<PAGE>
As filed with the Securities and Exchange Commission on January 11, 2000
Registration No. 333- 92943
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO.1 TO
FORM S-1
REGISTRATION STATEMENT
Under
the Securities Act of 1933
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INTERWOVEN, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7372 77-0523543
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial classification identification no.)
incorporation or code number)
organization)
Interwoven, Inc.
1195 West Fremont Avenue, Suite 2000
Sunnyvale, California 94087
(408) 774-2000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
David M. Allen
Chief Financial Officer
Interwoven, Inc.
1195 West Fremont Avenue, Suite 2000
Sunnyvale, California 94087
(408) 774-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Matthew P. Quilter, Esq. Mark A. Bertelsen, Esq.
Horace L. Nash, Esq. Jose F. Macias, Esq.
Katherine Tallman Schuda, Esq. Jon C. Avina, Esq.
William L. Hughes, Esq. Brooke D. Coleman, Esq.
FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI
Two Palo Alto Square Professional Corporation
Palo Alto, California 94306 650 Page Mill Road
(650) 494-0600 Palo Alto, California 94304
(650) 493-9300
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 11, 2000
3,000,000 Shares
[LOGO OF INTERWOVEN APPEARS HERE]
Common Stock
--------
We are selling 1,000,000 shares of common stock and the selling stockholders
are selling 2,000,000 shares of common stock. We will not receive any of the
proceeds from shares of common stock sold by the selling stockholders.
Our common stock is listed on The Nasdaq Stock Market's National Market under
the symbol "IWOV." On January 7, 2000, the reported last sale price of our
common stock was $125.38 per share.
The underwriters have an option to purchase a maximum of 450,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 7.
<TABLE>
<CAPTION>
Price Underwriting Proceeds Proceeds to
to Discounts and to Selling
Public Commissions Interwoven Stockholders
------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
Total....................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Robertson Stephens
Dain Rauscher Wessels
SoundView Technology Group
Adams, Harkness & Hill, Inc.
The date of this prospectus is , 2000.
<PAGE>
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Special Note Regarding Forward-
Looking Statements................. 15
Use of Proceeds..................... 16
Price Range of Common Stock......... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Consolidated Financial
Data............................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................ 30
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management.......................... 44
Related Party Transactions.......... 55
Principal and Selling Stockholders.. 57
Description of Capital Stock........ 61
Shares Eligible for Future Sale..... 65
Underwriting........................ 68
Notice to Canadian Residents........ 70
Legal Matters....................... 71
Experts............................. 71
Where You Can Find Additional
Information........................ 71
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
-----------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus;
it does not contain all the information you should consider before buying
shares in this offering. You should read the entire prospectus carefully before
making a decision whether to purchase our common stock. Unless otherwise
indicated, information in this prospectus assumes that the underwriters do not
exercise their over-allotment option.
Interwoven
Interwoven is a provider of software products and services that help
businesses and other organizations manage the information that makes up the
content of their web sites. In the Internet industry, this is often referred to
as "web content management." We have designed our software products to help
companies rapidly and efficiently develop, maintain and extend large web sites
that are essential to their businesses. Our principal product, TeamSite,
incorporates widely accepted Internet industry standards and is designed with
an open architecture that allows it to support a wide variety of Internet
software products, including web authoring tools and web application servers.
Using TeamSite, our customers can manage web content, control the versions of
their web sites, manage web site contribution and content approval processes,
and develop Internet applications. TeamSite allows large numbers of
contributors across an enterprise to add web content in a carefully-managed
process. In addition, our OpenDeploy product allows customers to distribute web
content automatically from one server to one or more servers.
As leading companies demonstrate success on the Internet, business leaders
are seeking to capitalize on new business opportunities, reach a broader
customer base and reduce overall operating costs by moving their businesses to
the Internet. The use of the Internet to conduct business is frequently
referred to as "Internet commerce" or "eBusiness." Companies are making
significant investments to develop and deploy these eBusiness initiatives.
International Data Corporation, or IDC, estimates that spending on software
applications and services for Internet commerce will grow from $7.8 billion in
1998 to $53.8 billion in 2002.
The competitive online environment is driving companies to deploy complex
web sites that offer enhanced user experiences. These web sites can contain
hundreds of thousands of content-rich web pages, and this content has been
increasing in volume and complexity. In addition, today's web sites must be
updated frequently by numerous contributors throughout an enterprise. Web teams
find it difficult to manage the increasing complexity, volume and variability
of this content. At the same time, the large number of web authoring tools and
web application servers have contributed to the increasing technological
complexity involved in developing and maintaining web sites. These trends have
created a need for content management software that can accommodate the
increasing volume of web content, leverage existing investments in computers,
software and associated information technology infrastructure, and allow more
contributors to add content to a web site. IDC estimates that one of the
markets in which we participate, which they refer to as the web development
life-cycle management software market, will grow from $76.4 million in 1998 to
$1.6 billion in 2003.
Interwoven's content management software assists customers in accelerating
their time-to-web--the rate at which they can deploy new content on their web
sites--by enabling them to develop multiple eBusiness applications
simultaneously. It lowers web operating costs by reducing a customer's
dependence on highly-paid web professionals and reducing the time required to
test and approve new content for a web site or eBusiness application. The
scalability of our products also allows customers to manage hundreds of
thousands of web files and enables hundreds of employees throughout the
enterprise to contribute web content. In addition, our software's architecture
is non-proprietary and based on recognized industry standards, so it enables
businesses to take advantage of existing investments in technology and web
content and, at the same time, to integrate new technologies and applications
easily.
3
<PAGE>
We market and sell our software products and services primarily through a
direct sales force in North America. To date, we have licensed our software
products to 175 customers, including AltaVista, AT&T/TCI, BellSouth, Best Buy,
Cisco Systems, eBay, E*Trade, FedEx, Gap, General Electric, the U.S. Department
of Education, USWeb/CKS, Viacom/Nickelodeon and Yahoo!/GeoCities, although we
have incurred losses to date resulting in an accumulated deficit of
approximately $21.3 million at September 30, 1999.
We were incorporated in California in March 1995 and reincorporated in
Delaware in October 1999. Our principal executive offices are located at 1195
West Fremont Avenue, Suite 2000, Sunnyvale, California 94087 and our telephone
number is (408) 774-2000. Our World Wide Web address is www.interwoven.com. The
information on our web site is not part of this prospectus.
Recent Developments
For the quarter ended December 31, 1999, we had revenues of $7.5 million,
compared to revenues of $1.9 million for the quarter ended December 31, 1998.
License revenues represented 65% and service revenues represented 35% of the
revenues for the quarter ended December 31, 1999. Our net loss for the quarter
ended December 31, 1999 was $4.6 million, or $0.23 per share on a pro forma
basic and diluted basis (on approximately 20.5 million weighted average pro
forma shares), compared to a net loss for the quarter ended December 31, 1998
of $1.8 million or $0.15 per share on a pro forma basic and diluted basis (on
approximately 12.0 million weighted average pro forma shares). Our net loss
before the effect of non-cash charges related to stock-based compensation and
acquisition expenses was $3.5 million, or $0.17 per share on a pro forma basic
and diluted basis, for the quarter ended December 31, 1999, compared to $1.6
million, or $0.13 per share on a pro forma basic and diluted basis, for the
quarter ended December 31, 1998.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Interwoven.................. 1,000,000 shares
Common stock offered by the selling stockholders.... 2,000,000 shares
Common stock to be outstanding after this offering.. 23,883,450 shares
Use of proceeds..................................... For general corporate
purposes, including
working capital. See "Use
of Proceeds."
Nasdaq National Market symbol....................... IWOV
</TABLE>
The number of shares of our common stock to be outstanding immediately after
this offering is based on the number of shares outstanding as of December 31,
1999. It does not include:
. 1,543,522 shares issuable upon exercise of options outstanding as of
December 31, 1999 under our stock option plans and 2,580,402 shares
available for future issuance under those plans;
. 300,000 shares available for future issuance under our employee stock
purchase plan; and
. 45,648 shares issuable upon exercise of outstanding warrants.
----------------
Interwoven(R), TeamSite(R), OpenDeploy(TM) and SmartContext(TM) are our
trademarks. This prospectus also contains trademarks of other companies and
organizations.
Unless otherwise indicated, all information contained in this prospectus
reflects:
. a 2-for-3 reverse stock split completed in October 1999;
. the conversion in October 1999 of each outstanding share of our
preferred stock into two-thirds of a share of common stock, except for
Series B Preferred Stock, each share of which converted into 0.702205
shares of common stock; and
. our reincorporation from California to Delaware, which was completed in
October 1999.
5
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Ended September
Years Ended December 31, 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues..................... $ -- $ 168 $ 4,003 $ 2,109 $ 9,261
Gross profit................. -- 73 2,670 1,299 5,572
Total operating expenses..... 520 2,933 9,165 5,886 16,999
Loss from operations......... (520) (2,860) (6,495) (4,587) (11,427)
Net loss..................... (510) (2,948) (6,344) (4,498) (11,011)
Net loss per share:
Basic and diluted.......... $ (0.22) $ (1.36) $ (2.85) $ (1.98) $ (6.51)
Weighted average shares--
basic and diluted......... 2,282 2,356 2,633 2,505 3,722
Pro forma net loss per share:
Basic and diluted.......... $ (0.74) $ (0.74)
Weighted average shares--
basic and diluted......... 8,530 14,957
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments......... $ 21,995 $ 78,195 $ 196,301
Working capital................................ 18,203 74,403 192,509
Total assets................................... 29,472 85,672 203,778
Long-term debt and capital lease obligations,
less current portion.......................... 875 875 875
Manditorily redeemable convertible preferred
stock......................................... 52,996 -- --
Total stockholders' equity (deficit)........... (31,218) 77,978 196,084
</TABLE>
See Note 1 of Notes to Consolidated Financial Statements for a description
of the method that we used to compute our basic and diluted net loss per share
and pro forma basic and diluted net loss per share.
The pro forma balance sheet data gives effect to the application of the net
proceeds of approximately $56.2 million from the sale of 3,622,500 shares of
our common stock in our initial public offering in October 1999.
The pro forma as adjusted balance sheet data gives effect to the sale of the
1,000,000 shares of common stock that we are offering under this prospectus at
an assumed public offering price of $125.38 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by us. See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before buying shares
in this offering. The risks and uncertainties described below are not the only
risks we face. These risks are the ones we consider to be significant to your
decision whether to invest in our common stock at this time. We might be wrong.
There may be risks that you in particular view differently than we do, and
there are other risks and uncertainties that are not presently known to us or
that we currently deem immaterial, but that may in fact impair our business
operations. If any of the following risks actually occur, our business, results
of operations and financial condition could be seriously harmed, the trading
price of our common stock could decline and you may lose all or part of your
investment.
Our operating history is limited, so it will be difficult for you to evaluate
our business in making an investment decision.
We were incorporated in March 1995 and have a limited operating history. We
are still in the early stages of our development, which makes the evaluation of
our business operations and our prospects difficult. We shipped our first
product in May 1997. Since that time, we have derived substantially all of our
revenues from licensing our TeamSite product and related services. Before
buying our common stock, you should consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly those companies whose businesses depend on the Internet.
These risks and difficulties, as they apply to us in particular, include:
. potential fluctuations in operating results and uncertain growth rates;
. limited market acceptance of our products;
. concentration of our revenues in a single product;
. our dependence on a small number of orders for most of our revenue;
. our need to expand our direct sales forces and indirect sales channels;
. our need to manage rapidly expanding operations; and
. our need to attract and train qualified personnel.
If we do not increase our license revenues significantly, we will fail to
achieve profitability.
We have incurred net losses in each quarter since our inception, and we
expect our net losses to increase. We incurred net losses of approximately
$510,000 in 1996, $2.9 million in 1997, $6.3 million in 1998 and $11.0 million
for the nine months ended September 30, 1999. As of September 30, 1999, we had
an accumulated deficit of approximately $21.3 million. To compete effectively,
we plan to continue to invest aggressively to expand our sales and marketing,
research and development, and professional services organizations. As a result,
if we are to achieve profitability we will need to increase our revenues
significantly, particularly our license revenues. We cannot predict when we
will become profitable, if at all.
Our operating results fluctuate widely and are difficult to predict, so we may
fail to satisfy the expectations of investors or market analysts and our stock
price may decline.
Our quarterly operating results have fluctuated significantly in the past,
and we expect them to continue to fluctuate unpredictably in the future. It is
possible that in some future periods our results of operations may not meet or
exceed the expectations of public market analysts and investors. If this
occurs, the price of our common stock is likely to decline.
7
<PAGE>
Our quarterly results depend on a small number of large orders, so the loss of
any single large order could harm those results and cause our stock price to
drop.
Each quarter, we derive a significant portion of our license revenues from a
small number of relatively large orders. As a result, our operating results
could suffer if any large orders are delayed or cancelled in any future period.
In the first, second and third quarters of 1999, our top five customers
accounted for 41%, 30% and 30%, respectively, of the total revenue in those
quarters. We expect that we will continue to depend upon a small number of
large orders for a significant portion of our license revenues.
We face significant competition, which could make it difficult to acquire and
retain customers and inhibit any future growth.
We expect the competition in the market in which we operate to persist and
intensify in the future. Competitive pressures may seriously harm our business
and results of operations if they inhibit our future growth, or require us to
hold down or reduce prices, or increase our operating costs. Our competitors
include:
. potential customers that utilize in-house development efforts;
. developers of software that directly addresses the need for web content
management, such as Vignette.
In addition, other enterprise software companies such as Rational Software and
Documentum have announced plans to enter our market. We also face potential
competition from companies--for example, Microsoft and IBM--that may decide in
the future to enter our market. Many of our existing and potential competitors
have longer operating histories, greater name recognition, larger customer
bases and significantly greater financial, technical and marketing resources
than we do. Many of these companies can also leverage extensive customer bases
and adopt aggressive pricing policies to gain market share. Potential
competitors may bundle their products in a manner that discourages users from
purchasing our products. Barriers to entering the web content management
software market are relatively low.
Because the market for our products is new, we do not know whether existing and
potential customers will purchase our products in sufficient quantity for us to
achieve profitability.
The market for web content management software in which we sell is new and
rapidly evolving. While we have licensed our products to 175 customers, we
expect that we will continue to need intensive marketing and sales efforts to
educate prospective clients about the uses and benefits of our products and
services. Various factors could inhibit the growth of the market, and market
acceptance of our products and services. In particular, potential customers
that have invested substantial resources in other methods of conducting
business over the Internet may be reluctant to adopt a new approach that may
replace, limit or compete with their existing systems. We cannot be certain
that a viable market for our products will emerge, or if it does emerge, that
it will be sustainable.
Our lengthy sales cycle makes it particularly difficult for us to forecast
revenue, requires us to incur high costs of sales, and aggravates the
variability of quarterly fluctuations.
The time between our initial contact with a potential customer and the
ultimate sale, which we refer to as our sales cycle, typically ranges between
three and nine months depending largely on the customer. If we do not shorten
our sales cycle, it will be difficult for us to reduce sales and marketing
expenses. In addition, as a result of our lengthy sales cycle, we have only a
limited ability to forecast the timing and size of specific sales. This makes
it more difficult to predict quarterly financial performance, or to achieve it,
and any delay in completing sales in a particular quarter could harm our
business and cause our operating results to vary significantly.
We rely heavily on sales of one product, so if it does not achieve market
acceptance we are likely to experience larger losses.
Since 1997, we have generated substantially all of our revenues from
licenses of, and services related to, our TeamSite product. We believe that
revenues generated from TeamSite will continue to account for a large
8
<PAGE>
portion of our revenues for the foreseeable future. A decline in the price of
TeamSite, or our inability to increase license sales of TeamSite, would harm
our business and operating results more seriously than it would if we had
several different products and services to sell. In addition, our future
financial performance will depend upon successfully developing and selling
enhanced versions of TeamSite. If we fail to deliver product enhancements or
new products that customers want it will be more difficult for us to succeed.
We depend on our direct sales force to sell our products, so future growth will
be constrained by our ability to hire and train new sales personnel.
We sell our products primarily through our direct sales force, and we expect
to continue to do so in the future. Our ability to sell more products is
limited by our ability to hire and train direct sales personnel, and we believe
that there is significant competition for direct sales personnel with the
advanced sales skills and technical knowledge that we need. Some of our
competitors may have greater resources to hire personnel with that skill and
knowledge. If we are not able to hire experienced and competent sales
personnel, our business would be harmed. Furthermore, because we depend on our
direct sales force, any turnover in our sales force can significantly harm our
operating results. Sales force turnover tends to slow sales efforts until
replacement personnel can be recruited and trained to become productive. See
"--We must attract and retain qualified personnel, which is particularly
difficult for us because we compete with other Internet-related software
companies and are located in the San Francisco Bay area where competition for
personnel is extremely intense."
