be able to maintain or
increase international market demand for its products. Risks inherent in the
Company's international business activities generally include currency
fluctuations, unexpected changes in regulatory requirements, tariffs and other
trade barriers, costs of and the Company's limited experience in localizing
products for foreign countries, lack of acceptance of localized products in
foreign countries, longer accounts receivable payment cycles, difficulties in
managing international operations, potentially weaker protection for
intellectual property in certain foreign countries, potentially adverse tax
consequences including restrictions on the repatriation of earnings, and the
burdens of complying with a wide variety of foreign laws and practices. To date,
substantially all of the Company's international revenues have been denominated
in U.S. dollars. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in future currency
exchange rates will not have a material adverse effect on revenues from
international sales and thus the Company's business, results of operations and
financial condition. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international operations and,
consequently, the Company's business, results of operations and financial
condition.
SERVICES AND SUPPORT
The Company has established a services and support organization to provide
enterprise technology solutions and system integration. The Company assigns a
support representative to each of its customers as a point of contact for
resolving issues. TriTeal's professional services engineers and customer support
representatives are trained in cross-platform issues in order to diagnose and
solve technical problems related not only to the Company's products, but also to
the software and hardware technologies with which the Company's products
interact. The Company believes that its single contact system for enterprise
support is a key differentiating feature as compared to other vendors.
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TriTeal's support structure involves phone support and channel support
through the Company's engineering and field organizations. The Company's
services and support organization offers support both domestically and
internationally. This support is purchased separately from the product. The
Company tracks all support requests through a customer database that maintains
current status reports as well as historical logs of customer interactions. When
appropriate, these support representatives provide the customer with direct
access to the Company's development engineers. In addition, the Company
maintains a technical support area on its Web site which contains enhancements
and corrections to software defects that may be accessed through a file transfer
protocol, thereby enabling TED users to install that code on their platforms
automatically. In addition, the Company offers pre- and post-sales support from
its field systems engineers and professional services engineers, who are based
in all of the Company's sites worldwide. For those enterprise customers that
require custom features, the Company can deploy its professional services
engineering resources to assist the customer on its development efforts. The
Company also encourages application integration by assisting other software
companies or MIS organizations in the integration process.
The Company has created the UniTED Partners Program, which trains selected
resellers in providing enterprise support. UniTED Partners are awarded TriTeal
Certification after five days of support training for field engineers. The
Company recommends certified UniTED Partners to its enterprise customers to
address their training needs at three levels: end-user, developer and system
administration.
RESEARCH AND DEVELOPMENT
As of March 31, 1997, the Company employed 48 persons in its research and
development organization. The Company believes that its future success depends
in large part upon its ability to continue to enhance its existing products and
to develop new products that maintain cross-platform technological
competitiveness. The Company relies on extensive input concerning product
development from the Company's customers communicated through the Company's
sales and marketing organizations, as well as market research data. TriTeal's
research and development efforts are directed at increasing product
functionality, improving product performance, expanding the capabilities of its
products to interoperate with other acquired technologies and developing new
products.
The Company's research and development organization consists of three
groups: engineering, quality assurance and advanced research. These groups are
dedicated to maintaining the Company's core products, engineering corrections to
system defects, implementing performance enhancements and building complementary
desktop services and applications. The Company seeks to support open systems
standard software, while providing additional features and functionality that
complement and enhance standardized software.
Each of the client/server, desktop system software and Internet/intranet
markets is characterized by rapid technological advances, evolving industry
standards, changes in consumer expectations, and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products as well as products currently under development
obsolete and unmarketable. Accordingly, the life cycles of the Company's
products are difficult to estimate. The Company's future success will depend
upon its ability to enhance its current products and to develop and introduce
new products that keep pace with technological developments, respond to evolving
consumer requirements and achieve market acceptance. The Company's future
success will also depend in part upon its ability to maintain and enhance its
technology relationships in order to provide customers with integrated product
solutions. The Company's ability to develop and introduce new products and
enhancements on a timely basis may be adversely affected by a number of factors,
including the ability of the Company's engineers to solve technical problems and
to test products as well as business priorities in light of the availability of
development and other resources and other factors, including factors that may be
outside the control of the Company and factors discussed under the caption "Risk
Factors" and elsewhere in this Report on Form 10-K. If the Company is unable to
develop on a timely basis new software products or enhancements to existing
products, if such new products or enhancements do not achieve market acceptance,
or if the Company is unable to maintain its technology relationships, the
Company's business, results of operations and financial condition will be
materially and adversely affected.
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The Company's current products are designed to adhere to certain open
systems standards, and current and future sales of the Company's products will
be dependent, in part, on market acceptance of such standards. Emergence of new
industry standards could require the Company to modify its products to adhere to
such standards. There can be no assurance that the Company would be successful
in incorporating new standards effectively or on a timely basis or that any
resulting products would achieve commercial acceptance. Failure by the Company
to effectively incorporate into its products new industry standards that are
widely adopted in the markets served by the Company would have a material
adverse effect on the Company's business, results of operations and financial
condition.
COMPETITION
The market in which the Company competes is characterized by rapidly
changing technology and evolving standards. The Company's competitors and
potential competitors, which include Microsoft Corporation ("Microsoft"),
Netscape Communications Corporation ("Netscape") and the original CDE developers
(Hewlett-Packard Company ("Hewlett-Packard"), IBM, Novell and Sunsoft, a
subsidiary of Sun Microsystems, Inc.), have or may have a more established and
larger marketing and sales organization, significantly greater financial and
technical resources and a larger installed base of customers, as well as greater
name recognition than the Company. Accordingly, such competitors or potential
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sales of their products than the Company or may be
better positioned to achieve market acceptance of new technology or products.
The Company also expects that competition will increase as a result of software
industry consolidation. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
enterprise customers in the Company's markets. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, or that competitive
factors faced by the Company will not have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's products are based in part on a non-exclusive license of the
CDE industry standard. Each of the original CDE developers has developed or is
developing unique implementations of CDE specific to its own UNIX platforms.
Because CDE was developed as an open systems industry standard, any of the
original CDE developers, or their assignees, other competitors or third-party
licensees, may develop similar products or sell competing products in the
Company's markets. In addition, the Company has developed its TED product based
in part on a non-exclusive license of the CDE technology from Hewlett-Packard.
Under the terms of the Company's license agreement with Hewlett-Packard, all
modifications to the CDE developed by the Company are owned by the Company and
are licensed back to Hewlett-Packard on a non-exclusive basis. There can be no
assurance that one or more of these competitors and potential competitors will
not develop or market products that would directly compete with the Company's
products or license a third party to do so.
The Company believes that the principal competitive factors affecting its
market include adherence to open systems standards, product features and
functionality, ability to integrate with third-party products, ease of use,
quality, performance, price, customer service and support, effectiveness of
sales and marketing efforts and company reputation. Although the Company
believes that it currently competes favorably with respect to such factors,
there can be no assurance that the Company can maintain its competitive position
against current and potential customers, especially those with greater
financial, marketing, service, support, technical and other resources than the
Company.
LICENSE AGREEMENTS AND INTELLECTUAL PROPERTY
The Company relies on certain technology that it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There
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can be no assurance that these third-party technology licenses will continue to
be available to the Company on commercially reasonable terms, if at all. The
loss of or inability to maintain any of these technology licenses could result
in delays or reductions in product shipments until equivalent technology, if
any, could be identified, licensed and integrated. Any such delays or reductions
in product shipments could materially and adversely affect the Company's
business, results of operations and financial condition.
The Company's principal product, TED, is based in part on X11, Motif and CDE
standards specified and administered by X/Open Company, Ltd. Certain of the
Company's third-party technology licensing agreements for implementation of
these standards are summarized below:
The Company has developed its TED product based in part on a non-exclusive
license of CDE technology from Hewlett-Packard. Under the terms of the license
agreement with Hewlett-Packard, all modifications to CDE developed by the
Company are owned by the Company, and the Company granted to Hewlett-Packard a
paid-up, non-exclusive, worldwide license to use, reproduce, distribute and
prepare derivative works of such modifications in both source code and object
code form. The Hewlett-Packard license agreement terminates in July 1997,
subject to unlimited one-year extensions at the Company's option. The
Hewlett-Packard license agreement is also terminable on breach, bankruptcy or
cessation of business by either party. In addition, if an infringement action is
brought against Hewlett-Packard relating to the CDE technology licensed by
Hewlett-Packard to TriTeal and Hewlett-Packard is not able to procure for
TriTeal the use of CDE, replace CDE with a non-infringing product or modify CDE
to be non-infringing, then Hewlett-Packard may terminate TriTeal's rights to its
CDE to the extent necessary to avoid infringement. In the event the
Hewlett-Packard license agreement is terminated, the Company believes that it
could successfully license comparable CDE technology from another source.
In May 1996, the Company entered into a software license agreement with SCO,
pursuant to which the Company granted to SCO a non-exclusive, royalty-free
license to certain TriTeal desktop technology in exchange for the grant to the
Company of a non-exclusive, royalty-free license to CDE, effective if SCO
obtains the right to sublicense CDE. The SCO license agreement terminates in May
1999, subject to one-year extensions upon mutual agreement of the parties.
Pursuant to a license agreement with The Open Group, the Company has
licensed Motif applications from The Open Group on a non-exclusive basis. The
license agreement is terminable by OSF in the event of default by the Company in
its payment obligations or upon the Company's bankruptcy.
In May 1995, TriTeal entered into a software license agreement with SPYRUS,
pursuant to which SPYRUS granted to the Company a worldwide, non-exclusive,
royalty-bearing license for SPYRUS' network security technology, which is the
basis for the Company's TEDSECURE product. The SPYRUS license agreement
terminates in May 2000, but may be extended for one-year terms at the Company's
option, subject to the written consent of SPYRUS.
Pursuant to an OEM source license agreement between the Company and
Spyglass, Inc. ("Spyglass"), the Company licensed certain Internet/intranet
component technologies from Spyglass, on a non-exclusive, royalty-bearing basis.
The Spyglass license agreement terminates in September 1998, subject to one-year
extensions at the Company's option. The Company has incorporated this technology
from Spyglass into its TEDVISION product.
While it may be necessary or desirable in the future to obtain other
licenses relating to one or more of the Company's products or to current or
future technologies, there can be no assurance that the Company will be able to
do so on commercially reasonable terms, if at all.
The Company's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on trademark, trade secret,
copyright law, confidentiality procedures and contractual provisions to protect
its technology, the Company believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. To
date, the Company has had no patents issued; however, it has three patent
applications pending. There can be no assurance
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that any patents will issue from such applications or that others will not
develop technologies that are similar or superior to the Company's technology.
The Company believes the source code for the Company's proprietary software is
protected both as a trade secret and copyright work. However, effective
trademark, copyright and trade secret protection may not be available in every
foreign country in which the Company's products are distributed. The Company's
policy is to enter into confidentiality agreements with its employees,
consultants and vendors, and the Company generally controls access to, and
distribution of, its software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization. There can be no assurance that the steps taken by the Company to
protect its proprietary technology will be adequate to prevent misappropriation
of its technology by third parties, or that third parties will not be able to
develop similar technology independently.
The Company may receive notices from third parties claiming that the
Company's products infringe third-party proprietary or intellectual property
rights. The Company expects that, as the number of software products in the
industry increases and the functionality of these products or their
implementation further overlaps, software products will increasingly be subject
to such claims. Any such claim, with or without merit, could result in costly
litigation and require the Company to enter into royalty or licensing
arrangements. Such royalty or licensing arrangements, if required, may not be
available on terms acceptable to the Company, if at all. Consequently, any such
litigation could have a material adverse effect on the Company's business,
results of operations and financial condition.
EMPLOYEES
As of March 31, 1997, the Company had no part-time employees and 130
full-time employees, including 42 in sales and marketing, 61 in product
development and support services and 27 in finance and administration. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good. The loss of certain key
employees or the Company's inability to attract and retain other qualified
employees could have a material adverse effect on the Company's business and
operations.
EXECUTIVE OFFICERS
The executive officers of TriTeal Corporation and their ages as of June 27,
1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------ --------- ----------------------------------------------------
<S> <C> <C>
Jeffrey D. Witous................... 36 President, Chief Executive Officer
and Chairman of the Board
Arthur S. Budman.................... 35 Chief Financial Officer and Director
Ronald B. Hegli..................... 36 Vice President, Engineering
Robert D. Ruhe...................... 39 Executive Vice President, Worldwide Field Operations
Rand R. Schulman.................... 44 Executive Vice President
Garrett M. Thomas................... 52 Vice President, Corporate General Counsel
Oran M. Thomas...................... 34 Chief Technology Officer
Gregory J. White.................... 39 Chief Operating Officer and Secretary
</TABLE>
JEFFREY D. WITOUS co-founded the Company and has served as Chief Executive
Officer since April 1995, Chairman of the Board since March 1994 and President
since June 1996. From March 1994 to April 1995, Mr. Witous served as Executive
Vice President of Business Development. Prior to joining the Company, Mr. Witous
served as National Business Development Manager for Sun Microsystems Computer
Corporation ("SMCC"), a subsidiary of Sun Microsystems, Inc. ("Sun"), a computer
hardware, software and services company, from April 1991 to January 1994.
ARTHUR S. BUDMAN joined the Company in November 1994, was appointed Chief
Financial Officer in February 1995 and was elected to the Board of Directors in
January 1996. From January 1985 to November 1994, he was employed by Ernst &
Young LLP, a public accounting firm, serving most recently as Senior Manager.
Mr.
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Budman is co-founder of the San Diego Software Industry Council, a trade
association for software companies. Mr. Budman is a certified public accountant.
RONALD B. HEGLI has served as Vice President of Engineering since December
1996. From March 1994 to December 1996, Mr. Hegli held various engineering
positions, including Manager of Development and Director of Engineering. From
May 1988 to March 1994, Mr. Hegli was a Senior Engineer at Digital Equipment
Corporation, where he was lead engineer for desktop environments, including the
initial port of the CDE to the Alpha platform. From August 1983 to May 1988, Mr.
Hegli was a senior engineer at General Electric Company, developing computer
systems for nuclear power plant monitoring.
ROBERT D. RUHE has served as Executive Vice President, Worldwide Field
Operations, since September 1996. Mr. Ruhe served as Vice President of Federal
Business from May 1995 to September 1996. From July 1992 to May 1995, he served
as Manager of National Civilian Federal Sales for Sun Microsystems Federal Inc.
From February 1981 to July 1992, he was employed by Digital Equipment
Corporation, a computer manufacturer, where he served most recently as Strategic
Federal Account Manager.
RAND R. SCHULMAN has served as Executive Vice President since February 1996.
From July 1994 to February 1996, he was Vice President of Marketing for the
Company. From January 1992 to June 1994, Mr. Schulman served as Vice President
of Sales and Marketing at Pages Software, a computer software company. Mr.
Schulman was employed in various capacities from December 1983 to January 1992
by Island Graphics/Dainippon Screen Mfg. Co., a computer software company,
serving most recently as General Manager and Senior Vice President.
GARRETT L. THOMAS joined the Company in January 1997 as Vice President,
Corporate General Counsel. For the past 13 years, he has held various legal
positions with Sun, most recently as General Counsel of Sun's government
operations. Prior to joining Sun, Mr. Thomas held various legal positions at
software and telecommunications companies.
ORAN M. THOMAS co-founded the Company and has served as Chief Technical
Officer since April 1995. From January 1993 to November 1993, Mr. Thomas served
as President and Secretary of the Company. From January 1993 to February 1995,
he served as the Company's Chief Financial Officer. Mr. Thomas served as a
director of the Company from January 1993 to January 1996. From January 1988 to
September 1993, he served as Senior Software Engineer at Science Applications
International Corporation, a software company, where he managed the
multi-platform, commercial systems software development group.
GREGORY J. WHITE co-founded the Company, has served as Chief Operating
Officer since April 1995 and as Secretary since November 1993. From November
1993 to March 1994 and from April 1995 to June 1996, he served as President of
the Company. From March 1994 to January 1995, Mr. White served as Chief
Executive Officer for the Company. From July 1990 to September 1993, he held the
position of Sales Executive for SMCC.
Each officer serves at the discretion of the Board of Directors. The
Company's By-laws permit the Board of Directors to establish by resolution the
authorized number of directors, and the Company currently has four directors
authorized. There are no family relationships among any of the directors or
officers of the Company.
RISK FACTORS
Limited Operating History
The Company was founded in January 1993 and commenced shipment of its
initial software products in May 1993 and its current flagship product, TED, in
August 1995. Accordingly, the Company has only a limited operating history upon
which an evaluation of the Company and its prospects can be based, making
prediction of future operating results difficult, if not impossible. The
Company's prospects must be considered in light of the risks and uncertainties
frequently encountered by companies in their early stages of development,
particularly those companies in new and rapidly evolving markets. To address
these risks, the Company must, among other things,
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respond to competitive developments, continue to attract, retain and motivate
qualified persons and continue to upgrade its software products and services.
There can be no assurance that the Company will be successful in addressing such
risks. Although the Company has experienced revenue growth in recent periods,
such growth rates should not be relied upon as indicative of future operating
results, and there can be no assurance that the Company will be able to sustain
revenue growth. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
History of Operating Losses; Uncertainty of Future Operating Results
Since its inception, the Company has incurred substantial costs to research,
develop and enhance its technology and products, to recruit and train a
marketing and sales group and to establish an administrative organization. As a
result, the Company incurred net losses in its fiscal years ended March 31, 1997
and 1996. Through March 31, 1997 the Company had an accumulated deficit of $6.6
million. The Company anticipates that its operating expenses will increase
substantially in the foreseeable future as it increases its sales and marketing
activities, expands its operations and management and continues the development
of its products and technologies. Accordingly, there can be no assurance that
the Company will achieve or sustain profitability. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Fluctuations in Quarterly Results
The Company has experienced significant fluctuations in its revenues and
operating results from quarter to quarter and anticipates that it will continue
to experience such quarterly fluctuations. The Company's revenues and operating
results have generally been higher in the fourth fiscal quarter than in any
preceding quarter of each fiscal year, due largely, the Company believes, to the
positive effect of the Company's incentive sales compensation plans. In
addition, as a result of the Company's incentive sales compensation plans, first
fiscal quarter revenues in any year are typically lower than revenues in the
immediately preceding fourth fiscal quarter. In fiscal 1997, however, revenues
for the fourth quarter were approximately equal to third quarter revenues, and
there can be no assurance that the historical patterns of operating results will
be repeated in the future. In addition, the Company's sales are made
predominantly in the third month of each fiscal quarter and tend to be
concentrated in the latter half of that third month. Accordingly, the Company's
quarterly results of operations are difficult to predict, and delays in product
delivery or in closings of sales near the end of a quarter could cause quarterly
revenues to fall substantially short of anticipated levels and, to a greater
degree, adversely affect profitability. Factors that may contribute to such
fluctuations, in addition to incentive compensation, include seasonal factors,
such as the fiscal year ends of the government and other customers and reduction
in European business during summer months; the number of new orders and product
shipments; the size and timing of individual orders; the timing of introduction
of products or product enhancements by the Company, the Company's competitors or
other providers of hardware, software and components for the Company's market;
competition and pricing in the software industry; market acceptance of new
products; new product introductions by competitors; product quality problems;
customer order deferrals in anticipation of new products; changes in customer
budgets or procurement practices; changes in operating expenses; changes in
Company or customer strategies; personnel changes; changes in foreign currency
exchange rates; changes in mix of products sold; and changes in general economic
conditions.
The Company's sales generally comprise a small number of orders with a large
dollar amount per order. The loss or delay in receipt of individual orders,
therefore, could have a more significant impact on the revenues and quarterly
results of the Company than on those of companies with higher sales volumes or
lower revenues per order. For example, during the fourth quarter of fiscal 1997,
the Company's revenues fell substantially short of anticipated levels due
primarily to a failure to close an order from a government reseller. The
Company's software products generally are shipped as orders are received and
revenues are recognized upon delivery of the products, provided no significant
vendor obligations exist and collection of the related receivable is deemed
probable. As a result, software license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. The timing
of license fee revenue is difficult to predict because of the length of the
Company's sales cycle, which is typically three to nine months from the initial
contact. Because the Company's operating expenses are based on anticipated
revenue trends and because a high percentage of the Company's expenses are
relatively fixed, a delay in the recognition of revenue from a limited number of
license transactions could cause significant
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variations in operating results from quarter to quarter and could result in
losses substantially in excess of anticipated amounts. To the extent such
expenses precede, or are not subsequently followed by, increased revenues, the
Company's operating results would be materially and adversely affected. In
addition, the achievement of anticipated revenues is substantially dependent on
the ability of the Company to attract, on a timely basis, and retain skilled
personnel, especially sales and support personnel. As a result of the foregoing
factors, among others, revenues for any quarter are subject to significant
variation, and the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. Fluctuations in operating results may
also result in volatility in the price of the Company's Common Stock in the
public market. Due to all of the foregoing factors, among others, it is likely
that, from time to time in the future, the Company's results of operations would
be below the expectations of public market analysts and investors. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Customer and Market Concentration
A relatively small number of customers (primarily government resellers)
account for a significant percentage of the Company's revenues. In fiscal 1997,
two of the Company's government resellers, Sylvest Management and IBM, accounted
for 37% and 36% of revenues, respectively. In fiscal 1996, sales to Logicon and
AT&T accounted for 18% and 12% of revenues, respectively, and sales to the
Company's top four customers accounted for approximately 45% of revenues. In
fiscal 1995, sales to AT&T, IBM and British Columbia Telephone accounted for
29%, 12% and 11% of revenues, respectively. The Company expects that sales of
its products to a limited number of customers will continue to account for a
high percentage of revenue for the foreseeable future. More than 30% of the
Company's revenues during fiscal 1996 and more than 80% of its revenues during
fiscal 1997 were derived indirectly through distributors from sales to
departments and agencies of the U.S. Government. The Company believes that the
success and further development of the Company's business will continue to be
dependent, in significant part, upon its ability to continue such indirect
sales. A significant reduction in the federal funds available for agencies and
departments the Company is supplying, either through agency budget cuts by
Congress or the imposition of budgetary constraints, or a determination by the
Government that funding of such agencies and departments should be reduced or
discontinued, would have a material adverse effect on the Company's results of
operations. The future success of the Company will depend on its ability to
obtain orders from new customers and successfully market its products in diverse
industries. The loss of a major customer, failure to close a major order or any
reduction, cancellation or delay in orders by such customers, or the failure of
the Company to successfully market its products in existing targeted industry
segments or new industry segments, would have a material adverse effect on the
Company's business, results of operations and financial condition. For example,
during the fourth quarter of fiscal 1997, the Company's revenues fell
substantially short of anticipated levels due primarily to a failure to close an
order from a government reseller, and there can be no assurance that delays,
cancellations or failures to close orders will not occur in the future.
Similarly, changes in government procurement practices have resulted in the
past, and may result in the future, in losses or delays in orders. In addition,
orders from government resellers and agencies of the U.S. government may subject
the Company to other risks that are not typically present in commercial
contracts, such as retroactive price adjustments and potential penalties, as
well as the risk of termination at the convenience of the government. The
occurrence of any one of these factors could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company generally does not offer payment terms beyond 60 days; however,
the Company's sales to government resellers and agencies of the U.S. government
typically have longer payment cycles. Because the Company derives a substantial
portion of its revenues from government resellers and agencies of the U.S.
Government, the Company's largest receivables tend to have lengthy collection
cycles. At March 31, 1997, approximately 87% of the Company's outstanding trade
receivables were from government resellers and agencies of the U.S. Government.
See Note 6 of Notes to Consolidated Financial Statements. To date, the impact of
such lengthy collection cycles has not been material to the Company's working
capital requirements; however, there can be no assurance that future delays in
payment will not adversely affect the Company's ability to meet its anticipated
liquidity needs.
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Because a large portion of the Company's revenues are currently derived from
enterprises that support UNIX operating systems, a significant decline in the
UNIX operating systems market would have a material adverse effect on the
Company's business, results of operations and financial condition. Similarly,
widespread adoption of other desktop system software and operating environments,
such as Windows NT, Java-based operating environments or other technologies,
could create a more homogeneous environment throughout an enterprise, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
See " - Customers and Markets."
Dependence on Growth of Desktop System and Client/Server Market
All of the Company's business is in the desktop system and client/server
application software markets, which are still emerging markets that are
intensely competitive, highly fragmented and subject to rapid change. The
Company's future financial performance will depend in large part on continued
growth in the number of organizations adopting client/server computing
environments, the continued use by these organizations of a variety of
incompatible computing technologies and commercial acceptance of the Company's
products as a desktop systems software solution to address these problems of
fragmentation. There can be no assurance that the desktop system and
client/server application software markets will maintain their current level of
growth or that they will continue to be heterogeneous or that the Company's
principal product, TED, will be widely adopted. If the desktop system and
client/server application software markets fail to grow or grow more slowly or
if the enterprise environment becomes more homogeneous than the Company
currently anticipates, or if the Company's products are not widely adopted, the
Company's business, results of operations and financial condition would be
materially adversely affected. The Company has spent, and intends to continue to
spend, significant resources educating potential customers about the benefits of
its products. However, there can be no assurance that such expenditures will
enable the Company's products to achieve any additional degree of market
acceptance. See " Customers and Markets."
Certain of the Company's products and products in development are intended
for use with the Internet/intranet. The success of the Company's products and
products in development, if commercially released, may depend, in part, on their
compatibility with the Internet. The commercial market for products and services
designed for use with the Internet/intranet has only recently began to
experience rapid growth, and there can be no assurance that this growth pattern
will continue. To the extent that the Internet continues to experience rapid
growth in the level of use and the number of users, there can be no assurance
that the Internet infrastructure will be able to support the demands of such
growth or will not otherwise lose its utility due to delays in the development
and adoption of new standards and protocols required to handle increased levels
of activity or due to increased government regulation. It is difficult to
predict with any assurance whether the demand for Internet-related products and
services will increase or decrease in the future. There can be no assurance that
the Company will be able to successfully compete in the market for
Internet-related products and services without substantial modification or
customization of the Company's products or services or the introduction of new
products and services.
Reliance on Certain Relationships
In connection with the Company's TED family of products, the Company has
established strategic relationships with a number of organizations that it
believes are important to its ability to enhance its worldwide sales, marketing
and support activities as well as to develop and market enhancements and new
applications for its products. The Company's indirect channel relationships
provide marketing and sales opportunities for the Company's direct sales force
and expand distribution of its products. These relationships also assist the
Company in keeping pace with technological and marketing developments and the
needs of major customers and vendors. There can be no assurance that the Company
will be able to continue to successfully manage its strategic relationships or
that any customer, system integrator or distributor will continue to market or
to purchase the TED family of products or that the Company will be successful in
establishing strategic relationships in connection with its SoftNC technology or
products. The failure by the Company to maintain these relationships or the
failure to establish new relationships in the future could have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that these events will not occur in the
future. See " - Marketing and Sales."
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The Company licenses technology from OEMs and other third parties to enable
the Company to develop new applications for its products. Such licenses are
terminable on the occurrence of certain events. This software is then integrated
with internally developed software and used in the Company's products to perform
key functions. There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially reasonable
terms, if at all. The loss of or inability to maintain any of these technology
licenses could result in delays or reductions in product shipments until
equivalent technology, if any, could be identified, licensed and integrated. Any
such delays or reductions in product shipments could materially and adversely
affect the Company's business, results of operations and financial condition.
Industry Conditions, New Product Development and Technological Change
The client/server and desktop system software market is characterized by
rapid technological advancements, evolving industry standards, changes in
consumer expectations and frequent new product introductions and enhancements.
The introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. Accordingly, the life
cycles of the Company's products are difficult to estimate. The Company's future
success will depend upon its ability to enhance its current products and to
develop and introduce new products that keep pace with technological
developments, respond to evolving consumer requirements and achieve market
acceptance. The Company's future success will also depend in part upon its
ability to maintain and enhance its technology relationships in order to provide
customers with integrated product solutions. The Company's ability to develop
and introduce new products and enhancements on a timely basis may be adversely
affected by a number of factors, including the ability of the Company's
engineers to solve technical problems and to test products, as well as business
priorities in light of the availability of development and other resources and
other factors, including factors that may be outside the control of the Company.
If the Company is unable to develop on a timely basis new software products or
enhancements to existing products, if such new products or enhancements do not
achieve market acceptance, or if the Company is unable to maintain its
technology relationships, the Company's business, results of operations and
financial condition will be materially and adversely affected. See " - Products
and Technologies" and " - Research and Development."
The Company's current products are designed to adhere to certain open
systems standards, and current and future sales of the Company's products will
be dependent, in part, on market acceptance of such standards. Emergence of new
industry standards could require the Company to modify its products to adhere to
such standards. There can be no assurance that the Company would be successful
in incorporating new standards effectively or on a timely basis or that any
resulting products would achieve commercial acceptance. Failure by the Company
to effectively incorporate into its products new industry standards that are
widely adopted in the markets served by the Company would have a material
adverse effect on the Company's business, results of operations and financial
condition.
Product Concentration
To date, substantially all of the Company's revenues have been attributable
to sales of licenses of the TED family of products and related services. The
Company has not introduced for commercial sale any products based on, or
recognized any revenues from licenses of, its SoftNC technology. The Company
currently expects the TED family of products and related services to account for
substantially all of its revenues for the foreseeable future. As a result,
factors adversely affecting the pricing of or demand for the TED products, such
as competition or technological change, could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company's future financial performance will depend, in significant part, on the
successful development, introduction and customer acceptance of new and enhanced
versions of the TED family of products and related services and on the Company's
ability to develop and commercialize products based on the Company's SoftNC
technology. There can be no assurance that the Company will continue to be
successful in developing and marketing the TED family of products and related
services, or that the Company will be successful in developing and marketing
products based on the Company's SoftNC technology. See " - Products and
Technologies."
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<PAGE> 21
Competition
The market in which the Company competes is characterized by rapidly
changing technology and evolving standards. The Company's competitors and
potential competitors, which include Microsoft, Netscape, and the original CDE
developers (Hewlett-Packard, IBM, Novell, and Sunsoft, a subsidiary of Sun),
have or may have more established and larger marketing and sales organizations,
significantly greater financial and technical resources and a larger installed
base of customers, as well as greater name recognition than the Company.
Accordingly, such competitors or potential competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sales
of their products than the Company or may be better positioned to achieve market
acceptance of new technology or products. The Company also expects that
competition will increase as a result of software industry consolidation. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the enterprise customers in
the Company's markets. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors, or that competitive factors faced by the
Company will not have a material adverse effect on the Company's business,
results of operations and financial condition. See " - Competition."
The Company's products are based in part on a non-exclusive license of the
CDE industry standard. Each of the original CDE developers has developed or is
developing unique implementations of CDE specific to its own UNIX platforms.
Because CDE was developed as an open systems industry standard, any of the
original CDE developers or their assignees, other competitors or third-party
licensees, may develop similar products or sell competing products in the
Company's markets. In addition, the Company has developed its TED product based
in part on a non-exclusive license of the CDE technology from Hewlett-Packard.
Under the terms of the Company's license agreement with Hewlett-Packard, all
modifications to the CDE developed by the Company are owned by the Company and
are licensed back to Hewlett-Packard on a non-exclusive basis. There can be no
assurance that one or more of these competitors and potential competitors will
not develop or market products that would directly compete with the Company's
products or license a third party to do so.
Management of Growth
The Company has recently experienced a period of significant growth in total
revenues that has placed and is expected to continue to place a significant
strain upon its managerial, financial and operational resources. To manage its
expansion, the Company must improve these resources on a timely basis and
continue to expand, train and manage its employee base. In addition, the Company
will be required to manage multiple relationships with various customers,
distribution channels, technology licensors and licensees and other third
parties. There can be no assurance that the Company's systems, procedures or
controls will be adequate to support the Company's operations or that the
Company's management will be able to achieve the rapid execution necessary to
fully exploit any future market opportunity for the Company's products and
services or successfully manage relationships with its customers, distribution
channels, technology licensors and licensees or other third parties. The
Company's future operating results will also depend on its ability to expand its
sales and marketing organizations, implement and manage new distribution
channels to penetrate different and broader markets and expand its support
organization. If the Company is unable to manage expansion effectively, the
Company's business, results of operations and financial condition will be
materially and adversely affected. There can be no assurance, however, that such
expansion or growth will occur. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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<PAGE> 22
Lengthy Sales and Implementation Cycle
The licensing of the Company's products by its customers typically involves
a significant technical evaluation and commitment of capital and other
resources, with delays frequently associated with customers' internal procedures
to approve large capital expenditures and to test and accept new technologies
that affect key operations, particularly with respect to government sales. For
these and other reasons, the sales cycle associated with the licensing of the
Company's products is typically lengthy and subject to a number of significant
risks. For example, during the fourth quarter of fiscal 1997, the Company's
revenues fell substantially short of anticipated levels due primarily to a
failure to close an order from a government reseller. There can be no assurance
that the Company will not experience these and additional cancellations, delays
or failures to close orders in the future. Because of the lengthy sales cycle
and the large size of many customers' orders, if revenues forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Company's operating results for that quarter could be materially and adversely
affected.
Evolving Distribution Channels
The Company's strategy is to leverage its sales and marketing through its
indirect channel relationships, which include OEMs, VARs and system integrators,
that distribute or resell the Company's products in their respective markets. To
the extent that average selling prices through indirect channel relationships
decline relative to the Company's direct sales in the future, the Company's
average selling prices and gross margins may be materially and adversely
affected.
In addition, the Company's agreements with indirect channel entities
typically do not restrict such entities from distributing competing products
and, in many cases, may be terminated by either party without cause.
Furthermore, in some cases the Company has granted exclusive distribution rights
that are limited by territory and in duration, and such agreements typically do
not require any minimum purchase volumes; therefore, there can be no assurance
that these relationships will produce significant revenues in the future.
Consequently, the Company may be adversely affected should any indirect channel
entity fail to adequately penetrate its market segment. Failure to recruit,
manage or retain important indirect channel entities, or to manage conflict
within the channel, could materially and adversely affect the business, results
of operations and financial condition of the Company.
The Company plans to expand its direct sales force. There can be no
assurance that such internal expansion will be successfully completed, that the
cost of such expansion will not exceed the revenues generated or that the
Company's sales and marketing organization will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of the Company's current or potential competitors. The
Company's inability to effectively manage the expansion of its direct sales
force could have a material adverse effect on the Company's business, results of
operations and financial condition. See " Marketing and Sales."
Dependence on Key Personnel
The Company's performance and prospects are substantially dependent on the
continued service of its executive officers and key technical and sales and
marketing personnel, most of whom have worked together for only a short period
of time. Given the Company's early stage of development, the Company is
dependent on its ability to retain and motivate highly qualified personnel,
especially its management and technical and sales personnel. The Company has
"key person" life insurance policies on certain of its executive officers. Even
so, the loss of the services of any of its executive officers or other key
employees could have a material adverse effect on the business, results of
operations and financial condition of the Company.
The Company's future success also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to identify, attract, assimilate or
retain other highly qualified technical and managerial personnel in the future.
The inability to identify, attract and retain the necessary technical and
managerial personnel could have a material adverse effect upon the Company's
business, results of operations and
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<PAGE> 23
financial condition.
Dependence on Proprietary Technology; Risks of Infringement
The Company's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on trademark, trade secret,
copyright law, confidentiality procedures and contractual provisions to protect
its technology, the Company believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. To
date, the Company has had no patents issued; however, it has three patent
applications pending. There can be no assurance that any patents will be issued
from such applications or that others will not develop technologies that are
similar or superior to the Company's technology. The Company believes the source
code for the Company's proprietary software is protected both as a trade secret
and copyright work. However, effective trademark, copyright and trade secret
protection may not be available in every foreign country in which the Company's
products are distributed. The Company's policy is to enter into confidentiality
agreements with its employees, consultants and vendors, and the Company
generally controls access to and distribution of its software, documentation and
other proprietary information. Despite these precautions, it may be possible for
a third party to copy or otherwise obtain and use the Company's products or
technology without authorization. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will be adequate to prevent
misappropriation of its technology by third parties or that third parties will
not be able to develop similar technology independently.
The Company may receive notices from third parties claiming that the
Company's products infringe third-party proprietary or intellectual property
rights. The Company expects that, as the number of software products in the
industry increases and the functionality of these products or their
implementation further overlaps, software products will increasingly be subject
to such claims. Any such claim, with or without merit, could result in costly
litigation and may require the Company to enter into royalty or licensing
arrangements. However, such royalty or licensing arrangements, if required, may
not be available on terms acceptable to the Company, if at all. Consequently,
any such litigation could have a material adverse effect on the Company's
business, results of operations and financial condition. See " - License
Agreements and Intellectual Property."
International Operations
Although, to date, the Company has not made a significant percentage of its
sales internationally, a significant portion of the Company's customer base are
large multinational companies. To meet the needs of such companies, both
domestically and internationally, the Company must directly or indirectly
provide worldwide sales and product support services. In April 1997, the Company
relocated the European headquarters of its European subsidiary, TriTeal B.V.,
from the Netherlands to the United Kingdom and closed the Netherlands facility.
The European operations are responsible for generating and fulfilling customer
demand and supporting indirect channel activities. In addition, the Company's
marketing department supports European activities from the Company's
headquarters in Carlsbad, California. The Company intends to enter additional
international markets and to continue to expand its international operations and
direct and indirect sales and marketing activities worldwide, which will require
significant management and financial resources and could adversely affect the
Company's business, results of operations and financial condition. The Company
has committed and intends to continue to commit significant time and financial
resources to developing international sales and support channels. To the extent
that the Company is unable to expand its international sales organization in a
timely manner, the Company's growth, if any, in international sales will be
limited, and the Company's business, results of operations and financial
condition could be materially and adversely affected.
There can be no assurance that the Company will be able to maintain or
increase international market demand for its products. Risks inherent in the
Company's international business activities generally include currency
fluctuations, unexpected changes in regulatory requirements, tariffs and other
trade barriers, costs of and the Company's limited experience in localizing
products for foreign countries, lack of acceptance of localized products in
foreign countries, longer accounts receivable payment cycles, difficulties in
managing international operations, potentially weaker protection for
intellectual property in certain foreign countries, potentially adverse tax
23
<PAGE> 24
consequences including restrictions on the repatriation of earnings, and the
burdens of complying with a wide variety of foreign laws and practices. To date,
substantially all of the Company's international revenues have been denominated
in U.S. dollars. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in future currency
exchange rates will not have a material adverse effect on revenues from
international sales and thus the Company's business, results of operations and
financial condition. There can be no assurance that any of such factors will not
have a material adverse effect on the Company's future international operations
and, consequently, the Company's business, results of operations and financial
condition. See " - Marketing and Sales" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Risk of Product Defects
Software products as complex as those offered by the Company frequently
contain errors or may fail, especially when first introduced or when new
versions are released. Although the Company conducts extensive product testing,
the Company may discover software errors in its new products or enhancements
after their release, possibly resulting in a loss or delay of recognition of
revenues. The Company's products are typically intended for use in applications
that may be critical to a customer's business. As a result, the Company expects
that its customers and potential customers have a greater sensitivity to product
defects than the market for software products generally. Although the Company's
business has not been adversely affected by any such errors to date, there can
be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found in products or releases after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, diversion of development resources, damage to the Company's
reputation or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, results of operations and
financial condition. See " - Research and Development."
Product Liability
The Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
However, it is possible that the limitation of liability provisions contained in
the Company's license agreements may not be effective under the laws of certain
jurisdictions. Although the Company has not experienced any product liability
claims to date, the sale and support of products by the Company may entail the
risk of such claims, and there can be no assurance that the Company will not be
subject to such claims in the future. A successful product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, results of operations and financial condition.
Potential Volatility of Stock Price
The market price of the Company's Common Stock has been, and may continue to
be, highly volatile and could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new software or services by the Company or its competitors,
changes in or failure of the Company to meet financial estimates by securities
analysts, general market conditions or other events or factors, many of which
are beyond the Company's control. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many high technology companies and that
often have been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
for a company's securities, securities class action litigation has often been
initiated. Such litigation could result in substantial costs and a diversion of
management attention and resources, which could have a material adverse effect
on the Company's business, results of operations and financial condition.
Future Capital Needs; Uncertainty of Additional Financing
The Company's operations to date have required substantial amounts of
capital. The Company expects to spend substantial funds to support the growth of
its products, to develop new products, to add enhancements and
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<PAGE> 25
additional applications to its products and to expand internationally. The
Company anticipates that its existing capital resources and credit facilities
should enable it to maintain its current and planned operations for at least the
next 12 months.
The Company's capital requirements will depend on numerous factors,
including the progress of the Company's research and development programs, the
commercial acceptance of its products, the resources the Company devotes to
advanced technologies and the demand for its products. To the extent that funds
generated from operations and available credit facilities are insufficient, the
Company will have to raise additional funds to meet its capital requirements. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution, and such equity securities may
have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. No assurance can be given that additional financing will
be available on acceptable terms, if at all. If adequate funds are not
available, the Company may have to, among other things, reduce substantially or
eliminate expenditures for the development and marketing of its products. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Antitakeover Provisions
Certain provisions of the Company's Certificate of Incorporation and
By-laws, as well as provisions of Delaware law, could discourage potential
acquisition proposals and delay or prevent a change in control of the Company.
For example, the Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 5,000,000 shares of Preferred Stock and to determine
the designations, price, rights, powers, preferences, privileges and
limitations, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the Rights of the holders of any
Preferred Stock that may be issued in the future. The Certificate of
Incorporation and By-laws, among other things, provide for a classified Board of
Directors, require that stockholder actions occur at duly called meetings of the
stockholders, provide that special meetings of stockholders may be called only
by the Chairman of the Board of Directors, the Chief Executive Officer or a
majority of the Board of Directors, do not permit cumulative voting in the
election of directors and require advance notice of stockholder proposals and
director nominations. These provisions, as well as certain applicable provisions
of Delaware law, could serve to depress the Company's stock price or discourage
a hostile bid in which stockholders could receive a premium for their shares. In
addition, these provisions could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, or delay, prevent or deter a merger, acquisition or tender offer in
which the Company's stockholders could receive a premium for their shares, or a
proxy contest for control of the Company or other change in the Company's
management.
ITEM 2. PROPERTIES
At March 31, 1997, the Company leased approximately 32,000 square feet of
office space for its corporate headquarters in Carlsbad, California, under
operating leases expiring at various dates through 1999. At the same date, the
Company also occupied approximately 8,500 square feet of office space under
lease and rental agreements in various locations across the United States in
support of its regional activities and approximately 3,000 square feet of office
space in the Netherlands and the United Kingdom.
In April 1997, the Company signed a 10-year lease agreement for
approximately 51,000 square feet of office space intended for use as the new
corporate headquarters in Carlsbad, California. Under the terms of the lease,
which is scheduled to commence in April 1998, the Company is committed to future
lease payments aggregating approximately $11.2 million through fiscal 2008.
In April 1997, the Company elected to close its 2,600 square-foot facility
in the Netherlands and relocate its European headquarters to the United Kingdom.
In May 1997, the Company terminated its current lease for a 400-square foot
office building in the United Kingdom and signed a new lease in the United
Kingdom for a 1,400 square- foot facility. Under the terms of the lease, the
Company is committed to future lease payments aggregating approximately $116,000
through fiscal 2001.
25
<PAGE> 26
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National Market
on August 7, 1996 under the symbol "TEAL." The following table sets forth, for
the periods indicated, the high and low sale prices per share of the Common
Stock, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997 HIGH LOW
-------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Second Quarter (commencing August 7, 1996) ................... $ 15.75 $ 8.00
Third Quarter ................................................ 21.75 12.25
Fourth Quarter................................................ 23.25 5.50
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on June 19, 1997 was $9.62 per share. As of June 19, 1997, there were
approximately 178 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. In addition, the Company's line of
credit agreement currently prohibits the payment of cash dividends on its
capital stock without the consent of the lender.
RECENT SALES AND ISSUANCES OF UNREGISTERED SECURITIES
From April 1, 1996 to March 31, 1997, the Registrant has sold and issued
(without payment of any selling commission to any person) the following
unregistered securities:
1. During the period, the Registrant granted incentive stock options to
employees, officers and, directors of the Company under its 1995 Stock Option
Plan (the "1995 Plan") covering an aggregate of 513,797 shares of the Company's
Common Stock. Certain of these options vest over a period of time following
their respective dates of grant.
2. During the period, 21,696 unregistered shares of Common Stock were issued
upon exercise of stock options by employees for an aggregate exercise price of
$5,424.
3. In February 1997, 32,277 shares of Common Stock were issued to Imperial
Bank upon exercise of a warrant for an aggregate exercise price of $68,750.
4. In June 1996, pursuant to the terms of an equity financing of the
Company, the Registrant issued 566,164 shares of the Company's Series C
Preferred stock to a group of investors, including a director of the Company,
for $3,963,148 in cash.
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<PAGE> 27
The sales and issuances of securities in the transactions described in
paragraphs (1) and (2) above were deemed to be exempt from registration under
the Securities Act by virtue of Rule 701 promulgated thereunder in that they
were offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
With respect to the grant of stock options described in paragraph (1) above,
exemption from registration under the Securities Act was unnecessary in that
none of such transactions involved a "sale" of securities as such term is used
in Section 2(3) of the Securities Act.
The sales and issuances of securities in the transactions described in
paragraphs (3) and (4) above were deemed to be exempt from registration under
the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder.
The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to such
information.
27
<PAGE> 28
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from the
audited Consolidated Financial Statements of the Company and should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements of
the Company and related notes thereto included elsewhere in this Report on Form
10-K.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
License fees ...................... $ 13,704 $ 6,750 $ 2,575 $ 148
Maintenance and services .......... 2,121 1,471 1,535 285
-------- -------- -------- --------
Total revenues ............ 15,825 8,221 4,110 433
Costs of revenues:
Cost of license fees .............. 2,719 1,751 785 3
Cost of maintenance and services .. 676 421 384 192
-------- -------- -------- --------
Total costs of revenues ... 3,395 2,172 1,169 195
-------- -------- -------- --------
Gross profit .............. 12,430 6,049 2,941 238
Operating expenses:
Research and development .......... 2,499 2,391 485 8
Selling, general and administrative 12,742 8,569 2,290 99
-------- -------- -------- --------
Total operating expenses .. 15,241 10,960 2,775 107
-------- -------- -------- --------
Operating income (loss) ............. (2,811) (4,911) 166 131
Interest income (expense), net ...... 901 (26) (2) --
-------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes ....... (1,910) (4,937) 164 131
Provision for (benefit from)
income taxes ...................... -- (95) 48 56
-------- -------- -------- --------
Net income (loss) ................... $ (1,910) $ (4,842) $ 116 $ 75
======== ======== ======== ========
Net income (loss) per share (2) ..... $ (0.23) $ (0.72) $ 0.02 $ 0.01
======== ======== ======== ========
Shares used in computing net income
(loss) per share (2) ............. 8,428 6,712 6,503 6,463
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments ...................... $ 42,864 $ 301 $ 1,225 $ 22
Working capital ..................... 46,223 428 1,541 95
Total assets ........................ 55,701 6,636 3,155 238
Long-term debt, less current portion -- 243 120 79
Total stockholders' equity .......... 48,116 1,269 1,740 85
</TABLE>
(1) The Company was incorporated on January 14, 1993, but did not commence
operations until after March 31, 1993. Accordingly, there were no results of
operations for the period from January 14, 1993 (inception) through March 31,
1993, and no balance sheet data at March 31, 1993.
(2) See Note 1 of Notes to Consolidated Financial Statements.
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<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements as a result of certain
factors, including those set forth below and as well as those discussed under
the caption "Risk Factors" in Item 1 of this Report on Form 10-K. The following
discussion should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this Report on Form 10-K.
OVERVIEW
TriTeal develops, markets and supports open systems-based, mission-critical
desktop system software and integrated applications that enable multi-platform
deployment of client/server applications throughout an enterprise. The Company
was founded in January 1993, commenced operations in April 1993 and released its
first product in May 1993. In August 1995, the Company introduced its current
flagship product, TED. The Company's current products are based, in part, on
certain technologies licensed from Hewlett-Packard, Spyglass, SPYRUS and other
technology vendors. The Company's revenues historically have been derived from
two principal sources: (i) license fees for the use of the Company's software
products, and (ii) maintenance agreements and software development contract
revenues. To date, substantially all of the Company's revenues have been
attributable to sales of licenses of the TED family of products and related
services. The Company does not anticipate receiving a significant amount of
revenues from software development contracts in the future. TriTeal recently
introduced its Java-based SoftNC technology, a thin-client, platform-independent
solution designed to allow simultaneous access to Java and legacy applications.
The Company has not introduced for commercial sale any products based on, or
recognized any revenues from licenses of, its SoftNC technology. Revenues from
software licenses are generally recognized upon shipment of software. Revenues
from maintenance agreements are recognized over the contract terms, which
generally is one year. Software development contract revenues are recognized
using the percentage-of-completion method. See Note 1 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
net revenues represented by each item reflected on the Company's Statements of
Operations.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
License fees ...................... 87% 82% 63%
Maintenance and services .......... 13 18 37
---- ---- ----
Total revenues ............ 100 100 100
Costs of revenues:
Cost of license fees .............. 17 21 19
Cost of maintenance and services .. 4 5 9
---- ---- ----
Total cost of revenues .... 21 26 28
---- ---- ----
Gross profit .............. 79 74 72
Operating expenses:
Research and development .......... 16 29 12
Selling, general and administrative 81 104 56
---- ---- ----
Total operating expenses .. 97 133 68
---- ---- ----
Operating income (loss) ... (18) (59) 4
Interest income, net ................ 6 -- --
---- ---- ----
Income (loss) before provision for
income taxes ..................... (12) (59) 4
Provision for income taxes ......... -- -- 1
---- ---- ----
Net income (loss) ................... (12)% (59)% 3%
==== ==== ====
</TABLE>
29
<PAGE> 30
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Revenues
The Company's total revenues increased to $15.8 million in fiscal 1997 from
$8.2 million in fiscal 1996 and $4.1 million in fiscal 1995. During fiscal 1997,
two of the Company's government resellers, Sylvest Management and IBM, accounted
for 37% and 36% of revenues, respectively. License fees increased to $13.7
million in fiscal 1997 from $6.8 million in fiscal 1996 and $2.6 million in
fiscal 1995. During the years ended March 31, 1997, 1996 and 1995, license fees
aggregated 87%, 82% and 63% of total revenues, respectively. These increases in
license fees were due primarily to increased market acceptance of the Company's
existing products, introduction of enhanced and new products and expansion of
the Company's direct sales force. Maintenance and services revenues, which also
include revenues derived from software development contracts, increased to $2.1
million in fiscal 1997 from $1.5 million in each of fiscal 1996 and fiscal 1995.
