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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
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: 0-27772
METROWERKS INC.
(exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par value
(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 registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [x]
The aggregate market value of the voting stock by non-affiliates
of the registrant as of OCTOBER 15, 1998 WAS $33,111,474.
Number of shares of common stock outstanding as of OCTOBER 15, 1998: 12,919,030
This Annual Report on Form 10-K contains 72 Pages of which this is number 1.
The Index to exhibits begins on page 28.
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<S> <C> <C>
Part I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Part II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters 19
Item 6. Selected Consolidated Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 27
Part III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 27
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 28
Signatures 30
</TABLE>
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Except for the historical information contained herein, the discussion in this
Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below, as well as under the
captions "Additional Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 1. Business
Metrowerks Inc. ("Metrowerks" or "the Company") was amalgamated on January 1,
1990 under the Canada Business Corporations Act and the information contained
herein includes that of the Company and its wholly owned subsidiary, Metrowerks
Corporation, a Texas corporation, which was formed in June 1994, and Metrowerks
Corporation's wholly owned subsidiary, Metrowerks Co. Ltd., a Japanese
corporation, which was formed in August 1996. Metrowerks is a computer software
development company that designs, develops, markets and supports software
development tools. The Company's products are used primarily by professional
software programmers and by programmers in the academic community to create
software applications. The Company's principal product line, Metrowerks(R)
CodeWarrior,(R) consists of a suite of programming tools used to develop
software in the C, C++, Java,/TM/ Pascal and low-level (assembly) programming
languages.
CodeWarrior is hosted on Windows(R) 95/98/NT(R)-based, Solaris-based and
Macintosh(R) computers and is used to develop software for platforms using a
variety of operating systems ("OS") including desktop operating systems Windows
95/98/NT and Mac(R) OS and commercial off-the-shelf embedded operating systems,
such as VxWorks, QNX, Nucleus OS and Windows CE. CodeWarrior is also the
primary tools solution for many proprietary platforms such as 3Com's Palm
Computing platform, Sony PlayStation, Nintendo 64 and AG Communications', a
Lucent subsidiary, GTD-5 operating system.
The Company's principal line of products, known as CodeWarrior, includes an
Integrated Development Environment ("IDE") which includes: native and two-
machine debuggers, which use a common user interface and which provide source-
level debugging capabilities for a variety of operating systems, including those
listed above; a text editor for editing source code; class browsers used for
developing and editing programs in object-oriented languages such as C++ and
Java; a state-of-the-art project manager which obsoletes "make" files; computer
language compilers for compiling source code written in C, C++, Pascal, Java,
and assembly programming languages into machine code for a variety of
microprocessors, including the 68K, PowerPC,(R) x86, and MIPS(R) families of
microprocessors; and linkers, which permit compiled object code to be linked to
create "executable object code," more commonly known as software programs.
The Company believes that CodeWarrior has become the industry standard for
developing Macintosh programs, and that its CodeWarrior products have been used
to program over 75% of all software applications that run native on the Power
Macintosh computer. Since the introduction of CodeWarrior in January 1994, the
number of registered users of CodeWarrior has grown to over 130,000 users in 75
countries.
BACKGROUND
PROGRAMMING LANGUAGES AND COMPILERS
Microprocessors operate based on electrical impulses, with each character or
"bit" consisting of "on" (current or "1") and "off" (no current or "0"). Each
keystroke on the computer keyboard is represented by one "byte," which is
composed of a unique sequence of eight bits. This programming language is known
as machine language or object code. Because it is difficult and cumbersome to
program in object code, programming languages that use the standard 26-letter
alphabet have been devised. Programming languages are divided into two basic
types: low-level and high-level. Low-level languages, known as assembly
languages, map the logic of the instructions that a microprocessor processes on
a one-for-one basis. Programs written in assembly language are very efficient in
their use of microprocessor memory. However, because of this one-to-one mapping
to a particular microprocessor's instruction set, there is not "one" assembly
language but rather one for every kind of
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microprocessor. In order for a program written in assembly language for a
particular kind of microprocessor to operate on a different kind of
microprocessor, the program must be rewritten. Therefore, programming in
assembly languages takes longer, is expensive and requires a great deal of
technical training and skill.
The problems inherent in low-level languages led to the development of high-
level languages. From the perspective of the programmer, these high-level
languages are easier to use and understand. Currently, the dominant high-level
programming languages are:
C and C++ - the dominant programming languages used for developing "shrink-
wrapped" Windows and Macintosh applications software, and used increasingly
to develop software for 32-bit embedded systems; and
Java - used for networking-based applications where Java-optimized
bytecodes can run on a variety of hardware, and do not need to be rewritten
in native mode to run on each specified platform.
Pascal - used for education purposes;
BASIC - used for database application front-end development and in
education;
COBOL - used for programming mainframe-based applications;
Because high-level languages use their own logic to solve problems and do not
match the microprocessor's instruction set on a one-for-one basis, their "source
code" must be translated, or compiled, into object code. This task is performed
by software programs, known as compilers, which convert a software application
written in source code into object code that a particular microprocessor can
understand. Development of all software applications requires that source code
be compiled into object code, and thus one of the most important tools a
programmer uses is a compiler.
TECHNOLOGICAL TRENDS
The continuing evolution of computer technology has dramatically impacted the
environment in which computer programmers must operate. The development of new
programming languages, new operating systems, new types of microprocessors and
the increased focus by developers and companies on time-to-market issues have
all created new demands on programmers.
One of the most significant changes has been the increasing number of 32-bit
microprocessors used in desktop and embedded systems. This shift has resulted in
the development of new operating systems for the desktop and embedded systems
markets, the creation of major new microprocessors, such as Intel's Pentium(R)
family of processors, the increased use of object-oriented programming
languages, most notably C++ and Java, and the importance of networking and
communications technology. Prior to the invention in the 1980's of relatively
low-cost Dynamic Random Access Memory ("DRAM"), programmers went to great
lengths to "optimize" their software to use as little memory as possible,
resulting in relatively longer product development times. Today's competitive
environment for desktop and embedded applications software requires that
reliable software applications be developed with a wide variety of features and
brought to market quickly and in a cost-effective manner. Today's programmer
must balance optimization and use of memory and systems resources with time-to-
market considerations.
The introduction and increasing use of Reduced Instruction Set Computing
("RISC") technology, such as the PowerPC microprocessors now used in the Power
Macintosh computer and the modified RISC architectures of the Pentium, Pentium
Pro and Pentium II microprocessors, has also affected the applications software
market. RISC-based microprocessors utilize different instruction sets than the
traditional complex instruction sets utilized in other common microprocessors
such as Intel's X86 or Motorola's 68K family of microprocessors. Because of
their relatively low cost, 32-bit RISC-based microprocessors are being utilized
in embedded systems applications in
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consumer electronics products, hand-held computers, set-top boxes, game
machines, telecommunications products, automotive products and other electronic
systems. These 32-bit microprocessors permit more features and functionality
than can be programmed into 4-, 8- or 16-bit microprocessors, which have lower
computing power and memory capability.
NEEDS OF PROGRAMMERS
The Company believes that software companies and their programmers regard the
following as critical attributes of programming tools:
. BUILD TIME. The Company believes that today, programmers are concerned with
not only creating the most highly optimized code, but also with the time
required to build code and the speed with which a reliable product can be
brought to market. Therefore, "build time," the time it takes to convert a
set of source code instructions into a finished application, has become
critically important to programmers. Shorter build times allow programmers
more time to add features to an application and to test and debug the
software more thoroughly.
. SPEED, SIZE AND QUALITY OF OBJECT CODE. In general, application developers
prefer to have applications whose code is smaller and faster than their
competitor's application. Faster code execution usually maximizes customer
satisfaction regarding performance, and smaller code size minimizes the use
of memory which can reduce hardware system requirements. This is true for
both desktop and embedded applications. Some applications, particularly in
the embedded systems market, are time-critical and/or memory constrained and
demand code that is optimized for speed and/or size.
. EASE OF USE. Because of the sophisticated nature of software development, the
large number and geographic dispersion of programmers and the increasing
number of microprocessors and operating systems being targeted by developers,
software development tools must be easy to use. Extensive training
requirements and learning curves associated with complicated development
tools can result in increased costs and extended development cycles.
. FREQUENCY OF UPDATES. Due to the increased pace of microprocessor innovation,
changes in operating systems and evolving standards for programming
languages, programming tools must be updated frequently. Programmers must
keep current with these changes so that the development process is not
delayed by requiring programmers to spend time modifying their software
applications to reflect such changes.
. SOPHISTICATED DEBUGGING. Because of the increasing complexity of software,
programming tools must provide debugging capabilities sophisticated enough to
permit programmers to test software quickly and thoroughly to identify and
correct "bugs" in the software being developed. This need is particularly
critical for developers of embedded applications, which are usually burned
into read-only memory ("ROM").
STRATEGY
The Company's vision is to be the leading high-volume provider of cost-
effective, standardized programming tools for software developers in the desktop
development market, the embedded development market and the Java technology
market. The Company has focused on providing developers with a single IDE that
allows them to write software applications in a variety of programming languages
targeted at a variety of microprocessors and operating systems used in these
markets. The key elements of the Company's strategy are as follows:
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SALES PENETRATION IN THE EMBEDDED MARKET. The Company has expanded its sales
strategy to better target the embedded market. The Company intends to sell
into the embedded market through direct sales to end customers and through
original equipment manufacturer ("OEM") licensing arrangements. OEMs as defined
by the Company includes semiconductor vendors and systems vendors.
Direct Sales to End Customers. The Company has historically sold most of
its products indirectly through third party distributors. These types of
distribution channels have not been utilized in the embedded market, and in
fiscal 1998 the Company focused on strengthening its direct sales team for
its anticipated growth in the embedded market. The Company's direct sales
force has increased from 11 employees at the end of fiscal 1997 to 26
employees at the end of fiscal 1998. The Company anticipates that it will
need to increase the number of employees in its direct sales force in
fiscal 1999 to properly address the sales opportunities that the Company
believes exist in the embedded market.
OEM Licensing Arrangements. Metrowerks has targeted semiconductor vendors
and systems vendors as potential licensees of the CodeWarrior IDE and other
CodeWarrior technologies. Semiconductor vendors typically ship hardware and
software development tools to potential customers for evaluating their
microprocessors for potential platforms. By providing developers with an
easy-to-use product that is customized for their boards, semiconductor
vendors increase the potential for design wins by reducing the customer's
development costs and improving the time to market for the new product.
The Company entered into several OEM arrangements in fiscal 1998 including
agreements with Applied Microsystems Corporation, Be, Inc., 3Com
Corporation and QNX Software Systems, Ltd., and anticipates that OEM
arrangements, as described above, will be a significant percentage of
revenue for fiscal 1999. However, there can be no assurance that the
Company will be able to enter into future agreements or that the existing
or future agreements will result in sales of the CodeWarrior products.
Systems vendors (primarily providers of integrated development solutions
including off-the-shelf operating systems, proprietary operating systems
and hardware platforms) need traditional embedded tools for initial
platform development (pre-platform development) that are compatible with
the tools used for application development (post-platform development).
System vendors need to provide developers with post-platform development
tools that are easy-to-use, desktop-like tools. Management believes that
the Company is well positioned for this market, as CodeWarrior products are
unique in that they benefit from development experience in both the desktop
and embedded markets. The Company does not believe that any of their
competitors have similar product experience.
BROADEN PRODUCT OFFERINGS. The Company believes that its future success is
highly dependent on its ability to market CodeWarrior products that have a
variety of front-ends (for new programming languages) and back-ends (for new
platforms or operating systems) in order to reach as large a group of potential
customers as possible. In fiscal 1998, the Company released four new products
with ten additional products scheduled for release through the end of calendar
1998. In continuing to execute on this element of its strategy, the Company
intends to:
Expand by Developing Back-Ends for Embedded Platforms. The Company's
initial products had back-ends for Motorola 68K and PowerPC microprocessors
used by the Macintosh computer. The Company has since developed back ends
for the x86 family of microprocessors (including optimizations for Intel
MMX, AMD K6 and AMD K6-2 with 3D Now! instruction sets), the MIPS families
of microprocessors, the NEC V800 and Vr Series of microprocessors and
Motorola's 56800 family of DSP microprocessors. The Company is in the
process of developing back ends for Motorola's MCore microprocessor and
Hitachi SuperH families of microprocessors which are popular in the
embedded systems market.
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Increase Support for a Variety of Operating Systems. The Company currently
supports development for desktop operating systems such as Windows 95/98/NT
and Mac OS; commercial off-the-shelf embedded operating systems such as
VxWorks, QNX, Nucleus OS and Windows CE, and proprietary embedded operating
systems such as PlayStation OS, Palm OS, and Nintendo. The Company
anticipates supporting additional multi-purpose, commercial off-the-shelf
embedded operating systems and proprietary embedded operating systems in
the future. The Company's intention is to provide developers with the
ability to target a variety of operating systems and the related
microprocessors from the CodeWarrior IDE.
Partnering Agreements. The Company has entered into product development
agreements with various companies. The details of these arrangements vary,
but generally they provide for the porting of Metrowerks' programming tools
to a specific platform, for payments to Metrowerks for its porting efforts
and for either ownership of, or a license to market, the ported programming
tools. The other party to these agreements is generally permitted to
utilize the ported tools for its own internal use, or in certain instances,
to bundle the tools with hardware developed by such party. These partnering
agreements have provided the Company with a significant amount of revenue,
constituting approximately 21% of its revenue for fiscal 1998 and 26% for
fiscal 1997. As a result, the Company is able to devote more of its
financial resources to research and development than it would otherwise be
able to do. There can be no assurance that the Company will be able to
continue to enter into these arrangements in the future.
CONTINUED ENHANCEMENTS TO THE COMPANY'S WINDOWS 95/98/NT DEVELOPMENT TOOLS. In
fiscal 1997, the Company released CodeWarrior Professional, which combined the
Company's Windows 95/98/NT-hosted and Mac-hosted tools for developing
applications for the desktop market. The Company has focused on adding features
to the CodeWarrior Professional product to make the product more competitive
with other tools in the Windows development market. The Company added several
new features in fiscal 1998 including fully integrated debug support and support
for Intel MMX, AMD K6 and AMD K6-2 with 3D Now! instruction sets. In September
1998, Metrowerks shipped CodeWarrior Professional Release 4 which included a
resource editor and, in the Company's opinion, one of the most highly optimized
x86 compilers in the market. The Company plans to add several functions to these
tools in the near future the most important of which is Rapid Application
Development ("RAD") tools scheduled to be released with CodeWarrior Professional
Release 5 in the third quarter of fiscal 1999. Although Microsoft dominates this
market, the Company feels that the market is large enough for the Company to
increase market share in certain niches. These niches include:
Cross-Platform Development - Developers who program for Windows as
well as other targets such as Mac OS, Solaris and Linux, which
Microsoft does not support.
Academic Development - Educational institutions have a variety of
installed systems and benefit from the ability to deploy a common
solution across platforms. See Strategy - Target the Educational
Market below.
Game Development - Developers in this market benefit from the
multimedia extension support provided by CodeWarrior for Intel and AMD
processors. Developers also benefit from CodeWarrior's support of
multiple gaming platforms, including Sony PlayStation and Nintendo 64.
High-Performance Development - The x86 compiler in CodeWarrior
Professional is, in the Company's opinion, one of the most highly
optimized compilers in the market. Additionally, the Company recently
released the CodeWarrior Analysis Tools, a suite of low-priced tools
for analyzing code performance. The code performance tools are
compatible with code generated by either CodeWarrior or Microsoft's
Visual C++.
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TARGET THE EDUCATIONAL MARKET. The Company currently markets its CodeWarrior
Academic products to universities, colleges and high schools, many of which have
standardized on CodeWarrior for computer programming classes. Educational
institutions have a variety of installed computers and operating systems in
their labs that may or may not be compatible with the student's home computer.
Because CodeWarrior is a multi platform solution (runs on Windows 95/98/NT,
Solaris and Mac OS and allows students to write code for platforms), all of
these institutions can eliminate the need for different sets of development
tools for each platform. Additionally, CodeWarrior allows students and
professors to share code bases that are written on different platforms.
CodeWarrior's multiple language support also offers greater flexibility in
language choice to these institutions.
MAINTAIN LEADERSHIP IN THE MACINTOSH COMPUTER MARKET. The Company believes that
its CodeWarrior products have become the industry standard for Macintosh-
hosted programming tools and that its CodeWarrior products have been
used to program over 75% of all commercially available software applications for
the Power Macintosh computer. The Company's intention is to maintain this
position through continued enhancements to its Macintosh tools.
PRODUCTS
The following is a listing of the Company's products which represent over 90
percent of the Company's total product revenues:
Desktop Products
CODEWARRIOR PROFESSIONAL: CodeWarrior Professional is Metrowerks' flagship
product. It is an integrated development tools suite for creating applications
that run on the Windows 95/98/NT or Mac OS operating systems. CodeWarrior
Professional supports the development of applications in C, C++, Java, and
Pascal. On the Windows platform, it includes support for 3DNow! extensions on
AMD K-6 processors, and MMX extensions on Pentium processors. On the Macintosh
platform, it includes support for AltiVec extensions on PowerPC processors.
CODEWARRIOR PROFESSIONAL ACADEMIC: This product is identical to CodeWarrior
Professional and is marketed to the academic community. This product is
limited to non-commercial use.
DISCOVER PROGRAMMING FOR WINDOWS AND DISCOVER PROGRAMMING FOR MACINTOSH: These
are entry-level products designed for individuals who want to learn
programming. These products contain the CodeWarrior IDE hosted on Windows
95/98/NT or MacOS for developing C, C++, Java and Pascal applications. The
products contain books and materials specifically designed for people who want
to learn how to program.
VISUAL SOURCESAFE FOR MACINTOSH: This product is a version control tool that
is used by developers on Macintosh computers to manage large software
projects. It is fully compatible with Microsoft's Windows-based Visual
SourceSafe.
The Company has released or is currently planning to release the following
CodeWarrior desktop tools in fiscal 1999:
CODEWARRIOR PROFESSIONAL (SOLARIS): CodeWarrior Professional (Solaris) is the
version of the CodeWarrior Professional product hosted on the Solaris
operating system and running on workstations from Sun Microsystems Inc. This
product allows developers to create C/C++ applications using command-line
adapters for GNU compilers and Java applications using Metrowerks bytecode
compilers.
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CODEWARRIOR ANALYSIS TOOLS(TM): This CodeWarrior product which was introduced
in October 1998, is a combination hierarchical profiler and visual code
coverage tool. Developers use these tools to analyze and verify program
execution in order to assure the highest performance and quality in their
programs. The tools can be used with code generated by CodeWarrior or
Microsoft Visual C++.
Embedded Systems Products
MICROPROCESSOR SPECIFIC:
The following embedded products all include the CodeWarrior IDE hosted on
Windows 95/98/NT operating systems with C/C++ and assembly language
support:
CODEWARRIOR FOR POWERPC(TM) EMBEDDED SYSTEMS: For designing applications
running on MIPS (ISA level I, II, III, IV) RISC microprocessors.
CODEWARRIOR FOR MIPS(R) EMBEDDED SYSTEMS: For designing applications
running on MIPS (ISA level I, II, III, IV) RISC microprocessors.
CODEWARRIOR FOR NEC(R) V800 SERIES: For designing applications running on
the NEC V8xx Series of RISC microprocessors.
CODEWARRIOR FOR NEC(R) VR SERIES: For designing applications running on the
NEC Vr Series of RISC microprocessors (MIPS ISA levels I, II, III and IV).
DISCOVER PROGRAMMING FOR MOTOROLA(R) DSP: Entry level product designed as a
starter kit and development solution for the Motorola 56811 and 56824
Digital Signal Processors ("DSPs"). Discover Programming for Motorola DSP
supports application development in C or assembly language only.
PLATFORM SPECIFIC:
CODEWARRIOR FOR SONY PLAYSTATION(TM): This product includes the CodeWarrior
IDE hosted on Windows 95/98/NT and Mac OS operating systems with C, C++ and
assembly language support for developing applications that run on the Sony
PlayStation and Sony PlayStation Development System.
CODEWARRIOR FOR PALM COMPUTING PLATFORM: This product includes the
CodeWarrior IDE hosted on Windows 95/98/NT and Mac OS operating systems
with C language support for developing applications that run on the 3Com
Palm Computing platform. The Company has entered into an OEM agreement with
3Com that grants to 3Com the exclusive right to market CodeWarrior for
Palm Computing platform throughout fiscal 1999 on a per unit royalty basis.
CODEWARRIOR FOR NUCLEUS PLUS(R) EMBEDDED DEVELOPMENT KIT: This product
features kernel-aware debugging support for the Nucleus PLUS(R) real-time
operating system from Accelerated Technology Inc. It is used in
conjunction with CodeWarrior tools targeting a particular microprocessor to
create a complete solution for Nucleus PLUS development.
The Company has released or is currently planning to release the following
CodeWarrior desktop tools in fiscal 1999:
CODEWARRIOR FOR QNX(R) 4.2: This product is a Windows 95/98/NT-hosted version
of the CodeWarrior IDE which can be used to develop legacy QNX applications
running on x86-based hardware. This product supports application development
in C, C++ and assembly language.
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CODEWARRIOR FOR QNX(R)/NEUTRINO: This product is a Windows 95/98/NT-hosted
version of the CodeWarrior IDE which can be used to develop applications
running under the QNX/Neutrino operating system. This product supports
application development in C, C++ and assembly language. These tools support
Neutrino development for hardware that is based on x86, PowerPC, and MIPS
microprocessors.
CODEWARRIOR FOR VXWORKS(R)/TORNADO(TM) EMBEDDED DEVELOPMENT KIT: This product
features kernel aware debugging support for the VxWorks(R) real-time operating
system from Wind River Systems(R). It is used in conjunction with CodeWarrior
tools targeting a particular microprocessor to create a complete development
solution for VxWorks development.
WINDOWS(R) CE/X86 EMBEDDED DEVELOPMENT KIT: This embedded toolkit supports
Windows CE development for x86-based hardware. The embedded toolkit is used in
conjunction with x86 core development tools to create a complete package for
Windows CE application development for x86-based platforms.
WINDOWS(R) CE/MIPS EMBEDDED DEVELOPMENT KIT: This embedded toolkit supports
Windows CE development for MIPS-based hardware. The embedded toolkit is used
in conjunction with MIPS core development tools to create a complete package
for Windows CE application development for MIPS-based platforms.
CODEWARRIOR FOR M-CORE(TM) EMBEDDED SYSTEMS: This product will include the
CodeWarrior IDE and hosted on Windows 95/98/NT, back-ends for developing
software applications to run on Motorola's M-CORE family of microprocessors.
CODEWARRIOR FOR HITACHI SUPERH EMBEDDED SYSTEMS: This product will include the
CodeWarrior IDE hosted on Windows 95/98/NT, C, C++, and Assembly front-ends
and back-ends for developing software applications to run on Hitachi SuperH
microprocessors.
Note: All products that support C++ development also support EC++ development
as defined by the EC++ Technical Committee.
There can be no assurance that any of these new platforms, operating systems or
programming languages or that any of the Company's proposed programming tools
will be completed or achieve commercial success. Failure of a particular
platform for which the Company has developed a back-end or a programming
language for which the Company has developed a front-end would result in reduced
demand for software applications that run on the platform or in the programming
language, which in turn could adversely affect the Company's business, financial
condition and results of operations. See "Additional Risk Factors-Importance of
New Products and Technological Change."