If we do not develop our indirect sales channel, we will be less likely to
increase our revenues.
If we do not develop indirect sales channels, we may miss sales
opportunities that might be available through these other channels. For
example, domestic and international resellers may be able to reach new
customers more quickly or more effectively than our direct sales force.
Although we are currently investing and plan to continue to invest significant
resources to develop these indirect sales channels, we may not succeed in
establishing a channel that can market our products effectively and provide
timely and cost-effective customer support and services. In addition, we may
not be able to manage conflicts across our various sales channels, and our
focus on increasing sales through our indirect channel may divert management
resources and attention from direct sales.
We must attract and retain qualified personnel, which is particularly difficult
for us because we compete with other Internet-related software companies and
are located in the San Francisco Bay area where competition for personnel is
extremely intense.
Our success depends on our ability to attract and retain qualified,
experienced employees. We compete for experienced engineering, sales and
consulting personnel with Internet professional services firms, software
vendors, consulting and professional services companies. It is also
particularly difficult to recruit and retain personnel in the San Francisco Bay
area, where we are located. Although we provide compensation packages that
include incentive stock options, cash incentives and other employee benefits,
the volatility and current market price of our common stock may make it
difficult for us to attract, assimilate and retain highly qualified employees
in the future. In addition, our customers generally purchase consulting and
implementation services. While we have recently established relationships with
some third-party service providers, we continue to be the primary provider of
these services. It is difficult and expensive to recruit, train and retain
qualified personnel to perform these services, and we may from time to time
have inadequate levels of staffing to perform these services. As a result, our
growth could be limited due to our lack of capacity to provide those services,
or we could experience deterioration in service levels or decreased customer
satisfaction, any of which would harm our business.
If we do not improve our operational systems on a timely basis, we will be more
likely to fail to manage our growth properly.
We have expanded our operations rapidly in recent years. We intend to
continue to expand our operational systems for the foreseeable future to pursue
existing and potential market opportunities. This rapid growth
9
<PAGE>
places a significant demand on management and operational resources. In order
to manage our growth, we need to implement and improve our operational systems,
procedures and controls on a timely basis. If we fail to implement and improve
these systems in a timely manner, our business will be seriously harmed.
Difficulties in introducing new products and upgrades in a timely manner will
make market acceptance of our products less likely.
The market for our products is characterized by rapid technological change,
frequent new product introductions and Internet-related technology
enhancements, uncertain product life cycles, changes in customer demands and
evolving industry standards. We expect to add new content management
functionality to our product offerings by internal development, and possibly by
acquisition. Content management technology is more complex than most software,
and new products or product enhancements can require long development and
testing periods. Any delays in developing and releasing new products could harm
our business. New products or upgrades may not be released according to
schedule or may contain defects when released. Either situation could result in
adverse publicity, loss of sales, delay in market acceptance of our products or
customer claims against us, any of which could harm our business. If we do not
develop, license or acquire new software products, or deliver enhancements to
existing products on a timely and cost-effective basis, our business will be
harmed.
Our products might not be compatible with all major platforms, which could
limit our revenues.
Our products currently operate on the Microsoft Windows NT and Sun Solaris
operating systems. In addition, our products are required to interoperate with
leading web content authoring tools and web application servers. We must
continually modify and enhance our products to keep pace with changes in these
applications and operating systems. If our products were to be incompatible
with a popular new operating system or Internet business application, our
business would be harmed. In addition, uncertainties related to the timing and
nature of new product announcements, introductions or modifications by vendors
of operating systems, browsers, back-office applications, and other Internet-
related applications, could also harm our business.
We have no significant experience conducting operations internationally, which
may make it more difficult than we expect to expand overseas and may increase
the costs of doing so.
To date, we have derived all of our revenues from sales to North American
customers. We plan to expand our international operations in the future. There
are many barriers to competing successfully in the international arena,
including:
. costs of customizing products for foreign countries;
. restrictions on the use of software encryption technology;
. dependence on local vendors;
. compliance with multiple, conflicting and changing governmental laws and
regulations;
. longer sales cycles; and
. import and export restrictions and tariffs.
As a result of these competitive barriers, we cannot assure you that we will be
able to market, sell and deliver our products and services in international
markets.
If we fail to establish and maintain strategic relationships, the market
acceptance of our products, and our profitablity, may suffer.
To offer products and services to a larger customer base our direct sales
force depends on strategic partnerships and marketing alliances to obtain
customer leads, referrals and distribution. If we are unable to
10
<PAGE>
maintain our existing strategic relationships or fail to enter into additional
strategic relationships, our ability to increase our sales and reduce expenses
will be harmed. We would also lose anticipated customer introductions and co-
marketing benefits. Our success depends in part on the success of our strategic
partners and their ability to market our products and services successfully. In
addition, our strategic partners may not regard us as significant for their own
businesses. Therefore, they could reduce their commitment to us or terminate
their respective relationships with us, pursue other partnerships or
relationships, or attempt to develop or acquire products or services that
compete with our products and services. Even if we succeed in establishing
these relationships, they may not result in additional customers or revenues.
If our services revenues do not grow substantially, our total revenues are
unlikely to increase.
Our services revenues represent a significant component of our total
revenues--21% of total revenues for 1998 and 37% of total revenues for the nine
months ended September 30, 1999. We anticipate that services revenues will
continue to represent a significant percentage of total revenues in the future.
To a large extent, the level of services revenues depends upon our ability to
license products which generate follow-on services revenue. Additionally,
services revenues growth depends on ongoing renewals of maintenance and service
contracts. Moreover, if third-party organizations such as systems integrators
become proficient in installing or servicing our products, our services
revenues could decline. Our ability to increase services revenues will depend
in large part on our ability to increase the capacity of our professional
services organization, including our ability to recruit, train and retain a
sufficient number of qualified personnel.
We might not be able to protect and enforce our intellectual property rights, a
loss of which could harm our business.
We depend upon our proprietary technology, and rely on a combination of
patent, copyright and trademark laws, trade secrets, confidentiality procedures
and contractual provisions to protect it. We currently do not have any issued
United States or foreign patents, but we have applied for one U.S. patent. It
is possible that a patent will not issue from our currently pending patent
application or any future patent application we may file. We have also
restricted customer access to our source code and required all employees to
enter into confidentiality and invention assignment agreements. Despite our
efforts to protect our proprietary technology, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. In addition, the laws of some foreign countries do not protect
our proprietary rights as effectively as the laws of the United States, and we
expect that it will become more difficult to monitor use of our products as we
increase our international presence. In addition, third parties may claim that
our products infringe theirs.
Our failure to deliver defect-free software could result in greater losses and
harmful publicity.
Our software products are complex and have in the past and may in the future
contain defects or failures that may be detected at any point in the product's
life. We have discovered software defects in the past in some of our products
after their release. Although past defects have not had a material effect on
our results of operations, in the future we may experience delays or lost
revenue caused by new defects. Despite our testing, defects and errors may
still be found in new or existing products, and may result in delayed or lost
revenues, loss of market share, failure to achieve acceptance, reduced customer
satisfaction, diversion of development resources and damage to our reputation.
As has occurred in the past, new releases of products or product enhancements
may require us to provide additional services under our maintenance contracts
to ensure proper installation and implementation. Moreover, third parties may
develop and spread computer viruses that may damage the functionality of our
software products. Any damage to or interruption in the performance of our
software could also harm our business.
Defects in our products may result in customer claims against us that could
cause unanticipated losses.
Because customers rely on our products for business critical processes,
defects or errors in our products or services might result in tort or warranty
claims. It is possible that the limitation of liability provisions in our
11
<PAGE>
contracts will not be effective as a result of existing or future federal,
state or local laws or ordinances or unfavorable judicial decisions. We have
not experienced any product liability claims like this to date, but we could in
the future. Further, although we maintain errors and omissions insurance, this
insurance coverage may not be adequate to cover us. A successful product
liability claim could harm our business. Even defending a product liability
suit, regardless of its merits, could harm our business because it entails
substantial expense and diverts the time and attention of key management
personnel.
Year 2000 concerns by our customers could cause them to defer purchases of our
products.
We may experience reduced sales of products as customers and potential
customers put a priority on correcting their own Year 2000 problems or avoiding
new ones and therefore defer purchases of our products until later in 2000. As
a result, the demand for our products may be particularly volatile and
unpredictable in early 2000.
Year 2000 problems with our products may increase our costs.
Our products are generally integrated into enterprise computer systems
involving sophisticated hardware and complex software products, which may not
be Year 2000 compliant. We may in the future be subject to claims based on Year
2000 problems in other parties' products, Year 2000 problems alleged to be
found in our products, Year 2000-related issues arising from the integration of
multiple products within an overall system, or other similar claims. The total
cost of Year 2000 compliance may be material and may harm our business.
Acquisitions may harm our business by being more difficult than expected to
integrate or by diverting management's attention.
In July 1999, we acquired Lexington Software Associates, a software
consulting company, to help support our existing customer base and to help
attract and retain new customers. As part of our business strategy, we may seek
to acquire or invest in additional businesses, products or technologies that we
feel could complement or expand our business. If we identify an appropriate
acquisition opportunity, we might be unable to negotiate the terms of that
acquisition successfully, finance it, or integrate it into our existing
business and operations. We may also be unable to select, manage or absorb any
future acquisitions successfully. Further, the negotiation of potential
acquisitions, as well as the integration of an acquired business, would divert
management time and other resources. We may have to use a substantial portion
of our available cash, including proceeds of this offering, to consummate an
acquisition. On the other hand, if we consummate acquisitions through an
exchange of our securities, our stockholders could suffer significant dilution.
In addition, we cannot assure you that any particular acquisition, even if
successfully completed, will ultimately benefit our business.
If widespread Internet adoption does not continue, or if the Internet cannot
accommodate continued growth, our business will be harmed because it depends on
growth in the use of the Internet.
Acceptance of our products depends upon continued adoption of the Internet
for commerce. As is typical in the case of an emerging industry characterized
by rapidly changing technology, evolving industry standards and frequent new
product and service introductions, demand for and acceptance of recently
introduced products and services are subject to a high level of uncertainty. To
the extent that businesses do not consider the Internet a viable commercial
medium, our customer base may not grow. In addition, critical issues concerning
the commercial use of the Internet remain unresolved and may affect the growth
of Internet use. The adoption of the Internet for commerce, communications and
access to content, particularly by those who have historically relied upon
alternative methods, generally requires understanding and accepting new ways of
conducting business and exchanging information. In particular, companies that
have already invested substantial resources in other means of conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new, Internet-based strategy that may render their existing
infrastructure obsolete. If the use of the Internet fails to develop or
develops more slowly than expected, our business may be seriously harmed.
12
<PAGE>
To the extent that there is an increase in Internet use, an increase in
frequency of use or an increase in the required bandwidth of users, the
Internet infrastructure may not be able to support the demands placed upon it.
In addition, the Internet could lose its viability as a commercial medium due
to delays in development or adoption of new standards or protocols required to
handle increased levels of Internet activity. Changes in, or insufficient
availability of, telecommunications or similar services to support the Internet
also could result in slower response times and could adversely impact use of
the Internet generally. If use of the Internet does not continue to grow or
grows more slowly than expected, or if the Internet infrastructure, standards,
protocols or complementary products, services or facilities do not effectively
support any growth that may occur, our business would be seriously harmed.
There is substantial risk that future regulations could be enacted that either
directly restrict our business or indirectly impact our business by limiting
the growth of Internet commerce.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt new legislation or regulations covering issues such as user
privacy, pricing, content and quality of products and services. If enacted,
these laws, rules or regulations could indirectly harm us to the extent that
they impact our customers and potential customers. We cannot predict if or how
any future legislation or regulations would impact our business. Although many
of these regulations may not apply to our business directly, we expect that
laws regulating or affecting commerce on the Internet could indirectly harm our
business.
Our existing stockholders hold a majority of our stock and will be able to
control matters requiring stockholder approval.
Immediately after the closing of this offering, approximately 30.1% of our
outstanding capital stock will be owned by our directors and executive officers
or their affiliated entities. As a result, these stockholders, acting together,
could significantly influence all matters requiring approval by the
stockholders, including the election of all directors and approval of
significant corporate transactions.
We have various mechanisms in place to discourage takeover attempts, which
might tend to suppress our stock price.
Provisions of our certificate of incorporation and bylaws that may
discourage, delay or prevent a change in control include:
. we are authorized to issue "blank check" preferred stock, which could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. we provide for the election of only one-third of our directors at each
annual meeting of stockholders, which slows turnover on the board of
directors;
. we limit who may call special meetings of stockholders;
. we prohibit stockholder action by written consent, so all stockholder
actions must be taken at a meeting of our stockholders; and
. we require advance notice for nominations for election to the board of
directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and our
stock incentive plans may discourage, delay or prevent a change in control of
us. See "Description of Capital Stock--Anti-Takeover Provisions."
Purchasers in this offering will incur immediate and substantial dilution.
The public offering price of our common stock will be substantially higher
than the book value per share of the outstanding common stock. As a result, if
we were liquidated for book value immediately following this
13
<PAGE>
offering, each stockholder purchasing in this offering would receive less than
they paid for their common stock. To the extent that outstanding options to
purchase our common stock are exercised, or options or warrants reserved for
issuance are issued and exercised, each stockholder purchasing in this offering
will experience further substantial dilution.
If a significant number of shares become available for sale and are sold in a
short period of time, the market price of our stock could decline.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Our common stock began trading on the Nasdaq National Market on
October 8, 1999; however, to date there have been a limited number of shares
trading in the public market. After this offering, a total of 6,622,500 shares
of our common stock will be available on the open market. Our current
stockholders who are not participating in this offering hold 2,221,198 shares
that they will be able to sell in the public market beginning on April 5, 2000,
when the lock-up agreements signed in connection with our initial public
offering expire. In addition, 90 days after this offering, our executive
officers, directors and the selling stockholders will be able to sell an
additional 10,951,377 shares of our common stock. If many of these shares are
sold when they become available for resale, the market price of our common
stock may decline. For a detailed discussion of the shares eligible for future
sale, see "Shares Eligible for Future Sale."
We have broad discretion to use the offering proceeds and how we invest these
proceeds may not yield a favorable, or any, return.
The net proceeds of this offering are not allocated for specific uses other
than working capital and general corporate purposes. Thus, our management has
broad discretion over how these proceeds are used and could spend the proceeds
in ways with which you may not agree. We cannot assure you that the proceeds
will be invested in a way that yields a favorable, or any, return for us.
14
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. In some cases, you can identify forward-looking statements
by terms such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," "continue" or the negative of
these terms or other comparable terminology. The forward-looking statements
contained in this prospectus involve known and unknown risks, uncertainties and
other factors that may cause industry trends or our actual results, level of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these statements. These factors include those listed under "Risk
Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.
15
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $118.1
million from the sale of 1,000,000 shares of our common stock at an assumed
public offering price of $125.38 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. We will
not receive any portion of the proceeds from the sale of shares of common stock
by the selling stockholders. The primary purposes of this offering are to
obtain additional working capital, create a larger public float for our common
stock and facilitate our future access to public capital markets.
We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including increased sales
and marketing expenditures, increased research and development expenditures and
capital expenditures. We have not yet determined our expected use of these
proceeds.
The amounts and timing of these expenditures will vary depending on a number
of factors, including the amount of cash generated by our operations,
competitive and technological developments and the rate of growth, if any, of
our business. We may also use a portion of the net proceeds to acquire
additional businesses, products and technologies, or to establish joint
ventures that we believe will complement our current or future business.
However, we have no specific plans, agreements or commitments to do so and are
not currently engaged in any negotiations for any acquisition or joint venture.
We will retain broad discretion in the allocation of the net proceeds of
this offering. Pending the uses described above, we will invest the net
proceeds of this offering in short-term to medium-term interest-bearing,
investment-grade securities. We cannot predict whether the proceeds will be
invested to yield a favorable return. We believe that our available cash,
together with the net proceeds of this offering, will be sufficient to meet our
capital requirements for at least the next 24 months.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "IWOV" since our initial public offering on October 8, 1999. Before
then, there was no public market for our common stock. The following table
shows, for the periods indicated, the high and low prices per share of our
common stock.