Maintenance, which consists primarily of technical support, increased to $1.7
million in fiscal 1997 from $752,000 in fiscal 1996 and $267,000 in fiscal 1995.
The increase in maintenance revenues was due primarily to additional maintenance
agreements associated with a larger installed base of customers. The Company
does not anticipate receiving a significant amount of revenues from software
development contracts in the future; however, it may enter into such contracts
in special situations where such software development may be necessary or where
the technology may allow the Company to introduce new products, penetrate new
markets or establish strategic relationships.
Cost of Revenues
The Company's total cost of revenues increased to $3.4 million in fiscal
1997 from $2.2 million in fiscal 1996 and $1.2 million in fiscal 1995. As a
percentage of revenues, gross margin increased to 79% in fiscal 1997 from 74% in
fiscal 1996 and 72% in fiscal 1995. The annual increases in gross margin were a
result of the shift in revenue mix to software license revenues, which typically
have higher gross margins, as well as lower average third-party royalty rates.
There can be no assurance that gross margins will remain at this level in the
future. The cost of license fees, which consists primarily of third-party
royalties for licensed technology, related maintenance charges, and media and
documentation, increased to $2.7 million in fiscal 1997 from $1.8 million in
fiscal 1996 and $785,000 in fiscal 1995. These increases in the cost of license
fees were due principally to a higher volume of sales of licenses. The cost of
maintenance and services, which consists primarily of labor and services,
increased to $676,000 in fiscal 1997 from $421,000 in fiscal 1996 and $384,000
in fiscal 1995. These increases in the cost of maintenance and services were due
primarily to an increase in the number of customer support and development
personnel and related overhead costs necessary to support a larger installed
customer base, product upgrades and development activities.
Research and Development
Research and development expenses include expenses associated with the
development of new products, enhancements of existing products and quality
assurance activities. These expenses consist primarily of personnel costs,
overhead costs relating to occupancy, equipment depreciation and supplies. In
accordance with Statement of Financial Accounting Standards No. 86, development
costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. To date, the Company's software
development has been completed concurrent with the establishment of
technological feasibility and, accordingly, no costs have been capitalized.
Research and development expenses increased to $2.5 million in fiscal 1997 from
$2.4 million in fiscal 1996 and $485,000 in fiscal 1995. The increases in
research and development expenses were attributable primarily to the development
of the Company's research and development organization and reflect the increased
costs associated with both additional headcount as well as expanded research and
development efforts. The increase from fiscal 1996 to fiscal 1997 was offset in
large part by an $800,000 non-recurring charge in fiscal 1996 related to license
fees for certain Internet/intranet technologies. Research and development
expenses represented 16%, 29% and 12% of total revenues in fiscal 1997, 1996 and
1995, respectively. The Company believes that a significant level of investment
30
<PAGE> 31
for product development is required and, accordingly, the Company anticipates
that, for the foreseeable future, these expenses will continue to increase in
absolute dollars.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of salaries,
commissions and bonuses, promotional expenses and occupancy costs. Selling,
general and administrative expenses increased to $12.7 million in fiscal 1997
from $8.6 million in fiscal 1996 and $2.3 million in fiscal 1995. The increases
in selling, general and administrative expenses were due primarily to the hiring
of additional sales and marketing personnel, sales commissions and bonuses
associated with increased sales volume, increased travel associated with
additional headcount and increased sales volumes, additional promotional
activities and, to a lesser degree, increased administrative personnel and
occupancy costs. The Company believes that selling, general and administrative
expenses will increase in absolute dollars as the Company expands its sales and
administrative staff, adds infrastructure and incurs additional costs related to
being a publicly-held company.
Interest Income (Expense), Net
Interest income (expense), net represents interest earned on the Company's
cash, cash equivalents and short-term investments, offset in part by interest
expense on the Company's borrowings, principally its equipment loan and line of
credit. Net interest income was $901,000 during fiscal 1997 compared to net
interest expense of $26,000 and $2,000 during fiscal 1996 and 1995,
respectively. This increase was attributable to earnings on the proceeds from
the Company's initial public offering in August 1996 and follow-on public
offering in February 1997, which together generated approximately $44.7 million
in cash proceeds.
Income Taxes
At March 31, 1997, the Company had net operating loss carryforwards for
federal and state tax reporting purposes of approximately $6.7 million and $3.7
million, respectively. The Company also had research and development credit
carryforwards for federal and state tax reporting purposes of approximately
$229,000 and $127,000, respectively. Utilization of the carryforwards may be
subject to annual limitations due to changes in the Company's ownership
resulting from the Company's initial public offering and follow-on public
offering. See Note 8 of Notes to Consolidated Financial Statements. The net
operating loss carryforwards expire, if not utilized, at various dates through
2010 and 2000 for federal and state tax reporting purposes, respectively. A
valuation allowance has been recorded for the entire net deferred tax asset as a
result of uncertainties regarding the realization of the asset due to the
limited operating history of the Company. See Note 8 of Notes to Consolidated
Financial Statements.
The Company had an effective tax rate of approximately 29% in fiscal 1995.
This rate differs from the federal statutory rate primarily due to state income
taxes and permanent differences.
FACTORS AFFECTING OPERATING RESULTS
The Company has experienced significant fluctuations in its revenues and
operating results from quarter to quarter and anticipates that it will continue
to experience such quarterly fluctuations. The Company's revenues and operating
results have generally been higher in the fourth fiscal quarter than in any
preceding quarter of each fiscal year, due largely, the Company believes, to the
positive effect of the Company's incentive sales compensation plans. In
addition, as a result of the Company's incentive sales compensation plans, first
fiscal quarter revenues in any year are typically lower than revenues in the
immediately preceding fourth fiscal quarter. In fiscal 1997, however, revenues
for the fourth quarter were approximately equal to third quarter revenues, and
there can be no assurance that the historical patterns of operating results will
be repeated in the future. In addition, the Company's sales are made
predominantly in the third month of each fiscal quarter and tend to be
concentrated in the latter half of that third month. Accordingly, the Company's
quarterly results of operations are difficult to predict, and delays in product
delivery or in closings of sales near the end of a quarter could cause quarterly
revenues to fall substantially short of anticipated levels and, to a greater
degree, adversely affect profitability. Factors that may contribute to such
31
<PAGE> 32
fluctuations, in addition to incentive compensation, include seasonal factors,
such as the fiscal year ends of the government and other customers and reduction
in European business during summer months; the number of new orders and product
shipments; the size and timing of individual orders; the timing of introduction
of products or product enhancements by the Company, the Company's competitors or
other providers of hardware, software and components for the Company's market;
competition and pricing in the software industry; market acceptance of new
products; reduction in demand for existing products and shortening of product
life cycles as a result of new product introductions by competitors; product
quality problems; customer order deferrals in anticipation of new products;
changes in customer budgets or procurement procedures; changes in operating
expenses; changes in Company or customer strategy; personnel changes; changes in
foreign currency exchange rates; changes in mix of products sold; and changes in
general economic conditions.
The Company's sales generally comprise a small number of orders with a large
dollar amount per order. The loss or delay in receipt of individual orders,
therefore, could have a more significant impact on the revenues and quarterly
results of the Company than on those of companies with higher sales volumes or
lower revenues per order. For example, during the fourth quarter of fiscal 1997,
the Company's revenues fell substantially short of anticipated levels due
primarily to a failure to close an order from a government reseller, and there
can be no assurance that delays, cancellations or failures to close orders will
not occur in the future. The Company's software products generally are shipped
as orders are received, and revenues are recognized upon delivery of the
products, provided no significant vendor obligations exist and collection of the
related receivable is deemed probable. As a result, software license revenues in
any quarter are substantially dependent on orders booked and shipped in that
quarter. The timing of license fee revenue is difficult to predict because of
the length of the Company's sales cycle, which is typically three to nine months
from the initial contact. Because the Company's operating expenses are based on
anticipated revenue trends and because a high percentage of the Company's
expenses are relatively fixed, a delay in the recognition of revenue from a
limited number of license transactions could cause significant variations in
operating results from quarter to quarter and could result in losses
substantially in excess of anticipated amounts. To the extent such expenses
precede, or are not subsequently followed by, increased revenues, the Company's
operating results would be materially and adversely affected. In addition, the
achievement of anticipated revenues is substantially dependent on the ability of
the Company to attract, on a timely basis, and retain skilled personnel,
especially sales and support personnel. As a result of the foregoing factors,
among others, revenues for any quarter are subject to significant variation, and
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Fluctuations in operating results may also
result in volatility in the price of the Company's Common Stock in the public
market. Due to all of the foregoing factors, among others, it is likely that,
from time to time in the future, the Company's results of operations would be
below the expectations of public market analysts and investors.
The Company has recently experienced a period of significant growth in total
revenues that has placed and is expected to continue to place a significant
strain upon its managerial, financial and operational resources. To manage its
expansion, the Company must improve these resources on a timely basis and
continue to expand, train and manage its employee base. In addition, the Company
will be required to manage multiple relationships with various customers,
distribution channels, technology licensors and licensees and other third
parties. There can be no assurance that the Company's systems, procedures or
controls will be adequate to support the Company's operations or that the
Company's management will be able to achieve the rapid execution necessary to
fully exploit any future market opportunity for the Company's software products
and services or successfully manage relationships with its customers,
distribution channels, technology licensors and licensees or other third
parties. The Company's future operating results will also depend on its ability
to expand its sales and marketing organizations, implement and manage new
distribution channels to penetrate different and broader markets and expand its
support organization. If the Company is unable to manage expansion effectively,
the Company's business, results of operations and financial condition will be
materially and adversely affected. There can be no assurance, however, that such
expansion or growth will occur.
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<PAGE> 33
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and met its capital
expenditure requirements primarily from proceeds of the Company's initial and
follow-on public offerings of Common Stock and private sales of Preferred Stock,
sales of its software products and services, as well as borrowings under its
bank credit facility.
In August 1996, the Company completed the initial public offering of
2,875,000 shares of its Common Stock (including exercise of the underwriters'
over-allotment option), generating net proceeds of approximately $20.4 million.
In February 1997, the Company completed a follow-on public offering of its
Common Stock, generating net proceeds of approximately $24.3 million.
Net cash used for operating activities was $4.2 million, $4.6 million and
$23,000 in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The net cash
used during fiscal 1997 and fiscal 1996 reflects primarily net losses incurred
and increases in accounts receivable and prepaid expenses and other current
assets, which were partially offset by increases in accrued compensation and
related benefits and deferred revenues. Net cash used during fiscal 1995
reflects primarily an increase in accounts receivable, which was partially
offset by net income generated as well as an increase in accrued compensation
and related benefits and deferred revenue. The Company generally does not offer
payment terms beyond 60 days; however, the Company's sales to government
resellers and agencies of the U.S. government typically have longer payment
cycles. Because the Company derives a substantial portion of its revenues from
government resellers and agencies of the U.S. Government, the Company's largest
receivables tend to have lengthy collection cycles. At March 31,1997,
approximately 87% of the Company's outstanding trade receivables were from
government resellers and agencies of the U.S. Government. See Note 6 of Notes to
Consolidated Financial Statements. To date, the impact of such lengthy
collection cycles has not been material to the Company's working capital
requirements; however, there can be no assurance that future delays in payment
will not adversely affect the Company's ability to meet its anticipated
liquidity needs.
Investing activities used net cash of $32.7 million in fiscal 1997, and
consisted primarily of the purchase of short-term investments and, to a lesser
extent, the purchase of property and equipment. Investing activities used $1.0
million and $407,000 in fiscal 1996 and 1995, respectively, and consisted
primarily of the purchase of property and equipment. Capital expenditures have
generally consisted of computer workstations, networking equipment, office
furniture and equipment and leasehold improvements. The Company had no material
firm commitments for capital expenditures at March 31, 1997, but expects to
purchase additional computer equipment and to enhance its management information
systems throughout fiscal 1998.
Financing activities generated $48.2 million during fiscal 1997 from the
issuance of Preferred Stock and Common Stock, offset in part by repayments of
long-term debt. Since inception, the Company had raised $9.4 million from the
sale of Preferred Stock and $44.7 million from the sale of Common Stock in the
Company's initial and follow-on offerings. Financing activities generated cash
of $4.7 million and $1.6 million in fiscal 1996 and 1995, respectively, from the
issuance of Preferred Stock and from the net proceeds of long-term debt. At
March 31, 1997, the Company had $42.9 million in cash, cash equivalents and
short-term investments and $46.2 million of working capital. The Company has a
$3.0 million revolving bank credit facility which expires on October 30, 1997.
Borrowings are secured by substantially all Company assets. At March 31, 1997,
there were no amounts outstanding under the facility.
As of March 31, 1997, the Company's principal commitments consisted of
obligations under operating leases, aggregating $1.4 million. In April 1997, the
Company signed a 10-year lease agreement for approximately 51,000 square feet of
office space intended for use as a new corporate headquarters in Carlsbad,
California. Under the terms of the lease, which is scheduled to commence in
April 1998, the Company is committed to future minimum lease payments
aggregating approximately $11.2 million through fiscal 2008.
The Company's operations to date have required substantial amounts of
capital. The Company expects to spend substantial funds to support the growth of
its products, to add enhancements and additional applications to its products
and to expand internationally. The Company believes that its current cash, cash
equivalents and short-term investments, along with its available credit
facility, will be sufficient to meet its anticipated cash needs for working
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<PAGE> 34
capital, capital expenditures and business expansion for at least the next 12
months. The estimate of the period for which the Company expects its available
cash balances and credit facilities to be sufficient to meet its capital
requirements is a forward-looking statement that involves risks and
uncertainties as set forth herein and in Item 1 under the caption "Business -
Risk Factors" and elsewhere in this Report on Form 10-K. The Company's capital
requirements will depend on numerous factors, including the progress of the
Company's research and development programs, the commercial acceptance of its
products, the resources the Company devotes to advanced technologies and the
demand for its products. To the extent that funds generated from operations are
insufficient, the Company will have to raise additional funds to meet its
capital requirements. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the stockholders of the Company
will be reduced, stockholders may experience additional dilution, and such
equity securities may have rights, preferences or privileges senior to those of
the holders of the Company's Common Stock. No assurance can be given that
additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, the Company may have to, among other things,
reduce substantially or eliminate expenditures for the development and marketing
of its products.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and Notes thereto, together
with the independent auditor's report thereon, appear at pages F-1 through F-14
of this Report on Form 10-K and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
IDENTIFICATION OF DIRECTORS
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Election of Directors -
Nominees" contained in the Company's definitive Proxy Statement for the 1997
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year ended
March 31, 1997 (the "Proxy Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Executive Officers" at the end
of Part I, Item 1 of this Report on Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Compliance with the Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" contained
in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Executive Compensation"
contained in the Proxy Statement.
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<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Certain Transactions" contained
in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements required by this item are submitted in
a separate section beginning on page F-1 of this Report on Form 10-K.
<TABLE>
<CAPTION>
Consolidated Financial Statements of TriTeal Corporation
--------------------------------------------------------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.....................................................F-1
Consolidated Balance Sheets as of March 31, 1997 and 1996.............................................F-2
Consolidated Statements of Operations for the years ended March 31, 1997, 1996 and 1995...............F-3
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1997, 1996 and 1995.....F-4
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995...............F-5
Notes to Consolidated Financial Statements............................................................F-6
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required, are not
applicable, or the information is included in the Consolidated
Financial Statements or notes thereto.
3. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
REFERENCE EXHIBIT DESCRIPTION
--------- -------------------------------------------------------------------------------------------
<S> <C>
3.1 Registrant's Certificate of Incorporation (2)
3.2 Registrant's By-laws (3)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen stock certificate (1)
*10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and
officers. (1)
*10.2 1995 Stock Option Plan (1)
*10.3 Form of Incentive Stock Option Agreement under the 1995 Stock Option Plan (1)
*10.4 Form of Nonstatutory Stock Option Agreement under the 1995 Stock Option Plan (1)
*10.5 Form of Nonstatutory Stock Option Agreement outside the 1995 Option Plan (1)
*10.6 Form of NonQualified Stock Option Agreement outside the 1995 Stock Option Plan (1)
*10.7 1996 Employee Stock Purchase Plan (1)
*10.8 Form of Employee Stock Purchase Plan Offering (1)
*10.9 Form of Restricted Stock Purchase Agreement (1)
10.10 Series A Preferred Stock Purchase Agreement, dated January 10, 1995, between the
Registrant and certain investors (1)
10.11 Series B Preferred Stock Purchase Agreement, dated September 30, 1995, between the
Registrant and certain investors (1)
10.12 Series C Preferred Stock Purchase Agreement, dated June 7, 1996, between the Registrant
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C>
and certain investors (1)
10.13 Investors' Rights Agreement, dated June 7, 1996, between the Registrant and certain
investors (1)
10.14 Imperial Bank Credit Terms and Conditions, dated April 4, 1995 as amended (1)
10.15 Warrant to Purchase Common Stock, dated May 5, 1995, between the Registrant and PT
Carlsbad Associates (1)
10.16 Full Service Office Lease, dated January 19, 1995, between the Registrant and PT
Carlsbad Associates (1)
10.17 Full Service Office Lease, dated August 19, 1994, between the Registrant and PT Carlsbad
Associates (1)
10.18 CDE and TED Core Software License Agreement, dated May 20, 1996, between the
Registrant and The Santa Cruz Operation, Inc (1)
10.19 Common Desktop Environment Software License Agreement, dated April 19, 1996,
between the Registrant and Hewlett-Packard Company, as amended (1)
10.20 OEM Source License Agreement, dated January 24, 1996, between the Registrant and
Spyglass, Inc (1)
10.21 Independent Software License Agreement, dated May 18, 1995, between the Registrant and
SPYRUS (1)
10.22 OEM Source License Agreement, dated April 26, 1995, between the Registrant and Spyglass,
Inc (1)
10.23 Master Software License and Support Agreement, dated October 31, 1994, between the
Registrant and Spyglass, Inc (1)
10.24 Master Software License and Support Agreement, dated October 31, 1994, between the
Registrant and Open Software Foundation, Inc (1)
10.25 Sublease, dated June 7, 1995, between Scripps Memorial Hospitals and the Registrant (1)
10.26 Imperial Bank Revolving Line of Credit, dated November 18, 1996 (4)
10.27 Office Lease, dated April 17, 1997, between the Registrant and Marco Plaza Enterprises
10.28 Underwriting Agreement between the Registrant and PaineWebber Incorporated and Piper
Jaffray, Inc., as representatives of the underwriters, dated August 6, 1996 (2)
10.29 Underwriting Agreement between the Registrant and PaineWebber Incorporated, Hambrecht
and Quist and Piper Jaffray, Inc., as representatives of the underwriters, dated
February 19, 1997
*10.30 Description of Fiscal Year 1997 Executive Bonus Arrangement (3)
*10.31 Form of Fiscal Year 1998 Performance Incentive Plan
11.1 Statement regarding the calculation of net income (loss) per share
21.1 Subsidiaries of Registrant (1)
23.1 Consent of Ernst & Young LLP, independent auditors
24.1 Power of Attorney. Reference is made to the signature page of this Report on Form 10-K
27.1 Financial Data Schedule
</TABLE>
- ----------
* Indicates management compensatory plan, contract or arrangement
(1) Filed as an exhibit to the Registrant's Statement on Form
SB-2 (No. 333-5052-LA) or amendments thereto and
incorporated by reference.
(2) Filed as an exhibit to the Registrant's Form 10-Q for the
six months ended September 30, 1996 and incorporated by
reference.
(3) Filed as an exhibit to the Registrant's Statement on Form
S-1 (No. 333-20579) or amendments thereto and incorporated
by reference.
(4) Filed as Exhibit 10.1 to the Registrant's Form 10-Q for the
nine months ended December 31, 1996 and incorporated by
reference.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fiscal quarter ended
March 31, 1997.
36
<PAGE> 37
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 on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
city of San Diego, County of San Diego, State of California on the 27th day of
June, 1997.
TRITEAL CORPORATION
By: /s/ Jeffrey D. Witous
----------------------------------------
JEFFREY D. WITOUS
President, Chief Executive Officer,
and Chairman of the Board of Directors
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey D. Witous and Arthur S. Budman and each
of them, jointly and severally, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him in any and all capacities,
to sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connections therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and attorney to do and perform each and
every act and thing requisite and necessary to be done therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents or his substitute
or substitutes, may lawfully do so or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ ---------------------------------------- -------------
<S> <C> <C>
/S/ JEFFREY D. WITOUS President, Chief Executive Officer,
- ------------------------------ and Chairman of the Board of Directors
Jeffrey D. Witous (principal executive officer) June 27, 1997
/S/ ARTHUR S. BUDMAN Chief Financial Officer and Director
- ------------------------------ (principal financial and accounting
Arthur S. Budman officer) June 27, 1997
/S/ TERRY A. STRAETER Director June 27, 1997
- ------------------------------
Dr. Terry A. Straeter
/S/ GARY A. WETSEL Director June 27, 1997
- ------------------------------
Gary A. Wetsel
</TABLE>
37
<PAGE> 38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
TriTeal Corporation
We have audited the accompanying consolidated balance sheets of TriTeal
Corporation as of March 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TriTeal Corporation at March
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
April 30, 1997
F-1
<PAGE> 39
TRITEAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................... $ 11,614,707 $ 301,251
Short-term investments .............................. 31,248,987 --
Accounts receivable, net of allowance for doubtful
accounts of $300,000 at March 31, 1997 and $80,000
at March 31, 1996 ................................ 8,748,817 4,872,054
Prepaid expenses and other current assets ........... 2,196,112 378,485
------------- -------------
Total current assets ........................ 53,808,623 5,551,790
Property and equipment, net ........................... 1,561,609 1,024,040
Other assets, net ..................................... 330,622 60,140
------------- -------------
Total assets ................................ $ 55,700,854 $ 6,635,970
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ...................................... $ -- $ 113,542
Accounts payable .................................... 1,507,250 784,575
Accrued liabilities ................................. 5,064,570 3,181,761
Deferred revenues ................................... 1,013,414 922,732
Current portion of long-term debt ................... -- 121,388
------------- -------------
Total current liabilities ................... 7,585,234 5,123,998
Long-term debt ........................................ -- 242,776
Stockholders' equity:
Preferred Stock, $.001 par value
Authorized shares -- 5,000,000
Issued and outstanding shares -- no shares and
1,527,247 shares at March 31,1997 and 1996, .... -- 1,527
respectively
Common Stock, $.001 par value
Authorized shares -- 30,000,000
Issued and outstanding shares --10,768,493 shares
and 4,186,902 shares at March 31,1997 and 1996,
respectively ..................................... 10,768 4,187
Additional paid-in capital .......................... 54,861,984 5,869,825
Preferred stock subscriptions ....................... -- 363,129
Notes receivable from stockholders .................. (96,667) (167,250)
Deferred compensation ............................... (100,300) (151,900)
Retained earnings (deficit) ......................... (6,560,165) (4,650,322)
------------- -------------
Total stockholders' equity .................. 48,115,620 1,269,196
------------- -------------
Total liabilities and stockholders' equity .. $ 55,700,854 $ 6,635,970
============= =============
</TABLE>
See accompanying notes.
F-2
<PAGE> 40
TRITEAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
License fees ............................ $ 13,704,577 $ 6,750,281 $ 2,575,294
Maintenance and services ................ 2,121,148 1,470,883 1,534,572
------------ ------------ ------------
Total revenues .................. 15,825,725 8,221,164 4,109,866
Costs of revenues:
Cost of license fees .................... 2,719,452 1,751,442 785,550
Cost of maintenance and services ........ 675,871 420,969 383,754
------------ ------------ ------------
Total costs of revenues ......... 3,395,323 2,172,411 1,169,304
------------ ------------ ------------
Gross profit .................... 12,430,402 6,048,753 2,940,562
Operating expenses:
Research and development ................ 2,498,873 2,390,627 484,499
Selling, general and administrative ..... 12,742,656 8,569,275 2,290,064
------------ ------------ ------------
Total operating expenses ........ 15,241,529 10,959,902 2,774,563
------------ ------------ ------------
Operating income (loss) ................... (2,811,127) (4,911,149) 165,999
Interest income (expense), net ............ 901,284 (25,943) (2,317)
------------ ------------ ------------
Income (loss) before provision for
(benefit from) income taxes ............. (1,909,843) (4,937,092) 163,682
Provision for (benefit from)
income taxes ............................ -- (95,500) 47,800
------------ ------------ ------------
Net income (loss) ......................... $ (1,909,843) $ (4,841,592) $ 115,882
============ ============ ============
Net income (loss) per share ............... $ (0.23) $ (0.72) $ 0.02
============ ============ ============
Shares used in computing net income
(loss) per share ....................... 8,428,152 6,712,321 6,503,134
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 41
TRITEAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
------------------------------ -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 ............. -- $ -- 3,492,902 $ 3,493
Issuance of Series A
convertible preferred
stock, net ........................ 727,247 727 -- --
Net income ........................... -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1995 ............. 727,247 727 3,492,902 3,493
Issuance of Series B convertible
preferred stock, net ............... 800,000 800 -- --
Preferred stock subscriptions .......... -- -- -- --
Issuance of common stock in
exchange for notes
receivable and service
rendered.......................... -- -- 694,000 694
Deferred compensation ................ -- -- -- --
Amortization of deferred
compensation........................ -- -- -- --
Net loss ............................. -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1996 ............. 1,527,247 1,527 4,186,902 4,187
Issuance of Series C convertible
preferred stock, net ............... 566,164 566 -- --
Conversion of preferred stock
into common stock upon initial
public offering, net ............... (2,093,411) (2,093) 2,093,411 2,093
Issuance of common stock upon
initial public offering, net........ -- -- 2,875,000 2,875
Issuance of common stock upon
follow-on public offering, net....... -- -- 1,365,000 1,365
Issuance of common stock upon
exercise of options and
warrants ........................... -- -- 211,552 212
Issuance of common stock under
Employee Stock Purchase Plan ....... -- -- 36,628 36
Repayments of notes receivable
from stockholders .................. -- -- -- --
Amortization of
deferred compensation ............ -- -- -- --
Net loss ............................. -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1997 ............. -- $ -- 10,768,493 $ 10,768
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NOTES
ADDITIONAL PREFERRED RECEIVABLE RETAINED
PAID-IN STOCK FROM DEFERRED EARNINGS
CAPITAL SUBSCRIPTIONS STOCKHOLDERS COMPENSATION (DEFICIT) TOTAL
------------ ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 ............. $ 6,507 $ -- $ -- $ -- $ 75,388 $ 85,388
Issuance of Series A
convertible preferred
stock, net ........................ 1,538,312 -- -- -- -- 1,539,039
Net income ........................... -- -- -- -- 115,882 115,882
------------ ------------- ------------- ------------- ------------ ------------
Balance at March 31, 1995 ............. 1,544,819 -- -- -- 191,270 1,740,309
Issuance of Series B convertible
preferred stock, net................ 3,964,200 -- -- -- -- 3,965,000
Preferred stock subscriptions .......... -- 363,129 -- -- -- 363,129
Issuance of common stock in
exchange for notes
receivable and service
rendered ........................... 172,806 -- (167,250) -- -- 6,250
Deferred compensation ................ 188,000 -- -- (188,000) -- --
Amortization of deferred
compensation ....................... -- -- -- 36,100 -- 36,100
Net loss ............................. -- -- -- -- (4,841,592) (4,841,592)
------------ ------------- ------------- ------------- ------------ ------------
Balance at March 31, 1996 ............. 5,869,825 363,129 (167,250) (151,900) (4,650,322) 1,269,196
Issuance of Series C convertible
preferred stock, net ............... 3,928,727 (363,129) -- -- -- 3,566,164
Conversion of preferred stock
into common stock upon initial
public offering, net ............... -- -- -- -- -- --
Issuance of common stock upon
initial public offering, net ....... 20,379,119 -- -- -- -- 20,381,994
Issuance of common stock upon
follow-on public offering, net ..... 24,317,477 -- -- -- -- 24,318,842
Issuance of common stock upon ......... --
exercise of options and
warrants ........................... 117,801 -- -- -- -- 118,013
Issuance of common stock under
Employee Stock Purchase Plan ....... 249,035 -- -- -- -- 249,071
Repayments of notes receivable
from stockholders .................. -- -- 70,583 -- -- 70,583
Amortization of
deferred compensation ............ -- -- -- 51,600 -- 51,600
Net loss ............................. -- -- -- -- (1,909,843) (1,909,843)
------------ ------------- ------------- ------------- ------------ ------------
Balance at March 31, 1997 ............. $ 54,861,984 $ -- $(96,667)) $ (100,300) $ (6,560,165) $ 48,115,620
============ ============= ============= ============= ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 42
TRITEAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................... $ (1,909,843) $ (4,841,592) $ 115,882
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization .......................... 625,885 332,445 60,863
Provision for doubtful accounts ........................ 220,000 20,000 60,000
Amortization of deferred compensation .................. 51,600 36,100 --
Issuance of common stock for services .................. -- 6,250 --
Deferred income taxes .................................. -- (95,500) 44,947
Changes in operating assets and liabilities:
Accounts receivable .................................. (4,096,763) (3,412,783) (1,392,464)
Prepaid expenses and other current assets ............ (1,817,627) (342,408) (36,077)
Accounts payable ..................................... 722,675 601,564 163,011
Accrued liabilities .................................. 1,882,809 2,560,000 606,737
Deferred revenue ..................................... 90,682 549,377 353,955
------------ ------------ ------------
Net cash used in operating activities ...................... (4,230,582) (4,586,547) (23,146)
Cash flows from investing activities:
Purchases of short-term investments ...................... (80,415,565) -- --
Sales and maturities of short-term investments ........... 49,166,578 -- --
Purchases of property and equipment ...................... (1,163,454) (964,341) (396,655)
Other assets ............................................. (270,482) (36,807) (10,352)
------------ ------------ ------------
Net cash used in investing activities ...................... (32,682,923) (1,001,148) (407,007)
Cash flows from financing activities:
Net proceeds from (repayments of) line of
credit ................................................ (113,542) 113,542 --
Proceeds from long-term debt ............................. -- 364,164 125,123
Repayments of long-term debt ............................. (364,164) (141,525) (31,730)
Proceeds from repayments of notes receivable
from stockholders ...................................... 70,583 -- --
Proceeds from issuance of common stock, net .............. 45,067,920 -- --
Proceeds from stock subscriptions, net ................... -- 363,129 --
Proceeds from issuance of preferred stock, net ........... 3,566,164 3,965,000 1,539,039
------------ ------------ ------------
Net cash provided by financing activities .................. 48,226,961 4,664,310 1,632,432
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents .............................................. 11,313,456 (923,385) 1,202,279
Cash and cash equivalents at beginning of
year ..................................................... 301,251 1,224,636 22,357
============ ============ ============
Cash and cash equivalents at end of year ................... $ 11,614,707 $ 301,251 $ 1,224,636
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................. $ 28,418 $ 42,243 $ 7,904
============ ============ ============
Income taxes ............................................. $ -- $ -- $ 7,407
============ ============ ============
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for notes
receivable ............................................... $ -- $ 167,250 $ --
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 43
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
TriTeal Corporation (the "Company"), develops, markets and supports open
systems-based, mission-critical desktop system software and integrated
applications that enable multi-platform deployment of client/server applications
throughout an enterprise. The Company recently introduced its Java-based SoftNC
technology, a thin-client, platform-independent solution designed to allow
simultaneous access to Java and legacy applications.
Reincorporation
In August 1996, the Company reincorporated in the State of Delaware,
providing for 30,000,000 authorized shares of Common Stock with a $.001 par
value per share and for 5,000,000 authorized shares of Preferred Stock with a
$.001 par value per share. Pursuant to the reincorporation, each share of Common
Stock and each share of Preferred Stock of the predecessor California
corporation was exchanged for one share of Common Stock and one share of
Preferred Stock, respectively, of the Delaware corporation. The accompanying
financial statements have been retroactively restated to give effect to the
reincorporation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary in The Netherlands. To date, substantially all
of the Company's international operations have been denominated in U.S. dollars.
Foreign currency transaction gains and losses were insignificant for the years
ended March 31, 1997, 1996 and 1995. All intercompany accounts and transactions
have been eliminated in consolidation.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets
(principally three to five years). Leasehold improvements are amortized over the
lesser of the estimated economic life of the asset or the remaining term of the
lease.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less when purchased. Short-term investments are
recorded at amortized cost plus accrued interest which approximates market
value. The Company generally invests its excess cash in certificates of deposit,
commercial paper, corporate debt instruments and U.S. government securities. The
Company has established guidelines relative to diversification and maturities
that are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The Company has not experienced any losses on its
cash equivalents or short-term investments.
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," to
value its investments. Under the statement, the Company classifies its
short-term investments as "Available-for-Sale" and records such assets at
estimated fair value in the balance sheet. As of March 31, 1997 and 1996, the
fair market value of cash equivalents and short-term investments approximated
cost.
F-6
<PAGE> 44
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concentration of Credit Risk
Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Credit losses have been
minimal and such losses have been within management's expectations.
Revenue Recognition
Revenue from sales of software licenses is recognized upon product shipment
provided that no significant vendor obligations remain and collection of the
resulting receivable is deemed probable. Maintenance revenue is recognized
ratably over the term of the maintenance agreement, which in most cases is one
year. Revenue from software development contracts is recognized under the
percentage-of-completion method.
Capitalized Software
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," development costs incurred
in the research and development of new software products and enhancements to
existing software products are expensed as incurred until technological
feasibility in the form of a working model has been established. To date, the
Company's software development has been completed concurrent with the
establishment of technological feasibility and, accordingly, no costs have been
capitalized.
Income Taxes
The Company accounts for income taxes following the provisions of SFAS
No.109, "Accounting for Income Taxes." SFAS No. 109 is an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns.
Computation of Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
common shares and common stock equivalents outstanding. Common equivalent shares
from stock options and warrants are excluded from the computation when their
effect is antidilutive except that, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, common shares and common equivalent
shares issued during the 12 months prior to the Company's August 1996 initial
public offering (the "IPO") have been included in the calculation as outstanding
for all periods prior to the IPO (using the treasury stock method). The
calculation also gives effect to the conversion of all convertible preferred
shares (using the if-converted method), which automatically converted into
common shares upon completion of the IPO.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates.
Accounting Standard on Impairment of Long-Lived Assets
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
The adoption had no effect on the consolidated financial statements.
F-7
<PAGE> 45
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounting Standard on Earnings per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which will be effective for the Company's fiscal 1998
financial statements. The Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
The new requirements for calculating primary earnings per share exclude the
dilutive effect of stock options and warrants. The adoption of this statement is
not expected to have a material impact, since the Company is currently in a net
loss position and the impact of stock options and warrants is not included in
the net loss per share calculations as their effect is antidilutive.
Stock Options
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by the Statement, the Company has
elected to continue accounting for its stock-based compensation in accordance
with the provisions of APB No. 25. As such, the new provisions of SFAS No. 123
had no impact on the financial position or results of operations of the Company.
2. BALANCE SHEET COMPONENTS
Short-term Investments
The Company has classified all of its marketable securities as available-for-
sale securities. The fair market value of these investments approximates
cost. The following table summarizes available-for-sale securities at March 31,
1997:
<TABLE>
<S> <C>
Certificates of deposit.................. $ 6,000,693
Commercial paper.......................... 15,186,401
Corporate debt securities................. 7,065,565
U.S. government agency obligations........ 2,996,328
--------------
$ 31,248,987
==============
</TABLE>
At March 31, 1997, all short-term investments are due within one year of the
date of purchase.
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Computer equipment..................$ 1,948,477 $ 988,356
Furniture and fixtures.............. 537,077 384,416
Leasehold improvements.............. 109,335 58,663
--------------- ---------------
2,594,889 1,431,435
Less accumulated depreciation
and amortization................ (1,033,280) (407,395)
--------------- ---------------
$ 1,561,609 $ 1,024,040
=============== ===============
</TABLE>
F-8
<PAGE> 46
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------- -------------
1997 1996
--------------- -------------
<S> <C> <C>
Royalties payable.................. $ 1,593,280 $ 1,534,014
Accrued compensation
and related benefits............ 1,452,661 877,222
Allowance for sales returns ....... 1,061,706 511,332
Other accrued liabilities.......... 956,923 259,193
--------------- -------------
$ 5,064,570 $ 3,181,761
=============== =============
</TABLE>
3. LINE OF CREDIT FACILITY AND LONG-TERM DEBT
Effective March 31, 1995, the Company entered into a revolving bank credit
facility (the "Facility"). Borrowings are secured by substantially all Company
assets and are limited to the lesser of $1.1 million or 80% of eligible accounts
receivable At March 31, 1996, $113,542 was outstanding under the Facility. A
portion of the proceeds from the Company's IPO during fiscal 1997 was used to
repay the amount due under the Facility.
On August 4, 1996, the Facility expired. On November 18, 1996, the Company
entered into a $3 million revolving bank credit facility (the "revolving
Facility") which expires on October 30, 1997. Borrowings are secured by
substantially all Company assets and bear interest at the bank's prime rate
(8.50% at March 31, 1997). At March 31, 1997, no amounts were outstanding under
the revolving Facility.
4. LONG-TERM DEBT
During fiscal 1996, the Company refinanced and converted $364,164 due under
the Facility into a three-year term loan. This note was repaid in full during
fiscal 1997.
5. LEASE COMMITMENTS
The Company leases its offices under operating lease agreements which expire
at various dates through February 2002. In April 1997, the Company signed a
10-year lease agreement commencing in fiscal 1998 for approximately 51,000
square feet of office space intended for use as a new corporate headquarters in
Carlsbad, California. Future annual minimum lease payments under noncancellable
operating leases having initial terms in excess of one year, including the
10-year lease signed in April 1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31, AMOUNT
------------------------------------------- ------------
<S> <C>
1998....................................... $ 741,021
1999....................................... 1,278,388
2000....................................... 1,144,109
2001....................................... 1,125,528
2002....................................... 1,207,174
Thereafter................................. 7,074,720
------------
$ 12,570,940
============
</TABLE>
Rent expense for the years ended March 31, 1997, 1996 and 1995 was $620,596,
$413,185 and $65,000, respectively.
F-9
<PAGE> 47
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company conducts its business within one industry segment. Total export
sales for the years ended March 31, 1997, 1996 and 1995 were $509,540,
$1,256,790 and $49,110, respectively.
During fiscal 1997, 1996 and 1995, sales to government resellers and
agencies of the U.S. Government approximated 81%, 34% and 12%, of revenues,
respectively; related accounts receivable were $7,692,087 and $2,495,475 at
March 31, 1997 and 1996, respectively. Sales to individual customers (primarily
government resellers) exceeding 10% or more of revenues in each year ended March
31 were as follows: during 1997, two customers accounted for 37% and 36% of
revenues, respectively; during 1996, two customers accounted for 18% and 12% of
revenues, respectively; and during 1995, three customers accounted for 29%, 12%
and 11% of revenues, respectively.
7. STOCKHOLDERS' EQUITY
Common Stock
During fiscal 1997, the Company raised net proceeds of approximately
$20,400,000 and $24,300,000 through the completion of its IPO and follow-on
public offering, respectively.
Stock Option Plans
From March 1, 1993 to May 31, 1995, the Company granted an aggregate of
669,000 non-qualified stock options to certain executive officers and key
employees of the Company. The exercise price of such options was $0.25 per
share, the fair value of the common stock on the date of grant as determined by
the Board of Directors. Such options vest over a three-year period in accordance
with the original vesting schedule of the options. In July 1995, the Company
canceled such options and issued 669,000 shares of common stock to certain
officers and key employees under restricted stock purchase agreements (the
"Agreements"). Pursuant to the Agreements, the Company has the option to
repurchase, at the original option issue price of $0.25 per share, the unvested
shares in the event of termination of employment. At March 31, 1997 and 1996,
144,667 and 307,667 shares were subject to repurchase by the Company,
respectively.
During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"),
under which 1,350,000 shares of the Company's Common Stock were reserved for
issuance upon exercise of options granted by the Company. The Plan provides for
the grant of both incentive and nonstatutory stock options to officers,
directors, employees and consultants of the Company. Options granted by the
Company generally vest over a three-to-four year period and are exercisable for
a period of 10 years from the date of grant. Options generally are granted at
the fair market value of the shares at the date of grant as determined by the
Board of Directors.
The Company recorded $188,000 of deferred compensation for options granted
during the year ended March 31, 1996, representing the difference between the
option exercise price and the deemed fair market value for financial statement
presentation purposes. The Company is amortizing such compensation ratably over
the vesting period of the options. During the years ended March 31, 1997 and
1996, the Company charged to operations $51,600 and $36,100, respectively, for
amortization of such deferred compensation.
F-10
<PAGE> 48
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option transactions, including 899,350 non-qualified
stock options granted outside of the Plan, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE PRICE
SHARES PER SHARE PER SHARE
------------- -------------- -------------
<S> <C> <C> <C>
Outstanding at March 31, 1994............ 555,000 $ 0.001 -0.25 $ 0.03
Granted................................ 787,900 $ 0.25 $ 0.25
--------- --------------
Outstanding at March 31, 1995............ 1,342,900 $ 0.001 -0.25 $ 0.16
Granted................................ 731,550 $ 0.25 -5.00 $ 0.82
Canceled............................... (706,750) $ 0.001 -0.50 $ 0.19
--------- --------------
Outstanding at March 31, 1996............ 1,367,700 $ 0.001 -5.00 $ 0.72
Granted................................ 513,797 $ 6.00 -22.50 $ 14.60
Exercised.............................. (179,275) $ 0.001 -3.50 $ 0.27
Canceled............................... (21,191) $ 0.25 -18.375 $ 2.54
========= ===============
Outstanding at March 31, 1997............ 1,681,031 $ 0.001-22.50 $ 4.98
========= ===============
</TABLE>
A detail of the options outstanding at March 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED
RANGE OF OPTIONS CONTRACTUAL LIFE AVERAGE PRICE OPTIONS
EXERCISE PRICES OUTSTANDING IN YEARS PER SHARE EXERCISABLE
----------------- ---------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
$ 0.001 - 5.00 1,174,274 7.57 $ 2.62 631,793
$ 5.01 - 10.00 87,475 9.14 $ 6.29 --
$ 10.01 - 15.00 147,150 9.58 $ 13.00 --
$ 15.01 - 20.00 261,632 9.75 $ 18.31 --
$ 20.01 - 22.50 10,500 9.77 $ 21.11 --
--------- ---- ------- -------
1,681,031 8.29 $ 12.20 631,793
========= ==== ======= =======
</TABLE>
At March 31, 1997, options to purchase 631,793 common shares, were
exercisable and options to purchase 389,044 common shares were available for
future grant.
The Company has elected to follow APB No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations in accounting for its employee and
director stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123 requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB No. 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Adjusted pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of that
Statement. For options granted in the year ended March 31, 1996 and the period
prior to the Company's IPO, the fair value for options was estimated at the date
of grant using the "minimum value" method for option pricing with the following
weighted-average assumptions: risk-free interest rate of 6%; dividend yield of
0%; and a weighted average expected life of the option of eight years. For
options granted from August 6, 1996 to March 31, 1997, the fair value of the
options were estimated at the date of grant using the "Black-Scholes" method
F-11
<PAGE> 49
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for option pricing with the following weighted average assumptions: risk-free
interest rate of 6%; dividend yield of 0%; expected volatility of 65%; and
weighted-average expected life of the option of eight years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The effect
of applying SFAS No. 123 for purposes of providing pro forma disclosures is not
likely to be representative of the effects on reported net income (loss) for
future years. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net loss:
As reported ........................ $ (1,909,843) $ (4,841,592)
============= =============
Pro forma .......................... $ (2,779,233) $ (4,904,296)
============= =============
Net loss per share:
As reported ........................ $ (0.23) $ (0.72)
============= =============
Pro forma .......................... $ (0.33) $ (0.73)
============= =============
</TABLE>
Warrant
In connection with the Line of Credit Facility (Notes 3 and 4), the Company
issued a warrant for the purchase of 32,277 shares of common stock at $2.13 per
share. This warrant was exercised during fiscal 1997.
Employee Stock Purchase Plan
On June 11, 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 250,000 shares for issuance thereunder. The
Purchase Plan became effective upon the completion of the Company's IPO. The
Purchase Plan permits eligible employees to purchase common stock, through
payroll deductions of up to 15% of the employee's compensation, at a price equal
to 85% of the fair market value of the common stock at either the beginning or
the end of the offering period, whichever is lower. During fiscal 1997, the
Company issued 36,368 shares of common stock under the Purchase Plan.
Common Stock Reserved
At March 31, 1997, a total of 2,283,707 shares of the Company's Common Stock
have been reserved for the issuance pursuant to the exercise of options and the
purchase of stock under the 1996 Employee Stock Purchase Plan.
F-12
<PAGE> 50
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT
Federal ..................................... $ -- $ -- $ --
State ....................................... -- -- 800
------------ ------------ ------------
Total current ............................... -- -- 800
DEFERRED
Federal ..................................... -- (85,900) 46,900
State ....................................... -- (9,600) 100
------------ ------------ ------------
Total deferred .............................. -- (95,500) 47,000
============ ============ ============
Total provision for (benefit from) income taxes $ -- $ (95,500) $ 47,800
============ ============ ============
</TABLE>
The reconciliation of the Company's income tax provision (benefit) computed
at the Federal statutory rate in effect for each of the three years presented
below to the recorded provision for (benefit from) income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Provision (benefit) at Federal statutory rate .... $ (661,500) $(1,694,600) $ 57,300
State income tax provision, net of federal benefit -- -- 600
Net operating loss not benefited ................. 661,500 1,599,100 --
Permanent differences and other .................. -- -- (10,100)
=========== =========== ===========
Provision (benefit) at effective rate ............ $ -- $ (95,500) $ 47,800
=========== =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Accrual to cash adjustments .............. $ -- $ (187,400)
Section 481 adjustment ................... (376,400) --
----------- -----------
Total deferred tax liabilities ........ (376,400) (187,400)
Deferred tax assets:
Capitalized research expense ............. 201,700 76,400
Accruals and reserves .................... 787,300 --
Net operating loss carryforwards ......... 2,549,300 1,835,400
Research tax credit carryforwards ........ 311,200 43,900
Depreciation ............................. 64,500 38,600
Other .................................... 36,300
----------- -----------
Total deferred tax assets ............. 3,950,300 1,994,300
Depreciation .............................. (3,573,900) 1,806,900
----------- -----------
Net deferred tax assets ............... 376,400 187,400
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
F-13
<PAGE> 51
TRITEAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A valuation allowance of $3,573,900 has been recognized to offset the entire
amount of deferred tax assets as realization of such assets is uncertain.
Approximately $ 701,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to additional paid-in capital.
As of March 31, 1997, the Company has approximately $6,656,000 and
$3,662,000 of Federal and state net operating loss carryforwards, respectively.
The difference between the Federal and state tax loss carryforwards is primarily
attributable to the capitalization of research expenses for California purposes
and the 50% limitation on the California tax loss carryforwards. These Federal
and state carryforwards will begin expiring in 2010 and 2000, respectively,
unless previously utilized. The Company also has Federal and state research tax
credit carryforwards of approximately $228,800 and $126,800, respectively, which
will begin expiring in 2009, unless previously utilized.
Federal and California tax laws limit the utilization of net operating loss
and tax credit carryforwards that arise prior to certain cumulative changes in a
corporation's ownership resulting in a change of control of the Company.
However, the Company believes that such limitations will not have a material
impact on the utilization of the carryforwards.
9. EMPLOYEE RETIREMENT PLAN
The Company has established a 401(k) defined contribution retirement plan
(the "Plan") covering all employees. The Plan provides for voluntary employee
contributions from 1% to 15% of annual compensation (as defined). The Company
may contribute such amounts as determined by the Board of Directors. There were
no employer contributions to the Plan during the years ended March 31, 1997,
1996 and 1995.