RESEARCH AND DEVELOPMENT
The Company continues to make substantial investments in research and
development. While the Company believes that its future performance will depend
upon the success of its research and development efforts, it also believes that
the modular design of its CodeWarrior products provides it with the ability to
incrementally add a new back-end (for a new platform or operating system) or a
new front-end (for a new programming language). This architecture significantly
reduces both the cost and the time-to-market required to release new tools for a
new platform, operating system or programming language, that it would otherwise
face if it had to develop an entirely new set of programming tools.
The Company has a program, "Metrowerks Permanent Testing Partners," which helps
supplement the Company's product testing efforts. The Company has a testing
group of over 1,300 CUSTOMERS. This testing group is provided with product
updates or new releases in advance of their release to the public. The members
of this group utilize the product and notify the Company of any errors they
encountered, which are subsequently corrected prior to the general release of
the product. The Company believes that its Metrowerks Permanent Testing Partners
program provides it with additional product testing and quality control
capabilities at very little additional cost.
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The Company has also supplemented its internal product development efforts
through external product development agreements. Such funding is generally
pursuant to agreements with third parties which provide for the Company to
develop programming tools from existing CodeWarrior technology for a specific
platform designed by the third party. The Company receives product development
fees, generally to be paid subject to the Company meeting performance standards
and development milestones, which are usually sufficient to cover all or a
substantial portion of the Company's research and development costs. The Company
either owns, or is generally granted a license to market, these programming
tools with its products. The Company recorded revenues of approximately US$2.3
million, US$4.7 million and US$3.9 million pursuant to these product development
agreements for fiscal 1996, 1997 and 1998, respectively. The Company has shifted
its focus towards selling and marketing its existing product line and,
accordingly, product development agreements were a smaller percentage of total
revenues in fiscal 1998. While the Company anticipates that these revenues will
not increase significantly as a percentage of total revenue in fiscal 1999, they
will remain an important factor in the Company's ongoing operations. There can
be no assurance that the Company will continue to be able to enter into such
software development arrangements.
Because of the need to develop new products and enhance its current product
offerings, the Company has invested, and continues to invest, substantial
resources in its research and development efforts. At July 31, 1998, the
Company's research and development staff constituted approximately 56% of the
Company's employees, having grown from 90 employees at July 31, 1997 to 141
employees at July 31, 1998. The Company also relies on independent contractors
for some of its research and development projects. The Company incurred costs of
approximately US$3.3 million, US$6.5 million and US$10.0 million on research and
development activities for fiscal 1996, 1997 and 1998. Such expenditures
constituted 31%, 35% and 52% of revenue, respectively, for such periods.
The Company generally releases new versions of, or updates for, its CodeWarrior
products twice a year. The success of new product introductions and updates
depends upon several factors, including recognition of market requirements,
product cost, timely completion and introduction of new products and the
targeted platform, operating system or programming languages, and quality of new
products and such platforms, operating systems or programming languages. There
can be no assurance that the Company will not encounter delays in the
development and introduction of future products. Software products as complex as
those offered by the Company may also contain undetected errors when first
introduced or as updates are released. Although the Company has not experienced
any material errors in its products, there can be no assurance that, despite
testing by the Company and its testing partners, errors will not be found in new
products after commencement of commercial shipments, resulting in a loss of or
delay in market acceptance. There can also be no assurance that the Company will
successfully identify new product opportunities and develop and bring new
products to market in a timely manner, that the Company's products will be
accepted by its targeted customers or utilized in connection with its targeted
applications or that products or technologies developed by other companies will
not render the Company's products or technologies obsolete or noncompetitive.
Further, the success of certain of the Company's new tools will depend in part
on the amount of software applications developed for a new platform, operating
system or programming language, which in turn will depend upon the commercial
success of such platform, operating system or programming language introduced by
other companies. The failure of the Company's new product development efforts or
the lack of market acceptance for the Company's new tools would have a material
adverse effect on the Company's business, financial condition and results of
operations. The failure of any new platform, operating system or programming
language for which the Company may have devoted substantial resources in
developing new tools would also have a material adverse effect on the Company's
business, financial condition and results of operations. See "Additional Risk
Factors-Importance of New Products and Technological Change" and "Risk Factors-
Software Defects."
SALES AND MARKETING
11
<PAGE>
SALES. The Company sells its products through a combination of direct and
indirect selling methods. A majority of the Company's desktop product sales and
a small percentage of its embedded product sales are made through major
distributors such as Ingram Micro, Inc., and Merisel Americas, Inc., which sell
to retail stores and mail-order catalogs in the United States and Canada and
through distributors that sell to academic institutions. CodeWarrior
Professional is listed in a variety of mail-order catalogs, including
PC/MacConnection and MacWarehouse, two of the largest mail-order software
distribution catalogs specializing in the North American computer market. The
Company believes that desktop software programmers frequently utilize mail-order
channels rather than retail stores because of the lower prices offered through
such mail order companies. Accordingly, the Company continues to emphasize mail-
order distribution as a method of marketing.
The Company's direct sales force is the primary source for its embedded product
sales as well as site license sales of its desktop products. The Company
increased the number of direct sales personnel from 11 people at July 31, 1997
to 26 people at July 31, 1998 in anticipation of the introduction of several new
embedded products. The Company's direct sales team sells directly to end-users
worldwide.
In fiscal 1998, the Company expanded its sales efforts to include the
establishment of OEM relationships with various semiconductor vendors and system
vendors ("OEM partners"). Through these OEM relationships the Company typically
licenses certain CodeWarrior technologies to the OEM partner for exclusive and
non-exclusive distribution to their customers. The Company established an OEM
sales team in fiscal 1998 which is now comprised of 4 employees to develop and
monitor these relationships exclusively. See "Strategy".
Outside of the United States and Canada, the Company sells directly and through
distributors in 73 countries. In fiscal 1996, 1997 and 1998, sales outside of
North America were US$1.9 million, US$4.4 million and US$4.3 million,
respectively. Approximately 22% of the Company's registered users are located
outside the United States. The Company relies primarily on distributors to
generate international product sales. The Company generally enters into
distribution agreements with these distributors for a one or two year term, with
provisions for annual renewals thereafter. Product localization (such as
translation of user interface prompts and packaging) is performed for the
Company by third parties and by the Company's Japanese subsidiary.
The Company also offers a toll free telephone number for orders which are
processed and filled by the Company's operations center in Austin, Texas. With
the emergence of new distribution channels such as on-line services and other
electronic distribution, the Company is exploring other cost-effective methods
of distribution.
MARKETING. The Company markets its products through trade show exhibits and
conferences, presentations to large groups of end-users and advertisements in
various software catalogs and magazines. All marketing, advertising and public
relations activities are performed by the Company's marketing group with
assistance from the Company's creative advisors.
CUSTOMERS
As of July 31, 1998, the Company had over 130,000 registered users of its
CodeWarrior products. Most of the Company's desktop customers are small
independent software vendors who generally purchase one copy of the Company's
products. The Company's embedded customers range from one and two person
developer teams to large corporate developer teams. A large number of students,
researchers in academia and university computer science labs use the Company's
academic product line.
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<PAGE>
CUSTOMER AND TECHNICAL SUPPORT SERVICES
The Company believes in providing timely, high quality technical support, which
it believes is critical to maintaining customer satisfaction and is an important
element of the value it provides to customers. The Company provides telephone,
electronic mail and fax-based customer support from 8:00 a.m. to 7:00 p.m., CST,
five days per week and has a staff of 15 technical support individuals. Members
of the Company's technical support staff typically have several years of
experience in areas such as software engineering, software testing or tools
development. Most customer support services for the Company's customers outside
North America are provided through its international distributors; however, the
Company provides the distributors with any needed technical assistance.
COMPETITION
The marketplace for professional programming tools is intensely competitive.
Given the variety of platforms and operating systems on or for which the
Company's products operate, the Company faces competition from many companies.
While many of the Company's competitors are software vendors or other technology
companies who offer products for sale to the public, the Company also faces
competition, particularly in the embedded systems market, from platform
manufacturers who develop software applications and programming tools
internally, and who are therefore less inclined to purchase programming tools
from a third party. See "Additional Risk Factors - Competition." The Company
believes that it must continue to develop new products and introduce
enhancements to its existing products in a timely manner to remain competitive.
Even if the Company introduces new and enhanced products, it may not be able to
compete effectively because of the significantly larger resources available to
many of its competitors. The Company's ability to compete successfully also
depends on a number of other factors both within and outside of its control,
including: product pricing; product quality and performance; its ability to
attract and retain key employees; effectiveness of its sales and marketing;
timing of new product introductions by the Company, its competitors and creators
of new hardware platforms; general market and economic conditions; and
government actions throughout the world. There can be no assurance that the
Company will be able to compete successfully or that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
EMBEDDED SYSTEMS. The market for programming tools for the embedded systems
market is fragmented, highly competitive and characterized by rapid technology
advances. The Company's success will depend on the continued enhancement of
its current products and execution of the Company's sales strategy in the
embedded market. The Company's products compete with tools developed
internally by companies and tools offered by third parties. Many platform
manufacturers, telecommunications companies and automotive manufacturers, to
name a few, develop software applications and programming tools internally
(proprietary systems), and accordingly, the Company believes they are less
inclined to purchase tools from a third party. In addition, the Company faces
competition from third-party embedded software providers of operating systems
and tools such as WindRiver Systems, Inc., Integrated Systems, Inc., Microsoft
Corporation, Green Hills Software, Inc. and Cygnus Solutions. Many of the
Company's existing and potential competitors have substantially greater
financial, technical, marketing and sales resources than the Company.
WINDOWS 95/98/NT PROGRAMMING TOOLS. The Company's PC-hosted tools are new to
the market and will need to add additional features to compete with other PC-
hosted programming tools. The Company faces significant and intense
competition from Microsoft, Inprise and Watcom in this market. All of these
companies are well established, have strong brand name recognition, and have
substantially greater financial, technical and marketing resources than the
Company. There can be no assurance that the Company will be able to compete
successfully with these companies.
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<PAGE>
MACINTOSH PROGRAMMING TOOLS. With respect to its programming tools for the Mac
OS and any next generation operating system from Apple, the Company faces
competition from Symantec's Java-based tools and from Apple Computer. Symantec
and Apple Computer have substantially greater financial, technical and
marketing resources than the Company. The Company estimates that over 75% of
the Power Macintosh applications available today were built with CodeWarrior.
INTELLECTUAL PROPERTY
The Company regards its software as proprietary and attempts to protect it with
copyrights, trademarks, license agreements, trade secret laws, restrictions on
disclosure and transferring title and other methods, rather than patents.
Despite these precautions, it may be possible for unauthorized third parties to
copy certain portions of the Company's products and obtain and use information
the Company regards as proprietary. While the Company's competitive position may
be affected by its ability to protect its proprietary information, the Company
believes that copyright protections are less significant to the Company's
success than other factors, such as trade secret protection, the knowledge,
ability and experience of the Company's personnel, name recognition and ongoing
product development and support.
The Company licenses its products primarily under "shrink wrap" licenses (that
is, licenses included as part of the product packaging). Shrink wrap licenses
are not negotiated with or signed by individual licensees and purport to take
effect upon the opening of the product package. Certain provisions of such
licenses, including provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of certain jurisdictions. In keeping with industry standards, the Company
does not copy protect its software. Accordingly, it may be possible for
unauthorized parties to copy or reverse engineer the Company's products or
otherwise obtain and use information that the Company regards as proprietary.
Furthermore, there can be no assurance that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's products. Policing unauthorized use of the Company's products
is difficult, and while the Company is unable to determine the extent of
software piracy of its products, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent, as do the laws of
the United States and Canada.
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs will increasingly become subject to infringement claims. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products.
Any such assertion could require the Company to enter into license or royalty
arrangements or result in costly litigation. There can be no assurance that such
license or royalty agreements will be available on reasonable terms or at all.
Although the Company believes that it currently owns or has adequate rights to
utilize all material technologies relating to its existing products, as it
develops new back-ends and front-ends for its CodeWarrior products, it
anticipates that it may find it desirable or necessary to obtain other licenses
from third parties entitling it to use certain technologies. There can be no
assurance that such licenses would be available to the Company on acceptable
terms, if at all. The Company currently has non-exclusive licenses to certain
software programs from Microsoft, a competitor of the Company. The licensed
technologies are incorporated in the Company's Windows 95/98/NT hosted products.
The Company pays Microsoft a royalty based upon the number of CodeWarrior
products sold that incorporate these programs. These licenses will expire upon
the next major release of Windows 95/98/NT. The Company licenses operating
system software from Apple pursuant to a non-exclusive license. The Company pays
a license fee to Apple for this licensed technology. The agreement has a term of
one year and is automatically renewable for successive one-year terms, subject
to earlier termination by Apple upon nine month's written notice. In connection
with the development of its programming tools for the Java programming language,
the Company has a non-exclusive license with Sun Microsystems ("Sun") to use or
modify the Java programming
14
<PAGE>
language for the purpose of developing a Java-based CodeWarrior product. This
license is for an initial five-year term and is renewable by the Company for up
to five successive one-year terms. The Company pays Sun a royalty based upon the
number of CodeWarrior products sold that incorporate the Java technology.
Termination by Microsoft, Apple or Sun or the lapse of these agreements would
require product redesign and could significantly increase research and
development costs or would require the Company to obtain licenses from third
parties, which may not be available to the Company on acceptable terms, if at
all. The Company's loss or inability to obtain necessary or desirable licenses
from third parties could have a material adverse effect on the Company's
business, financial condition or results of operations. See "Additional Risk
Factors-Proprietary Technology."
PRODUCTION AND BACKLOG
The Company's manufacturing operations consist of assembling, packaging and
shipping the software products and documentation needed to fulfill each order.
All fulfillment and shipping is currently performed in Austin, Texas. The
Company's products are CD-ROM based. The Company produces its own CD-ROM master
disks, with disk duplication performed by third parties. Other than software
user documentation, the Company does not ship documentation such as user manuals
with its product, although a copy of such documentation is available on the CD-
ROM disk and a printed version is available to users for an additional fee.
The Company does not believe that backlog is a meaningful indicator of sales
that can be expected in future periods, particularly in view of the fast pace of
technological change in the software industry. The Company generally ships its
products within a few days after acceptance of a customer purchase order and,
therefore, has insignificant product backlog. Product development agreement
revenue backlog was approximately US$250,000, US$780,000 and US$1.2 million as
of July 31, 1996, 1997 and 1998, respectively.
EMPLOYEES
As of July 31, 1998, the Company employed 250 full-time personnel, including 141
in research and development; 15 in technical support; 68 in sales and marketing;
and 26 in management 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 its success will depend in
part on its continued ability to attract and retain highly qualified personnel
in a competitive market for experienced and talented software engineers and
sales and marketing personnel. See "Additional Risk Factors - Dependence on Key
Personnel."
ADDITIONAL RISK FACTORS
FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced significant
period-to-period fluctuations in revenues and operating results and anticipates
that such fluctuations will continue. These fluctuations may be attributable to
a number of factors, including the volume and timing of orders received during
the quarter, the timing and acceptance of new products and product enhancements
by the Company or its competitors, stages of product life cycles, purchasing
patterns of customers and distributors, market acceptance of products sold by
the Company's customers, competitive conditions in the industry, business cycles
affecting the markets in which the Company's products are sold, extraordinary
events, such as acquisitions, including related charges, and economic conditions
generally or in specific geographic areas. The future operating results of the
Company may fluctuate as a result of these and other factors, including the
Company's ability to continue to develop innovative and competitive products. In
addition, the Company has not entered into long-term product development
agreements with its customers, and the timing of product development agreement
fees is difficult to predict. The procurement process of the Company's customers
is often several months or longer from initial inquiry to order and may involve
competing considerations. Further, as licensing of the Company's products
increasingly becomes a more strategic decision made at higher management levels,
there can be no assurance that sales cycles for the Company's
15
<PAGE>
product will not lengthen. Product revenue in any quarter depends on the volume
and timing of orders received in that quarter. Because the Company's staffing
and operating expenses are based on anticipated total revenue levels and a high
percentage of the Company's costs are fixed in the short term, small variations
between anticipated orders and actual orders, as well as non-recurring or large
orders, could cause disproportionate variations in the Company's operating
results from quarter to quarter.
A number of additional factors may cause the Company's revenues and operating
results to vary significantly from period to period. These factors include:
software "bugs" or other product quality problems, changes in operating
expenses, changes in Company strategy, personnel changes, foreign currency
exchange rates, and mix of products sold. Although the Company has seen
significant revenue growth for the last several years, there can be no assurance
that the Company will be able to continue its growth in revenue or profits on a
quarterly or annual basis. Due to all of the foregoing factors, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance. It is possible that, in some future quarters, the Company's
operating results could be below the expectations of stock market analysts and
investors. In such event, the price of the common stock could be materially and
adversely affected.
IMPORTANCE OF NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The market for embedded
programming tools is fragmented and the market for desktop and embedded
programming tools is characterized by ongoing technological developments,
evolving industry standards and rapid changes in customer requirements. The
Company's success depends upon its ability to continue to develop and introduce
in a timely manner new products that take advantage of technical advantages, to
continue to enhance its existing product lines, to offer its products across a
spectrum of microprocessor families and operating systems used in the embedded
systems market and to respond promptly to customers' requirements. The Company
must continuously update its existing products to keep them current with
changing technology and must develop new products to take advantage of new
technologies that could render the Company's existing products obsolete. The
Company has historically experienced minor delays in the development of new
products. Such delays are common in the software industry and are likely to be
experienced by the Company in the future. The Company's future prospects depend
upon the Company's ability to increase the functionality of existing products in
a timely manner and to develop new products that address new technologies and
achieve market acceptance. New products and enhancements must keep pace with
competitive offerings, adapt to evolving industry standards and provide
additional functionality. There can be no assurance that the Company will be
successful in developing and marketing, on a timely basis or at all, competitive
products, product enhancements and new products that respond to technological
change, changes in customer requirements and emerging industry standards, or
that the Company's new or enhanced products will adequately address the changing
needs of the marketplace. The inability of the Company, due to resource
constraints or technological or other reasons, to develop and introduce new
products or product enhancements in a timely manner could have a material
adverse effect on the Company's business, financial condition and results of
operations. From time to time, the Company or its competitors may announce new
products, capabilities or technologies that have the potential to replace or
shorten the life cycles of the Company's existing products. There can be no
assurance that announcements of currently planned or other new products will not
cause customers to defer purchasing existing Company products. Any failure by
the Company to anticipate or respond adequately to changing market conditions,
or any significant delays in product development or introduction, would have a
material adverse effect on the Company's business, financial condition and
results of operations. If the results of product development efforts are
inadequate or delayed, the Company's business, financial condition and results
of operations would be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company has experienced, and expects to
continue to experience, significant growth in the number of employees, the scope
and complexity of its operating and financial systems and the geographic
dispersion of its operations. The Company's continued success will depend
significantly on its ability to integrate new operations and new personnel.
There can be no assurance that the Company will be successful in achieving such
integration efficiently. The Company's future performance depends to a
significant
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<PAGE>
degree upon the continued contributions of its key management, product
development, marketing, sales, customer support and operations personnel,
several of who have joined the Company only recently. In addition, the Company
believes its future success will depend in large part upon its ability to
attract and retain highly skilled managerial, product development, marketing,
sales, customer support and operations personnel, many of whom are in great
demand. Competition for such personnel is intense and there can be no assurance
that the Company will be successful in attracting and retaining such personnel.
The failure of the Company to attract, integrate and retain the necessary
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
PROPRIETARY TECHNOLOGY. The Company's success is heavily dependent upon its
proprietary technology. To protect its proprietary rights, the Company relies on
a combination of copyright, trade secret, trademark laws, nondisclosure and
other contractual restrictions on copying, distribution and technical measures.
The Company seeks to protect its software, documentation and other written
materials through trade secret and copyright laws, which provide only limited
protection. As a part of its confidentiality procedures, the Company generally
enters into nondisclosure agreements with its employees, consultants,
distributors and corporate partners and limits access to and distribution of its
software, documentation and other proprietary information.
SOFTWARE DEFECTS. As a result of their complexity, software products may contain
undetected errors or compatibility issues, particularly when first introduced or
as new versions are released. There can be no assurance that, despite testing by
the Company and testing and use by current and potential customers, errors will
not be found in new products after commencement of commercial shipments. The
occurrence of such errors could result in loss of or delay in market acceptance
of the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTERNATIONAL SALES. In the fiscal years ended July 31, 1996, 1997 and 1998,
the Company derived approximately 18%, 24%, and 18%, respectively, of its total
revenue from sales outside of North America. The Company expects that
international sales will continue to generate a significant percentage of its
total revenue in the foreseeable future. International operations are subject to
certain risks, including political and economic instability; foreign government
regulation; more prevalent software piracy; longer payment cycles; unexpected
changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions and other barriers and restrictions; greater difficulty in
accounts receivable collection; potentially adverse tax consequences; the
burdens of complying with a variety of foreign laws; staffing and managing
foreign operations; changes in diplomatic and trade relationships; possible
recessionary environments in economies outside the United States; and other
factors beyond the control of the Company. Sales by the Company's Japanese
subsidiary are denominated in the local currency, and an increase in the
relative value of the dollar against such currencies would reduce the Company's
revenues in dollar terms or make the Company's products more expensive and,
therefore, potentially less competitive in foreign markets. There can be no
assurance that the Company's future results of operations will not be adversely
affected by currency fluctuations. The Company relies on distributors for sales
of its products in certain foreign countries and, accordingly, is dependent on
their ability to promote and support the Company's products. The Company's
international distributors generally offer products of several different
companies, including in some cases products that are competitive with the
Company's products, and such distributors are not subject to any minimum
purchase or resale requirements. There can be no assurance that the Company's
international distributors will continue to purchase the Company's products or
provide them with adequate levels of support.
FLUCTUATION IN STOCK PRICE. The market price of the Company's common stock has
fluctuated in the past, and is likely to fluctuate in the future. The Company
believes that various factors, including quarterly fluctuations in results of
operations, announcements of new products by the Company or by its competitors,
and changes in the software industry in general cause, and may continue to
cause, the market price of the common stock to fluctuate, perhaps substantially.
In addition, in recent years the stock market in general, and the shares of
technology companies in particular, have experienced extreme price fluctuations.
This volatility has had a substantial effect on the market prices of securities
issued by the Company and other high technology companies, often for reasons
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unrelated to the operating performance of the specific companies. There can be
no assurance that the market price of the common stock will remain at or near
its current level. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against that company. Such litigation, if instituted against the
Company, 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, financial condition and results of operations, even if the
Company is successful in such suits. These market fluctuations, as well as
general economic, political and market conditions such as recessions, may
adversely affect the market price of the common stock.
ITEM 2. PROPERTIES
The Company's headquarters are located in a leased facility in Austin, Texas,
consisting of approximately 97,200 square feet of office space. This lease
expires in March 2004. The Company has sub-leased 21,600 square feet of the
facility through May 2000. The Company leases an additional 14,000 square feet
in Austin, Texas formerly used for fulfillment, distribution and administrative
operations which is now sub-leased for the remainder of the lease term. The
Company also leases offices in Cupertino, California; Boston, Massachusetts;
Saint-Laurent, Quebec, Canada; and Tokyo, Japan for sales, marketing and
engineering operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or to which any of the Company's properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Metrowerks' common stock is traded on the NASDAQ National Market under the
symbol MTWKF and The Toronto Stock Exchange and the Montreal Exchange under the
symbol MWK.