<TABLE>
<CAPTION>
Price
---------------
High Low
------- -------
<S> <C> <C>
1999:
Fourth quarter (starting October 8, 1999)................... $177.88 $ 36.75
2000:
First quarter (through January 10, 2000).................... $180.00 $118.88
</TABLE>
The closing sale price of our common stock as reported on the Nasdaq
National Market on January 7, 2000 was $125.38. As of December 31, 1999, we had
approximately 239 stockholders of record. This does not include the number of
persons whose stock is in nominee or "street name" accounts through brokers.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock or other
securities, and we do not anticipate paying a cash dividend in the foreseeable
future. Our lines of credit currently prohibit the payment of dividends.
16
<PAGE>
CAPITALIZATION
The following table sets forth the following information, as of September
30, 1999:
. our actual capitalization;
. our pro forma capitalization after giving effect to the conversion of
all outstanding shares of preferred stock into shares of common stock in
October 1999 and the application of the net proceeds of approximately
56.2 million from the sale of 3,622,500 shares of our common stock in
our initial public offering; and
. our pro forma as adjusted capitalization after giving effect to the sale
of 1,000,000 shares of common stock by us at an assumed public offering
price of $125.38 per share, less the estimated underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Debt and leases, current and long-term......... $ 1,375 $ 1,375 $ 1,375
Mandatorily redeemable convertible preferred
stock, 18,763,092 shares authorized,
18,543,523 shares issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted...................................... 52,996 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, no shares
authorized, issued or outstanding, actual;
5,000,000 shares authorized, no shares
issued or outstanding, pro forma and pro
forma as adjusted........................... -- -- --
Common stock, $0.001 par value, 26,666,667
shares authorized, 6,588,846 shares issued
and outstanding, actual; 100,000,000 shares
authorized, 22,681,885 shares issued and
outstanding, pro forma; 23,681,885 shares
issued and outstanding, pro forma as
adjusted.................................... 7 23 24
Additional paid-in capital................... (4,590) 104,590 222,695
Notes receivable from stockholders........... (202) (202) (202)
Deferred stock-based compensation............ (5,114) (5,114) (5,114)
Accumulated deficit.......................... (21,319) (21,319) (21,319)
-------- -------- --------
Total stockholders' equity (deficit)....... (31,218) 77,978 196,084
-------- -------- --------
Total capitalization..................... $ 23,153 $ 79,353 $197,459
======== ======== ========
</TABLE>
The table excludes:
. 64,123 shares of common stock issued upon the exercise of warrants in
October 1999;
. 1,030,258 shares issuable upon exercise of options outstanding at
September 30, 1999 under our stock option plans and 3,240,484 shares
available for future issuance under those plans;
. 300,000 shares available for future issuance under our employee stock
purchase plan; and
. 45,648 shares issuable upon exercise of outstanding warrants.
17
<PAGE>
DILUTION
The pro forma net intangible book value of our common stock as of September
30, 1999, after giving effect to the conversion of all outstanding shares of
preferred stock into common stock and the application of the net proceeds of
approximately $56.2 million from the sale of 3,622,500 shares of our common
stock in our initial public offering in October 1999, was $77.4 million, or
approximately $3.41 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding. Assuming our sale
of 1,000,000 shares of common stock offered at an assumed public offering price
of $125.38 per share, and after deducting estimated underwriting discounts and
commissions and estimated offering expenses, our pro forma net tangible book
value as of September 30, 1999 would have been $195.5 million, or $8.26 per
share. This represents an immediate increase in pro forma net tangible book
value of $4.85 per share to existing stockholders and an immediate dilution in
net tangible book value of $117.12 per share to new investors. Investors
participating in this offering will incur immediate, substantial dilution. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................ $ 125.38
Pro forma net tangible book value per share as of September
30, 1999.................................................... $ 3.41
Increase in pro forma net tangible book value per share
attributable to new investors............................... 4.85
------
Pro forma net tangible book value per share after offering..... 8.26
--------
Dilution per share to new investors............................ $ 117.12
========
</TABLE>
The following table summarizes, on a pro forma basis, as of September 30,
1999, the differences between the number of shares of common stock purchased
from us, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors purchasing shares in this
offering. We have used an assumed public offering price of $125.38 per share,
and we have not deducted estimated underwriting discounts and commissions and
estimated offering expenses in our calculations.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ ------------------- Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 22,681,885 95.8% 114,585,500 47.8% $ 5.05
New investors.................... 1,000,000 4.2 125,375,000 52.2 125.38
---------- ----- ----------- ----- -------
Total.......................... 23,681,885 100.0% 239,960,500 100.0% $ 10.13
========== ===== =========== ===== =======
</TABLE>
This discussion of dilution, and the table quantifying it, assume no
exercise of any outstanding stock options. The exercise of stock options
outstanding under our stock option plans having an exercise price less than the
offering price would increase the dilutive effect to new investors.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with,
and is qualified by reference to, the Consolidated Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other financial data included elsewhere in this
prospectus.
The consolidated statement of operations data for the years ended December
31, 1996, 1997 and 1998 and the nine months ended September 30, 1999 and the
consolidated balance sheet data at December 31, 1997 and 1998, and
September 30, 1999 are derived from and are qualified by reference to audited
consolidated financial statements included elsewhere in this prospectus. The
consolidated balance sheet data at December 31, 1996 is derived from audited
consolidated financial statements not included in this prospectus. The
consolidated statement of operations data for the nine months ended September
30, 1998 are derived from unaudited consolidated financial statements included
elsewhere in this prospectus and, in our opinion, include all adjustments
consisting solely of normal recurring accruals which are necessary to present
fairly the data for that period. Historical results are not necessarily
indicative of future results and the results for interim periods are not
necessarily indicative of results to be expected for the entire year.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
--------------------------- --------------------
1996 1997 1998 1998 1999
------- -------- -------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License ................... $ -- $ 84 $ 3,176 $ 1,570 $ 5,814
Services .................. -- 84 827 539 3,447
------- -------- -------- --------- ---------
Total revenues............ -- 168 4,003 2,109 9,261
Cost of revenues:
License.................... -- -- 59 19 147
Services................... -- 95 1,274 791 3,542
------- -------- -------- --------- ---------
Total cost of revenues.... -- 95 1,333 810 3,689
------- -------- -------- --------- ---------
Gross profit................ -- 73 2,670 1,299 5,572
Operating expenses:
Research and development... 328 884 1,797 1,227 2,930
Sales and marketing........ 101 1,519 4,817 2,960 9,058
General and
administrative............ 91 530 1,739 1,135 2,077
Amortization of deferred
stock-based compensation.. -- -- 812 564 2,685
Amortization of acquired
intangible assets......... -- -- -- -- 249
------- -------- -------- --------- ---------
Total operating expenses.. 520 2,933 9,165 5,886 16,999
------- -------- -------- --------- ---------
Loss from operations........ (520) (2,860) (6,495) (4,587) (11,427)
Interest and other income
(expense), net............. 10 (88) 151 89 416
------- -------- -------- --------- ---------
Net loss.................... $ (510) $ (2,948) $ (6,344) $ (4,498) $ (11,011)
======= ======== ======== ========= =========
Net loss per share:
Basic and diluted.......... $ (0.22) $ (1.36) $ (2.85) $ (1.98) $ (6.51)
Weighted average shares--
basic and diluted......... 2,282 2,356 2,633 2,505 3,722
Pro forma net loss per
share:
Basic and diluted.......... $ (0.74) $ (0.74)
Weighted average shares--
basic and diluted......... 8,530 14,957
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------- September 30,
1996 1997 1998 1999
----- ------- ------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and
investments....................... $ 17 $ 1,019 $ 9,022 $ 21,995
Working capital.................... (208) 792 8,844 18,203
Total assets....................... 92 1,384 13,908 29,472
Long-term debt and capital lease
obligations, less current portion
.................................. -- 87 1,257 875
Mandatorily redeemable convertible
preferred stock................... 385 4,627 20,464 52,996
Total stockholders' deficit........ (525) (3,734) (10,752) (31,218)
</TABLE>
See Note 1 of Notes to Consolidated Financial Statements for a discussion
regarding computation and presentation of pro forma basic and diluted net loss
per share and shares used in computing pro forma basic and diluted net loss per
share.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with "Selected Consolidated Financial
Data" and our Consolidated Financial Statements and Notes appearing elsewhere
in this prospectus.
Overview
Interwoven was incorporated in March 1995 to provide software products and
services for web content management. Designed specifically for the web, our
products allow large teams of people across an enterprise to contribute and
edit web content on a collaborative basis, reducing the time-to-web for
critical eBusiness initiatives. From March 1995 through March 1997, we were a
development stage company conducting research and development for our initial
products. In May 1997, we shipped the first version of our principal product,
TeamSite. We have subsequently developed and released enhanced versions of
TeamSite and have introduced related products. As of December 31, 1999, we had
sold our products and services to 175 customers. We market and sell our
products primarily through a direct sales force and augment our sales efforts
through relationships with systems integrators and other strategic partners. We
are headquartered in Sunnyvale, California and maintain additional offices in
the metropolitan areas of Atlanta, Boston, Chicago, Dallas, Los Angeles, New
York City, Seattle and Washington, D.C. Our revenues to date have been derived
exclusively from accounts in North America. In May 1999, we opened an office in
the United Kingdom. We had 205 employees as of December 31, 1999.
We derive revenues from the license of our software products and from
services we provide to our customers. To date, we have derived virtually all of
our license revenues from licenses of TeamSite. License revenues are recognized
when persuasive evidence of an agreement exists, the product has been
delivered, no significant post-delivery obligations remain, the license fee is
fixed or determinable and collection of the fee is probable. Services revenues
consist of professional services and maintenance fees. Professional services
primarily consist of software installation and integration, business process
consulting and training. We generally bill our professional services customers
on a time and materials basis and recognize revenues as the services are
performed. Maintenance agreements are typically priced based on a percentage of
the product license fee, and typically have a one-year term that is renewable
annually. Services provided to customers under maintenance agreements include
technical product support and an unspecified number of product upgrades as
released by us during the term of a maintenance agreement. Revenues from
maintenance support agreements are recognized ratably over the term of the
agreement.
Since inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our engineering,
sales and marketing and services organizations, and to establish an
administrative organization. As a result, we have incurred net losses in each
quarter since inception and, as of September 30, 1999, had an accumulated
deficit of $21.3 million. We anticipate that our cost of services revenues and
operating expenses will increase substantially in future quarters as we grow
our services organization to support an increased level and expanded number of
services offered, increase our sales and marketing operations, develop new
distribution channels, fund greater levels of research and development, and
improve operational and financial systems. Accordingly, we expect to incur
additional losses for the foreseeable future as we continue to expand our
operations. In addition, our limited operating history makes the prediction of
future results of operations difficult and, accordingly, there can be no
assurance that we will achieve or sustain profitability.
20
<PAGE>
Results of Operations
The following table lists, for the periods indicated, each line as a
percentage of total revenues:
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
--------------- -------------------
1997 1998 1998 1999
------ ------ -------- --------
<S> <C> <C> <C> <C>
Revenues:
License.............................. 50 % 79 % 74 % 63 %
Services............................. 50 21 26 37
------ ------ -------- --------
Total revenues..................... 100 100 100 100
Cost of revenues:
License.............................. -- 1 1 2
Services............................. 57 32 37 38
------ ------ -------- --------
Total cost of revenues............. 57 33 38 40
------ ------ -------- --------
Gross profit........................... 43 67 62 60
Operating expenses:
Research and development............. 526 45 58 32
Sales and marketing.................. 904 120 140 98
General and administrative........... 315 43 54 22
Amortization of deferred stock-based
compensation........................ -- 20 27 29
Amortization of acquired intangible
assets.............................. -- -- -- 3
------ ------ -------- --------
Total operating expenses........... 1,745 228 279 184
------ ------ -------- --------
Loss from operations................... (1,702) (161) (217) (124)
Interest and other income (expense),
net................................... (52) 4 4 5
------ ------ -------- --------
Net loss............................... (1,754)% (157)% (213)% (119)%
====== ====== ======== ========
</TABLE>
Nine Months Ended September 30, 1998 and 1999
Revenues
Total revenues increased 339% from $2.1 million for the nine months ended
September 30, 1998 to $9.3 million for the nine months ended September 30,
1999. This increase was attributable to greater market acceptance of our
software products after their introduction in 1997 and an increase in the
number of sales and marketing staff, resulting in an increased number of
customers.
License. License revenues increased 270% from $1.6 million for the nine
months ended September 30, 1998 to $5.8 million for the nine months ended
September 30, 1999. License revenues represented 74% and 63% of total revenues,
respectively, in those periods. The increase in license revenues reflects
continued growth from the low level of revenue in 1998, our first full year in
which we licensed our products. The decline in the percentage of total revenues
represented by license revenues reflects the more rapid growth of services
revenues due to a growing customer base.
Services. Services revenues increased 543% from $539,000 for the nine months
ended September 30, 1998 to $3.4 million for the nine months ended September
30, 1999. Services revenues represented 26% and 37% of total revenues,
respectively, in those periods. The increase in services revenues reflects an
increase in both professional services and maintenance fees generated from an
expanded number of customers who licensed our products.
Cost of Revenues
License. Cost of license revenues includes expenses incurred to manufacture,
package and distribute software products and related documentation, as well as
costs of licensing third-party software sold in conjunction with our software
products. Cost of license revenues increased 674% from $19,000 for the nine
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months ended September 30, 1998 to $147,000 for the nine months ended September
30, 1999. Cost of license revenues represented 1% and 3% of license revenues in
the nine months ended September 30, 1998 and 1999, respectively. The increase
in cost of license revenues, both as a percentage of license revenues and in
absolute dollars, reflects increased sales of our product.
Services. Cost of services revenues consists primarily of salary and related
costs of our professional services, training, maintenance and support staffs,
as well as subcontractor expenses. Cost of services revenues increased 348%
from $791,000 for the nine months ended September 30, 1998 to $3.5 million for
the nine months ended September 30, 1999. Cost of services revenues represented
147% and 103% of services revenues, respectively, in those periods. This
increase in absolute dollar amounts was due to an increase in the number of in-
house staff from 10 at September 30, 1998 to 43 at September 30, 1999, and a
$370,000 increase in subcontractor expenses.
We expect our cost of services revenues to increase in dollar amounts as a
result of the increased staffing of our professional services organization due
to our acquisition of Lexington Software in July 1999 and through our continued
expansion of our services staff and consulting organizations. Since services
revenues have substantially lower margins than license revenues, this expansion
would reduce our gross margins if our license revenues were not to increase
significantly. We expect cost of services revenues as a percentage of services
revenues to vary from period to period depending on the mix of services we
provide, whether the services are performed by our in-house staff or
subcontractors, and the overall utilization rates of professional services
staff.
Gross Profit
Gross profit increased 329% from $1.3 million for the nine months ended
September 30, 1998 to $5.6 million for the nine months ended September 30, 1999
representing 62% and 60% of total revenues, respectively, in those periods.
This increase in absolute dollars reflected increased license and services
revenues from a growing customer base. The decrease in gross profit percentage
was a result of the expansion of our professional services organization. We
have made and will continue to make investments in our professional services
organization to increase the capacity of that organization to meet the demand
for services from our customers. We expect gross profit as a percentage of
total revenues to fluctuate from period to period as a result of changes in the
relative proportion of license and services revenues.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel and related costs to support product development.
Research and development expenses increased 139% from $1.2 million for the nine
months ended September 30, 1998 to $2.9 million for the nine months ended
September 30, 1999. Research and development expenses represented 58% and 32%
of total revenues, respectively, in those periods. This increase in dollar
amounts was due to an increase in the number of product development personnel.
We believe that continued investment in research and development is critical to
our strategic objectives, and we expect that the dollar amounts of research and
development expenses will increase in future periods. To date, all software
development costs have been expensed in the period incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related costs for sales and marketing personnel, sales
commissions, travel and marketing programs. Sales and marketing expenses
increased 206% from $3.0 million for the nine months ended September 30, 1998
to $9.1 million for the nine months ended September 30, 1999. Sales and
marketing expenses represented 140% and 98% of total revenues, respectively, in
those periods. The increase in dollar amounts reflected increased sales and
marketing personnel costs of $2.7 million, higher sales commissions and bonuses
of $1.5 million and increased marketing related costs of $300,000. We expect to
continue to invest heavily in sales and marketing in order to expand our
customer base and increase brand awareness. We also anticipate that the
percentage of total revenues represented by sales and marketing expenses will
fluctuate from period to period depending primarily on when we hire new sales
personnel, the timing of new marketing programs and the levels of revenues in
each period.