F-14
<PAGE> 1
EXHIBIT 10.27
LEASE AGREEMENT
LANDLORD
MARCO PLAZA ENTERPRISES,
a California general partnership
TENANT
TRITEAL CORPORATION,
a Delaware corporation
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF BASIC LEASE INFORMATION................................................................................i
ARTICLE 1 -- DEFINITIONS..........................................................................................1
1.1 Acceleration Estimate...........................................................................1
1.2 Additional Rent.................................................................................1
1.3 Base Annual Rent................................................................................1
1.4 Base Monthly Rent...............................................................................1
1.5 Basic Terms.....................................................................................1
1.6 Business Days...................................................................................1
1.7 Commencement of Construction....................................................................1
1.8 Common Area.....................................................................................1
1.9 Common Area Maintenance Charges.................................................................1
1.10 CPI.............................................................................................1
1.11 Declarations....................................................................................1
1.12 Fair Market Rent................................................................................2
1.13 Excess Operating Costs Rent.....................................................................2
1.14 Hazardous Materials.............................................................................2
1.15 Insurance Charges...............................................................................2
1.16 Hazardous Materials Laws........................................................................2
1.17 Landlord's Indemnitees..........................................................................2
1.18 Lease Term......................................................................................2
1.19 Lease Year......................................................................................2
1.20 Operating Costs.................................................................................2
1.21 Premises........................................................................................3
1.22 Profit..........................................................................................3
1.23 Project.........................................................................................3
1.24 Property Taxes..................................................................................3
1.25 Rentable........................................................................................3
1.26 Rent............................................................................................3
1.27 Rules and Regulations...........................................................................3
1.28 Site Amenities..................................................................................3
1.29 Site Plan.......................................................................................3
1.30 Target Commencement Date........................................................................3
1.31 Tenant's Indemnitees............................................................................3
1.32 Tenant Improvements.............................................................................3
1.33 Tenant's Proportional Share.....................................................................3
1.34 Usable..........................................................................................4
1.35 Work Letter.....................................................................................4
ARTICLE 2 -- PREMISES.............................................................................................4
2.1 Lease...........................................................................................4
2.1.1 Premises...............................................................................4
2.1.2 Site Plan..............................................................................5
2.2 Lease of the Premises...........................................................................5
2.3 Suitability of Premises.........................................................................5
2.4 Landlord's Work in the Premises and Project.....................................................5
ARTICLE 3 -- LEASE TERM...........................................................................................5
3.1 Lease Term......................................................................................5
3.2 Commencement Date...............................................................................5
</TABLE>
I-(i)
<PAGE> 3
<TABLE>
<S> <C>
3.3 Delay in Commencement...........................................................................5
3.3.1 Acceptance Letter......................................................................5
3.3.2 Acceleration Estimate..................................................................6
3.3.3 LIQUIDATED DAMAGES.....................................................................6
3.3.4 Early Completion.......................................................................6
3.4 Early Occupancy.................................................................................6
3.5 Option(s) to Extend Term........................................................................7
3.5.1 Extension Notice.......................................................................7
3.5.2 Base Monthly Rent During Extension.....................................................7
ARTICLE 4 -- RENTAL AND OTHER PAYMENTS............................................................................8
4.1 Base Monthly Rent...............................................................................8
4.2 Interest on Past Due Obligations................................................................8
4.3 Late Charges....................................................................................8
4.4 Security Deposit; Additional Security and Loans.................................................8
4.4.1 Deposit of Funds.......................................................................8
4.4.2 Return of Security Deposit.............................................................8
4.4.3 Additional Security and Loans..........................................................9
4.4.4 Transfer of Security Deposit and Additional Security...................................9
ARTICLE 5 -- OTHER CHARGES PAYABLE BY TENANT......................................................................9
5.1 Rent............................................................................................9
5.2 Common Area Maintenance Charges.................................................................9
5.2.1 Tenant to Bear Proportional Share of Common Area Maintenance Charges...................9
5.2.2 Landlord's Common Area Maintenance Charges.............................................9
5.2.3 Exclusions from Common Area Maintenance Charges.......................................10
5.2.4 Repairs Due to Misuse.................................................................10
5.3 Payment of Excess Operating Costs Rent.........................................................10
5.3.1 Previous Charges......................................................................10
5.3.2 Year-End Adjustments..................................................................11
5.3.3 Audit.................................................................................11
5.4 Personal Property Taxes........................................................................11
ARTICLE 6 -- USE OF PROPERTY.....................................................................................11
6.1 Permitted Uses.................................................................................11
6.2 Manner of Use..................................................................................11
6.2.1 Interference with Use/Nuisance........................................................11
6.2.2 Violation of Law/Insurance Provisions.................................................12
6.2.3 Permits...............................................................................12
6.3 Rules and Regulations..........................................................................12
6.4 Landlord's Access..............................................................................12
6.5 Quiet Possession...............................................................................12
ARTICLE 7 -- HAZARDOUS MATERIALS.................................................................................13
7.1 Prohibition....................................................................................13
7.1.1 Use...................................................................................13
7.1.2 Normal Usage..........................................................................13
7.2 Disclosure and Warning Obligations.............................................................13
7.3 Notice of Actions..............................................................................13
7.4 Hazardous Materials Indemnity..................................................................14
7.5 Assignment and Subletting......................................................................14
7.6 Environmental Tests and Audits.................................................................14
7.7 Lease "As Is"..................................................................................14
7.8 Survival.......................................................................................14
</TABLE>
I-(ii)
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE 8 -- UTILITIES...........................................................................................15
8.1 Payment and Arrangement........................................................................15
8.2 Interruption of Services and Utilities.........................................................15
8.3 Operating Hours................................................................................15
ARTICLE 9 -- PARKING AND CONTROL OF COMMON AREAS.................................................................15
9.1 Control of Common Areas by Landlord............................................................15
9.2 License........................................................................................16
ARTICLE 10 -- ALTERATIONS, IMPROVEMENTS AND SIGNAGE..............................................................16
10.1 Changes/Alterations............................................................................16
10.2 Manner of Construction.........................................................................16
10.2.1 Conditions to Consent..................................................................16
10.2.2 Cost...................................................................................16
10.2.3 Good and Workmanlike Manner............................................................16
10.3 Construction Insurance.........................................................................17
10.4 Liens..........................................................................................17
10.5 Signage........................................................................................17
ARTICLE 11 -- INSURANCE AND INDEMNITY............................................................................17
11.1 Insurance to be Obtained by Landlord...........................................................17
11.1.1 Fire and Casualty Insurance............................................................17
11.1.2 Liability Insurance....................................................................17
11.2 Insurance to be Obtained by Tenant.............................................................18
11.2.1 Liability Insurance....................................................................18
11.2.2 Insurance of Personal Property.........................................................18
11.2.3 Additional Insurance Obligations.......................................................18
11.3 Waiver of Subrogation..........................................................................18
11.4 Form of Policies...............................................................................18
11.5 Indemnification................................................................................19
11.5.1 Indemnification of Landlord............................................................19
11.5.2 Landlord's Nonliability................................................................19
11.5.3 Indemnification of Tenant..............................................................19
ARTICLE 12 -- ASSIGNMENT AND SUBLETTING..........................................................................19
12.1 Landlord's Consent Required....................................................................19
12.1.1 Transfer...............................................................................19
12.1.2 Procedure..............................................................................20
12.1.3 Affiliates.............................................................................20
12.2 Recapture Right................................................................................20
12.3 Transfer Without Consent.......................................................................20
12.4 No Release of Tenant...........................................................................20
12.5 Effect of a Transfer...........................................................................20
12.6 Event of Bankruptcy............................................................................21
12.7 No Merger......................................................................................21
12.8 Assignment Fees and Procedures.................................................................21
ARTICLE 13 -- DAMAGE OR DESTRUCTION..............................................................................21
13.1 Repair of Damage by Landlord...................................................................21
13.2 Rent Abatement Due to Casualty.................................................................22
13.3 Landlord's Option to Repair....................................................................22
13.4 Damage Near End of Term........................................................................22
13.5 Waiver of Statutory Provisions.................................................................22
</TABLE>
I-(iii)
<PAGE> 5
<TABLE>
<S> <C>
ARTICLE 14 -- CONDEMNATION.......................................................................................22
14.1 Total Condemnation.............................................................................22
14.2 Partial Condemnation...........................................................................22
14.3 Condemnation of Parking Area...................................................................23
14.4 Distribution of Condemnation Award.............................................................23
14.5 Waiver.........................................................................................23
ARTICLE 15 -- DEFAULTS; REMEDIES.................................................................................23
15.1 Covenants and Conditions.......................................................................23
15.2 Defaults by Tenant.............................................................................23
15.3 Remedies.......................................................................................24
15.4 The Right to Relet the Premises................................................................25
15.5 Waiver of Rights of Redemption.................................................................25
15.6 Cumulative Remedies............................................................................25
15.7 Additional Remedies Upon Default...............................................................25
15.7.1 Assumption or Rejection of Lease.......................................................25
15.7.2 Assignment.............................................................................26
15.7.3 Other Matters..........................................................................26
15.8 Default by Landlord............................................................................26
15.9 Landlord's Cure................................................................................26
ARTICLE 16 -- PROTECTION OF CREDITORS............................................................................27
16.1 Subordination..................................................................................27
16.2 Attornment.....................................................................................27
16.3 Signing of Documents...........................................................................27
16.4 Estoppel Certificates..........................................................................27
16.4.1 Request................................................................................27
16.4.2 Failure to Respond.....................................................................27
16.5 Tenant's Financial Condition...................................................................27
16.6 Mortgagee Protection Clause....................................................................28
ARTICLE 17 -- TERMINATION OF LEASE...............................................................................28
17.1 Condition Upon Termination.....................................................................28
17.2 Non-Removal by Tenant..........................................................................28
17.3 Abandoned Property.............................................................................28
17.4 Landlord's Actions on Premises.................................................................29
17.5 Holding Over...................................................................................29
ARTICLE 18 -- MISCELLANEOUS PROVISIONS...........................................................................29
18.1 Right of First Refusal.........................................................................29
18.2 Successors; No Third Party Beneficiaries.......................................................29
18.3 Severability...................................................................................30
18.4 Interpretation.................................................................................30
18.5 Other Tenancies................................................................................30
18.6 Entire Agreement...............................................................................30
18.7 Landlord's Liability...........................................................................30
18.8 Notices........................................................................................30
18.9 Waivers........................................................................................30
18.10 No Recordation.................................................................................31
18.11 Choice of Law..................................................................................31
18.12 Corporate Authority; Partnership Authority.....................................................31
18.13 No Partnership.................................................................................31
18.14 Joint and Several Liability....................................................................31
</TABLE>
I-(iv)
<PAGE> 6
<TABLE>
<S> <C>
18.15 Attorneys' Fees................................................................................31
18.16 Lender Modification............................................................................31
18.17 Brokers........................................................................................31
18.18 Force Majeure..................................................................................32
18.19 Tenant Obligations Survive Termination.........................................................32
18.20 Tenant's Waiver................................................................................32
18.21 Submission of Lease............................................................................33
||
EXHIBITS
Exhibit "A"......................................................................................Site Plan
Exhibit "B"..........................................................................Rules and Regulations
Exhibit "C"....................................................................................Work Letter
Exhibit "D"....................................................................................Definitions
Exhibit "E" .............................................................................Acceptance Letter
</TABLE>
I-(v)
<PAGE> 7
LEASE AGREEMENT
SUMMARY OF BASIC LEASE INFORMATION
<TABLE>
<S> <C>
1. Lease Date: April ___, 1997
2. Landlord: Marco Plaza Enterprises, a California general partnership
3. Address of Landlord: c/o Newport National Corporation
5050 Avenida Encinas, Suite 350
Carlsbad, CA 92008
Attn: Mr. Jeffry Brusseau
4. Tenant: Triteal Corporation, a Delaware corporation
5. Address of Tenant: 2011 Palomar Airport Road, Suite 200
Carlsbad, CA 92009-1431
Attn: General Counsel
6. Premises (Section Project Rentable Area: Approximately 51,000 square feet
2.1 of Lease): (as of Lease Date)
Building Rentable Area: Approximately 51,000 square feet
Premises Rentable Area: Approximately 51,000 square feet
7. Project: Cornerstone Corporate Centre
Building: Building D
8. Lease Term
(Article 3 of Lease): Lease Term: Ten (10) years
Target Commencement Date: Subject to Section 1.30, April 15, 1998
Target Expiration Date: Subject to Section 1.30, April 14, 2008
Liquidated Damages for Substantial Completion of Premises after
Target Commencement Date: Tenant's actual hold-over rents, not
to exceed $1,000/day.
Incentive Fee for Substantial Completion of Premises prior to
Target Commencement Date: Subject to provisions of Section
3.3.4, cash equal to the Acceleration Estimate
Options to Extend: Two (2) for five (5) years each
</TABLE>
4/15/97 II-(i) Landlord Initials: _______
Tenant Initials: _______
<PAGE> 8
<TABLE>
<S> <C>
9. Rent Base Monthly Rent:
(Article 4 of Lease) $1.64 per Rentable square foot of the Premises per month,
which shall increase as follows:
</TABLE>
<TABLE>
<CAPTION>
Base Monthly Rent
Lease Years (Per Rentable Sq. Ft.
of Premises)
------------------------------------------------------------
<S> <C>
1-3 $1.64
------------------------------------------------------------
4-6 1.79
------------------------------------------------------------
7-9 1.95
------------------------------------------------------------
10 2.12
------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Initial Base Monthly Rent: $83,640 (assumes Premises = 51,000)
Initial Base Annual Rent: $1,003,680 (assumes Premises = 51,000)
Base Monthly Rent During Extensions: At commencement of each
Extension Term, Fair Market Rent to be increased by 9% (nine
percent) after three (3) years of such Extension Term.
First Month's Base Monthly Rent due upon execution of Lease:
$83,640
Late Charge: Ten percent (10%) of the overdue amount
Lease Interest Rate: Twelve percent (12%)
10. Operating Costs Allowance Operating Costs during first (1st) Lease Year
(Article 5 of Lease):
11. Use (Article 6 of Lease): General office and other uses consistent with a computer software
development company, in conformance with the Declarations and all
laws, ordinances, and regulations.
12. Security Deposit $83,640
(Article 4 of Lease):
13. Brokers (Section Landlord's Broker: Business Real Estate
19.17 of Lease): Tenant's Broker: The Irving Hughes Group, Inc.
14. Lease Guarantors: None
15. Tenant Improvement Allowance Up to Thirty Dollars ($30) per Usable (See Work Letter -
Exhibit "C") square foot of the Premises
16. Tenant Contingency Allowance: Up to Two Dollars ($2) per Usable square foot of the Premises.
(See Work Letter -- Exhibit "C")
17. Right of First Refusal to Lease: All or any portion of Building C in the Project, within five (5)
Business Days after notice.
</TABLE>
4/15/97 Landlord Initials: _______
II-(ii) Tenant Initials: _______
<PAGE> 9
<TABLE>
<S> <C>
18. The following exhibits are attached hereto and incorporated into this Lease:
Exhibit "A"......................................................................................Site Plan
Exhibit "B"..........................................................................Rules and Regulations
Exhibit "C"....................................................................................Work Letter
Exhibit "D"....................................................................................Definitions
Exhibit "E" .............................................................................Acceptance Letter
</TABLE>
The foregoing Summary of Basic Lease Information is hereby incorporated
into and made a part of this Lease. Each reference in this Lease to the Summary
of Basic Lease Information shall mean the information set forth above and shall
be construed to incorporate all of the terms provided under the particular lease
paragraph pertaining to such information. In the event of a conflict between the
Summary of Basic Lease Information and the Lease, the terms of the Lease shall
prevail.
LANDLORD:
MARCO PLAZA ENTERPRISES, a California general partnership
By: /s/ Robert Kronick
------------------------------------------------------
Name: Robert Kronick
----------------------------------------------------
Title: Partner
---------------------------------------------------
TENANT:
TRITEAL CORPORATION, a Delaware corporation
By: /s/ Gregory Jay White
------------------------------------------------------
Name: Gregory Jay White
----------------------------------------------------
Title: TriTeal Corporation
---------------------------------------------------
4/15/97 Landlord Initials: _______
II-(iii) Tenant Initials: _______
<PAGE> 10
LEASE AGREEMENT
This Lease Agreement, which includes the Basic Terms (as hereinafter
defined) ("Lease"), is made as of the date shown in the Basic Terms, by and
between the Landlord shown in the Basic Terms and the Tenant shown in the Basic
Terms.
ARTICLE 1 -- DEFINITIONS
In addition to the defined terms set forth in the Basic Terms or
elsewhere in this Lease, unless the context otherwise requires, the following
terms shall have the meanings set forth below.
1.1 ACCELERATION ESTIMATE. "Acceleration Estimate" means an
estimate Landlord shall obtain promptly after Commencement of Construction
(i) if Commencement of Construction occurs after August 1, 1997, and (ii) of the
additional costs of construction (both hard costs such as materials and soft
costs such as engineering and architectural fees) which Landlord reasonably
anticipates incurring in order to achieve Substantial Completion of the
Improvements by the Target Commencement Date.
1.2 ADDITIONAL RENT. "Additional Rent" refers collectively to
Excess Operating Costs Rent and any other charges due and payable by Tenant
under this Lease other than Base Monthly Rent.
1.3 BASE ANNUAL RENT. "Base Annual Rent" shall mean the sum of the
twelve (12) Base Monthly Rent amounts due in any Lease Year.
1.4 BASE MONTHLY RENT. "Base Monthly Rent" means the rental
specified in Article 4 of this Lease.
1.5 BASIC TERMS. "Basic Terms" means the Summary of Basic Lease
Information set forth at the beginning hereof.
1.6 BUSINESS DAYS. "Business Days" means any day on which business
is conducted by federal savings banks in San Diego County, California.
1.7 COMMENCEMENT OF CONSTRUCTION. "Commencement of Construction"
means the date on which Landlord's Contractor (as defined in the Work Letter)
commences the foundation for the Building.
1.8 COMMON AREA. "Common Area" means all areas, space, equipment
and special services in the Building and in the Project which are from
time-to-time provided by Landlord for the common or joint use and benefit of the
occupants of the Project and Building, their employees, agents, servants,
customers and other invitees, including without limitation, parking areas,
access roads, driveways, retaining walls, landscaped areas, truck service-ways,
stairs, ramps, sidewalks, pools, patios, hardscapes, electrical rooms,
mailrooms, common area restrooms and locker rooms and hallways.
1.9 COMMON AREA MAINTENANCE CHARGES. "Common Area Maintenance
Charges" means the costs and expenses described in Section 5.4.2 of this Lease.
1.10 CPI. "CPI" shall mean the Consumer Price Index published by
the United States Bureau of Labor Statistics, Los Angeles-Anaheim-Riverside, All
Urban Consumers (1982 - 84 = 100), or a successor or similar statistic selected
by Landlord in the event the present index is no longer published.
1.11 DECLARATIONS. "Declarations" means any Declaration or
Declarations of Covenants, Conditions and Restrictions which have been or may be
recorded against the Building or all or a portion of the Project, including, but
not limited to, (i) that certain Declaration of Covenants, Conditions, and
Restrictions, Carlsbad Airport Centre, dated September 4, 1986, recorded
September 12, 1986, in the San Diego County Recorder's Office, Document No.
4/17/97 Landlord Initials: _______
1 Tenant Initials: _______
<PAGE> 11
86-401456, as amended by a First Amendment dated January 15, 1987, recorded
January 28, 1987, as Document No. 87-048040, and (ii) that certain Mutual
Easement Agreement between Carlsbad Airport Centre and Opus Southwest
Corporation dated January 27, 1987, recorded in the San Diego County Recorder's
Office on January 28, 1987, as Document No. 87-048043.
1.12 FAIR MARKET RENT. "Fair Market Rent" shall mean the price
that a ready and willing single tenant would pay, as of the commencement of the
Extension Term, as annual rent to a ready and willing landlord for property
comparable to the Premises on the terms of this Lease, if such property were
exposed for lease on the open market for a reasonable period of time. As used
herein, "comparable property" shall mean an office building similar to the
Building in a project similar to the Project located in the Carlsbad, California
area, with improvements similar in age and character to the Premises, which has
been improved with tenant improvements comparable to those constructed in the
Building; provided, however, that the value of the equipment which Tenant is
entitled to remove at the expiration or termination of the Term of this Lease
shall be disregarded. All relevant factors shall be considered, including,
without limitation, the fact that this Lease is a full service, modified gross
lease, net of concessions and tenant improvement allowances generally being
offered by landlords of comparable properties, the age of the improvements, the
condition of the Premises, the rental market conditions then in existence,
whether Landlord will or will not be required to pay a real estate brokerage
commission.
1.13 EXCESS OPERATING COSTS RENT. "Excess Operating Costs Rent"
means Tenant's Proportional Share of the amount by which the Operating Costs for
each calendar year exceeds the Operating Costs Allowance (as set forth in the
Basic Terms).
1.14 HAZARDOUS MATERIALS. The term "Hazardous Material(s)" shall
mean any toxic or hazardous substance, material or waste or any pollutant or
contaminant or infectious or radioactive material which are, or in the future
become, regulated under applicable local, state or federal law for the
protection of health or the environment, or which are classified as hazardous or
toxic substances, materials or wastes, pollutants or contaminants, as defined,
listed or regulated by any federal, state or local law, regulation or order or
by common law decision, including, without limitation, (i) trichloroethylene,
tetrachloroethylene, perchloroethylene and other chlorinated solvents, (ii)any
petroleum products or fractions thereof, (iii)asbestos, (iv)polychlorinated
biphenyls, (v) flammable explosives, (vi) urea formaldehyde and (vii)
radioactive materials and waste.
1.15 INSURANCE CHARGES. "Insurance Charges" shall mean any and all
premiums and other costs for insurance policies insuring the Premises, Building,
Project and Common Area, required by this Lease and paid by Landlord.
1.16 HAZARDOUS MATERIALS LAWS. The term "Hazardous Materials
Law(s)" shall mean any federal, state or local laws, ordinances, codes,
statutes, regulations, administrative rules, policies and orders, and other
authority, existing now or in the future, which classify, regulate, list or
define hazardous substances, materials, wastes contaminants, pollutants and/or
the Hazardous Materials.
1.17 LANDLORD'S INDEMNITEES. "Landlord's Indemnitees" shall refer
collectively to Landlord's agents, partners, members, managers, shareholders,
officers, directors, employees, successors and/or assigns.
1.18 LEASE TERM. "Lease Term" means the entire period commencing
with the Commencement Date and continuing for the period specified in Item 8 of
the Basic Terms, plus any extensions, renewals or holding over periods.
1.19 LEASE YEAR. "Lease Year" or "lease year" shall mean a
consecutive twelve (12) month period during the Lease Term commencing on the
Commencement Date; provided that the Lease Year may be adjusted by Landlord to
commence on the first day of a calendar month after the Commencement Date.
1.20 OPERATING COSTS. "Operating Costs" means all of the Common
Area Maintenance Charges, Property Taxes, and Insurance Charges.
4/15/97 Landlord Initials: _______
2 Tenant Initials: _______
<PAGE> 12
1.21 PREMISES. "Premises" means the space described in Section 2.1
and delineated on the Site Plan.
1.22 PROFIT. "Profit" shall mean rent and all other amounts paid or
payable by a transferee to Tenant pursuant to a Transfer (as defined in Article
11 herein) which is in excess of the scheduled Base Monthly Rent and all other
Rent due hereunder.
1.23 PROJECT. "Project" means the project at the address set forth
in the Basic Terms, and more particularly described in the Site Plan, together
with all fixtures, equipment and personal property owned by Landlord, now or
hereafter situated or located therein or thereupon and used in connection with
the operation and maintenance thereof.
1.24 PROPERTY TAXES. "Property Taxes" means: (i) general real
property and improvements taxes, any form of assessment, special assessment or
reassessment, any fee, license fee, license tax, business license fee,
commercial rental tax, levy, charge, assessment, penalty or other tax imposed by
any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agriculture, lighting,
drainage or other improvement district thereof, as against any legal or
equitable interest of Landlord in the Project; (ii) any tax on the Landlord's
right to receive, or the receipt of, rent or income from the Project or against
Landlord's business of leasing the Project; (iii) any tax or charge for fire
protection, streets, sidewalks, road maintenance, refuse or other services
provided to the Project by any governmental agency; (iv) any tax imposed upon
this transaction or based upon a reassessment of the Project due to a change in
ownership or transfer of all or part of Landlord's interest in the Project; and
(v) any charge or fee replacing any tax previously included within the
definition of Property Taxes. "Property Taxes" does not, however, include
Landlord's Federal or State income, franchise, inheritance or estate taxes.
1.25 RENTABLE. "Rentable" area or "Rentable" square feet shall mean
the square footage determined according to the definitions set forth on Exhibit
"D" attached hereto.
1.26 RENT. "Rent" and/or "rent" shall mean the Base Monthly Rent,
Additional Rent and any other amounts Tenant is required to pay under this
Lease.
1.27 RULES AND REGULATIONS. "Rules and Regulations" mean the rules
and regulations set forth in Exhibit "B" attached to this Lease.
1.28 SITE AMENITIES. "Site Amenities" shall mean the sand
volleyball court, barbeque area, lap pool, spa/jacuzzi, lunch patio, jogging
trail, and one-half court for basketball (over portions of the Project parking
lot) to be constructed by Landlord at its sole cost in a location selected by
Landlord in the Common Area, for the non-exclusive use of Tenant and other
occupants of the Project, in accordance with this Lease.
1.29 SITE PLAN. "Site Plan" refers to the Site Plan attached as
Exhibit "A."
1.30 TARGET COMMENCEMENT DATE. "Target Commencement Date" means
April 15, 1998; provided, however, that if the Commencement of Construction
occurs after August 1, 1997 and Tenant disapproves the Acceleration Estimate
pursuant to Section 3.3.2, then the Target Commencement Date shall be April 15,
1998 plus the number of days after August 1, 1997, that the Commencement of
Construction occurred.
1.31 TENANT'S INDEMNITEES. "Tenant's Indemnitees" shall refer
collectively to Tenant's agents, partners, members, managers, shareholders,
officers, directors, employees, successors and/or assigns.
1.32 TENANT IMPROVEMENTS. "Tenant Improvements" shall refer to the
Tenant Improvements as defined in the Work Letter attached hereto as Exhibit
"C."
1.33 TENANT'S PROPORTIONAL SHARE. "Tenant's Proportional Share"
shall mean all of Tenant's Building Proportional Share, Tenant's Project
Proportional Share and Tenant's Site Amenities Proportional Share.
4/15/97 Landlord Initials: _______
3 Tenant Initials: _______
<PAGE> 13
Tenant's Building Proportional Share shall be calculated from time to time as
determined by Landlord and shall be the percentage obtained by dividing the
rentable square footage of the Premises by the total rentable square footage of
the Building. Tenant's Project Proportional Share shall be calculated from time
to time as determined by Landlord and shall be the percentage obtained by
dividing the rentable square footage of the Premises by the total rentable
square footage of the Project as then constructed. Tenant's Site Amenities
Proportional Share shall be an amount rather than a fraction, shall be
calculated from time to time as determined by Landlord, and shall be calculated
pursuant to the following:
If A = Total Common Area Maintenance Charges allocable to
the Site Amenities in excess of the Operating Costs
Allowance allocable to the Site Amenities; and
B = Total Rentable square footage of the Project leased and
occupied by tenants with rights to use the Site
Amenities; and
C = Total Rentable square footage of the Premises within
the Building;
D = Total Rentable square footage of the Project planned;
and
X = Tenant's share of Common Area Maintenance Charges for
the Site Amenities;
B - C
- -----
D - C
Tenant's Building Proportional Share, Tenant's Project Proportional Share and
Tenant's Site Amenities Proportional Share shall initially be calculated using
the numbers set forth in Item 6 of the Basic Terms.
1.34 USABLE. "Usable" square feet shall mean the square footage
determined according to the definitions set forth on Exhibit "D."
1.35 WORK LETTER. "Work Letter" means the Work Letter which is
attached to this Lease as Exhibit"C."
ARTICLE 2 - PREMISES
2.1 LEASE. Upon and subject to the terms, covenants and conditions
hereinafter set forth, Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord the Premises. By execution of this Lease, the parties acknowledge
that the Option to Lease entered into as of January 29, 1997, by and between
Landlord and Tenant ("Option to Lease"), has been exercised by Tenant and the
Option to Lease shall be deemed terminated and superseded in its entirety by the
terms and provisions of this Lease. Notwithstanding the foregoing, concurrently
with the execution of this Lease, Tenant shall pay to Landlord all amounts of
the Option Consideration (as defined in the Option to Lease) which have not been
paid as of such date of execution. Landlord's concurrent receipt of such amounts
is a condition precedent to the effectiveness of this Lease, which condition is
to Landlord's benefit only.
2.1.1 PREMISES. The Premises will be the Building. The Building will
be, in turn, located in and constitute a portion of the Project. Landlord
reserves the right to change the shape, size, location, number and extent of the
improvements shown on the Site Plan and eliminate or add any improvements to any
portion of the Project as provided in Article 5, provided there is no change to
the Site Amenities (except in accordance with this Lease) and no material
adverse impact on access to the Premises. Upon Substantial Completion (as
defined in the Work Letter) of the Building, the Rentable area of the Premises
shall be determined in accordance with the Work Letter and Exhibit "D." In the
event that Landlord determines that the Rentable area of any of the Premises,
Building or the Project differ from the amount set forth in the Basic Terms, all
amounts, percentages and figures appearing or referred to in this Lease,
including, without limitation, Tenant's Proportional Share, based upon such
amount shall be revised accordingly and such revised figures shall be deemed to
be the Rentable area of the Premises, Building or Project, respectively. In such
case, the Base Monthly Rent and any other payments due hereunder which are based
on a Rentable square footage basis shall be increased or decreased accordingly.
4/15/97 Landlord Initials: _______
4 Tenant Initials: _______
<PAGE> 14
2.1.2 SITE PLAN. The purpose of the Site Plan is to show the
approximate location of the Premises. Notwithstanding any other provision
contained in this Lease, Landlord reserves the right at any time to vary and
adjust the size of the various buildings (other than the Building), the location
of any other tenant automobile parking areas, the Site Amenities (except in
accordance with this Lease), and other common areas as shown on said Site Plan,
provided, however, that said parking area (including landscaped common areas)
shall at all times provide for not less than the minimum parking required by the
local jurisdiction in which the Project is located.
2.2 LEASE OF THE PREMISES. Tenant acknowledges that this Lease is
subordinate and subject to the Declarations, all liens, encumbrances, deeds of
trust, reservations, restrictions and other matters affecting the Project or the
Premises and any law, regulation, rule, order or ordinance of any governmental
entity applicable to the Project or the Premises or the use or occupancy
thereof, in effect on the execution of this Lease or thereafter promulgated.
Landlord grants Tenant during the Lease Term the concurrent right to use the
Common Area and the Site Amenities on a nonexclusive basis and subject to the
provisions of this Lease; provided, however, that so long as Tenant is the only
occupant or tenant of the Building, Tenant shall have the exclusive right to use
the Common Area within the Building on an exclusive basis. Easements for light
and air are not included in the leasing of these Premises to Tenant. Landlord
further reserves the exclusive right of access to the roof, except for any
rights of access specifically granted to Tenant under the terms of this Lease or
any rights of access approved by Landlord, in its sole discretion, in writing.
2.3 SUITABILITY OF PREMISES. Tenant acknowledges that, except as
expressly set forth herein, Landlord has made no representation or warranty
regarding the condition of the Premises or the Project or the suitability of
such Premises or the Project for the operation or conduct of Tenant's business
thereon or for any other purpose. The taking of possession of the Premises by
Tenant shall conclusively establish that the Premises and the Project were
acceptable to Tenant and in satisfactory condition to conduct business at such
time.
2.4 LANDLORD'S WORK IN THE PREMISES AND PROJECT. The Premises shall be
completed as set forth in the Work Letter. Except as specifically set forth in
this Lease and the Work Letter, Landlord shall not provide or pay for any
interior improvement work or services related to the improvement of the Premises
or the construction of the Project. Tenant specifically acknowledges that
Landlord is under no obligation to construct all or any portion of the Project
except as set forth in this Lease, and Tenant will have no claim against
Landlord should Landlord decide for any reason or no reason to not build any
improvements or the Project except as set forth herein.
ARTICLE 3 - LEASE TERM
3.1 LEASE TERM. The term of this Lease ("Lease Term") shall be for the
period of time specified in the Basic Terms, but shall be extended to include
any fraction of a calendar month between the commencement of the Lease Term and
the first day of the first full calendar month thereafter. Notwithstanding the
Lease Term, this Lease is a binding contract between Landlord and Tenant from
and after the date of full execution and delivery hereof by both parties,
enforceable in accordance with its terms.
3.2 COMMENCEMENT DATE. The commencement date of the Lease Term
("Commencement Date") shall be the earlier of the date of the Substantial
Completion of the Premises or the date Tenant occupies the Premises in
accordance with the Work Letter.
3.3 DELAY IN COMMENCEMENT. Landlord will use its diligent, good faith
efforts to Substantially Complete the Premises by the Target Commencement Date
(as such date may be extended due to a Tenant Delay [as defined in the Work
Letter]) or as set forth anywhere in this Lease or the Work Letter. If Landlord
cannot Substantially Complete the Premises by the Target Commencement Date, this
Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for
any loss or damage resulting therefrom except as specifically set forth in
Section 3.3.3 below.
3.3.1 ACCEPTANCE LETTER. Upon Substantial Completion of the
Premises, Tenant shall, within five (5) days of request therefor by Landlord,
execute an acceptance letter ("Acceptance Letter") in substantially the form
4/15/97 Landlord Initials: _______
5 Tenant Initials: _______
<PAGE> 15
of the Acceptance Letter attached hereto as Exhibit "E"; provided, however, that
the failure of Tenant to execute such Acceptance Letter shall not affect any
obligation of Tenant hereunder or Landlord's determination of the Commencement
Date. If the Tenant fails to execute and deliver such Acceptance Letter in the
form proposed by Landlord, then Landlord and any prospective purchaser or
encumbrancer may conclusively presume and rely upon the following facts: (i)
that the Premises were in an acceptable condition and were delivered in
compliance with all requirements of the Work Letter and (ii) the Commencement
Date is the date specified in the Acceptance Letter proposed by Landlord.
3.3.2 ACCELERATION ESTIMATE. If the Commencement of
Construction occurs after August 1, 1997, Landlord shall deliver the
Acceleration Estimate to Tenant within thirty (30) days after the Commencement
of Construction. Tenant shall have ten (10) days to either approve or disapprove
the Acceleration Estimate by written notice to Landlord. Failure of Tenant to
timely deliver such written notice to Landlord shall be deemed Tenant's
disapproval of the Acceleration Estimate.
3.3.3 LIQUIDATED DAMAGES. IF LANDLORD DOES NOT SUBSTANTIALLY
COMPLETE THE PREMISES BY THE TARGET COMMENCEMENT DATE, THEN TENANT, AS ITS SOLE
AND EXCLUSIVE REMEDY, WILL BE ENTITLED TO RECEIVE LIQUIDATED DAMAGES IN AN
AMOUNT EQUAL TO THE AMOUNT SET FORTH IN ITEM 8 OF THE BASIC TERMS FOR EACH DAY
OF DELAY BETWEEN THE TARGET COMMENCEMENT DATE AND THE DATE LANDLORD
SUBSTANTIALLY COMPLETES THE PREMISES. IN THE EVENT OF SUCH A DELAY, TENANT WILL
BE DAMAGED AND WILL BE ENTITLED TO COMPENSATION FOR THOSE DAMAGES. SUCH DAMAGES
WILL, HOWEVER, BE EXTREMELY DIFFICULT AND IMPRACTICAL TO ASCERTAIN BECAUSE THE
PROOF OF THE AMOUNT OF SUCH DAMAGES WILL BE BASED ON OPINIONS OF SUCH DAMAGES,
WHICH CAN VARY IN SIGNIFICANT AMOUNTS, AND IT IS IMPOSSIBLE TO PREDICT AS OF THE
DATE ON WHICH THIS LEASE IS MADE THE AMOUNT OF SUCH DAMAGES. LANDLORD DESIRES TO
LIMIT THE AMOUNT OF DAMAGES FOR WHICH LANDLORD MIGHT BE LIABLE SHOULD LANDLORD
FAIL TO SUBSTANTIALLY COMPLETE THE PREMISES AS AFORESAID. LANDLORD AND TENANT
WISH TO AVOID THE COST AND LENGTHY DELAYS WHICH WOULD RESULT IF TENANT FILED A
LAWSUIT TO COLLECT ITS DAMAGES FOR SUCH FAILURE TO TIMELY DELIVER. THEREFORE, IF
LANDLORD FAILS TO TIMELY SUBSTANTIALLY COMPLETE THE PREMISES AS DESCRIBED ABOVE,
THE FOREGOING AMOUNT OF LIQUIDATED DAMAGES SHALL BE DEEMED TO CONSTITUTE A
REASONABLE ESTIMATE OF TENANT'S DAMAGES UNDER THE PROVISIONS OF SECTION 1671 OF
THE CALIFORNIA CIVIL CODE, AND TENANT'S SOLE AND EXCLUSIVE REMEDY IN THE EVENT
OF A DELAY IN THE SUBSTANTIAL COMPLETION OF THE PREMISES. IN CONSIDERATION OF
THE PAYMENT OF SUCH LIQUIDATED DAMAGES, TENANT WILL BE DEEMED TO HAVE WAIVED ALL
OTHER CLAIMS FOR DAMAGES OR RELIEF AT LAW OR IN EQUITY INCLUDING ANY RIGHTS
TENANT MAY HAVE PURSUANT TO SECTION 1680 OR SECTION 3389 OF THE CALIFORNIA CIVIL
CODE. LANDLORD SHALL PAY SUCH LIQUIDATED DAMAGES TO TENANT WITHIN TEN (10) DAYS
AFTER LANDLORD SUBSTANTIALLY COMPLETES THE PREMISES IN ACCORDANCE WITH THE WORK
LETTER.
-------- ------
LANDLORD TENANT
3.3.4 EARLY COMPLETION. If (i) Commencement of Construction
occurs after August 1, 1997, and (ii) Tenant approves the Acceleration Estimate
pursuant to Section 3.3.2 above, and (iii) Landlord Substantially Completes the
Premises prior to the Target Commencement Date, Tenant has agreed to pay to
Landlord an incentive fee in an amount equal to the amount set forth in Item 8
of the Basic Terms ("Incentive Fee"). Tenant shall pay the Incentive Fee to
Landlord within ten (10) days after the Substantial Completion of the Premises.
3.4 EARLY OCCUPANCY. If Tenant enters or occupies the Premises
prior to the Commencement Date
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6 Tenant Initials: _______
<PAGE> 16
solely for the purpose of preparing the Premises for the conduct of business
thereon and not for the purposes of conducting business thereon, Tenant's entry
and/or occupancy of the Premises shall be subject to all of the provisions of
this Lease and the Work Letter with the exception of the payment of Base Monthly
Rent and Additional Rent, which obligations shall commence as of the
Commencement Date. If requested by Landlord, Tenant shall execute a hold
harmless agreement in a form prepared by Landlord. Early occupancy of the
Premises shall not advance the expiration date of this Lease. Landlord shall
have the right to charge Tenant for any utility or other costs incurred by
Tenant during such early occupancy period.
3.5 OPTION(S) TO EXTEND TERM. Tenant shall have the options to
extend ("Extension Option") the Term as set forth in the Basic Terms (as
exercised, each is an "Extension Term"), on the following terms and conditions:
3.5.1 EXTENSION NOTICE. Tenant's option to extend the Term
shall be subject to satisfaction of each of the following conditions precedent,
which are solely for the benefit of Landlord:
3.5.1.1 Each Extension Option shall be exercised by
written notice ("Extension Notice") delivered by Tenant to Landlord not sooner
than eighteen (18) months and not later than fifteen (15) months prior to the
then scheduled end of the Term ("Extension Deadline"); and
3.5.1.2 The Lease shall be in effect and Tenant
shall not be in default under any of Sections 15.2.1, 15.2.2, 15.2.3, 15.2.4, or
15.2.6, or any material default under Section 15.2.5 (beyond any applicable
period of cure) both on the day of the Extension Notice and on the last day of
the Term.
3.5.2 BASE MONTHLY RENT DURING EXTENSION. In the event the
Term is extended following exercise by Tenant of an Extension Option, then all
of the terms, covenants and conditions of the Lease shall remain in full force
and effect, except that Base Monthly Rent to be applicable during the Extension
Term shall be adjusted to the Base Monthly Rent During Extensions as described
in Item 9 of the Basic Terms and as further described below.
3.5.2.1 As part of the Extension Notice, Tenant
shall notify Landlord of Tenant's proposed Base Monthly Rent During Extension
for the first Lease Year of such Extension Term, which proposal shall be based
on Tenant's good faith estimate of the Fair Market Rent. Landlord shall have
fifteen (15) days after receipt of Tenant's Extension Notice to either accept
Tenant's proposed Base Monthly Rent During Extension for the first Lease Year of
such Extension Term or deliver written notice to Tenant of Landlord's proposed
Base Monthly Rent During Extension for the first Lease Year of such Extension
Term. Landlord's failure to respond within such 15-day period shall be deemed
acceptance of Tenant's proposal.
3.5.2.2 If Landlord does not initially accept
Tenant's proposal and timely delivers to Tenant written notice of Landlord's
proposed Base Monthly Rent During Extension for the first Lease Year of such
Extension Term, Tenant shall have ten (10) days after receipt thereof to either
accept or reject Landlord's proposal. Tenant's failure to respond within such
10-day period shall be deemed Tenant's acceptance of Landlord's proposal.
3.5.2.3 If Tenant timely rejects Landlord's
proposal, the parties shall meet within fifteen (15) days to negotiate and
attempt to agree in good faith on an appropriate Base Monthly Rent During
Extension. If the parties do not agree on a Base Monthly Rent During Extension
within ten (10) days of such meeting, Tenant shall have the right to either
rescind Tenant's Extension Notice (without any further right or obligation to
extend the Term of this Lease) or elect to send the matter of the Base Monthly
Rent During Extension for the first Lease Year of such Extension Term to
arbitration. If Tenant fails to deliver written notice to Landlord of Tenant's
election within such ten (10) day period, Tenant shall be deemed to have elected
to send the matter of the Base Monthly Rent During Extension for the first Lease
Year of such Extension Term to arbitration. Such arbitration shall be conducted
in San Diego, California, within thirty (30) days after Tenant makes such
election (or is deemed to have made such election) pursuant to the then
applicable Commercial Arbitration Rules of the American Arbitration Association;
provided, however, that the decision of any such arbitration shall be expressly
limited to selecting either Landlord's proposal or Tenant's proposal to be
submitted to the arbitration at the commencement of such arbitration of the Base
Monthly Rent During Extension for the first Lease Year of such Extension Term as
most nearly satisfying the requirement of
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this Lease. Tenant's election to send the matter to arbitration shall be
Tenant's binding commitment to occupy the Premises during said Extension Term
and pay Base Monthly Rent during Extension as determined by the arbitration. The
cost of the arbitration, which costs shall include fees charged by the
arbitrators, attorneys' fees and expert or consultant fees, shall be paid by the
party whose proposal was not selected.
ARTICLE 4 - RENTAL AND OTHER PAYMENTS
4.1 BASE MONTHLY RENT. From and after the Commencement Date, Tenant
shall pay to Landlord, in advance, on the first day of each and every calendar
month during the Lease Term, the Base Monthly Rent. The Base Monthly Rent for
any fraction of a month at the beginning of the Lease Term will be prorated.
Payment of the Base Monthly Rent, Additional Rent and all other charges deemed
to be Rent under this Lease shall be without prior notice, deduction, offset or
demand, shall be in lawful money of the United States of America and shall be
made at the address set forth for Landlord in the Basic Terms or at such other
place as Landlord may direct. Base Monthly Rent payable for any period of less
than one (1) month shall be prorated based upon a thirty (30) day month. Tenant
shall pay to Landlord as prepaid Base Monthly Rent, immediately upon execution
of this Lease (in addition to the security deposit required), the amount
specified in the Basic Terms, which sum shall be applied to the first calendar
month of the Lease Term for which payment of Base Monthly Rent is due; provided,
however, that the Option Consideration shall be credited against Tenant's
obligation to deliver such prepaid Base Monthly Rent.
4.2 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to
Landlord which is not paid when due shall bear interest from the date which is
five (5) days after the due date at the Lease Interest Rate but if such Lease
Interest Rate exceeds the maximum interest rate permitted by law, such Lease
Interest Rate shall be reduced to the highest rate allowed by law under the
circumstances. Interest shall not be payable on late charges to be paid by
Tenant under this Lease. The payment of interest on such amounts shall not
excuse or cure any default by Tenant under this Lease and the parties agree that
such amounts are a reasonable estimate of the costs Landlord will incur as a
result of its loss of the use of its money due to such late payment by Tenant.
4.3 LATE CHARGES. Tenant's failure to pay any Rent promptly may cause
Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord under any mortgage or trust deed encumbering the Premises.
Therefore, if Landlord does not receive any Rent payment within five (5) days
after it becomes due, Tenant shall pay Landlord a late charge in the amount
specified in the Basic Terms. The parties agree that such late charge represents
a fair and reasonable estimate of the costs Landlord will incur by reason of
such late payment. Acceptance of such late charge by Landlord shall, in no
event, constitute a waiver of Tenant's default with respect to such overdue
amount. The late charge shall be deemed Rent and the rights to require it shall
be in addition to all of Landlord's rights and remedies hereunder or at law and
shall not be construed as liquidated damages or as limiting Landlord's remedies
in any manner.
4.4 SECURITY DEPOSIT; ADDITIONAL SECURITY AND LOANS
4.4.1 DEPOSIT OF FUNDS. Upon the execution of this Lease,
Tenant shall deposit with Landlord a cash security deposit ("Security Deposit")
in the amount set forth in the Basic Terms. Landlord may, but shall not be
obligated to, apply all or part of the Security Deposit to any unpaid Rent or
other charges due from Tenant or to cure any other defaults of Tenant. If
Landlord uses any part of the Security Deposit, Tenant shall restore the
Security Deposit to its full amount within ten (10) days after Landlord's
written request. Tenant's failure to do so shall be a default under this Lease.
Interest shall accrue on the Security Deposit in Tenant's favor at a rate equal
to the then average rate given by San Diego, California banks for three-month
certificates of deposit, and shall become part of the Security Deposit. Landlord
shall not be required to keep the Security Deposit separate from its other
accounts and no trust relationship is created with respect to the Security
Deposit.
4.4.2 RETURN OF SECURITY DEPOSIT. Provided that Tenant has not
been in default of its obligations under this Lease more than three (3) times,
Landlord shall return the Security Deposit to Tenant on the date which is the
later of three (3) Lease Years after the Commencement Date, or the date when
Tenant is not then in default under
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this Lease. If Tenant has had more than three (3) defaults under this Lease,
whether or not such defaults have been cured, then Landlord shall retain the
Security Deposit for the Term.
4.4.3 ADDITIONAL SECURITY AND LOANS. Tenant shall deliver to
Landlord or, at Landlord's request, to Landlord's construction and/or permanent
lender, additional security in an amount up to the first (1st) Lease Year's Base
Annual Rent ("Additional Security"). The Additional Security shall be held and
used by Landlord in the same manner and for the same purposes as the Security
Deposit. The Additional Security may be cash or a letter of credit (at Tenant's
election) or other financial instrument reasonably acceptable to Landlord. If
the Additional Security is a letter of credit, it shall be issued in favor of
Landlord.
4.4.3.1 Landlord will determine the amount of such
Additional Security as soon as reasonably possible. Any expense incurred by
Tenant in the obtaining and maintaining of such Additional Security shall be the
sole cost and expense of Tenant; provided, however, that Tenant shall not be
required to incur any such expense in excess of Seventy-Five Thousand Dollars
($75,000) during the Term of the Lease. If such costs or expenses exceed
Seventy-Five Thousand Dollars ($75,000), Tenant shall still be required to
deliver the Additional Security as long as Landlord pays any excess costs or
expenses (which shall not exceed reasonable and competitive costs and expense
for such services).
4.4.3.2 Tenant may, but shall not be obligated to,
submit to Landlord concepts, ideas or opportunities for Landlord's permanent
financing of the Building. Landlord may, but shall not be obligated to, utilize
any or all of such concepts, ideas or opportunities. In the event that Landlord
does utilize a concept, idea or opportunity proposed or arranged by Tenant for
Landlord's permanent financing of the Building and such event results in lower
costs to Landlord of such financing than what Landlord had otherwise arranged,
Landlord will reduce the Base Monthly Rent by amortizing the amount of such
lower costs over the remaining initial Lease Term.
4.4.4 TRANSFER OF SECURITY DEPOSIT AND ADDITIONAL SECURITY.
Landlord may deliver the funds deposited hereunder by Tenant to a purchaser of
Landlord's interest in the Premises, in the event that such interest be sold;
and thereupon Landlord shall be discharged from any further liability with
respect to such Security Deposit and Additional Security.
ARTICLE 5 - OTHER CHARGES PAYABLE BY TENANT
5.1 RENT. All Rent under this Lease shall, unless this Lease expressly
provides otherwise, be paid with the next installment of Base Monthly Rent
falling due.
5.2 COMMON AREA MAINTENANCE CHARGES. Landlord shall operate, maintain,
manage and repair the Building, Project and Common Area in a neat, orderly
condition, reasonably equivalent to that found in projects in San Diego County
similar to the Building.
5.2.1 TENANT TO BEAR PROPORTIONAL SHARE OF COMMON AREA
MAINTENANCE CHARGES. Tenant agrees to pay to Landlord, as part of Excess
Operating Costs Rent, Tenant's Proportional Share of the Common Area Maintenance
Charges and certain charges for the Site Amenities as set forth below which are
allocable to the Lease Term.