The closing price of the Company's common stock as reported by the NASDAQ
National Market as of July 31, 1998 was US$5.13 per share. The price per share
in the following table sets forth the low and high prices in the NASDAQ National
Market for the quarter indicated (all amounts in US $):
<TABLE>
<CAPTION>
LOW HIGH
--------- ----------
<S> <C> <C>
Fiscal 1997
First quarter ended October 31, 1996 $9.25 $12.00
Second quarter ended January 31, 1997 7.00 11.25
Third quarter ended April 30, 1997 4.88 9.75
Fourth quarter ended July 31, 1997 4.00 7.75
Fiscal 1998
First quarter ended October 31, 1997 $6.50 $11.00
Second quarter ended January 31, 1998 7.79 10.00
Third quarter ended April 30, 1998 6.87 9.50
Fourth quarter ended July 31, 1998 5.12 7.87
</TABLE>
The closing price of the Company's common stock as reported by The Toronto Stock
Exchange as of July 31, 1998 was Canadian $7.73 per share. The price per share
in the following table sets forth the low and high prices in The Toronto Stock
Exchange for the quarter indicated (all amounts in Canadian $):
<TABLE>
<CAPTION>
LOW HIGH
--------- ----------
<S> <C> <C>
Fiscal 1997
First quarter ended October 31, 1996 $12.75 $16.15
Second quarter ended January 31, 1997 9.50 14.30
Third quarter ended April 30, 1997 7.00 12.75
Fourth quarter ended July 31, 1997 5.50 10.50
Fiscal 1998
First quarter ended October 31, 1997 $ 9.87 $15.30
Second quarter ended January 31, 1998 10.87 14.30
Third quarter ended April 30, 1998 9.75 13.75
Fourth quarter ended July 31, 1998 7.72 11.85
</TABLE>
The Company has not paid dividends and does not plan to pay dividends on its
common stock in the foreseeable future. Additionally, the Company's letter of
credit restricts the Company from paying out any dividends. The Company
presently intends to reinvest earnings to fund future growth. At July 31, 1998,
there were approximately 75 stockholders of record of the Company. Certain
record holders are represented by brokers and other institutions on behalf of
stockholders. The Company believes the total number of beneficial owners of its
common stock to be in excess of 4,000 owners.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements, including the Notes to Consolidated
Financial Statements included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1994 1995 1996 1997 1998
------------------------------------------------------------------------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue 2,040 5,143 10,619 18,293 19,055
Cost of sales 207 910 2,664 4,563 3,046
Operating expenses:
Research and development 1,080 1,574 3,250 6,486 9,964
Selling, administrative and technical support 1,053 2,348 4,622 8,109 10,704
Depreciation 66 155 355 1,154 1,684
Non-recurring charge - - - 4,297 -
Total operating expenses 2,199 4,077 8,227 20,046 22,352
Operating income (loss) from operations (366) 156 (272) (6,316) (6,343)
Other income:
Interest income and other 34 98 377 341 446
Net earnings (loss) $ (332) $ 254 $ 105 $(5,975) $(5,897)
Net earnings (loss) per share basic and diluted(1) $(0.05) $ 0.03 $ 0.01 $ (0.52) $ (0.48)
Shares used in per share calculation:
Basic 6,904 7,956 10,620 11,523 12,311
Diluted 6,904 8,100 10,708 11,523 12,311
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 31,
1994 1995 1996 1997 1998
------------------------------------------------------------------------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 767 $4,746 $11,498 $ 5,042 $ 6,708
Total assets 1,677 6,634 18,305 14,168 20,511
Long-term debt, less current portion 201 - - - -
Total stockholders' equity 473 5,571 16,437 10,562 16,218
</TABLE>
(1) For an explanation of the determination of the number of shares used in
computing per share amounts and the weighted average number of common stock
outstanding, see Note 1 to the Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Statements in this report concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company or industry trends to differ
materially from those expressed or implied by such forward-looking statements.
Relevant risks and uncertainties include, among others, those discussed in Item
1 of Part I under the heading "Additional Risk Factors" and elsewhere in this
report and those described from time to time in the Company's other filings with
the Securities and Exchange Commission, press releases and other communications.
OVERVIEW
Metrowerks designs, develops, markets and supports professional software
programming tools. The Company's products are used primarily by professional
software programmers, and by programmers in the academic community, to develop
software applications for a variety of platforms, including Windows 95/98/NT
operating systems used by PCs; the Mac OS operating system used by the Macintosh
and Power Macintosh computers; and for proprietary and multi-purpose real-time
operating systems used in the embedded systems market. The Company derives
substantially all of its revenue from a limited number of products. The
Company's future revenue is substantially dependent upon the continued
acceptance of its CodeWarrior products. The Company is also in the process of
developing a number of new products and new versions of existing products and
believes that its future operating results will depend upon the commercial
success of these new products. There can be no assurance that the Company's new
products will achieve market acceptance.
The Company also derives a significant portion of its revenue from product
development agreements pursuant to which the Company receives payments from a
third party for porting its programming tools to a particular platform,
operating system or programming language. The amount of revenue the Company
receives from this particular source will depend upon the number of such
agreements to which the Company is a party during such quarter and the timing of
deliverables under such agreements. Further, there can be no assurance that the
Company will be able to continue to enter into such development agreements in
the future. The Company's product development efforts have also entailed
significant research and development expenditures. In addition, to enhance its
competitive position in the future, it will be necessary for the Company to
broaden its product offerings. This objective may require expansion of the
Company's internal product development efforts or acquisitions of or investments
in complementary businesses, products or technologies. Furthermore, if the
Company were unable to enter into new software development agreements in the
future, the Company would, at a minimum, have to increase its internal research
and development expenditures. These higher expense levels combined with
fluctuations in revenue could affect the Company's quarterly and annual results
and result in fluctuations in its operating results. The Company intends to
continue to invest significant amounts in expanding its product line, and,
accordingly, may continue to experience losses and volatility of revenue and
operating results in future periods. The Company believes that the recent
revenue growth rates should not be relied upon as an indication of revenue
growth rates for future periods.
The Company has and will continue to make certain investments in its software
systems and applications to ensure the Company is year 2000 compliant. "Year
2000 Compliant" means that a program, when used in accordance with its
associated documentation, will (a) initiate and operate, (b) correctly store,
represent, and process dates, and (c) not cause or result in an abnormal
termination or ending, when processing data containing dates in the Year 2000
and in any preceding and following years, provided that all third-party products
that exchange date data with the program do so properly and accurately and in a
form and format compatible with the program.
21
<PAGE>
The products provided by Metrowerks process dates only to the extent that these
products use date data provided by the host or target operating system for date
representations used in internal processes, such as file modifications. Any
Year 2000 Compliance issues resulting from the operation of the products are
therefore necessarily subject to the Year 2000 Compliance of the relevant host
or target operating system. The Company has directed its customers to the
relevant statements of Microsoft Corporation, Sun Microsystems, Inc., Apple
Computer, Inc., and other host or target operating systems relating to the Year
2000 Compliance of their operating systems. Except as expressly described
above, the products, in themselves, do not process date data and therefore do
not implicate Year 2000 Compliance issues.
The Company has also assessed the readiness of its internal computer systems and
does not expect to incur significant costs in implementing Year 2000 changes if
necessary. There can be no assurance that such changes will fully completed in
a timely manner. Additionally, the Company could be adversely impacted by Year
2000 issues faced by major distributors, suppliers, customers and financial
service organizations with which the company interacts.
On August 1, 1995, the Company adopted the United States dollar as its reporting
currency, and the historical consolidated financial statements have been
restated to present amounts in United Sates dollars.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of income as a percentage of revenue for the periods indicated.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUE
YEAR ENDED JULY 31,
1994 1995 1996 1997 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue, net 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 10.2 17.7 25.1 24.9 16.0
Operating expenses:
Research and development 52.9 30.6 30.6 35.5 52.3
Selling, administrative and technical support 51.6 45.7 43.5 44.3 56.2
Depreciation 3.2 3.0 3.3 6.3 8.8
Non-recurring charge - - - 23.5 -
Total operating expenses 107.7 79.3 77.4 109.6 117.3
Operating income (loss) from operations (17.9) 3.0 (2.5) (34.5) (33.3)
Other income:
Interest income and other 1.7 1.9 3.5 1.8 2.4
Net earnings (loss) (16.2)% 4.9% 1.0% (32.7)% (30.9)%
</TABLE>
REVENUE
The Company sells its products through its direct sales force and indirectly
through distributors. The Company recognizes revenue from the sale of its
products upon the later of shipment or the satisfaction of all significant
Company obligations. All revenue is derived from unaffiliated customers. Product
returns are estimated and provided for at the time of sale. Such return
allowances as a percentage of revenue have varied significantly over recent
years and periods, reflecting the Company's experience in product returns as it
has significantly expanded the proportion of its sales through third-party
distribution channels and increased its product portfolio. The Company expects
return allowances will continue to vary in the future. The Company's agreements
with its distributors generally provide the distributors with limited rights to
return unsold inventories under a stock
22
<PAGE>
balancing program. The Company monitors activities of its distributors in an
effort to minimize excessive returns and establishes its return allowances based
on its estimates of expected returns. While historically the Company's returns
have been within expectations, the establishment of return allowances requires
judgments regarding such factors as future competitive conditions and product
acceptance, which can be difficult to predict.
The Company also derives revenue from product development agreement fees.
Product development agreement fees related to software development are
recognized on a percentage of completion over the term of the contract, and are
included in revenue in the income statement.
Total revenue increased from $18.3 million in fiscal 1997 to $19.1 million in
fiscal 1998, a 4% increase. Product sales in fiscal 1998 increased $1.5 million,
or 11%, from $13.6 million in fiscal 1997 to $15.1 million in fiscal 1998. The
increase in product sales is due to the increase in embedded product sales from
$2.9 million in fiscal 1997 to $4.7 million in fiscal 1998, a 61% increase.
Embedded product revenues consist primarily of sales of CodeWarrior for PowerPC
and CodeWarrior for MIPS as well as the Company's OEM agreement with 3Com
for their Palm Computing platform. Desktop product sales, consisting primarily
of the Company's flagship product CodeWarrior Professional and to a lesser
extent the licensing of the CodeWarrior IDE to Be, Inc., increased $405,000 from
$9.3 million in fiscal 1997 to $9.7 million in fiscal 1998. Product development
agreement revenues decreased 16%, or $800,000 from $4.7 million in fiscal 1997
to $3.9 million in fiscal 1998. The decrease in product development agreement
revenue occurred as many of the agreements entered into by the Company were
reaching final stages and the Company began to shift its focus towards the sales
of these newly developed products.
The Company's revenues in 1997 increased to $18.3 million from $10.6 million in
fiscal 1996, an increase of 72% or $7.7 million. The increase in fiscal 1997
was due primarily to increased product sales of CodeWarrior for Mac OS as the
Company's subscriber base increased from approximately 50,000 registered users
at July 31, 1996 to approximately 100,000 users at July 31, 1997. The Company's
product revenues increased $5.2 million or 62% from $8.4 million in fiscal 1996
to $13,578 in fiscal 1997. In 1997, alliances with new partners such as NEC,
Motorola, Microsoft, and Microware resulted in an increase in product
development agreement revenues of $2.4 million from $2.3 million in fiscal 1996
to $4.7 million in fiscal 1997.
COST OF SALES
Cost of sales consists primarily of the cost of product media and duplication,
the cost of packaging materials, amortization of capitalized software
development costs, royalties and shipping expenses. Costs associated with
product development agreement revenues are included in research and development
expenses and are not separately identified and approximate revenue. Costs
associated with technical support are included in selling, general and
administrative expenses and were $528,000, $566,000 and $690,000 in fiscal 1996,
1997 and 1998, respectively. Cost of sales decreased from $4.6 million in fiscal
1997 to $3.0 million in fiscal 1998, representing a 33% reduction. Cost of
sales as a percentage of product revenue decreased from 34% in fiscal 1997 to
20% in fiscal 1998. The Company restructured its production and fulfillment
operations by bringing in-house all packaging, fulfillment and shipping
activities. In addition, the Company has increased the amount of sales
generated by its direct sales force, which typically result in higher margins
than those products sold through distributors.
Cost of sales increased from $2.7 million in fiscal 1996 to $4.6 million in
1997, an increase of 71%. Cost of sales as a percentage of product revenue
increased from 32% in fiscal 1996 to 34% in fiscal 1997. The increase in cost
of sales as a percentage of product revenue from fiscal 1996 to fiscal 1997
resulted from royalty payments paid by the Company in 1997 which did not exist
in 1996. Margins were also adversely affected by increased sales of hardware,
such as General Magic Inc.'s Magic Cap Communicator and the 3Com PalmPilot,
which have lower margins than software products.
23
<PAGE>
OPERATING EXPENSES
Research and development costs increased 54% from $6.5 million in fiscal 1997 to
$10.0 million in fiscal 1998, representing 36% and 52% of total revenue,
respectively. Research and development expenditures consist primarily of
personnel-related costs. Increases in expenses were due primarily to the growth
of the Company's research and development team required to expand and enhance
the Company's product line. The Company's research and development headcount
increased from 90 at July 31, 1997 to 141 at July 31, 1998. Selling,
administrative and technical support costs increased 32% from $8.1 million in
fiscal 1997 to $10.7 million in fiscal 1998, representing 44% and 56% of total
revenue, respectively. The increase in 1998 resulted from the Company's focus on
developing the infrastructure necessary to provide support for the Company's
growth and expansion into new markets. These costs are primarily personnel
related, as the Company's selling, administrative and technical support
headcount has increased from 77 at July 31, 1997 to 109 at July 31, 1998.
Depreciation expense increased 46% from $1.2 million in fiscal 1997 to $1.7
million in fiscal 1998, representing 6% and 9% of total revenue, respectively.
The increase in 1998 resulted from significant investments in property and
equipment including leasehold improvements for the Company's new corporate
headquarters in Austin, Texas.
Research and development expenses increased from $3.3 million, or 31% of
revenues, in fiscal 1996 to $6.5 million, or 35% of revenues, in fiscal 1997.
The increase in research and development expenses was due to an increase in
headcount from 65 at July 31, 1996 to 90 at July 31, 1997. Selling,
administrative and technical support costs increased from $4.6 million in fiscal
1996 to $8.1 million in fiscal 1997, representing 44% of total revenue in each
year. The increase selling, administrative and technical support costs was
primarily caused by an increase in headcount of 60 at July 31, 1996 to 77 at
July 31, 1997. The increases in the Company's total headcount in 1997 resulted
from the Company's commitment to develop the technology needed for the Company's
expansion into the Windows and embedded markets as well as building the
infrastructure necessary to provide support for the Company's anticipated growth
in these new markets. Depreciation expense increased from $355,000 in fiscal
1996 to $1.2 million in fiscal 1997. The increase in 1997 resulted from
significant investments in property and equipment necessary to provide support
for the Company's personnel growth during these periods.
NON-RECURRING CHARGE
The Company recorded a non-recurring charge of $4.3 million in fiscal 1997
related to the write-off of certain assets associated with the Mac OS. The
decision to record this charge was based on the significant decline in sales of
Mac OS-related products. In 1997, the Company accelerated its diversification
efforts to focus on the Windows and embedded systems markets and believed that
the Mac OS-related assets were significantly impaired.
PROVISION FOR INCOME TAXES
As a result of accumulated operating losses, the Company did not record any
provisions for income taxes in 1996, 1997 or 1998. As of July 31, 1998, the
Company had net operating loss carryforwards of approximately $4.4 million and
$6.9 million which begin to expire in 2000 and 2010 for state and federal
purposes, respectively. Due to the uncertainty regarding the recoverability of
these deferred tax assets, no benefit from the Company's operating losses has
been recorded. If the Company records profits in future periods, such losses may
reduce the amount of taxes payable.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements from cash
generated from operations, the sale of equity securities, bank lines of credit
and long-term and short-term debt. At July 31, 1998 the Company had cash and
cash equivalents of $6.7 million and no long-term debt. Metrowerks has working
capital of approximately $10.8 million at July 31, 1998 compared to $7.5 million
at July 31, 1997 and $13.5 million at July 31, 1996.
In fiscal 1996, 1997 and 1998, the Company's operating activities consumed cash
of $1.4 million, $2.9 million and $6.8 million, respectively. In fiscal 1997,
the primary causes of the use in cash from operations was the increase in
receivables resulting from increased sales and increased use of third-party
distributors. In fiscal 1998, the use in cash from operations was a result of
the net loss for the year and the increase in receivables.
The Company has made significant investments in technology fiscal 1996, 1997 and
1998 resulting in cash expenditures of $1.6 million, $2.4 million and $2.7
million, respectively, for property and equipment. Total cash used for
investment activities was $2.6 million, $3.7 million and $3.1 million, in fiscal
1996, 1997 and 1998, respectively.
In February 1996, the Company issued 1,000,000 common shares for net proceeds of
$10.3 million. In December 1997, the Company completed an offering of 1,250,000
special warrants for net proceeds of $11.6 million to obtain the financial
resources needed for execution of its expansion into the embedded systems,
Windows and Java markets. All warrants were converted to common shares in
January 1998. Total cash provided by financing activities was $10.8 million,
$150,000 and $11.9 million in fiscal 1996, 1997 and 1998, respectively.
During April 1998, the Company entered into an $800,000 line of credit agreement
with a bank. Borrowings under the agreement bear interest at the bank's prime
rate of interest plus one percent (9.5% as of July 31, 1998). The agreement,
which expires in January 2000, is fully used to secure letters of credit issued
to the Company's landlord for leasehold improvements. The assets of the
company, except the Company's intellectual property, collateralize borrowings
under the agreement. The credit agreement contains certain minimum quarterly
profitability and various financial-ratio requirements. If these financial-
ratio requirements are not met, the Company will need to collateralize the line
of credit with short-term securities until such time the Company is in
compliance. Under the agreement, the Company may not pay dividends or make any
other distribution payment on account or in redemption, retirement or purchase
of any capital stock. The Company must also limit the amount of funds transfers
to any affiliate.
The Company currently anticipates that existing funds together with anticipated
cash flow from operations will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months. To the
extent that these sources of funds are insufficient to meet these requirements,
the Company will be required to raise additional funds. Possible sources of
financing include the sale of equity securities or borrowings from banks. The
sale of additional equity or convertible debt securities could be dilutive.
There can be no assurance that the Company will be able to obtain financing on
commercially reasonable terms, if at all, in the future.
25
<PAGE>
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Restated Information," and the Canadian Institute of Chartered
Accountants (CICA) issued Section 1701, which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997.
Management does not believe the implementation of SFAS No. 130 and No. 131 will
have a material effect on its financial statements.
In October 1997, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition as
amended on March 31, 1998, which delineates the accounting for software product
and maintenance revenues. SOP 97-2 supersedes the Accounting Standards
Executive Committee SOP 91-1, Software Revenue Recognition, and is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
The Company is evaluating the requirements of SOP 97-2 and its amendments and
the effects, if any, on the Company's current revenue recognition policies.
26
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" on F-1 for a listing of the
consolidated financial statements filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors is incorporated herein by reference from the
section entitled "Particulars of Matters to be Acted Upon at the Meeting" of the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended, for the registrant's Annual
Meeting of Stockholders (the "Proxy Statement"). The Proxy Statement is
anticipated to be filed within 120 days after the end of the registrant's fiscal
year ended July 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by reference
from the section entitled "Compensation of Executive Officers and Directors" of
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled "Share
Capital - Principal Holders of Common Shares" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Potential
Conflicts of Interest" of the Proxy Statement.
27
<PAGE>
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
(a) The following documents are filed as part of this report
(1) Consolidated Financial Statements - See "Index to Consolidated
Financial Statements" on F-1
(2) Consolidated Financial Statement Schedule - See "Index to Consolidated
Financial Statements" on F-1
(3) Exhibit Index
Exhibit Number Exhibit Title
3.10 Amended Articles of Incorporation of the
Company (1)
3.20 By-Laws of Metrowerks (1)
10.10* Incentive Stock Option Plan and related
agreements (1)
10.20* 1995 Stock Option Plan and related agreements
(1)
10.30 Lease agreement between the Company and
Modular Power Facilities Limited Partnership
(1)
10.31 Lease agreement between the Company and Met
10W-97, Ltd., a Texas limited partnership (2)
10.32 First Amendment to Lease agreement between
the Company and Met 10W-97, Ltd., a Texas
limited partnership (2)
10.40 401(K) Plan of the Company (1)
11 Statement Regarding Computation of Per Share
Earnings (2)
21 List of Subsidiaries (1)
27 Financial Data Schedule (2)
(b) Reports on Form 8-K -
None
________________________________________________________________________________
* Denotes a compensation plan or other agreement under which
directors or executive officers may participate.
(1) Incorporated by reference to Exhibit of same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
July 31, 1997.
(2) Filed herewith.
28
<PAGE>
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
The financial statements and other information contained in this Annual Report
are the responsibility of Management. They have been prepared in accordance with
generally accepted accounting principles and present fairly the consolidated
financial position, results of operations and changes in financial position of
the Company. Where necessary, Management has made informed judgments and
estimates of the outcome of events and transactions, with due consideration
given to materiality.
As a means of fulfilling its responsibility for the integrity of financial
information included in this Annual Report, Management relies on the Company's
system of internal control. This system has been established to ensure, within
reasonable limits, that the assets are safeguarded, that transactions are
properly recorded and executed in accordance with Management's authorization and
that the accounting records provide a solid foundation from which to prepare the
financial statements.
The Company's independent public accountants are responsible for auditing the
financial statements and giving an opinion on them. As part of that
responsibility, they review and assess the effectiveness of internal accounting
controls to establish a basis for reliance thereon in determining the nature,
timing and extent of audit tests to be applied. Management emphasizes the need
for constructive recommendations as part of the audit process.
The Board of Directors carries out its responsibility for the consolidated
financial statements principally through its Audit Committee, consisting solely
of outside directors, which reviews the financial statements and reports thereon
to the Board. The Committee meets periodically with the independent public
accountants and Management to review their respective activities and the
discharge of their responsibilities. The independent public accountants have
free access to the Committee, with or without Management, to discuss the scope
of their audit, the adequacy of the system of internal control and the adequacy
of financial reporting.
Management recognizes its responsibility for fostering a strong ethical climate
so that the Company's affairs are carried out according to the highest standards
of personal and corporate conduct. This responsibility is characterized in the
code of business conduct which is publicized throughout the Company.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Metrowerks Inc.