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General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for accounting, human resources, legal
and other administrative functions, as well as provisions for doubtful
accounts. General and administrative expenses increased 83% from $1.1 million
for the nine months ended September 30, 1998 to $2.1 million for the nine
months ended September 30, 1999, representing 54% and 22% of total revenues,
respectively, in those periods. This increase in absolute dollar amounts
reflected additional staffing of these functions to support expanded operations
during this same period. We expect general and administrative expenses to
increase in dollar amounts in 1999 as we add personnel to support expanding
operations, incur additional costs related to the growth of our business, and
assume the reporting requirements of a public company.
Amortization of Deferred Stock-Based Compensation. In 1998 and the first
nine months of 1999, we recorded deferred stock-based compensation of $1.9
million and $6.7 million in connection with stock options granted during 1998
and 1999, respectively. These amounts represent the difference between the
exercise price of stock options granted during those periods and the deemed
fair value of our common stock at the time of the grants. Amortization of
deferred stock-based compensation was $564,000 and $2.7 million for the nine
months ended September 30, 1998 and 1999, respectively. We expect per quarter
amortization related to these options of approximately $1.0 million during the
remainder of 1999, between $500,000 and $750,000 during 2000, between $270,000
and $400,000 during 2001, between $100,000 and $185,000 during 2002 and $50,000
in the quarter ended March 31, 2003.
Amortization of Acquired Intangible Assets. In July of 1999, we recorded
intangible assets of approximately $800,000 in connection with the acquisition
of Lexington Software. Goodwill related to this transaction approximated
$300,000 and intangible assets related to the workforce of Lexington Software
approximated $500,000 of the purchase price. The total purchase price for this
acquisition was approximately $800,000. The purchase price was allocated to the
tangible and intangible assets acquired and liabilities assumed based upon
their respective fair values at the acquisition date. Amortization of acquired
intangible assets was $249,000 for the nine months ended September 30, 1999.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, increased 367% from $89,000 for
the nine months ended September 30, 1998 to $416,000 for the nine months ended
September 30, 1999. The increase was due to increased interest income earned
from higher cash balances on hand as a result of sales of our preferred stock
in June 1999, partially offset by increased interest expense.
Income Taxes
As of September 30, 1999, we had approximately $14.7 million of federal and
$8.6 million of state net operating loss carryforwards available to reduce
future taxable income. These net operating loss carryforwards begin to expire
in 2010 and 2003 for federal and state tax purposes, respectively. Under the
Tax Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited. Events which cause limitation in the
amount of net operating losses that we may utilize in any one year include, but
are not limited to, a cumulative ownership change of more than 50%, as defined,
over a three year period. We have provided a full valuation allowance on the
deferred tax asset because of the uncertainty regarding its realization. Our
accounting for deferred taxes under Statement of Financial Accounting Standards
No. 109 involves the evaluation of a number of factors concerning the
realizability of our deferred tax assets. In concluding that a full valuation
allowance was required, management primarily considered factors such as our
history of operating losses and expected future losses and the nature of our
deferred tax assets. See Note 6 of Notes to Consolidated Financial Statements.
Years Ended December 31, 1996, 1997 and 1998
Revenues
We had no revenues in 1996. Total revenues increased from $168,000 in 1997
to $4.0 million in 1998. This increase was attributable to greater market
acceptance of our software products after their introduction in 1997 and an
increase in the number of sales and marketing staff, resulting in an increased
number of customers.
23
<PAGE>
License. License revenues increased from $84,000 in 1997 to $3.2 million in
1998. License revenues represented 50% and 79% of total revenues, respectively,
in those periods. The increase in license revenues reflects growth from the low
level of revenue in 1997, our first year in which we licensed our products.
Services. Services revenues increased from $84,000 in 1997 to $827,000 in
1998. Services revenues represented 50% and 21% of total revenues,
respectively, in those periods. The increase in services revenues reflects an
increase in both professional services and maintenance fees generated from an
expanded number of customers who licensed our products.
Cost of Revenues
License. We had no cost of license revenues in 1996 or 1997. Cost of license
revenues in 1998 was $59,000 and represented 2% of license revenues in 1998.
The increase in cost of license revenues reflects increased sales of third-
party products sold in conjunction with our software products.
Services. We had no cost of services revenues in 1996. Cost of services
revenues increased from $95,000 in 1997 to $1.3 million in 1998. Cost of
services revenues represented 113% and 154% of services revenues, respectively,
in those periods. This increase was due to an increase in the number of in-
house staff from 3 to 11, and a $45,000 increase in subcontractor expenses.
Gross Profit
Gross profit increased from $73,000 in 1997 to $2.7 million in 1998,
representing 43% and 67% of total revenues, respectively, in those periods.
This increase reflected increased license and services revenues from a growing
customer base.
Operating Expenses
Research and Development. Research and development expenses increased from
$328,000 in 1996 to $884,000 in 1997 and $1.8 million in 1998. Research and
development expenses represented 526% and 45% of total revenues in 1997 and
1998, respectively. This increase in dollar amounts was due to increases in the
number of product development personnel.
Sales and Marketing. Sales and marketing expenses increased from $101,000 in
1996 to $1.5 million in 1997 and $4.8 million in 1998. Sales and marketing
expenses represented 904% and 120% of total revenues in 1997 and 1998,
respectively. The increase in dollar amounts from 1996 to 1997 reflects
increases in sales and marketing personnel costs of $900,000 and increased
marketing related costs of $100,000. The increase in dollar amounts from 1997
to 1998 reflects increases in sale and marketing personnel costs of
$1.4 million, higher sales commissions and bonuses of $900,000 and increased
marketing related costs of $200,000.
General and Administrative. General and administrative expenses increased
from $91,000 in 1996 to $530,000 in 1997 and $1.7 million in 1998, representing
315% and 43% of total revenues in 1997 and 1998, respectively. This increase in
dollar amounts reflects additional staffing of these functions to support
expanded operations during this same period.
Amortization of Deferred Stock-Based Compensation. In 1998 we recorded
deferred stock-based compensation of $1.9 million, $812,000 of which was
amortized in 1998.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, decreased from $10,000 in 1996 to
a net interest expense of $88,000 in 1997 and increased to a net interest
income of $151,000 in 1998. The decrease from 1996 to 1997 reflected increased
interest expense on promissory notes issued in conjunction with the sale of our
preferred stock. The increase from 1997 to 1998 was due to increased interest
income earned from cash balances on hand as a result of sales of our preferred
stock in March, October, November and December 1998, partially offset by
increased interest expense.
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<PAGE>
Quarterly Results of Operations
The following tables set forth our unaudited consolidated statements of
operations data in dollars and as a percentage of total revenues for each of
our last seven quarters. This data has been derived from unaudited consolidated
financial statements that have been prepared on the same basis as our annual
audited consolidated financial statements and, in our opinion, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of this information. These unaudited quarterly results should
be read in conjunction with the annual consolidated audited financial
statements and notes thereto appearing elsewhere in this prospectus. The
results of operations for any quarter are not necessarily indicative of the
results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- --------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License................ $ 187 $ 437 $ 946 $ 1,606 $ 1,360 $ 1,898 $ 2,556
Services............... 44 218 277 288 742 1,004 1,701
----- ------- ------- ------- ------- ------- -------
Total revenues....... 231 655 1,223 1,894 2,102 2,902 4,257
Cost of revenues:
License................ -- -- 19 40 15 104 28
Services............... 75 275 441 483 549 880 2,113
----- ------- ------- ------- ------- ------- -------
Total cost of
revenues............ 75 275 460 523 564 984 2,141
----- ------- ------- ------- ------- ------- -------
Gross profit......... 156 380 763 1,371 1,538 1,918 2,116
Operating expenses:
Research and
development........... 282 453 492 570 779 922 1,229
Sales and marketing.... 473 884 1,603 1,857 2,287 2,938 3,833
General and
administrative........ 185 387 563 604 598 646 833
Amortization of
deferred stock-based
compensation.......... 151 196 217 248 640 1,028 1,017
Amortization of
acquired intangible
assets................ -- -- -- -- -- -- 249
----- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,091 1,920 2,875 3,279 4,304 5,534 7,161
----- ------- ------- ------- ------- ------- -------
Loss from operations.... (935) (1,540) (2,112) (1,908) (2,766) (3,616) (5,045)
Interest and other
income (expense), net.. 4 53 32 62 65 89 262
----- ------- ------- ------- ------- ------- -------
Net loss................ $(931) $(1,487) $(2,080) $(1,846) $(2,701) $(3,527) $(4,783)
===== ======= ======= ======= ======= ======= =======
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Revenues:
License................ 81% 67% 77% 85% 65% 65% 60%
Services............... 19 33 23 15 35 35 40
----- ------- ------- ------- ------- ------- -------
Total revenues....... 100 100 100 100 100 100 100
Cost of revenues:
License................ -- -- 2 2 1 4 1
Services............... 32 42 36 26 26 30 49
----- ------- ------- ------- ------- ------- -------
Total cost of
revenues............ 32 42 38 28 27 34 50
----- ------- ------- ------- ------- ------- -------
Gross profit......... 68 58 62 72 73 66 50
Operating expenses:
Research and
development........... 122 69 40 30 37 32 29
Sales and marketing.... 205 135 131 98 109 101 90
General and
administrative........ 80 59 46 32 28 22 19
Amortization of
deferred stock-based
compensation.......... 65 30 18 13 30 35 24
Amortization of
acquired intangible
assets................ -- -- -- -- -- -- 6
----- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 472 293 235 173 204 190 168
----- ------- ------- ------- ------- ------- -------
Loss from operations.... (404) (235) (173) (101) (131) (124) (118)
Interest and other
income (expense), net.. 2 8 3 3 3 3 6
----- ------- ------- ------- ------- ------- -------
Net loss................ (402)% (227)% (170)% ( 98)% (128)% (121)% (112)%
===== ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE>
Our license and services revenues have grown in each of the seven quarters
in the period ended September 30, 1999, except that our license revenues
declined in the three month period ended March 31, 1999 from that in the three
month period ended December 31, 1998. This decline reflected the unusually high
revenues in the prior period, due in part to a few large license sales in that
period. In addition, many companies that license enterprise-scale software
products to large customers experience seasonal declines in the first fiscal
quarter following the end of their fiscal year. Because of our limited
operating history, we do not know whether this pattern was responsible for the
declines in the three months ended March 31, 1999, or whether it will apply to
future quarterly results. As a general matter, we depend on sales to a
relatively few large customers. As a result, our revenues are subject to
period-to-period fluctuations reflecting the impact of a few large sales.
Increased services revenues beginning in the three month period ended March
31, 1999 reflect an increase in both professional services and maintenance fees
generated from an expanded number of customers which had licensed our products
in prior periods, and an increase in the number of professional services staff
and a higher effective staff utilization rate.
As a result of our limited operating history and the emerging nature of the
market for web content management software and services in which we compete, it
is difficult for us to forecast our revenues or earnings accurately. It is
possible that in some future periods our results of operations may not meet or
exceed the expectations of public market analysts and investors. If this
occurs, the price of our common stock is likely to decline. Factors that have
caused our results to fluctuate in the past, and are likely to cause
fluctuations in the future, include:
. the size of customer orders and the timing of product and service
deliveries;
. variability in the mix of products and services sold;
. our ability to retain our current customers and attract new customers;
. the amount and timing of operating costs relating to expansion of our
business, including our planned international expansion;
. the announcement or introduction of new products or services by us or
our competitors;
. our ability to attract and retain personnel, particularly management,
engineering and sales personnel and technical consultants;
. our ability to upgrade and develop our systems and infrastructure to
accommodate our growth; and
. costs related to acquisition of technologies or businesses.
In addition, our products are typically shipped when orders are received, so
license backlog at the beginning of any quarter in the past has represented
only a small portion of expected license revenues for that quarter. Moreover,
we typically recognize a substantial percentage of revenues in the last month
of the quarter, frequently in the last week or even the last days of the
quarter. As a result, at the beginning of a quarter we have no assurance about
the levels of sales in that quarter, and the delay or cancellation of any large
orders can result in a significant shortfall from anticipated revenues. These
factors make license revenues in any quarter difficult to forecast. Since our
expenses are relatively fixed in the near term, any shortfall from anticipated
revenues could result in significant variations in operating results from
quarter to quarter and harm to our business.
As a result of these and other factors, we believe that period-to-period
comparisons of our results of operations may not be meaningful and should not
be relied upon as indicators of our future performance.
Liquidity and Capital Resources
In October 1999, we completed the initial public offering of our common
stock and realized net proceeds from the offering of approximately $56.2
million. Before our initial public offering, we funded our operations
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<PAGE>
through private sales of equity securities. We raised a total of $37.0 million,
net of offering costs, from the issuance of preferred stock. At September 30,
1999, our sources of liquidity consisted of $22.6 million in cash, cash
equivalents and investments and $19.2 million in working capital. We have a
$3.0 million line of credit and a $1.5 million equipment line of credit with
Silicon Valley Bank, each of which bear interest at the bank's prime rate,
which was 7.75% at September 30, 1999, plus 0.25%. At September 30, 1999, the
line of credit was unused and $1.4 million was outstanding under the equipment
line of credit. The lines of credit are secured by all of our tangible and
intangible assets, and contain financial covenants including; a quick asset
ratio, excluding deferred maintenance revenue, of at least 2:1; a liquidity
ratio of unrestricted cash plus 80% of eligible accounts receivable minus
outstanding advances divided by loans outstanding of not less than 1.5:1; and a
covenant that quarterly net losses will not exceed a threshold based on
projected annual revenues. We intend to maintain both lines of credit. We are
currently in compliance with all related financial covenants and restrictions.
Net cash used in operating activities was $2.7 million in 1997 and $6.0
million in 1998. Net cash used in operating activities in 1997 and 1998
reflected net losses and, to a lesser extent, accounts receivable, offset in
part by increases in accrued liabilities. Net cash used in operating activities
was $5.1 million in the nine months ended September 30, 1999. Net cash used in
operating activities reflected increasing net losses.
From inception, our investing activities have consisted primarily of
purchases of property and equipment, principally computer hardware and software
for our growing number of employees. Capital expenditures, including those
under capital leases, totaled $176,000, $1.7 million and $1.3 million in 1997,
1998 and the nine months ended September 30, 1999, respectively. We expect that
capital expenditures will increase with our anticipated growth in operations,
infrastructure and personnel. As of September 30, 1999 we had no material
capital expenditure commitments.
During the nine months ended September 30, 1999, our investing activities
have consisted of purchases of short-term investments. To date, we have not
invested in derivative securities or any other financial instruments that
involve a high level of complexity or risk. We expect that, in the future, cash
in excess of current requirements will continue to be invested in high credit
quality, interest-bearing securities.
Net cash provided by financing activities in 1997, 1998 and the first nine
months of 1999 was $3.9 million, $15.8 million and $19.4 million, respectively.
Net cash provided by financing activities reflected primarily the proceeds of
issuances of preferred stock in each of these periods, and, in 1998, included
proceeds from a bank equipment loan.
We believe that the net proceeds of this offering, together with cash, cash
equivalents, investments and funds available under existing credit facilities,
will be sufficient to meet our working capital requirements for at least the
next 24 months. Thereafter, we may require additional funds to support our
working capital requirements or for other purposes and may seek to raise
additional funds through public or private equity financing or from other
sources. There can be no assurance that additional financing will be available
on acceptable terms, if at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to develop or enhance our
products, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements, which could have a material adverse
effect on our business, financial condition and operating results.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 is effective for all fiscal quarters
beginning with the quarter ending June 30, 2000. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in
27
<PAGE>
other contracts, and for hedging activities. We will adopt SFAS No. 133 in the
quarter ending June 30, 2000 and do not expect its adoption to have an impact
on our results of operations, financial position or cash flows.
Qualitative and Quantitative Disclosures About Market Risk
We develop products in the United States and market our products in North
America, and, to a lesser extent in Europe. As a result, our financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in foreign markets. Since all of our revenue is
currently denominated in U.S. dollars, a strengthening of the dollar could make
our products less competitive in foreign markets. Our interest income and
expense is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of our financial investments are short-term.
Due to the short-term nature of our financial investments, we believe that
there is not a material risk exposure.
Year 2000 Compliance
The Year 2000 issue refers generally to the problems that some software may
have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able
to distinguish whether "00" means 1900 or 2000, which may result in system
failures or erroneous results.
We have conducted a Year 2000 readiness review for the current and prior
versions of our products. The review included:
. assessment;
. implementation, including remediation, upgrading and replacement of non-
compliant product versions;
. validation testing; and
. contingency planning.