5.2.2 LANDLORD'S COMMON AREA MAINTENANCE CHARGES. For the
purpose of this Lease, the term "Common Area Maintenance Charges" means the
total cost and expense incurred by Landlord in operating, maintaining, managing
and repairing the Building, Project and the Common Area, including, without
limitation, costs and expenses for the following: servicing, maintenance,
replacement and repair of heating/ventilation and air-conditioning systems
(amortized over an appropriate industry standard useful life); gardening and
landscaping; maintenance and repair of roof; pest extermination services;
janitorial services for the Premises; utilities, water and sewer charges (other
than with respect to utilities separately metered and paid directly by Tenant);
maintenance of parking areas; fees, charges and other costs (including, without
limitation, consulting, accounting and legal fees, but excluding legal and
accounting fees directly attributable to other tenants) reasonably necessary to
manage the Building
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and the Project (including a fee to Landlord for management of the Project;
costs of compliance with any and all governmental laws, ordinances, and
regulations applicable to the Building or Project which were not imposed as of
the Commencement Date; installation, maintenance and replacement of signs
identifying the Building and Project (other than Tenant's signs whose
maintenance is paid for by Tenant); charges under any Declarations; Property
Taxes for the Building and Project; Insurance Charges for the Building and
Project; all personal property taxes levied on or attributable to personal
property used in connection with the Common Area; rental or lease payments paid
by Landlord for rented or leased personal property used in the operation or
maintenance of the Building Common Area; fees for required licenses and permits
(except as set forth in Work Letter); repairing, resurfacing, repaving,
maintaining, painting, lighting, cleaning, refuse removal, security (if any),
and similar items; reasonable and customary operating reserves; and the
amortized costs (as reasonably determined by Landlord over an appropriate
industry standard useful life) to repair, maintain or install capital
improvements. Notwithstanding the foregoing, Tenant's Proportional Share of
Common Area Maintenance Charges due to Landlord's management fee shall not
exceed four percent (4%) of the first (1st) Lease Year's Base Annual Rent
throughout the Lease Term. Project Operating Expenses would include the
operating expenses for the Site Amenities; provided, however, that unless and
until the Project includes buildings and occupants with rights to use the Site
Amenities in addition to the Building and Tenant (at which time Tenant's
obligation shall be determined by Tenant's Site Amenities Proportional Share),
Tenant shall be liable to Landlord for all of the costs and expenses of
operating, maintaining, managing and repairing the Site Amenities, except
twenty-seven and one-half percent (27.5%) of such costs and expenses shall be
deemed included within the Operating Costs Allowance. Landlord may cause any or
all of such services to be provided by an independent contractor.
5.2.3 EXCLUSIONS FROM COMMON AREA MAINTENANCE CHARGES.
Notwithstanding anything in this Lease to the contrary, the term "Common Area
Maintenance Charges" (and hence Operating Costs) shall in no event include any
of the following: (i)any ground lease rental; (ii)costs incurred by Landlord for
the repair of damage to the Building or the Common Area, to the extent that
Landlord is reimbursed by insurance proceeds; (iii)advertising and promotional
expenditures for the Building or the Common Area, and marketing costs,
including, without limitation, leasing commissions, attorneys' fees in
connection with the negotiation and preparation of letters of intent, leases,
subleases and/or assignments with present or prospective tenants or other
occupants in the Building; (iv)electric power costs for which any tenant
directly contracts at the local public service company or for which any tenant
is separately metered or submetered and pays Landlord directly; or (v)the cost
of any utility services obtained by Tenant.
5.2.4 REPAIRS DUE TO MISUSE. Notwithstanding any provision of
this Lease to the contrary, Tenant shall be responsible for all of Landlord's
costs and expenses due to repairs to the Premises, Site Amenities or Project
which are made necessary by any misuse or neglect by (a) Tenant or any of its
agents, employees, contractors, or subtenants or (b) any visitors, patrons,
guests or invitees of Tenant while in or upon the Premises.
5.3 PAYMENT OF EXCESS OPERATING COSTS RENT. The parties acknowledge
that Tenant is leasing the Premises on a modified gross (net of electricity)
basis. Tenant shall pay Excess Operating Costs Rent, in advance, in monthly
installments on the first day of each month during the Lease Term (prorated for
any fractional month). Landlord shall provide to Tenant a written notice of
Landlord's budget showing a reasonable estimate of the Excess Operating Costs
Rent, approximately thirty (30) days prior to the commencement of each calendar
year or portion thereof after the expiration of the first (1st) Lease Year
(which amount may be re-estimated from time to time by Landlord during the
calendar year) and an estimate of Tenant's share thereof for the ensuing year or
portion thereof. Tenant shall pay to Landlord, monthly in advance, one-twelfth
(1/12th) of the estimate of Excess Operating Costs Rent (or, if less than a full
calendar year has been estimated, then the monthly pro rata share).
5.3.1 PREVIOUS CHARGES. If, for any reason, Landlord is unable
to provide to Tenant the estimate of the Excess Operating Costs Rent at least
thirty (30) days prior to the commencement of any calendar year during the Lease
Term, then Tenant shall continue to pay monthly the same amount of Excess
Operating Costs Rent as was applicable for the most recent previous month
("Previous Charges") until thirty (30) days after receipt of such estimate at
which time Tenant shall commence paying as of the first day of the first
calendar month after delivery of such new estimate, the new estimated Excess
Operating Costs Rent. Subject to the foregoing, Tenant shall also pay, together
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with its next installment, the difference between the Previous Charges and the
amount of the new estimated Excess Operating Costs Rent for such preceding
months. Any delay by Landlord in delivering the new estimated Excess Operating
Costs Rent shall not be deemed a waiver of any such Excess Operating Costs Rent.
5.3.2 YEAR-END ADJUSTMENTS. Within one hundred twenty (120)
days after the end of each calendar year during the Lease Term, Landlord shall
provide Tenant with a written statement showing in reasonable detail the actual
Excess Operating Costs Rent for such year. Landlord and Tenant shall, within
thirty (30) days thereafter, make any payment or credit necessary to bring
Tenant's previously estimated Excess Operating Costs Rent into conformance with
the actual Excess Operating Costs Rent as determined by Landlord. Any amount due
Tenant as a credit shall be credited against installments next coming due from
Tenant under the Lease and any amounts owed to Landlord shall be paid with the
next installment of Base Monthly Rent; provided, however, that if the Lease Term
has terminated and no other amounts are then owing to Landlord from Tenant
pursuant to this Lease, any such amount due Tenant or Landlord shall be remitted
to the party owed such amount within thirty (30) days of the date Landlord
calculates and notifies Tenant of the amount of such adjustment.
5.3.3 AUDIT. Landlord shall retain its records regarding
Common Area Maintenance Charges for a period of at least one (1) year following
the final billing for the calendar year in question. At any time during such one
(1) year period, upon reasonable advance written notice to Landlord, but not
more frequently than once in any calendar year, Tenant shall have the right to
audit all of Landlord's or Landlord's agent's records pertaining to Common Area
Maintenance Charges by a representative of Tenant's choice. If such audit
reveals that Landlord's annual statement was incorrect, any over-billing
discovered in the course of such audit shall be refunded to Tenant within thirty
(30) days of Landlord's receipt of a copy of the audit, unless Landlord disputes
the audit, and any underbilling shall be paid by Tenant to Landlord within
thirty (30) days of the audit. In the event that any overbilling exceeds the
amount actually due from Tenant for the year by three percent (3%) or more, then
Landlord shall reimburse Tenant for the reasonable costs of the audit. If
Landlord disputes the results of Tenant's audit, Landlord and Tenant shall
attempt to resolve such dispute in good faith. If Landlord and Tenant are unable
to do so within thirty (30) days, then Landlord shall commission a second audit
by an independent accounting firm selected by Landlord. The results of such
second audit shall be deemed conclusive as to any such dispute. Landlord shall
pay the cost of such second audit and Tenant's audit unless such second audit
reveals amounts actually due from Tenant for the year are within the three
percent (3%) noted above, in which event Tenant shall pay for the second audit
as well as Tenant's audit. In any event, Tenant shall continue to pay all Rent
and Excess Operating Costs Rent as otherwise provided by this Lease until the
dispute is resolved or the results of the second audit are available.
5.4 PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all
taxes charged against trade fixtures, furnishings, equipment or any other
personal property belonging to Tenant. Tenant shall use its best efforts to have
such personal property taxed separately from the Premises. If any of Tenant's
personal property is taxed with the Premises or Project, Tenant shall pay
Landlord the taxes for the personal property within fifteen (15) days after
Tenant receives a written statement from Landlord for such personal property
taxes.
ARTICLE 6 - USE OF PROPERTY
6.1 PERMITTED USES. Tenant shall use the Premises only for the
Permitted Uses set forth in the Basic Terms and for no other use or purpose
without the prior written consent of Landlord, which consent may be withheld in
the sole, absolute and/or arbitrary discretion of Landlord.
6.2 MANNER OF USE.
6.2.1 INTERFERENCE WITH USE/NUISANCE. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
obstruct or interfere with or infringe on the rights of other occupants or
customers of the Project, or injure or annoy them, or use or allow the Premises
to be used for any improper, immoral, or objectionable purposes; nor shall
Tenant cause, maintain or permit any nuisance in, on or about the Premises or
commit or suffer to be committed any waste in, on or about the Premises. Tenant
shall keep the interior of the Premises (except for Landlord's obligation to
maintain the Common Areas), and every part thereof, in a clean
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condition, free from any noises, vibrations, music volumes, lighting (including,
without limitation, strobe lighting), speakers, videos, odors or nuisances
deemed objectionable by Landlord, and shall comply with all health and police
regulations in all respects. Tenant shall not display or sell merchandise, or
place carts, portable signs, devices or any other objects, outside the defined
exterior walls or roof and permanent doorways of the Premises or in corridors,
without the prior written consent of Landlord.
6.2.2 VIOLATION OF LAW/INSURANCE PROVISIONS. Tenant shall not
use or occupy the Premises in violation of any law, ordinance, regulation or
requirement or other directive of any federal, state or local governmental or
quasi-governmental authority having or exercising jurisdiction over the Project.
Tenant shall, at its sole cost and expense, fully comply with all laws,
ordinances, regulations, requirements and other directives of any federal,
local, governmental or quasi-governmental authority having jurisdiction over the
Premises and the Project, including, without limitation, operational and other
requirements imposed upon either owners or operators of any public accommodation
under the Americans with Disabilities Act 42 U.S.C. 12101 et. seq., and shall
immediately discontinue any use of the Premises which is declared by any
governmental authority having or exercising jurisdiction thereover to be a
violation of any law, ordinance, regulation or directive. If requested by
Landlord, Tenant shall provide evidence satisfactory to Landlord of Tenant's
compliance. Tenant shall not do or permit to be done anything which will
(i)increase the premium of any insurance policy covering the Premises or the
Project and/or the property located therein; (ii)cause a cancellation of or be
in conflict with any such insurance policies; or (iii)result in a refusal by
insurance companies in good standing to issue or continue any such insurance in
amounts satisfactory to Landlord. Tenant shall, at Tenant's expense, comply with
all rules, orders, regulations and requirements of insurers and of the American
Insurance Association or any other organization performing a similar function.
Tenant shall promptly, upon demand, reimburse Landlord for any additional
premium charges for such policy or policies caused by reason of Tenant's failure
to comply with the provisions of this Section. Additionally, after Substantial
Completion of the Premises pursuant to the Work Letter, Tenant agrees at its
sole cost to install any improvements, changes or alterations in the Premises
authorized in writing by Landlord and required by any governmental authority as
a result of Tenant's proposed use of the Premises or its manner of operation
thereunder, and Tenant's failure to perform same shall constitute a default by
Tenant hereunder.
6.2.3 PERMITS. Except as set forth in the Work Letter, Tenant
shall obtain and pay for all permits required for Tenant's occupancy of the
Premises and shall promptly take all substantial and non-substantial actions
necessary to comply with all applicable statutes, ordinances, rules,
regulations, orders and requirements regulating the use by Tenant of the
Premises, including the Occupational Health and Safety Act.
6.3 RULES AND REGULATIONS. Tenant shall comply with the Rules and
Regulations and any amendments, modifications and/or additions thereto as may
hereafter be adopted and published by Landlord. Landlord shall not be liable to
Tenant for any violation of such Rules and Regulations or the breach in any
provision in any lease by any other tenant or other party. In the event of any
inconsistency between the Rules and Regulations and this Lease, this Lease shall
prevail.
6.4 LANDLORD'S ACCESS. Landlord and its agents, independent contractors
and designated representatives, may enter the Premises at all reasonable times
to post notices of non-responsibility, to make repairs and/or to show the
Premises to holders of any encumbrances, potential buyers, mortgagees, investors
or tenants or other parties, or for any other purpose Landlord deems reasonably
necessary. Landlord shall give Tenant prior notice of such entry, except in the
case of an emergency, in which case no prior notice need be given. Any entry to
the Premises by Landlord in the event of an emergency shall not, under any
circumstances, be construed or deemed to be a forcible or unlawful entry onto
the Premises or to be an eviction of Tenant from the Premises or any part
thereof. Landlord may place customary "For Lease" signs on the Premises during
the last one hundred eighty (180) days of the Lease Term.
6.5 QUIET POSSESSION. If Tenant pays the Rent and complies with all
other terms of this Lease, Landlord assures Tenant that it may occupy and enjoy
the Premises for the full Lease Term, subject to the provisions of this Lease
and to any mortgages or deeds of trust encumbering the Project.
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ARTICLE 7 - HAZARDOUS MATERIALS
7.1 PROHIBITION. Tenant shall not cause or permit any Hazardous
Materials to be brought upon, kept, or used in connection with the Premises or
Project by Tenant, its agents, employees, contractors or invitees, in a manner
or for a purpose prohibited by or which could result in liability under any
applicable law, regulation, rule or ordinance, including without limitation, the
Hazardous Materials Laws. Tenant shall, at its own expense, at all times and in
all respects comply with all Hazardous Materials Laws, including, without
limitation, any Hazardous Materials Laws relating to industrial hygiene,
environmental protection or the use, analysis, generation, manufacture, storage,
disposal or transportation of any Hazardous Materials.
7.1.1 USE. Tenant shall, at its own expense, procure, maintain
in effect and comply with all conditions of any and all permits, licenses and
other governmental and regulatory approvals relating to the presence of
Hazardous Materials within, on, under or about the Premises or required for
Tenant's use of any Hazardous Materials in or about the Premises in conformity
with all applicable Hazardous Materials Laws and prudent industry practices
regarding management of such Hazardous Materials. Upon termination or expiration
of the Lease, Tenant shall, at its own expense, cause all Hazardous Materials
placed in or about the Premises or Project by Tenant or at Tenant's direction to
be removed from the Premises and Project and transported for use, storage or
disposal in accordance and compliance with all applicable Hazardous Materials
Laws.
7.1.2 NORMAL USAGE. Landlord recognizes and agrees that Tenant
may use materials in normal quantities that are applicable to general office use
and that such use by Tenant shall not be deemed a violation of this Section, so
long as the levels are not in violation of any Hazardous Materials Laws.
Landlord acknowledges that it is not the intent of this Article 7 to prohibit
Tenant from operating its business as described in this Lease. Tenant may
operate its business according to the custom of the industry so long as the use
or presence of Hazardous Materials is strictly and properly monitored according
to all applicable governmental requirements.
7.2 DISCLOSURE AND WARNING OBLIGATIONS. Tenant shall comply with all
laws, ordinances and regulations in the State where the Premises is located
regarding the disclosure of the presence or danger of Hazardous Materials.
Tenant acknowledges and agrees that all reporting and warning obligations
required under the Hazardous Materials Laws are the sole responsibility of
Tenant, whether or not such Hazardous Materials Laws permit or require Landlord
to provide such reporting or warnings, and Tenant shall be solely responsible
for complying with Hazardous Materials Laws regarding the disclosure of, the
presence or danger of Hazardous Materials, including, without limitation, all
notices or other requirements under California Health and Safety Code Section
25915 et. seq., and 25249.5 et. seq. and California Code of Regulations Section
12000 et. seq.
7.3 NOTICE OF ACTIONS; HAZARDOUS MATERIALS LIST. Tenant shall
immediately notify Landlord in writing of (a) any enforcement, cleanup, removal
or other governmental or regulatory action instituted, completed or threatened
pursuant to any Hazardous Materials Laws; (b)any claim made or threatened by any
person against Landlord, or the Premises or the Project, relating to damage,
contribution, cost recovery, compensation, loss or injury resulting from or
claimed to result from any Hazardous Materials; (c)any reports made to any
environmental agency arising out of or in connection with any Hazardous
Materials in, on or about the Premises or with respect to any Hazardous
Materials removed from the Premises, including, any complaints, notices,
warnings, reports or asserted violations in connection therewith; and (d)any
release of a Hazardous Material that Tenant knows or has reason to believe has
or will come to be released or located within, on, under or about the Premises
or the Project. Tenant shall also provide to Landlord, as promptly as possible,
and in any event within five (5) Business Days after Tenant first receives or
sends the same, copies of all claims, reports, complaints, notices, warnings or
asserted violations relating in any way to the Premises or Tenant's use thereof.
Upon written request of Landlord (to enable Landlord to defend itself from any
claim or charge related to any Hazardous Materials Law), Tenant shall promptly
deliver to Landlord notices of hazardous waste manifests reflecting the legal
and proper disposal of all such Hazardous Materials removed or to be removed
from the Premises. All such manifests shall list the Tenant or its agent as a
responsible party and in no way shall attribute responsibility for any such
Hazardous Materials to Landlord. As a material inducement to Landlord to allow
Tenant to use Hazardous Materials in connection with its business, Tenant agrees
to deliver to Landlord prior to the Commencement Date, a list identifying each
type of Hazardous Material to be present on the
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Premises and setting forth any and all governmental approvals or permits
required in connection with the presence of Hazardous materials on the Premises
("Hazardous Materials List"). Tenant shall deliver to Landlord an updated
Hazardous Materials List at least once a year and shall also deliver an updated
list before any new Hazardous Materials are brought onto the Premises or on or
before the date Tenant obtains any additional permits or approvals.
7.4 HAZARDOUS MATERIALS INDEMNITY. Tenant shall indemnify, defend (by
counsel reasonably acceptable to Landlord), protect, and hold Landlord and each
of Landlord's Indemnitees free and harmless from and against any and all claims,
liabilities, penalties, forfeitures, losses and/or expenses, attorneys' fees,
consultant fees and expert fees, judgments, administrative rulings or orders,
fines, costs for death of or injury to any person or damage to any property
whatsoever (including, without limitation, water tables, sewer systems and
atmosphere), arising from, or caused or resulting, in whole or in part, directly
or indirectly, by the release, presence or discharge in, on, under or about the
Premises or Project of any Hazardous Materials caused by or arising from the
activities of Tenant, Tenant's agents, employees, licensees, or invitees, or
from the transportation or disposal of any Hazardous Materials to or from the
Premises or Project by Tenant, Tenant's agents, employees, licensees or invitees
or at Tenant's direction, or by Tenant's failure to comply with any Hazardous
Materials Laws, or from Tenant's failure to provide adequate disclosures or
warnings required by the Hazardous Materials Laws, or from any breach by Tenant
of the obligations in this Article7. Tenant's indemnification obligations
hereunder shall include, without limitation, and whether foreseeable or
unforeseeable, all costs of any required or necessary Hazardous Materials
management plan, investigation, repairs, cleanup or detoxification or
decontamination of the Premises or Project, and the presence and implementation
of any closure, remedial action or other required plans in connection therewith,
and shall survive the expiration of or early termination of the Lease Term.
7.5 ASSIGNMENT AND SUBLETTING. If (i) any anticipated use of the
Premises by any proposed assignee or sublessee involves the generation, storage,
use, treatment or disposal of Hazardous Materials in a manner or for a purpose
prohibited by any governmental agency or authority, (ii) the proposed assignee
or sublessee has been required by any prior landlord, lender or governmental
authority to take remedial action in connection with Hazardous Material
contaminating a property if the contamination resulted from such party's action
or use of the property in question or (iii) the proposed assignee or sublessee
is subject to an enforcement order issued by any governmental authority in
connection with the use, disposal or storage of a Hazardous Material, it shall
not be unreasonable for Landlord to withhold its consent to an assignment or
subletting to such proposed assignee or sublessee. Landlord may require a
written statement from the proposed assignee or sublessee attesting to such
matters.
7.6 ENVIRONMENTAL TESTS AND AUDITS. Tenant shall not perform or cause
to be performed any Hazardous Materials surveys, studies, reports or
inspections, relating to the Premises or Project, without obtaining Landlord's
prior written consent. At any time prior to the expiration of the Lease Term, if
Landlord has a reasonable basis to believe that Hazardous Materials are present
in, on or about the Premises in violation of any Hazardous Materials Laws,
Landlord shall have the right to enter upon the Premises in order to conduct
appropriate tests and to deliver to Tenant the results of such tests to
demonstrate that levels of any Hazardous Materials in excess of permissible
levels has occurred as a result of Tenant's use of the Premises. Such testing
shall be at Tenant's expense if Landlord has a reasonable basis for suspecting
and confirms the presence of Hazardous Materials in the soil or surface or
ground water in, on, under, or about the Premises, or the Project which has been
caused by or resulted from the activities of Tenant, its agents, employees,
contractors or invitees.
7.7 LEASE "AS IS". Subject to the express provisions of this Lease
(including the Work Letter), Tenant, in entering into this Lease, is leasing the
Premises "As Is" and is relying solely upon its own inspections, investigations
and analyses of the Premises relating to Hazardous Materials. Tenant further
acknowledges Tenant is not relying in any way upon any representations,
statements, warranties, studies, reports, or other information of Landlord or
its representatives, whether oral or written, of any nature whatsoever regarding
any Hazardous Materials.
7.8 SURVIVAL. The respective rights and obligations of Landlord and
Tenant under this Article 7 shall survive the expiration or termination of this
Lease. During any period of time employed by Tenant after the termination of
this Lease to complete the removal from the Premises or Project or remediation
of any such Hazardous Materials, Tenant shall continue to pay the full rental in
accordance with this Lease, which rental shall be prorated
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daily.
ARTICLE 8 - UTILITIES
8.1 PAYMENT AND ARRANGEMENT. Tenant shall arrange for and pay, directly
to the appropriate supplier, the cost of all electric power and telephone
supplied to the Premises. In the event the Premises are less than the entire
Building, and if any utilities to the Premises are jointly metered and such
utilities are not otherwise included as a Common Area Maintenance Charge,
Landlord shall determine, and Tenant shall pay, Tenant's share of the monthly
costs of such utilities. Tenant's share shall be determined by the ratio of the
rentable square footage of the Premises as compared to the rentable square
footage of all the leased and occupied property within the Project subject to
the common metering. Landlord shall have the right to bill Tenant for such
amounts on an estimated basis, in which case, such estimated statements shall be
delivered to Tenant and Tenant shall pay such amounts to Landlord concurrently
with its payment of Base Monthly Rent. The Tenant shall pay such charges, as
Rent, within five (5) days of notification of the amount by the Landlord.
Landlord reserves the right to require Tenant to install and maintain, at
Tenant's sole expense, separate meters for any public utility servicing the
Premises for which a separate meter is not presently installed.
8.2 INTERRUPTION OF SERVICES AND UTILITIES. Landlord shall not be
liable for, and Tenant shall not be entitled to any reduction of, the Base
Monthly Rent, Additional Rent or any other Rent payable hereunder by reason of
Landlord's failure to make available any of the services or utilities described
in this Lease, when such failure or interruption is caused by acts of God,
accident, breakage, repairs, strikes, lockouts or other labor disturbances or
disputes, necessary repairs, installations, construction and expansion,
non-payment of utility charges due from Tenant, or by reason of governmental
regulation, statute, ordinance, restriction or decree or any other similar
cause. Notwithstanding the foregoing, Landlord shall be responsible for the
consequences of Landlord's own negligence or intentional misconduct.
Furthermore, Landlord shall not be liable under any circumstances for a loss of,
or injury to, property or for injury to, or interference with, Tenant's
business, including, without limitation, loss of profits, however occurring,
through or in connection with or incidental to a failure to furnish any of the
foregoing services or utilities. Tenant, as a material part of the consideration
to be rendered to Landlord, hereby waives all claims against Landlord for the
foregoing damages from any cause arising at any time.
8.3 OPERATING HOURS. Normal operating hours for the Building and
included within the Operating Costs Allowance are 7:00 a.m. to 6:00 p.m.
weekdays and Saturday from 8:00 a.m. to 1:00 p.m. Tenant shall be permitted
heating/ventilation/air conditioning ("HVAC") service at other hours for which
Tenant shall pay at a rate equal to Seven Dollars ($7.00) per hour of usage
(subject to a reasonable adjustment based on actual design of the HVAC system
pursuant to the Work Letter), increased in proportion to the increase of the CPI
on each annual anniversary of the Lease Date. Landlord shall meter and Tenant
shall pay for such operation of the HVAC systems beyond the normal sixty hours
weekly usage on a quarterly basis.
ARTICLE 9 - PARKING AND CONTROL OF COMMON AREAS
9.1 CONTROL OF COMMON AREAS BY LANDLORD. All Common Areas, the Site
Amenities, and all automobile parking areas, driveways, entrances and exits
thereto, and other facilities furnished by Landlord in or near the Project,
shall at all times be subject to the exclusive control and management of
Landlord or Landlord's designated agent. Landlord shall have the right to
construct, maintain and operate lighting facilities on all said areas and
improvements; to police the same; from time to time to change the area, level,
location and arrangement of parking areas and other facilities hereinabove
referred to; to restrict parking by tenants, their officers, agents and
employees to employee parking areas; to close all or any portion of said areas
or facilities to such extent as may, in the opinion of Landlord, be legally
sufficient to prevent a dedication thereof or the accrual of any rights to any
person or the public therein; to close temporarily all or any portion of the
parking areas or facilities; to discourage non-customer parking; to convert such
areas into leasable areas; to construct additional parking facilities and to do
and perform such other acts in and to said areas and improvements as, in the use
of good business judgment, the Landlord shall determine to be advisable with a
view to the improvement of the convenience and use thereof by tenants, their
officers, agents, employees and customers, provided that such changes shall not
reduce the number of parking spaces below the
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number required as stated below. No such change shall entitle Tenant to an
abatement of Rent. Tenant will have the nonexclusive use of not less than four
(4) parking spaces per one thousand (1,000) usable square feet of the Premises;
provided, however, that Tenant shall have the right to designate up to twelve
(12) of the foregoing parking spaces immediately adjacent to the Building as
reserved for the Tenant, with the remainder of the parking spaces pursuant to
the foregoing calculation to be on a nonexclusive basis.
9.2 LICENSE. All Common Areas are to be used and occupied under a
license which may be revoked by Landlord in the event of a default by Tenant and
termination of the Lease, and if any such license be revoked, or if the amount
of such areas be diminished, Landlord shall not be subject to any liability nor
shall Tenant be entitled to any compensation or diminution or abatement of Rent,
or shall such revocation or diminution of such areas be deemed constructive or
actual eviction.
ARTICLE 10 - ALTERATIONS, IMPROVEMENTS AND SIGNAGE
10.1 CHANGES/ALTERATIONS. Tenant shall not make any alterations,
additions, or changes, including, without limitation, installation of any
permanently attached trade fixtures, exterior signs, exterior machinery, floor
coverings, interior or exterior lighting, plumbing fixtures, shades or awnings
(collectively "Alterations") in and to the Premises or any part thereof without
the prior written consent of Landlord which consent may be withheld in
Landlord's sole and absolute discretion; provided, however, that Tenant may make
nonstructural Alterations that do not affect the electrical, plumbing, heating,
ventilation, air conditioning or other systems of the Premises and that cost
less than $10,000 in any Lease Year without Landlord's consent. Any construction
undertaken in or to the Premises shall be performed in accordance with this
Article and the other obligations of this Lease.
10.2 MANNER OF CONSTRUCTION.
10.2.1 CONDITIONS TO CONSENT. Landlord may impose, as a
condition of its consent to any Alterations or repairs on or about the Premises,
such requirements as Landlord in its reasonable discretion may deem desirable,
including, but not limited to, the requirements that Tenant obtain bonds and
that Tenant utilize for such purposes only contractors, materials, mechanics and
materialmen approved by Landlord, in its sole discretion. Tenant shall construct
such Alterations or repairs in strict conformance with any and all applicable
rules and regulations of Landlord and any federal, state, county or municipal
code or ordinance and pursuant to a valid building permit, issued by the local
governing entity, and obtained at Tenant's sole cost and expense. All fixtures
installed by Tenant shall be new.
10.2.2 COST. In any event, a licensed contractor approved by
Landlord shall perform all mechanical, electrical, plumbing, air conditioning,
permanent partition and ceiling tile work, and such work shall be performed at
Tenant's cost. If Landlord's consent is required, Landlord reserves the right to
approve, in Landlord's reasonable discretion, the contractor selected by Tenant
for the completion of any Alterations. In the event Tenant orders any
construction, alteration, decorating or repair work and fails to pay amounts
when due to the contractor or contractors in connection with such items,
Landlord, without any obligation to do so, may pay any such amounts directly to
such contractor or contractors (with a notice to Tenant of such payment) and the
amounts paid by Landlord shall be deemed Rent under this Lease, payable upon
billing therefor.
10.2.3 GOOD AND WORKMANLIKE MANNER. All work with respect to
any Alterations or repairs must be done in a good and workmanlike manner and
diligently prosecuted to completion to the end that the Premises shall at all
times be a complete unit except during the period of work. Upon completion of
any Alterations, Tenant agrees to deliver to the Landlord's management office a
copy of the "as built" drawings of the Alterations and record any necessary
notices to evidence completion. In performing the work of any such Alterations,
Tenant shall have the work performed in such manner as not interfere with or to
obstruct the access to the Common Area and to any other tenant of the Project.
10.3 CONSTRUCTION INSURANCE. Whether or not Landlord's consent is
required, Tenant agrees to obtain, carry and deliver to Landlord prior to the
commencement of any Alterations and maintain in effect until completion of
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all Alterations "Builder's All Risk" insurance in an appropriate amount covering
the construction of such Alterations, and such other insurance as Landlord may
require, it being understood and agreed that all of such Alterations shall be
insured by Tenant pursuant to Section11.2.2 of this Lease immediately upon
completion thereof.
10.4 LIENS. Tenant shall keep the Premises and the Project free from
any mechanics', materialmen's, designer's or other liens arising out of any work
performed, materials furnished or obligations incurred by or for Tenant or any
person or entity claiming by, through or under Tenant. If any such liens are
filed and are not released of record by payment or posting of a proper bond
within ten (10) days after such filing, Landlord may, without waiving its rights
and remedies based on such breach by Tenant and without releasing Tenant from
any obligations hereunder, cause such liens to be released by any means it shall
deem proper, including payment of the claim giving rise to such lien, in which
event all amounts paid by Landlord shall immediately be due and payable by
Tenant as Rent. Tenant hereby indemnifies, protects, defends (with legal counsel
acceptable to Landlord) and holds Landlord and Landlord's Indemnitees, the
Premises and the Project harmless from any liability, cost, obligation, expense
(including, without limitation, reasonable attorneys' fees and expenses), or
claim of any mechanics', materialmen's, design professional's or other liens in
any manner relating to any work performed, materials furnished or obligations
incurred by or for Tenant or any person or entity claiming by, through or under
Tenant. Whether or not Landlord's consent is required, Tenant shall notify
Landlord in writing within fifteen (15) days prior to commencing any Alterations
so that Landlord shall have the right to record and post notices of
non-responsibility or any other notices deemed necessary by Landlord on the
Premises.
10.5 SIGNAGE. As an Alteration, Tenant shall have the right to have its
name displayed on the Building at a location mutually chosen by Landlord and
Tenant. Any such signage shall also be subject to the requirements of all
government agencies with jurisdiction over the Project, and the Declarations.
Landlord shall use a signage company selected by Tenant and reasonably
acceptable to Landlord. Tenant shall pay all costs of Landlord associated with
installing such signage within ten (10) days of receiving an invoice from
Landlord setting forth such costs. All such signage shall be subject to
Landlord's specifications and approval as to size, graphics and style, which
approval may be withheld in Landlord's reasonable discretion.
ARTICLE 11 - INSURANCE AND INDEMNITY
11.1 INSURANCE TO BE OBTAINED BY LANDLORD.
11.1.1 FIRE AND CASUALTY INSURANCE. Landlord shall maintain
during the Lease Term a policy or policies of insurance insuring the Premises
and the Common Area and, at Landlord's election, other portions of the Project,
against all direct physical loss or damage, whether due to fire or other
casualties covered within the classification of fire and extended coverage,
vandalism coverage and malicious mischief, sprinkler leakage, water damage and
special extended coverage. Such coverage shall be for full replacement value,
and may include, at the option of Landlord, the risks of earthquakes and/or
flood damage and additional hazards, a rental loss endorsement and one or more
loss payee endorsements in favor of the holders of any mortgages or deeds of
trust encumbering the interest of Landlord in all or any portion of the Project
or the interest of any ground or underlying lessors in the Project. The costs of
such insurance shall be included as a component of the Common Area Maintenance
Charges.
11.1.2 LIABILITY INSURANCE. Landlord shall maintain a
commercial general liability insurance policy, or an equivalent, written on an
occurrence form that includes personal injury coverage, bodily injury, death,
property damage, and advertising injury coverage, insuring against liability
arising out of the ownership, use, or maintenance of the Common Area or the
Project. The initial amount of such insurance shall be Two Million Dollars
($2,000,000) each occurrence/Three Million Dollars ($3,000,000) general
aggregate on a per location basis and Two Million Dollars ($2,000,000) for
personal injury and advertising injury coverage. Landlord may also obtain
umbrella coverage up to Ten Million Dollars ($10,000,000). The costs of all such
insurance shall be included as part of the Common Area Maintenance Charges.
11.2 INSURANCE TO BE OBTAINED BY TENANT.
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11.2.1 LIABILITY INSURANCE. During the Lease Term, Tenant
shall, at Tenant's expense, maintain a commercial general liability insurance
policy, or an equivalent, written on an occurrence form that includes personal
injury coverage, bodily injury, death, property damage, advertising injury
coverage and contractual liability coverage including Tenant's indemnity
obligations under this Lease, insuring against liability arising out of the
ownership, use, occupancy or maintenance of the Premises, and the business
operated by Tenant and any subtenants or licensees of Tenant in the Premises.
The initial amount of such insurance shall be Three Million Dollars
($3,000,000.00) each occurrence/Five Million Dollars ($5,000,000.00) general
aggregate on a per location basis and Three Million Dollars ($3,000,000.00) for
personal injury and advertising injury coverage. If alcohol will be served from
or in the Premises, such coverage shall contain endorsements deleting any liquor
liability exclusion and adding a liquor liability endorsement.
11.2.2 INSURANCE OF PERSONAL PROPERTY. Tenant shall at all
times during the Lease Term, and at its own expense, maintain a policy or
policies of standard fire, extended coverage and special extended coverage
insurance ("All Risks") with extended coverage in the name of the Tenant, and
naming Landlord as an additional insured, in an amount adequate to cover the
cost of replacement of all trade fixtures, alterations, decorations, inventory
additions or improvements, and all plate and tempered glass within the Premises,
made to the Premises by Tenant or by Landlord on Tenant's behalf in the event of
fire or extended coverage loss in an amount equal to the full replacement value.
Notwithstanding such insurance coverage by Tenant for plate glass, Landlord may
replace, at the expense of Tenant, any and all plate and other glass, frames or
glazing damaged or broken from any cause whatsoever in and about the Premises.
11.2.3 ADDITIONAL INSURANCE OBLIGATIONS. Landlord may
reasonably require Tenant to increase the amounts of coverage and/or to maintain
additional coverage based on insurance coverages and amounts maintained by
lessees of similar space in San Diego County.
11.3 WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive any
and all rights of recovery against the other or against the officers, employees,
agents and representatives of the other, on account of loss or damage occasioned
to such waiving party or its property or the property of others under its
control, to the extent that such loss or damage is insured against under any
fire and extended coverage insurance policy which either may have in force at
the time of such loss or damage or under the insurance policies required to be
maintained under this Article. Landlord and Tenant shall, if required, for each
of the policies of insurance required under this Lease, give notice to the
insurance carrier or carriers that the foregoing mutual waiver of subrogation is
contained in this Lease.
11.4 FORM OF POLICIES. The minimum limits of policies of insurance
required of Tenant under this Lease shall in no event limit the liability of
Tenant under this Lease. Such insurance shall: (i)be an occurrence policy (or
policies); (ii)name Landlord, the Project or Building manager or managers, and
any other party having an interest in the Project as an additional insured;
(iii)be issued by an insurance company having a General Policyholders Rating of
B+ or better and a financial size of "VI" or better, as set forth in the most
current issue of Best's Rating Guide, or which is otherwise acceptable to
Landlord and licensed to do business in California; (iv)be primary insurance as
to all claims thereunder and provide that any insurance carried by Landlord is
excess and noncontributing with any insurance required of Tenant; (v)provide
that said insurance shall not be canceled or coverage changed unless thirty (30)
days prior written notice shall have been given to Landlord and any mortgagee of
Landlord's; and (vi)with respect to the liability insurance described in Section
11.2.1, contain a cross-liability endorsement or severability of interest clause
acceptable to Landlord. Any insurance policies required hereunder may be part of
a blanket policy with a "per project, per location" endorsement so long as such
blanket policy contains all provisions required hereby and does not reduce the
coverage, impair the rights of either party or negate the requirements of this
Lease. Tenant shall deliver said policy or policies or certificates thereof (at
Tenant's election), together with any endorsements reflecting the changes to the
policy required to comply with the requirements of this Lease, to Landlord on or
before the Commencement Date and at least ten (10) days before the expiration
date of such policies. In the event Tenant shall fail to procure such insurance,
or to deliver such policies or certificates (at Tenant's election) and
appropriate endorsements, Landlord may, at its option, procure such policies for
the account of Tenant, and the cost thereof plus a ten percent (10%) handling
charge shall be paid by Tenant to Landlord as Additional Rent within five (5)
days after delivery to Tenant of bills therefor.
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11.5 INDEMNIFICATION.
11.5.1 INDEMNIFICATION OF LANDLORD. To the fullest extent
permitted by law, Tenant shall indemnify, protect, defend (with legal counsel
acceptable to Landlord) and save Landlord and Landlord's Indemnitees harmless
from and against any and all claims, actions, damages, liabilities and expenses,
including attorneys' fees, in connection with loss of life, personal injury,
bodily injury and/or damage to property arising from or out of any occurrence
in, upon or about the Premises, or the occupancy or use by Tenant of the
Premises and/or Project or any part thereof, or occasioned wholly or in part by
any act or omission of Tenant, its agents, contractors, employees, servants,
tenants or concessionaires, except to the extent caused by Landlord's gross
negligence or willful misconduct. Tenant shall further indemnify, defend,
protect and hold Landlord and Landlord's Indemnitees harmless from and against
any and all claims arising from any breach or default in performance of any
obligation on Tenant's part to be performed under the terms of this Lease, or
arising from any act, neglect, fault or omission of Tenant or its agents,
contractors, employees, servants, tenants or concessionaires, and from and
against all costs, attorneys' fees, expenses and liabilities incurred in
connection with such claim or any action or proceeding brought thereon. In case
any action or proceeding shall be brought against Landlord by reason of any such
claim, Tenant, upon notice from Landlord, shall defend the same at Tenant's
expense by counsel approved in writing by Landlord. Tenant, as a material part
of the consideration to Landlord, hereby assumes all risk of damage to property
or injury to persons in, upon or about the Premises from any cause whatsoever
except Landlord's gross negligence or intentional misconduct. Tenant hereby
waives all its claims in respect thereof against Landlord.
11.5.2 LANDLORD'S NONLIABILITY. Landlord shall not be liable
for injury or damage which may be sustained by a person, goods, wares,
merchandise, or other property of Tenant, or Tenant's employees, invitees,
customers, or of any other person in or about the Premises caused by or
resulting from any peril which may affect the Premises, including, without
limitation, fire, steam, electricity, gas, water, or rain which may leak or flow
from or into any part of the Premises, or from the breakage, leakage,
obstruction, or other defects of the pipes, sprinklers, wires, appliances,
plumbing, air conditioning, or lighting fixtures of the Premises, whether such
damage or injury results from conditions arising upon the Premises or upon other
portions of the Project or from other sources. Landlord shall not be liable for
any damages arising from any act or neglect of: (a) any other tenant or occupant
of the Project; or (b) any officer, employee, agent, representative, customer,
business visitor, or invitee of any such tenant. Notwithstanding the foregoing,
nothing contained in this Lease shall operate to relieve Landlord of the
consequences of its own gross negligence or willful misconduct or the gross
negligence or willful misconduct of its agents or employees.
11.5.3 INDEMNIFICATION OF TENANT. To the fullest extent
permitted by law, Landlord shall indemnify, protect, defend (with legal counsel
acceptable to Tenant) and save Tenant and Tenant's Indemnitees harmless from and
against any and all claims, actions, damages, liabilities and expenses,
including attorneys' fees, in connection with loss of life, personal injury,
bodily injury and/or damage to property arising from or out of any occurrence
in, upon or about the Premises and due to the gross negligence or willful
misconduct of Landlord. Except as otherwise set forth in this Lease, and subject
to Section 11.5.2 above, Landlord shall further indemnify, defend, protect and
hold Tenant and Tenant's Indemnitees harmless from and against any and all
losses, expenses and damages arising from any breach or default in performance
of any obligation on Landlord's part to be performed under the terms of this
Lease.
ARTICLE 12 - ASSIGNMENT AND SUBLETTING
12.1 LANDLORD'S CONSENT REQUIRED.
12.1.1 TRANSFER. Tenant shall not either voluntarily or by
operation of law, assign, mortgage, pledge, hypothecate or encumber this Lease
or the leasehold interest created hereby or any interest herein, or sublet the
Premises or any portion thereof, or license the use of all or any portion of the
Premises or permit any other person to occupy or use the Premises or any portion
thereof (collectively referred to herein as a "Transfer"), without the prior
written consent of Landlord, which consent is subject to the following
conditions: (i)the proposed transferee's use of
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the Premises must be consistent with Article 6 hereof; (ii)the transferee is of
a character and engaged in a business which is in keeping with the Landlord's
standards for the Project; (iii)the proposed Transfer must not breach any
financing agreement or any other agreement relating to the Project; (iv)the net
worth of the proposed transferee must be sufficient to discharge the obligation
under this Lease (in Landlord's reasonable judgment); and (v)subject to Landlord
not having available space in the Project for such proposed transferee, the
proposed transferee must not be an existing tenant in the Project.
12.1.2 PROCEDURE. Prior to a Transfer, Tenant shall request
Landlord's consent in writing, and shall include with such request a copy of all
proposed contracts, agreements, subleases, or other documents describing the
Transfer between Tenant and the proposed transferee. Landlord shall respond to
Tenant's request for consent to a proposed Transfer within thirty (30) days
after receipt of all information described above and reasonably necessary to
allow Landlord to evaluate all the conditions set forth in Section 12.1.1 above.
If Tenant hereunder is a corporation or is an unincorporated association or
partnership, then the transfer, assignment, or hypothecation of any stock or
interest in such corporation, association or partnership in the aggregate in
excess of twenty-five percent (25%) shall be deemed a Transfer under the meaning
of this Article 12 (other than normal bulk transactions of publicly held stock).
12.1.3 AFFILIATES. Notwithstanding the foregoing, Landlord's
prior written consent shall not be required for a Transfer to a wholly owned
subsidiary or a parent of Tenant ("Affiliate"). Promptly upon a transfer to an
Affiliate, Tenant shall deliver written notice to Landlord thereof.
12.2 RECAPTURE RIGHT. In lieu of giving or withholding consent pursuant
to Section 12.1, Landlord may, at its option, terminate this Lease (or in the
case of a proposed subletting or assignment of a portion of the Premises, elect
to terminate this Lease as respects that portion) upon thirty (30) days' prior
notice. Thereafter Landlord may enter into a lease agreement with such proposed
transferee and shall be entitled to all of the Profit related thereto. In
consideration for Landlord's right and election to terminate this Lease as set
forth above, Landlord will release Tenant from liability under this Lease for
Base Monthly Rent and Additional Rent with respect to the Premises (or the
portion of the Premises subject to the proposed Transfer) accruing after
termination of this Lease resulting from Landlord's exercise of such right.
Landlord and Tenant agree and acknowledge that Landlord's right to recapture as
set forth above is intended to permit Landlord to maintain control over the
leasing of space in the Project to protect its interest in the Project and the
interest of any lenders and to prevent such interest from being impaired. Tenant
understands the nature of this right and has approved the recapture provisions
in consideration for Landlord's agreement to release Tenant from liability for
future Rent due with respect to the recaptured portion of the Premises pursuant
to the provisions of this Section.
12.3 TRANSFER WITHOUT CONSENT. Any Transfer without Landlord's prior
written consent shall, at the option of the Landlord, constitute a non-curable
breach of this Lease.
12.4 NO RELEASE OF TENANT. No Transfer shall release Tenant or any
guarantor or change Tenant's primary liability to pay the Rent and to perform
all other obligations of Tenant under this Lease. Landlord's acceptance of Rent
from any other person is not a waiver of any provision of this Article 12.
Consent to one Transfer is not a consent to any subsequent Transfer. If Tenant's
transferee defaults under this Lease, Landlord may proceed directly against
Tenant without pursuing remedies against the transferee and without releasing
such transferee from its obligations under this Lease. Landlord may consent to
subsequent assignments or modifications of this Lease by Tenant's transferee,
without notifying Tenant or obtaining its consent. Such action shall not relieve
Tenant's liability under this Lease.
12.5 EFFECT OF A TRANSFER. Whether or not Landlord's consent is
required, the transferee shall agree to comply with and be bound by all of the
terms, covenants, conditions, provisions and agreements of this Lease to the
extent of the space transferred, assigned or sublet; and Tenant shall deliver to
Landlord promptly after execution an executed copy of each such Transfer
document between Tenant and the transferee. In addition, any sublease shall
provide that it shall be subject and subordinate to this Lease and to all
mortgages; that Landlord may enforce the provisions of the sublease, including
collection of rents; and that in the event of termination of this Lease for any
reason, including without limitation a voluntary surrender by Tenant, or in the
event of any reentry or repossession of
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the Premises by Landlord, Landlord may, at its option, either (i)terminate the
sublease, or (ii)take over all of the right, title and interest of Tenant, as
sublessor, under such sublease, in which case such sublessee shall attorn to
Landlord but in such event Landlord shall not (a)be liable for any previous act
or omission of Tenant under such sublease, (b)be subject to any defense or
offset previously accrued in favor of the sublessee against Tenant, or (c)be
bound by any previous modification of any sublease made without Landlord's
written consent, or by any previous prepayment by sublessee of more than one
month's rent.
12.6 EVENT OF BANKRUPTCY. If this Lease is assigned to any person or
entity pursuant to the provisions of the United States Bankruptcy Code, 11
U.S.C. Section 101 et seq. (the "Bankruptcy Code"), any and all monies or other
consideration payable or otherwise to be delivered in connection with such
assignment shall be paid or delivered to Landlord, shall be and remain the
exclusive property of Landlord, and shall not constitute the property of Tenant
or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and
all monies or other considerations constituting Landlord's property under this
Section not paid or delivered to Landlord shall be held in trust for the benefit
of Landlord and shall be promptly paid or delivered to Landlord. Any person or
entity to which this Lease is assigned pursuant to the provisions of the
Bankruptcy Code shall be deemed without further act or deed to have assumed all
of the obligations arising under this Lease on and after the date of such
assignment.
12.7 NO MERGER. No merger shall result from Tenant's sublease of
the Premises under this Article 12, Tenant's surrender of this Lease or the
termination of this Lease in any other manner.
12.8 ASSIGNMENT FEES AND PROCEDURES. In the event Landlord shall be
requested to consent to a Transfer, Tenant shall pay Landlord a reasonable fee
to reimburse Landlord for costs and expenses, including attorneys' fees,
incurred in connection with reviewing Tenant's request for consent.
ARTICLE 13 - DAMAGE OR DESTRUCTION
13.1 REPAIR OF DAMAGE BY LANDLORD. Tenant agrees to promptly notify
Landlord in writing of any damage to the Premises resulting from fire,
earthquake or any other casualty (such events referred to collectively as
"Casualty"). If the Premises, or any common areas of the Building providing
access to the Premises (such that Tenant does not have reasonable access to the
Premises) shall be damaged by a Casualty, Landlord shall, within sixty (60) days
after the date of the Casualty, provide written notice to Tenant indicating the
anticipated time period for repairing the Casualty (the "Repair Period Notice").
In the event the Repair Period Notice indicates that the time period for
repairing the Casualty is estimated to exceed two hundred seventy (270) days
from the date of the Repair Period Notice, Landlord (pursuant to the provisions
of Section 13.3 below) or Tenant may elect to terminate this Lease ("Tenant's
Termination Election"). Such election must be made by Tenant within thirty (30)
days after the receipt of the Repair Period Notice or will be deemed waived by
Tenant. If Tenant elects to terminate the Lease, the termination shall be
effective thirty (30) days after Landlord's receipt of Tenant's Termination
Election. If the Repair Period Notice indicates that the time period for
repairing the Casualty is estimated to not exceed two hundred seventy (270) days
from the date of the Repair Period Notice, or if Tenant does not exercise
Tenant's Termination Election as provided above, then subject to the other
provisions of this Article, Landlord will repair the damage pursuant to the
provisions hereof. If Landlord is obligated to or elects to repair the Casualty
as provided herein, Landlord agrees to promptly and diligently, subject to
reasonable delays for insurance adjustment and other matters beyond Landlord's
reasonable control, and subject to the other provisions of this Article, restore
the Premises and the Tenant Improvements originally constructed by Landlord to
substantially the same condition as existed prior to the Casualty, except for
modifications required by building codes and other laws, and any other
modifications to the common areas deemed desirable by Landlord provided that
access to the Premises shall not thereby be materially impaired. If Tenant
requests that Landlord make any modifications to the Tenant Improvements in
connection with the rebuilding, Landlord may condition its consent to such
modifications on (i) Tenant's payment to Landlord prior to commencement of
construction of any sums necessary to complete the Tenant Improvements in excess
of the amount of insurance proceeds received by Landlord and (ii)confirmation by
Landlord's architect that the modifications will not increase the scope of work
or time period necessary to complete the Tenant Improvements.