By: /s/ Jean Belanger
(Jean Belanger)
Chairman & Chief Executive Officer
Dated: October 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on October 16, 1998.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Jean Belanger Chairman & Chief Executive Officer October 16, 1998
- -------------------------------------------------------------------------------------------------------------
(Jean Belanger)
/s/ Greg Galanos President & Chief Technology Officer October 16, 1998
- -------------------------------------------------------------------------------------------------------------
(Greg Galanos)
/s/ David Perkins Senior VP, OEM Sales & Business Development October 16, 1998
- -------------------------------------------------------------------------------------------------------------
(David Perkins)
/s/ Geoff Beattie Director October 16, 1998
- -------------------------------------------------------------------------------------------------------------
(Geoff Beattie)
/s/ Stephen Lockyer Director October 16, 1998
- -------------------------------------------------------------------------------------------------------------
(Stephen Lockyer)
/s/ Peter Tolnai Director October 16, 1998
- -------------------------------------------------------------------------------------------------------------
(Peter Tolnai)
/s/ Tom Woods Director October 16, 1998
- -------------------------------------------------------------------------------------------------------------
(Tom Woods)
/s/ Jim Welch Vice President Finance & Chief Financial Officer October 16, 1998
- -------------------------------------------------------------------------------------------------------------
(Jim Welch) (principal financial and accounting officer)
</TABLE>
30
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of July 31, 1996, 1997 and 1998 F-3
Consolidated Statements of Operations for the years
ended July 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended July 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows for the years
ended July 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
Consolidated Financial Statement Schedule:
Report of Independent Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
All other schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements and
related notes.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Metrowerks Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Metrowerks
Inc. and Subsidiaries (the "Company") as of July 31, 1996, 1997 and 1998, and
the results of their operations and their cash flows for each of the three
years in the period ended July 31, 1998, in conformity with generally accepted
accounting principles in the United States and Canada. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Austin, Texas
October 2, 1998
F-2
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $11,498 $ 5,042 $ 6,708
Short-term investments - - 400
Accounts receivable, net 2,838 5,027 6,650
Inventories 254 302 293
Income and other taxes recoverable 224 295 254
Prepaid expenses and other current assets 573 456 804
-------------- -------------- --------------
Total current assets 15,387 11,122 15,109
Long-term receivable - - 1,039
Property and equipment, net 1,716 3,046 4,363
Software development costs, net 1,202 - -
-------------- -------------- --------------
Total assets $18,305 $14,168 $ 20,511
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,129 $ 1,913 $ 1,859
Accrued liabilities 550 1,498 1,712
Deferred revenue 189 195 722
-------------- -------------- --------------
Total current liabilities 1,868 3,606 4,293
Commitments (Note 11) - - -
Stockholders' equity:
Capital stock:
Preferred stock, Class A and B, no par value,
Authorized unlimited number;
None outstanding in 1996, 1997 or 1998 - - -
Common stock, no par value, authorized unlimited number
Issued and outstanding: 11,494,543 shares in 1996,
11,535,094 in 1997 and 12,919,030 in 1998 17,446 17,596 29,465
Accumulated deficit (1,009) (6,984) (12,881)
Cumulative translation adjustment - (50) (366)
-------------- -------------- --------------
Total stockholders' equity 16,437 10,562 16,218
-------------- -------------- --------------
Total liabilities and stockholders' equity $18,305 $14,168 $ 20,511
</TABLE>
Signed on behalf of the Board of Directors.
/s/ JEAN BELANGER /s/ JIM WELCH
JEAN BELANGER JIM WELCH
Director Vice President, Finance & Chief Financial Officer
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue, net $ 10,619 $ 18,293 $ 19,055
Cost of product sales 2,664 4,563 3,046
Operating expenses:
Research and development 3,250 6,486 9,964
Selling, administrative and technical 4,622 8,109 10,704
support
Depreciation 355 1,154 1,684
Non-recurring charge (Note 3) - 4,297 -
-------------- -------------- --------------
Total operating expenses 8,227 20,046 22,352
Loss from operations (272) (6,316) (6,343)
Other income:
Interest income and other, net 377 341 446
-------------- -------------- --------------
Net income (loss) $ 105 $ (5,975) $ (5,897)
Net income (loss) per share, basic and diluted $ 0.01 $ (0.52) $ (0.48)
Shares used in per share calculation:
Basic 10,620 11,523 12,311
Diluted 10,708 11,523 12,311
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative Total
Common Stock Special Warrants Accumulated Translation Stockholders'
Shares Amount Shares Amount Deficit Adjustment Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1995 8,177,293 $ 2,221 2,000,000 $ 4,464 $ (1,114) $ - $ 5,571
Conversion of special
warrants 2,000,000 4,464 (2,000,000) (4,464) - - -
Issuance of common stock,
from private
offerings (Note 6) 1,000,000 10,341 - - - - 10,341
Issuance of common stock
upon exercise of stock
options 317,250 420 - - - - 420
Net income - - - - 105 - 105
- -------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996 11,494,543 17,446 - - (1,009) - 16,437
Issuance of common stock
upon exercise of stock
options 40,551 150 - - - - 150
Foreign currency translation
Adjustment - - - - - (50) (50)
Net loss - - - - (5,975) - (5,975)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 11,535,094 17,596 - - (6,984) (50) 10,562
Issuance of special warrants - - 1,500,000 11,718 - - 11,718
Conversion of special
warrants (Note 6) 1,475,000 13,759 (1,500,000) (11,718) - - 2,041
Purchase and retirement of
officers' shares (Note 6) (225,000) (2,166) - - - - (2,166)
Issuance of common stock
upon exercise of stock
options 133,936 276 - - - - 276
Foreign currency translation
adjustment - - - - - (316) (316)
Net loss - - - - (5,897) - (5,897)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1998 12,919,030 $ 29,465 - $ - $(12,881) $ (366) $16,218
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1996, 1997 AND 1998
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 105 $(5,975) $(5,897)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation of property and equipment 355 1,154 1,684
Amortization of software development costs 275 289 -
Non-recurring charge (Note 3) - 4,297 -
Changes in operating assets and liabilities:
Accounts receivable (2,278) (3,911) (1,623)
Inventories (190) (406) 9
Income and other taxes receivable 13 (71) 41
Prepaid expenses and other assets (375) 117 (348)
Long-term receivable - - (1,039)
Accounts payable 521 685 (357)
Accrued liabilities 63 948 214
Deferred revenue 106 6 527
--------- --------- ---------
Net cash used in operating activities (1,405) (2,867) (6,789)
Cash flows from investing activities:
Purchase of available-for-sale securities - - (400)
Acquisition of property and equipment (1,599) (2,385) (2,698)
Software development costs capitalized (1,005) (833) -
Acquisition of software company's net assets - (471) -
--------- --------- ---------
Net cash used in investing activities (2,604) (3,689) (3,098)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 10,341 - -
Proceeds from issuance of special
warrants, net - - 11,593
Proceeds from exercise of stock options 420 150 276
--------- --------- ---------
Net cash provided by financing activities 10,761 150 11,869
Increase (decrease) in cash and cash equivalents 6,752 (6,406) 1,982
Effect of exchange rate changes on cash - (50) (316)
Cash and cash equivalents at beginning of year 4,746 11,498 5,042
--------- --------- ---------
Cash and cash equivalents at end of year $11,498 $ 5,042 $ 6,708
Non-cash investing and financing activities:
Property and equipment financed by
accounts payable $ 115 $ 99 $ 303
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS:
The Company's principal line of business is the research, design,
development, marketing and support of computer software development tools.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
These financial statements have been prepared by the Company in accordance
with accounting principles generally accepted in the United States ("US
GAAP") and in Canada ("Canadian GAAP"). All dollar amounts presented are
denominated in United States dollars.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Metrowerks Corporation, a Texas
corporation, which was formed in June 1994, and Metrowerks Corporation's
wholly owned subsidiary, Metrowerks Co. Ltd., a Japanese corporation, which
was formed in August 1996. All significant intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Product revenue, which consists of sales to distributors and from corporate
license programs, is recognized when the related products are shipped, when
no significant vendor obligations remain, and collection of the receivable,
net of provisions for estimated future returns, is probable. Accounts
receivable that were not billed as of July 31, 1996, 1997 and 1998 totaled
$186, $1,268 and $2,670, respectively. The allowance for estimated future
returns was $275, $1,192 and $1,825 at July 31, 1996, 1997 and 1998,
respectively. Long-term receivables are discounted using applicable interest
rates for obligations with similar terms on the interest rate method.
Product development agreement revenue is recognized on a percentage of
completion basis calculated by the ratio of cost incurred to total estimated
costs.
COST OF SALES
Cost of sales consists primarily of the cost of product media and
duplication, the cost of packaging materials, fulfillment, amortization of
capitalized software development costs, royalties and shipping expenses.
Cost associated with product development agreement revenue is included in
research and development expense and not separately identified and
approximates the related contract revenue.
TECHNICAL SUPPORT
Technical support expense consists primarily of personnel, telephone and on-
line product assistance costs. These costs totaled $528, $566 and $690 for
the years ended July 31, 1996, 1997 and 1998, respectively.
ADVERTISING COSTS
Advertising expense consists of costs from catalog advertising, trade
journal advertising, mass mailings and various other promotional items.
Advertising costs are expensed as incurred. For the years ended July 31,
1996, 1997 and 1998, advertising expense amounted to $1,179, $1,865 and
$1,841, respectively.
F-7
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CASH AND CASH EQUIVALENTS
The Company considers investments in highly liquid instruments purchased
with original maturities of 90 days or less to be cash equivalents. The
Company's cash equivalents consist principally of government guaranteed
instruments and are reported at cost which approximates fair market value.
The Company maintains its cash and cash equivalents in major, creditworthy
financial institutions in the United States, Canada and Japan and has not
experienced any losses on its deposits.
During fiscal 1998, the Company adopted the Canadian Institute of Chartered
Accountants ("CICA") Section 5040 "Cash Flow Statements". This adoption did
not have a material effect on the financial statements of the Company.
SHORT-TERM INVESTMENTS
As of July 31, 1998, short-term investments are comprised of a certificate
of deposit. The Company classifies its investments in debt and equity
securities as available for sale. These investments are recorded at fair
value based on quoted market prices and unrealizable gains and losses
thereon are included as a separate component of stockholders' equity. As of
July 31, 1998 unrealizable gains and losses were not significant. The cost
of securities is based on the specific identification method.
CREDIT RISK
The Company performs ongoing credit reviews of its customers and records an
allowance for doubtful accounts receivable when accounts are determined to
be uncollectible. The allowance for doubtful accounts at July 31, 1996, 1997
and 1998 was $9, $75 and $90, respectively.
INVENTORIES
Inventories, consisting of product documentation, magnetic media and
hardware are stated at the lower of cost or net realizable value. Cost is
determined using the average cost method.
SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to operations as incurred.
The Company capitalizes certain software development costs subsequent to the
establishment of technological feasibility, if material. In addition, the
Company periodically reviews its software development costs to assess net
realizable value. Any impairments are recognized in operating results when a
permanent diminution in value occurs. Based on the Company's product
development process, technological feasibility is established upon
completion of a working model. In both fiscal 1997 and fiscal 1998, costs
incurred by the Company between completion of the working model and the
point at which the product is ready for general release were insignificant.
For the years ended July 31, 1996 and 1997, amortization expense amounted to
$275 and $289, respectively, and as of July 31, 1996 accumulated
amortization totaled $358.
Research and software development costs are reduced by investment tax
credits.
PROPERTY AND EQUIPMENT
Purchased property and equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of
the respective assets as follows:
Office equipment 3-5 years
Computer equipment 2-5 years
Software 3 years
F-8
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY AND EQUIPMENT, CONTINUED
The Company provides for depreciation of leasehold improvements over the
shorter of the estimated useful lives of the improvements or the terms of
the related leases. Expenditures for maintenance and repairs are expensed as
incurred. Upon retirement or other disposition of assets, the cost and
related accumulated depreciation are eliminated from the accounts and the
resulting gain or loss is reflected in operations.
DEFERRED REVENUE
Deferred revenue consists of amounts received in advance for product,
maintenance, documentation, magnetic media and development services to be
delivered in future periods.
Allowances for estimated future software updates are provided for in the
same period as the related revenue.
FOREIGN CURRENCY TRANSLATION
The financial statements of the parent company and the Japanese subsidiary
have been translated into U.S. dollars. The functional currency of the
parent company and the Japanese subsidiary is the applicable currency.
Monetary asset and liability amounts have been translated using the exchange
rates in effect at the applicable year end. Inventories, property and
equipment, and non-monetary asset and liability amounts have been translated
at historical exchange rates. Income statement amounts have been translated
using the weighted average exchange rate for the applicable year. The
adjustment resulting from the changes in exchange rates from year to year
have been reported as a separate component of stockholders' equity. Currency
transaction gains or losses are included in the results of operations and
are immaterial for all periods presented.
FEDERAL INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method. This method requires that deferred taxes be computed utilizing the
liability method and adjusted when new tax laws or rates are enacted.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. The Company recorded no
income tax expense in 1996, 1997 or 1998, and has provided a full valuation
allowance to reduce the net deferred tax asset to zero because the
realization of tax benefits associated with net operating loss carryforwards
is not assured.
During fiscal 1998, the Company adopted the CICA Section 3465 "Income
Taxes". This adoption did not have a material effect on the financial
statements of the Company.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128 effective December 31, 1997. SFAS No. 128
requires the presentation of basic and diluted earnings per share. Basic EPS
is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS is computed by giving effect to all dilutive potential common shares
that were outstanding during the period. For the Company, dilutive potential
common shares consist of the incremental common shares issuable upon
exercise of stock options for all periods. In accordance with SFAS No. 128,
all prior period earnings per share amounts have been restated to reflect
this method of calculation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash equivalents, accounts
receivable, accounts payable and accrued liabilities. The carrying value of
these financial instruments approximate fair value at July 31, 1996, 1997
and 1998 due to their short-term nature.
F-9
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECLASSIFICATIONS
Certain prior year financial statement items have been reclassified to
conform to the current year presentation.
3. NON-RECURRING CHARGE:
The Company recorded a non-recurring charge of $4,297 in fiscal 1997 related
to the write-off of certain assets associated with Apple Computer's
Macintosh Operating System ("Mac OS"). The decision to record this charge
was based on the significant decline in sales of Mac OS related products.
The Company had accelerated its diversification efforts to focus on the
Windows and embedded systems markets and believed that the Mac OS related
assets were significantly impaired.
The components of the write-off were as follows:
Software development costs $1,746
Provision for promotional and inventory related costs 1,722
Write-off of inventories 358
Acquired in-process research and development 471
----------------
Total $4,297
The $1,746 write-off of software development costs relates to previously
capitalized Mac OS IDE development costs. The provision for accounts
receivable primarily relates to promotional costs in assisting distributors
and retail outlets in selling Mac OS related products already existing in
the distribution channel. The write-off of inventories relates to Mac OS
inventory on-hand as of quarter ended April 30, 1997. The write-off of
acquired in-process research and development relates to the purchase of
substantially all of the assets of a software company. The assets of the
software company acquired will be developed to assist in porting Mac OS
applications to Apple's next generation operating system, Rhapsody. At the
time of acquisition, technological feasibility had not been reached.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
July 31, 1996
Accumulated
Cost Depreciation Net
----------------------------------------
Office equipment $ 464 $ 62 $ 402
Computer equipment 1,288 403 885
Software 505 91 414
Leasehold improvements 17 2 15
----------- ---------- -----------
$2,274 $ 558 $1,716
July 31, 1997
Accumulated
Cost Depreciation Net
---------------------------------------
Office equipment $1,336 $ 265 $1,071
Computer equipment 2,372 1,077 1,295
Software 798 306 492
Leasehold improvements 275 87 188
----------- ---------- -----------
$4,781 $1,735 $3,046
F-10
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT, CONTINUED:
<TABLE>
<CAPTION>
July 31, 1998
Accumulated
Cost Depreciation Net
--------------------------------------------------------
<S> <C> <C> <C>
Office equipment $1,939 $ 701 $1,238
Computer equipment 3,335 1,889 1,446
Software 960 591 369
Leasehold improvements 1,515 205 1,310
---------------- ---------------- ----------------
$7,749 $3,386 $4,363
</TABLE>
5. ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
July 31,
1996 1997 1998
--------------------------------------------------------
<S> <C> <C> <C>
Accrued payroll and related costs $ 241 $ 550 $ 844
Professional fees 115 250 248
Provision for costs of software update 59 169 50
Royalties 47 113 140
Other 88 416 430
---------------- ---------------- ----------------
$ 550 $1,498 $1,712
</TABLE>
6. CAPITAL STOCK:
PREFERRED STOCK
The Class A preferred shares are non-voting, non-cumulative preferred
shares, redeemable at the option of the Company or the holder at their
stated amount. Dividends on Class A shares, having priority over all other
classes of shares may be paid at the discretion of the Board of Directors up
to a maximum of 10% of the stated capital.
The terms of the Class B preferred shares will be determined by the Board of
Directors at the time of issuance of the shares.
As of July 31, 1998, there were no issued Class A or Class B preferred
shares.
STOCK OPTION PLAN
The Company maintains an incentive stock option plan ("Plan") for the
benefit of directors, officers and employees under which 2,600,000 shares of
common stock were reserved for issuance. The exercise price of the incentive
stock option is the fair market value of the shares as at the date of the
grant. Stock options generally become vested ratably over a three-year
period and have an exercise period of no later than five years after the
date of grant.
F-11
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
6. CAPITAL STOCK, CONTINUED:
STOCK OPTION PLAN, CONTINUED:
Option activity under the Plan follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
OPTIONS --------------------------------------------------------------------------
AVAILABLE WEIGHTED TOTAL
FOR AVERAGE EXERCISE
GRANTS SHARES EXERCISE PRICE PRICE AMOUNT
---------- ---------- ---------------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at August 1, 1995 833,750 612,950 $0.99 - $ 4.14 $1.48 $ 907
Granted (443,050) 443,050 3.69 - 12.82 5.80 2,569
Exercised - (317,250) 1.05 - 3.69 1.33 (420)
Canceled 124,600 (124,600) 1.05 - 12.82 4.11 (513)
Balance at July 31, 1996 515,300 614,150 1.10 - 12.82 4.14 2,543
Reserved 1,000,000 - - - -
Granted (758,500) 758,500 5.06 - 11.77 7.25 5,497
Exercised - (40,551) 0.99 - 4.14 3.69 (150)
Canceled 165,332 (165,332) 1.13 - 12.82 8.78 (1,453)
Balance at July 31, 1997 922,132 1,166,267 0.99 - 11.77 5.50 6,427
Granted (551,200) 551,200 6.38 - 9.48 8.28 4,564
Exercised - (133,936) 0.99 - 7.00 2.06 (276)
Canceled 128,930 (128,930) 3.48 - 9.37 7.12 (934)
Balance at July 31, 1998 499,862 1,454,601 $1.03 - $11.77 $6.72 $ 9,781
</TABLE>
The Company has applied Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for the Plan. Accordingly, no compensation expense has been
recognized under the Plan as all grants were made at fair value. Had
compensation expense for the Plan been determined based upon the fair value
at the grant date for awards under the Plan consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss)
would have changed to the pro forma amounts, indicated below:
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net income (loss) - as reported $ 105 $ (5,975) $ (5,897)
Net loss - pro forma $ (69) $ (6,422) $ (7,319)
Net income (loss) - per share as reported $ 0.01 $ (0.52) $ (0.48)
Net loss - per share pro forma $ (0.01) $ (0.56) $ (0.59)
</TABLE>
The aggregate fair value and weighted average fair value per share of
options granted in fiscal 1996, 1997 and 1998 were $1,411,384, $3,434,170
and $3,025,266 and $3.19, $4.53 and $5.49 per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted assumptions:
F-12
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
6. CAPITAL STOCK, CONTINUED:
STOCK OPTION PLAN, CONTINUED
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Expected volatility 53% 53% 79%
Risk-free interest rate 5.80% 6.25% 5.74%
Expected life 4 years 4 years 4 years
Expected dividend yield 0.00% 0.00% 0.00%
</TABLE>
The following table summarizes information about fixed stock options
outstanding at July 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AVERAGE ------------------------------------ ------------------------------------
REMAINING NUMBER AVERAGE NUMBER AVERAGE
RANGE OF CONTRACTUAL OUTSTANDING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES LIFE (YEARS) JULY 31, 1998 PRICE JULY 31, 1998 PRICE
--------------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ .03 - $ 4.14 1.90 254,700 $2.90 203,207 $ 2.75
$ .06 - $ 8.62 3.72 1,136,151 $7.40 255,424 $ 6.86
$9.35 - $11.77 3.86 63,750 $9.97 10,000 $10.56
---------------- ----------------
TOTAL 3.41 1,454,601 $6.72 468,631 $ 5.16
</TABLE>
At July 31, 1996 and 1997 options to purchase 128,473 and 250,684 shares of
common stock at a weighted exercise price of $1.55 and $2.67 per share,
respectively, were exercisable.
On July 17, 1997, the Company repriced 618,500 options to a price equal to
110% of the then market value. These options were repriced from a range of
between $8.50 and $13.14 to $7.00.
ISSUANCE OF COMMON SHARES
On February 27, 1996, the Company entered into an Underwriting Agreement for
the purpose of issuing to certain underwriters 1,000,000 common shares at a
price of $11.84 ($11.19 net of underwriters' fee). The company received net
proceeds of $10,341 from the offering. The proceeds are net of offering
costs of $1,504.
ISSUANCE AND CONVERSION OF SPECIAL WARRANTS
On October 21, 1997, the Company entered into an Underwriting Agreement for
the purpose of issuing to certain underwriters by way of private placement,
1,500,000 special warrants ("Special Warrants") at a price of $10.08 each
($9.62 net of underwriters' fee). Upon the exercise of the 1,500,000 Special
Warrants thereby sold, 1,250,000 shares were to have been issued from
treasury by the Company and 250,000 were to have been transferred by three
officers of the Company. These arrangements were modified in that the
Company agreed to assume two of the officers' obligations to deliver an
aggregate of 225,000 Common Shares upon the exercise of the Special Warrants
in consideration of the payment by those officers of the proceeds received
by them in connection with the offering of the Special Warrants. The special
warrants were exercised in January 1998. Accordingly, 1,475,000 shares were
issued from treasury by the Company and 25,000 shares were transferred by an
officer of the Company. The 225,000 Common Shares owned by the other two
officers of the Company were purchased by the Company for cancellation in
December 1997. The Company received net proceeds of $11,593 from the
offering. The proceeds are net of offering costs of $1,007.
F-13
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
7. EARNINGS PER SHARE:
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which
establishes standards for computing and presenting earnings per share. SFAS
No. 128 is effective for fiscal years ending after December 15, 1997.
Earnings per share calculated under SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
BASIC: Year Ended July 31,
1996 1997 1998
----------------- ---------------- ----------------
<S> <C> <C> <C>
Net income (loss) for the year $ 105 $(5,975) $(5,897)
----------------- ---------------- ----------------
Weighted average number of common shares
issued and outstanding 10,620 11,523 12,311
Earnings (loss) per share $ 0.01 $ (0.52) $ (0.48)
<CAPTION>
DILUTED: Year Ended July 31,
1996 1997 1998
----------------- ---------------- ----------------
<S> <C> <C> <C>
Net income (loss) for the year $ 105 $(5,975) $(5,897)
----------------- ---------------- ----------------
Weighted average number of common shares
issued and outstanding 10,620 11,523 12,311
Common stock equivalents:
Employee stock options 108 -- --
----------------- ---------------- ----------------
Average common and common stock equivalents 10,728 11,523 12,311
----------------- ---------------- ----------------
Earnings (loss) per share $ 0.01 $ (0.52) $ (0.48)
</TABLE>
For the years ended July 31, 1997 and 1998, stock options are excluded as
their inclusion would be anti-dilutive given the Company's loss. The
earnings per share calculation does not include outstanding options with
exercise prices ranging from $0.99 to $11.77 and $1.03 to $11.77 for the
years ended July 31, 1997 and 1998, respectively.
8. LINE OF CREDIT:
During April 1998, the Company entered into a $800 line of credit agreement
with a bank. Borrowings under the agreement bear interest at the bank's
prime rate of interest plus one percent (9.5% as of July 31, 1998). The
agreement, which expires in January 2000, is fully utilized to collateralize
letters of credit issued to the Company's landlord for leasehold
improvements. Borrowings under the agreement are collateralized by the
assets of the Company except the Company's intellectual property. The credit
agreement contains certain minimum quarterly profitability and various
financial-ratio requirements. Under the agreement, the Company may not pay
dividends or make any other distribution payment on account or in
redemption, retirement or purchase of any capital stock, and the Company
must also limit the amount of funds transferred to any affiliate.