We have completed all phases of our plan, except for contingency planning,
with respect to the current and prior versions of all of our products. As a
result, the current and prior versions of each of our products are Year 2000
compliant when configured and used in accordance with the related
documentation, and provided that the underlying operating system of the host
machine and any other software used with or in the host machine or our products
are also Year 2000 compliant.
We define "Year 2000 compliant" as the ability to:
. correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
. function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
. where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined, and
predetermined manner;
. store and provide output of date information in ways that are
unambiguous as to century if the date elements in interfaces and data
storage specify the century; and
. recognize year 2000 as a leap year.
We have not tested our products on all platforms or all versions of
operating systems that our products currently support.
28
<PAGE>
We have tested licensed software, shareware and freeware obtained from
third parties that is incorporated into our products or sold in conjunction
with our products, and have assurances from our vendors that this licensed
software is Year 2000 compliant. Despite our testing, our products may contain
undetected errors or defects associated with Year 2000 date functions. Known
or unknown errors or defects in our products could result in:
. delay or loss of revenue;
. diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; or
. liability from our customers.
Accordingly, errors or defects in our products could seriously harm our
business.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues, and we are aware of lawsuits against other software
vendors. Because of the unprecedented nature of this litigation, it is
uncertain whether or to what extent we will be affected by it.
Our internal systems include both our computer and network systems and
other systems. We have assessed our most important computer and network
systems and our other systems. To the extent that we were not able to assess
the technology provided by third-party vendors, we sought assurances from them
that their systems are Year 2000 compliant. Although we are not currently
aware of any material operational issues or costs associated with Year 2000
compliance for these systems, we may experience unanticipated problems and
costs caused by undetected errors or defects in the technology used in these
systems.
We currently have only limited information concerning the Year 2000
compliance status of our customers. As is the case with other similarly
situated software companies, if our current or future customers fail to
achieve Year 2000 compliance or if they divert technology expenditures,
especially technology expenditures that were reserved for enterprise software,
to address Year 2000 compliance problems, our business could be harmed.
We have funded our Year 2000 plan from available cash and have not
separately accounted for these costs in the past. To date, these costs have
not been material. We may incur additional costs related to the Year 2000 plan
for:
. administrative personnel to manage the project;
. outside contractor assistance;
. technical support for our products; and
. product engineering and customer satisfaction.
We may experience material problems and costs with Year 2000 compliance
that could harm our business.
We do not have a contingency plan to address situations that may result if
we are unable to achieve Year 2000 readiness of our critical operations. The
cost of developing and implementing a plan may itself be material. Finally, we
are also subject to external forces that might generally affect industry and
commerce, such as utility or transportation company Year 2000 compliance
failures and related service interruptions.
29
<PAGE>
BUSINESS
Overview
Interwoven is a provider of software products and services that help
businesses and other organizations manage the information that makes up the
content of their web sites. In the Internet industry this is often referred to
as "web content management." Our flagship software product, TeamSite, is
designed to help customers develop, maintain and extend large web sites that
are essential to their businesses. TeamSite incorporates widely accepted
Internet industry standards and is designed with an open architecture that
allows it to support a wide variety of web authoring tools and web application
servers. Using TeamSite, our customers can manage web content, control the
versions of their web sites, manage web site contribution and content approval
processes, and develop eBusiness applications. TeamSite allows large numbers of
contributors across an enterprise to add web content in a carefully-managed
process. In addition, our OpenDeploy product allows customers to automate the
distribution of web content across multiple web sites. By using our products,
businesses can accelerate their time-to-web, lower web operating costs,
establish a differentiated presence on the web and attract and retain
customers. Currently, we have licensed our software products to 175 customers
operating in a broad range of industries. Our customers include AltaVista,
AT&T/TCI, BellSouth, Best Buy, Cisco Systems, eBay, E*Trade, FedEx, Gap,
General Electric, the U.S. Department of Education, USWeb/CKS,
Viacom/Nickelodeon and Yahoo!/GeoCities.
Industry Background
The use of the Internet to communicate and conduct business is increasing
rapidly. Companies are accelerating their movement to the Internet to
capitalize on new business opportunities, reach broader consumer audiences and
reduce operational costs. Forrester Research estimates that the business-to-
consumer Internet commerce market in the U.S. will grow from $7.8 billion in
1998 to $108.0 billion in 2003. In addition, Forrester Research estimates that
the business-to-business Internet commerce market in the U.S. will grow from
$43.1 billion in 1998 to $1.3 trillion in 2003. In this prospectus we refer to
business-to-business and business-to-consumer Internet commerce as "e-
commerce."
Migrating to the Web. As leading companies demonstrate revenue growth and
achieve competitive advantage by using the Internet, chief executives and other
senior corporate decision makers are realizing that eBusiness initiatives are
critical for the success of their businesses. As a result, many companies are
developing eBusiness applications to enable them to market and sell products
and services to consumers online, offer web-based customer self-service
programs, implement business-to-business supply chain management solutions, and
migrate other operational functions online. IDC estimates that spending on
software applications and services for Internet commerce will grow from
$7.8 billion in 1998 to $53.8 billion in 2002. In this prospectus we refer to
the use of the Internet to conduct business generally as "Internet commerce" or
"eBusiness."
Moving Online Successfully. To compete online and to capitalize on Internet
revenue opportunities, businesses must rapidly build a differentiated presence
on the web and must continuously maintain and extend that presence. Since
first-mover advantage is amplified on the web, companies must deploy high
quality eBusiness applications quickly to create an online brand and establish
a loyal base of customers. Accelerating the time required to develop and deploy
eBusiness applications, or time-to-web, is essential to attracting customers
and generating revenue opportunities. In addition, to retain customers, a
company must differentiate its web site from competing sites by offering rich,
accurate and relevant content. Once customers discover value in a web site,
they may be less likely to visit competing web sites. Web site reliability is
also important, since customers are only a click away from competitors' sites
and may lose patience with an incomplete or non-functioning web site. Moreover,
poor quality web sites can easily damage a business' online brand.
Evolving Web Sites. As a result of this competitive environment and the
available online business opportunities, web sites have rapidly evolved from
simple online corporate brochures to complex online storefronts. Early web
sites contained relatively limited content, consisting primarily of static text
and simple graphics. This content was infrequently updated and web sites
required only a few developers to build and maintain them. Today, companies are
seeking to differentiate their online presence and to become leaders on
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the Internet by transforming their businesses through sophisticated eBusinesses
applications featuring content-rich web sites. In many cases, the content on
these web sites must be updated on a daily or hourly basis to meet consumer
expectations and to exploit emerging business opportunities. For example, a
large online retailer may need to showcase tens of thousands of products
through the use of graphic images and product descriptions. All of this
information must be continuously refreshed as products are introduced or
discontinued and as descriptive product information is revised. As the volume
of web content has grown and sophisticated eBusiness applications have emerged,
the responsibility for the development and management of web content has
shifted from a few developers in small web teams to many contributors working
in different departments across the enterprise. Furthermore, the large number
of web authoring tools and web application servers required by these
applications have contributed to the increasing technological complexity
involved in developing these web sites.
Managing Web Content. Web content, such as high-resolution graphics, audio
segments, video clips, hyperlinked text and executable software, is the basis
for every web page and most eBusiness applications. IDC estimates that the
number of web pages will grow from 925 million in 1998 to 13.1 billion in 2003.
In addition, complex eBusiness initiatives may contain hundreds of thousands of
web pages. This dramatic growth in content has created a strong need for
solutions to content management problems. These solutions must be highly
automated to accommodate the volume, complexity and variability of this web
content. In addition, these solutions must leverage existing investments in
information technology, be highly scalable, and enable participation by
increasing numbers of content contributors. IDC estimates that one of the
markets in which we participate, which IDC refers to as the "web development
life-cycle management software" market, will grow from $76.4 million in 1998 to
$1.6 billion in 2003.
Market Opportunity. Until recently, businesses have attempted to satisfy
their web content management needs largely through in-house solutions. In-house
solutions can be expensive and difficult to maintain, which can increase the
risk of delaying the launch of important eBusiness initiatives. For example,
in-house solutions may need to be extensively re-engineered each time a new web
authoring tool or eBusiness application is introduced. Other businesses have
used third-party solutions, typically turning to either workgroup software or
web publishing software. Workgroup software is generally designed to enable
small groups of developers to manage relatively simple web sites. They
generally do not scale to support large numbers of contributors or the
increasing complexity and volume of web content. Using workgroup software may
impair a company's ability to deliver up-to-date and accurate web content. Web
publishing software is generally designed only to collect and display
information on a web site, and because it is often proprietary, does not
accommodate many popular web authoring tools or web application servers. In
addition, other third-party solutions do not allow large numbers of
contributors to add content to a web site, do not allow web teams to work on
applications simultaneously, and do not integrate new web technologies easily,
thereby slowing the deployment of eBusiness initiatives.
With the proliferation of eBusiness initiatives, the need has emerged for a
common infrastructure, or "platform," that can enable large and diverse groups
of content contributors, accommodate popular web authoring tools, and integrate
to leading web application servers. An open architecture for such a platform
enables customers to leverage their existing investments in information
technology and facilitates rapid adoption of new web technologies and
standards.
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The Interwoven Solution
Interwoven provides web content management software that serves as a
platform from which its customers may develop multiple eBusiness applications.
Our software products are specifically designed to help our customers rapidly
and efficiently build, maintain and extend large web sites and eBusiness
initiatives that are essential to their businesses.
[graphic representing web software positioning (p. 32)]
A multi-layer graphical representation of web software positioning from
development to delivery. The top layer consists of four boxes. The box on the
far left reads "Customer Relationship Management." The next box to the right
reads "Electronic Commerce." The next box to the right reads "Knowledge
Management." The next box to the right reads "Global Supply Chain." The layer
immediately below the top layer reads "Web Application Servers." The next layer
down contains the Interwoven logo and reads "Deploy," "QA" and "Develop" and a
description to the left of the layer reads "Content Management." The next layer
down reads "Web Authoring Tools." The bottom layer consists of three boxes. The
box on the far left reads "Non-Technical Contributors." The next box to the
right reads "Business Contributors." The next box to the right reads "Technical
Contributors."
Our products offer customers the following primary benefits:
Accelerate eBusiness Revenue Opportunities. Our products enable customers to
migrate their businesses to the web rapidly, thereby increasing their ability
to generate more revenues and compete more effectively. Today, the volume and
complexity of web content and the number of eBusiness applications continue to
grow so rapidly that it can be difficult for businesses to meet their web site
development schedules. Our products enable customers to develop and deploy
multiple eBusiness applications simultaneously. This approach allows companies
to complete their eBusiness initiatives more rapidly. In addition, our products
allow content contributors to perform quality assurance functions on content
modifications, which significantly reduces testing time.
Reduce Cost of Web Operations. Complex web sites can consist of up to
hundreds of thousands of pages containing both static and dynamic content
supplied by departments throughout the enterprise. As a result, these sites can
be expensive to deploy and manage. Our products lower the costs of web
operations primarily by reducing the dependency on specialized web development
personnel and by improving operating efficiency through automation of workflow
processes, such as task assignment, routing, and approval. Automated workflow
processes can reduce the time required to assemble, test and validate new web
content. In addition, our products support evolving web standards and our open
architecture is compatible with third-party web authoring tools and web
application servers. As a result, businesses can productively leverage their
existing information technology infrastructure.
Create Highly Differentiated Web Sites. To attract and retain online
customers, today's leading web sites continuously enhance their users' online
experience. Businesses seek to achieve this by introducing new web
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technologies and refreshing content frequently. The open architecture of our
products facilitates rapid integration of new web technologies and simultaneous
development of multiple eBusiness applications, such as global supply chain
management, customer relationship management, knowledge management and e-
commerce applications. In addition, our products are highly
scalable, permitting the collaborative efforts of hundreds of contributors to
be coordinated as the need arises.
Improve Web Site Quality. Protecting brand and image online has become
critical for companies doing business on the Internet. Non-functioning or poor
quality sites can significantly harm a business' online brand. With TeamSite,
companies can create reliable, high-quality web sites. TeamSite enables our
customers to conduct comprehensive testing of the entire web site as it is
built, updated or extended. In addition, TeamSite promotes individual
accountability, and faster and more accurate authoring, by enabling all web
developers and content contributors to control their own portion of the quality
assurance and test process. This improves a site's overall quality. By using
sophisticated workflow processes to maintain quality control, TeamSite also
ensures that no unauthorized or unapproved content or application is deployed
to the customer's site.
The Interwoven Strategy
Our goal is to establish our software as the platform of choice for web
content management across the enterprise. To achieve this goal, we intend to
pursue the following key strategies:
Establish Position as a Leading Provider of Content Management Software
Products. We intend to establish our leadership in content management solutions
by continuing to offer comprehensive, easy-to-use software products. Our
feature-rich products address our customers' complete eBusiness life-cycle
needs as they build, maintain and extend their web sites. We intend to extend
that leadership position by introducing enhanced web content management
products that assist our customers in accelerating their eBusiness initiatives,
and aggressively increasing our sales and marketing efforts.
Become the Preferred Web Development Platform for Industry-Leading Internet
Technology Vendors. We intend to increase demand for our products among the
customers of industry-leading Internet technology vendors. We intend to do so
by providing a robust web development platform to complement their own
eBusiness production applications. Unlike existing closed-architecture, or
proprietary products, our products are designed to integrate easily with the
products of industry-leading technology providers. This is attractive to
Internet technology vendors because it expands their markets and eliminates
costly integration and customization. We intend to continue to strengthen our
existing relationships with vendors such as ATG, Bluestone, BroadVision, IBM,
InterWorld, Microsoft and Netscape. We also intend to enter into additional
relationships with other leading technology providers, including additional
reseller relationships. We believe our products can become widely adopted as a
standard web development platform across Internet technology vendors.
Expand Relationships with Systems Integrators and Internet Professional
Services Firms. We have begun establishing relationships with leading systems
integrators, such as Andersen Consulting and KPMG, and Internet professional
services firms, such as USWeb/CKS and iXL. These firms provide consulting
services to assist their clients in designing and developing eBusiness
applications. Our existing relationships with the leading systems integrators
and Internet professional services firms have allowed us to expand our market
reach and increase our access to senior decision makers. These firms have
significant influence on a customer's technology selection, and their
recommendations represent significant endorsements. We intend to continue to
expand and build additional relationships with key systems integrators and
Internet professional services firms.
Extend our Technology Leadership Through Adherence to Industry
Standards. Our products integrate easily and cost-effectively with web
authoring tools and web application servers offered by other Internet
technology vendors. In addition, our products have been designed to meet the
demanding openness and scalability required of Internet software products. Our
open architecture supports web authoring tools and web application servers that
adhere to industry standards. The scalability of our products allows customers
to manage hundreds of thousands of computer files that contain web content and
enables hundreds of employees throughout the enterprise to contribute web
content. We intend to continue to invest significantly in research
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<PAGE>
and development to increase the functionality of our products while adopting
industry standards. We also intend to continue to participate actively in the
promotion of industry standards, such as XML.
Increase International Sales. As the Internet adoption rate accelerates
overseas, we believe that significant international market demand will exist
for content management solutions, especially in Europe and Asia. We intend to
devote significant resources to penetrate international markets. To that end,
we have begun expanding our overseas direct and indirect sales channels and our
international marketing presence. We have recently opened an office in the
United Kingdom, and intend to open additional offices in Europe and the Pacific
Rim during the next twelve months.
Products and Services
Our product line consists of TeamSite, our web content management product,
and OpenDeploy, our web content replication and syndication product. We
generally license our products on a per-server and per-user basis and
occasionally on an enterprise or site license basis. We also provide services,
including professional services, maintenance and support.
The following table highlights the features of our products:
Product Description Server Platforms
TeamSite 4.0 Server-based content management . Sun Solaris
application . Windows NT
. allows numerous developers and
contributors to add content to a web
site
. interoperates with leading web
authoring tools and web application
servers
. SmartContext Editing allows direct
edits to web site content through a
simple browser interface
. supports simultaneous eBusiness
application development and deployment
. offers real-time testing capability and
sophisticated workflow processes
. offers comprehensive file versioning
and whole-site versioning
- --------------------------------------------------------------------------------
TeamSite Server-based content templating . Sun Solaris
Templating application . Windows NT
. allows content contribution using
standard templates
. promotes participation from non-
technical contributors
. allows contribution through standard
web browsers
. optional software module licensed with
TeamSite
- --------------------------------------------------------------------------------
TeamSite Reporting and auditing application . Sun Solaris
Global . allows administrators to monitor system . Windows NT
Report activity
Center . delivers sophisticated reporting and
auditing functionality
. optional software module licensed with
TeamSite
- --------------------------------------------------------------------------------
OpenDeploy Content replication and distribution . Sun Solaris
3.1.2 application . Windows NT
. transfers content among multiple web . IBM AIX
servers simultaneously . Silicon
. enables automated scheduling of web Graphics IRIX
site updates
. ensures conformity of web site roll-out
. offers secure and transactional content
deployment over the Internet
- --------------------------------------------------------------------------------
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TeamSite -- Content Management
Our flagship product, TeamSite, is a software product that is designed to
develop, maintain and extend large web sites.