13.2 RENT ABATEMENT DUE TO CASUALTY. Landlord and Tenant agree and
acknowledge that Tenant shall
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be provided with full abatement of Rent during the time period commencing on the
last to occur of (i) the date of the Casualty or (ii) the date Tenant ceases to
enjoy the substantial benefit of the Premises, and continuing until Substantial
Completion of Landlord's restoration obligations as provided herein ("Abatement
Period"), provided that if Tenant is only able to occupy a portion of the
Premises and receive the substantial benefit of such portion for Tenant's uses
of the Premises, Rent shall be abated during the Abatement Period for the
portion of the Premises not occupied by Tenant. Landlord and Tenant acknowledge
and agree that the Rent abatement as provided in this Section is Tenant's sole
remedy due to the occurrence of the Casualty and that Landlord shall not be
liable to Tenant or any other person for any direct, indirect or consequential
damage (including, but not limited to, lost profits of Tenant or loss of or
interference with Tenant's business, or otherwise), whether or not caused by the
negligence of Landlord or Landlord's employees, contractors, licensees, or
invitees, due to or arising out of or as a result of the Casualty (including but
not limited to the termination of the Lease in connection therewith). Tenant
acknowledges and agrees that Tenant shall maintain adequate business
interruption insurance to provide coverage as to such matters.
13.3 LANDLORD'S OPTION TO REPAIR. Notwithstanding the terms of
Section13.1 of this Lease, Landlord may elect not to rebuild and/or restore the
Premises and/or Building and to instead terminate this Lease by notifying Tenant
in writing of such termination within sixty (60) days after the date of the
Casualty in the event the Building shall be damaged by Casualty (whether or not
the Premises are affected) and one or more of the following conditions exists:
(i)Landlord determines that the time period for repair will exceed two hundred
seventy (270) days as provided in Section 13.1 above; (ii)the damage is not
fully covered, except for deductible amounts, by insurance required to be
carried by Landlord under the terms of this Lease; (iii)the holder of the
mortgage on the Building or ground lessor with respect to the Project requires
that the insurance proceeds or a portion thereof be used to retire the mortgage
debt, or terminates the ground Lease, as the case may be; or (iv)Landlord elects
not to rebuild the Building for any reason, provided that in connection with
such election Landlord also terminates all other leases in the Building.
13.4 DAMAGE NEAR END OF TERM. In the event that the Premises or the
Building is destroyed or damaged by a Casualty during the last two (2) years of
the Lease Term, notwithstanding anything else contained in this Article,
Landlord shall have the option to terminate this Lease by giving written notice
to Tenant of the exercise of such option within thirty (30) days after such
damage or destruction, in which event this Lease shall cease and terminate as of
the date of the notice. In such event or in the event of a termination pursuant
to the other provisions of this Article, Tenant shall pay Rent, properly
apportioned up to the date of the Casualty, and both parties shall thereafter be
freed and discharged of all future obligations hereunder, except for any
provisions of this Lease which by their terms survive the expiration or earlier
termination of the Lease Term.
13.5 WAIVER OF STATUTORY PROVISIONS. The provisions of this Lease,
including this Article13, constitute an express agreement between Landlord and
Tenant with respect to the occurrence of any Casualty to the Premises and/or
Building or any other portion of the Project and Tenant therefore fully waives
the provisions of any statute or regulation, including, without limitation,
Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any
rights or obligations concerning a Casualty.
ARTICLE 14 - CONDEMNATION
14.1 TOTAL CONDEMNATION. If the whole of the Premises shall be acquired
or condemned by eminent domain for any public or quasi-public use or purpose,
then the Lease Term shall cease and terminate as of the date of title vesting in
such proceeding and all rentals shall be paid up to that date.
14.2 PARTIAL CONDEMNATION. If any part of the Premises shall be
acquired or condemned by eminent domain for any public or quasi-public use or
purpose, and if such partial taking or condemnation renders the Premises
reasonably unsuitable for the business of the Tenant, then Tenant shall have the
right to terminate the Lease Term as of the date of title vesting in such
proceeding by delivering written notice thereof to Landlord within thirty (30)
days after Tenant becomes aware of the proposed condemnation. In the event of a
partial taking or condemnation which is not extensive enough to render the
Premises unsuitable for the business of the Tenant then this Lease shall
continue in full force and effect.
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14.3 CONDEMNATION OF PARKING AREA. If the whole or any part of the
parking area in the Project shall be acquired or condemned by eminent domain for
any public or quasi-public use or purpose and if, as the result of such partial
taking, the ratio of the number of parking stalls does not conform to the
parking requirements of this Lease ("Parking Restrictions"), in effect at the
time that title to such parking area is acquired through such condemnation
process, then the Lease Term shall cease and terminate from the date of title
vesting in such proceeding unless Landlord provides substantially equal parking
facilities in the vicinity of the Project within sixty (60) days after the date
of acquisition and such alternative parking satisfies the requirements of the
Parking Restrictions.
14.4 DISTRIBUTION OF CONDEMNATION AWARD. Any condemnation award or
payment shall be distributed in the following order: (a)first, to any ground
lessor, mortgagee or beneficiary under a deed of trust encumbering the Premises,
the amount of its interest in the Premises; (b)second, to Tenant, only the
amount, if any, of any award specifically designated for loss of or damage to
Tenant's movable trade fixtures or removable personal property, and the Tenant
hereby assigns any other rights which the Tenant may have now or in the future
to any other award to the Landlord; and (c)third, to Landlord, the remainder of
such award, whether as compensation for reduction in the value of the leasehold,
the taking of the fee, or otherwise. In no event shall Tenant have any claim
against Landlord for the value of any unexpired term of this Lease. If this
Lease is not terminated, Landlord shall repair any damage to the Premises caused
by the condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority.
14.5 WAIVER. Tenant hereby waives any statutory rights of termination
which may arise by reason of any taking of the Premises under the power of
eminent domain, including, without limitation, the provisions of Section
1265.130 of the California Code of Civil Procedure.
ARTICLE 15 - DEFAULTS; REMEDIES
15.1 COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Premises is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
15.2 DEFAULTS BY TENANT. Tenant shall be in default under this Lease if
Tenant breaches its obligations hereunder and fails to cure such breach within
the period set forth herein, except that there shall be no cure period for
breaches of Sections 15.2.3 and 15.2.4, and the cure period for breaches of
Section 15.2.2 shall be the minimum mandated by California statute. Tenant shall
be in breach of its obligations under this Lease:
15.2.1 If Tenant abandons or vacates the Premises;
15.2.2 If Tenant fails to pay Base Monthly Rent, Additional
Rent or any Rent required to be paid by Tenant, as and when due;
15.2.3 If Tenant fails or refuses to occupy and operate the
Premises in accordance with Article 6;
15.2.4 If (i) Tenant's use of the Premises involves the
generation or storage, use, treatment or disposal of Hazardous Material in a
manner or for a purpose prohibited by any Hazardous Materials Law; (ii) Tenant
has been required by any lender or governmental authority to take remedial
action in connection with Hazardous Material contaminating the Premises if the
contamination resulted from Tenant's action or use of the Premises; or (iii)
Tenant is subject to an enforcement order issued by any governmental authority
in connection with the use, disposal or storage of a Hazardous Material on the
Premises.
15.2.5 If Tenant fails to perform any of Tenant's nonmonetary
obligations under this Lease (other than Tenant's obligations under Sections
15.2.3, 15.2.4 and 15.2.6 for which there will be no additional cure periods)
for a period of twenty (20) days after written notice from Landlord; provided
that if such cure is not reasonably susceptible of being cured within such
twenty (20) day period, Tenant shall not be in default if Tenant commences such
performance within the twenty (20) day period and uses its best efforts and due
diligence to promptly cure the
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default. However, Landlord shall not be required to give such notice if Tenant's
failure to perform constitutes a non-curable breach of this Lease. The notice
required by this Section is intended to satisfy any and all notice requirements
imposed by law on Landlord prior to the commencement of an unlawful detainer
action and is not in addition to any such requirement;
15.2.6 If (i)Tenant makes a general assignment or general
arrangement for the benefit of creditors; (ii)Tenant files a petition for
adjudication of bankruptcy or for reorganization or rearrangement or any similar
proceeding; (iii)a petition for adjudication of bankruptcy or for reorganization
or rearrangement is filed against Tenant and is not dismissed within forty-five
(45) days; (iv)a trustee or receiver is appointed to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease and possession is not restored to Tenant within
forty-five (45) days; or (v)substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease is subjected to attachment,
execution or other judicial seizure which is not discharged within forty-five
(45) days. If a court of competent jurisdiction determines that any of the acts
described in this subsection is not a default under this Lease, and a trustee is
appointed to take possession (or if Tenant remains a debtor in possession) and
such trustee or Tenant transfers Tenant's interest hereunder, then Landlord
shall receive, as Additional Rent, the difference between the Rent (or any other
consideration) paid in connection with such assignment or sublease and the Rent
payable by Tenant hereunder.
15.3 REMEDIES. On the occurrence of any default by Tenant, Landlord
may, at any time thereafter, with or without notice or demand and without
limiting Landlord in the exercise of any right or remedy which Landlord may
have:
15.3.1 Terminate Tenant's right to possession of the Premises
by any lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall have the immediate right to re-enter the Premises and remove all
persons and property and such property may be removed and stored in a public
warehouse or elsewhere at the cost of, and for the account of Tenant, all
without service of notice or resort to legal process and without being deemed
guilty of trespass, or becoming liable for any loss or damage which may be
occasioned thereby; and Landlord shall be entitled to recover from Tenant all
damages incurred by Landlord by reason of Tenant's default, including (i)the
worth at the time of the award of all Base Monthly Rent, Additional Rent and
other charges which were earned or were payable at the time of the termination;
(ii)the worth at the time of the award of the amount by which the unpaid Base
Monthly Rent, Additional Rent and other charges which would have been earned or
were payable after termination until the time of the award exceeds the amount of
such rental loss that Tenant proves could have been reasonably avoided; (iii)the
worth at the time of the award of the amount by which the unpaid Base Monthly
Rent, Additional Rent and other charges which would have been payable for the
balance of the term after the time of award exceeds the amount of such rental
loss that Tenant proves could have been reasonably avoided; and (iv)any other
amount necessary to compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom, including, but
not limited to, any costs or expenses incurred by Landlord in maintaining or
preserving the Premises after such default, the cost of recovering possession of
the Premises, expenses of reletting, including, without limitation, necessary
renovation or alteration of the Premises, Landlord's reasonable attorneys' fees,
and any real estate commissions or other such fees paid or payable. Any such
sums which are based on percentages of income, increased costs or other data
shall be reasonable estimates or projections computed by Landlord on the basis
of the amounts thereof accruing during the twenty-four (24) month period
immediately prior to the default, except that if it becomes necessary to compute
such sums before a twenty-four (24) month period has expired, then the
computation shall be made on the basis of the amounts accruing during such
shorter period. As used in subsections (i) and (ii) above, the "worth at the
time of the award" is computed by allowing interest on unpaid amounts at the
rate of fifteen percent (15%) per annum, but if such rate exceeds the maximum
interest rate permitted by law, such rate shall be reduced to the highest rate
allowed by law under the circumstances. As used in subsection (iii) above, the
"worth at the time of the award" is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of the
award, plus one percent (1%). If Tenant shall have abandoned the Premises,
Landlord shall have the option of (a)retaking possession of the Premises and
recovering from Tenant the amount specified in this Section 15.3.1, or
(b)proceeding under Section 15.3.2 below;
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15.3.2 Maintain Tenant's right to possession, in which case
this Lease shall continue in effect whether or not Tenant shall have abandoned
the Premises. This remedy is intended to be that remedy described in California
Code of Civil Procedure Section 1951.4. In such event, Landlord shall be
entitled to enforce all of Landlord's rights and remedies under this Lease,
including the right to recover the Rent as it becomes due hereunder; and/or
15.3.3 Whether or not Landlord elects to terminate this Lease
on account of any default by Tenant, Landlord shall have all rights and remedies
at law or in equity including, but not limited to, the right to re-enter the
Premises, and Landlord shall have the right to terminate any and all subleases,
licenses, concessions or other arrangements for possession entered into by
Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed
to Tenant's interest in such subleases, licenses, concessions or arrangements.
In the event of Landlord's election to succeed to Tenant's interest in any such
subleases, licenses, concessions or arrangements, Tenant shall, as of the date
of notice by Landlord of such election, have no further right to or interest in
the Rent or other consideration receivable thereunder.
15.4 THE RIGHT TO RELET THE PREMISES. Should Landlord elect to
re-enter, as herein provided, or should it take possession pursuant to legal
proceedings or pursuant to any notice provided for by law, it may either
terminate this Lease or it may from time to time without terminating this Lease,
make such alterations and repairs as may be necessary in order to relet the
Premises, and relet said Premises or any part thereof for such term or terms
(which may be for a term extending beyond the Lease Term) and at such rental or
rentals and upon such other terms and conditions as Landlord in its sole
discretion may deem advisable; upon each such reletting all rentals received by
the Landlord from such reletting shall be applied, first, to the repayment of
any indebtedness other than Rent due hereunder from Tenant to Landlord; second,
to the payment of any costs and expenses of such reletting, including brokerage
fees and attorneys' fees and of costs of such alterations and repairs; third, to
the payment of Rent due and unpaid hereunder, and the residue, if any, shall be
held by Landlord and applied in payment of future Rent as the same may become
due and payable hereunder. If such rentals received from such reletting during
any month are less than that to be paid during that month by Tenant hereunder,
Tenant shall pay any such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. No such re-entry or taking possession of said
Premises by Landlord shall be construed as an election on its part to terminate
this Lease unless a written notice of such intention be given to Tenant or
unless the termination thereof be decreed by a court of competent jurisdiction.
15.5 WAIVER OF RIGHTS OF REDEMPTION. Tenant hereby expressly waives any
and all rights of redemption granted by or under any present or future laws in
the event of Tenant being evicted or dispossessed for any cause, or in the event
of Landlord obtaining possession of the Premises, by reason of the violation by
Tenant of any of the covenants or conditions of this Lease, or otherwise.
15.6 CUMULATIVE REMEDIES. Landlord's exercise of any right or remedy
stated or set forth anywhere in this Lease shall not prevent Landlord from
exercising any other right or remedy which may be provided by law, in equity or
this Lease, whether or not stated in this Lease. The termination of this Lease
under this Article 15 shall not release Tenant from obligations arising as a
result of any acts or omissions occurring prior to such expiration or
termination, including, without limitation, any indemnity obligations of Tenant
and any obligations of Tenant under Article 7 of this Lease and all such
obligations shall survive such termination.
15.7 ADDITIONAL REMEDIES UPON DEFAULT. In addition to any rights or
remedies hereinbefore or hereinafter conferred upon Landlord under the terms of
this Lease, the following remedies and provisions shall specifically apply in
the event Tenant engages in any one or more of the acts contemplated by the
provisions of Section15.2.6 of this Lease:
15.7.1 ASSUMPTION OR REJECTION OF LEASE. In all events, any
receiver or trustee in bankruptcy shall either expressly assume or reject this
Lease within sixty (60) days following the entry of an "Order for Relief" or
within such earlier time as may be provided by applicable law. In the event of
an assumption of this Lease by a debtor or by a trustee, such debtor or trustee
shall within fifteen (15) days after such assumption (i) cure any default or
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provide adequate assurance that defaults will be promptly cured; (ii) compensate
Landlord for actual monetary loss or provide adequate assurance that
compensation will be made for actual monetary loss, including, but not limited
to, all attorneys' fees and costs incurred by Landlord resulting from any such
proceedings; and (iii) provide adequate assurance of future performance. Where a
default exists under this Lease, the trustee or debtor assuming this Lease may
not require Landlord to provide services or supplies incidental to this Lease
before its assumption by such trustee or debtor, unless Landlord is compensated
under the terms of this Lease for such services and supplies provided before the
assumption of such Lease;
15.7.2 ASSIGNMENT. The debtor or trustee may only assign this
Lease if (i) it is assumed and assignee agrees to be bound by this Lease, (ii)
adequate assurance of future performance by the assignee is provided, whether or
not there has been a default under this Lease, and (iii) the debtor or trustee
has received Landlord's prior written consent pursuant to the provisions of
Section 12.1 of this Lease. Any consideration paid by any assignee in excess of
the rental reserved in this Lease shall be the sole property of, and paid to,
Landlord. Landlord shall be entitled to the fair market value for the Premises
and the services provided by Landlord (but in no event less than the Rent
reserved in this Lease) subsequent to the commencement of a bankruptcy event;
15.7.3 OTHER MATTERS. Any Security Deposit and the Additional
Security given by Tenant to Landlord or Landlord's construction lender to secure
the future performance by Tenant of all or any of the terms and conditions of
this Lease shall be automatically transferred to Landlord upon the entry of an
"Order of Relief." The parties agree that Landlord is entitled to adequate
assurance of future performance of the terms and provisions of this Lease in the
event of an assignment under the provisions of the Bankruptcy Code. For purposes
of any such assumption or assignment of this Lease, the parties agree that the
term "adequate assurance" shall include, without limitation, at least the
following: (a)any proposed assignee must have, as demonstrated to Landlord's
satisfaction, a net worth (as defined in accordance with generally accepted
accounting principles consistently applied) in an amount sufficient to assure
that the proposed assignee will have the resources to meet the financial
responsibilities under this Lease, including the payment of all Rent. The
financial condition and resources of Tenant are material inducements to Landlord
entering into this Lease; (b)any proposed assignee must not be engaged in any
business or activity which it will conduct on the Premises and which will
subject the Premises to contamination by any Hazardous Materials; (c)any
proposed assignee must agree in writing to be bound by all the terms and
provisions of this Lease.
15.8 DEFAULT BY LANDLORD. Landlord shall not be in default unless
Landlord fails to perform obligations required of Landlord within a reasonable
time, but in no event later than thirty (30) days after written notice by Tenant
to Landlord and to the holder of any first mortgage or deed of trust covering
the Premises whose name and address shall have theretofore been furnished to
Tenant in writing, specifying wherein Landlord has failed to perform such
obligation; provided, however, that if the nature of Landlord's obligation is
such that more than thirty (30) days are required for performance, then Landlord
shall not be in default if Landlord commences performance within such thirty
(30) day period and thereafter diligently prosecutes the same to completion.
15.9 LANDLORD'S CURE. All covenants and agreements to be kept or
performed by Tenant under this Lease shall be performed by Tenant at Tenant's
sole cost and expense and without any reduction or abatement of Base Monthly
Rent, Additional Rent or any other Rent payable under the Lease except for any
abatement specifically permitted under Article 13 of this Lease. If Tenant shall
default in the performance of its obligations under this Lease, Landlord may,
but shall not be obligated to, make any such payment or perform any such act on
Tenant's part without waiving its right based upon any default of Tenant and
without releasing Tenant from any obligations hereunder and Tenant shall, within
fifteen (15) days after delivery by Landlord to Tenant of statements therefor
reimburse Landlord for all such expenditures, losses, costs, liabilities,
damages and expenses. All sums so paid by Landlord and all necessary incidental
costs, and interest thereon at the Lease Interest Rate accruing from the date
paid or incurred by Landlord until reimbursed to Landlord by Tenant, shall be
payable to Landlord by Tenant as Rent on demand and Tenant covenants to pay all
such sums. Tenant's obligations under this Sections hall survive the expiration
or sooner termination of the Lease Term.
ARTICLE 16 - PROTECTION OF CREDITORS
16.1 SUBORDINATION. Landlord shall have the right to require Tenant
to subordinate this Lease to any
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ground lease, deed of trust, mortgage or the Declarations encumbering the
Premises, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. Landlord may, by written notice to Tenant, subordinate this Lease
to any new Declarations. If any beneficiary under a deed of trust or mortgagee
under a mortgage elects to have this Lease prior to the lien of its deed of
trust or mortgage and gives written notice thereof to Tenant, this Lease shall
be deemed prior to such deed of trust or mortgage whether this Lease is dated
prior or subsequent to the date of said deed of trust or mortgage or the date of
recording thereof. As a condition to any such subordination, Landlord's lender
shall provide to Tenant a commercially reasonable nondisturbance agreement
(which may be part of a subordination and attornment agreement) recognizing
Tenant's right to possession of the Premises so long as Tenant is not in default
under this Lease beyond any applicable cure period.
16.2 ATTORNMENT. If Landlord's interest in the Premises is acquired by
any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at
a foreclosure sale, or by any other person or entity, as a result of any other
transfer by Landlord, Tenant shall attorn to the transferee of or successor to
Landlord's interest in the Premises and recognize such transferee or successor
as Landlord under this Lease. Tenant waives the protection of any statute or
rule of law which gives or purports to give Tenant any right to terminate this
Lease or surrender possession of the Premises upon the transfer of Landlord's
interest.
16.3 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument
or documents necessary or appropriate to effectuate or evidence any such
attornment or subordination or agreement to do so. If Tenant fails to do so
within ten (10) days after written request,such failure shall constitute a
default under this Lease entitling Landlord to terminate this Lease.
16.4 ESTOPPEL CERTIFICATES.
16.4.1 REQUEST. Upon either party's written request
("Requesting Party"), the other party ("Responding Party") shall execute,
acknowledge and deliver to the Requesting Party a written statement certifying:
(i)that none of the terms or provisions of this Lease have been changed (or if
they have been changed, stating how they have been changed); (ii)that this Lease
has not been canceled or terminated and is in full force and effect; (iii)the
last date of payment of the Base Monthly Rent, and other charges and the time
period covered by such payment; (iv)that the Requesting Party is not in default
under this Lease (or, if the Requesting Party is claimed to be in default,
stating why) and (v)such other statements as required by the Requesting Party,
or any lender or prospective lender, investor or purchaser. The Responding Party
shall deliver such statement to the Requesting Party within ten (10) days after
the Requesting Party's request. Any such statement by the Responding Party may
be given by the Requesting Party to any prospective purchaser or encumbrancer of
the Premises. Such purchaser or encumbrancer may rely conclusively upon such
statement as true and correct.
16.4.2 FAILURE TO RESPOND. If the Responding Party does not
deliver such statement to the Requesting Party within such ten (10) day period,
such failure shall constitute a default under this Lease. Further, the
Requesting Party and any prospective purchaser or encumbrancer, may conclusively
presume and rely upon the following facts: (i)that the terms and provisions of
this Lease have not been changed except as otherwise represented by the
Requesting Party; (ii)that this Lease has not been canceled or terminated except
as otherwise represented by the Requesting Party; (iii)that not more than one
month's Base Monthly Rent or other charges have been paid in advance; and
(iv)that Landlord is not in default under this Lease. In such event, the
Requesting Party shall be estopped from denying the truth of such facts.
16.5 TENANT'S FINANCIAL CONDITION. Within ten (10) days after written
request from Landlord, Tenant shall deliver to Landlord such financial
statements as are reasonably required by Landlord and are available to the
public to verify the net worth of Tenant, or any assignee, subtenant, or
guarantor of Tenant. Tenant covenants that during the term of this Lease Tenant
shall maintain a minimum net worth of Ten Million Dollars ($10,000,000.00). In
addition, Tenant shall deliver to any lender or proposed purchaser of the
Premises or any portion of the Project designated by Landlord any financial
statements required by such lender or purchaser (which are available to the
public) to facilitate the sale, financing or refinancing of the Premises or any
portion of the Project. Tenant represents
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and warrants to Landlord that each such financial statement is a true and
accurate statement as of the date of such statement. All financial statements
shall be confidential and shall be used only for the purposes set forth herein.
Each such financial statement shall be executed by Tenant and shall be certified
by Tenant to be true and correct.
16.6 MORTGAGEE PROTECTION CLAUSE. Tenant agrees to give any mortgagees
and/or trust deed holders, by registered mail, a copy of any notice of default
served upon the Landlord, provided that prior to such notice Tenant has been
notified in writing of the addresses of such mortgagees and/or trust deed
holders. Tenant further agrees that if Landlord shall have failed to cure such
default within the time provided for in this Lease, then the mortgagees and/or
trust deed holders shall have an additional thirty (30) days within which to
cure such default or if such default cannot be cured within that time, then such
additional time as may be necessary if within such thirty (30) days any
mortgagee and/or trust deed holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings if necessary to effect such cure), in
which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
ARTICLE 17 - TERMINATION OF LEASE
17.1 CONDITION UPON TERMINATION. Upon the termination of this Lease,
Tenant shall surrender the Premises to Landlord, broom clean and in the same
condition as received except for ordinary wear and tear which Tenant was not
otherwise obligated to remedy under any provision of this Lease. However, Tenant
shall not be obligated to repair any damage which Landlord is required to repair
under Article 14 of this Lease. No act done by Landlord or any agent or employee
of Landlord during the Lease Term shall be deemed to constitute an acceptance by
Landlord of a surrender of the Premises unless such intent is specifically
acknowledged in writing and signed by Landlord. The delivery of keys to the
Premises to Landlord or any agent or employee of Landlord shall not constitute a
surrender of the Premises or effect a termination of this Lease, whether or not
the keys are thereafter retained by Landlord and, notwithstanding such delivery,
Tenant shall be entitled to the return of such keys at any reasonable time upon
request until this Lease shall have been properly terminated. The voluntary or
other surrender of this Lease by Tenant, whether accepted by Landlord or not, or
a mutual termination hereof, shall not work a merger, and, at the option of
Landlord, shall operate as an assignment to Landlord of all subleases or
subtenancies affecting the Premises.
17.2 NON-REMOVAL BY TENANT. All Alterations, including signs and sign
cases, made by Tenant, or made by the Landlord on the Tenant's behalf and for
which Tenant has paid Landlord in accordance with this Lease, shall remain the
property of the Tenant for the Lease Term. Such Alterations shall not be removed
from the Premises. At the expiration or termination of this Lease Term, all such
Alterations become the property of the Landlord; provided, however, Landlord may
require that Tenant, at Tenant's sole cost, remove any such Alterations or
utility installations at the expiration of the Lease Term and to restore the
Premises to their prior condition. In removing any such Alterations as may be
required by the Landlord, the Tenant shall remove any of its personal property
and shall repair any damage to the Premises caused by such removal and, prior to
such removal, Tenant shall post a bond or other security as may be required by
the Landlord in order to insure the Landlord that the Premises will be repaired
in a prompt and workmanlike manner. If Tenant fails promptly to commence and
diligently pursue to completion such removal and restoration required by the
provisions of this Article 17, Tenant shall pay to Landlord the cost of such
removal and restoration, such cost to include a reasonable charge for Landlord's
overhead. Tenant shall continue to pay Rent for the portion of the Premises not
completely vacated during such time together with all costs and expenses
incurred by Landlord in removing, storing and disposing of such property
together with all costs and expenses of repair to and clean up of the Premises.
Thereafter, Landlord may retain or dispose of in any manner the personal
property not so removed, without liability to Tenant.
17.3 ABANDONED PROPERTY. Any property of Tenant not removed by Tenant
upon the expiration of the Lease Term (or within two (2) days after a
termination by reason of Tenant's default) shall be considered abandoned, and
Landlord may remove any or all such items and dispose of the same in any manner
or store the same in a public warehouse or elsewhere for the account of and at
the expense and risk of Tenant. If Tenant shall fail to pay the cost of storing
any such property after it has been stored for a period of thirty (30) days or
more, Landlord may sell any or all of such property at public or private sale,
in such manner and at such times and places as Landlord, in its sole discretion,
may deem proper, without notice to or demand upon Tenant. Landlord shall apply
the proceeds of such
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sale (a)first, to the costs and expenses of such sale, including reasonable
attorneys' fees actually incurred; (b) second, to the payment of the expense of
or charges for removing and storing any such property; and (c) the balance to
Landlord.
17.4 LANDLORD'S ACTIONS ON PREMISES. Tenant hereby waives all claims
for damages or other liability in connection with Landlord's re-entering and
taking possession of the Premises or removing, retaining, storing or selling the
property of Tenant as herein provided, and Tenant hereby indemnifies and holds
Landlord and Landlord's Indemnitees harmless from any such damages or other
liability, and no such re-entry shall be considered or construed to be a
forcible entry.
17.5 HOLDING OVER. Tenant shall vacate the Premises upon the expiration
or earlier termination of this Lease. Tenant shall reimburse Landlord for and
indemnify Landlord and Landlord's Indemnitees against all damages incurred by
Landlord from any delay by Tenant in vacating the Premises. If Tenant remains in
possession of all or any part of the Premises after the expiration of the Lease
Term with or without the express or implied consent of Landlord, such tenancy
shall be from month-to-month only and not a renewal hereof or an extension for
any further term, and in such case, Base Monthly Rent then in effect shall be
increased by fifty percent (50%) and other monetary sums due hereunder shall be
payable in the amount and at the time specified in this Lease, and such
month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein, except that the month-to-month tenancy will be
terminable on thirty (30) days notice given at any time by either party.
ARTICLE 18 - MISCELLANEOUS PROVISIONS
18.1 RIGHT OF FIRST REFUSAL. Commencing with the Lease Date and
continuing until the Lease Term expires or is terminated, Tenant shall have the
right to lease all or any portion of the office building in the Project
identified as "Building C" on the site plan on the same terms and conditions
that Landlord has received a bona fide offer for such a lease ("Right of First
Refusal") if Landlord, in its sole and absolute discretion, elects to construct
Building C. Promptly upon Landlord's receipt of a written offer to lease all or
any portion of Building C, Landlord shall deliver to Tenant a copy of such
offer. Landlord shall also use its reasonable, good faith efforts to inform
Tenant of serious inquiries from a bona fide purchaser of the Building or, if
Tenant is then an occupant of any portion of Building C, Building C. Tenant
shall have five (5) Business Days after receipt of an offer in which to exercise
its Right of First Refusal. If Tenant elects to exercise its Right of First
Refusal, Tenant must deliver written notice to Landlord within such five (5)
Business Day period stating unconditionally that Tenant will enter into a lease
on the same terms and conditions as contained in the offer. If Tenant fails to
exercise its Right of First Refusal or fails to timely notify Landlord within
such five (5) Business Day period, then Tenant shall be deemed to have declined
to exercise its right and Landlord shall be free to enter into a lease of that
portion of Building C specified in the offer. In the event that Landlord does
not enter into a lease which is substantially similar to the offer delivered to
Tenant within six (6) months thereafter, Tenant's Right of First Refusal shall
be deemed to be applicable again to any and all future bona fide offers to lease
Building C received by Landlord during the Term of the Lease. Notwithstanding
any other provision of this Lease, the Right of First Refusal is personal to
Triteal Corporation and Triteal Corporation may not assign or otherwise transfer
the Right of First Refusal to any other person or entity except in conjunction
with a Transfer to an Affiliate. If a Transfer to an Affiliate is made, any and
all such Affiliates (or other Affiliates pursuant to future Transfers) shall
also be prohibited from assigning the Right of First Refusal to any other person
or entity except in conjunction with a Transfer to another Affiliate.
18.2 SUCCESSORS; NO THIRD PARTY BENEFICIARIES. Subject to limitations
expressed elsewhere in this Lease, all rights and liabilities herein given to,
or imposed upon, the respective parties hereto shall extend to and bind the
several respective heirs, executors, administrators, successors, and assigns of
the said parties; and if there shall be more than one Tenant, they shall all be
bound jointly and severally by the terms, covenants and agreements herein. No
rights, however, shall inure to the benefit of any assignee of Tenant unless the
assignment to such assignee has been approved by Landlord in writing as provided
in Article 12 hereof. This Lease grants certain rights and imposes certain
obligations by and between Landlord and Tenant only, and there are no third
party beneficiaries of the agreement contained herein.
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18.3 SEVERABILITY. A determination by a court of competent jurisdiction
that any provision of this Lease or any part thereof is illegal or unenforceable
shall not cancel or invalidate the remainder of such provision or this Lease,
which shall remain in full force and effect.
18.4 INTERPRETATION. The captions of the Articles or Sections of this
Lease are to assist the parties in reading this Lease and are not a part of the
terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Premises with Tenant's expressed or
implied permission.
18.5 OTHER TENANCIES. Landlord reserves the absolute right to effect
such other tenancies in the Project as Landlord, in the exercise of its sole
business judgment, shall determine to best promote the interest of the Project.
Tenant does not rely on the fact, nor does Landlord represent, that any specific
tenant or type or number of tenants shall, during the term of this Lease, either
(i)enter into a lease for any space in the Project or (ii)continue to lease any
space in the Project under any lease which is in effect as of the date of this
Lease, or that any tenant under any lease in effect as of the date of this Lease
will not assign or transfer its interest under its lease or change the use of
the premises under such lease. By executing this Lease, Tenant acknowledges that
Landlord has not made any representations, warranties or statements as to any of
the foregoing and agrees that the occurrence of any of the foregoing or any
similar event shall not affect Tenant's obligations under this Lease.
18.6 ENTIRE AGREEMENT. Any Exhibits attached hereto shall be
incorporated herein as though fully set forth herein. This Lease and the
Exhibits, if any, attached hereto and forming a part hereof, set forth all the
covenants, promises, agreements, conditions and understandings, either oral or
written, between Landlord and Tenant concerning the Premises and there are no
covenants, promises, agreements, conditions or understandings, either oral, or
written, between them other than are herein set forth, including the Option to
Lease. Except as herein otherwise provided, no subsequent alteration, amendment,
change or addition to this Lease shall be binding upon Landlord or Tenant unless
reduced to writing and signed by the party to be charged with their performance.
18.7 LANDLORD'S LIABILITY. As used in this Lease, the term "Landlord"
means only the current owner or owners of the fee title to the Premises or the
leasehold estate under a ground lease of the Premises at the time in question.
Each Landlord is obligated to perform the obligations of Landlord under this
Lease only during the time such Landlord owns such interest or title. Any
Landlord who transfers its title or interest is relieved of all liability with
respect to the obligations of Landlord under this Lease to be performed on or
after the date of transfer. However, each Landlord shall deliver to its
transferee all funds previously paid by Tenant if such funds have not yet been
applied under the terms of this Lease. The obligations of Landlord under this
Lease do not constitute personal obligations of Landlord, or its partners,
directors, employees, officers, members, managers or shareholders and Tenant
shall look solely to the Project and to no other assets of Landlord for
satisfaction of any liability with respect to this Lease and will not seek
recourse against the partners, directors, officers, members, managers or
shareholders of Landlord herein, nor against any of their personal assets for
such satisfaction.
18.8 NOTICES. All notices required or permitted under this Lease shall
be in writing and shall be personally delivered or sent by certified mail,
return receipt requested, postage prepaid or by overnight courier marked for
delivery next Business Day. Notices to Tenant shall be delivered to the address
specified in Item 5 of the Basic Terms, except that upon Tenant's taking
possession of the Premises, the Premises shall be Tenant's address for notice
purposes. Notices to Landlord shall be delivered to the address specified in
Item 3 of the Basic Terms or such other address as may be instructed by
Landlord. All notices shall be effective upon personal delivery or three (3)
Business Days after deposit in the U.S. Mail or one (1) Business Day after
deposit with an overnight courier.
18.9 WAIVERS. All waivers must be in writing and signed by the waiving
party. Landlord's failure to enforce any provision of this Lease or its
acceptance of Rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without
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notice to Tenant, negotiate such check without being bound to the conditions of
such statement.
18.10 NO RECORDATION. Tenant shall not record this Lease or a
memorandum hereof without prior written consent from Landlord. However, Landlord
may require that a "Short Form" memorandum of this Lease be executed by both
parties and recorded.
18.11 CHOICE OF LAW. The internal laws without regard to choice of law
rules of the State of California shall govern this Lease.
18.12 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he or she has full authority to do so and that this Lease binds
the corporation. Concurrently with execution of this Lease, Tenant shall deliver
to Landlord a certified copy of a resolution of Tenant's Board of Directors
authorizing the execution of this Lease or other evidence of such authority
reasonably acceptable to Landlord. If Tenant is a partnership, each person
signing this Lease for Tenant represents and warrants that he or she is a
general partner of the partnership, that he or she has full authority to sign
for the partnership and that this Lease binds the partnership and all general
partners of the partnership. Tenant shall give written notice to Landlord of any
general partner's withdrawal or addition. Concurrently with execution of this
Lease, Tenant shall deliver to Landlord a copy of Tenant's recorded statement of
partnership or certificate of limited partnership.
18.13 NO PARTNERSHIP. Landlord shall not by virtue of this Lease, in
any way or for any purpose, be deemed to have become a partner of Tenant in the
conduct of its business, or otherwise, or joint venturer or a merger of a joint
enterprise with Tenant, nor is Tenant an agent of Landlord for any reason
whatsoever.
18.14 JOINT AND SEVERAL LIABILITY. All parties signing this Lease as
Tenant shall be jointly and severally liable for all obligations of Tenant.
18.15 ATTORNEYS' FEES. If either party commences litigation against the
other for the specific performance of this Lease, the interpretation of this
Lease, for damages for the breach hereof or otherwise for enforcement of any
remedy hereunder, the parties hereto agree to and hereby do waive any right to a
trial by jury and, in the event of any such commencement of litigation, the
prevailing party shall be entitled to recover from the other party such costs
and reasonable attorneys' fees as may have been incurred. Further, if Landlord
is named as a defendant in any suit brought against Tenant in connection with or
arising out of Tenant's occupancy hereunder, Tenant shall be obligated to pay to
Landlord, in addition to all other amounts for which Tenant is obligated
hereunder, all of Landlord's reasonable costs and expenses incurred in
connection with any such acts, including reasonable attorneys' fees. Any
attorneys' fees incurred in enforcing any right of indemnity set forth in this
Lease shall be recoverable and deemed to be within the scope of such indemnity
and/or this attorneys' fees provision.
18.16 LENDER MODIFICATION. If, in connection with obtaining any loans
including but not limited to a construction loan, permanent financing or
refinancing for the Project, a lender shall request reasonable modifications to
this Lease as a condition to such financing, Tenant will not unreasonably
withhold, delay or defer its consent thereto, provided that such modifications
do not increase the obligations of Tenant hereunder or materially adversely
affect the leasehold interest hereby created or Tenant's rights hereunder.
18.17 BROKERS. Except as specifically set forth herein, nothing
contained herein shall impose upon Landlord any obligation to pay any commission
or payment to Tenant's Broker specified in Item 12 of the Basic Terms. Landlord
shall pay Landlord's Broker pursuant to a separate agreement. Landlord shall be
responsible for paying a commission to Tenant's Broker in an amount equal to
four percent (4%) of Base Monthly Rent due for Lease Years one through five,
plus two percent (2%) of Base Monthly Rent due for Lease Years six through ten;
provided, however, that such commission payable to Tenant's Broker shall be
deemed earned only at the rate of fifty percent (50%) upon the mutual execution
of the Lease and fifty percent (50%) upon the Commencement Date. If and to the
extent Landlord owes a commission to Tenant's Broker as aforesaid, Landlord
shall pay such commission fifty percent (50%) upon Landlord's obtaining a
construction loan for construction of the Building, and fifty percent (50%) upon
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the Commencement Date. Landlord and Tenant hereby warrant to each other that
they have had no dealings with any real estate broker or agent in connection
with the negotiation of this Lease, excepting only the real estate brokers or
agents specified in Item 12 of the Basic Terms, and that they know of no other
real estate broker or agent who may be entitled to a commission in connection
with this Lease. Each party agrees to indemnify and defend the other party
against and hold the other party harmless from any and all claims, demands,
losses, liabilities, lawsuits, judgments, and costs and expenses (including,
without limitation, reasonable attorneys' fees) with respect to any leasing
commission or equivalent compensation alleged to be owing on account of the
indemnifying party's dealings with any real estate broker or agent other than
that specified herein.
18.18 FORCE MAJEURE. If Landlord or Tenant cannot perform any of their
obligations due to events beyond their reasonable control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions. Notwithstanding any provision in this
Lease to the contrary, Tenant shall be required to make each and every payment
of Rent in a timely fashion, and the due date for such payment shall not be
extended for events of force majeure or otherwise.
18.19 TENANT OBLIGATIONS SURVIVE TERMINATION. All obligations of Tenant
hereunder not fully performed as of the expiration or earlier termination of the
Lease Term shall, survive the expiration or earlier termination of the Lease
Term, including, without limitation, all payment obligations and all obligations
concerning the condition of the Premises.
18.20 TENANT'S WAIVER. Any claim which Tenant may have against Landlord
for default in performance of any of the obligations herein contained to be kept
and performed by Landlord shall be deemed waived unless such claim is asserted
by written notice thereof to Lessor within forty-five (45) days of Tenant's
knowledge of the alleged default or of accrual of the cause of action and unless
suit be brought thereon within six (6) months subsequent to the accrual of such
cause of action.
18.21 SUBMISSION OF LEASE. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or an
option for lease, and it is not effective as a lease or otherwise until
execution and delivery by both Landlord and Tenant.
LANDLORD:
Dated:_____________________ MARCO PLAZA ENTERPRISES, a
California general partnership
By: /s/ Robert Kronick
----------------------------------------------
Name: Robert Kronick
--------------------------------------------
Title: Partner
-------------------------------------------
TENANT:
Dated:____________________ TRITEAL CORPORATION, a
Delaware corporation
By: /s/ Gregory Jay White
----------------------------------------------
Name: Gregory Jay White
--------------------------------------------
Title: Chief Operating Officer
-------------------------------------------
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
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EXHIBIT "A"
Site Plan
[Site Plan Graphics]
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EXHIBIT "A"
<PAGE> 43
EXHIBIT "B"
RULES AND REGULATIONS
1. WALKWAYS. The sidewalks, roadways, and other public portions in the
Project shall be used by the Tenant for the purpose solely of ingress and egress
to and from the Premises of the Tenant. Tenant, its employees and agents, shall
not loiter in the entrances or corridors, nor in any way obstruct the sidewalks,
halls, stairways or elevators, and shall use the same only as a means of ingress
and egress for the Premises.
2. CONDITIONS OF PREMISES. The Tenant shall keep the interior portion
of the Premises, to include all windows, doors, and all other glass, plate
fixtures, and trim in a clean condition. No improvements, additions, or
materials of any kind are permitted to be placed on the outside of any of the
Premises by Tenant.
3. STORAGE OF REFUSE. All waste paper, garbage and refuse shall be kept
in the kind of container specified by Landlord, and shall be placed outside of
the Premises in specified trash containers prepared for collection in the manner
and at the times and places specified by Landlord. Landlord may implement a
recycling program and in such case, Tenant shall deposit refuse in accordance
with any requirements of such recycling program. If Landlord shall provide or
designate a service for picking up refuse and garbage, Tenant shall use same at
Tenant's cost whether billed directly or as part of Common Area Maintenance
Charges.
4. AERIALS. No aerial shall be erected on the roof or exterior walls of
the Premises, or within the Project, without in each instance, the written
consent of the Landlord, which may be withheld in Landlord's sole discretion.
Any aerial so installed without such written consent shall be subject to removal
without notice at any time.
5. CONDUCT. Tenant shall conduct its business in an orderly manner in
the best interests of the Project. No loudspeakers, televisions, phonographs,
radios, or other devices shall be used in a manner so as to be heard or seen
outside of the Premises without the prior written consent of the Landlord, which
may be withheld in Landlord's sole discretion.
6. OUTSIDE AREAS. Tenant shall not place or permit any dirt or rubbish
in any Common Area or any obstruction or materials in such areas, including,
without limitation, inventory, costs or signage of any type or kind. No exterior
storage shall be allowed without permission in writing from Landlord.
7. PARKING. Subject to the terms of the Lease, Tenant and Tenant's
employees shall park only in those portions of the parking area designated for
that purpose by Landlord. Landlord has the right to make changes in the parking
procedures and guidelines from time-to-time, to benefit the Project, in
Landlord's sole opinion.
8. PLUMBING. The plumbing facilities shall not be used for any purpose
other than that for which they are constructed, and no foreign substance of any
kind shall be thrown therein, and the expense of any breakage, stoppage, or
damage resulting from a violation of this provision shall be borne by Tenant,
who shall, or whose employees, agents or invitees shall have caused it.
9. FLAMMABLE MATERIALS. The Tenant shall not keep or permit to be kept
on the Premises any flammable or combustible fluid, chemical, or explosive
material of any kind. Tenant shall not burn any trash or garbage of any kind in
or about the Premises, or the Project.
10. AUCTIONS. Tenant shall not hold any auction, fire, or bankruptcy
sale in the Premises.
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EXHIBIT "B"
Page 1 of 2
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11. NO ANIMALS. Tenant shall not bring into the Premises at the
Project any animals of any type or kind, except animals necessary to assist
persons with disabilities.
12. SAFES. Landlord shall have the right to prescribe the weight, size
and position of all safes and other heavy property brought into the Project and
also the times and manner of moving the same in and out of the Project. Safes
and other heavy objects shall, if considered necessary by Landlord, stand on
supports of such thickness as is necessary to properly distribute the weight.
Landlord will not be responsible for loss of or damage to any such safe or
property in any case. All damage done to any part of the Project, its contents,
occupants or visitors by moving or maintaining any such safe or other property
shall be the sole responsibility of Tenant and any expense of said damage or
injury shall be borne by Tenant.
13. SAFETY PROCEDURES. Tenant shall comply with all safety, fire
protection and evacuation procedures and regulations established by Landlord or
any governmental agency.
14. PROTECTION FROM THEFT. Tenant acknowledges that Landlord may not
provide any guard service or other security measures. In any event, Tenant shall
assume any and all responsibility for protecting the Premises from theft,
robbery and pilferage, which includes keeping doors locked and other means of
entry to the Premises closed.
15. WAIVER BY LANDLORD. Landlord may waive any one or more of these
Rules and Regulations for the benefit of any particular tenant or tenants, but
no such waiver by Landlord shall (i)be effective unless in writing, or (ii)be
construed as a waiver of such Rules and Regulations in favor of any other tenant
or tenants, or (iii)prevent Landlord from thereafter enforcing any such Rules
and Regulations against any or all tenants of the Project.
16. CHANGES TO RULES. Landlord reserves the right from time to time to
amend or supplement the foregoing rules and regulations, and to adopt and
promulgate additional rules and regulations applicable to the Premises. Notice
of such rules and regulations and amendments and supplements thereto, if any,
shall be given to the Tenant and Tenant agrees to comply with all such rules and
regulations upon receipt of notice. Landlord shall not be liable in any way to
Tenant for any damage or inconvenience caused by any other tenant's
non-compliance with these rules and regulations.
4/15/97 Landlord Initials: _______
Tenant Initials: _______
EXHIBIT "B"
Page 2 of 2
<PAGE> 45
EXHIBIT "C"
WORK LETTER AGREEMENT
MARCO PLAZA ENTERPRISES, a California general partnership ("Landlord")
and TRITEAL CORPORATION, a Delaware corporation ("Tenant") as of this ______ day
of _________________, 199____, are executing simultaneously with this Work
Letter Agreement ("Work Letter"), a written lease (the "Lease") covering the
Premises described in the Lease.
This Work Letter defines the scope of Improvements (as defined below)
which Landlord shall be obligated to construct or install. If there is a
conflict between the terms and provisions of this Work Letter and the Lease,
this Work Letter shall control. Terms which have initial capital letters and are
not otherwise defined in this Work Letter shall have the meaning set forth in
the Lease.
This Work Letter is a part of the Lease and shall be subject to all of
its terms and conditions, including all definitions contained therein. In
consideration of the mutual covenants hereinafter contained, Landlord and Tenant
mutually agree as set forth below.
SECTION 1 - IMPROVEMENTS; PLANNING AND DOCUMENTS
1.1 CONSTRUCTION. Landlord agrees to furnish all of the material, labor
and equipment as may be reasonably necessary for the construction of the
Improvements (as defined below) in a good and workmanlike manner in substantial
conformance with the Shell Plans and Specifications (as defined below) and the
T.I. Plans and Specifications (as defined below) and in compliance with all
covenants, conditions and restrictions to which the Land is subject and all
applicable building laws, ordinances, orders, rules, regulations and
requirements of any governmental agency having jurisdiction over the development
of the Land. Landlord shall use its reasonable efforts to achieve Substantial
Completion of the Improvements by the Target Commencement Date.
1.1.1 IMPROVEMENTS. "Improvements" shall mean the Building and
all improvements, machinery, equipment, fixtures and other property, real,
personal or mixed (excepting Tenant's trade fixtures, machinery and equipment)
installed or constructed on the Land or in the Building by Landlord (including,
without limitation, Common Area, Site Amenities, and other site improvements and
landscaping), together with all additions, alterations and replacements thereof.
Improvements shall include the Shell Improvements (as defined below) and Tenant
Improvements (as defined below) constructed by Landlord.
1.1.2 LAND. "Land" shall mean that portion of the Project upon
which Landlord shall construct the Building and the portions of the Common Area
as required pursuant to this Lease.
1.2 SHELL IMPROVEMENTS.
1.2.1 SHELL DEFINITIONS.
1.2.1.1 EXTERIOR BUILDING FINISHES. "Exterior
Building Finishes" shall mean the exterior building finish materials to be
incorporated into the Building, a list of which is attached hereto as Schedule 3
and which Landlord and Tenant have reviewed and mutually believe will fall
within the Twenty-Two Dollars ($22.00) per square foot of exterior Building skin
area as contemplated by the approved Preliminary Plans and Specifications.
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Tenant Initials: _______
EXHIBIT "C"
Page 1 of 14
<PAGE> 46
1.2.1.2 PRELIMINARY PLANS AND SPECIFICATIONS.
"Preliminary Plans and Specifications" shall mean those preliminary plans and
specifications for the Shell Improvements, prepared by Brian Paul and
Associates, Architects and Planners ("Building Architect"), which describe and
depict the site plan and Common Area within the Building and certain preliminary
exterior elevation improvements, and which are referenced and/or described on
Schedule 2 attached hereto.