9. RELATED PARTY TRANSACTIONS:
In fiscal 1998, the Company paid a fee of approximately $150 in connection
to a special warrant offering to an underwriter in which a director of the
Company is an officer.
In fiscal 1997, and 1998, the Company paid fees of approximately $50, and
$150, respectively, to a law firm in which a director of the Company was a
senior partner.
F-14
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
10. EMPLOYEE BENEFITS:
In January 1996, the Company established a 401(k) retirement savings plan
(the "Plan") for all employees. All employees meeting minimum age
requirements are eligible to enroll in the Plan after 250 hours of
employment. The Company did not provide matching contributions to employee
accounts for the years ended July 31, 1996, 1997 or 1998.
11. COMMITMENTS:
The Company leases various facilities under noncancelable operating leases.
Future minimum lease payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
July 31, 1998 are as follows:
1999 $ 1,056
2000 1,027
2001 1,142
2002 1,139
2003 1,142
2004 761
----------
$ 6,267
Total rent expense for noncancelable operating leases was $139, $422 and
$783 for the years ended July 31, 1996, 1997 and 1998, respectively.
The Company has an option to renew the lease for its headquarters for an
additional period of five years beginning in April 2004 at the market price
at the time of renewal.
The Company engages the services of individual contractors to assist in
research and development related to the Company's software products.
12. RISKS AND UNCERTAINTIES:
CUSTOMER CONCENTRATIONS:
As of July 31, 1998, the Company has accounts receivable in excess of 10% of
its total accounts receivable with two unrelated parties, aggregating
approximately $1,094 (16% of total accounts receivable) and $1,150 (17% of
total accounts receivable). As of July 31, 1997, the Company has accounts
receivable in excess of 10% of its total accounts receivable with one
unrelated party, aggregating approximately $2,146 (34% of total accounts
receivable). Historically, the Company has not incurred any bad debt expense
in connection with any transactions with any of these unrelated parties.
Additionally, the Company had sales in excess of 10% of its net sales to one
unrelated party for the year ended July 31, 1997, aggregating approximately
$3,050 (15.6% of total sales). They were no customer concentrations of
revenue greater than 10% of sales for the years ended July 31, 1996 or 1998.
F-15
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
12. RISKS AND UNCERTAINTIES, CONTINUED:
YEAR 2000 COMPLIANCE:
"Year 2000 Compliant" means that a program, when used in accordance with its
associated documentation, will (a) initiate and operate, (b) correctly
store, represent, and process dates, and (c) not cause or result in an
abnormal termination or ending, when processing data containing dates in the
Year 2000 and in any preceding and following years, provided that all third
party products that exchange date data with the program do so properly and
accurately and in a form and format compatible with the program.
The products provided by Metrowerks process dates only to the extent that
these products use date data provided by the host or target operating system
for date representations used in internal processes, such as file
modifications. Any Year 2000 Compliance issues resulting from the operation
of the products are therefore necessarily subject to the Year 2000
Compliance of the relevant host or target operating system. The Company has
directed its customers to the relevant statements of Microsoft Corporation,
Sun Microsystems, Inc., Apple Computer, Inc., and other host or target
operating systems relating to the Year 2000 Compliance of their operating
systems. Except as expressly described above, the products, in themselves,
do not process date data and therefore do not implicate Year 2000 Compliance
issues.
The Company has also assessed the readiness of its internal computer systems
and does not expect to incur significant costs in implementing Year 2000
changes if necessary. There can be no assurance that such changes will fully
completed in a timely manner. Additionally, the Company could be adversely
impacted by Year 2000 issues faced by major distributors, suppliers,
customers and financial service organizations with which the company
interacts.
13. INCOME TAXES:
The components of the net deferred tax asset are as follows at July 31:
<TABLE>
<CAPTION>
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net operating loss carryforward $ 272 $ 2,043 $ 3,813
Property and equipment 30 178 101
Reserves 120 546 668
Research and development tax credit 98 270 477
Other (119) 46 247
---------------- ---------------- ----------------
Net deferred tax asset before valuation
allowance 401 3,083 5,307
Valuation allowance (401) (3,083) (5,307)
---------------- ---------------- ----------------
Net deferred tax asset $ - $ - $ -
</TABLE>
During the years ended July 31, 1996, 1997 and 1998 the valuation allowance
decreased by $21 and increased by $2,682 and $2,224, respectively.
Net operating loss carryforwards of $4,447 and $6,900 begin to expire in
2000 and 2010 for state and federal purposes, respectively.
The difference between the actual income tax provision computed by applying
the statutory income tax rate to income (loss) before taxes is attributed to
the following:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1996 1997 1998
% % %
---------------- ---------------- ----------------
<S> <C> <C> <C>
Statutory tax rate (benefit) 38.00 (38.00) (38.00)
Foreign taxes (1.80)
Future benefit of timing differences not
recognized (43.11) 39.40 40.90
Permanent differences 5.11 (1.40) (1.10)
---------------- ---------------- ----------------
Effective rate - - -
</TABLE>
F-16
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
14. REVENUE:
Revenue is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Product $ 7,246 $ 12,254 $ 14,450
Product development agreements 2,263 4,715 3,944
Hardware and other 1,110 1,324 661
---------------- ---------------- ----------------
$ 10,619 $ 18,293 $ 19,055
</TABLE>
15. GEOGRAPHIC DATA:
The Company's revenue by geographic location are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
United States $ 8,320 $ 11,316 $ 12,593
Canada 2,299 4,980 4,342
Japan - 1,997 2,120
---------------- ---------------- ----------------
$ 10,619 $ 18,293 $ 19,055
</TABLE>
The Company's net income (loss) by geographic location are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
United States $ (726) $ (4,346) $ (3,135)
Canada 831 (1,317) (1,943)
Japan - (312) (819)
---------------- ---------------- ----------------
$ 105 $ (5,975) $ (5,897)
</TABLE>
The Company's assets by geographic location are as follows:
<TABLE>
<CAPTION>
JULY 31,
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
United States $ 4,466 $ 6,947 $ 12,928
Canada 13,839 6,197 6,355
Japan - 1,024 1,228
---------------- ---------------- ----------------
$ 18,305 $ 14,168 $ 20,511
</TABLE>
F-17
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
16. RECENT PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Restated Information," and the Canadian Institute of
Chartered Accountants (CICA) issued Section 1701, which establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997.
Management does not believe the implementation of SFAS No. 130 and No. 131
will have a material effect on its financial statements.
In October 1997, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition
as amended on March 31, 1998, which delineates the accounting for software
product and maintenance revenues. SOP 97-2 supersedes the Accounting
Standards Executive Committee SOP 91-1, Software Revenue Recognition, and is
effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company is evaluating the requirements of SOP 97-2
and its amendments and the effects, if any on the Company's current revenue
recognition policies.
F-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Metrowerks Inc. and Subsidiaries
Our report on the consolidated financial statements of Metrowerks Inc. and
Subsidiaries is included on page F-2 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the consolidated
financial statement schedule listed in the index on page F-1 of this Form 10-K
herein.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
PricewaterhouseCoopers LLP
Austin, Texas
October 2, 1998
S-1
<PAGE>
METROWERKS INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Balance at Charged to Costs Balance at End of
Description Beginning of Year and Expenses Deductions Year
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts and returns
1996 257 901 874 284
1997 284 2,623 1,640 1,267
1998 1,267 6,164 5,516 1,915
</TABLE>
S-2
<PAGE>
EXHIBIT 10.31
LEASE AGREEMENT
Between
Met 10 W-97, Ltd., a Texas limited partnership
as Landlord,
and
Metrowerks Corporation
as Tenant.
Covering approximately 97,200 gross square feet of the Building known (or to be
known) as
Metric 10 A
located at
9801 Metric Boulevard
Austin, Texas, 78758.
STANDARD INDUSTRIAL LEASE AGREEMENT
TRAMMELL CROW COMPANY - (AUS/9 1)
LEASE AGREEMENT
THIS LEASE AGREEMENT is made and entered into by and between Met IOW-97, Ltd.
referred to as "Landlord," and Metrowerks Corporation, hereinafter referred to
as "Tenant."
Approximately 97,200 gross square feet
9801 Metric Boulevard
Austin, Texas 78758
(Metric 10A)
a Texas limited partnership, hereinafter
1. PREMISES AND TERM. In consideration of the mutual obligations of Landlord and
Tenant set forth herein, Landlord leases to Tenant, and Tenant hereby takes from
Landlord, certain leased premises situated within the County of Travis, State of
Texas, as more particularly described on EXHIBIT "A" attached hereto and
incorporated herein by reference (the "Premises"), to have and to hold, subject
to the terms, covenants and conditions in this Lease. The term of this Lease
shall commence on the Commencement Date hereinafter set forth and shall end on
the last day of the month that is seventy-two (72) months after the Commencement
Date.
A. Building or Improvements to be Constructe . If the Premises or part thereof
are to be constructed, the "Commencement Date" shall be deemed to be April 1,
1998, except that such date shall be extended for one (1) day for each day
caused by a Landlord delay. Tenant shall have the right to enter (but not
occupy) the Premises not less than ten (10) days prior to Commencement Date to
perform punch list items, cabling/telephone installation, move coordination and
furniture installation.
2. BASE RENT, SECURITY DEPOSIT AND ESCROW DEPOSITS.
A. Base Rent. Tenant agrees to pay Landlord rent for the Premises, in advance,
without demand, deduction or set off, at the rate as shown below. One such
monthly installment, plus the other monthly charges set forth in Paragraph 2C
below, shall be due and payable on the date hereof, and a like monthly
installment shall be due and payable on or before the first day of each calendar
month succeeding the Commencement Date, except that all payments due hereunder
for any fractional calendar month shall be prorated.
Months Base Rental Rate Per Square Foot Total Base Rental
1- 4 $0.40 $39,000.00
------------------------------------------------
5-72 $0.65 $63,180.00
- -------------------------------------------------------------------
<PAGE>
B. Security Deposit. See Exhibit C, Number 5.
C. Escrow Deposit5. Tenant shall not be required to pay any operating
expenses on 37,200 square feet for months I - 4 of the Lease Term. Otherwise
without limiting in any way Tenant's other obligations under this Lease, Tenant
agrees to pay to Landlord its Proportionate Share (as defined in this Paragraph
2C below) of (i) Taxes (hereinafter defined) payable by Landlord pursuant to
Paragraph 3A below, and the cost of any tax consultant, not to exceed five
hundred dollars ($500) per year, to assist Landlord in determining the fair tax
valuation of the Building and land (ii) the cost of utilities payable by
Landlord pursuant to Paragraph 8 below, (iii) Landlord's cost of maintaining any
insurance or insurance related expense applicable to the Building and Landlord's
personal property used in connection therewith including, but not limited to,
insurance pursuant to Paragraph 9A below, and (iv) Landlord's cost of
maintaining the Premises which include but are not limited to (a) maintenance
and repairs, (b) landscaping, (c) common area utilities, (d) water and sewer,
(e) roof repairs, (f) management fees, (g) exterior painting, and (h) parking
lot maintenance and repairs (collectively , the "Tenant Costs"). Escrow deposits
shall not include the following expenses: (a) any costs for interest,
amortization, or other payments on loans to Landlord; (b) expenses incurred in
leasing or procuring tenants, (c) legal expenses other than those incurred for
the general benefit of the Building's tenants, (d) allowances, concessions, and
other costs of renovating or otherwise improving space for occupants of the
Building or vacant space in the Building, (e) rents under ground leases, and (f)
costs incurred in selling, syndicating, financing, mortgaging, or hypothecating
any of Landlord's interests in the Building.
During each month of the term of this Lease, on the same day that rent is due
hereunder, Tenant shall deposit in escrow with Landlord an amount equal to
one-twelfth (1/12) of the estimated amount of Tenant's Proportionate Share of
the Tenant Costs. These expenses are estimated to equal $0.1342 per square foot
per month during 1998. See Exhibit D for a detailed estimate of Basic Operating
Costs for 1998. Tenant authorizes Landlord to use the funds deposited with
Landlord under this Paragraph 2C to pay such Tenant Costs. The initial monthly
escrow payments are based upon the estimated amounts for the year in question
and shall be increased or decreased annually to reflect the projected actual
amount of all Tenant Costs. If the Tenant's total escrow deposits for any
calendar year are less than Tenant's actual Proportionate Share of the Tenant
Costs for such calendar year, Tenant shall pay the difference to Landlord within
ten (10) days after demand. If the total escrow deposits of Tenant for any
calendar year are more than Tenant's actual Proportionate Share of the Tenant
Costs for such calendar year, Landlord shall retain such excess and credit it
against Tenant's escrow deposits next maturing after such determination. In the
event the Premises constitute a portion of a multiple occupancy building (the
"Building"), Tenant's "Proportionate Share" with respect to the Building, as
used in this Lease, shall mean a fraction, the numerator of which is the gross
rentable area contained in the Premises and the denominator of which is the
gross rentable area contained in the entire Building. In the event the Premises
or the Building is part of a project or business park owned, managed or leased
by Landlord or an affiliate of Landlord (the "Project"), Tenant's "Proportionate
Share" of the Project, as used in this Lease, shall mean a fraction, the
numerator of which is the gross rentable area contained in the Premises and the
denominator of which is the gross rentable area contained in all of the
buildings (including the Building) within the Project.
At any time during the Term and within one (1) year after the expiration of the
Term, upon five (5) days prior written notice and during normal business hours
at Landlord's office or such other place as Landlord shall reasonably designate,
Tenant shall be entitled to inspect and examine those books and records of
Landlord relating to the determination of any item of Basic Operating Costs paid
in the preceding calendar year of the Term. If, after inspection and examination
of such books and records, Tenant disputes the amounts of Basic Operating Costs
charged by Landlord, Tenant, by written notice to Landlord, may request an
independent audit of such books and records. The independent audit of the books
and records shall be conducted by a certified public accountant designated by
Tenant and reasonably acceptable to Landlord. If, within ten (10) days after
Landlord's receipt of Tenant's notice requesting an audit, Landlord and Tenant
are unable to agree on the certified public accountant to conduct such audit,
then Tenant may designate a reputable accounting firm not then employed by
Landlord and Tenant to conduct such audit. The audit shall be limited to the
determination of the amount of any or all items of Basic Operating Costs for the
subject Adjustment Period and the Adjustment Period immediately prior thereto.
Adjustment Period shall be defined as any 12-month period during which
additional rent was billed to Tenant. If the audit discloses that any item of
Basic Operating Costs billed to Tenant was incorrect, the appropriate party
shall pay the other party the deficiency or overpayment, as applicable. All
costs and expenses of the audit shall be paid by the Tenant unless the audit
shows that Landlord overstated Basic Operating Costs by more than two and
one-half percent (2.5%), but less than five percent (5%), in which event
Landlord and Tenant shall share equally the cost of such audit; provided that if
the overstatement is five percent (5%) or More, Landlord shall pay the costs and
expenses of the audit up to $2,500 per annual audit.
3. TAXES
A. Real Property Taxes. Subject to reimbursement under Paragraph 2C herein,
Landlord agrees to pay all taxes, assessments and governmental charges of any
kind and nature (collectively referred to herein as "Taxes") that accrue against
the Premises, the Building and/or the land of which the Premises or the Building
are a part. If at any time during the term of this Lease there shall be levied,
assessed or imposed on Landlord a capital levy or other tax directly on the
rents received therefrom and/or a franchise tax, assessment, levy or charge
measured by or based, in whole or in part, upon such rents from the Premises
and/or the land and
2
improvements of which the Premises are a part, then all such taxes, assessments,
levies or charges, or the part thereof so measured or based shall be deemed to
be included within the term "Taxes" for the purposes hereof.
If at any time during the term of this Lease there shall be levied, assessed
or imposed on the Landlord a franchise tax, business tax, income tax, or other
levy relating to this Lease or the Premises, such levy being in lieu of all or a
portion of the local property tax for schools, a reasonable allocation of such
amount shall be deemed to be included within the term "Taxes" for purposes of
determining Tenant's share of Taxes to be reimbursed to Landlord.
B. Personal Property Taxes. Tenant shall be liable for all taxes levied or
assessed against any personal property or fixtures placed in or on the Premises.
If any such taxes are levied or assessed against Landlord or Landlord's property
and (i) Landlord pays the same or (ii) the assessed value of Landlord's property
is increased by inclusion of such personal property and fixtures and Landlord
pays the increased taxes, then Tenant shall pay to Landlord, within thirty (30)
days of receipt of written demand, the amount of such taxes.
4. LANDLORD'S REPAIRS AND MAINTENANCE.
<PAGE>
Structural Repairs. Landlord, at its own cost and expense, shall maintain the
foundation and the structural soundness of the exterior walls of the Building in
good repair, reasonable wear and tear excluded. The term "walls" as used herein
shall not include windows, glass or plate glass, any doors, special store fronts
or office entries, and the term "foundation" as used herein shall not include
loading docks. Tenant shall immediately give Landlord written notice of defect
or need for repairs, after which Landlord shall have reasonable opportunity to
effect such repairs or cure such defect.
5. TENANTS REPAIRS.
A. Maintenance of Premises and Appurtenances. Tenant, at its own cost and
expense, shall pay its prorata share to (i) maintain all non-structural parts of
the interior of the Premises and promptly make all necessary repairs and
replacements to the interior of the Premises (except those for which Landlord is
expressly responsible hereunder), and (ii) keep the parking areas, driveways and
alleys surrounding the Premises free of trash and debris from Tenant's use.
Tenant's obligation to maintain, repair and make replacements to the Premises
shall cover, but not be limited to, pest control (including termites), trash
removal and the maintenance, repair and replacement of all HVAC, electrical,
plumbing, sprinkler and other mechanical systems.
C. Parking. Tenant and its employees, customers and licensees shall have the
right to use only its Proportionate Share of any parking areas that have been
designated for such use by Landlord in writing, subject to (i) all rules and
regulations promulgated by Landlord, and (ii) rights of ingress and egress of
other lessees. Landlord shall not be responsible for enforcing Tenant's parking
rights against any third parties, however, Landlord shall use its reasonable
efforts to assistant Tenant to enforce parking rules and regulations. Tenant
agrees not to park on any public streets or private roadways adjacent to or in
the vicinity of the Premises. Tenant shall be provided a total parking ratio of
not less than 4 spaces per 1,000 square feet leased at no cost throughout the
term of the Lease or any Renewals. Landlord shall stripe the truck court at
Landlord's cost to accommodate the 4: 1,000 square foot parking ratio. All
parking locations shall be designated in Exhibit F of this Lease Agreement.
D. System Maintenance. Landlord shall service HVAC equipment within thirty
(30) days of Tenant's occupancy to ensure such HVAC equipment is in good working
order. Tenant, at its own cost and expense, shall enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
reasonably approved by Landlord for servicing all hot water, heating and air
conditioning systems and equipment within the Premises. The service contract
must include the replacement of filters on a regular basis and all services
suggested by the equipment manufacturer in its operations/maintenance manual and
must become effective within thirty (30) days of the date Tenant takes
possession of the Premises.
E. Option to Maintain Premise5. Landlord reserves the right to perform, in
whole or in part, after written notice to Tenant and Tenant's failure to so
perform after reasonable opportunity to do so has elapsed, maintenance, repairs
and replacements to the Premises, paving, common area, landscape, exterior
painting, common sewage line plumbing and any other items that are otherwise
Tenant's obligations obligation to pay its prorata share of costs under this
Paragraph 5, in which event, Tenant
Proportionate Share of the cost and expense of such repair, replacement,
maintenance and other such items.
shall be liable for its
6. ALTERATIONS. Tenant shall not make any alterations, additions or improvements
to the Premises without the prior written consent of Landlord, which consent
shall not be unreasonably withheld, delayed or conditioned. Tenant shall not
make any alterations, additions or improvements which would modify the
structural, mechanical, or electrical systems of the building without Landlord
consent. Notwithstanding the foregoing, Tenant may make alterations which do not
impact the structural, mechanical, or electrical systems of the building, and
cost less than or equal to twenty five thousand dollars ($25,000), without
Landlord consent.
However, Tenant must notify Landlord of all alterations to the building prior to
the commencement of such alterations. Landlord shall not be required to notify
Tenant of whether it consents to any alteration, addition or improvement until
it (a) has received plans and specifications in a CAD disk format therefor which
are sufficiently detailed to allow construction of the work depicted thereon to
be performed in a good and workmanlike manner, and (b) has had a reasonable
opportunity to review them. If the alteration, addition or improvement will
affect the Building's structure, HVAC system, or mechanical, electrical, or
plumbing systems, then the plans and specifications therefor must be prepared by
a licensed engineer reasonably acceptable to Landlord and provided to Landlord
in a CAD disk format. Landlord's approval of any plans and specifications shall
not be a representation that the plans or the work depicted thereon will comply
with law or be adequate for any purpose, but shall merely be Landlord's consent
to performance of the work. Upon completion of any alteration, addition, or
improvement, Tenant shall deliver to Landlord accurate, reproducible as-built
plans therefor in a CAD disk format. Tenant may erect shelves, bins, machinery
and trade fixtures provided that such items (1) do not alter the basic character
of the Premises or the Building; (2) do not overload or damage the same; and (3)
may be removed without damage to the Premises. Unless Landlord specifies in
writing otherwise at the time of consent, all alterations, additions, and
improvements shall be Landlord's property when installed in the Premises. All
shelves, bins, machinery and trade fixtures installed b y Tenant shall be
removed on or before the later to occur of the day of termination or expiration
of this Lease or vacating the Premises, at which time Tenant shall restore the
Premises to their condition as of the Commencement Date of this Lease. All work
performed by a Tenant in the Premises (including that relating to the
installations, repair replacement, or removal of any item) shall be performed in
accordance with all applicable governmental laws, ordinances, regulations, and
with Landlord's specifications and requirements, in a good and workmanlike
manner, and so as not to damage or alter the Building's structure or the
Premises. Tenant shall be responsible for compliance with The Americans With
Disabilities Act of 1990. In connection with any such alteration, addition or
improvement, Tenant shall pay to Landlord an administration fee of two and
one-half percent (2.5%) of all costs incurred for such work. Tenant shall only
be required to perform modifications or restoration to the Premises upon
vacating the Building that exceed normal wear and tear. Not withstanding the
foregoing, in the event Tenant elects to modify the Premises after Commencement,
Landlord shall have the right to cause Tenant to restore the portion of the
Premises being modified to its original condition upon Occupancy provided
Landlord includes such requirement in its consent to such modifications.
Landlord shall be responsible for compliance with the American with Disabilities
Act (ADA) on the exterior of the Building and all common areas upon Comencement
of the Lease. Such costs for compliance shall be construed as costs incurred by
the Landlord, which will not be amortized as operating expenses of the Building
and passed through to the Tenant. Tenant shall, at its sole cost and expense, be
responsible for compliance with the ADA for matters within its Premises,
excluding matters pertaining to the Building. Landlord represents and warrants
upon Substantial Completion, complete compliance with ADA codes.
7. SIGNS. Any signage Tenant desires for the Premises shall be subject to
Landlord's written approval, which approval shall not be unreasonably delayed,
and shall be submitted to Landlord prior to the Commencement Date of this Lease.