Web Content Management. TeamSite is designed to version, manage and
control all web content. It supports parallel, distributed content
contribution across the enterprise. TeamSite allows large numbers of
contributors across an enterprise to add web content in a carefully-managed
process. TeamSite is compatible with leading web authoring tools and web
application servers, allowing businesses to leverage existing investments
in information technology systems, content and expertise. This enables a
faster time-to-web for eBusiness initiatives. TeamSite captures and stores
the history of all modifications to the web content. These content
histories, or versions, are managed and tracked for individual web files
and for whole web sites.
Workflow. TeamSite is designed for a diverse group of users, including
non-technical and technical users, participating in building and
contributing content to the web site operations. To facilitate the
management of these web content contributors, TeamSite automates workflow
processes such as task assignment, resource scheduling, content routing,
content approval and web site release.
Web Application Development. TeamSite provides programmers with a
software development system that accommodates their choice of software
development tools. TeamSite's computer file versioning features allow
programmers to track software code modifications. Using TeamSite,
programmers can reduce the time required to build, install and test the
developed software code by working in a copy of the running web site.
The architecture of TeamSite enables businesses to implement it without
making significant changes to their existing web content or systems
architecture, resulting in rapid implementation. Additionally, TeamSite's open
architecture allows customers to use their preferred web content authoring
software, web application servers and other web-based technologies. TeamSite
currently operates on Sun Solaris and Microsoft Windows NT operating systems.
TeamSite was first shipped in May 1997. We first shipped the current version of
TeamSite, TeamSite 4.0, in October 1999.
We also license optional software modules with TeamSite that extend its
functionality. TeamSite Templating allows web content to be contributed using
customer-defined templates, thereby eliminating the need for contributors to be
familiar with HTML or client-side applications. TeamSite Global Report Center
enables TeamSite administrators to generate reports on web operations activity.
OpenDeploy -- Content Replication and Syndication
Our OpenDeploy software product transfers web content from development to
production web servers. OpenDeploy allows users automatically and precisely to
distribute the same web content to numerous servers that can be located in one
or multiple sites. This "synchronizes" web content so that regardless of which
server your request for a web page reaches, you view the same content. By
automating this process, businesses can maximize the availability of their web
sites and minimize the time required for users to access content offered by
those sites. Customers using OpenDeploy can also automate the scheduled
deployment of content. We believe that OpenDeploy provides the most effective
method for distribution and integration of dynamic content across web sites.
OpenDeploy is typically licensed with TeamSite by our customers, but it may
be used on a stand-alone basis. OpenDeploy encrypts content for secure transfer
over TCP/IP. The version of OpenDeploy shipped within the United States uses
128-bit SSL encryption. Due to U.S. export regulations, the international
version does not utilize encryption. OpenDeploy operates on Sun Solaris,
Microsoft Windows NT, IBM AIX and Silicon Graphics IRIX operating systems. We
first shipped OpenDeploy in January 1998. The current version of OpenDeploy
3.1.2, was first shipped in November 1999.
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Interwoven Services
Our services organization consists of 60 professional employees who utilize
a comprehensive methodology to deliver our web content management products to
our customers. These services professionals may configure each solution they
deliver to meet the specific needs of the customer. We sell our services in
conjunction with licenses of our software products. These services include:
.needs analysis and web operations strategy;
.software installation and configuration support;
.project management;
.workflow mapping;
.content and web site release management; and
.education and training.
In addition to professional services, we offer various levels of product
maintenance to our customers. Maintenance services are typically subject to an
annual, renewable contract and are typically priced as a percentage of product
license fees. Customers under maintenance contracts receive technical product
support and product upgrades as they are released throughout the life of the
maintenance contracts.
Technology
We believe that our technology offers our customers and partners a highly-
scalable web content management solution that is implemented through an open
architecture that incorporates widely accepted Internet industry standards and
supports a wide variety of web-based software applications. Our products are
specifically designed for the web. Our customers typically use our technology
as the platform to manage their enterprise-wide web content operations.
Content Management Process. The following graph illustrates how TeamSite
manages content:
[flow diagram representing web workflow process (p. 36)]
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Collaboration Through Work Areas, Staging Areas and Editions. TeamSite
provides a virtual work area for each contributor. A virtual work area is a
local, desktop web site representation that appears to a contributor as a
complete, fully-functioning web site. This provides web developers and
contributors the ability to see changes instantaneously in the development
environment as they would appear in the actual production site. This approach
improves quality by promoting individual accountability, allowing web
developers to discover costly bugs and helping web contributors prevent
deployment of inaccurate content to the production site. Users submit revised
content from work areas to a common staging area, a pre-production version of
the web site which consolidates web site changes. After the consolidated
changes in the staging area are approved, the next edition of the production
site can be authorized and deployed. This content management process makes
site-level rollbacks, site recovery and site audits possible.
Content Versioning. TeamSite captures the history of modifications to web
content within each contributors' work area as well as the content within the
common staging area. Our comprehensive content versioning technology allows
customers to record and manage all web content modifications and capture
complete histories of all web files. TeamSite Global Report can then be used to
audit and report on historical changes made to a company's web files and site.
Whole-Site Versioning. An extension of our techniques for content versioning
allows TeamSite to capture editions of the entire web site. As the content for
an edition of an entire web site is approved, a full version of this site can
be captured and recorded providing a complete history of whole site editions.
This provides customers with an effective way to review and roll back to
previous editions of their web sites as necessary for audit, disaster recovery
and compliance requirements.
Concurrent Development. TeamSite supports multiple contributors working on a
single project, and multiple teams working on many projects simultaneously, by
utilizing a technique we refer to as branching. A development branch typically
consists of many work areas connected to one staging area. Branches, for
example, might represent a company's intranet and extranet sites. When
required, the content within these independent branches can be synchronized.
Templating
Our TeamSite Templating module enables non-technical content contributors to
add content through customer-specific style templates, allowing a preferred
look and feel to be leveraged where desired.
Product Features
Open Architecture. Our architecture incorporates widely accepted Internet
industry standards and supports a wide variety of web-based software
applications to integrate into our customers' heterogeneous environments. As a
result, TeamSite also integrates with commercially available content web
authoring tools and web application servers that adhere to industry standards.
This allows our customers' content contributors to use their favorite web
authoring software. For example, a graphics designer may use Adobe Photoshop, a
layout expert may use Macromedia Dreamweaver, and a non-technical contributor
may use Microsoft Office 2000, to add content to a site. In addition,
TeamSite's browser interface has been developed primarily in Java and
JavaScript.
Project Management and Workflow. TeamSite allows customers to manage web
development tasks through automated workflow processes, such as task
assignment, resource scheduling, routing and approval. This enables TeamSite
users to build, enforce and automate the business processes necessary to
maintain high-quality web sites.
Ease of Use. Our SmartContext Editing feature provides non-technical users
with a simple and efficient interface for contributing content as they browse
through the web site. With SmartContext Editing, non-technical contributors are
only required to be familiar with a web browser. For web sites with many
content
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<PAGE>
contributors, TeamSite offers an easy to use, sophisticated technique for
tracking multiple content changes and merging them into a single file.
Deployment and Content Syndication. OpenDeploy allows customers to deploy
content to numerous web sites through a single transaction to ensure consistent
site roll-outs. In addition, it can be used to deploy and run application
programs automatically as well as to replicate content from relational
databases. OpenDeploy can also be used in an encrypted mode for the secure
deployment of content over the Internet.
Scalability, Performance and Availability
Scalability and Performance. TeamSite uses a multi-threaded approach to
promote faster server performance through parallel software code execution. It
also uses C++ and object-oriented programming to promote scalability and
performance. In addition, OpenDeploy can distribute content to a single or to
multiple production web servers simultaneously. This content replication
functionality meets the requirements for the most demanding web sites that are
often located on geographically dispersed servers.
Availability. Our design also promotes reliability and availability by
allowing customers to employ their normal data backup and recovery tools. In
addition, critical data is duplicated, providing the necessary redundancy for
data recovery to minimize the potential for data loss.
Industry Standards
Open to All Files, Tools and Applications. Unlike proprietary, closed
implementations, our products have been developed to accommodate industry
leading Internet technologies, such as XML and Java, and other evolving
industry standards. The TeamSite server presents its content through popular
file management systems such as Unix Network File System and Microsoft Windows
Network File System.
eXtensible Markup Language. XML provides customers the ability to integrate
new applications and data with other XML-compliant technologies and legacy
applications. Together with companies such as Microsoft and IBM, we are a
sponsoring member of OASIS, an industry association promoting XML standards.
Our products use and support XML, and promote XML for data and content
exchange.
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Customers
Our products and services are marketed and sold to a diverse group of
customers operating in a broad range of industries. Our customers include both
established companies migrating their operations online and new companies
formed specifically to deliver products and services over the Internet. These
customers typically consider the web and their web operations to be critical
to their future success.
As of December 31, 1999, 175 companies had licensed our products. In 1998,
Cisco Systems accounted for 13% of our total revenues. The following table is
a representative list of our customers. Each of these customers had purchased
more than $50,000 in licenses and services from us. In August 1999 we entered
into an enterprise license agreement with General Electric.
<TABLE>
<CAPTION>
Technology Consulting Services Financial Services
---------- ------------------- ------------------
<S> <C> <C>
AIM Technology American Management Systems ABN Amro
AltaVista Business Net On-line AG Edwards
Ascend/Lucent Information AON Service
Canon Computer Systems Cenquest FleetBoston
Cisco Systems Dahlin, Smith & White BancTec
Consensus DynaMind Barclays Global
Documentum Hewitt Associates Block Financial
Doublebill.com iXL Credit Suisse
Electronic Arts MacLaren McCan First Boston
Hitachi Opus 360 Charles Schwab
Honeywell International Origin International Channel Point
How 2 HQ Single Source IT Edward Jones & Co
iNextv Targetbase E*TRADE
Intraware USWeb/CKS Fidelity Investment
LookSmart First American Financial
MicroAge Retail Ford Motor Credit
NCR ------ Frank Russell
NTT Data Asimba John Hancock
Network Associates Asset Depot.com Minnesota Life
Nortel Networks Best Buy Sun Bank
Novell Birthday Express.com
PMC Sierra Bizbuyer Health
Storagetek Brandwise.com ------
Sun Microsystems BuyerZone.com atheart.com
TechRepublic eBay Baxter Healthcare
Tivoli eBookers.com Blue Cross California
Xerox Gap Empire Blue Cross and Blue Shield
Yahoo!/GeoCities Gazoontite.com ePatients.com
Learning Curve International Healthstream
Telecommunications/Utilities Lowes Kaiser
---------------------------- National Automotive PacificCare
Alltel Parts Association Principal Life Insurance
AT&T/TCI Paper Exchange
Azurix Petopia Media/Entertainment
BellSouth Petstore.com -------------------
Interpath PlanetRx.com Ancestry.com
Pennyslvania Power & Light Royal Caribbean Cruises Ask Jeeves
Salt River Project Service Master ChipCenter
Sempra Energy Shoplink Clubmom
Telia SmallOffice.com CondeNet
Tesco
VitaminShoppe.com
Walgreens
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Media/Entertainment Industrial/Transportation Government/Professional
------------------- ------------------------- -----------------------
<S> <C> <C>
Discovery Online American Airlines American Bar Association
Earthweb Boeing Federal Bureau of Prisons
Educational Testing Service Carlson Companies U.S. Department of Justice
Egreetings Clorox U.S. Department of Education
HearMe.com FedEx U.S. Postal Service
Hearst New Media General Electric
Hungry Minds Gordon Food Services
iConnect.com Phoenix Group
Lawloop.com United Airlines
Los Angeles Times Whirlpool
Loquesa.com W.W. Grainger
Mars Music.com Yellow Services
Monster.com
MTVN-Online
myPlay
National Public
Radio/Minnesota
Public Radio
Netflicks.com
PhotoDisc
Pure Entertainment
Quokka Sports
SmartAge
Sega
Tavolo
Viacom/Nickelodeon
whynotu.com
</TABLE>
Technology Vendors and Service Providers
Technology Vendors
To ensure that our products are well integrated with related web
technologies, we work with vendors of web authoring tools and web application
servers. Web authoring tools, such as Macromedia's Dreamweaver, Microsoft's
Office 2000 and Adobe's Photoshop, provide the content that we manage. Web
application servers, such as Akamai's FreeFlow, ATG's Dynamo, Bluestone's
Sapphire/Web, BroadVision's One-to-One Commerce, IBM's Net.Commerce,
Interworld's Commerce Exchange, Intershop's efinity, Microsoft's SiteServer and
net.Genesis' net.Analysis, distribute the content managed by our software over
the Internet. We have developed specific product interfaces for some of these
companies, such as software and service modules for BroadVision and ATG, and
some companies refer customers to us or resell our products. BroadVision and
Bluestone, for example, resell our products.
Service Providers
We work with leading systems integrators, including Andersen Consulting,
Cambridge Technology Partners, Computer Sciences Corporation, EDS, Ernst &
Young and KPMG, and Internet professional services firms, including Agency.com,
AnswerThink, iXL and USWeb/CKS. Our prospective customers frequently retain the
services of these firms for the delivery and implementation of eBusiness
applications, and these firms may recommend a content management solution as
part of the eBusiness application they deliver. We intend to devote significant
resources to develop these relationships further.
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We believe that these relationships with these entities are essential as we
continue to seek to integrate our products with current and future web
technologies and deploy and implement our solution at customer sites. Our
relationships with technology providers and service providers are not binding,
however, and can be terminated by these providers at any time.
Sales and Marketing
To date, we have sold our products and services primarily through our direct
sales force in North America and Europe. As of December 31, 1999, we had 67
professionals in our direct sales force, of which 63 were located in the United
States and 4 were in Europe. We intend to increase the size of our direct sales
force and establish additional sales offices domestically and internationally.
In May 1999, we opened our first international sales office in the United
Kingdom to support the management of direct and indirect sales channels in
Europe.
We are also aggressively developing our indirect sales channel by expanding
our relationships with leading Internet technology vendors, Internet
professional services firms and systems integrators that recommend and, when
appropriate, resell our products. For example, BroadVision and Bluestone
currently resell our products.
We believe that demand is increasing for content management solutions such
as those we sell. We may not be able to expand our sales and marketing staff,
either domestically or internationally, to take advantage of any increase in
demand for those solutions. Our failure to expand our sales and marketing
organization or other distribution channels could materially adversely affect
our business. See "Risk Factors--We must attract and retain qualified
personnel, which is particularly difficult for us because we compete with other
Internet-related software companies and are located in the San Francisco Bay
area where competition for personnel is extremely intense."
Research and Development
We invest significantly in research and development to enhance our current
products, and develop new products. Our research and development expenses were
$884,000 in 1997, $1.8 million in 1998 and $2.9 million for the nine months
ended September 30, 1999. We expect that we will increase our product
development expenditures substantially in the future. As of December 31, 1999,
36 employees were engaged in research and development activities and we plan to
continue to hire additional engineers to further our research and development
activities. Our business could be harmed if we were not able to hire and retain
the required number of engineers. See "Risk Factors--We must attract and retain
qualified personnel, which is particularly difficult for us because we compete
with other Internet-related software companies and are located in the San
Francisco Bay area where competition for personnel is extremely intense."
We may fail to complete our product development efforts within our
anticipated schedules, and even if completed, the products developed may not
have the features necessary to make them successful in the marketplace. Future
delays or problems in the development or marketing of product enhancements or
new products could harm our business. See "Risk Factors--Difficulties in
introducing new products and upgrades in a timely manner will make market
acceptance of our products less likely."
Competition
The market for content management solutions is rapidly emerging and is
characterized by intense competition. We expect existing competition and
competition from new market entrants to increase dramatically. A growing number
of companies are vying to provide web content management solutions. In this
market, new products are frequently introduced and existing products are often
enhanced. In addition, new companies, or alliances among existing companies,
may be formed that may rapidly achieve a significant market position.
41
<PAGE>
Potential customers may have developed in-house solutions which might make
it more difficult for us to sell products to them. We compete with third-party
content management solution providers, primarily Vignette, and, to a lesser
extent, with workgroup solutions, and content publishing application providers.