1.2.1.3 SHELL CONSTRUCTION DRAWINGS. "Shell
Construction Drawings" shall mean 1/4 or 1/8 scale construction drawings for the
Shell Improvements containing all information reasonably necessary to construct
the Shell Improvements, which drawings shall be reasonably consistent with the
Preliminary Plans and Specifications and shall incorporate the selected Exterior
Building Finishes.
1.2.1.4 SHELL IMPROVEMENTS. "Shell Improvements"
shall mean a three-story office building of steel frame construction with
finishes as may be required by the City of Carlsbad for a building shell final
inspection and mutually acceptable to Landlord and Tenant pursuant to the terms
hereof, including two finished elevators and an elevator lobby on each floor,
fire sprinkler systems (distributed with heads required for building shell final
inspection by the City of Carlsbad), emergency stairway exits, central plant for
HVAC system and an HVAC water loop for each floor, finished restrooms on each
floor, finished Common Area for fire exiting on the ground floor and finished
lobby of the ground floor from the front of the Building entrance to the
Building core and finished Common Area corridors on each floor, all such
improvements to be reasonably comparable to "Class A" standards of a suburban
office building, and substantially in conformance with the Office
Building-Outline Specifications dated January 17, 1997, attached hereto as
Schedule 1. Shell Improvements shall include the Site Amenities and those
components of the Premises which are identified in the Preliminary Plans and
Specifications as elements of the basic Building shell, or more specifically as
"Shell Improvements," land, land preparation, landscaping and all necessary
utilities stubbed to the Building, or as otherwise mutually identified by
Landlord and Tenant, in writing.
1.2.1.5 SHELL PLANS AND SPECIFICATIONS. "Shell Plans
and Specifications" shall mean collectively the Preliminary Plans and
Specifications, the Exterior Building Finishes Plans, the Shell Construction
Drawings, and all related plans, drawings, specifications and notes developed or
prepared in connection therewith.
1.2.2 PREPARATION OF SHELL IMPROVEMENT DOCUMENTS. Landlord and
Tenant have approved the Preliminary Plans and Specifications, including the
size, location and design of the Site Amenities. Any material changes to the
size, location or design of the Size Amenities shall be subject to Tenant's
prior written approval, which approval shall not be unreasonably withheld or
delayed.
1.2.2.1 EXTERIOR FINISHES. The Building will have a
mutually agreed upon Exterior Building Finish materials such as limestone, metal
paneling, brick veneer, glass, or granite near the entryway to conform to or be
compatible with the overall architectural theme for the Project as determined by
Landlord. Tenant acknowledges that Landlord has negotiated and agreed upon the
Base Monthly Rent and other economic terms and conditions of this Lease based
upon the assumption that the cost of the Exterior Building Finishes to be
incorporated into the Building are estimated to be Twenty-Two Dollars ($22.00)
per square foot of Building exterior skin area as set forth on Schedule3. Within
ten (10) days after the Lease Date, two (2) or more of the Exterior Building
Finishes shall be selected by Landlord and reviewed by Tenant for inclusion in
the Shell Improvements. Should either Landlord or Tenant select Exterior
Building Finishes from Schedule 3 attached hereto whose estimated composite
costs exceed Twenty-Two Dollars ($22.00) per square foot of exterior Building
skin area, such excess cost shall be at the selecting parties' expense based on
such estimated costs, without regard to whether or not the actual cost of
construction of such selected materials is less than or greater than the
estimated cost set forth on Schedule 3.
1.2.2.2 INPUT. Tenant will have input into the
colors, materials and quality of all
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Tenant Initials: _______
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<PAGE> 47
Common Area finishing. Landlord will reasonably consider such input in making
its final determination of such colors, materials and quality of Common Area
finishing. Tenant will provide any such input within five (5) days of Landlord's
notice of an opportunity to do so.
1.2.2.3 PROCESS. The approval of the Exterior
Building Finishes to be included in the Shell Improvements shall be subject to
Tenant's review and approval, which approval shall not unreasonably withheld or
delayed. Tenant shall respond in writing to Landlord within five (5) days of
receipt of any selection of Exterior Building Finishes, specifying its approval
or reasonable changes to the materials selected, if any. Failure of Tenant to
respond within said five (5) day period shall be deemed Tenant's approval of
Landlord's selection of Exterior Building Finishes so submitted. If Tenant
requests revisions to the Exterior Building Finishes selected in conformance
with the terms of this Work Letter, Landlord shall incorporate such reasonable
revisions subject to Tenant's agreement to pay any excess estimated composite
costs as set forth above.
1.2.2.4 SHELL CONSTRUCTION DRAWINGS. As soon as is
reasonably practicable following the designation of the Exterior Building
Finishes, Landlord shall prepare the Shell Construction Drawings in substantial
conformance with the Preliminary Plans and Specifications and incorporating the
approved Exterior Building Finishes.
1.3 TENANT IMPROVEMENTS.
1.3.1 TENANT DEFINITIONS.
1.3.1.1 DESIGN DEVELOPMENT DRAWINGS. "Design
Development Drawings" shall mean reasonably detailed preliminary construction
drawings for the Tenant Improvements, which drawings shall be reasonably
consistent with the approved Schematic Design Drawings.
1.3.1.2 SCHEMATIC DESIGN DRAWINGS. "Schematic Design
Drawings" shall mean reasonably detailed and dimensioned 1/8 scale preliminary
schematic design drawings for the Tenant Improvements, which drawings are
reasonably consistent with the approved Space Plan.
1.3.1.3 SPACE PLAN. "Space Plan" shall mean a floor
by floor layout designation of all counters, fixtures, demising walls and
partitions, and other equipment to be included in the Building as the Tenant
Improvements. The Space Plan shall be prepared by the Futas Design Group or as
otherwise selected by Tenant in its reasonable discretion.
1.3.1.4 TENANT IMPROVEMENTS. "Tenant Improvements"
shall mean all those portions of the Premises which are identified in the Space
Plan and which are the responsibility of Landlord's Contractor, or as otherwise
mutually identified by Landlord and Tenant, in writing. The Tenant Improvements
shall be based on the approved Space Plan.
1.3.1.5 T.I. CONSTRUCTION DRAWINGS. "T.I.
Construction Drawings" shall mean 1/4 or 1/8 scale construction drawings for the
Tenant Improvements containing all information reasonably necessary to construct
the Tenant Improvements, which drawings shall be reasonably consistent with the
approved Design Development Drawings.
1.3.1.6 T.I. PLANS AND SPECIFICATIONS. "T.I. Plans
and Specifications" shall mean collectively the Space Plan, Schematic Design
Drawings, Design Development Drawings, and T.I. Construction Drawings, and all
related plans, drawings, specifications and notes developed or prepared in
connection therewith.
4/15/97 Landlord Initials: _______
Tenant Initials: _______
EXHIBIT "C"
Page 3 of 14
<PAGE> 48
1.3.2 PLANNING; PREPARATION OF TENANT IMPROVEMENT
DOCUMENTS.
1.3.2.1 SPACE PLAN. Concurrently with the execution
of this Work Letter, Tenant shall cause the Space Plan to be prepared in
accordance with this Work Letter. Landlord will have the right to reasonably
review and approve the draft Space Plan. Tenant shall submit the proposed Space
Plan to Landlord for Landlord's review and approval, which approval shall not be
unreasonably withheld or delayed. Landlord shall respond in writing to Tenant
within ten (10) days of receipt of any portion of the Space Plan specifying its
approval or reasonable changes to the plans submitted, if any. Failure of
Landlord to respond within said ten (10) day period shall be deemed Landlord's
approval of the Space Plan so submitted. If Landlord requests reasonable
revisions to the Space Plan in conformance with the terms of this Lease, Tenant
shall revise said documents and resubmit them to Landlord for its review and
approval. Failure of Landlord to respond within ten (10) days shall be deemed
Landlord's approval on the revised Space Plan so submitted. The foregoing
process shall continue until the Space Plan is approved. Notwithstanding any
provision in this Work Letter to the contrary, Tenant shall be responsible for
producing a final Space Plan approved by Landlord no later than May 23, 1997.
Tenant acknowledges that Landlord is relying on Tenant's timely delivery of the
final approved Space Plan in order to allow Landlord to Substantially Complete
the Premises by the Target Commencement Date. Accordingly, for each day which
passes after the foregoing date and before an approved Space Plan is delivered
to Landlord, the Target Commencement Date shall be delayed the same number of
days.
1.3.2.2 SCHEMATIC DESIGN DRAWINGS. As soon as is
reasonably practicable following Landlord's approval of the Space Plan, Tenant
shall submit to Landlord proposed Schematic Design Drawings. The Schematic
Design Drawings shall be subject to the approval of Landlord, which approval
shall not be unreasonably withheld or delayed. Landlord shall respond in writing
to Tenant within ten (10) days of receipt of any portion of the Schematic Design
Drawings specifying its approval or disapproval thereof. Landlord may only
disapprove proposed Schematic Design Drawings if they do not substantially
conform to the approved Space Plan. If Landlord disapproves any portion of the
Schematic Design Drawings, then Landlord shall, timely and specifically and in
writing, (a) approve those portions which are acceptable to Landlord, and
(b)disapprove those portions which are not acceptable to Landlord, specifying
the reasons for such disapproval and describing in detail the change Landlord
requests for each item disapproved. Failure of Landlord to respond within said
ten (10) day period shall be deemed Landlord's approval of the Schematic Design
Drawings so submitted. In the event the Schematic Design Drawings have been
disapproved by Landlord, and Tenant and Landlord are unable to resolve
Landlord's disapproval after good faith efforts to do so over a period of ten
(10) Business Days after delivery of Landlord's notice disapproving Schematic
Design Drawings, Landlord and Tenant shall submit their disagreement to the
dispute resolution procedure described in Section 1.3.2.5 below.
1.3.2.3 DESIGN DEVELOPMENT DRAWINGS. As soon as is
reasonably practicable following approval of the Schematic Design Drawings,
Tenant shall submit to Landlord proposed Design Development Drawings. The Design
Development Drawings shall be subject to the approval of Landlord, which
approval shall not be unreasonably withheld or delayed. Landlord shall respond
in writing to Tenant within ten (10) days of receipt of any portion of the
Design Development Drawings. Landlord may only disapprove proposed Design
Development Drawings if they do not substantially conform to the approved
Schematic Design Drawings. If Landlord disapproves any portion of the Design
Development Drawings, then Landlord shall, timely and specifically and in
writing, (a) approve those portions which are acceptable to Landlord, and (b)
disapprove those portions which are not acceptable to Landlord, specifying the
reasons for such disapproval and describing in detail the change Landlord
requests for each item disapproved. Failure of Landlord to respond within said
ten (10) day period shall be deemed Landlord's approval of the Design
Development Drawings so submitted. In the event the Design Development Drawings
have been disapproved by Landlord, and Tenant and Landlord are unable to resolve
Landlord's disapproval after good faith
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Tenant Initials: _______
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<PAGE> 49
efforts to do so over a period of ten (10) Business Days after delivery of
Landlord's notice disapproving the Design Development Drawings, Landlord and
Tenant shall submit their disagreement to the dispute resolution procedure
described in Section 1.3.2.5 below.
1.3.2.4 T.I. CONSTRUCTION DRAWINGS. As soon as is
reasonably practicable following approval of the Design Development Drawings,
Tenant shall submit to Landlord proposed T.I. Construction Drawings. The T.I.
Construction Drawings shall be subject to the approval of Landlord, which
approval shall not be unreasonably withheld or delayed. Landlord shall respond
in writing to Tenant within ten (10) days of receipt of any portion of the T.I.
Construction Drawings. Landlord may only disapprove the T.I. Construction
Drawings if they do not substantially conform to the approved Design Development
Drawings. If Landlord disapproves any portion of the T.I. Construction Drawings,
then Landlord shall, timely and specifically and in writing, (a) approve those
portions which are acceptable to Landlord, and (b) disapprove those portions
which are not acceptable to Landlord, specifying the reasons for such
disapproval and describing in detail the change Landlord requests for each item
disapproved. The failure of Landlord to respond within said ten (10) day period
shall be deemed Landlord's approval of the T.I. Construction Drawings so
submitted. In the event the T.I. Construction Drawings have been disapproved by
Landlord, and Tenant and Landlord are unable to resolve Landlord's disapproval
after good faith efforts to do so over a period of ten (10) Business Days after
delivery of Landlord's notice disapproving the T.I. Construction Drawings,
Landlord and Tenant shall submit their disagreement to the dispute resolution
procedure described in Section 1.3.2.5 below. Notwithstanding any provision of
this Work Letter to the contrary, Tenant shall be responsible for delivering
final T.I. Construction Drawings approved by Landlord no later than August 1,
1997. Tenant acknowledges that Landlord is relying on Tenant's timely delivery
of the final approved T.I. Construction Drawings in order to allow Landlord to
timely deliver the Premises on the Target Commencement Date. Accordingly, for
each day which passes after the foregoing date and before approved T.I.
Construction Drawings are delivered to Landlord, the Target Commencement Date
shall be delayed the same number of days.
1.3.2.5 DESIGN DISPUTES. In the event Landlord and
Tenant are unable to resolve Landlord's disapproval of a phase of the
development of the T.I. Plans and Specifications as described in Sections
1.3.2.2, 1.3.2.3, and 1.3.2.4 above (a "Design Dispute"), they shall resolve
those differences through the binding arbitration of a neutral third-party in
accordance with this provision. In the event of a Design Dispute, Landlord and
Tenant shall meet within three (3) days to make a good faith attempt to mutually
appoint a single party who shall be a licensed architect ("Arbitrating
Architect"), with not less than ten (10) years experience in commercial and
industrial architecture and who is not then employed or otherwise previously
affiliated with either party, to arbitrate their differences and resolve the
Design Dispute. If Landlord and Tenant are unable to agree upon a single
Arbitrating Architect, then each shall, within two (2) Business Days after the
meeting, select an architect that meets the foregoing qualifications. The two
(2) architects so appointed shall, within two (2) Business Days after their
appointment, appoint a third architect meeting the foregoing qualifications who
shall serve as the Arbitrating Architect. If the two (2) architects so selected
cannot agree on the selection of the Arbitrating Architect within the time above
specified, then either party, on behalf of both parties, may request appointment
of the Arbitrating Architect by the Presiding Judge of the San Diego Superior
Court. The procedures for arbitrating and resolving the Design Dispute shall be
established by the Arbitrating Architect in a manner designed to promptly
resolve the Design Dispute. The determination of the Arbitrating Architect shall
be limited solely to the issue of the Design Dispute and shall be made within
ten (10) Business Days of its submission by the parties for arbitration. The
decision of the Arbitrating Architect shall be binding on both parties. The cost
of the arbitration, including, without limitation, attorneys' fees and costs,
witness fees, expert witness fees, and costs of the arbitration proceeding, may
be awarded by the Arbitrating Architect to the prevailing party. The
non-prevailing party shall be charged with any time delays caused by the Design
Dispute. In the event of any judicial enforcement or confirmation proceeding
relating to an arbitration award for a Design Dispute, the prevailing party
shall be entitled to recover from the other party all related costs, including
reasonable attorneys' fees and costs.
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Tenant Initials: _______
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1.3.2.6 OWNERSHIP. Notwithstanding the fact that
Tenant is responsible for developing all phases of the approved T.I. Plans and
Specifications, the parties have agreed that, by execution hereof, Tenant is
assigning to Landlord all of Tenant's right, title and interest in and to the
ownership of the T.I. Plans and Specifications.
1.4 BUILDING PERMITS. Landlord shall be responsible for obtaining from
any relevant and jurisdictional governmental authority all governmental
approvals necessary for the construction of the Shell Improvements, including a
building permit. Tenant shall be responsible for obtaining from any relevant and
jurisdictional governmental authority all governmental approvals necessary for
the construction of the Tenant Improvements, including a building permit.
Landlord shall be responsible for the payment of the building permit fees for
the Shell Improvements and, pursuant to the Tenant Improvement Allowance and/or
the Tenant Contingency Allowance, Landlord shall also be responsible for the
payment of the building permit fees for the Tenant Improvements. If a change to
the approved Shell Plans and Specifications or T.I. Plans and Specifications is
required by any governmental authority as a condition to obtaining a building
permit, such change shall be made to the Shell Plans and Specifications and/or
T.I. Plans and Specifications and deemed to have been approved by Landlord
and/or Tenant, as appropriate. Any change to the approved Shell Plans and
Specifications which is not mandated by a governmental authority shall be
subject to Tenant's reasonable review and approval. Tenant shall negotiate in
good faith for the allocation of any increase in construction costs due to such
a change. The costs associated with any such changes related to the Shell
Improvements shall be Landlord's responsibility and related to the Tenant
Improvements shall be Tenant's responsibility. The parties shall cooperate with
each other as may be reasonably necessary to obtain the building permit and any
and all other permits, as appropriate. Notwithstanding any provision of this
Work Letter or the Lease to the contrary, Tenant shall obtain the necessary
building permits for the approved T.I. Plans and Specifications no later than
November 7, 1997. Tenant acknowledges that Landlord is relying upon Tenant's
timely acquisition of the Tenant Improvements building permits so that Landlord
may Substantially Complete the Premises by the Target Commencement Date.
Accordingly, for each day which passes after the foregoing date and before all
building permits for the Tenant Improvements are obtained and delivered to
Landlord, the Target Commencement Date shall be delayed the same number of days.
1.5 CONDITION OF PREMISES: LIMITATION. Except as specifically provided
in this section, Landlord makes no warranties or representations with regard to
the Premises or the Improvements, or any portion thereof, and Tenant shall
accept the Premises in the condition in which they are delivered on the
Commencement Date; provided, however, that the Premises shall be constructed in
substantial conformance with the approved T.I. Plans and Specifications and in
accordance with all applicable laws then in effect. Landlord makes no warranty
to Tenant regarding any other aspect of the Improvements or the Premises,
including but not limited to, any patent or latent defects, which Tenant
expressly waives any rights to make claims therefore; provided, however, that
Landlord hereby assigns to Tenant on a nonexclusive basis all guarantees and
warranties from any contractors, subcontractors, materialmen and suppliers which
provide construction, labor or materials to the Premises.
1.6 APPROVALS. After Landlord's approval of any of the T.I. Plans and
Specifications and/or Tenant's approval of the Exterior Building Finishes, no
significant changes, modifications or alterations may be made without the prior
written consent of both Landlord and Tenant; provided, however, if any changes
are required (i) by any governmental agency with jurisdiction over the Project,
(ii) as a result of field conditions, or (iii) to substitute reasonably
equivalent materials to avoid unanticipated delays, strikes or shortages, then
Landlord shall be authorized to make such changes. The costs of any such changes
to the T.I. Plans and Specifications are to be included within the Total Cost
(as hereinafter defined). Any changes to the T.I. Plans and Specifications
and/or the Exterior Building Finishes Plans after approval thereof, other than
any changes required under Subsections (i), (ii) and (iii) above, shall
constitute a Change Order (as hereinafter defined).
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1.7 COSTS. All costs and fees associated with the preparation of the
Shell Plans and Specifications, including, without limitation, all consultant or
subcontractor design fees, and all costs of constructing the Shell Improvements
shall be borne solely by Landlord, except as expressly set forth herein.
Notwithstanding the foregoing, in the event Tenant selects Exterior Building
Finishes pursuant to Section 1.3.1 above whose estimated composite costs as set
forth on Schedule 3 exceed Twenty-Two Dollars ($22.00) per square foot of
Building exterior skin area, such excess costs may be paid in a lump cash sum by
Tenant or, up to the amount set forth herein, be subject to the Tenant
Contingency Allowance set forth in Section 3.2 below. Shell Plans and
Specifications shall be prepared by the Building Architect and other consultants
selected by Landlord in its sole discretion. T.I. Plans and Specifications shall
be prepared by Futas Design Group and other consultants selected by Tenant and
reasonably approved by Landlord.
SECTION 2 - TENANT IMPROVEMENTS
2.1 TENANT IMPROVEMENTS. The Tenant Improvements are and shall remain
Landlord's property and shall be surrendered to Landlord upon expiration or
earlier termination of the Lease in accordance with the provisions of the Lease.
2.2 PREMISES FURNISHINGS. It is expressly understood that Landlord's
obligation to construct Tenant Improvements in the Premises is limited to
construction of the Tenant Improvements specifically contemplated by the T.I.
Plans and Specifications. Tenant shall be solely responsible for the performance
and expense of the design, layout, provision, delivery and installation of any
furniture, furnishings, equipment, and any other personal property Tenant will
use at the Premises. In arranging for the performance of any of the work
referred to in the preceding sentence, Tenant shall be permitted to enter the
Premises only upon the prior consent of Landlord and shall adopt a schedule in
conformance with the schedule(s) of Landlord's Contractor (as hereinafter
defined) and conduct its work in such a manner as to maintain harmonious labor
relations so as not to interfere unreasonably with or delay the work of
Landlord's contractors in substantially completing the Tenant Improvements.
SECTION 3 - TENANT IMPROVEMENT ALLOWANCE
3.1 TENANT IMPROVEMENT ALLOWANCE. Landlord has agreed to contribute a
one-time tenant improvement allowance for the cost of preparing the T.I. Plans
and Specifications related to Tenant Improvements and toward the cost of
constructing the Tenant Improvements, including any necessary permits and
demolition work in an amount up to the amount specified in Item 15 of the Basic
Terms of the Lease ("Tenant Improvement Allowance"). The Tenant Improvement
Allowance is based on the Usable square feet of the Premises, and the
calculation of usable square feet for the Premises shall be mutually agreed to
by the Building Architect and Futas Design Group. Tenant shall be solely
responsible for any and all costs of constructing the Tenant Improvements in
excess of the Tenant Improvement Allowance pursuant to the provisions of Section
3.2 and Section 3.3 below. The total of all costs incurred by Landlord in
connection with the design and construction of the Tenant Improvements shall be
referred to as the "Total Costs."
3.1.1 ALLOCATION. Notwithstanding Section 3.1 above, the
parties have agreed that certain portions of Tenant Improvement Allowance may
only be used for certain portions of the Tenant Improvements. Such allocations
are as follows: (a) a minimum of Twenty-Two Dollars ($22.00) per usable square
foot of the Tenant Improvement Allowance shall be used for building standard
tenant improvements as described on Schedule 4 attached hereto and incorporated
herein; (b) a maximum of Two Dollars Fifty Cents ($2.50) per Usable square foot
of the Tenant Improvement Allowance shall be used for architecture and
engineering fees; (c) a maximum of One Dollar ($1.00) per Usable square foot of
the Tenant Improvement Allowance shall be used for fees and permits related to
the Tenant Improvements; and (d)the remainder of the Tenant Improvement
Allowance shall be used for Tenant Improvements which are more expensive than
building standard and for other upgrades to the Shell Improvements, or,
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a combination thereof, as Tenant requests in its sole discretion. Portions of
the Tenant Improvement Allowance may be utilized for nonbuilding standard Tenant
Improvements and other upgrades to the Shell Improvements if and only if Tenant
incorporates such requests into the Exterior Building Finishes or the Space
Plan, as appropriate, prior to their initial approval.
3.1.2 COMMON AREA. Notwithstanding Sections 3.1 and 3.1.1
above, Tenant has agreed to apply Fifty Thousand Dollars ($50,000) of the Tenant
Improvement Allowance to reimburse Landlord for constructing and finishing the
Common Area corridors in the Building, the lobby on the ground floor of the
Building, and the fire exit corridors on each floor of the Building to Class "A"
suburban office building standards (as reasonably determined by the Building
Architect and reflected in the approved Shell Plans and Specifications).
3.2 TENANT CONTINGENCY ALLOWANCE. In the event Tenant selects Exterior
Building Finishes which are in excess of the assumed costs as set forth in
Section 1.2.2.1 above, and Tenant elects to not pay such excess in a cash lump
sum to Landlord upon Substantial Completion of the Premises, and/or the actual
cost of the Tenant Improvements exceeds either the total Tenant Improvement
Allowance or the specific allocations set forth in Section 3.1.1 above
(collectively, the "Excess Costs"), Landlord has agreed to advance payment
towards the Excess Costs in an amount up to the amount of the Tenant Contingency
Allowance specified in Item 16 of the Basic Terms of the Lease. In such event,
Tenant shall repay to Landlord as Additional Rent the amount of the Tenant
Contingency Allowance paid by Landlord. Such repayment of the Tenant Contingency
Allowance shall be at the rate of One and Forty-Three Hundredths Cents ($0.0143)
per Rentable square foot per month in the Premises for each One Dollar ($1.00)
per Rentable square foot in the Premises of Excess Cost paid by Landlord, and
adding the resulting monthly amount to the Base Monthly Rent due hereunder. For
example, and not by way of limitation, if Tenant selected Exterior Building
Finishes the cost of which exceeded the Twenty-Two Dollars ($22.00) per square
foot of Building skin area budget by Fifty-One Thousand Dollars ($51,000.00),
which Fifty-One Thousand Dollars ($51,000.00) were the total Excess Cost, then
the Base Monthly Rent due hereunder would be increased by One and Forty-Three
Hundredths Cents ($0.0143) per Rentable square foot per month (because such
Excess Cost is equal to One Dollar ($1.00) per Rentable square foot of
Premises).
3.3 COST OF TENANT IMPROVEMENT WORK.
3.3.1 OBTAINING COST QUOTATION. Landlord shall retain a
contractor, acceptable to Landlord in its sole discretion ("Contractor"), as
contractor for the Tenant Improvements. The Contractor may be an affiliate of
Landlord or any of its partners. Within ten (10) days after Landlord's approval
of the T.I. Construction Documents, Landlord shall provide to Tenant the cost of
the Tenant Improvements ("Cost Quotation") based upon the approved T.I.
Construction Documents. Landlord will require the Contractor to competitively
bid all major subtrades for the Tenant Improvements construction. Landlord will
provide copies of such bids and make a recommendation to select a particular
bidder for review by Tenant. Landlord and Tenant will mutually agree on the
selection of each subtrade vendor based on such competitive bids; provided,
however, Landlord or Contractor shall not be required to include the lowest bid
for any particular trade in the Cost Quotation if, in Landlord's or Contractor's
reasonable judgment, a higher bid is more desirable for the quality of, or the
timeliness in completing, the Tenant Improvements or other qualitative
considerations such as the subtrade vendor's prior experience and availability.
If Landlord and Tenant are not able to mutually agree on each major subtrade
vendor, Landlord's selection shall be binding for all such subtrades except
finish trades such as millwork, wall coverings, and carpet, for which Tenant's
selection shall be final. Notwithstanding the foregoing, neither Landlord nor
Tenant shall be permitted to select any major subtrade vendor whose costs exceed
the lowest subtrade vendor by more than five percent (5%) unless and until the
other party mutually agrees.
3.3.2 APPROVAL OF COST QUOTATION BY TENANT. Tenant shall,
within five (5) Business Days of
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Tenant Initials: _______
EXHIBIT "C"
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<PAGE> 53
receipt thereof, either: (i) agree in writing to pay the cost by which the Cost
Quotation exceeds the sum of the Tenant Improvement Allowance and the Tenant
Contingency Allowance ("Additional Cost"), or (ii) revise the T.I. Construction
Documents or Space Plan so that the Cost Quotation is either (a) no more than
the Tenant Improvement Allowance plus Tenant Contingency Allowance, or (b) in
excess of the Tenant Improvement Allowance plus Tenant Contingency Allowance by
the amount of Additional Cost which Tenant agrees to pay. If Tenant elects to
revise the T.I. Construction Documents in order to reduce the Cost Quotation,
the period of time between Tenant's election to revise the T.I. Construction
Documents and the approval of the revised T.I. Construction Documents by Tenant
shall constitute a Tenant Delay (as defined below). If the sum of the Cost
Quotation plus the amounts described in Section 3.1.1(b) and 3.1.1(c) is less
than the maximum Tenant Improvement Allowance set forth in the Basic Terms, the
Tenant Improvement Allowance shall be deemed to be an amount equal to such sum.
The failure of Tenant to respond within the five (5) Business Day period shall
be a Tenant Delay. Upon approval by Tenant, Landlord shall be authorized to
proceed with the Improvements in accordance with the approved T.I. Construction
Documents. All costs of revising the T.I. Construction Documents, including,
without limitation, re-engineering, estimating, printing of drawings, costs of
any space planner, architect, engineering consultants and other consultants and
any other incidental expenses, shall be chargeable against the Tenant
Improvement Allowance and includable in the Total Cost.
3.4 LANDLORD COSTS FOR TENANT IMPROVEMENTS. All costs incurred by
Landlord in connection with (a) the design, construction and installation of the
Tenant Improvements, (b) any demolition or modification of any existing
improvements as may be necessary to accomplish construction of the Tenant
Improvements in conformance with the T.I. Construction Documents, or (c) any
other measures taken by Landlord which may be reasonably required to accomplish
Landlord's construction of the Tenant Improvements, including but not limited to
Landlord's procurement of bonds, insurance policies and governmental permits,
and shall be charged against the Tenant Improvement Allowance and included
within the Total Cost; provided, however, that the cost of such construction
insurance policy shall be fixed at one percent (1%) of the Total Cost for the
Tenant Improvements.
3.5 TENANT COSTS FOR TENANT IMPROVEMENTS. Tenant shall deliver to
Landlord at least twenty (20) days prior to the commencement of construction of
the Tenant Improvements cash equal to one hundred percent (100%) of the amount
of the Additional Costs. Tenant shall be solely responsible for all Additional
Costs.
SECTION 4 - CONSTRUCTION OF TENANT IMPROVEMENTS
4.1 COMMENCEMENT OF CONSTRUCTION. Landlord intends to arrange for the
Commencement of Construction to occur on or before November 1, 1997. If
Commencement of Construction does not occur on or before November 1, 1997,
Landlord shall not in any event be liable to Tenant for damages as a result
thereof but Tenant shall have the right, as its sole and exclusive remedy, to
terminate this Lease by delivering written notice thereof to Landlord by on or
before November 5, 1997. If Tenant fails to deliver such notice of termination
by on or before November 5, 1997, such right to terminate shall be deemed waived
and the Lease shall continue in full force and effect.
4.2 CONSTRUCTION OF TENANT IMPROVEMENTS. After approval of the T.I.
Construction Documents, Landlord's Contractor shall use its diligent efforts to
Substantially Complete (as defined below) the Tenant Improvements on or before
the Target Commencement Date set forth in the Lease. Landlord shall enter into a
construction contract with Contractor which contains a guaranteed delivery date
for the Tenant Improvements, including a \liquidated damage penalty provision,
such date of delivery to be established after approval of the final T.I.
Construction Drawings and subject to events of force majeure. Such construction
contract with the Contractor shall specify that the cost of the general
conditions for the Improvements shall be four percent (4%) of the cost of
construction, and shall specify a profit for the Tenant Improvements of four
percent (4%) of the sum of the cost of construction and general conditions.
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Tenant Initials: _______
EXHIBIT "C"
Page 9 of 14
<PAGE> 54
4.3 COMPLETION OF TENANT IMPROVEMENTS. Landlord shall be responsible
for the construction of the Tenant Improvements in substantial conformance with
the approved T.I. Construction Documents. Upon Substantial Completion (as
defined below) of the Tenant Improvements, Landlord shall provide a "punchlist"
identifying the corrective work of the type commonly found on an architectural
punchlist with respect to the Tenant Improvements, which list shall be in
Landlord's reasonable discretion based on whether such items were required by
the approved T.I. Construction Documents. Within ten (10) Business Days after
delivery of the punchlist, Landlord shall commence the correction of punchlist
items and diligently pursue such work to completion within thirty (30) days
after Substantial Completion. The punchlist procedure to be followed by Landlord
and Tenant shall in no way limit Tenant's obligation to occupy the Premises
under the Lease nor shall it in any way excuse Tenant's obligation to pay Rent
as provided under the Lease, unless such punchlist items reasonably precludes
Tenant from occupying the Premises, as reasonably determined by Landlord and
Tenant.
4.4 MONTHLY REPORTS; SITE MEETINGS. Landlord shall provide to Tenant
monthly progress reports describing the condition and estimated schedule for
completing the Tenant Improvements ("Monthly Reports"). Landlord shall include
in the Monthly Report a comparison of then-known actual costs of the Tenant
Improvements compared to the estimated cost as reflected in the approved Cost
Quotation. In no event shall the Monthly Reports be deemed to be a
representation, warranty or an assurance by Landlord of the date of Substantial
Completion or the Total Cost of the Tenant Improvements and Tenant specifically
acknowledges that the Monthly Report is only an estimate by Landlord based on
information provided to Landlord. Landlord shall have no liability or
responsibility for any errors or inaccuracies in a Monthly Report. In addition,
Landlord and Tenant shall coordinate on-site meetings of construction personnel
as reasonably appropriate in order to implement the construction described in
this Work Letter.
4.5 SUBSTANTIAL COMPLETION. "Substantial Completion" or "Substantially
Completed" as used herein shall mean both (a) delivery of written notice to
Tenant of the completion of construction of the Tenant Improvements in the
Premises pursuant to the approved T.I. Construction Documents with the exception
of minor details of construction installation, decoration, or mechanical
adjustments and punchlist items as certified to by Landlord, and (b) the
issuance by the City of Carlsbad of a final inspection approval, certificate of
occupancy, a temporary certificate of occupancy or some other authorization or
Tenant has occupied and obtained the beneficial use of the Premises. Substantial
Completion shall be deemed to have occurred notwithstanding the requirement to
complete "punchlist" items or similar corrective work. Tenant agrees that if
Landlord shall be delayed in causing such work to be Substantially Completed as
a result of any of the events as defined below (referred to herein as a "Tenant
Delay"), then such delay shall be the responsibility of Tenant, and will result
in the Commencement Date of the Term being the earlier of: (i) Tenant's opening
of the Premises for business; (ii) the date of Substantial Completion or (iii)
the date when Substantial Completion would have occurred if there had been no
Tenant Delay, providing that Landlord shall not be required to work on an
overtime basis in order to bring the Premises to Substantial Completion. For the
purposes of this Work Letter, a Tenant Delay is defined as follows: (a) Tenant's
failure to comply with any time frames set forth herein or in the Lease, (b) any
changes in any stage of the T.I. Plans and Specifications requested by Tenant
after Landlord's and Tenant's final approval of such stage, including, without
limitation, any changes made to reduce the Cost Quotation pursuant to this Work
Letter, (c) Tenant's failure to furnish any documents required herein or approve
any item or any cost estimates as required herein, (d) Tenant's request for
materials, finishes, or installations other than Landlord's Building Standard
items, (e) Tenant's failure to perform any act or obligation imposed on Tenant
by the Lease or this Work Letter as and when requested thereunder or hereunder,
or (f) any other delay otherwise caused by Tenant, its agents, employees or
contractors which operates to delay Landlord's Substantial Completion of the
Tenant Improvements, as reasonably determined by Landlord.
SECTION 5 - TENANT WORK
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Tenant Initials: _______
EXHIBIT "C"
Page 10 of 14
<PAGE> 55
5.1 FINISH WORK. All finish work and decoration and other work desired
by Tenant and not included within the Improvements as set forth in the approved
Shell Construction Documents or T.I. Construction Documents, including
specifically, without limitation, all computer systems, cabling, telephone
systems, telecommunications systems and other items (the "Tenant Work") shall be
furnished and installed by Tenant at Tenant's sole expense and shall not be
chargeable against the Tenant Improvement Allowance. If any Tenant Work is not
set forth on the approved T.I. Construction Documents, Tenant shall secure
Landlord's prior consent for such Tenant Work in the same manner and following
the same procedures provided for in the Lease. Tenant shall not commence the
construction or installation of any improvements on the Premises, including,
specifically, the Tenant Work, without Landlord's prior written approval (which
shall not be unreasonably withheld) of: (i) Tenant's contractor, (ii) detailed
plans and specifications for the Tenant Work, and (iii) a certificate(s) of
insurance accurately showing that Tenant's contractor maintains insurance
coverage in amounts, types, form and with companies reasonably acceptable to
Landlord. All such certificates or policies shall be endorsed to show Landlord
as an additional insured and insurance shall be maintained by Tenant or Tenant's
contractor at all times during the performance of the Tenant Work.
5.2 LANDLORD'S OBLIGATIONS. Landlord is under no obligation to
construct or supervise construction of any of the Tenant Work and any inspection
by Landlord shall not be construed as a representation that the Tenant Work is
in compliance with the final plans and specifications therefor or that the
construction will be free from faulty material or workmanship or that the Tenant
Work is in conformance with any building codes or other applicable regulations.
All of the Tenant Work shall be undertaken and performed in strict accordance
with the provisions of the Lease and this Work Letter.
SECTION 6 - CHANGE ORDERS
Tenant may request changes in the Tenant Improvements during
construction only by written instructions to Landlord, or its designated
representative, on a form approved by Landlord. All such changes will be subject
to Landlord's prior written approval, which shall be approved or disapproved by
Landlord in its reasonable discretion, within three (3) Business Days of
receipt. Prior to commencing any change, Landlord will prepare and deliver to
Tenant, for Tenant's approval, a change order (the "Change Order") setting forth
the additional time, if any, needed for such change and the total costs of such
change which will include associated architectural, engineering and construction
contractor's fees. If a Change Order requires additional time to construct, the
Target Commencement Date shall be extended by a similar number of days. Within
two (2) Business Days after delivery to Tenant of the total costs of the Change
Order, Tenant shall deliver notice of approval, together with a cash payment
equal to one hundred percent (100%) of the cost of the Change Order if and to
the extent such cost exceeds the sum of the Tenant Improvement Allowance and the
Tenant Contingency Allowance ("Payment"). If Tenant fails to approve such Change
Order and deliver the Payment within five (5) days after delivery by Landlord,
Tenant will be deemed to have withdrawn the proposed Change Order and Landlord
will not proceed to perform the change. Upon Landlord's receipt of Tenant's
approval and Payment, Contractor will proceed to perform the change.
SECTION 7 - RESPONSIBILITY FOR FUNCTION
Tenant will be responsible for the function of all Tenant Improvements whether
or not approved by Landlord or installed by Landlord at Tenant's request.
Landlord's preparation and/or approval of any design or construction documents
will not constitute any representation or warranty as to the adequacy,
efficiency, performance or desirability of the Improvements.
SECTION 8 - TENANT AND LANDLORD OBLIGATIONS
4/15/97 Landlord Initials: _______
Tenant Initials: _______
EXHIBIT "C"
Page 11 of 14
<PAGE> 56
8.1 ACCESS AND ENTRY. During Landlord's construction of the Premises,
Landlord agrees to provide reasonable access as described herein to the Premises
to Tenant and its agents, for the purpose of installing Tenant's fixtures,
Tenant Work and furniture, so long as such access does not interfere with the
conduct of Landlord's construction activities or affect Landlord's ability to
diligently bring the Premises to Substantial Completion by the Target
Commencement Date. Landlord acknowledges that access during the construction of
the Tenant Improvements for purpose of performing Tenant Work is important to
Tenant. If Landlord, in its reasonable discretion, determines that the providing
of such access may affect its ability to bring the Premises to Substantial
Completion on the Estimated Lease Term Commencement Date as set forth in this
Lease, Landlord shall have the right to deny or otherwise restrict such access
to Tenant and its agents until Substantial Completion of the Tenant
Improvements. The terms of such access may require that Tenant and Tenant's
agents perform work at times and in the manner designated by Landlord, including
nights, weekends, and holidays. Also, Tenant and its agents may be required to
utilize only certain access areas at certain times, designated by Landlord. With
respect to any approved Tenant Work, Tenant shall adopt a schedule in
conformance with the schedule of Landlord's Contractor and conduct its work in
such a manner as to maintain harmonious labor relations so as not to interfere
unreasonably with or delay the work of Landlord's Contractor. Tenant's
contractors and agents shall be subject to the supervision of Landlord's
construction supervisor.
8.2 RISK OF LOSS. All materials, work, installations and decorations of
any nature brought upon or installed in the Premises before the Commencement
Date shall be at the risk of the party who brought such materials or items onto
the Premises. Neither Landlord nor any party acting on Landlord's behalf shall
be responsible for any damage or loss or destruction of such items brought to or
installed in the Premises by Tenant prior to such date, except in the event of
Landlord's gross negligence or willful misconduct. As a condition to such early
entry, Landlord may require Tenant to execute a hold harmless agreement, in a
form acceptable to Landlord. Such early occupancy shall be subject to the terms
and provisions of the Lease.
8.3 CONFORMANCE WITH LAWS. All Tenant Work shall be done in conformity
with applicable codes and regulations of governmental authorities having
jurisdiction over the Project and the Premises and valid building permits and
other necessary authorizations from appropriate governmental agencies when
required, shall be obtained by Tenant for the Tenant Work at Tenant's expense.
Any Tenant Work not acceptable to the applicable governmental authority or not
reasonably satisfactory to Landlord in accordance with the standard in the
preceding sentence (unless previously approved by Landlord), shall be promptly
corrected, replaced, or brought into compliance with such applicable codes and
regulations at Tenant's expense. Notwithstanding any failure by Landlord to
object to any such Tenant Work, Landlord shall have no responsibility therefor.
8.4 LIENS. Tenant shall keep the Premises and Project free from any
mechanics', materialmen's or other liens arising out of any work performed upon
or materials or furniture, fixtures or improvements delivered to the Premises
including but not limited to any Tenant Work performed, materials furnished or
obligations incurred by or for Tenant or any person or entity claiming by,
through or under Tenant. Landlord shall have the right at all times to post and
keep posted on the Premises any notices which it deems necessary for its
protection from such liens. If any such liens are filed and are not released of
record by payment or posting of a proper bond within ten (10) days after such
filing, Landlord, may, without waiving its rights and remedies based on such
breach by Tenant and without releasing Tenant from any obligations hereunder or
under the Lease, cause such liens to be released by any means it shall deem
proper, including payment of the claim giving rise to such lien in which event
all amounts paid by Landlord shall immediately be due and payable by Tenant.
SECTION 9 - TENANT'S REPRESENTATIVE
Tenant has designated ___________________ as its sole representative
with respect to the matters set forth in this Work
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Tenant Initials: _______
EXHIBIT "C"
Page 12 of 14
<PAGE> 57
Letter, who shall have full authority and responsibility to act on behalf of
Tenant as required in this Work Letter. Tenant may change its representative
under this Work Letter at any time by providing five (5) days prior written
notice to Landlord. All inquiries, requests, instructions, authorizations and
other communications with respect to matters covered by this Work Letter from
Landlord will be made to Tenant's Representative.
SECTION 10 - LANDLORD'S REPRESENTATIVE
Landlord has designated James McCann as its sole representative with
respect to the matters set forth in this Work Letter, who shall have full
authority and responsibility to act on behalf of Landlord as required in this
Work Letter. Landlord may change its representative under this Work Letter at
any time by providing five (5) days prior written notice to Tenant. All
inquiries, requests, instructions, authorizations and other communications with
respect to the matters covered by this Work Letter from Landlord will be made to
Tenant's representative. Tenant will communicate solely with Landlord's
Representative and will not make any inquiries of or requests to, and will not
give any instructions or authorizations to, any other employee or agent of
Landlord, including Landlord's architect, engineers, and contractors or any of
their agents or employees, with regard to matters covered by this Work Letter.
SECTION 11 - MISCELLANEOUS
11.1 SOLE OBLIGATIONS. Except as herein expressly set forth with
respect to the Improvements or in the Lease, Landlord has no agreement with
Tenant and has no obligation to do any work with respect to the Premises. Any
other work in the Premises which may be permitted by Landlord pursuant to the
terms and conditions of the Lease, including any alterations or improvements as
contemplated in the Lease, shall be done at Tenant's sole cost and expense and
in accordance with the terms and conditions of the Lease.
11.2 APPLICABILITY. This Work Letter shall not be deemed applicable to:
(a) any additional space added to the original Premises at any time, whether by
the exercise of the Right of First Refusal or any options under the Lease or
otherwise, or (b) any portion of the original Premises or any additions thereto
in the event of a renewal or extension of the original Lease Term, whether by
the exercise of any options under the Lease or any amendment or supplement
thereto. The construction of any additions or improvements to the Premises not
contemplated by this Work Letter shall be effected pursuant to a separate work
letter agreement, in the form then being used by Landlord and specifically
addressed to the allocation of costs relating to such construction.
11.3 AUTHORITY; COUNTERPARTS. Any person signing this Work Letter on
behalf of Tenant warrants and represents that such person has authority to do
so. This Work Letter may be executed in counterparts, each of which shall be
deemed an original, but all of which together constitute one instrument.
11.4 BINDING ON SUCCESSORS. Subject to the limitations on assignment
and subletting contained in the Lease, this Work Letter shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns.
11.5 LANDLORD'S APPROVAL RIGHTS. Landlord may withhold its approval of
the Space Plan, including any revisions requested by Tenant, the T.I.
Construction Documents, Change Orders or other work requested by Tenant which
require work which: (i)exceeds or affects the structural integrity of the
Project, or any part of the heating, ventilating, air conditioning, plumbing,
mechanical, electrical, communication or other systems of the Project; (ii)is
not approved by the holder of any mortgage or deed of trust encumbering the
Project at the time the work is proposed; (iii)would not be approved by a
prudent owner of property similar to the Project; (iv)violates any agreement
which affects the Project or binds Landlord; (v)Landlord reasonably believes
will increase the cost of operation or maintenance of the common areas within or
any of the systems of the Project; (vi)Landlord reasonably believes will reduce
the market value of the Premises or Project at the end of the Lease Term;
(vii)does not conform
4/15/97 Landlord Initials: _______
Tenant Initials: _______
EXHIBIT "C"
Page 13 of 14
<PAGE> 58
to applicable building codes or is not approved by any governmental authority
with jurisdiction over the Premises; (viii)is not a Building Standard item or an
item of equal or higher quality; (ix)in Landlord's determination detrimentally
affects the uniform exterior appearance of the Project; or (x)is reasonably
disapproved by Landlord for any other reason not set forth herein.
11.6 TIME OF THE ESSENCE. Time is of the essence as to each and every
term and provision of this Work Letter. In all instances where Tenant is
required to approve an item, if no written notice of disapproval is given within
the stated time period at the end of said period the item shall automatically be
deemed approved and the next succeeding time period shall commence. Except as
otherwise provided, all references herein to a "number of days" shall mean and
refer to calendar days.
11.7 FORCE MAJEURE. If either party cannot perform any of its
obligations due to events beyond such party's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events; provided, however, that in no event shall the due date
for the payment of any money be extended.
11.8 ATTORNEYS' FEES. In any action to enforce or interpret the terms
of this Work Letter, the party prevailing in that action shall be entitled to
recover its reasonable attorneys' fees and costs of suit, both at trial and on
appeal.
11.9 INCORPORATION. This Work Letter is and shall be incorporated by
reference in the Lease and all of the terms and provisions of the Lease are
incorporated herein for all purposes. Any default by Tenant hereunder also
constitutes a default under the Lease.
IN WITNESS WHEREOF, the Work Letter has been made and executed as of
the date set forth below.
LANDLORD:
Dated:___________________ MARCO PLAZA ENTERPRISES, a
California general partnership
By: /s/ Robert Kronick
-------------------------------------------------
Name: Robert Kronick
-------------------------------------------------
Title: Partner
-------------------------------------------------
TENANT:
Dated: 4/17/97 TRITEAL CORPORATION, a
Delaware corporation
By: /s/ Gregory Jay White
-------------------------------------------------
Name: Gregory Jay White
-------------------------------------------------
Title: Chief Operating Officer
-------------------------------------------------
4/15/97 Landlord Initials: _______
Tenant Initials: _______
EXHIBIT "C"
Page 14 of 14
<PAGE> 1
EXHIBIT 10.29
Primary and Secondary
Common Stock Offering
2,200,000 Shares
TRITEAL CORPORATION
Common Stock
UNDERWRITING AGREEMENT
February 19, 1997
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
TriTeal Corporation, a Delaware corporation (the "Company"),
and the persons named in Schedule I (the "Selling Stockholders") propose to sell
an aggregate of 2,200,000 shares (the "Firm Shares") of the Company's Common
Stock, $0.001 par value per share (the "Common Stock"), of which 1,365,000
shares are to be issued and sold by the Company and an aggregate of 835,000
shares are to be sold by the Selling Stockholders in the respective amounts set
forth opposite their respective names in Schedule I, in each case to you and to
the other underwriters named in Schedule II (collectively, the "Underwriters"),
for whom you are acting as representatives (the "Representatives"). The Company
has also agreed to grant to you and the other Underwriters an option (the
"Option") to purchase up to an additional 330,000 shares of Common Stock (the
"Option Shares") on the terms and for the purposes set forth in Section 1(b).
The Firm Shares and the Option Shares are hereinafter collectively referred to
as the "Shares."
The public offering price per share for the Shares and the
purchase price per share for the Shares to be paid by the several Underwriters
shall be agreed upon by the Company, the Selling Stockholders and the
Representatives, acting on behalf of the several Underwriters, and such
agreement shall be set forth in a separate written instrument substantially in
the form of Exhibit A hereto (the "Price Determination Agreement"). The Price
Determination Agreement may take the form of an exchange of any standard form of
written telecommunication among the Company, the Selling Stockholders and the
Representatives and shall specify such applicable information as is indicated in
Exhibit A hereto. The offering of the Shares will be governed by this Agreement,
as supplemented by the Price Determination Agreement. From and after the date of
the execution and delivery of the Price Determination Agreement, this Agreement
shall be deemed to incorporate, and, unless the context otherwise indicates, all
references contained herein to "this Agreement" and to the phrase "herein" shall
be deemed to include the Price Determination Agreement.
-1-
<PAGE> 2
Each Selling Stockholder has executed and delivered a Custody
Agreement and a Power of Attorney in the form attached hereto as Exhibit B
(collectively, the "Agreement and Power of Attorney") pursuant to which each
Selling Stockholder has placed his Firm Shares in custody and appointed the
persons designated therein as a committee (the "Committee") with authority to
execute and deliver this Agreement on behalf of such Selling Stockholder and to
take certain other actions with respect thereto and hereto.