Tenant shall repair, paint and/or replace the Building fascia surface to which
its signs are attached upon Tenant's vacating the Premises or the removal or
alteration of its signage. Tenant shall not, without Landlord's prior written
consent, (i) make any changes to the exterior of the Premises, such as painting;
(ii) install any exterior lights, decorations, balloons, flags, pennants or
banners; or (iii)
<PAGE>
erect or install any signs, windows or door lettering, placards, decorations or
advertising media of any type which can be viewed from the exterior of the
Premises. All signs, decorations, advertising media, blinds, draperies and other
window treatment
or bars or other security
3
all respects to the criteria established by Landlord or shall be
installations visible from outside the Premises shall conform in otherwise
subject to Landlord's prior written consent, which shall not be unreasonably
withheld. Tenant shall have the right to place its logo on the facia of the
Building and on a monument sign in front of the Building, subject to approval by
the Landlord, such approval not to be unreasonably withheld. All signs shall
comply with all applicable governmental codes.
8. UTILITIES. Landlord agrees to provide normal water and electricity service to
the Premises. Tenant shall pay for all water, gas, heat, light, power,
telephone, sewer, sprinkler charges and other utilities and services used on or
at the Premises, together with any taxes, penalties, surcharges or the like
pertaining to the Tenant's use of the Premises and any maintenance charges for
utilities.
Landlord shall have the right to cause any of said services to be separately
metered to Tenant, at Tenant's expense. Tenant shall pay its pro rata share, as
reasonably determined by Landlord, of all charges for jointly metered utilities.
Landlord shall not be liable for any interruption or failure of utility service
on the Premises, and Tenant shall have no rights or claims as a result of any
such failure. In the event water is not separately metered to Tenant, Tenant
agrees that it will not use water and sewer capacity for uses other than normal
domestic restroom and kitchen usage, and Tenant further agrees to reimburse
Landlord for the entire amount of common water and sewer costs as additional
rental if, in fact, Tenant uses water or sewer capacity for uses other than
normal domestic restroom and kitchen uses without first obtaining Landlord's
written permission, including but not limited to the cost for acquiring
additional sewer capacity to service Tenant's excess sewer use. Furthermore,
Tenant agrees in such event to install at its own expense a submeter to
determine Tenant's usage.
9. INSURANCE.
A. Landlord's Insurance. Subject to reimbursement under Paragraph 2C herein,
Landlord shall maintain insurance covering the Building in an amount not less
than the full "replacement cost" thereof, insuring against the perils of fire,
lightning, extended coverage, vandalism and malicious mischief
B. Tenant's Insurance. Tenant, at its own expense, shall maintain during the
term of this Lease a policy or policies of workers compensation and
comprehensive general liability insurance, including personal injury and
property damage, with contractual liability endorsement, in the amount of Five
Hundred Thousand Dollars ($500,000.00) FOR PROPERTY damage and One Million
Dollars ($1,000,000.00) per occurrence and One Million Dollars ($1,000,000.00)
in the aggregate for personal injuries or deaths of person
occurring in or about the Premises. Tenant, at its own expense, shall also
maintain during the ten-n of this Lease fire and extended coverage insurance
covering the replacement cost of (i) all alterations, additions, partitions and
improvements installed or placed on the Premises by Tenant Or by Landlord on
behalf of Tenant; and (ii) all of Tenant's personal property contained within
the Premises. Said policies shall (i) name the Landlord and management company
as additional insured and insure Landlord's and management company's contingent
liability under or in connection with this Lease (except for the workers'
compensation policy, which instead shall include a waiver of subrogation
endorsement in favor of Landlord); (ii) be issued by an insurance company which
is licensed t do business in the State of Texas; and (iii) Provide that said
insurance shall not be canceled unless thirty (30) days prior written notice has
been given to Landlord. Said policy or policies or certificates thereof shall be
delivered to Landlord by Tenant on or before the Commencement Date and upon each
renewal of said insurance.
C. Prohibited Use5. Tenant will not permit the Premises to be used for any
purpose or in any manner that would (i) void the insurance thereon, (ii)
increase the insurance risk or cost thereof, or (iii) cause the disallowance of
any sprinkler credits; including without limitation, use of the Premises for the
receipt, storage or handling of any product, material or Merchandise that is
explosive or highly inflammable. If any increase in the cost of any insurance on
the Premises or the Building is caused by Tenant's use of the Premises or
because Tenant vacates the Premises, then Tenant shall pay the amount of such
increase to Landlord upon demand therefor.
10. FIRE AND CASUALTY DAMAGE.
A. Tot I or Substantial Damage and Destruction. If the Premises or the
Building should be damaged Or destroyed by fire or other peril, Tenant shall
immediately give written notice to Landlord of such damage or destruction. If
the Premises or the Building should be totally destroyed by any peril covered by
the insurance to be provided by Landlord under Paragraph 9A above, or if they
should be so damaged thereby that, in Landlord's estimation, rebuilding or
repairs cannot be completed within one hundred eighty (180) days after the date
of such damage or after such completion there would not be enough time remaining
under the terms of this Lease to fully amortize such rebuilding or repairs, then
this Lease shall terminate and the rent shall be abated during the unexpired
portion of this Lease, effective upon the date of the occurrence of such damage.
B. Partial Damage or Destruction. If the Premises or the Building should be
damaged by any peril covered by the insurance to be provided by Landlord under
Paragraph 9A above and, in Landlord's estimation, rebuilding or repairs can be
substantially completed within one hundred eighty (180) days after the date of
such damage, then this Lease shall not terminate and Landlord shall
substantially restore the Premises to its previous condition, except that
Landlord shall not be required to rebuild, repair or replace any part of the
partitions, fixtures, additions and other improvements that may have been
constructed, erected or installed in or about the Premises after the
Commencement Date of this Lease for the benefit of, by or for Tenant.
C. Lienholders' Rights in Proceeds. Notwithstanding anything herein to the
contrary, in the event the holder of any indebtedness secured by a mortgage or
deed of trust covering the Premises requires that the insurance proceeds be
applied to such indebtedness, then Landlord shall have the right to terminate
this Lease by delivering written notice of termination to Tenant within fifteen
(15) days after such requirement is made known to Landlord by any such holder,
whereupon all rights and obligations hereunder shall cease and terminate.
D. Waiver of Subrogation. Notwithstanding anything in this Lease to the
contrary, Landlord and Tenant hereby waive and release each other of and from
any and all rights of recovery, claims, actions or causes of action against each
other, or their
<PAGE>
respective agents, officers and employees, for any loss or damage that may occur
to the Premises, improvements to the Building or personal property (Building
contents) within the Building and/or Premises, for any reason regardless of
cause or origin. Each party to this Lease agrees immediately after execution of
this Lease to give written notice of the terms of the mutual waivers contained
in this subparagraph to each insurance company that has issued to such party
policies of fire and extended coverage insurance and to have the insurance
policies properly endorsed to provide that the carriers of such policies waive
all rights of recovery under subrogation or otherwise against the other party.
11. LIABILITY AND INDEMNIFICATION. Except for any claims, rights of recovery and
causes of action that Landlord has released, Tenant shall hold Landlord harmless
from and defend Landlord against any and all claims Or liability for any injury
or damage (i) to any person or property whatsoever occurring in, on or about the
Premises or any part thereof, the Building and/or other common areas, the use of
which Tenant may have in accordance with this Lease, if (and only if) such
injury or damage shall be caused in whole or in part by the act, neglect, fault
or omission of any duty by Tenant, its agents, servants, employees or invitees;
(ii) arising from the conduct or management of any work done by the Tenant in or
about the Premises; (iii) arising from transactions of the Tenant; and (iv) all
costs, reasonable counsel fees, expenses and liabilities incurred in connection
with any such claim or action or proceeding brought thereon. The provisions of
this Paragraph I I shall survive the expiration or termination of this Lease.
Landlord shall not be liable in any event for personal injury or loss of
Tenant's property caused by fire, flood, water leaks, rain, hail, ice, snow,
smoke, lightning, wind, explosion, interruption of utilities or other
occurrences except when due to the gross negligence or willful misconduct of
Landlord, its agents or contractors. Landlord strongly recommends that Tenant
secure Tenant's own insurance in excess of the amounts required elsewhere in
this Lease to protect against the above occurrences if Tenant desires additional
coverage for such risks. Tenant shall give Prompt notice to Landlord of any
significant accidents involving injury to persons or property.
Furthermore, Landlord shall not be responsible for lost Or stolen personal
property, equipment, money or jewelry from the Premises or from the public areas
of the Building or the Project, regardless of whether such loss occurs when the
area is locked against entry.
Landlord shall not be liable to Tenant or Tenant's employees, customers or
invitees for any damages or losses to persons or property caused by any lessees
in the Building or the Project, or for any damages or losses caused by theft,
burglary, assault, vandalism or other crimes. Landlord strongly recommends that
Tenant provide its own security systems and services and secure Tenant's own
insurance in excess of the amounts required elsewhere in this Lease to PROTECT
AGAINST THE above occurrences if Tenant desires additional protection or
coverage for such risks. Tenant shall give Landlord prompt notice of any
criminal or suspicious conduct within or about the Premises, the Building or the
Project and/or any personal injury or property damage caused thereby. Landlord
may, but is not obligated to, enter into agreements with third parties for the
provision, monitoring, maintenance and repair of any courtesy patrols or similar
services or fire protective systems and equipment and, to the extent same is
provided at Landlord's sole discretion, Landlord shall not be liable to Tenant
for any damages, costs or expenses which occur for any reason in the event any
4
such system or equipment is not properly installed, monitored or maintained or
any such services are not properly provided.
Landlord shall use reasonable diligence in the maintenance of existing lighting,
if any, in the parking garage or parking areas servicing the Premises, and
Landlord shall not be responsible for additional lighting or any security
measures in the Project, the Premises, the parking garage or other parking
areas.
Landlord will indemnify and hold Tenant harmless from all suits, actions,
damages, liability and expense in connection with loss of life, bodily or
personal injury or property damage arising from any gross negligence or willful
misconduct of Landlord, its agents, contractors, employees or invitees. In
addition, if Tenant should, without fault on its part, be made a party to any
action against Landlord and related to the foregoing indemnification, Landlord
shall pay all costs, expenses and reasonable attorney's fees of Tenant.
12. USE. The Premises shall be used only for the purpose of sales,
manufacturing, distribution, administrative offices, and software development by
Tenant and for such other lawful purposes as may be directly incidental thereto.
Outside storage, including without limitation storage of trucks and other
vehicles, is prohibited without Landlord's prior written consent, which consent
shall not be unreasonably withheld. Tenant shall comply with all governmental
laws, ordinances and regulations applicable to the use of the Premises and shall
promptly comply with all governmental Orders and directives for the correction,
prevention and abatement of nuisances in, upon or connected with the Premises,
all at Tenant's sole expense. Tenant shall not permit any objectionable or
unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the
Premises, nor take any other action that would constitute a nuisance or would
disturb, unreasonably interfere with or endanger Landlord or any other lessees
of the Building or the Project. Landlord encourages Tenant to consult an
architect or other CONSULTANT REGARDING THE DETERMINATION of racking
requirements imposed by any governmental or regulatory entity.
13. HAZARDOUS WASTE. The term "Hazardous Substances," as used in this Lease,
shall mean pollutants, contaminants, toxic or hazardous wastes, radioactive
materials or any other substances, the use and/or the removal of which is
required or the use of which is restricted, prohibited or penalized by any
"Environmental Law," which term shall mean any federal, state or local statute,
ordinance, regulation or other law of a governmental or quasi -governmental
authority relating to pollution or protection of the environment or the
regulation of the storage or handling of Hazardous Substances. Tenant hereby
agrees that: (i) no activity will be conducted on the Premises that will produce
any Hazardous Substances, except for such activities that are part of the
ordinary course of Tenant's business activities (the "Permitted Activities"),
provided said Permitted Activities are conducted in accordance with all
Environmental Laws and have been approved in advance in writing by Landlord and,
in connection therewith, Tenant shall be responsible for obtaining any required
permits or authorizations and paying any fees and providing any testing required
by any governmental agency; (ii) the Premises will not be used in any manner
for the storage of any Hazardous Substances, except for the temporary storage of
such materials that are used in the ordinary course of Tenant's business (the
"Permitted Materials"), provided such Permitted Materials are properly stored in
a manner and location meeting all Environmental Laws and have been approved in
advance in writing by Landlord, and, in connection therewith, Tenant shall be
responsible for obtaining any required permits or authorizations and paying any
fees and Providing any testing required by any governmental agency; (iii) no
portion of the Premises will be used as a landfill or a dump; (iv) Tenant will
not install any underground tanks of any type; (v) Tenant will not allow any
surface or subsurface conditions to exist or come into existence that
constitute, or with the passage of time may constitute, a public or private
nuisance; and (vi) Tenant will not permit any Hazardous Substances to be
brought onto the Premises, except for the Permitted Materials, and if so brought
or found located thereon, the same shall be immediately removed, with proper
disposal, and all required clean-up procedures shall be diligently udertaken by
Tenant at its sole cost pursuant to all Environmental Laws. Landlord and
Landlord's representatives shall have the
<PAGE>
right but not the obligation to enter the Premises for the purpose of inspecting
the storage, use and disposal of any Permitted Materials to ensure compliance
with all Environmental Laws. Should it be determined, in Landlord's sole
opinion, that any Permitted Materials are being improperly stored, used or
disposed of, then Tenant shall immediately take such corrective action as
requested by Landlord. Should Tenant fail to take such corrective action within
twenty-four (24) hours, Landlord shall have the right to perform such work and
Tenant shall reimburse Landlord, on demand, for any and all reasonable costs
associated with said work. If at any time during or after the term of this
Lease, the Premises is found to be contaminated with Hazardous Substances due to
Tenant's use or occupancy of the Premises, Tenant shall diligently institute
proper and thorough clean-up procedures, at Tenant's sole cost. Tenant agrees to
INDEMNIFY AND HOLD Landlord harmless from all claims, demands, actions,
liabilities, costs, expenses, damages, penalties and obligations of any NATURE
arising from or as a result of any contamination of the Premises with Hazardous
Substances, or otherwise arising from the use of the Premises by Tenant. The
foregoing indemnification and the responsibilities of Tenant shall survive the
termination or expiration of this Lease.
To the best of Landlord's knowledge (i) no Hazardous Substances are located in,
on or under the Land or the Building in violation of any applicable law, (ii)
the Land and Building are not in violation of any applicable laws as stated
above, and (iii) no underground tanks used to store any Hazardous Substance are
located on, in or under the Land. To the best of Landlord's knowledge, Landlord
has not disposed of, stored, treated, processed or handled, or caused, suffered
or permitted the disposal, storage, treatment, processing or handling of, any
Hazardous Substance on, in or under the Land or the Building in violation of any
applicable law, and Landlord will not do, or cause, suffer or permit, any of the
foregoing to occur on, in, under or upon the Land or the Building except in
accordance with applicable law. To the best of Landlord's knowledge, information
and belief, there is no asbestos, formaldehyde insulation and/or concentrations
of radon gas on or about the Land or Building except in accordance with
applicable law. In the event that Hazardous Substances are located in, on or
under the Land or the Building, Landlord, at Landlord's sole cost and expense,
shall take all necessary action to cause the Land and the Building to comply
with all such applicable laws.
14. INSPECTION. Landlord's agents and representatives shall have the right to
enter the Premises at any reasonable time, upon prior notice to Tenant, during
business hours (or at any time in case of emergency), provided Tenant does not
reasonably refuse such entry, (i) to inspect the Premises, (ii) to make such
repairs as may be required or permitted pursuant to this Lease, and/or (iii)
during the last six (6) months of the Lease term, for the purpose of showing the
Premises. In addition, Landlord shall have the right to erect a suitable sign on
the Premises stating the Premises are available for lease. TENANT shall NOTIFY
Landlord in writing at least thirty (30)
days prior to vacating the Premises and shall arrange to meet with Landlord FOR
A JOINT INSPECTION of the Premises prior to vacating. If Tenant fails to give
such notice or to arrange for such inspection, then Landlord's inspection of the
Premises shall be deemed correct for the purpose of determining Tenant's
responsibility for repairs and restoration of the Premises.
15. ASSIGNMENT AND SUBLETTING. Tenant shall have the right to sublet or assign
its space to any affiliate or subsidiary without the consent of Landlord. Tenant
shall also have the right to sublet or assign its space to any other entity with
the consent of Landlord, whose consent will not be unreasonably withheld,
delayed, or conditioned. Landlord reserves the right to reject an assignee or
sublessee on the basis of financial credit worthiness at its sole option.
However, Tenant may sublease or assign the approximately 37,200 square feet on
the south side of the building to any Tenant without Landlord's consent. In the
event that Tenant requests Landlord to consent to any assignment or sublease,
Landlord shall notify Tenant in writing of Landlord's decision with regard to
such requested consent within fifteen (15) business days after Tenant gives
Landlord a written request for such consent. Any profits in excess of Tenant's
rental obligation received from an assignment/sublease shall be divided equally
between Landlord and Tenant after deducting for Tenant's marketing expenses
(which shall include all concessions such as rental abatement, leasehold
improvements, brokerage commissions, etc.) No assignment or subletting shall be
construed as a novation or a release of Tenant from the further performance of
Tenant's obligations hereunder.
16. CONDEMNATION. If more than eighty percent (80%) of the Premises are taken
for any public Or quasi-public use under governmental law, ordinance or
regulation, or by right of eminent domain or private purchase in lieu thereof,
and the taking prevents or materially interferes with the use of the remainder
of the Premises for the purpose for which they were leased to Tenant, then this
Lease shall terminate and the rent shall be abated during the unexpired portion
of this Lease, effective on the date of such taking. If less than eighty percent
(80%) of the Premises are taken for any public Or quasi-public use under any
governmental law, ordinance or
regulation, or by right of eminent domain or private purchase in lieu thereof,
or if, in the sole opinion of Tenant, the taking does not prevent or materially
interfere with the use of the remainder of the Premises for the purpose for
which they were leased to Tenant, then this Lease shall not terminate, but the
rent payable hereunder during the unexpired portion of this Lease shall be
reduced to such extent as may be fair and reasonable under all of the
circumstances. All compensation awarded in connection with or as a result of any
of the foregoing proceedings shall be the property of Landlord, and Tenant
hereby assigns any interest in any such award to Landlord; Provided, however,
Landlord shall have no interest in any award made to Tenant for loss of business
or goodwill or for the taking of Tenant's trade fixtures and personal property
or an award to Tenant for its contribution to the Tenant Improvements of
Premises, if a separate award for such items is made to Tenant.
5
17. HOLDING OVER. At the termination of this Lease by its expiration or
otherwise, Tenant shall immediately deliver possession of the Premises to
Landlord with all repairs and maintenance required herein to be performed by
Tenant completed
Notwithstanding the foregoing, any holding over by the Tenant after the
expiration of the Terrn shall be construed as tenancv from month-to-month and
rent shall be increased to one hundred fifty percent (150%) thereafter at the
Base Rent in effect at the time of such holdover and otherwise upon all terms
and conditions set forth in the Lease. Notwithstanding the foregoing, in the
event Tenant provides Landlord four (4) months prior written notice, Tenant's
Base Rent shall be increased to one hundred twenty five percent (125%) of its
then current Base Rent for up to the initial three (3) months of holdover. This
penalty shall compensate Landlord for any liquidated damages as a result of such
holdover. Either Landlord or the Tenant may terminate such month-to-month
tenancy only upon thirty (30) days written notice to the other party.
18. QUIET ENJOYMENT. Landlord represents that it has the authority to enter into
this Lease and that, so long as Tenant pays all amounts due hereunder and
performs all other covenants and agreements herein set forth, Tenant shall
peaceably and quietly have, hold and enjoy the Premises for the term hereof
without hindrance or molestation from Landlord, subject to the terrns and
provisions of this Lease.
19. EVENTS OF DEFAULT. The following events (herein individually referred to as
an "Event of Default") each shall be deemed to be a default in or breach of
Tenant's obligations under this Lease:
<PAGE>
A. Tenant shall fail to pay any installment of the rent herein reserved when
due, or any other payment or reimbursement to Landlord required herein when due,
and such failure shall continue for a period of ten (10) five (5) days from
Tenant's receipt of written notice of such failure from Landlord.
B. Tenant shall (i) vacate or abandon all or a substantial portion of the
Premises or (it) fail to continuously operate its business at the Premises for
the permitted use set forth herein, in either event whether or not Tenant is in
default of the rental payments due under this Lease. Tenant shall have the right
to vacate up to seventy-five percent (75%) of the Premises, at any time, and
from time to time during the Term. In the event that Landlord desires to retake
possession of the Premises during a period that Tenant has vacated greater than
seventy-five percent (75%) of the Premises, then Landlord shall deliver written
notice thereof to Tenant, and if Tenant shall fail to re-occupy the Premises
within sixty (60) days thereafter, then Landlord may retake possession of the
Premises by delivering written notice thereof, and this Lease shall terminate as
of such date.
C. Tenant shall fail to discharge any lien placed upon the Premises in
violation of Paragraph 22 hereof within thirty (30) days after Tenant's receipt
of written notice that any such lien or encumbrance has BEEN FILED AGAINST THE
Premises.
D. Tenant shall fail to comply with any term, provision or covenant of this
Lease (other than those listed above in this paragraph) and shall not Cure such
failure within thirty (30) days after receipt of written notice thereof from
Landlord; provided, however, if such failure is incapable of being cured within
such thirty (30) day period, Tenant shall not be deemed to be in default if
Tenant shall commence to cure such failure within such thirty (30) day period
and diligently continue until completion.
20. REMEDIES. Upon each occurrence of an Event of Default, Landlord shall have
the option to pursue any one or more of the following remedies without any
notice or demand:
(a) Terminate this Lease;
(b) Enter upon and take possession of the Premises without terminating this
Lease;
(c) Make such payments and/or take such action and pay and/or perform whatever
Tenant is obligated to pay or perform under the terms of this Lease, and Tenant
agrees that Landlord shall not be liable for any damages resulting to Tenant
from such action; and/or
(d) Alter all locks and other security devices at the Premises, with or
without terminating this Lease, and pursue, at Landlord's option, one or more
remedies pursuant to this Lease, and Tenant hereby expressly agrees that
Landlord shall not be requited to provide to Tenant the new key to the Premises,
regardless of hour, including Tenant's regular business hours;
and in any such event Tenant shall immediately vacate the Premises, and if
Tenant fails to do so, Landlord, without waiving any other remedy it may have,
may enter upon and take possession of the Premises and expel or remove Tenant
and any other person who may be occupying such Premises or any part thereof,
without being liable for prosecution or any claim of damages therefore, The
provisions of this Lease are intended to supersede Section 93.002 of the Texas
Property Code and Tenant hereby expressly waives any and all rights and remedies
Tenant may have under Paragraph (g) of such Section 93.002.
A. Damages Upon Termination. If Landlord terminates this Lease at Landlord's
option, Tenant shall be liable for and shall pay to Landlord the sum of all
rental and other payments owed to Landlord HEREUNDER ACCRUED TO THE date of such
termination, plus, as liquidated damages, an amount equal to (i) the present
value of the total rental and other payments owed hereunder for the remaining
portion of the Lease term, calculated as if such term expired on the date set
forth in Paragraph 1, less (ii) the present value of the then fair market rental
for the Premises for such period, provided that, because of the difficulty of
ascertaining such value and in order to achieve a reasonable estimate of
liquidated damages hereunder, Landlord and Tenant stipulate and agree, for the
purposes hereof, that such fair market rental shall in no event exceed seventy-
five percent (75%) of the rental amount for such period set forth in Paragraph 2
above.