We may face increased competition from these providers in the future. Other
potential competitors include client/server software vendors which are
developing or extending existing products which address our market. In
addition, although we currently partner with a number of companies that provide
complementary products such as web tools, enterprise document repositories and
web servers, they may introduce competitive products in the future. Other large
software companies, such as Microsoft and IBM, may also introduce competitive
products. Many of our existing and potential competitors have greater
technical, marketing and financial resources than we do.
We believe that competitive factors in the web content management industry
include:
. the quality, scalability and reliability of software;
. functionality that enables a broad base of contributors to add and
modify web content;
. interoperability with all leading web authoring tools and web
application servers based on industry standards;
. ability to provide advanced workflow functionality;
. the ability to leverage existing information technology infrastructure;
and
. adherence to emerging industry standards, including XML.
We believe our products compete favorably on each of these factors.
Proprietary Rights and Licensing
Our success depends upon our ability to maintain the proprietary aspects of
our technology and operate without infringing the proprietary rights of others.
We rely on a combination of patent, trademark, trade secret and copyright law,
and contractual restrictions, to protect the proprietary aspects of our
technology. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. We currently
do not have any issued United States or foreign patents, but we have applied
for one U.S. patent. It is possible that a patent will not issue from our
currently pending patent application. These legal protections afford only
limited protection for our technology. Our license agreements impose
restrictions on our customers' ability to utilize our software. We also seek to
protect our intellectual property by requiring employees and consultants with
access to our proprietary information to execute confidentiality agreements
with us and by restricting access to our source code. There can be no assurance
that all employees or consultants have signed or could sign these agreements.
Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments
and enhancements to existing products are equally as important as the various
legal protections of our technology to establishing and maintaining a
technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of
our software exists, software piracy can be expected to be a persistent
problem. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringement or invalidity. However, the laws of many countries do not protect
our proprietary rights to as great an extent as do the laws of the United
States. Any resulting litigation could result in substantial costs and
diversion of resources and could seriously harm our business, operating results
and financial condition. There can be no assurance that our means of protecting
our proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to meaningfully
protect our property could seriously harm our business, operating results and
financial condition.
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<PAGE>
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by us with respect to our current or future
products. We expect that developers of web-based commerce software products
will increasingly be subject to infringement claims as the number of products
and competitors in our industry segment grows and as the functionality of
products in different segments of the software industry increasingly overlaps.
Any claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require us to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on
terms acceptable to us or at all. A successful infringement claim against us
and our inability to license the infringed technology or develop or license
technology with comparable functionality could seriously harm our business,
financial condition and operating results. See "Risk Factors--We might not be
able to protect and enforce our intellectual property rights, a loss of which
could harm our business."
Employees
As of December 31, 1999, we had a total of 205 employees, including 87 in
sales and marketing, 36 in research and development, 60 in professional
services and 22 in administration and finance. Of these employees, 200 were
located in the United States and 5 were located in the United Kingdom. None of
our employees is represented by a collective bargaining agreement, nor have we
experienced any work stoppage. We consider our relations with our employees to
be good.
Our future operating results depend in significant part on the continued
service of our key technical, sales and senior management personnel. Other than
as described in "Management--Employment and Severance Agreements," none of
these individuals is bound by an employment agreement. Our future success also
depends on our continuing ability to attract and retain highly qualified
technical, sales and senior management personnel. Competition for these
personnel is intense, and we may not be able to retain our key technical, sales
and senior management personnel or attract these personnel in the future. We
have experienced difficulty in recruiting qualified technical, sales and senior
management personnel, and we expect to experience these difficulties in the
future. If we are unable to hire and retain qualified personnel in the future,
this inability could seriously harm our business.
Facilities
Our principal office occupies approximately 40,000 square feet in Sunnyvale,
California, under a lease that expires in August 2003. In addition, we also
lease sales and service offices in the metropolitan areas of Atlanta, Boston,
Chicago, Dallas, London, Los Angeles, New York City, Seattle and Washington,
D.C. We believe that our existing facilities will be adequate for our current
needs.
Legal Proceedings
We are not a party to any material legal proceedings. We could become
involved in litigation from time to time relating to claims arising out of our
ordinary course of business.
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MANAGEMENT
Executive Officers and Directors
The following table presents information regarding our executive officers
and directors as of January 10, 2000.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Martin W. Brauns............ 40 President, Chief Executive Officer and Director
Peng T. Ong................. 36 Chairman of the Board
David M. Allen.............. 41 Vice President and Chief Financial Officer
Michael A. Backlund......... 45 Senior Vice President of Worldwide Sales and
Field Operations
Jeffrey E. Engelmann........ 38 Vice President of Product Marketing and
Technology Partnerships
Jack S. Jia................. 36 Vice President of Engineering
Jozef Ruck.................. 48 Vice President of Corporate and Channels
Marketing
John Van Siclen............. 43 Vice President of Corporate Development
Kathryn C. Gould............ 49 Director
Mark W. Saul................ 38 Director
Mark C. Thompson............ 42 Director
Ronald E.F. Codd............ 44 Director
</TABLE>
Martin W. Brauns has served as our President, Chief Executive Officer and
member of the Board of Directors since March 1998. Before joining Interwoven,
Mr. Brauns served as President and Chief Operating Officer of Sqribe
Technologies, Inc., a software company from July 1997 to November 1997. From
March 1996 to June 1997, Mr. Brauns served in a number of positions, including
most recently as Vice President of North American Sales, at Informix Software,
Inc., a software company. From 1992 to January 1996, Mr. Brauns served as Vice
President of Worldwide Sales of Adaptec Inc., a hardware and software
manufacturer. Mr. Brauns holds a Bachelor of Science in international business
and a Master of Business Administration from San Jose State University.
Peng T. Ong is our founder and Chairman of our Board of Directors. He also
served as a Vice President until January 2000. Prior to founding Interwoven,
Mr. Ong was a founder of Electric Classifieds, Inc., an Internet classifieds
company, and its Chief Architect from March 1994 to May 1995. From 1994 to
December 1995, he served as a consultant to Illustra Information Technologies,
Inc., a software company. Mr. Ong holds a Bachelor of Science in electrical
engineering from the University of Texas at Austin and a Master of Science in
computer science from the University of Illinois at Urbana-Champaign.
David M. Allen has served as our Vice President and Chief Financial Officer
since joining Interwoven in March 1999. Before joining Interwoven, Mr. Allen
served as Vice President and Chief Financial Officer of Object Systems
Integrators, Inc., a telecommunications network management company, from July
1996 to March 1999. From 1985 to July 1996, he served in a number of positions,
including most recently as Vice President and Chief Financial Officer, at
Telecommunications Techniques Corporation, a communications test equipment
manufacturing company. Mr. Allen holds a Bachelor of Science in accounting from
the University of Maryland.
Michael A. Backlund has served as our Senior Vice President of Worldwide
Sales and Field Operations since October 1999. From May 1998 to October 1999,
he served as our Vice President of Worldwide Sales. From January 1997 to May
1998, Mr. Backlund served in a number of positions at Computer Associates
International, a software company, including most recently as Vice President of
Divisional Sales. Prior to joining Interwoven, he was a founder of CMS
Communications, Inc., a telecommunications equipment company, and served in a
number of capacities from August 1986 to December 1996, including most recently
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<PAGE>
as Vice President of Sales and Marketing. Mr. Backlund holds a Bachelor of Arts
and a Master of Arts in economics from the University of Southern California.
Jeffrey E. Engelmann has served as our Vice President of Product Marketing
and Technology Partnerships since January 2000. From January 1999 through
December 1999, he served as our Vice President of Business Development. Before
joining Interwoven in January 1999, Mr. Engelmann served as Executive
Operations Officer of the Internet division of IBM. From 1991 to December 1997,
he served in a number of development, consulting and sales positions within
IBM, including most recently as Business Unit Executive of eBusiness Solution
Sales. Mr. Engelmann holds a Bachelor of Science in chemical engineering and an
Bachelor of Arts in computer science from the University of Wisconsin at
Madison.
Jack S. Jia has served in a variety of positions, including most recently as
our Vice President of Engineering, since joining Interwoven in January 1997.
Prior to joining Interwoven, Mr. Jia was a founder of V-Max America, Inc., a
computer distribution company, and served as the Chief Executive Officer from
June 1993 to October 1998. From May 1995 to January 1997, he served as a
Project Manager at Silicon Graphics, Inc., a computer systems company, and from
January 1993 to May 1995, he served in a number of senior engineering positions
at Sun Microsystems, Inc., a computer systems company. Mr. Jia holds a Bachelor
of Science in electrical engineering and a Master of Science in computer
science from the Northern Jiao-Tong University, Beijing, a Master of Science in
electrical engineering from Polytechnic University of New York, and a Master of
Business Administration from Santa Clara University.
Jozef Ruck has served as our Vice President of Corporate and Channels
Marketing since January 2000. From March 1999 through December 1999, he served
as our Vice President of Marketing. From April 1997 to April 1999, Mr. Ruck
served in a number of positions at Genesys Telecommunications Laboratories, a
call center software company, including most recently as Vice President of
Customer Marketing. From September 1994 to March 1997, he served in a number of
positions, including most recently as Western Region Sales Director, at Network
Appliance, Inc., a data storage company. Mr. Ruck holds a Bachelor of Science
in mechanical engineering from Oregon State University and a Master of Business
Administration from Santa Clara University.
John Van Siclen has served as our Vice President of Corporate Development
since joining Interwoven in December 1999. Before he joined Interwoven, Mr. Van
Siclen served as President and Chief Executive Officer of Perspecta, Inc., a
start-up Internet software company, from February 1997 to November 1999.
Perspecta was acquired by Excite@Home in October 1999. From February 1996 to
February 1997, Mr. Van Siclen served as Vice President, Alternate Channels at
Informix Software, Inc., a database software company. From 1990 through January
1996, Mr. Van Siclen held various sales and marketing management positions,
including, most recently, Vice President of Worldwide Sales and Marketing at
NetFrame Systems, a network systems company. Mr. Van Siclen holds a Bachelor of
Arts in history from Princeton University.
Kathryn C. Gould has been one of our directors since March 1998. She is a
founder of Foundation Capital, a venture capital firm, and has been a managing
member since December 1995. Since 1989, Ms. Gould has been a general partner of
Merrill, Pickard, Anderson & Eyre, a venture capital firm. Ms. Gould holds a
Bachelor of Science in physics from the University of Toronto and a Master of
Business Administration from the University of Chicago.
Mark W. Saul has been one of our directors since July 1997. Since September
1999, Mr. Saul has served as a member of Foundation Capital, a venture capital
firm. From June 1996 to September 1999, Mr. Saul served as President and Chief
Executive Officer and Chairman of the Board of Acuity Corporation, a web-based
customer interaction solutions company. From May 1995 to May 1996, Mr. Saul was
Vice President of Marketing for Network Appliance, Inc. From March 1994 to May
1995, he served as Vice President of World Wide Field Operations of Minerva
Systems, Inc., a video technology company. Mr. Saul holds a Bachelor of Arts in
history and a Bachelor of Science in engineering from Stanford University and a
Master of Business Administration from the Harvard Business School.
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<PAGE>
Mark C. Thompson has been one of our directors since July 1999. Since 1988,
Mr. Thompson has served in a number of positions with Charles Schwab since
1988, a financial services center, including most recently Senior Vice
President and Executive Producer of Schwab.com. Mr. Thompson holds a Bachelor
of Arts in international relations, and a Master of Arts in new media from
Stanford University.
Ronald E.F. Codd has been one of our directors since July 1999. Mr. Codd has
served as President, Chief Executive Officer and a director of Momentum
Business Applications, Inc., a publicly held software company, since January
1999. From 1991 to December 1998, he served as Senior Vice President, Finance
and Administration, Chief Financial Officer and Secretary of PeopleSoft, Inc.,
an enterprise software developer. Mr. Codd also serves on the board of
directors of Adept Technology, Inc., a robotics manufacturer and Intraware,
Inc., a provider of business-to-business e-commerce services. Mr. Codd holds a
Bachelor of Science in accounting from the University of California at Berkeley
and a Master of Management from the J.L. Kellogg Graduate School of Management
(Northwestern University).
There are no family relationships among any of our directors or officers.
Board Composition
We currently have six directors. Our bylaws state that our board of
directors is divided into three classes: Class I, the term for which will
expire at the annual meeting of stockholders to be held in 2000, Class II, the
term for which will expire at the annual meeting of stockholders to be held in
2001, and Class III, the term for which will expire at the annual meeting of
stockholders to be held in 2002. At each annual meeting of stockholders after
the initial classification, the successors to directors whose terms have
expired will be elected to serve from the time of election and qualification
until the third annual meeting following election. The Class I directors are
Messrs. Brauns and Saul; the Class II directors are Mr. Peng and Ms. Gould; and
the Class III directors are Messrs. Thompson and Codd.
In addition, our bylaws provide that the authorized number of directors may
be changed only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the total number of directors.
This classification of the board of directors may have the effect of
delaying or preventing a change in control. See "Description of Capital Stock--
Anti-Takeover Provisions."
Board Committees
Our board of directors has a compensation committee and an audit committee.
Compensation Committee. The current members of our compensation committee
are Mr. Saul and Ms. Gould. The compensation committee reviews and makes
recommendations to our board concerning salaries and incentive compensation for
our officers and employees. The compensation committee also administers our
stock plans.
Audit Committee. The current members of our audit committee are Messrs. Codd
and Thompson. Our audit committee reviews and monitors our financial statements
and accounting practices, makes recommendations to our board regarding the
selection of independent auditors and reviews the results and scope of the
audit and other services provided by our independent auditors.
Compensation Committee Interlocks and Insider Participation
Before July 1999, the compensation committee consisted of Mr. Brauns, Ms.
Gould and Eileen Richardson, a former director. No compensation decisions were
made by this committee before our initial
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<PAGE>
public offering in October 1999; rather, all compensation decisions were made
by the full board of directors. Since July 1999, our compensation committee has
consisted of Mr. Saul and Ms. Gould, both of whom are "non-employee directors"
under federal securities laws and "outside directors" under federal tax laws.
No interlocking relationship exists between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has an interlocking relationship existed in the past.
Preferred Stock Financings. Entities associated with Foundation Capital
purchased 2,480,419 shares of Series C Preferred Stock at $1.6186 per share in
March 1998, 613,896 shares of Series D Preferred Stock at $2.80668 per share in
October 1998 and 146,666 shares of Series E Preferred Stock at $8.49 per share
in June 1999. Ms. Gould is a member of Foundation Capital and may be deemed to
own beneficially the shares held by entities associated with Foundation
Capital. Mr. Saul is a member of Foundation Capital but does not own
beneficially the shares held by entities associated with Foundation Capital.
Loan to Martin W. Brauns. In March 1998, we loaned $240,000 to Mr. Brauns,
our President and Chief Executive Officer, secured by a promissory note and
stock pledge agreement, in connection with his purchase of 1,333,333 shares of
our common stock. The note accrued interest at a rate of 6% per year and has
been paid in full.
Director Compensation
Our directors receive no cash compensation for their services as directors
but are reimbursed for their reasonable expenses in attending board and board
committee meetings.
Each eligible director who is not our employee will be granted an option to
purchase 20,000 shares of common stock under our 1999 Equity Incentive Plan at
the time the director first joins our board. Immediately following each annual
meeting of our stockholders, each eligible director will automatically be
granted an additional option to purchase 10,000 shares under the plan if the
director has served continuously as a member of the board for at least one
year. Mr. Codd and Mr. Thompson were each granted an option to purchase 20,000
shares of Common Stock under our 1998 Stock Option Plan in July 1999. Ms. Gould
and Mr. Saul were each granted an option to purchase 10,000 shares of Common
Stock under the 1999 Equity Incentive Plan in October 1999. These options have
10-year terms and terminate three months following the date the director ceases
to be one of our directors or consultants or 12 months following that date if
the termination is due to death or disability. All options granted to outside
directors under the plan are fully vested and immediately exercisable as of the
date of grant.
Executive Compensation
The following table presents information on compensation for 1998 and 1999
paid to or accrued by our chief executive officer and each of our four other
most highly compensated executive officers whose salary and bonus for 1999 was
more than $100,000. The restricted stock value is calculated based upon a
purchase price of $0.18 per share for Mr. Brauns and a purchase price of $0.39
per share for Mr. Ruck, and assuming that the estimated fair market value on
the date of grant is equal to $17.00 per share, which was the initial public
offering price of a share of our common stock on October 8, 1999. On December
31, 1999, Mr. Brauns held 1,333,333 shares of our common stock and Mr. Ruck
held 246,666 shares of our common stock pursuant to restricted stock awards and
subject to our right to repurchase these shares upon termination of employment.