The Company and the Selling Stockholders confirm as follows
their respective agreements with the Representatives and the several other
Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the respective representations, warranties and
agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions of this Agreement, (i) the Company and
each of the Selling Stockholders, severally and not jointly, agree to sell to
the several Underwriters and (ii) each of the Underwriters, severally and not
jointly, agrees to purchase from the Company and the Selling Stockholders, at
the purchase price per share for the Firm Shares to be agreed upon by the
Representatives, the Company and the Selling Stockholders in accordance with
Section 1(c) and set forth in the Price Determination Agreement, the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule II, plus
such additional number of Firm Shares which such Underwriter may become
obligated to purchase pursuant to Section 9 hereof. Schedule II may be attached
to the Price Determination Agreement.
(b) Subject to all the terms and conditions of this Agreement, the
Company grants the Option to the several Underwriters to purchase, severally and
not jointly, up to 330,000 Option Shares from the Company at the same price per
share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of this Agreement (or, if
the Company has elected to rely on Rule 430A, on or before the 30th day after
the date of the Price Determination Agreement), upon written or telegraphic
notice (the "Option Shares Notice") by the Representatives to the Company no
later than 12:00 noon, New York City time, at least two and no more than five
business days before the date specified for closing in the Option Shares Notice
(the "Option Closing Date") setting forth the aggregate number of Option Shares
to be purchased and the time and date for such purchase. On the Option Closing
Date, the Company will issue and sell to the Underwriters the number of Option
Shares set forth in the Option Shares Notice, and each Underwriter will purchase
such percentage of the Option Shares as is equal to the percentage of Firm
Shares that such Underwriter is purchasing, as adjusted by the Representatives
in such manner as they deem advisable to avoid fractional shares.
(c) The public offering price per share for the Firm Shares and the
purchase price per share for the Firm Shares to be paid by the several
Underwriters shall be agreed upon and set forth in the Price Determination
Agreement. In the event such price has not been agreed upon and the Price
Determination Agreement has not been executed by the close of business on the
fourteenth business day following the date on which the Registration Statement
becomes effective, this Agreement shall terminate forthwith, without liability
of any party to any other party except that Section 7 shall remain in effect.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to
the Representatives for the accounts of the Underwriters at the office of
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019,
credit to the account of the Company with the Depository Trust Company, against
payment of the purchase price by wire transfer of Federal Funds or similar same
day funds to an account designated in writing by the
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<PAGE> 3
Company to PaineWebber Incorporated at least one business day prior to the
Closing Date (as hereinafter defined). Such payment shall be made at 10:00 a.m.,
New York City time, on the third business day (or fourth business day, if the
Price Determination Agreement is executed after 4:30 p.m.) after the date on
which the first bona fide offering of the Shares to the public is made by the
Underwriters or at such time on such other date, not later than ten business
days after such date, as may be agreed upon by the Company and the
Representatives (such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option
Shares against payment by the Underwriters (in the manner specified above) will
take place at the offices specified above at the time and date (which may be the
Closing Date) specified in the Option Shares Notice.
The cost of original issue tax stamps, if any, in connection
with the issuance and delivery of the Firm Shares and Option Shares by the
Company to the respective Underwriters shall be borne by the Company. The cost
of tax stamps, if any, in connection with the sale of the Firm Shares by the
Selling Stockholders shall be borne by the Selling Stockholders. The Company and
the Selling Stockholders will pay and save each Underwriter and any subsequent
holder of the Shares harmless from any and all liabilities with respect to or
resulting from any failure or delay in paying Federal and state stamp and other
transfer taxes, if any, which may be payable or determined to be payable in
connection with the original issuance or sale to such Underwriter of the Firm
Shares and Option Shares.
3. Representations and Warranties of the Company. The Company
represents, warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No. 333-20579) on Form S-1
relating to the Shares, including a preliminary prospectus and such amendments
to such registration statement as may have been required to the date of this
Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a preliminary
prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules
and Regulations included at any time as part of the registration statement.
Copies of such registration statement and amendments and of each related
preliminary prospectus have been delivered to the Representatives. The term
"Registration Statement" means the registration statement as amended at the time
it becomes or became effective (the "Effective Date"), including financial
statements and all exhibits and any information deemed to be included by Rule
430A or Rule 434 of the Rules and Regulations. If the Company files a
registration statement to register a portion of the Shares and relies on Rule
462(b) of the Rules and Regulations for such registration statement to become
effective upon filing with the Commission (the "Rule 462 Registration
Statement"), then any reference to the "Registration Statement" shall be deemed
to include the Rule 462 Registration Statement, as amended from time to time.
The term "Prospectus" means the prospectus as first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is
required, the form of final prospectus included in the Registration Statement at
the Effective Date.
(b) On the Effective Date, the date the Prospectus is first filed with
the Commission pursuant to Rule 424(b) (if required), at all times subsequent to
and including the Closing Date and, if later, the Option Closing Date and when
any post-effective amendment to the Registration Statement becomes effective or
any amendment or supplement to the Prospectus is filed with the Commission, the
Registration Statement and the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment or
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<PAGE> 4
supplement thereto), including the financial statements included in the
Prospectus, did or will comply with all applicable provisions of the Act and the
Rules and Regulations and will contain all statements required to be stated
therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no part of the Registration Statement or any such
amendment did or will contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not or will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. For all purposes of this
Agreement, the amounts of the selling concession and reallowance set forth in
the Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representatives specifically for
inclusion in the preliminary prospectus, the Registration Statement or the
Prospectus. The Company has not distributed any offering material in connection
with the offering or sale of the Shares other than the Registration Statement,
the preliminary prospectus, the Prospectus or any other materials, if any,
permitted by the Act.
(c) The only subsidiaries (as defined in the Rules and Regulations) of
the Company is the subsidiary listed on Exhibit 21 to the Registration Statement
(the "Subsidiary"). Each of the Company and the Subsidiary is, and at the
Closing Date will be, a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation. Each of the
Company and the Subsidiary has, and at the Closing Date will have, full power
and authority to conduct all the activities conducted by it, to own or lease all
the assets owned or leased by it and to conduct its business as described in the
Registration Statement and the Prospectus. Each of the Company and the
Subsidiary is, and at the Closing Date will be, duly licensed or qualified to do
business and in good standing as a foreign corporation in all jurisdictions in
which the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such licensing or qualification necessary,
except where failure to be so qualified would not have a material adverse effect
on the Company and the Subsidiary, considered as a whole. All of the outstanding
shares of capital stock of the Subsidiary have been duly authorized and validly
issued, and are fully paid and non-assessable and are owned by the Company free
and clear of all liens, encumbrances and claims whatsoever. Except for the stock
of the Subsidiary and as disclosed in the Registration Statement, the Company
does not own, and at the Closing Date will not own, directly or indirectly, any
shares of stock or any other equity or long-term debt securities of any
corporation or have any equity interest in any firm, partnership, joint venture,
association or other entity. Complete and correct copies of the certificate of
incorporation and of the bylaws of each of the Company and the Subsidiary and
all amendments thereto have been delivered to the Representatives, and no
changes therein will be made subsequent to the date hereof and prior to the
Closing Date or, if later, the Option Closing Date, except as contemplated by
the Registration Statement.
(d) The outstanding shares of Common Stock have been, and the Shares to
be issued and sold by the Company upon such issuance will be, duly authorized,
validly issued, fully paid and nonassessable and will not be subject to any
preemptive or similar right. The description of the Common Stock in the
Registration Statement and the Prospectus is, and at the Closing Date will be,
complete and accurate in all respects. Except as set forth in the Prospectus,
the Company does not have outstanding, and at the Closing Date will not have
outstanding, any options to purchase, or any rights or warrants to subscribe
for, or any securities or obligations convertible
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<PAGE> 5
into, or any contracts or commitments to issue or sell, any shares of Common
Stock, any shares of capital stock of the Subsidiary or any such warrants,
convertible securities or obligations.
(e) The financial statements and schedules included in the Registration
Statement or the Prospectus present fairly the consolidated financial condition
of the Company as of the respective dates thereof and the consolidated results
of operations and cash flows of the Company for the respective periods covered
thereby, all in conformity with generally accepted accounting principles applied
on a consistent basis throughout the entire period involved, except as otherwise
disclosed in the Prospectus. No other financial statements or schedules of the
Company are required by the Act or the Rules and Regulations to be included in
the Registration Statement or the Prospectus. Ernst & Young LLP (the
"Accountants") who have reported on such financial statements and schedules, are
independent accountants with respect to the Company as required by the Act and
the Rules and Regulations.
(f) The Company maintains a system of internal accounting control
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(g) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus and prior to the Closing Date,
except as set forth in or contemplated by the Registration Statement and the
Prospectus, (i) there has not been and will not have been any change in the
capitalization of the Company and the Subsidiary, (ii) neither the Company nor
the Subsidiary has incurred nor will it incur any material liabilities or
obligations, direct or contingent, nor has it entered into nor will it enter
into any material transactions other than pursuant to this Agreement and the
transactions referred to herein and (iii) the Company has not and will not have
paid or declared any dividends or other distributions of any kind on any class
of its capital stock.
(h) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended.
(i) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the best
knowledge of each of the Company and the Subsidiary, threatened against or
affecting the Company or the Subsidiary or any of their respective officers in
their capacity as such, before or by any Federal or state court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, wherein an unfavorable ruling, decision or finding might materially and
adversely affect the Company and the Subsidiary or their businesses, properties,
business prospects, condition (financial or otherwise) or results of operations,
considered as a whole.
(j) Each of the Company and the Subsidiary has, and at the Closing Date
will have, (i) all governmental licenses, permits, consents, orders, approvals
and other authorizations necessary to carry on its business as contemplated in
the Prospectus, except for those which would not materially and adversely affect
the Company or the Subsidiary or the business or results of operations of the
Company or the Subsidiary, (ii) complied in all respects with all laws,
regulations and orders applicable to it or its business and (iii) performed all
its obligations required to be performed by it, and is not, and at the Closing
Date will not be, in default, under any indenture, mortgage, deed of trust,
voting trust agreement, loan agreement, bond, debenture,
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<PAGE> 6
note agreement, lease, contract or other agreement or instrument (collectively,
a "contract or other agreement") to which it is a party or by which its property
is bound or affected in each case where any such failure to perform might
adversely affect the Company and the Subsidiary or their businesses, properties,
business prospects condition (financial or otherwise) or results of operations.
To the best knowledge of the Company and the Subsidiary, no other party under
any contract or other agreement to which it is a party is in default in any
respect thereunder. Neither the Company nor the Subsidiary is, nor at the
Closing Date will either of them be, in violation of any provision of its
certificate of incorporation or bylaws.
(k) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery of the
Shares by the Company, in connection with the execution, delivery and
performance of this Agreement by the Company or in connection with the taking by
the Company of any action contemplated hereby, except such as have been obtained
under the Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the bylaws and rules of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with the
purchase and distribution by the Underwriters of the Shares to be sold by the
Company.
(l) The Company has full corporate power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the Company and
is enforceable against the Company in accordance with the terms hereof, except
as may be limited by the effect of any applicable bankruptcy, insolvency,
moratorium or similar laws affecting creditors' rights generally. The
performance of this Agreement and the consummation of the transactions
contemplated hereby and the application of the net proceeds from the offering
and sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds" will not result in the creation or imposition
of any lien, charge or encumbrance upon any of the assets of the Company or the
Subsidiary pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or give any other party a right to terminate any of its obligations under, or
result in the acceleration of any obligation under, the certificate of
incorporation or bylaws of the Company or the Subsidiary, any contract or other
agreement to which the Company or the Subsidiary is a party or by which the
Company or the Subsidiary or any of its properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to the
business or properties of the Company or the Subsidiary.
(m) The Company and the Subsidiary has good and valid title to all
properties and assets described in the Prospectus as owned by it, free and clear
of all liens, charges, encumbrances or restrictions, except such as are
described in the Prospectus or are not material to the business of the Company
or the Subsidiary, constituted as a whole. Each of the Company and the
Subsidiary has valid, subsisting and enforceable leases for the properties
described in the Prospectus as leased by it, with such exceptions as are not
material and do not materially interfere with the use made and proposed to be
made of such properties by the Company and such Subsidiary.
(n) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company or the Subsidiary is a party
have been duly authorized, executed and delivered by the Company or the
Subsidiary, constitute valid and binding agreements of the Company or the
Subsidiary and are enforceable against the Company or the Subsidiary in
accordance with the terms thereof, except as may be limited by the effect of any
applicable bankruptcy, insolvency, moratorium or
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<PAGE> 7
similar laws affecting creditors' rights generally.
(o) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Representatives was or will be, when made,
inaccurate, untrue or incorrect in any material respect.
(p) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action intended, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(q) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement.
(r) Prior to the Closing Date, the Shares will be duly authorized for
quotation on the Nasdaq National Market upon official notice of issuance.
(s) Neither the Company nor the Subsidiary is involved in any material
labor dispute nor, to the knowledge of the Company and the Subsidiary, is any
such dispute threatened.
(t) Each of the Company and the Subsidiary own, or have licensed or
otherwise possess adequate rights to use, all material trademarks and trade
names which are used in or necessary for the conduct its business as described
in the Prospectus. No claims have been asserted by any person to the use of any
such trademarks or trade names or challenging or questioning the validity or
effectiveness of any such trademark or trade name. The use, in connection with
the business and operations of the Company and the Subsidiary of such trademarks
and trade names does not, to the Company's knowledge, infringe on the rights of
any person.
(u) Neither the Company nor the Subsidiary nor, to the Company's
knowledge, any employee or agent of the Company or the Subsidiary has made any
payment of funds of the Company or the Subsidiary or received or retained any
funds in violation of any law, rule or regulation or of a character required to
be disclosed in the Prospectus.
(v) The Company has complied, and until the completion of the
distribution of the Shares will comply in all material respects with the
provisions of (including, without limitation, filing all forms required by)
Section 517.075 of the Florida Securities and Investor Protection Act and
regulation 3E-900.001 issued thereunder with respect to the offering and sale of
the Shares.
(w) The Company and its Subsidiary (i) are in compliance with any and
all applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or imposing
liability or standards of conduct concerning any Hazardous Material (as
hereinafter defined) ("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable Environmental Laws
to conduct their respective businesses and (iii) are in compliance with all
terms and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, individually or in the
aggregate, result in a material adverse effect on the financial condition or on
the earnings, business, properties, business prospects or operations of the
Company and its Subsidiary, taken as a whole. The term "Hazardous Material"
means (A) any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
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<PAGE> 8
amended, (B) any "hazardous waste" as defined by the Resource Conservation and
Recovery Act, as amended, (C) any petroleum or petroleum product, (D) any
polychlorinated biphenyl and (E) any pollutant or contaminant or hazardous,
dangerous, or toxic chemical, material, waste or substance regulated under or
within the meaning of any other Environmental Law.
4. Representations and Warranties of the Selling Stockholders. Each
Selling Stockholder, severally and not jointly, represents, warrants and
covenants to each Underwriter that:
(a) Such Selling Stockholder has full power and authority to enter into
this Agreement and the Agreement and Power of Attorney. All authorizations and
consents necessary for the execution and delivery by such Selling Stockholder of
the Agreement and Power of Attorney, and for the execution of this Agreement on
behalf of such Selling Stockholder, have been given. Each of the Agreement and
Power of Attorney and this Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder and constitutes a valid
and binding agreement of such Selling Stockholder and is enforceable against
such Selling Stockholder in accordance with the terms thereof and hereof, except
as may be limited by the effect of any applicable bankruptcy, insolvency,
moratorium or similar laws affecting creditors' rights generally.
(b) Such Selling Stockholder now has, and at the time of delivery
thereof hereunder will have, (i) good and valid title to the Shares to be sold
by such Selling Stockholder hereunder, free and clear of all liens, encumbrances
and claims whatsoever (other than pursuant to the Agreement and Power of
Attorney), and (ii) full legal right and power, and all authorizations and
approvals required by law, to sell, transfer and deliver such Shares to the
Underwriters hereunder and to make the representations, warranties and
agreements made by such Selling Stockholder herein. Upon the delivery of and
payment for such Shares hereunder, such Selling Stockholder will deliver good
and valid title thereto, free and clear of all liens, encumbrances and claims
whatsoever.
(c) The performance of this Agreement and the consummation of the
transactions contemplated hereby will not result in the creation or imposition
of any lien, charge or encumbrance upon any of the assets of such Selling
Stockholder pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or result in the acceleration of any obligation under, if such Selling
Stockholder is a corporation or partnership, the organizational documents of
such Selling Stockholder, or, as to all such Selling Stockholders, any contract
or other agreement to which such Selling Stockholder is a party or by which such
Selling Stockholder or any of its property is bound or affected, or under any
ruling, decree, judgment, order, statute, rule or regulation of any court or
other governmental agency or body having jurisdiction over such Selling
Stockholder or the property of such Selling Stockholder, except where such
breach, violation or default would not have a material adverse effect on the
properties, assets, operations, business or financial condition of each such
Selling Stockholder.
(d) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by such Selling Stockholder of the transactions on its part
contemplated herein and in the Agreement and Power of Attorney, except such as
have been obtained under the Act or the Rules and Regulations and such as may be
required under state securities or Blue Sky laws or the bylaws and rules of the
NASD in connection with the purchase and distribution by the Underwriters of the
Shares to be sold by such Selling Stockholder.
(e) Such Selling Stockholder has no actual knowledge of any material
fact or condition not set forth in the Registration Statement or the Prospectus
which has adversely affected, or may adversely affect, the business, properties,
business prospects, condition (financial or
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<PAGE> 9
otherwise) or results of operations of the Company, and the sale of the Shares
proposed to be sold by such Selling Stockholder is not prompted by any such
knowledge.
(f) All information with respect to such Selling Stockholder contained
in the Registration Statement and the Prospectus (as amended or supplemented, if
the Company shall have filed with the Commission any amendment or supplement
thereto) does not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading.
(g) Other than as permitted by the Act and the Rules and Regulations,
such Selling Stockholder has not distributed and will not distribute any
preliminary prospectus, the Prospectus or any other offering material in
connection with the offering and sale of the Shares. Such Selling Stockholder
has not taken, directly or indirectly, any action intended, or which might
reasonably be expected, to cause or result in, under the Act or otherwise, or
which has caused or resulted in, stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares.
(h) Certificates in negotiable form for the Firm Shares to be sold
hereunder by such Selling Stockholder have been placed in custody, for the
purpose of making delivery of such Firm Shares under this Agreement, under the
Agreement and Power of Attorney which appoints American Stock Transfer & Trust
Company as custodian (the "Custodian") for each Selling Stockholder. Such
Selling Stockholder agrees that the Shares represented by the certificates held
in custody for him or it under the Agreement and Power of Attorney are for the
benefit of and coupled with and subject to the interest hereunder of the
Custodian, the Committee, the Underwriters, each other Selling Stockholder and
the Company, that the arrangements made by such Selling Stockholder for such
custody and the appointment of the Custodian and the Committee by such Selling
Stockholder are irrevocable, and that the obligations of such Selling
Stockholder hereunder shall not be terminated by operation of law, whether by
the death, disability, incapacity or liquidation of any Selling Stockholder or
the occurrence of any other event. If any Selling Stockholder should die, become
disabled or incapacitated or be liquidated or if any other such event should
occur before the delivery of the Shares hereunder, certificates for the Shares
shall be delivered by the Custodian in accordance with the terms and conditions
of this Agreement and actions taken by the Committee and the Custodian pursuant
to the Agreement and Power of Attorney shall be as valid as if such death,
liquidation, incapacity or other event had not occurred, regardless of whether
or not the Custodian or the Committee, or either of them, shall have received
notice thereof.
5. Agreements of the Company and the Selling Stockholders. The Company
and the Selling Stockholders (as to Sections 5(i), (j), (o), (p), (q) and (r))
agree, severally and not jointly, with the several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, and
will confirm such advice in writing, (i) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the
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<PAGE> 10
Registration Statement or the initiation of any proceedings for that purpose or
the threat thereof, (iv) of the happening of any event during the period
mentioned in the second sentence of Section 5(e) that in the judgment of the
Company makes any statement made in the Registration Statement or the Prospectus
untrue or that requires the making of any changes in the Registration Statement
or the Prospectus in order to make the statements therein, in light of the
circumstances in which they are made, not misleading and (v) of receipt by the
Company or any representative of the Company of any other communication from the
Commission relating to the Company, the Registration Statement, any preliminary
prospectus or the Prospectus. If at any time the Commission shall issue any
order suspending the effectiveness of the Registration Statement, the Company
will make every reasonable effort to obtain the withdrawal of such order at the
earliest possible moment. The Company will use its best efforts to comply with
the provisions of and make all requisite filings with the Commission pursuant to
Rule 430A and to notify the Representatives promptly of all such filings.
(c) The Company will furnish to the Representatives, without charge,
three signed copies of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto and will furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the
Company will deliver to each of the Underwriters, without charge, as many copies
of the Prospectus or any amendment or supplement thereto as the Representatives
may reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel to
the Underwriters should be set forth in the Prospectus in order to make any
statement therein, in the light of the circumstances under which it was made,
not misleading, or if it is necessary to supplement or amend the Prospectus to
comply with law, the Company will forthwith prepare and duly file with the
Commission an appropriate supplement or amendment thereto, and will deliver to
each of the Underwriters, without charge, such number of copies thereof as the
Representatives may reasonably request.
(f) Prior to any public offering of the Shares by the Underwriters, the
Company will cooperate with the Representatives and counsel to the Underwriters
in connection with the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions as the
Representatives may request; provided, that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not now so
qualified or to take any action which would subject it to general service of
process in any jurisdiction where it is not now so subject.
(g) During the period of five years commencing on the Effective Date,
the Company will furnish to the Representatives and each other Underwriter who
may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock, and will furnish to the
Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
(h) The Company will make generally available to holders of its
securities as soon as
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<PAGE> 11
may be practicable but in no event later than the last day of the fifteenth full
calendar month following the calendar quarter in which the Effective Date falls,
an earnings statement (which need not be audited but shall be in reasonable
detail) for a period of 12 months ended commencing after the Effective Date, and
satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the
Rules and Regulations).
(i) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay, or reimburse
if paid by the Representatives, all costs and expenses incident to the
performance of the obligations of the Company and the Selling Stockholders under
this Agreement, including but not limited to costs and expenses of or relating
to (i) the preparation, printing and filing of the Registration Statement and
exhibits to it, each preliminary prospectus, the Prospectus and any amendment or
supplement to the Registration Statement or the Prospectus, (ii) the preparation
and delivery of certificates representing the Shares, (iii) the printing of this
Agreement, the Agreement Among Underwriters, any Dealer Agreements, any
Underwriters' Questionnaire and the Agreement and Power of Attorney, (iv)
furnishing (including costs of shipping, mailing and courier) such copies of the
Registration Statement, the Prospectus and any preliminary prospectus, and all
amendments and supplements thereto, as may be requested for use in connection
with the offering and sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold, (v) the listing of the Shares on the Nasdaq National
Market, (vi) any filings required to be made by the Underwriters with the NASD,
and the fees, disbursements and other charges of counsel for the Underwriters in
connection therewith, (vii) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions
designated pursuant to Section 5(f), including the reasonable fees,
disbursements and other charges of counsel to the Underwriters in connection
therewith, and the preparation and printing of preliminary, supplemental and
final Blue Sky memoranda, (viii) counsel to the Company and counsel to the
Selling Stockholders where Cooley Godward LLP is acting as counsel to a Selling
Stockholder, (ix) the transfer agent for the Shares and (x) the Accountants. To
the extent that any Selling Stockholder engages special legal counsel to
represent him in connection with this offering, the fees and expenses of such
counsel shall be borne by such Selling Stockholder.
(j) If this Agreement shall be terminated by the Company or the Selling
Stockholders pursuant to any of the provisions hereof (otherwise than pursuant
to Section 9) or if for any reason the Company or any Selling Stockholder shall
be unable to perform its obligations hereunder, the Company or such Selling
Stockholders, as applicable, will reimburse the several Underwriters for all
out-of-pocket expenses (including the fees, disbursements and other charges of
counsel to the Underwriters) reasonably incurred by them in connection herewith
as a result of such termination by the Company or such Selling Stockholder, as
applicable.
(k) The Company will not at any time, directly or indirectly, take any
action intended, or which might reasonably be expected, to cause or result in,
or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares in violation of the
Exchange Act or any applicable NASD National Market rules.
(l) The Company will apply the net proceeds from the offering and sale
of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds."
(m) During the period of ninety (90) days commencing at the Closing
Date, the Company will not, without the prior written consent of PaineWebber
Incorporated, grant options to purchase shares of Common Stock at a price less
than the public offering price, other than grants made pursuant to the Company's
1995 Stock Option Plan or rights granted pursuant to the Company's Employee
Stock Purchase Plan.
(n) The Company will not, for a period of ninety (90) days after the
commencement of
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<PAGE> 12
the public offering of the Shares, without the prior written consent of
PaineWebber Incorporated, sell, contract to sell or otherwise dispose of any
shares of Common Stock or rights to acquire such shares (other than pursuant to
(i) agreements with corporate partners, research institutions or leasing
entities or (ii) employee, director or consultant stock option plans, the
Company's Employee Stock Purchase Plan or in connection with other employee,
director or consultant incentive compensation arrangements).
(o) The Selling Stockholders will not, and the Company will (i) cause
each of its executive officers and directors to and (ii) request that each
beneficial owner of more than five percent (5%) of the outstanding shares of
Common Stock enter into agreements with the Representatives in the form set
forth in Exhibit C to the effect that they will not, for a period of ninety (90)
days after the commencement of the public offering of the Shares, without the
prior written consent of PaineWebber Incorporated, sell, contract to sell or
otherwise dispose of any shares of Common Stock, other than pursuant to bona
fide gifts to or, if the stockholder is a partnership, any distribution to
partners so long as such transferees and donees agree in writing with
PaineWebber Incorporated to be bound by the provisions of this Section 5(o).
(p) The Selling Stockholders will not, without the prior written
consent of PaineWebber Incorporated, make any bid for or purchase any shares of
Common Stock during the one hundred twenty (120) day period following the date
hereof.
(q) As soon as any Selling Stockholder is advised thereof, such Selling
Stockholder will advise the Representatives and confirm such advice in writing,
(i) of receipt by such Selling Stockholder, or by any representative of such
Selling Stockholder, of any communication from the Commission relating to the
Registration Statement, the Prospectus or any preliminary prospectus, or any
notice or order of the Commission relating to the Company or any of the Selling
Stockholders in connection with the transactions contemplated by this Agreement
and (ii) of the happening of any event during the period from and after the
Effective Date that in the judgment of such Selling Stockholder makes any
statement made in the Registration Statement or the Prospectus untrue or that
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances in which they were made, not materially misleading.
(r) The Selling Stockholders will deliver to the Representatives prior
to or on the Effective Date a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
6. Conditions of the Obligations of the Underwriters. In addition to
the execution and delivery of the Price Determination Agreement, the obligations
of each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representatives not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 of the Rules and Regulations and Rule 430A shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction,
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<PAGE> 13
(iii) any request for additional information on the part of the staff of the
Commission or any such authorities shall have been complied with to the
satisfaction of the staff of the Commission or such authorities, and (iv) after
the date hereof no amendment or supplement to the Registration Statement or the
Prospectus shall have been filed unless a copy thereof was first submitted to
the Representatives and the Representatives did not object thereto in good
faith, and the Representatives shall have received certificates, dated the
Closing Date and the Option Closing Date and signed by the Chief Executive
Officer or the Chairman of the Board of Directors of the Company and the Chief
Financial Officer of the Company (who may, as to proceedings threatened, rely
upon the best of their information and belief), to the effect of clauses (i),
(ii) and (iii).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company and the Subsidiary, taken as a whole, whether or not
arising from transactions in the ordinary course of business, in each case other
than as set forth in or contemplated by the Registration Statement and the
Prospectus and (ii) neither the Company nor the Subsidiary shall have sustained
any material loss or interference with its business or properties from fire,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or any court or legislative or other governmental action,
order or decree, which is not set forth in the Registration Statement and the
Prospectus, if in the judgment of the Representatives any such development makes
it impracticable or inadvisable to consummate the sale and delivery of the
Shares by the Underwriters at the public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or the Subsidiary or any of
their respective officers or directors in their capacities as such, before or by
any federal, state or local court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, in which litigation or
proceeding an unfavorable ruling, decision or finding would materially and
adversely affect the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company and the
Subsidiary taken as a whole.
(e) Each of the representations and warranties of the Company and the
Selling Stockholders contained herein shall be true and correct in all material
respects at the Closing Date and, with respect to the Option Shares, at the
Option Closing Date, as if made at the Closing Date and, with respect to the
Option Shares, at the Option Closing Date, and all covenants and agreements
herein contained to be performed on the part of the Company and the Selling
Stockholders and all conditions herein contained to be fulfilled or complied
with by the Company and the Selling Stockholders at or prior to the Closing Date
and, with respect to the Option Shares, at or prior to the Option Closing Date,
shall have been duly performed, fulfilled or complied with.
(f) The Representatives shall have received opinions, each dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
and satisfactory in form and substance to counsel for the Underwriters, from
Cooley Godward LLP, counsel to the Company, to the effect set forth in Exhibit D
and from legal counsel on behalf of each of the Selling Stockholders (in each
instance, with such counsel to be reasonably acceptable to counsel for the
Underwriters), to the effect set forth in Exhibit E.
(g) The Representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from Pillsbury Madison & Sutro LLP,
counsel to the Underwriters, with respect to the Registration Statement, the
Prospectus and this Agreement, which opinion shall be
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<PAGE> 14
reasonably satisfactory to the Representatives.
(h) On the date of the Prospectus, the Accountants shall have furnished
to the Representatives a letter, dated the date of its delivery, addressed to
the Representatives and in form and substance satisfactory to the
Representatives, confirming that they are independent accountants with respect
to the Company as required by the Act and the Rules and Regulations and with
respect to the financial and other statistical and numerical information
contained in the Registration Statement. At the Closing Date and, as to the
Option Shares, the Option Closing Date, the Accountants shall have furnished to
the Representatives a letter, dated the date of its delivery, which shall
confirm, on the basis of a review in accordance with the procedures set forth in
the letter from the Accountants, that nothing has come to their attention during
the period from the date of the letter referred to in the prior sentence to a
date (specified in the letter) not more than five days prior to the Closing Date
and the Option Closing Date which would require any change in their letter dated
the date of the Prospectus, if it were required to be dated and delivered at the
Closing Date and the Option Closing Date.
(i) At the Closing Date and, as to the Option Shares, the Option
Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form and
substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of
such certificate, such documents are true and correct in all material
respects and do not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not untrue
or misleading and (B) since the Effective Date, no event has occurred
as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein not untrue or
misleading in any material respect;
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material
respects;
(iii) Each of the covenants required herein to be performed by
the Company on or prior to the date of such certificate has been duly,
timely and fully performed and each condition herein required to be
complied with by the Company on or prior to the delivery of such
certificate has been duly, timely and fully complied with;
(j) At the Closing Date and, as to the Option Shares, the Option
Closing Date, there shall have been furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by the Committee on behalf
of each of the Selling Stockholders, in form and substance satisfactory to the
Representatives, to the effect that the representations and warranties of each
of the Selling Stockholders contained herein are true and correct in all
material respects on and as of the date of such certificate as if made on and as
of the date of such certificate, and each of the covenants and conditions
required herein to be performed or complied with by the Selling Stockholders on
or prior to the date of such certificate has been duly, timely and fully
performed or complied with.
(k) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 5(n).
(l) The Shares shall be qualified for sale in such states as the
Representatives may reasonably request, and each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
and the Option Closing Date.
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<PAGE> 15
(m) Prior to the Closing Date, the Shares shall have been duly
authorized for quotation on the Nasdaq National Market upon official notice of
issuance.
(n) The NASD shall have approved the underwriting terms and
arrangements and such approval shall not have been withdrawn or limited.
(o) The Company and the Selling Stockholders shall have furnished to
the Representatives such certificates, in addition to those specifically
mentioned herein, as the Representatives may have reasonably requested as to the
accuracy and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus, as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of its and their
respective obligations hereunder, or as to the fulfillment of the conditions
concurrent and precedent to the obligations hereunder of the Representatives.
7. Indemnification.
(a) The Company and Jeffrey D. Witous, Rand R. Schulman, Oran M.
Thomas, Armando Viteri, Gregory J. White, Arthur S. Budman, Victoria Z. Farrell,
Ronald B. Hegli and Robert D. Ruhe (the "Principal Selling Stockholders") will,
jointly and severally, indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person,
if any, who controls each Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), from and against any and all losses, claims, liabilities,
expenses and damages (including any and all investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding between any of the indemnified
parties and any indemnifying parties or between any indemnified party and any
third party, or otherwise, or any claim asserted), to which any Underwriter, or
any such person, may become subject under the Act, the Exchange Act or other
Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, liabilities, expenses or damages arise out of or
are based on (i) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus, or (ii) the omission or alleged omission to state in such document a
material fact required to be stated in it or necessary to make the statements in
it not misleading, or (iii) any act or failure to act or any alleged act or
failure to act by an underwriter in connection with, or relating in any manner
to, the Shares or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action arising
out of or based upon matters covered by clause (i) or (ii) above (provided that
neither the Company nor the Principal Selling Stockholders shall be liable under
this clause (iii) to the extent it is finally judicially determined by a court
of competent jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or omitted to
be taken by such underwriter through its negligence or willful misconduct);
provided that neither the Company nor the Principal Selling Stockholders will be
liable to the extent that such loss, claim, liability, expense or damage (A)
arises from the sale of the Shares in the public offering to any person by an
Underwriter and is based on an untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives on behalf of any Underwriter expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus or (B)
results from an untrue statement of a material fact contained in, or the
omission of a material fact from, such preliminary prospectus, which untrue
statement or omission was corrected in the Prospectus (as then amended or
supplemented) if the Underwriters
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<PAGE> 16
sold Shares to the person alleging such loss, claim, liability, expense or
damage without sending or giving, at or prior to the written confirmation of
such sale, a copy of the Prospectus (as then amended or supplemented) if the
Company had previously furnished copies thereof to the Underwriters within a
reasonable amount of time prior to such sale or such confirmation, and the
Underwriters failed to deliver the corrected Prospectus, if required by law to
have so delivered it. Notwithstanding anything to the contrary contained in this
Section 7, the liability of each Principal Selling Stockholder to the
Underwriters or any other person shall be limited to an amount equal to the net
proceeds received (after deducting underwriters' discounts and commissions) by
such Principal Selling Stockholder from the sale of the Shares in this Offering.
No Principal Selling Stockholder shall be required to provide indemnification
hereunder until the Underwriters or control person seeking indemnification shall
have first made a demand for payment on the Company with respect to any such
losses, claims, liabilities, expenses or damages, and the Company shall have
either rejected such demand or failed to make such requested payment within 45
days after receipt of such demand. This indemnity agreement will be in addition
to any liability that the Company or any Principal Selling Stockholder may
otherwise have; provided, however, that in no case shall any Principal Selling
Stockholder be liable or responsible for any amount in excess of the net
proceeds received (after deducting underwriters' discounts and commissions) by
such Principal Selling Stockholder from the sale of the Shares in this Offering.
(b) Each Selling Stockholder, severally and not jointly,
agrees to indemnify and hold harmless the Company, each Underwriter, the
directors, officers, employees and agents of the Company and each Underwriter,
and each person, if any, who controls the Company and each Underwriter within
the meaning of the Act or the Exchange Act, to the same extent as the foregoing
indemnity from the Company to each Underwriter, but only insofar as losses,
claims, damages, liabilities or expenses arise out of or are based on (i) a
breach of such Selling Stockholder's representations and warranties contained in
Section 4 above or (ii) any untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to such Selling Stockholder furnished to the Company by or on behalf of
such Selling Stockholder specifically for use in the preparation of the
documents referred to in the foregoing indemnity; provided that such Selling
Stockholder will not be liable to the extent that such loss, claims, damage,
liability or expense results solely from an untrue statement of a material fact
contained in, or the omission of a material fact from, such preliminary
prospectus, which untrue statement or omission was corrected in the Prospectus
(as then amended or supplemented) if the Underwriters sold Shares to the person
alleging such loss, claim, liability, expense or damage without sending or
giving, at or prior to the written confirmation of such sale, a copy of the
Prospectus (as then amended or supplemented) if the Company had previously
furnished copies thereof to the Underwriters within a reasonable amount of time
prior to such sale or such confirmation, and the Underwriters failed to deliver
the corrected Prospectus, if required by law to have so delivered it.
Notwithstanding anything to the contrary contained in this Section 7, the
liability of each Selling Stockholder to the Underwriters or any other person
shall be limited to an amount equal to the net proceeds received (after
deducting underwriters' discounts and commissions) by such Selling Stockholder
from the sale of the Shares in this offering. The Company and the Selling
Stockholders may otherwise agree, as among themselves and without limiting the
rights of the Underwriters under this Agreement, as to the respective amounts of
such liability for which they each shall be responsible. This indemnity
agreement will be in addition to any liability that each Selling Stockholder may
otherwise have; provided, however, that in no case shall any Selling Stockholder
be liable or responsible for any amount in excess of the net proceeds received
(after deducting underwriters' discounts and commissions) by such Selling
Stockholder from the sale of the Shares in this Offering. This Section 7(b)
shall not be construed to limit in any manner the liability of the Principal
Selling Stockholders as set forth in Section 7(a) above.
(c) Each Underwriter will indemnify and hold harmless the Company, the
Selling Stock-
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<PAGE> 17
holders, each person, if any, who controls the Company or any of the Selling
Stockholders within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, each director of the Company and each officer of the Company who
signs the Registration Statement to the same extent as the foregoing indemnity
from the Company and the Selling Stockholders to each Underwriter, but only
insofar as losses, claims, liabilities, expenses or damages arise out of or are
based on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives on behalf
of such Underwriter expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus. This indemnity will be in addition to
any liability that each Underwriter might otherwise have; provided, however,
that in no case shall any Underwriter be liable or responsible for any amount in
excess of the underwriting discounts and commissions received by such
Underwriter.
(d) Any party that proposes to assert the right to be indemnified under
this Section 7 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 7, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions of this Section 7 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after notice
from the indemnifying party to the indemnified party of its election to assume
the defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified party
in connection with the defense. The indemnified party will have the right to
employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(i) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (ii) the indemnified party has reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, (iii) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (iv) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges will be reimbursed by
the indemnifying party promptly as they are incurred. An indemnifying party will
not be liable for any settlement of any action or claim effected without its
written consent (which consent will not be unreasonably withheld). No
indemnifying party shall, without the prior written consent of each indemnified
party, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding relating to the matters
contemplated by this Section 7 (whether or not any indemnified party is a party
thereto), unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising or
that may
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<PAGE> 18
arise out of such claim, action or proceeding.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 7 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, the Selling Stockholders
or the Underwriters, the Company, the Selling Stockholders and the Underwriters
will contribute to the total losses, claims, liabilities, expenses and damages
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted, but after deducting any contribution received
by the Company or the Selling Stockholders from persons other than the
Underwriters, such as persons who control the Company or the Selling
Stockholders within the meaning of the Act, officers of the Company who signed
the Registration Statement and directors of the Company, who also may be liable
for contribution) to which the Company or the Selling Stockholders and any one
or more of the Underwriters may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the Company, the
Selling Stockholders and the Underwriters. The relative benefits received by the
Company, the Selling Stockholders and the Underwriters shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders,
respectively, bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. If, but only if, the allocation provided by the foregoing
sentence is not permitted by applicable law, the allocation of contribution
shall be made in such proportion as is appropriate to reflect not only the
relative benefits referred to in the foregoing sentence but also the relative
fault of the Company, the Selling Stockholders and the Underwriters with respect
to the statements or omissions which resulted in such loss, claim, liability,
expense or damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company, the Selling Stockholders or
the Representatives on behalf of the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Stockholders and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 7(e) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, liability, expense or damage, or action in
respect thereof, referred to above in this Section 7(e) shall be deemed to
include, for purpose of this Section 7(e), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 7(e), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions received by it, and (ii) no
Selling Stockholder shall be required to contribute any amount in excess of the
net proceeds received by such Selling Stockholder from the sale of the Shares
hereunder (after deducting underwriter discounts and commissions), and no person
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 7(e) are several in proportion to their
respective underwriting obligations and not joint. For purposes of this Section
7(e), any person who controls a party to this Agreement within the meaning of
the Act will have the same rights to contribution as that party, and each
officer of the Company who signed the Registration Statement will have the same
rights to contribution as the Company, subject in each case to the provisions
hereof. Any party entitled to contribution, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim for
contribution may be made under this Section 7(e), will notify any such party
-18-
<PAGE> 19
or parties from whom contribution may be sought, but the omission so to notify
will not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have under this Section 7(e). No party will
be liable for contribution with respect to any action or claim settled without
its written consent (which consent will not be unreasonably withheld).
(f) The indemnity and contribution agreements contained in this Section
7 and the representations and warranties of the Company and the Selling
Stockholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any investigation made by or on behalf of the
Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii)
any termination of this Agreement.
8. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, on or prior to the Option Closing Date), by notice
to the Company from the Representatives, without liability on the part of any
Underwriter to the Company or any Selling Stockholder, if, prior to delivery and
payment for the Shares (or the Option Shares, as the case may be), in the sole
judgment of the Representatives, (i) trading in any of the equity securities of
the Company shall have been suspended by the Commission, by an exchange that
lists the Shares or by the Nasdaq National Market, (ii) trading in securities
generally on the New York Stock Exchange shall have been suspended or limited or
minimum or maximum prices shall have been generally established on such exchange
or over-the-counter market, or additional material governmental restrictions,
not in force on the date of this Agreement, shall have been imposed upon trading
in securities generally by such exchange or by order of the Commission or the
NASD or any court or other governmental authority, (iii) a general banking
moratorium shall have been declared by either federal or New York State
authorities or (iv) any material adverse change in the financial or securities
markets in the United States or in political, financial or economic conditions
in the United States or any outbreak or material escalation of hostilities or
declaration by the United States of a national emergency or war or other
calamity or crisis shall have occurred, the effect of any of which is such as to
make it, in the sole judgment of the Representatives, impracticable or
inadvisable to market the Shares on the terms and in the manner contemplated by
the Prospectus.
9. Substitution of Underwriters. If any one or more of the Underwriters
shall fail or refuse to purchase any of the Firm Shares which it or they have
agreed to purchase hereunder, and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of Firm Shares, the other
Underwriters shall be obligated, severally, to purchase the Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase, in the proportions which the number of Firm Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Firm Shares which all such non-defaulting Underwriters have so agreed
to purchase, or in such other proportions as the Representatives may specify;
provided that in no event shall the maximum number of Firm Shares which any
Underwriter has become obligated to purchase pursuant to Section 1 be increased
pursuant to this Section 9 by more than one-ninth of the number of Firm Shares
agreed to be purchased by such Underwriter without the prior written consent of
such Underwriter. If any Underwriter or Underwriters shall fail or refuse to
purchase any Firm Shares and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
exceeds one-tenth of the aggregate number of the Firm Shares and arrangements
satisfactory to the Representatives, the Company and the Committee for the
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, or the Company or any Selling Stockholder for the
purchase or sale of any Shares under this Agreement. In any such case either the
Representatives or the Company and the Committee
-19-
<PAGE> 20
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. Any action taken pursuant to this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. Miscellaneous. Notice given pursuant to any of the provisions of
this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered (a) if to the Company, at the office of the Company, 2011
Palomar Airport Road, Carlsbad, California 92009, Attention: Jeffrey D. Witous,
(b) if to any Selling Stockholder, __________________, or (c) if to the
Underwriters, to PaineWebber Incorporated at the offices of PaineWebber
Incorporated, 1285 Avenue of the Americas, New York, New York 10019, Attention:
Corporate Finance Department. Any such notice shall be effective only upon
receipt. Any notice under Section 8 or 9 may be made by telex or telephone, but
if so made shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company and the Selling Stockholders and of the
controlling persons, directors and officers referred to in Section 7, and their
respective successors and assigns, and no other person shall acquire or have any
right under or by virtue of this Agreement. The term "successors and assigns" as
used in this Agreement shall not include a purchaser, as such purchaser, of
Shares from any of the several Underwriters.
With respect to any obligation of the Company and the Selling
Stockholders hereunder to make any payment, to indemnify for any liability or to
reimburse for any expense, notwithstanding the fact that such obligation is a
joint and several obligation of the Company and the Selling Stockholders, the
Underwriters (or any other person to whom such payment, indemnification or
reimbursement is owed) may pursue the Company with respect thereto prior to
pursuing any Selling Stockholder.
All representations, warranties and agreements of the Company and the
Selling Stockholders contained herein or in certificates or other instruments
delivered pursuant hereto, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
of their controlling persons and shall survive delivery of and payment for the
Shares hereunder.
Any action required or permitted to be taken by the Representatives
under this Agreement may be taken by them jointly or by PaineWebber
Incorporated.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES OF SUCH STATE.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company, the Selling Stockholders and the Underwriters each hereby
irrevocably waive any right they may have to a trial by jury in respect of any
claim based upon or arising out of this Agreement or the transactions
contemplated hereby.
-20-
<PAGE> 21
This Agreement may not be amended or otherwise modified or any
provision hereof waived except by an instrument in writing signed by the
Representatives and the Company.
-21-
<PAGE> 22
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
TRITEAL CORPORATION
By /s/ Jeffrey D. Witous
---------------------------------------
Jeffrey D. Witous, President,
Chairman and Chief Executive Officer
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE I ATTACHED HERETO
By: The Committee
By /s/ Art Budman
---------------------------------------
Confirmed as of the date first
above mentioned:
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
Acting on behalf of themselves
and as the Representatives
of the other several Underwriters
named in Schedule II hereof.
By: PAINEWEBBER INCORPORATED
By /s/ Jim Arnett
-------------------------------
Title
----------------------------
HAMBRECHT & QUIST LLC
By /s/ Cristina Morgan
-------------------------------
Title Managing Director
----------------------------
<PAGE> 23
PIPER JAFFRAY INC.
By /s/ William Benjamin
-------------------------------
Title Vice President
-----------------------------
<PAGE> 24
SCHEDULE I
----------
SELLING STOCKHOLDERS
--------------------
<TABLE>
<CAPTION>
Total Number
of Firm Shares
Name of Selling Stockholder to be Sold
- --------------------------- ---------------
<S> <C>
Steven K. Beal 15,000
John C. Beer 1,800
Peter Bell 7,142
Mark Bonsak 11,500
Sophie and Arthur Brody Foundation 20,000
Arthur S. Budman 15,000
Konstantinos P. Caldis 15,000
Benjamin Casado 21,000
Gregory Cohn 1,000
Martin Cohn 2,500
Cooperative Holding Corporation 6,000
Robert L. Davis 6,000
Manual Dupkin II Education and Charitable Trust 28,571
Vickie Farrell 300
FFA General Partnership 2,428
Arthur J. and Elizabeth Foxe Franke 18,020
Bruce Friedman 1,250
Robert Gagnard 25,000
A.W. Greif T/U/D FBO David L. Greif 3,500
Ronald B. Hegli 10,000
Bruce H. Heimann, Trustee, FBO B.
Heimann Family Trust U/A/D 12/18/90 13,320
David L. and Barbara J. Heimann, Co-Trustees,
David L. Heimann Family Trust U/A/D 10/12/88 12,000
Charles S. Hilliard 10,000
Imperial Bancorp 32,277
James Jimmerson 6,650
David H. Koch 52,488
David Korkosz 20,000
Timothy T. Kraft 10,000
W. Kevin Kreitz 5,500
James P. Lampert 2,142
Lloyd Software Ltd. 50,000
Richard S. Mertz 7,000
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
Total Number
of Firm Shares
Name of Selling Stockholder to be Sold
- --------------------------- ---------------
<S> <C>
William C. and Joelene Mertz 7,000
J.J. Miller II, Trustee, UD Joshua W. Miller Trust 7,142
Geraldine F. Morrow Family Irrevocable Trust 10,000
Robert O'Rourke 25,000
Noble Ouye 1,800
Edmund A. and Susan R. Restivo, Jr. 1,500
Van Duyn Ridgway, Trustee, FBO Thayer
Ridgway II and Marianne Ayers Trust UDT 8/13/92 2,347
Van Duyn Ridgway, Trustee, FBO Ridgway
1992 Family Trust UDT 8/14/92 5,000
Robert Rinaldi 8,000
Rothschild Charitable Foundation, Inc. 7,142
Robert D. Ruhe 20,000
S. Kann Sons Co. 7,000
Donald E. and Eileen Sanshu 10,000
Rand R. Schulman 28,881
Richard Serbin 5,000
Slade, Inc. 12,500
John Solaro 8,000
Robert Stein 8,300
Oran M. Thomas 95,000
Armando Viteri 20,000
Gregory J. White 50,000
Jeffrey D. Witous 50,000
Wright & Roy Investments LLC 13,000
----------
Total 835,000
</TABLE>
<PAGE> 26
SCHEDULE II
-----------
UNDERWRITERS
------------
<TABLE>
<CAPTION>
Total Number
of Firm Shares
Name of Underwriters to be Purchased
- -------------------- ---------------
<S> <C>
PaineWebber Incorporated 440,000
Hambrecht & Quist LLC 440,000
Piper Jaffray Inc. 440,000
Alex. Brown & Sons Incorporated 80,000
Donaldson, Lufkin & Jenrette Securities Corporation 80,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated 80,000
Morgan Stanley & Co. Incorporated 80,000
Prudential Securities Incorporated 80,000
Smith Barney Inc. 80,000
Fahnestock & Co. Inc. 50,000
GS2 Securities, Inc. 50,000
Ladenburg, Thalmann & Co., Inc. 50,000
Pennsylvania Merchant Group Ltd. 50,000
Torrey Pines Securities, Inc. 50,000
Tucker Anthony Incorporated 50,000
Unterberg Harris 50,000
Wessels, Arnold & Henderson, L.P. 50,000
-------------
Total 2,200,000
</TABLE>
<PAGE> 27
EXHIBIT A
TRITEAL CORPORATION
---------------------
PRICE DETERMINATION AGREEMENT
February 19, 1997
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated February 19,
1997 (the Underwriting Agreement"), among TriTeal Corporation, a Delaware
corporation (the "Company"), the Selling Stockholders named in Schedule I
thereto or hereto (the "Selling Stockholders"), and the several Underwriters
named in Schedule II thereto or hereto (the "Underwriters"), for whom
PaineWebber Incorporated, Hambrecht & Quist LLC and Piper Jaffray Inc. are
acting as representatives (the "Representatives"). The Underwriting Agreement
provides for the purchase by the Underwriters from the Company and the Selling
Stockholders, subject to the terms and conditions set forth therein, of an
aggregate of 2,200,000 shares (the "Firm Shares") of the Company's common stock,
par value $.001 per share. This Agreement is the Price Determination Agreement
referred to in the Underwriting Agreement.