B. Damages Upon Repossession. If Landlord repossesses the Premises without
terminating this Lease, Tenant, at Landlord's option, shall be liable for and
shall pay Landlord on demand all rental and other payments owed to Landlord
hereunder, accrued to the date of such repossession, plus all amounts required
to be paid by Tenant to Landlord until the date of expiration of the term as
stated in Paragraph 1, diminished by all amounts actually received by Landlord
through reletting the Premises during such remaining term (but only to the
extent of the rent herein reserved). Actions to collect amounts due by Tenant to
Landlord under this paragraph may be brought from time to time, on one or more
occasions, without the necessity of Landlord's waiting until expiration of the
Lease term.
C. Costs of Relenting. Removing. Repairs and Enforcement - Upon an Event of
Default, in addition to any sum provided to be paid under this Paragraph 20,
Tenant also shall be liable for and shall pay to Landlord (i) brokers' fees and
all other costs and expenses incurred by Landlord in connection with reletting
the whole or any part of the Premises; (ii) the costs of removing, storing or
disposing of Tenant's or any other occupant's property; (iii) the costs of
repairing, altering, remodeling or otherwise putting the Premises into condition
acceptable to a new tenant or tenants utilizing Building-standard materials or
their equivalent; (iv) any and all costs and expenses incurred by Landlord in
effecting compliance with Tenant's obligations under this Lease; and (v) all
reasonable expenses incurred by Landlord in enforcing or defending Landlord's
rights and/or remedies hereunder, including without limitation all reasonable
attorneys' fees and all court costs incurred in connection with such enforcement
or defense.
D. Late Charae. In the event Tenant fails to make any payment due hereunder
within ten (10) days after such payment is due, including without limitation any
rental or escrow payment, in order to help defray the additional cost to
Landlord for processing such late payments and not as interest, Tenant shall pay
to Landlord on demand a late charge in an amount equal to five percent (5%) of
such payment. The provision for such late charge shall be in addition to all of
Landlord's other rights and remedies hereunder or at law, and shall not be
construed as liquidated damages or as limiting Landlord's remedies in any
manner.
E. Interest on Past Due Amounts. If Tenant fails to pay any sum which at any
time becomes due to Landlord under any provision of this Lease as and when the
same becomes due hereunder, and such failure continues for ten (10) days after
the due date for such payment, then Tenant shall pay to Landlord interest on
such overdue amounts from the date due until paid at an annual rate of ten
percent (10%).
<PAGE>
F. No Implied Acceptances or Waivers. Exercise by Landlord of any one or more
remedies hereunder granted or otherwise available shall not be deemed to be an
acceptance by Landlord of TENANT'S SURRENDER OF THE PREMISES, IT BEING
UNDERSTOOD that such surrender can be effected only by the written agreement of
Landlord. Tenant and Landlord further agree that forbearance by 6
Landlord to enforce any of its rights under this Lease or at law Or in equity
shall not be a waiver of Landlord's right to enforce any one or more of its
rights, including any right previously forborne, in connection with any existing
or subsequent default. No re-entry or taking possession of the Premises by
Landlord shall be construed as an election on its pail to terminate this Lease,
unless a written notice of such intention is given to Tenant, and,
notwithstanding any such reletting or re-entry or taking possession of the
Premises, Landlord may at any time thereafter elect to terminate this Lease for
a previous default. Pursuit of any remedies hereunder shall not preclude the
pursuit of any other remedy herein provided or any other remedies provided by
law, nor shall pursuit of any remedy herein provided constitute a forfeiture or
waiver of any rent due to Landlord hereunder or of any damages occurring to
Landlord by reason of the violation of any of the terms, provisions and
covenants contained in this Lease. Landlord's acceptance of any rent following
an Event of Default hereunder shall not be construed as Landlord's waiver of
such Event of Default. No waiver by Landlord of any violation or breach of any
of the terms, provisions and covenants of this Lease shall be deemed or
construed to constitute a waiver of any other violation or default.
G. Reletting of Premises. In the event of any termination of this Lease and/or
repossession of the Premises for an Event of Default, Landlord shall use
reasonable efforts to relet the Premises and to collect rental after reletting,
with no obligation to accept any lessee that Landlord deems undesirable or to
expend any funds in connection with such reletting or collection of rents
therefrom Tenant shall not be entitled to credit for or reimbursement of any
proceeds of such reletting in excess of the rental owed hereunder for the period
of such reletting. Landlord may relet the whole Or any portion of the Premises,
for any period, to any tenant and for any use or purpose.
H. Landlord's Default. If Landlord fails to perform any of its obligations
hereunder within thirty (30) days after written notice from Tenant specifying
such failure, Tenant's exclusive remedy shall be an action for damages. Unless
and until Landlord fai Is to so cure any default after such notice, Tenant shall
not have any remedy Or cause of action by reason thereof All obligations of
Landlord hereunder will be construed as covenants, not conditions; and all such
obligations will be binding upon Landlord only during the period of its
possession of the premises and not thereafter. The term "Landlord" shall mean
only the owner, for the time being, of the Premises and, in the event of the
transfer by such owner of its interest in the Premises, such owner shall
thereupon be released and discharged from all covenants and obligations of the
Landlord thereafter accruing, provided that such covenants and obligations shall
be binding during the Lease term upon each new owner for the duration of such
owner's ownership.
Notwithstanding any other provision of this Lease, Landlord shall not have any
personal liability hereunder. In the event of any breach Or default by Landlord
in any term or provision of this Lease, Tenant agrees to look solely to the
equity Or interest then owned by Landlord in the Premises or the Building;
however, in no event shall any deficiency judgment or any money judgment of any
kind be sought or obtained against any Landlord.
1. Tenant's Persgnal Prop. If Landlord repossesses the Premises pursuant to
the authority herein granted, or if Tenant vacates or abandons all or any part
of the Premises, then, in addition to Landlord's rights under Paragraph 27
hereof, Landlord shall have the right to remove and store, all of the furniture,
fixtures and equipment at the Premises, including that which is owned by or
leased to Tenant, at all times prior to any foreclosure thereon by LANDLORD OR
REPOSSESSION THEREOF by any lessor thereof or third party having a lien thereon.
In addition to the Landlord's other rights hereunder, Landlord may dispose of
the stored property if Tenant does not claim the property within ten (10) days
after the date the Property is stored. Landlord shall give Tenant at least ten
(10) days prior written notice of such intended disposition. Landlord shall also
have the obligation to relinquish possession of all or any portion of such
furniture, fixtures, equipment and other property to any person ("Claimant") who
presents to Landlord a copy of any instrument represented by Claimant to have
been executed by Tenant (or any predecessor of Tenant) granting Claimant the
right under various circumstances to take possession of such furniture,
fixtures, equipment or other property, without the necessity on the part of
Landlord to inquire into the authenticity or legality of said instrument. The
rights of Landlord herein stated shall be in addition to any and all other
rights that Landlord has Or may hereafter have at law or in equity, and Tenant
stipulates and agrees that the rights granted Landlord under this paragraph are
commercially reasonable. The Landlord's rights hereunder are subject and
subordinate to any prior lein rights held by any creditor of Tenant on the
personal property within the Premises.
21. MORTGAGES. Tenant accepts this Lease subject and subordinate to any
mortgages and/or deeds of trust now or at any time hereafter constituting a lien
or charge upon the Premises or the improvements situated thereon or the
Building, provided, however, that if the mortgagee, trustee or holder of any
such mortgage or deed of trust elects to have Tenant's interest in this Lease
superior to any such instrument, then by notice to Tenant from such mortgagee,
trustee or holder, this Lease shall be deemed superior to such lien, whether
this Lease was executed before or after said mortgage or deed of trust. Tenant,
at any time hereafter on demand, shall execute any instruments, releases or
other documents that may be required by any mortgagee, trustee or holder for the
purpose of subjecting and subordinating this Lease to the lien of any such
mortgage provided, however, such mortgagee, trustee or holder executes and
delivers to Tenant an agreement not to disturb Tenant's use or occupancy of the
Premises under this Lease Agreement upon any foreclosure or conveyance in lieu
thereof. Tenant shall not terminate this Lease or pursue any other remedy
available to Tenant hereunder for any default on the part of Landlord without
first giving written notice by certified or registered mail, return receipt
requested, to any mortgagee, trustee or holder of any such mortgage or deed of
trust, the name and post office address of which Tenant has received WRITTEN
notice, SPECIFYING THE default in reasonable detail and affording such
mortgagee, trustee or holder a reasonable opportunity (but in no event less than
thirty (30) days) to make perforinance, at its election, for and on behalf of
Landlord. Landlord shall obtain, as Exhibit E to the Lease Agreement, a Non-
Disturbance Agreement executed by holders of any mortgages on the Premises in a
form mutually agreeable to both parties.
22. MECHANIC'S LIENS. Tenant has no authority, express or implied, to create or
place any lien Or encumbrance of any kind or nature whatsoever upon, or in any
manner to bind, the interest of Landlord or Tenant in the Premises. Tenant will
save and hold Landlord harmless from any and all loss, cost or expense,
including without limitation reasonable attorneys' fees, based on or arising out
of asserted claims or liens against the leasehold estate or against the right,
title and interest of the Landlord
under the terms of this Lease.
23. MISCELLANEOUS.
in the Premises or
<PAGE>
A. Interpretation. The captions inserted in this Lease are for convenience
only and in noway define, limit or otherwise describe the scope or intent of
this Lease, or any provision hereof, or in any way affect the interpretation of
this Lease. Any reference in this Lease to rentable area shall mean the gross
rentable area as determined by the roofline of the building in question.
B. Binding Effect. Except as otherwise herein expressly provided, the terms,
provisions and covenants and conditions in this Lease shall apply to, inure to
the benefit of and be binding upon the parties hereto and upon their respective
heirs, executors, personal representatives, legal representatives, successors
and assigns. Landlord shall have the right to transfer and assign, in whole or
in part, its rights and obligations in the Premises and in the Building and
other property that are the subject of this Lease.
C. Evidence of Authority. Tenant agrees to furnish to Landlord, promptly upon
demand, a corporate resolution, proof of due authorization by partners or other
appropriate documentation evidencing the due authorization of such party to
enter into this Lease.
D. Force Majeure. Neither Landlord nor Tenant shall be held responsible for
delays in the performance of its obligations hereunder when caused by material
shortages, acts of God, labor disputes or other events beyond the control of
such obligated party. Notwithstanding anything contained herein before to the
contrary, Tenant's obligation to pay Rent hereunder shall not be extended or
excused due to force majeure.
E. Payments Constitute Rent. Notwithstanding anything in this Lease to the
contrary, all amounts payable by Tenant to or on behalf of Landlord under this
Lease, whether or not expressly denominated as rent, shall constitute rent.
F. Estoppel Certificates. Tenant agrees, from time to time, within ten (10)
days after request of Landlord, to deliver to Landlord, or Landlord's designee,
an estoppel certificate stating, to the extent of Tenant's knowledge and to the
extent true, that this Lease is in full force and effect, the date to which rent
has been paid, the unexpired term of this Lease, any defaults existing under
this Lease (or the absence thereof) and such other factual or legal matters
pertaining to this Lease as may be requested by Landlord.
It is understood and agreed that Tenant's obligation to famish such estoppel
certificates in a timely fashion is a material inducement for Landlord's
execution of this Lease.
Tenant agrees, from time to time, but not more than once per calendar year,
within ten (10) days after request from Landlord, to deliver to Landlord copies
of Tenant's most recent financial statements, including an income statement, a
balance sheet and related footnotes.
7
G. Entire Agreement. This Lease constitutes the entire understanding and
agreement of Landlord and Tenant with respect to the subject matter of this
Lease, and contains all of the covenants and agreements of Landlord and Tenant
with respect thereto.
Landlord and Tenant each acknowledge that no representations, inducements,
promises or agreements, oral or written, have been made by Landlord or Tenant,
or anyone acting on behalf of Landlord or Tenant, which are not contained
herein, and any prior agreements, promises, negotiations or representations not
expressly set forth in this Lease are of no force or effect. EXCEPT AS
SPECIFICALLY PROVIDED IN THIS LEASE, TENANT HEREBY WAIVES THE BENEFIT OF ALL
WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PREMISES, INCLUDING WITHOUT
LIMITATION ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR ANY
PARTICULAR PURPOSE. Landlord's agents and employees do not and will not have
authority to make exceptions, changes or amendments to this Lease, or factual
representations not expressly contained in this Lease. Under no circumstances
shall Landlord or Tenant be considered an agent of the other. This Lease mav not
be altered, changed or amended except by an instrument in writing signed by both
parties hereto.
H. Survival of Obligation. All obligations of Tenant hereunder not fully
performed as of the expiration or earlier termination of the term of this Lease
shall survive the expiration or earlier termination of the term hereof,
including without limitation all payment obligations with respect to taxes and
insurance and all obligations concerning the condition and repair of the
Premises.
Upon the expiration or earlier termination of the term hereof, and prior to
Tenant vacating the Premises, Tenant shall either pay to Landlord any amount
reasonably estimated by Landlord as necessary to put the Premises in good
condition and repair, reasonable wear and tear excluded or make such repairs,
including without limitation the cost of repairs to all heating and air
conditioning systems and equipment therein and if necessary in the opinion of an
independent certified HVAC contractor, replacement thereof.
Tenant shall also, prior to vacating the Premises, pay to Landlord the amount,
as estimated by Landlord, of Tenant's obligation hereunder for real estate taxes
and insurance premiums for the year in which the Lease expires or terminates up
to the date of expiration or termination of this Lease. All such amounts shall
be used and held by Landlord for payment of such obligations of Tenant
hereunder, with Tenant being liable for any additional costs therefore upon
demand by Landlord, or with any excess to be returned to Tenant after all such
obligations have been determined and satisfied, as the case may be. Any Security
Deposit held by Landlord may, at Landlord's option, be credited against any
amounts due from Tenant under this Paragraph 23H.
1. Severability of Terms. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws effective during the term
of this Lease, then, in such event, it is the intention of the parties hereto
that the remainder of this Lease shall not be affected thereby, and it is also
the intention of the parties to this Lease that in lieu of each clause or
Provision of this Lease that is illegal, invalid or unenforceable, there be
added, as a part of this Lease, a clause or provision as similar in terms to
such illegal, invalid or unenforceable clause or provision as may be possible
and be legal, valid and enforceable.
J. Effective Date. All references in this Lease to "the date hereof' or
similar references shall be deemed to refer to the last date, in point of time,
on which all parties hereto have executed this Lease.
K. Brokers' Commission. Tenant represents and warrants that it has dealt with
and will deal with no broker, other than Jamil Alam of Terren Commercial, agent
or other person in connection with this transaction or future related
transactions and that no other broker, agent or other person brought about this
transaction, and Tenant agrees to indemnify and hold Landlord harmless from and
against any claims by any other broker, agent or other person claiming a
commission or other form of compensation by virtue of having dealt with Tenant
with regard to this leasing transaction. Landlord and Broker shall mutually
execute a separate Broker Commission Agreement which shall be incorporated as
Exhibit G of the Lease Agreement.
L. Ambiguity. Landlord and Tenant hereby agree and acknowledge that this Lease
has been fully reviewed and negotiated by both Landlord and Tenant, and that
Landlord and Tenant have each had the opportunity to have this Lease reviewed by
their respective legal counsel, and, accordingly, in the event of any ambiguity
herein, Tenant does hereby waive the rule of construction that such ambiguity
shall be resolved against the party who prepared this Lease.
<PAGE>
M. Joint Several LighLlity. If there be more than one Tenant, the obligations
hereunder imposed upon Tenant shall be joint and several. If there be a
guarantor of Tenant's obligations hereunder, the obligations hereunder imposed
upon Tenant shall be joint and several obligations of Tenant and such guarantor,
and Landlord need not first proceed against Tenant before proceeding, against
such guarantor, nor shall any such guarantor be released from its guaranty for
any reason whatsoever, including, without limitation, in case of any amendments
hereto, waivers hereof or failure to give such guarantor any notices hereunder.
N. Third Party Right. Nothing herein expressed or implied is intended, or
shall be construed, to confer upon or give to any person or entity, other than
the parties hereto, any right or remedy under or by reason of this Lease.
O. Exhibits and Attachments. All exhibits, attachments, riders and addenda
referred to in this Lease, and the exhibits listed herein below and attached
hereto, are incorporated into this Lease AND MADE A PART HEREOF FOR ALL intents
and purposes as if fully set out herein. All capitalized terms used in such
documents shall, unless otherwise defined therein, have the same meanings as are
set forth herein.
P. Applicable Lease - This Lease has been executed in the State of Texas and
shall be governed in all respects by the laws of the State of Texas. It is the
intent of Landlord and Tenant to conform strictly to all applicable state and
federal usury laws. All agreements between Landlord and Tenant, whether now
existing or hereafter arising and whether written or oral, are hereby expressly
limited so that in no contingency or event whatsoever shall the amount
contracted for, charged or received by Landlord for the use, forbearance or
retention of money hereunder or otherwise exceed the maximum amount which
Landlord is legally entitled to contract for, charge or collect under the
applicable state or federal law. If, from any circumstance whatsoever,
fulfillment of any provision hereof at the time performance of such provision
shall be due shall involve transcending the limit of validity prescribed by law,
then THE OBLIGATION TO BE FULFILLED shall be automatically reduced to THE LIMIT
OF SUCH VALIDATION, and if from any such Circumstance Landlord shall ever
receive as interest or otherwise an amount in excess of THE MAXIMUM THAT CAN be
legally collected, then such amount which would BE EXCESSIVE INTEREST SHALL BE
APPLIED TO THE REDUCTION OF RENT HEREUNDER, AND IF SUCH AMOUNT which would be
excessive interest exceeds such rent, then such additional amount shall be
refunded to Tenant.
24. NOTICES. Each provision of this instrument or of any applicable governmental
laws, ordinances, regulations and other requirements with reference to the
sending, mailing or delivering of notice or the making of any payment by
Landlord to Tenant or with reference to the sending, mailing or delivering of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
(i) All rent and other payments required to be made by Tenant to Landlord
hereunder shall be payable to Landlord at the address for Landlord set forth
below or at such other address within the continental United States as Landlord
may specify from time to time by written notice delivered in accordance
herewith. Tenant's obligation to pay rent and any other amounts to Landlord
under the terms of this Lease shall not be deemed satisfied until such rent and
other amounts have been actually received by Landlord.
(ii) All payments required to be made by Landlord to Tenant hereunder shall be
payable to Tenant at the address set forth below, or at such other address
within the continental United States as Tenant may specify from time to time by
written notice delivered in accordance herewith.
(iii) Except as expressly provided herein, any written notice, document or
payment required or permitted to be delivered hereunder shall be deemed to be
delivered when received or, whether actually received or not, when (i)
personally delivered, (ii) delivered by commercial courier service, or (iii)
three business days after being deposited in the United States Mail, postage
prepaid, Certified or Registered Mail, addressed to the parties hereto at the
respective addresses set out below, or at such other address within the
continental United States as they have theretofore specified by written notice
delivered in accordance herewith.
25. ADDITIONAL PROVISIONS. See EXHIBIT "C" attached hereto and incorporated
herein by reference.
8
EXECUTED BY LANDLORD, this 22 dav of December 1997
LANDLORD:
MET 1OW-97, LTD., a Texas LIMITED PARTNERSHIP
By: ORI, Inc., a Texas Corpration, General Partner
By: Sanford L.G ottesman
Title:
Address- c/o Trammell Crow Central Texas, Inc.
301 Congress Avenue. Suite 1300, Austin, TX 78701
Attest Witness
Title:
EXECUTED BY TENANT, this 19 day of December 1997
Tenant, Metrowerks Corporation, a Texas corporation
By: Jean Belanger
Title:CEO and Chairman
Address
Attest
EXHIBIT "A" - Description of Premises
EXHIBIT "B" - Plans
EXHIBIT "C" - Additional Provisions
EXHIBIT "D" - Detailed Basic Operating Costs for 1998
EXHIBIT "E" Non-Disturbance and Attornment Agreement
EXHIBIT "I" Parking Location Designation
EXHIBIT "G" Broker Commission Agreement
9
<PAGE>
1. LEASEHOLD IMPROVEMENTS:
A.
EXHIBIT "C"
ADDITIONAL PROVISIONS
Landlord shall provide a $972,000 ($10.00 x 97,200) allowance ("Leasehold
Improvement Allowance). This includes a $0.50 per square foot allowance for
insulation. Landlord shall withhold $353,400 ($9.50 x 37,200) of the Leasehold
Improvement Allowance in an account that will bear interest to the benefit of
Tenant until Tenant elects to commence construction of the 37,200 square feet
withheld as shown above.
B. Tenant and Landlord agree to competitively bid the Leasehold Improvements
to the
open market [not less than four (4) qualified bids], agreeing that all
participating contractors, subcontractors and suppliers will be
properly qualified and insured to reasonable market levels. As an
alternative, Tenant may choose to conduct a negotiated bid on the
Leasehold Improvements. In the event Tenant selects Trammell Crow
Company to act as its general contractor, the fee to Trammell Crow
Company shall be $80,000, which shall include all profit, overhead,
and general conditions (other than costs directly attributable
to the construction project). Trammell Crow agrees to competitively
bid each task to not less than three (3) subcontractors, and
Tenant shall maintain the right to select each winning bid.
Should Tenant utilize Trammell Crow Company as its general contractor,
the construction management fee referenced in paragraph 9.d.
below shall be eliminated.
C.
Should Tenant require renovation work after Commencement of the Lease, Tenant
may, at its sole discretion, competitively bid such work or may elect to
contract with a chosen contractor. Qualifications for such vendors will be as
stated above. Any such renovation shall require Landlord's reasonable approval
subject to the provisions in Paragraph 6 of this Lease Agreement.
D. Trammell Crow Central Texas, Ltd. shall receive a construction management
fee
equal to $25,000 pursuant to a mutually agreed upon scope of services between
Trammell Crow Central Texas, Ltd. and Tenant.
E.
In the event Tenant elects to install windows instead of overhead doors, Tenant
shall only be required to pay for any premium associated with the installation
of said windows that is in excess of the amount budgeted for the overhead doors.
2. OPTION TO RENEW:
Tenant shall have the right to renew the Term of this Lease for one (1) period
of five (5) years; provided that Tenant is not, at the time of exercising the
first Option to Renew, in default of the Lease. In the event the Tenant
exercises its Option to Renew, the Lease Term shall be extended for the duration
of such option, subject to all terms and conditions of this Lease, excepting the
Market Terms as herein defined.
Tenant shall exercise its Option to Renew by giving written notice thereof to
Landlord of its desire to determine the Market Terms no later than seven (7)
months prior to the expiration of the then current Lease Term. If Tenant
exercises an Option to Renew, the rent payable by Tenant shall be equal to the
prevailing fair Market Terms. Market Terms is defined as being the average
rental rate, priced on a comparable basis, in effect for new leases signed by an
approximately like-size, third party tenant, with full consideration of
concessions, such as tenant improvements, term, free rent, moving allowances,
architectural allowances, operating expenses and brokerage fees offered in a
Comparable Building (as in hereinafter defined) in the vicinity. Comparable
Buildings shall be comparable size, quality, location, view and submarket.