Pursuant to Section 1 of the Underwriting Agreement, the undersigned
agree with the Representatives as follows:
The public offering price per share for the Firm Shares shall be
$19.25.
A-1
<PAGE> 28
The purchase price per share for the Firm Shares to be paid by the
several Underwriters shall be $18.19 representing an amount equal to the public
offering price set forth above, less $1.06 per share.
The Company represents and warrants to each of the Underwriters that
the representations and warranties of the Company set forth in Section 3 of the
Underwriting Agreement are accurate as though expressly made at and as of the
date hereof.
The Selling Stockholders represent and warrant to each of the
Underwriters that the representations and warranties of the Selling Stockholders
set forth in Section 4 of the Underwriting Agreement are accurate as though
expressly made at and as of the date hereof.
As contemplated by the Underwriting Agreement, attached as Schedule II
is a completed list of the several Underwriters, which shall be a part of this
Agreement and the Underwriting Agreement.
This Agreement shall be governed by the law of the State of New York
without regard to the conflict of laws principles of such State.
If the foregoing is in accordance with your understanding of the
agreement among the Underwriters, the Company and the Selling Stockholders,
please sign and return to the Company a counterpart hereof, whereupon this
instrument along with all counterparts and together with the Underwriting
Agreement shall be a binding agreement among the Underwriters, the Company and
the Selling Stockholders in accordance with its terms and the terms of the
Underwriting Agreement.
Very truly yours,
TRITEAL CORPORATION
By
------------------------------------
Jeffrey D. Witous, President,
Chairman and Chief Executive Officer
A-2
<PAGE> 29
THE SELLING STOCKHOLDERS NAMED
IN SCHEDULE I TO THE UNDERWRITING
AGREEMENT
By: The Committee
By
------------------------------------
Confirmed as of the date first
above mentioned:
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
Acting on behalf of themselves
and as the Representatives
of the other several Underwriters
named in Schedule II hereof.
By: PAINEWEBBER INCORPORATED
By
-------------------------------
Title
----------------------------
HAMBRECHT & QUIST LLC
By
-------------------------------
Title
-----------------------------
PIPER JAFFRAY INC.
By
-------------------------------
Title
-----------------------------
A-3
<PAGE> 30
EXHIBIT B
POWER OF ATTORNEY
TRITEAL CORPORATION
Common Stock
[Names and Addresses of Committee]
Ladies and Gentlemen:
The undersigned understands that TriTeal Corporation, a Delaware
corporation (the "Company"), has filed a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"), in connection with the proposed public offering and sale by the Company,
the undersigned (the "Selling Stockholder") and certain other Selling
Stockholders of the Company's Common Stock, par value $.001 per share (the
"Common Stock").
The Selling Stockholder desires to sell certain shares of Common Stock
and to include such shares among the shares covered by the Registration
Statement. The number of shares of Common Stock which the undersigned desires to
sell (the "Shares") are set forth beneath the signature of the Selling
Stockholder below.
Concurrently with the execution and delivery of this Power of Attorney,
the undersigned is delivering to you, or requesting the Company to deliver to
you, certificates for the Shares, which you are authorized to deposit with
American Stock Transfer & Trust Company, as custodian (the "Custodian"),
pursuant to a custody agreement in the form attached as Attachment A hereto (the
"Custody Agreement").
1. In connection with the foregoing, the Selling Stockholder hereby
makes, constitutes and appoints you collectively, and each of you, individually
(a "Member") and each of your respective substitutes under Section 3, the true
and lawful attorneys-in-fact of the undersigned (the Members or any of them or
their respective substitutes, being herein referred to collectively as the
"Committee"), with full power and authority, in the name and on behalf of the
B-1
<PAGE> 31
Selling Stockholder:
(a) To enter into the Custody Agreement and deposit with the Custodian
pursuant thereto the certificates for the Shares delivered to the Committee
concurrently herewith;
(b) For the purpose of effecting the sale of the Shares, to execute and
deliver (i) an Underwriting Agreement (the "Underwriting Agreement"), by and
among the Company, the other Selling Stockholders and the representatives (the
"Representatives"), selected by the Company, of the several Underwriters (the
"Underwriters") and (ii) a Price Determination Agreement (as defined in the
Underwriting Agreement), by and among the Company, the other Selling
Stockholders and the Representatives of the several Underwriters;
(c) To endorse, transfer and deliver certificates for the Shares to or
on the order of the Representatives or to their nominee or nominees, and to give
such orders and instructions to the Custodian as the Committee may in its sole
discretion determine with respect to (i) the transfer on the books of the
Company of the Shares in order to effect such sale (including the names in which
new certificates for such Shares are to be issued and the denominations
thereof); (ii) the delivery to or for the account of the Representatives of the
certificates for the Shares against receipt by the Custodian of the full
purchase price to be paid therefor; (iii) the remittance to the Selling
Stockholder of the Selling Stockholder's share of the proceeds, after payment of
expenses described in the Underwriting Agreement, from any sale of Shares; and
(iv) the return to the Selling Stockholder of certificates representing the
number of Shares (if any) deposited with the Custodian but not sold by the
Selling Stockholder under the Registration Statement for any reason;
(d) To retain Cooley Godward LLP (who are also counsel to the Company)
as legal counsel for the Selling Stockholders in connection with any and all
matters referred to herein;
(e) To take for the Selling Stockholder all steps deemed necessary or
advisable by the Committee in connection with the registration of the Shares
under the Act, including without limitation filing amendments to the
Registration Statement, requesting acceleration of effectiveness of the
Registration Statement, advising the Securities and Exchange Commission that the
reason the Selling Stockholder is offering the Shares for sale is to diversify
the Selling Stockholder's investments and to assist the Company in enlarging the
public market for the Common Stock, informing said Commission that the Selling
Stockholder has no knowledge of any material adverse information with regard to
the current and prospective operations of the Company which is not stated in the
Registration Statement, and such other steps as the Committee may in its
absolute discretion deem necessary or advisable;
(f) To make, acknowledge, verify and file on behalf of the Selling
Stockholder applications, consents to service of process and such other
B-2
<PAGE> 32
undertakings or reports as may be required by law with state commissioners or
officers administering state securities or Blue Sky laws and to take any other
action required to facilitate the qualification of the Shares under the
securities or Blue Sky laws of the jurisdictions in which the Shares are to be
offered;
(g) If necessary, to endorse (in blank or otherwise) on behalf of the
Selling Stockholder the certificate or certificates representing the Shares, or
a stock power or powers attached to such certificate or certificates; and
(h) To make, execute, acknowledge and deliver all such other contracts,
orders, receipts, notices, requests, instructions, certificates, letters and
other writings and, in general, to do all things and to take all action which
the Committee in its sole discretion may consider necessary or proper in
connection with or to carry out the aforesaid sale of Shares, as fully as could
the Selling Stockholder if personally present and acting.
2. This Power of Attorney and all authority conferred hereby is granted
and conferred subject to and in consideration of the interests of the Company,
the Representatives, the Underwriters and the other Selling Stockholders and,
for the purpose of completing the transactions contemplated by this Power of
Attorney, this Power of Attorney and all authority conferred hereby shall be
irrevocable and shall not be terminated by any act of the Selling Stockholder or
by operation of law, whether by the death, disability, incapacity or liquidation
of the Selling Stockholder or by the occurrence of any other event or events
(including without limitation the termination of any trust or estate for which
the Selling Stockholder is acting as a fiduciary or fiduciaries), and if, after
the execution hereof, the Selling Stockholder shall die or become disabled or
incapacitated or is liquidated, or if any other such event or events shall occur
before the completion of the transactions contemplated by this Power of
Attorney, the Committee shall nevertheless be authorized and directed to
complete all such transactions as if such death, disability, incapacity,
liquidation or other event or events had not occurred and regardless of notice
thereof.
3. Each Member shall have full power to make and substitute any person
in the place and stead of such Member, and the Selling Stockholder hereby
ratifies and confirms all that each Member or substitute or substitutes shall do
by virtue of these presents. All actions hereunder may be taken by any one
Member or his substitute. In the event of the death, disability or incapacity of
any Member, the remaining Member or Members shall appoint a substitute therefor.
4. The Selling Stockholder hereby represents, warrants and covenants
that:
(a) All information furnished to the Company by or on behalf of the
Selling Stockholder for use in connection with the preparation of the
Registration Statement is and will be true and correct in all material respects
B-3
<PAGE> 33
and does not and will not omit any material fact necessary to make such
information not misleading;
(b) The Selling Stockholder, having full right, power and authority to
do so, has duly executed and delivered this Power of Attorney;
(c) The Selling Stockholder has carefully reviewed the Registration
Statement and will carefully review each amendment thereto immediately upon
receipt thereof from the Company and will promptly advise the Company in writing
if:
(i) The name and address of the Selling Stockholder is not
properly set forth in each preliminary prospectus (collectively, the
"Preliminary Prospectus") contained in the Registration Statement and
the prospectuses (collectively, the "Prospectus") contained in the
Registration Statement at the time it becomes effective;
(ii) The Selling Stockholder has reason to believe that (A)
any information furnished to the Company by or on behalf of the Selling
Stockholder for use in connection with the Registration Statement or
the Prospectus or any Preliminary Prospectus is not true and complete;
and (B) any Preliminary Prospectus, the Prospectus and any supplements
thereto contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(iii) The Selling Stockholder knows of any material adverse
information with regard to the current or prospective operations of the
Company or any of its subsidiaries which is not disclosed in any
Preliminary Prospectus, the Prospectus or the Registration Statement;
or
(iv) Except as indicated in the Prospectus, the Selling
Stockholder knows of any arrangements made or to be made by any person,
or of any transaction already effected, (A) to limit or restrict the
sale of shares of the Common Stock during the period of the public
distribution, (B) to stabilize the market for the Common Stock or (C)
for withholding commissions, or otherwise to hold any other person
responsible for the distribution of the Selling Stockholder's
participation;
(d) In connection with the offering of the Shares, the Selling
Stockholder has not taken and will not take, directly or indirectly, any action
intended to, or which might reasonably be expected to, cause or result in
stabilization or manipulation of the price of the Shares to facilitate the sale
or resale of the Shares;
B-4
<PAGE> 34
(e) The Selling Stockholder has not distributed and will not distribute
any prospectus or other offering material in connection with the offering and
sale of the Shares other than a Preliminary Prospectus, a Prospectus or other
material permitted by the Act;
(f) The Selling Stockholder will notify the Company in writing
immediately of any changes in the foregoing information which should be made as
a result of developments occurring after the date hereof and prior to the
Closing Date under the Underwriting Agreement, and the Committee may consider
that there has not been any such development unless advised to the contrary;
(g) The Selling Stockholder has, and at the time of delivery of the
Shares to the Representatives and the Manager[s] it will have, full power and
authority to enter into this Power of Attorney, to carry out the terms and
provisions hereof and to make all the representations, warranties and covenants
contained herein; and
(h) This Power of Attorney is the valid and binding agreement of the
Selling Stockholder and is enforceable against the Selling Stockholder in
accordance with its terms.
5. The representations, warranties and covenants of the Selling
Stockholder in this Power of Attorney are made for the benefit of, and may be
relied upon by, the other Selling Stockholders, the Committee, the Company and
its counsel, and their representatives, agents and counsel, the Custodian, the
Underwriters and the Representatives.
6. The Committee shall be entitled to act and rely upon any statement,
request, notice or instructions respecting this Power of Attorney given to it by
the Selling Stockholder, not only as to the authorization, validity and
effectiveness thereof, but also as to the truth and acceptability of any
information therein contained.
It is understood that the Committee assumes no responsibility or
liability to any person other than to deal with the Shares deposited with it and
the proceeds from the sale of the Shares in accordance with the provisions
hereof. The Committee makes no representations with respect to and shall have no
responsibility for the Registration Statement, the Prospectus or any Preliminary
Prospectus nor, except as herein expressly provided, for any aspect of the
offering of Common Stock, and it shall not be liable for any error of judgment
or for any act done or omitted or for any mistake of fact or law except for its
own negligence or bad faith. The Selling Stockholder agrees to indemnify the
Committee for and to hold the Committee harmless against any loss, claim, damage
or liability incurred on its part arising out of or in connection with it acting
as the Committee under this Power of Attorney, as well as the cost and expense
of investigating and defending against any such
B-5
<PAGE> 35
loss, claim, damage or liability, except to the extent such loss, claim, damage
or liability is due to the negligence or bad faith of the Member seeking
indemnification. The Selling Stockholder agrees that the Committee may consult
with counsel of its own choice (who may be counsel for the Company) and it shall
have full and complete authorization and protection for any action taken or
suffered by it hereunder in good faith and in accordance with the opinion of
such counsel.
It is understood that the Committee may, without breaching any express
or implied obligation to the Selling Stockholder hereunder, release, amend or
modify any other Power of Attorney granted by any other Selling Stockholder.
[7. It is understood that the Committee shall serve entirely without
compensation.]
8. This Power of Attorney shall be governed by the laws of the State of
New York without regard to the conflict of laws principles of such State.
This Power of Attorney may be signed in two or more counterparts with
the same effect as if the signature thereto and hereto were upon the same
instrument.
In case any provision in this Power of Attorney shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
This Power of Attorney shall be binding upon the Committee and the
Selling Stockholder and the heirs, legal representatives, distributees,
successors and assigns of the Selling Stockholder.
Dated: __________, 19__
Very truly yours,
----------------------------------(1)
----------------------------------(1)
Signature(s) of Selling Stockholder(s)
- --------------------------
(1) To be signed in exactly the same manner as the shares are registered.
B-6
<PAGE> 36
----------------------------------
Address:
--------------------------
--------------------------
--------------------------
SHARES TO BE SOLD:
shares of Common Stock
----------
ACKNOWLEDGED AND ACCEPTED:
THE COMMITTEE:
- -------------------------------------
- -------------------------------------
- -------------------------------------
- -------------------------------------
B-7
<PAGE> 37
ATTACHMENT A
CUSTODY AGREEMENT
CUSTODY AGREEMENT, dated ________, 1997, among ______________________,
as Custodian (the "Custodian"), and the persons listed on Annex I hereto (each a
"Selling Stockholder" and collectively the "Selling Stockholders").
TriTeal Corporation, a Delaware corporation (the "Company"), intends to
file a Registration Statement (the "Registration Statement") with the Securities
and Exchange Commission to register for sale to the public under the Securities
Act of 1933, as amended (the "Act"), shares of the Company's common stock, $.001
par value per share (the "Common Stock").
The shares to be covered by the Registration Statement shall consist of
(a) up to _________ shares of Common Stock to be sold by the Company and (b) up
to ________ shares of Common Stock (the "Shares") to be sold by the Selling
Stockholders.
Each of the Selling Stockholders has executed and delivered a Power of
Attorney (the "Power of Attorney") naming _____________, ____________ and
_______________, and each of them, as his attorney-in-fact (the "Committee"),
for certain purposes, including the execution, delivery and performance of this
Agreement in his name, place and stead, in connection with the proposed sale by
each Selling Stockholder of the number of Shares set forth opposite such Selling
Stockholder's name in Annex I.
1. A custody arrangement is hereby established by the Selling
Stockholders with the Custodian with respect to the Shares, and the Custodian is
hereby instructed to act in accordance with this Agreement and any amendments or
supplements hereto authorized by the Committee.
2. There are herewith delivered to the Custodian, and the Custodian
hereby acknowledges receipt of, certificates representing the Shares, which
certificates have been endorsed in blank or are accompanied by duly executed
stock powers, in each case with all signatures guaranteed by a commercial bank
or trust company or by a member firm of the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. or a member of the National Association of
Securities Dealers, Inc. Such certificates are to be held by the Custodian for
the account of the Selling Stockholders and are to be disposed of by the
Custodian in accordance with this Agreement.
3. The Custodian is authorized and directed by the Selling
Stockholders:
(a) To hold the certificates representing the Shares delivered by the
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<PAGE> 38
Selling Stockholders in its custody;
(b) On or immediately prior to the settlement date for any Shares sold
pursuant to the Registration Statement (the "Closing Date"), to cause such
Shares to be transferred on the books of the Company into such names as the
Custodian shall have been instructed by the representatives (the
"Representatives") of the several Underwriters (the "Underwriters"); to cause to
be issued, against surrender of the certificates for the Shares, a new
certificate or certificates for such Shares, free of any restrictive legend,
registered in such name or names; to deliver such new certificates representing
such Shares to the Representatives, as instructed by the Representatives on the
Closing Date for their account or accounts against full payment therefor; and to
give receipt for such payment;
(c) To disburse such payments in the following manner: (i) to itself,
as agent for the Selling Stockholders, a reserve amount to be designated in
writing by the Committee from which amount the Custodian shall pay, as soon as
reasonably practicable, (A) the Selling Stockholders' proportionate share of all
expenses of the offering and sale of the Shares as provided in the Underwriting
Agreement by and among the Company, the Selling Stockholders and the
Representatives, (B) its reasonable charges and disbursements for acting
hereunder with respect to the sale of the Shares and (C) any applicable stock
transfer taxes; and (ii) to each Selling Stockholder, pursuant to the written
instructions of the Committee, (A) on the Closing Date, a sum equal to the share
of the proceeds to which such Selling Stockholder is entitled, as determined by
the Committee, less the reserve amount designated by the Committee, and (B)
promptly after all proper charges, disbursements, costs and expenses shall have
been paid, any remaining balance of the amount reserved under clause (i) above.
Before making any payment from the amount reserved under clause (i) above,
except payments made pursuant to subclause (B) of clause (ii) above, the
Custodian shall request and receive the written approval of the Committee. To
the extent the expenses referred to in subclause (A) of clause (i) above exceed
the amount reserved, the Selling Stockholders shall remain liable for their
proportionate share of such expenses.
Subject in each case to the indemnification obligations set forth in
Section 7, in the event Shares of any Selling Stockholder are not sold [prior to
____________, 19__], the Custodian shall deliver to such Selling Stockholder as
soon as practicable after such date termination of the offering of the Shares,
certificates representing such Shares deposited by such Selling Stockholder.
Certificates returned to any Selling Stockholder shall be returned with any
related stock powers, and any new certificates issued to the Selling
Stockholders with respect to such Shares shall bear any appropriate legend
reflecting the unregistered status thereof under the Act.
This Agreement is for the express benefit of the Company and the
Selling Stockholders, the Underwriters and the Representatives. The obligations
an
-2-
<PAGE> 39
authorizations of the Selling Stockholders hereunder are irrevocable and
shall not be terminated by any act of any Selling Stockholder or by operation of
law, whether by the death, disability, incapacity or liquidation of any Selling
Stockholder or by the occurrence of any other event or events (including without
limitation the termination of any trust or estate for which any Selling
Stockholder is acting as a fiduciary or fiduciaries), and if after the execution
hereof any Selling Stockholder shall die or become disabled or incapacitated or
is liquidated, or if any other event or events shall occur before the delivery
of such Selling Stockholder's Shares hereunder to the Representatives, such
Shares shall be delivered to the Representatives in accordance with the terms
and conditions of this Agreement, as if such event had not occurred, regardless
of whether or not the Custodian shall have received notice of such event.
Until payment of the purchase price for the Shares has been made to the
Selling Stockholders or to the Custodian, the Selling Stockholders shall remain
the owner of (and shall retain the right to receive dividends and distributions
on, and to vote) the number of Shares delivered by each of them to the Custodian
hereunder. Until such payment in full has been made or until the offering of
Shares has been terminated, each Selling Stockholder agrees that it will not
give, sell, pledge, hypothecate, grant any lien on, transfer, deal with or
contract with respect to the Shares and any interests therein.
The Custodian shall assume no responsibility to any person other than
to deal with the certificates for the Shares and the proceeds from the sale of
the Shares represented thereby in accordance with the provisions hereof, and the
Selling Stockholders, severally and not jointly, hereby agree to indemnify the
Custodian for and to hold the Custodian harmless against any and all losses,
claims, damages or liabilities incurred on its part arising out of or in
connection with it acting as the Custodian pursuant hereto, as well as the cost
and expenses of investigating and defending any such losses, claims, damages or
liabilities, except to the extent such losses, claims, damages or liabilities
are due to the negligence or bad faith of the Custodian. The Selling
Stockholders agree that the Custodian may consult with counsel of its own choice
(who may be counsel for the Company), and the Custodian shall have full and
complete authorization and protection for any action taken or suffered by the
Custodian hereunder in good faith and in accordance with the opinion of such
counsel.
Each of the Selling Stockholders, jointly and not severally, hereby
represents and warrants that: (a) it has, and at the time of delivery of its
Shares to the Representatives it will have, full power and authority to enter
into this Agreement and the Power of Attorney, to carry out the terms and
provisions hereof and thereof and to make all of the representations, warranties
and agreements contained herein and therein; and (b) this Agreement and the
Power of Attorney are the valid and binding agreements of such Selling
Stockholder and are enforceable against such Selling Stockholder in accordance
with their respective terms.
The Custodian's acceptance of this Agreement by the execution hereof
-3-
<PAGE> 40
shall constitute an acknowledgment by the Custodian of the authorization herein
conferred and shall evidence the Custodian's agreement to carry out and perform
this Agreement in accordance with its terms.
The Custodian shall be entitled to act and rely upon any statement,
request, notice or instruction with respect to this Agreement given to it on
behalf of each of the Selling Stockholders if the same shall be made or given to
the Custodian by the Committee, not only as to the authorization, validity and
effectiveness thereof, but also as to the truth and acceptability of any
information therein contained.
This Agreement may be executed in two or more counterparts with the
same effect as if the signatures thereto and hereto were upon the same
instrument. Execution by the Custodian of one counterpart hereof and its
delivery thereof to the Committee shall constitute the valid execution of this
Agreement by the Custodian.
This Agreement shall be binding upon the Custodian, each of the Selling
Stockholders and the respective heirs, legal representatives, distributees,
successors and assigns of the Selling Stockholders.
This Agreement shall be governed by the laws of the State of New York
without regard to the conflict of laws principles of such State.
Any notice given pursuant to this Agreement shall be deemed given if in
writing and delivered in person, or if given by telephone or telegraph if
subsequently confirmed by letter: (i) if to a Selling Stockholder, to his
address set forth in Annex I; and (ii) if to the Custodian, to it at
___________________________.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
----------------------------------
__________, as Custodian
THE SELLING STOCKHOLDERS
LISTED IN ANNEX I HERETO:
By: The Committee
By
--------------------------------
-4-
<PAGE> 41
ANNEX I
<TABLE>
<CAPTION>
Names and Addresses of Shares to be Sold
Selling Stockholders
<S> <C>
--------
Total.....................................
========
</TABLE>
<PAGE> 42
EXHIBIT C
_____ 1997
PAINEWEBBER INCORPORATED
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
In consideration of the agreement of the several Underwriters, for
which PaineWebber Incorporated, Hambrecht & Quist LLC and Piper Jaffray Inc.
(the "Representatives") intend to act as Representatives, to underwrite a
proposed public offering (the "Offering") of the Common Stock, par value $.001
per share (the "Common Stock") of TriTeal Corporation, a Delaware corporation
(the "Company"), the undersigned hereby agrees that the undersigned will not,
from the date hereof through ninety (90) days from the commencement of the
public offering of such shares, without the prior written consent of PaineWebber
Incorporated, offer to sell, sell, contract to sell, grant any option to sell,
or otherwise dispose of, or require the Company to file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933 to
register, any shares of Common Stock or securities convertible into or
exchangeable for Common Stock or warrants or other rights to acquire shares of
Common Stock of which the undersigned is now, or may in the future become, the
beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934) (other than pursuant to employee stock option plans or in
connection with other employee incentive compensation arrangements) provided,
however, that the foregoing shall not prohibit (i) a bona fide gift or gifts so
long as such donee or donees thereof agree to be bound by the terms of this
Lock-Up Agreement, or (ii) any distribution by a partnership to its partners so
long as such partners agree in writing to be bound by the terms of this Lock-Up
Agreement.
Very truly yours,
By [SIGNATURE]
----------------------------
Name
--------------------------
C-1
<PAGE> 43
EXHIBIT D
FORM OF OPINION OF
COUNSEL TO THE COMPANY
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
full corporate power and authority to conduct all the activities conducted by
it, to own or lease all the assets owned or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus.
All of the outstanding shares of Common Stock have been, and the
Shares, when paid for by the Underwriters in accordance with the terms of the
Agreement, will be, duly and validly authorized, validly issued, fully paid and
nonassessable are not subject to any preemptive or similar right under (i) the
general corporation law of the State of Delaware, (ii) the Company's certificate
of incorporation or bylaws, or (iii) any instrument, document, contract or other
agreement filed as an exhibit to the Registration Statement. Except as described
in the Registration Statement or the Prospectus, to the best of our knowledge,
there is no commitment or arrangement to issue, and there are no outstanding
options, warrants or other rights calling for the issuance of, any share of
capital stock of the Company or any Subsidiary to any person or any security or
other instrument that by its terms is convertible into, exercisable for or
exchangeable for capital stock of the Company.
No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery of the
Shares by the Company, in connection with the execution, delivery and
performance of the Agreement(2) by the Company or in connection with the taking
by the Company of any action contemplated thereby, except such as have been
obtained under the Act and the Rules and Regulations and such as may be required
under state securities or "Blue Sky" laws or by the bylaws and rules of the NASD
in connection with the purchase and distribution by the Underwriters of the
Shares to be sold by the Company.
The authorized, issued and outstanding capital stock of the Company was
as set forth in the Registration Statement and the Prospectus under the caption
"Capitalization" as of the date stated therein. For outstanding Common Stock,
counsel may rely solely on a certificate from the Transfer Agent. The
description of the Common Stock contained under the caption "Description of
Capital Stock" in the Prospectus is accurate in all material
- -------------------------
(2) All references in this opinion to the Agreement shall include the
Underwriting Agreement and the Price Determination Agreement.
D-1
<PAGE> 44
respects and is a fair summary to the extent required by the Act and the Rules
and Regulations. The form of stock certificate filed as an exhibit to the
Registration Statement is in due and proper form and complies with all
applicable statutory requirements.
The Registration Statement and the Prospectus comply in all material
respects as to form with the requirements of the Act and the Rules and
Regulations (except that we express no opinion as to financial statements,
schedules and other financial and statistical data contained in the Registration
Statement or the Prospectus).
To the best of our knowledge, any instrument, document, lease, license,
contract or other agreement (collectively, "Documents") required to be described
or referred to in the Registration Statement or the Prospectus has been properly
described or referred to therein to the extent required by the Act and the Rules
and Regulations and any Document required to be filed as an exhibit to the
Registration Statement has been filed as an exhibit thereto.
To the best of our knowledge, except as disclosed in the Registration
Statement or the Prospectus, no person or entity has the right to require the
registration under the Act of shares of Common Stock or other securities of the
Company by reason of the filing or effectiveness of the Registration Statement
or the offering contemplated thereby.
To the best of our knowledge, there are no legal or governmental
proceedings to which the Company is a party or to which any of the properties of
the Company is subject which are required to be shown in the Prospectus under
the Act and the Rules and Regulations.
The Company has full corporate power and authority to enter into the
Agreement, and the Agreement has been duly authorized, executed and delivered by
the Company, is a valid and binding agreement of the Company and, except for the
indemnification and contribution provisions thereof, as to which we express no
opinion, is enforceable against the Company in accordance with the terms
thereof.
The execution and delivery by the Company of, and the performance by
the Company of its agreements in, the Agreement do not and will not _.(i)
violate the certificate of incorporation or bylaws of the Company, (ii) breach
or result in a default under, cause the time for performance of any obligation
to be accelerated under, or result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company or the Subsidiary
pursuant to the terms of any Document filed as an exhibit to the Registration
Statement (iii) breach or otherwise violate any existing obligation of the
Company under any court or administrative order, judgment or decree of which we
have knowledge or (iv) violate applicable provisions of any statute or
regulation of the State of California, of the United States or the Delaware
General Corporation Law.
D-2
<PAGE> 45
The Shares have been duly authorized for quotation on the Nasdaq
National Market.
We have been advised by the staff of the Commission that the
Registration Statement has become effective under the Act and that no order
suspending the effectiveness of the Registration Statement has been issued and
no proceeding for that purpose has been instituted or is threatened or pending.
To our knowledge, there are no actions, suits, proceedings or
investigations pending or, to our knowledge, overtly threatened in writing
against the Company, before or by any court, governmental agency or arbitrator
which _.(i) seek to challenge the legality or enforceability of the Agreement,
(ii) seek to challenge the legality or enforceability of any of the Documents
filed, or required to be filed, as exhibits to the Registration Statement, (iii)
seek damages or other remedies with respect to any of the Documents filed, or
required to be filed, as exhibits to the Registration Statement, (iv) except as
set forth in or contemplated by the Registration Statement and the Prospectus,
seek money damages in excess of $1,000,000 or seek to impose criminal penalties
upon the Company or the Subsidiary of which we have knowledge or (v) seek to
enjoin any of the business activities of the Company or the Subsidiary or the
transactions described in the Prospectus and of which we have knowledge.
In connection with the preparation of the Registration Statement and
the Prospectus, we have participated in conferences with officers and
representatives of the Company and with its certified public accountants (as you
and your counsel have done). As such conferences we have made inquires of such
officers, representatives and accountants, and discussed the contents of the
Registration Statement and the Prospectus. Except with respect to matters
expressly covered by paragraph 4 of this opinion, we have not ourselves
independently verified, and, accordingly, do not render any opinion upon, the
accuracy, completeness or fairness of the Registration Statement or the
Prospectus. Based on the foregoing, nothing has come to our attention that
causes us to believe that, as of the Effective Date, the Registration Statement
contained any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus at the time such Prospectus was
issued, or at the Closing Date [and the Option Closing Date,] contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances in which they were made, not misleading (except that we
express no opinion as to financial statements, schedules and other financial or
statistical data contained in the Registration Statement or the Prospectus).
The foregoing opinion is subject to the qualification that the
D-3
<PAGE> 46
enforceability of the Agreement may be: _.(i) subject to bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally; and (ii) subject to general principles of equity and limitations on
the availability of equitable remedies (regardless of whether such
enforceability is considered in a proceeding at law or in equity), including
principles of commercial reasonableness or conscionability and an implied
covenant of good faith and fair dealing.
This letter is furnished by us solely for your benefit in connection
with the transactions referred to in the Agreement and may not be circulated to,
or relied upon by, any other person, except that this letter may be relied upon
by your counsel in connection with the opinion letter to be delivered to you
pursuant to Section 6(g) of the Agreement.
In rendering the foregoing opinion, counsel may rely, to the extent
they deem such reliance proper, on the opinions (in form and substance
reasonably satisfactory to Underwriters' counsel) of other counsel reasonably
acceptable to Underwriters' counsel as to matters governed by the laws of
jurisdictions other than the United States, the State of California and the
State of Delaware, and as to matters of fact, upon certificates of officers of
the Company and of government officials; provided that such counsel shall state
that the opinion of any other counsel is in form satisfactory to such counsel.
Copies of all such opinions and certificates shall be furnished to counsel to
the Underwriters on the Closing Date.
D-4
<PAGE> 47
EXHIBIT E
FORM OF OPINION
---------------
OF COUNSEL TO THE
-----------------
SELLING STOCKHOLDERS
--------------------
[Each of the Selling Stockholders who is a trustee has full power and
authority under his or her respective trust agreement to enter into the
Agreement and the Agreement and Power of Attorney and to sell, transfer and
deliver the Shares pursuant to the Agreement. All authorizations and consents
necessary under the respective trust agreements for the execution and delivery
of the Agreement and the Agreement and Power of Attorney on behalf of each of
the Selling Stockholders who is a trustee has been given.] Assuming each of the
Underwriters has purchased the Shares in good faith and without notice of any
adverse claim within the meaning of the applicable Uniform Commercial Code, the
delivery of the Shares on behalf of the Selling Stockholders pursuant to the
terms of the Agreement and payment therefor by the Underwriters will transfer
good and marketable title to the Shares to the several Underwriters purchasing
the Shares, free and clear of any adverse claims.
Each of the Agreement and the Agreement and Power of Attorney has been
duly authorized, executed and delivered by or on behalf of each of the Selling
Stockholders, is a valid and binding agreement of each Selling Stockholder and,
except for the indemnification and contribution provisions of the Agreement and
the Agreement and Power of Attorney are enforceable against the Selling
Stockholders in accordance with the terms thereof.
No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery of the
Shares by or on behalf of the Selling Stockholders, in connection with the
execution, delivery and performance of the Agreement and the Agreement and Power
of Attorney by or on behalf of the Selling Stockholders or in connection with
the taking by or on behalf of the Selling Stockholders of any action
contemplated thereby [or, if so required, all such consents, approvals,
authorizations and orders [specifying the same] have been obtained and are in
full force and effect], except such as have been obtained under the Act or the
Rules and Regulations and such as may be required under state securities or
"Blue Sky" laws or by the bylaws and rules of the NASD in connection with the
purchase and distribution by the Underwriters of the Shares to be sold by the
Selling Stockholders.
The execution and delivery by the Selling Stockholders of, and the
performance by the Selling Stockholders of their agreements in, the Agreement
E-1
<PAGE> 48
and the Agreement and Power of Attorney, do not and will not (i) violate the
certificate of incorporation or bylaws of any corporate Selling Stockholder,
(ii) breach or result in a default under, cause the time for performance of any
obligation to be accelerated under, or result in the creation or imposition of
any lien, charge or encumbrance upon any of the assets of any Selling
Stockholder pursuant to the terms of (A) any indenture, mortgage, deed of trust,
loan agreement, bond, debenture, note agreement, capital lease or other evidence
of indebtedness of which we have knowledge, or (B) any voting trust arrangement
to which any Selling Stockholder is a party that restricts the ability of any
such Selling Stockholder to issue or sell securities and of which we have
knowledge, (iii) breach or otherwise violate any existing obligation of any
Selling Stockholder under any court or administrative order, judgment or decree
of which we have knowledge or (iv) violate applicable provisions of any statute
or regulation in the States of Delaware, California or of the United States.
There are no transfer or similar taxes payable in connection with the
sale and delivery of the Shares by the Selling Stockholders to the several
Underwriters, except as specified in such opinion.
The foregoing opinion is subject to the qualification that the
enforceability of the Agreement and the Agreement and Power of Attorney may be:
_.(i) subject to bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally; and (ii) subject to general
principles of equity and limitations on the availability of equitable remedies
(regardless of whether such enforceability is considered in a proceeding at law
or in equity), including principles of commercial reasonableness or
conscionability and an implied covenant of good faith and fair dealing.
This letter is furnished by us solely for your benefit in connection
with the transactions referred to in the Agreement and may not be circulated to,
or relied upon by, any other person, [except that this letter may be relied upon
by your counsel in connection with the opinion letter to be delivered to you
pursuant to Section 6(g) of the Agreement].
In rendering the foregoing opinion, counsel may rely, to the extent
they deem such reliance proper, on the opinions (in form and substance
reasonably satisfactory to Underwriters' counsel) of other counsel reasonably
acceptable to Underwriters' counsel as to matters governed by the laws of
jurisdictions other than the United States and the State of Delaware, and as to
matters of fact, upon certificates of the Selling Stockholders and of government
officials; provided that such counsel shall state that the opinion of any other
counsel is in form satisfactory to such counsel. Copies of all such opinions and
certificates shall be furnished to counsel to the Underwriters on the Closing
Date.
E-2
<PAGE> 1
- -------------------------------------------------------------------------------
EXHIBIT 10.31
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PERFORMANCE INCENTIVE PLAN FY 1998
- -------------------------------------------------------------------------------
TRITEAL
===============================================================================
PERFORMANCE INCENTIVE PLAN
Fiscal Year 1998
===============================================================================
June 2, 1997
- ----------------------------------------------------TRITEAL--------------------
1
<PAGE> 2
- -------------------------------------------------------------------------------
PERFORMANCE INCENTIVE PLAN FY 1998
- -------------------------------------------------------------------------------
A. PURPOSE
The purpose of the Performance Incentive Plan ("Plan") is to encourage the
achievement of Company performance objectives through teamwork at the Company,
unit and individual level.
- -------------------------------------------------------------------------------
B. ELIGIBILITY TO PARTICIPATE
o Group A Participants:
CEO
Officers
Other selected senior level employees*
* Employees covered by other incentive arrangements may be transitioned
into the Plan by FY 1999
Provisions pertaining to Group A participants:
- Identified at the start of the fiscal year
- New hires are eligible on a pro-rated basis
- Employees promoted into a participating position are eligible on a
pro-rated basis
- Participants terminating prior to the end of the Plan period are
not eligible for that period, unless termination is due to death,
disability, or normal retirement, in which event a prorated
incentive may be paid
- No incentive is payable to the participant for the Plan period if
the participant is on a written Performance Plan
o Group B Participants:
All employees not in Group A or participating in any of the Company's
sales incentive plans will be eligible to participate in a discretionary
bonus pool. Actual recipients will be determined according to the process
outlined in Section H below.
- -------------------------------------------------------------------------------
C. TARGET and MAXIMUM INCENTIVES: GROUP A PARTICIPANTS
o Incentives expressed as percentage of base salary earned during each Plan
period.
o Target incentive guidelines by participant level:*
CEO 50%
Officers 25% - 35%
Vice Presidents/Directors 20% - 30%
Senior Individual Contributors 10% - 15%
* Variations may be made on an approved basis
- ----------------------------------------------------TRITEAL--------------------
2
<PAGE> 3
- -------------------------------------------------------------------------------
PERFORMANCE INCENTIVE PLAN FY 1998
- -------------------------------------------------------------------------------
o No maximum individual incentive, subject to limitation on "over Plan"
incentives specified in Section F below.
- -----------------------------------------------------TRITEAL--------------------
3
<PAGE> 4
- -------------------------------------------------------------------------------
PERFORMANCE INCENTIVE PLAN FY 1998
- -------------------------------------------------------------------------------
D. PLAN PERIODS
o Group A Participants: Incentives will be determined and paid on a
quarterly basis; incentives for performance over Plan, if any, will be
determined and paid on an annual basis.
o Group B Participants: Discretionary bonuses will be determined and paid
generally on an annual basis, although bonuses may be paid during the
year, as appropriate.
- -------------------------------------------------------------------------------
E. COMPANY PERFORMANCE OBJECTIVES and THRESHOLDS: GROUP A PARTICIPANTS
o At the start of the Plan year, Company performance objectives will be
established by quarter for revenue ($) and operating income ($,
excluding, as an expense, the accrual for target incentives under the
Plan).
o At the end of each Plan period, the Company performance level will be
determined, based upon the weighted average of the % achievement of the
revenue objective and the % achievement of the operating income
objective, with revenue performance weighted 2:1 compared to operating
income performance.
o Example: If 100% of the revenue objective is achieved and 97% of the
operating income objective is achieved, the Company performance level is
calculated as 100% x 2 = 200% + 97% = 297% + 3 = 99%.
o For Group A participants, company performance will be measured on a
cumulative basis, as follows:
Q1 incentive: Q1 performance vs. Q1 objectives
Q2 incentive: Q1 + Q2 performance vs. Q1 + Q2 objectives
Q3 incentive: Q1 + Q2 + Q3 performance vs. Q1 + Q2 + Q3 objectives
Q4 incentive: Q1 + Q2 + Q3 +Q4 performance vs. Q1 + Q2 + Q3 + Q4
objectives
o Thresholds: For any incentives to be paid to Group A participants
for a given quarter, each of the following minimum Company performance
levels must be achieved:
Revenue At least 80% of objectives
Operating income At least 70% of objectives
In addition, the weighted average of revenue performance and operating
income performance must be at least 80% achievement of objectives.
- ----------------------------------------------------TRITEAL--------------------
4
<PAGE> 5
- -------------------------------------------------------------------------------
PERFORMANCE INCENTIVE PLAN FY 1998
- -------------------------------------------------------------------------------
F. INCENTIVE DETERMINATION PROCESS: GROUP A PARTICIPANTS
o Incentives for Group A participants will be determined based 100% upon
Company performance. However, regardless of Company performance, no
incentive will be paid to a Group A participant for a given Plan period
if the participant is on a written Performance Plan at the end of the
Plan period.
o At the end of each of the first three Plan quarters, each Group A
participant's incentive will be determined based upon multiplying the
participant's target incentive by an adjustment factor, using the scale
below:
Quarterly Quarterly
Company Performance Level Target Incentive
(Weighted Average % Achievement of Objectives) Adjustment Factor
Over 100% 1.00
100% 1.00
95% 0.90
90% 0.80
85% 0.70
80% 0.60
Under 80% 0.00
o At the end of the 4th Plan quarter, each Group A participant's incentive
will be determined by multiplying the participant's target incentive by
an adjustment factor, according to the following process:
- The participant's Q4 target incentive will be based upon a % of
full year base salary earned, rather than base salary for the
quarter.
- The Q4 incentive may exceed 100% of the target incentive, if
cumulative Company performance is greater than 100% achievement of
objectives. However, the total "over Plan" incentives for all
Group A participants may not exceed 30% of the amount of actual
annual operating income that is greater than targeted operating
income.
- Since the Q4 incentive is based upon full year Company performance
and the participant's full year base salary, the actual incentive
paid (if any) to the Group A participant will be the full year
incentive minus incentive payments made for Q1, Q2 and Q3
(provided, however, that incentives previously paid will not be
repaid to the Company if the full year incentive is less than the
total of the Q1 + Q2 + Q3 incentive payments).
- ----------------------------------------------------TRITEAL--------------------
5
<PAGE> 6
- -------------------------------------------------------------------------------
PERFORMANCE INCENTIVE PLAN FY 1998
- -------------------------------------------------------------------------------
F. INCENTIVE DETERMINATION PROCESS: GROUP A PARTICIPANTS (continued)
- The following adjustment factor scale will be used for the Q4
incentive:
Q1 + Q2 + Q3 + Q4 Q4
Company Performance Level Target Incentive
(Weighted Average % Achievement of Objectives) Adjustment Factor
Over 150% *
150% 2.00
140% 1.80
130% 1.60
120% 1.40
110% 1.20
100% 1.00
90% 0.80
80% 0.60
Under 80% 0.00
* Slope continues at 2:1 (e.g., at 160% Company performance level, the
target incentive adjustment factor would be 2.20)
- -------------------------------------------------------------------------------
G. SAMPLE CALCULATION: GROUP A PARTICIPANTS
o Participant A = annual base salary of 160,000, target incentive of 35%
base
o Assume the following hypothetical Company performance targets and actual
performance levels:
<TABLE>
<CAPTION>
QUARTERLY Weighted YEAR TO DATE Weighted
Operating Average Operating Average
Revenue (M) Income (M) Performance Revenue (M) Income (M) Performance
Q1
<S> <C> <C> <C> <C> <C> <C>
Target 5.0 0.5 5.0 0.5
Actual 5.2 0.5 5.2 0.5
% Target 104.0% 100.0% 102.7% 104.0% 100.0% 102.7%
- -----------------------------------------------------------------------------------------------------------
Q2
Target 7.0 1.0 12.0 1.5
Actual 5.8 0.7 11.0 1.2
% Target 82.9% 70.0% 78.6% 91.7% 80.0% 87.8%
- -----------------------------------------------------------------------------------------------------------
Q3
Target 8.0 1.5 20.0 3.0
Actual 9.0 1.7 20.0 2.9
% Target 112.5% 113.3% 112.8% 100.0% 96.7% 98.9%
- -----------------------------------------------------------------------------------------------------------
Q4
Target 10.0 2.2 30.0 5.2
</TABLE>
- ----------------------------------------------------TRITEAL--------------------
6
<PAGE> 7
- -------------------------------------------------------------------------------
PERFORMANCE INCENTIVE PLAN FY 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Actual 11.8 3.1 31.8 6.0
% Target 118.0% 140.9% 125.6% 106.0% 115.4% 109.1%
</TABLE>
- ----------------------------------------------------TRITEAL--------------------
7
<PAGE> 8
- -------------------------------------------------------------------------------
PERFORMANCE INCENTIVE PLAN FY 1998
- -------------------------------------------------------------------------------
G. SAMPLE CALCULATION: GROUP A PARTICIPANTS (continued)
o Q1, Q2, Q3 Incentive Calculation:
<TABLE>
<CAPTION>
Q1 Q2 Q3
<S> <C> <C> <C>
Quarterly Base Salary 40,000 40,000 40,000
Target Incentive % 35% 35% 35%
Target Incentive 14,000 14,000 14,000
Company Performance YTD 102.7% 87.8% 98.9%
Incentive Adjustment Factor *1.000 0.756 0.978
Incentive 14,000 10,584 13,692
</TABLE>
* Capped at 100%
o Q4 Incentive Calculation:
<TABLE>
<S> <C>
Full year base salary 160,000
Target incentive % 35%
Target incentive 56,000
Company Performance YTD 109.1%
Incentive Adjustment Factor 1.182
Incentive 66,192
Minus Q1, Q2, Q3 Payments (38,276)
Final Q4 incentive *27,916
</TABLE>
* Subject to cap of 30% of incremental operating income over Plan that
can be applied to total of Group A participants' actual incentives over
target
- ----------------------------------------------------TRITEAL--------------------
8
<PAGE> 9
- -------------------------------------------------------------------------------
PERFORMANCE INCENTIVE PLAN FY 1998
- -------------------------------------------------------------------------------
H. BONUS DETERMINATION PROCESS: GROUP B PARTICIPANTS
o Target discretionary bonus pool determined at start of Plan year based
upon base payroll of eligible participants, targeted participation
percentage and projected typical discretionary bonus size.
o Example (hypothetical):
- Total base payroll for eligible Group B participants = $5,000,000
- Targeted participation percentage = 20%
- Targeted participating payroll = $5,000,000 x .20 = $1,000,000
- Typical discretionary bonus = 5% base salary
- Discretionary bonus pool = $1,000,000 x .05 = $50,000
o The discretionary bonus pool will be budgeted for the Plan year, rather
than accrued based upon company performance.
o Discretionary bonuses should generally not be less than $500 nor more
than $2,500 per recipient.
o Discretionary bonus award process:
- Participation based upon outstanding individual performance
- Candidates for award recommended by immediate supervisor,
detailing performance basis for award
- Candidates reviewed and approved by appropriate Officer
- Final awards subject to review and approval of CEO
- ----------------------------------------------------TRITEAL--------------------
9
<PAGE> 1
EXHIBIT 11.1
TRITEAL CORPORATION
STATEMENT REGARDING CALCULATION OF NET INCOME (LOSS) PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
March 31,
--------------------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Net income (loss) ........................ $(1,910) $(4,842) $ 116
======= ======= =======
Average common shares outstanding ........ 7,520 3,493 4,011
Adjustments to reflect requirements of the
Securities and Exchange Commission
(Effect of SAB 83) ....................... 908 2,492 2,492
Effect of assumed conversion of Series A
convertible preferred shares from date of
issuance ................................. - 727 -
------- ------- -------
Adjusted shares outstanding .............. 8,428 6,712 6,503
======= ======= =======
Net income (loss) per share(1) ........... $ (.23) $ (.72) $ 0.02
======= ======= =======
</TABLE>
(1) Common equivalent shares are excluded from the computation for loss periods,
as their effect is antidulitive, except that, pursuant to SAB 83, common shares
and common equivalent shares issued during the 12 months prior to the Company's
June 1996 initial public offering have been included in the calculation as
outstanding for all periods prior to the initial public offering.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No.333-13957) pertaining to the 1995 Stock Option Plan, 1996 Employee Stock
Purchase Plan and the Non-Plan Stock Options of TriTeal Corporation of our
report dated April 30, 1997, with respect to the consolidated financial
statements of TriTeal Corporation included in this Annual Report (Form 10-K) for
the year ended March 31, 1997.
/s/ ERNST & YOUNG LLP
San Diego, California
June 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 11,614,707
<SECURITIES> 31,248,987
<RECEIVABLES> 9,048,817
<ALLOWANCES> (300,000)
<INVENTORY> 0
<CURRENT-ASSETS> 53,808,623
<PP&E> 2,594,889
<DEPRECIATION> (1,033,280)
<TOTAL-ASSETS> 55,700,854
<CURRENT-LIABILITIES> 7,585,234
<BONDS> 0
0
0
<COMMON> 10,768
<OTHER-SE> 48,104,852
<TOTAL-LIABILITY-AND-EQUITY> 55,700,854
<SALES> 15,825,725
<TOTAL-REVENUES> 15,825,725
<CGS> 3,395,323
<TOTAL-COSTS> 15,241,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 220,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,909,843)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,909,843)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,909,843)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> 0
</TABLE>