12
If the Market Terms cannot be determined pursuant to the preceding paragraph
within thirty (30) days after Tenant gives notice of its desire to determine the
Market Terms for the renewal period, then, unless Tenant by the end of such
period withdraws the exercise of the Option to Renew, the Market Terms shall
<PAGE>
be determined by a process of "baseball arbitration," with each party appointing
a licensed real estate broker with not less than five (5) years experience in
the Austin, Texas real estate market who shall have general familiarity with the
rental rates for properties similar to the Premises, in the vicinity of the
Premises. The two brokers so selected shall choose a third broker with similar
qualifications, with each of said brokers to make their own independent
determination as to the Market Terms. The Market Terms to be established shall
be the average of the two values closest to each other, with the value
determined by the remaining broker disregarded. The brokers shall complete their
determinations no more than thirty (30) days prior to the end of the Lease Term;
however, failure to complete said determination within said period shall not
invalidate the appraisal. In the event of termination of the renewal option, the
renewal option shall thereafter be null and void and of no further force and
effect, and the Lease Agreement shall expire at the expiration of its original
Lease Tenn. Any termination of the Lease Agreement shall also terminate the
renewal option. The determination of the Market Terms by said brokers shall be
binding upon both Landlord and Tenant. The cost of the arbitration shall be
divided equally between Landlord and Tenant.
LATENT DEFECTS:
Landlord shall assign any and all warranties for latent defects in materials or
workmanship for one (1) year following substantial completion, even if Tenant
contributes in any way to the design or to the cost of construction. Landlord
shall assist Tenant in enforcing any and all contracts or warranties on
construction related to the Premises.
4.
CONFIDENTIALITY:
Landlord, Tenant, Landlord's Agent and Tenant's Broker agree that the terms and
conditions contained within the Lease and Commission Agreement shall be held in
strict confidentiality.
5. SECURITIZATION OF LEASE:
Tenant shall be required to post a lease securitization instrument (letter of
credit or certificate of deposit) in a form and with an institution acceptable
to Landlord for the following purpose:
Security for Rent:
$400,000 which shall retire at an annual rate of $54,000 per year over the six
(6) years of the Lease Term (but not less than $130,000) provided that the
following events occur based on Tenant's most recent Annual Report.
1 Tenant achieves audited net income equal to $500,000.
2. Tenant's Net Worth is equal to or greater than $20 million.
3. Tenant maintains a current ratio of 2: 1.
The Letter of Credit or Security Deposit must be received by Landlord within
three (3) business days of the execution of this Lease by both parties.
The Securitization of Lease shall be waived in its entirety if Tenant receives
an A credit rating from Standards & Poors (or Moody's equivalent) or Tenant is
acquired by a company with the above credit ratings and such company guarantees
Tenant's lease.
13
EXHIBIT "D"
ESTIMATED BASIC OPERAUNG COSTS FOR 1998
Cost per Month Cost per Year
Common Area Maintenance $0.0295 $0.3534
Insurance $0.0022 $0.0263
Property Tax $0.0797 $0.9568
Management Fee $0.0228 $0.2741
14
Initial Date
<PAGE>
EXHIBIT "E"
NON-DISTURBANCE AND ATTORNMENT AGREEMENT
SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
("Agreement") is made and entered into as of the day of
199 , by and between the insurance company affilidated of AEGON USA Realty
Advisors, Inc. that has executed the Agreement below as lender ("Lender"), and
METROWERKS CORPORATION a Texas (corporation]
("Tenant").
WHEREAS, Lender intends to fund a commercial mortgage loan (the "Loan") to
MET 1OA-98, Ltd. , a Texas limited Partnership ("Landlord") secured
by a mortgage or deed . of trust (the "Mortgage") on the land described on
Exhibit
"A," together with present or future improvements (the "Real Property"); and
WHEREAS, by a certain lease between Landlord and Tenant dated as of
Dec. 22, 1997 (together with all amendments, options, extensions and
renewals, the "Le ), Landlord has dernised to Tenant all or a portion of the
Real
Property and a Memorandum of the Lease has been recorded in the land records of
County, State of in Deed Book
Page ; and
WHEREAS, as a condition of the Loan's funding, Landlord will assign its interest
in the Lease to Lender as part of Lender's security; and
WHEREAS, the Tenant's execution and delivery of this Agreement and of an
estoppel certificate providing the Lender with current information on the status
of the Lease (the "Estoppel") are conditions precedent to Lender's obligation to
fund the Loan; and
WHEREAS, Tenant desires to enter into this Agreement in order to benefit from
the promises by Lender that are set forth in this Agreement;
NOW THEREFORE, in consideration of the foregoing and of the mutual covenants
herein contained, the parties agree as follows:
1 . If, upon the closing of the Loan, the Lease would not by its terms be
subordinate to the lien of Lender on the Real Property, Tenant so subordinates
the Lease.
2. The Tenant consents to the assignment of the Lease to Lender in support of
the Loan.
3. If Landlord defaults under the Lease and, upon notice, fails to cure its
default within the cure period provided under the Lease, Tenant will notify
Lender of the default and afford Lender a reasonable opportunity to cure it
before terminating the Lease or exercising any self-help rights from which a
right of setoff would arise.
4. If Lender forecloses the Loan or acquires title to the Real Property by
deed in lieu of foreclosure, the following terms and conditions will govern the
respective rights and obligations of Tenant and Lender or other new owner of the
Real Property (in either case, the "New Owner"):
<PAGE>
(a) The New owner shall not disturb Tenant's quiet enjoyment and possession of
its demised premises for so long as Tenant faithfully performs its
obligations under the Lease and under this Agreement.
(b) The New owner shall not be bound by any purchase option 1100
contained in the Lease.,
(c) The New Owner shall not be requitred to assume any of the landlord's
liabilities to Tenant under indemnification or hold harmless agreements in the
Lease arising from any Landlord default, act or omission occurring prior to the
date New Owner acquires title to the Real Property, or for damages caused by
any Landlord default, act or omission occurring prior to date New Owner
acquires title to the Real Property, and, following the acquisition of title,
the New Owner's Liability to the Tenant shall never exceed the value of its
interest in the Real Property and any insurance available to satisify such
liability
(d) This Agreement will not vary the terms of the Lease that condition opb
Tenant's obligation to pay rent on Landlord's performance of its
covenants under the Lease in respect of the habitability and quiet
enjoyment of the Real Property, which Lender agrees shall apply to
the New Owner as they have to the Landlord, provided Tenant has
performed its obligation under paragraph 3 of this Agreement.
(e) Subject to the other terms of this Agreement, Tenant will, upon notice
of the transfer, attorn to the New Owner (that is, recognize the New
Owner as the landlord under the Lease from the time of transfer of the
Real Property forward).
(f) The New Owner will not be bound by any modification of the Lease
made without Lender's consent.
The New Owner will not be bound by any rent paid more than one
month in advance unless it actually receives it, or unless Lender has
consented to the advance payment in writing.
(h) The New Owner will assume liability for the return of security or
other lease deposits, but only for those that it actually receives.
5. No Modification. No modification shall be valid unless in writing and
executed by the party against whom enforcement is sought.
6. Notices. Any notice under this Agreement may be delivered by hand or sent
by commercial delivery service or United States Postal Service express mail, in
either case for overnight delivery with proof of receipt, or sent by certified
mail, return receipt requested, to the following addresses:
To Tenant: Metrowerks Corporation
To Lender: Monumental Life Insurance Company
Director, Mortgage Loan Servicing
AEGON USA Realty Advisors, Inc.
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499
The notice shall be deemed to have been given on the date it was actually
received.
<PAGE>
7. Successors and Assigns. This Agreement shall be binding on, and shall inure
to the the parties' successors and assigns.
8. Counterparts. This Agreement may be executed and delivered in
counterparts for the-convenience of the parties.
9. The liens security interested and assignments of the Mortgages and the
credit. Documents shall not encumber any trade fixtures, equipment, inventory
or other owned by tenant.
EXHIBIT A
LEGAL DESCRIPTION OF PROPERTY
4. Legal description of land:
Lot One (1), Block "C", METRIC CENTER EAST, a subdivision in Travis County,
Texas, according to the map or plat thereof, recorded in Volume 98, Page(s)
95-97 of the Plat Records of Travis County, Texas. SAVE AND EXCEPT those
portions conveyed to the City of Austin in Volume 12999, Page 1781 of the Real
Property Record
Initial Date
EXHIBIT "G "
Broker Commission Agreement
(Attached)
17
Lease Commission Agreement
This Lease Commission Agreement (this "Agreement") is made by and between
Met 10 W97, Ltd. ("Owner") and Term Commercial Brokerage, Inc. ("Broker").
Name and Address of Tenant:
Metrowerks Corporation
9801 Metric Boulevard (Metric 10 West)
Austin, Texas 78758
1. Registration. Broker hereby registers itself and Tenant with Owner, and
Owner accepts such registration subject to the terms and conditions hereof
2. Broker's Covenants. Broker agrees that it shall (a) use its best efforts to
assist Owner and Tenant in their efforts to enter into a Lease, and (b) arrange
and coordinate a meeting (the "Meeting") between appropriate authorized
representatives of Owner and Tenant at which the form and substance of a Lease
is discussed, which Meeting must occur within the thirty (30) day period (the
"Meeting Period") which follows the date of this Agreement, (c) unless Owner
otherwise agrees in writing, not claim any commission or other compensation from
Owner in respect of the leasing of all or any portion of the Property other than
by reason of a Lease in accordance with the terms and conditions of this
Agreement, (d) not be entitled to any payment from Owner other than the
Commission, it being understood that Broker shall not be entitled to any
interest on any deferred (as provided for herein) payments of the Commission and
that all costs and expenses incurred by Broker in connection herewith shall be
borne solely by Broker, and (e) promptly pay the appropriate portion of the
Commission to all salespersons, brokers, finders and any other persons who are
entitled to payment of a portion thereof by reason of any agreement or
understanding with Broker. Owner acknowledges the meeting referenced in (b)
above has already occurred.
3. Broker's Representations and Warranties. Broker represents and warrants to
Owner that at all times during THE TERM of this Agreement, (a) Broker, at the
direction of Tenant, is representing Tenant in connection with the leasing of
all or a portion of the Property, (b) Tenant has expressed a serious interest in
negotiating a Lease with Owner through Broker, (c) Broker is familiar with
Tenant's expectations concerning price and terms, space requirements, and
financial condition, and all of such matters are generally consistent with the
Property and Owner's expectations, and (d) Broker is duly licensed Texas real
estate broker and is authorized to enter into this Agreement.
4. Termination. Broker's rights and Tenant's registration under this Agreement
shall automatically terminate, and no commission or other compensation shall be
payable to Broker, if any one or more of the following events occurs: (a) If
Broker fails to observe or perform any of its obligations hereunder, (b) if any
representation or warranty made by Broker in this Agreement is or at any time
becomes false or misleading in any respect, (c) if the Meeting has not occurred
prior to the expiration of the Meeting Period, (d) if at any time after the
Meeting, Owner gives written notice to Broker that, in the reasonable judgment
of Owner, there has been a lack of active and substantial progress towards the
consummation
<PAGE>
of a Lease for a period of sixty (60) consecutive days or more and reasonable
progress is not made within ten (10) days after such notice to Broker, or (e)
Tenant designates a person or entity other than Broker to act as his agent or
representative in connection with the leasing of the Property or any portion
thereof. Broker acknowledges and agrees that no commission or other compensation
will be payable to Broker unless a registration is in effect for Broker in
respect of Tenant, at the time the Lease is fully executed.
5. Duplicate Registrations. If for any reason, more than one registration is (or
alleged to be) in effect for Tenant, notwithstanding anything in this Agreement
to the contrary, the total commission payable by Owner in respect of any Lease
with Tenant shall be limited to the total Commission that would have been
payable by Owner if only one registration were in effect. In the event two (2)
or more registrations are in effect for Tenant and unless otherwise agreed to in
writing, the Commission shall be payable only to the broker who, been designated
in writing by Tenant as
representing Tenant in the consummation of the Lease, and Owner shall promptly
notify Broker upon Owner's determination of any duplicate registration of
Tenant.
6. Withdrawal of Property. Broker acknowledges and agrees that (a) Owner may,
with or without cause, withdraw the Property, or any portion thereof, from the
market or lease the Property, or any portion thereof, to a different tenant, in
each case, without liability or notice to Broker, and (b) Owner has not in any
way committed or represented to Broker that it will enter into (or attempt to
enter into) a Lease with Tenant, it being understood that any decision to enter
into (or attempt to enter into) a Lease shall be at the sole discretion of
Owner.
7. Indemnity. Broker shall indemnify and hold Owner harmless from and against
any and all loss, cost, liability and expense (including, without limitation,
all attorneys' fees) which Owner may incur by reason of (a) the failure of
Broker to observe or perform its obligations hereunder, (b) the present or
future inaccuracy of my representation or warranty made by Broker.
8. The Commission. Subject to the other terms and conditions of this Agreement,
Owner agrees to pay Broker the Commission if Owner and Tenant enter into a Lease
within the one hundred eighty (180) day period (the "Term") following the date
of this Agreement; provided, however, that this Agreement shall not apply to any
Lease other than the next Lease which is entered into after the date hereof, and
no Commission shall be payable to Broker with respect to any additional Lease
unless Owner and Broker enter into a separate Lease Commission Agreement with
respect thereto. The Term of this Agreement may be extended, but only if Owner
and Broker mutually agree to do so in writing. The Broker shall be paid a 4%
cash-out commission based on the aggregate Gross Rent as defined below.
Commissions shall not apply to renewals, extensions, or expansions unless the
Broker is actively involved in the renewal, extension, or expansion documents.
If those conditions are met, broker shall be paid four percent (4%) cash-out
commission on expansions (one-half at the time of execution of the expansion
document, and one half upon occupancy of the expansion space) and a two percent
(2%) cash-out commission on renewals (100% upon execution of the renewal or
extension documents).
9. Time of Payment .
----------------
In the case of a cash-out commission the Owner shall pay Broker such commission
in one installment, ten (10) days of full execution of the Lease Agreement and
the receipt of the Letter of Credit or Certificate of Deposit by Landlord. In
the event Tenant does not occupy Premises, then one-half of the commission shall
be repaid in full upon demand by Landlord.
Miscellaneous.
- --------------
a. "Base Rent" shall mean the minimum basic rental payment payable to Owner
excluding deposits, amortization of excess tenant improvements, taxes,
insurance, and common area maintenance charges. For the purposes of the initial
commission, the commission shall be $178,089.60.
b. Owner's Leasing representative may deal directly with prospective tenant
providing Broker is copied on all correspondence and provided all information
that is given to tenant either verbally or in writing.
c. Broker agrees that the Tenant will not be shown the Owner's properties
without an Owner's Leasing representative present.
d. Time is of the essence.
<PAGE>
c. All payments to be made hereunder and any notice required or permitted to be
delivered hereunder shall be deemed received when sent by United States Mail,
postage prepaid, addressed to
Owner or Broker, as the case may be, at the address appearing under the
signature of such party. A party may change its address for the purpose of
payment or notice by written notice to the other party pursuant to the terms
hereof
f. The failure of either party to insist upon strict performance or compliance
with the terms and conditions of this Agreement, or the failure of either party
to avail itself of any of its rights or remedies hereunder, shall not in any way
constitute or be deemed to be a waiver or estoppel in respect thereof or prevent
such party from thereafter insisting on strict compliance with the terms hereof
g. This Agreement constitutes the sole and entire Agreement of the parties and
supersedes any prior agreements (written and oral) between the parties
concerning the subject matter hereof
h. Recourse against Owner hereunder shall be limited to proceeding against
Owners' interest in the Project or the proceeds of disposition of the Project
and shall in no event exceed the amount of the commission plus reasonable
attorney's fees.
i. if Owner or Broker brings any action under this Agreement, the non-prevailing
party agrees in each case to pay the prevailing party's reasonable attorney's
fees and other costs and expenses incurred by the prevailing party in connection
therewith.
Accepted and Agreed to this day of
WITNESS:
WITNESS:
LANDLORD:
MET I OW-97, Ltd., a Texas limited partnership
By: ORI, Inc., a Texas Corporation, General Partner
By: Sanford L. Gottesman
Title: President
BROKER: TERREN COMMERCIAL BROKERAGE, INC.
By: Jamil Alam
Address: Terren Commercial
816 Congress Avenue, Suite I 100
Austin, Texas 78701
License #: 0400580-34 Expiration Date:
<PAGE>
Exhibit 10.32
FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "Amendment") is made as of
April 3 , 1998, by and between METROWERKS CORPORATION, a Texas corporation
("Tenant"), and MET 1OW-97, LTD., a Texas limited partnership ("Landlord")
(Tenant and Landlord sometimes collectively referred to herein as the
"Parties").
Recitals
A. The Parties entered into that certain Lease Agreement dated on or about
December 22, 1997 (the "Lease"), pursuant to which Landlord leased to Tenant,
and Tenant leased from Landlord, those certain premises locally known as Metric
10A of Metric Center industrial park, 9801 Metric Boulevard, Austin, Texas (the
"Premises").
B. The Parties desire to amend the Lease as hereinafter provided.
Amendment
In consideration of the premises and the mutual covenants and agreements
hereinafter made, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:
I. Base Rent. The Base Rent payable by Tenant under Paragraph 2A of the
Lease shall be amended to read as follows:
Months Base Rental Rate Per Square Foot
Total Base Rental Rate
1 - 4 $0.5957 $57,906.28
5 -72 $0.8445 $82,086.28
2. Leasehold Improvements.
(a) Paragraph LA of Exhibit "C" to the Lease is hereby amended to read in its
entirety as follows:
Landlord shall provide Tenant a $1,972,000.00 construction allowance for the
construction and installation of the tenant finish improvements contemplated
under this Lease (the "Leasehold Improvement Allowance"). Such allowance
includes a $0.50 per square foot allowance for insulation. Notwithstanding
anything to the contrary herein, Landlord shall not make any fundings of the
last $ 1, 000, 000. 00 of the Leasehold Improvement Allowance until twenty (20)
days after the date that Landlord has been provided the Additional LOC described
in Paragraph 5 below.
(b) The Parties hereby acknowledge Tenant has elected to install
windows instead of overhead doors and, as contemplated under Paragraph LE of
Exhibit "C" to the Lease, Landlord and Tenant hereby confirm, and agree that
such selection has derived a credit to Tenant in the amount of $7,965.
3. Lease Security. Paragraph 5 of Exhibit "C" to the Lease is hereby amended to
<PAGE>
add to the end thereof the following visions:
In addition to the aforementioned lease securitization instrument, Tenant shall
provide to Landlord no more than two (2) letters of credit (collectively, the
"Additional LOC") in the aggregate amount of $800,000.00, which shall be issued
by or confirmed by financial institutions approved by Landlord (which approval
shall not be unreasonably withheld if such institution has an investment grade
rating from Standards and Poors or Moody's). The Additional LOC shall be
automatically renewing over the primary term of the Lease, shall not expire
until the expiration of one (1) month after the termination of the primary term
of the Lease, and shall otherwise be in form and substance acceptable to
Landlord in its sole discretion.
In addition to any other terms and conditions reasonably required by Landlord,
the terms of the Additional LOC may provide that, commencing upon the first day
to occur following the expiration of eighteen (18) months after the
"Commencement Date" of this Lease and provided that an Event of Default has not
occurred under the terms of the Lease, the combined credit made available under
the Additional LOC shall be reduced from time to time thereafter in accordance
with the amortization schedule attached hereto as Schedule 1. The Additional LOC
shall further provide that Landlord shall be permitted to draw on the Additional
LOC upon the occurrence of an Event of Default under the Lease.
Tenant agrees that it shall replace any letter of credit comprising the
Additional LOC with another letter of credit in favor of Landlord from a
financial institution reasonably acceptable to Landlord, which shall be
identical in its terms to and in the amount of the original letter of credit
being replaced, within ten (10) business days of the occurrence of any of the
foregoing events: (a) the issuing or confirming bank is placed, voluntarily or
involuntarily, into receivership or any appointment of a receiver, trustee or
liquidator is made of with respect to such bank or any portion of the assets of
the such bank; (b) the issuing or confirming bank reports a loss for two (2)
consecutive fiscal quarters; or (c) the issuing or confirming bank's ratio of
reported capital to total assets declines to a ratio of less than 5.0%.
Upon the occurrence of an Event of Default under the Lease or under the
provisions of this paragraph 5, Landlord shall be permitted to draw upon any
letters of credit provided to Landlord by Tenant in accordance with the terms
and conditions set forth therein.
4. Miscellaneous.
(a) All terms and conditions of the Lease not expressly modified by
this Amendment shall remain in full force and effect, and, in the event of any
consistencies between this Amendment and the terms of the Lease, the terms set
forth in this Amendment shall govern and control. Except as expressly amended
hereby, the Lease shall remain in full force and effect as of the date thereof.
(b) This Amendment may be executed in one or more counterparts which
shall be construed together as one document.
2
<PAGE>
(c) Captions used herein are for convenience only and are not to be
utilized to ascribe any meaning to the contents thereof.
(d) Unless defined differently herein or the context clearly requires
otherwise, all terms used in this Amendment shall have the meanings ascribed to
them under the Lease.
(e) This Amendment (i) shall be binding upon and shall inure to the
benefit of each of the Parties and their respective successors, assigns,
receivers and trustees; (ii) may be modified or amended only by a written
agreement executed by each of the Parties; and (iii) shall be governed by and
construed in accordance with the laws of the State of Texas.
LANDLORD:
MET 1OW-97, LTD., a Texas limited partnership
By: ORI, Inc., a Texas corporation, its general partner
By:
Sanford L. Gottesman, President
TENANT:
METROWERKS CORPORATION, a Texas corporation
By: Jim Welch
Title: VP Finance
<PAGE>
EXHIBIT 11
METROWERKS INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1996 1997 1998
------------------ ---------------- ----------------
<S> <C> <C> <C>
Primary -
Weighted average common share outstanding/1/ 8,811 11,523 12,311
Conversion of warrants using the if converted method 1,809 -- --
------------------ ---------------- ----------------
10,620 11,523 12,311
Net income (loss) $ 105 $(5,975) $(5,897)
------------------ ---------------- ----------------
Net income (loss) per share $ 0.01 $ (0.52) $ (0.48)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1996 1997 1998
------------------ ---------------- ----------------
<S> <C> <C> <C>
Dilutive -
Weighted average common share outstanding/1/ 8,811 11,523 12,311
Conversion of warrants using the if converted method 1,809 -- --
Net effect of dilutive options based on treasury stock
method using average market price 108 -- --
------------------ ---------------- ----------------
10,728 11,523 12,311
Net income (loss) $ 105 $(5,975) $(5,897)
------------------ ---------------- ----------------
Net income (loss) per share $ 0.01 $ (0.52) $ (0.48)
</TABLE>
/1/ Weighted average number of Common Shares is calculated based on the number
of days outstanding during the year.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS ON PAGE
F-3 AND F-4 OF THE COMPANY'S FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED JULY 31,
1998, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 3,157
<SECURITIES> 3,951
<RECEIVABLES> 6,870
<ALLOWANCES> (90)
<INVENTORY> 293
<CURRENT-ASSETS> 15,109
<PP&E> 7,749
<DEPRECIATION> (3,386)
<TOTAL-ASSETS> 20,511
<CURRENT-LIABILITIES> 4,293
<BONDS> 0
0
0
<COMMON> 29,465
<OTHER-SE> (13,247)
<TOTAL-LIABILITY-AND-EQUITY> 20,511
<SALES> 17,611
<TOTAL-REVENUES> 19,055
<CGS> 3,046
<TOTAL-COSTS> 3,046
<OTHER-EXPENSES> 21,887
<LOSS-PROVISION> 465
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,897)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