Our right to repurchase Mr. Brauns' shares expires ratably over a 48-month
period that began in March 1998. Our right to repurchase Mr. Ruck's shares
expires for 53,333 shares on March 15, 2000 and for the remaining shares
ratably each month over 36 months. If declared by the board, dividends will be
paid on these restricted
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<PAGE>
stock awards. At December 31, 1999, the value of the restricted stock awards
was $161,926,626 for Mr. Brauns and $29,904,552 for Mr. Ruck, based on the
closing price per share of our common stock of $121.63 on that date.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------------------ ----------------------
Other Securities
Name and Principal Annual Restricted Underlying
Positions Year Salary Bonus Compensation Stock Award Options
- ------------------ ---- -------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Martin W. Brauns....... 1999 $250,000 $100,000 $-- $ -- 86,103
President and Chief 1998 206,119 100,000 320 22,426,661 --
Executive Officer
Peng T. Ong............ 1999 135,000 108,000 840 -- --
Chairman 1998 114,315 125,000 -- -- --
Michael A. Backlund.... 1999 145,000 155,000 -- -- 93,332
Senior Vice President 1998 80,826 65,450 -- -- 156,666
of Worldwide
Sales and Field
Operations
Jack S. Jia............ 1999 115,000 92,000 840 -- 36,666
Vice President of 1998 104,988 55,000 960 -- 96,666
Engineering
Jozef Ruck............. 1999 115,606 60,000 -- 4,097,122 --
Vice President of 1998 -- -- -- --
Corporate
and Channels Marketing
</TABLE>
Option Grants in 1999
The following table presents the grants of stock options during 1999 under
our 1996 Stock Option Plan and 1998 Stock Option Plan to each of the persons
listed in the Summary Compensation Table.
All options granted under the 1996 plan and 1998 plan are immediately
exercisable and are either incentive stock options or nonqualified stock
options. We have a right to repurchase the shares issued upon exercise of these
options at the original purchase price if they are unvested at the time the
grantee terminates employment with us. This repurchase right generally lapses
as to 25% of the shares on the first anniversary of the date of grant and the
remainder expire ratably over a 36-month period thereafter. We have also
granted nonqualified stock options that do not contain a repurchase right or
contain repurchase terms that are negotiated between the optionee and us.
Options expire 10 years from the first date of employment. Options were granted
at an exercise price equal to the fair market value of our common stock, as
determined by our board, on the date of grant. In 1999, we granted to our
employees and consultants options to purchase a total of 2,522,393 shares of
our common stock.
The 5% and 10% assumed annual rates of stock price appreciation are required
by the rules of the Securities and Exchange Commission and do not represent our
estimate or projection of future common stock prices. The potential realizable
values at 0%, 5% and 10% appreciation are calculated by assuming that the value
of the shares appreciates at the indicated rate for the entire term of the
options and that the option is exercised at the exercise price and sold on the
last day of its term at the appreciated price. For options granted before our
initial public offering in October 1999, we assumed that the fair market value
on the date of grant was $17.00 per share, which was the initial public
offering price.
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<PAGE>
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Expiration --------------------------------
Name Granted in 1999 Per Share Date 0% 5% 10%
- ---- ---------- ------------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Martin W. Brauns........ 86,103 3.4% $0.39 3/18/09 $1,430,171 $2,350,716 $3,763,013
Peng T. Ong............. -- -- -- -- -- -- --
Michael A. Backlund..... 66,666 2.7 0.39 1/28/09 1,107,322 1,820,062 2,913,546
13,333 0.5 7.64 7/22/09 124,797 267,343 486,036
13,333 0.5 14.00 10/06/09 39,999 182,545 401,238
Jack S. Jia............. 16,666 0.7 0.39 1/28/09 276,822 455,002 728,365
20,000 0.8 7.64 7/22/09 187,200 401,024 729,072
Jozef Ruck.............. -- -- -- -- -- -- --
</TABLE>
Aggregate Option Exercises in 1999 and Option Values at December 31, 1999
The following table presents the number of shares acquired and the value
realized upon exercise of stock options during 1999 and the number of shares of
common stock subject to "exercisable" and "unexercisable" stock options held as
of December 31, 1999 by each of the persons listed in the Summary Compensation
Table. Also presented are values of "in-the-money" options, which represent the
positive difference between the exercise price of each outstanding stock option
and the closing price of our common stock on December 31, 1999, which was
$121.63. Each of these options was exercisable immediately upon grant, subject
to our right to repurchase the option shares at the exercise price upon
termination of the optionee's employment. The repurchase right generally
expires as to 25% of the shares on the first anniversary of the date of grant
and the remainder expires ratably over a 36-month period thereafter. For
options exercised before our initial public offering in October 1999, the
amounts shown under the column "Value Realized" are based on the initial public
offering price of $17.00 per share, net of the exercise price.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised In-the-Money Options at
Shares Options at December 31, 1999 December 31, 1999
Acquired on Value ------------------------------- -------------------------
Name Exercise Realized Exercisable(1) Unexercisable(1) Exercisable Unexercisable
- ---- ----------- ----------- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin W. Brauns........ 86,103 $ 1,430,171 -- 722,221 $ -- $ 87,840,129
Peng T. Ong............. -- -- -- -- -- --
Michael A. Backlund..... 66,666 1,107,322 -- 187,984 -- 22,863,554
Jack S. Jia............. 96,666 1,471,422 -- 116,317 -- 14,147,055
Jozef Ruck.............. -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Options granted under our stock option plans are generally exercisable
immediately but the shares acquired upon exercise are subject to lapsing
rights of repurchase at the exercise price. The heading "exercisable"
refers to unexercised options to purchase shares as to which our right of
repurchase has lapsed. The heading "unexercisable" refers to shares that we
still have the right to repurchase upon termination of the optionee's
employment.
Employee Benefit Plans
1996 Stock Option Plan. As of December 31, 1999, options to purchase 22,332
shares of common stock were outstanding under the 1996 Stock Option Plan and
options to purchase 610,994 shares had been exercised, but remain subject to
our repurchase right. No additional options may be granted under this plan.
Options granted under the stock option plan are subject to terms substantially
similar to those described below with respect to options granted under the 1999
Equity Incentive Plan.
1998 Stock Option Plan. As of December 31, 1999, options to purchase
1,055,189 shares of common stock were outstanding under the 1998 Stock Option
Plan and options to purchase 1,383,726 shares had been
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<PAGE>
exercised, but remain subject to our repurchase right. No additional options
may be granted under this plan. Options granted under the stock option plan are
subject to terms substantially similar to those described below with respect to
options granted under the 1999 Equity Incentive Plan.
1999 Equity Incentive Plan. On July 22, 1999, the board adopted the 1999
Equity Incentive Plan and reserved 2,900,000 shares of common stock to be
issued under this plan. As of December 31, 1999, options to purchase 466,001
shares of common stock were outstanding under the 1999 Equity Incentive Plan,
options to purchase 2,433,999 shares remained available for issuance and no
options had been exercised. In addition, shares under the 1996 Stock Option
Plan and the 1998 Stock Option Plan not issued or subject to outstanding grants
on the effective date of the 1999 Equity Incentive Plan and any shares issued
under these plans that are forfeited or repurchased by us or that are issuable
upon exercise of options that expire or become unexercisable for any reason
without having been exercised in full will be available for grant and issuance
under the equity incentive plan. As a result these provisions, a total of
146,403 shares from the 1998 Stock Option Plan were available for issuance
under the 1999 Equity Incentive Plan as of December 31, 1999. Shares will again
be available for grant and issuance under the equity incentive plan that:
. are subject to issuance upon exercise of an option granted under the
equity incentive plan that cease to be subject to the option for any
reason other than exercise of the option;
. have been issued upon the exercise of an option granted under the equity
incentive plan that are subsequently forfeited or repurchased by us at
the original purchase price;
. are subject to an award granted pursuant to a restricted stock purchase
agreement under the equity incentive plan that are subsequently
forfeited or repurchased by us at the original issue price; or
. are subject to stock bonuses granted under the equity incentive plan
that terminates without shares being issued.
This plan became effective in October 1999 and will terminate on July 21,
2009, unless it is terminated earlier by our board. The plan authorizes the
award of options, restricted stock awards and stock bonuses. No person is
eligible to receive more than 1,000,000 shares in any calendar year under the
plan other than a new employee who is eligible to receive no more than
1,500,000 shares in the calendar year in which the employee commences
employment.
The plan is administered by our compensation committee, all of the members
of which are "non-employee directors" under applicable federal securities laws
and "outside directors" as defined under applicable federal tax laws. The
compensation committee has the authority to construe and interpret the plan,
grant awards and make all other determinations necessary or advisable for the
administration of the plan. Also, our non-employee directors are entitled to
receive automatic annual grants of fully vested options to purchase shares of
our common stock, as described under "Management--Director Compensation."
The plan provides for the grant of both incentive stock options that qualify
under Section 422 of the Internal Revenue Code and nonqualified stock options.
Incentive stock options may be granted only to our employees or employees of
our parent or subsidiary, if any. Awards other than incentive stock options may
be granted to employees, officers, directors, consultants, independent
contractors and advisors of ours or of our parent or subsidiary, if any,
provided the consultants, independent contractors and advisors render bona fide
services not in connection with the offer and sale of securities in a capital-
raising transaction. The exercise price of incentive stock options must be at
least equal to the fair market value of our common stock on the date of grant.
The exercise price of incentive stock options granted to 10% stockholders must
be at least equal to 110% of that value. The exercise price of nonqualified
stock options must be at least equal to 85% of the fair market value of our
common stock on the date of grant.
Options may be exercisable only as they vest or may be immediately
exercisable with the shares issued subject to our right of repurchase that
lapses as the shares vest. In general, options vest over a four-year period.
The maximum term of options granted under the plan is 10 years.
50
<PAGE>
Awards granted under the plan may not be transferred in any manner other
than by will or by the laws of descent and distribution. They may be exercised
during the lifetime of the optionee only by the optionee. The compensation
committee can determine otherwise and provide for these provisions in the award
agreement, but only with respect to awards that are not incentive stock
options. Options granted under the plan generally may be exercised for a period
of time after the termination of the optionee's service to us or to our parent
or subsidiary, if any. Options generally terminate immediately upon termination
of employment for cause.
The purchase price for restricted stock is determined by our compensation
committee. Stock bonuses may be issued for past services or may be awarded upon
the completion of certain services or performance goals.
If we are dissolved or liquidated or have a "change in control" transaction,
outstanding awards may be assumed or substituted by the successor corporation,
if any. In the discretion of the compensation committee the vesting of these
awards may accelerate upon one of these transactions.
1999 Employee Stock Purchase Plan. The board has adopted the 1999 Employee
Stock Purchase Plan and has reserved 300,000 shares for issuance under this
plan. This plan became effective in October 1999.
On each January 1, the aggregate number of shares reserved for issuance under
this plan will increase automatically by a number of shares equal to 1% of our
outstanding shares on December 31 of the preceding year. The aggregate number
of shares reserved for issuance under the plan may not exceed 3,000,000 shares.
The plan is administered by our compensation committee, which has the authority
to construe and interpret the plan.
Employees generally are eligible to participate in the plan if they are
employed ten days before the beginning of an offering period and they are
customarily employed by us, or our parent or any subsidiaries that we
designate, for more than 20 hours per week and more than five months in a
calendar year and are not, and would not become as a result of being granted an
option under the plan, 5% stockholders of us or our designated parent or
subsidiaries.
Under the plan, eligible employees are permitted to acquire shares of our
common stock through payroll deductions. Eligible employees may select a rate
of payroll deduction between 2% and 15% of their compensation and are subject
to maximum purchase limitations. Participation in the plan will end
automatically upon termination of employment for any reason.
Each offering period under the plan will be for two years and consist of
four six-month purchase periods. The first offering period began on October 8,
1999. Additional offering periods and purchase periods will begin on May 1 and
November 1 of each year. However, because the first offering period began on a
date other than May 1 or November 1, the length of the first offering period
will be more than two years, and the length of the first purchase period will
be more than six months.
The plan provides that, in the event of our proposed dissolution or
liquidation, each offering period that commenced prior to the closing of the
proposed event continues for the duration of the offering period, provided that
the compensation committee may fix a different date for termination of the
plan. The purchase price for our common stock purchased under the plan is 85%
of the lesser of the fair market value of our common stock on the first day of
the applicable offering period or the last day of the applicable purchase
period. The compensation committee has the power to change the duration of
offering periods without stockholder approval, if the change is announced at
least 15 days prior to the beginning of the affected offering period.
The plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. Rights granted under the plan are not
transferable by a participant other than by will or the laws of descent and
distribution.
The plan will terminate on July 21, 2009, unless it is terminated earlier
under the terms of the plan. The board has the authority to amend, terminate or
extend the term of the plan, except that no action may adversely affect any
outstanding shares previously purchased under the plan. Except for the
automatic annual increase of
51
<PAGE>
shares described above, stockholder approval is required to increase the number
of shares that may be issued or to change the terms of eligibility under the
plan. The board may make amendments to the plan as it determines to be
advisable if the financial accounting treatment for the plan is different from
the financial accounting treatment in effect on the date the plan was adopted
by the board.
401(k) Plan. We sponsor a defined contribution plan intended to qualify
under Section 401 of the Internal Revenue Code, or a 401(k) plan. All employees
are generally eligible to participate and may enter the plan as of the first
day of each calendar month. Participants may make pre-tax contributions to the
plan of up to 15% of their eligible earnings, subject to a statutorily
prescribed annual limit. Each participant is fully vested in his or her
contributions and the investment earnings. Contributions to the plan by the
participants or by us, and the income earned on these contributions, are
generally not taxable to the participants until withdrawn. Contributions by us,
if any, are generally deductible by us when made. Participant and company
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Employment and Severance Agreements
Mr. Brauns, our President and Chief Executive Officer, entered into an
employment agreement with us in February 1998. This agreement establishes Mr.
Brauns' initial annual salary of $250,000 and eligibility for benefits and
bonuses tied to our revenues. This agreement also provides for his election to
the Board of Directors as a condition of employment. This agreement continues
until it is terminated upon written notice by Mr. Brauns or by us. If his
employment is terminated by us for cause or if he voluntarily elects to
terminate his employment, we must pay his salary and other benefits through the
date of his termination. If his employment is terminated by us without cause or
if he terminates his employment under some circumstances, we must pay his
benefits through the date of his termination and his salary for up to 12
additional months after this date, unless Mr. Brauns is employed full-time by
another employer.
Under this agreement, Mr. Brauns agreed to purchase 1,333,333 shares of
common stock at an exercise price of $0.18 per share. The shares purchased by
Mr. Brauns are subject to our right to repurchase the shares upon termination
of his employment. Our repurchase right expires ratably over a 48 month period
from March 1998. Our repurchase right also expires as to all of the shares in
the event that we merge or consolidate with another entity or sell all or
substantially all of our assets.
In connection with this stock purchase, we agreed to loan Mr. Brauns the
entire purchase price. This loan has been repaid in full. See "Management--
Compensation Committee Interlocks and Insider Participation."
Mr. Ong's offer letter, dated February 29, 1996, provided for an initial
annual salary of $48,000 commencing on March 1, 1996. Mr. Ong's employment is
at will and may be terminated at any time, with or without formal cause.
Mr. Allen's offer letter, dated February 12, 1999, provides for an initial
annual salary of $140,000 commencing on March 3, 1999 and eligibility for an
incentive bonus of $35,000. The offer letter also provides for reimbursement
for relocation expenses. Mr. Allen received options to purchase 186,666 shares
of our common stock at an exercise price of $0.39 per share under the 1998
Stock Option Plan, of which options to purchase 46,667 shares vest on March 3,
2000 and the remainder will vest ratably over a 36-month period thereafter.
Half of the unvested portion of these options will vest if we sell the company.
Mr. Allen's employment is at will and may be terminated at any time, with or
without formal cause.
Mr. Backlund's offer letter, dated May 1, 1998, provides for an initial
annual salary of $135,000 commencing on May 26, 1998 and eligibility for an
incentive bonus of up to $100,000. The offer letter also provides for
reimbursement for relocation expenses. Mr. Backlund received options to
purchase 156,666 shares of our common stock at an exercise price of $0.21 per
share under the 1996 Stock Option Plan, of which options to purchase 39,166
shares vested on May 26, 1999 and the remainder will vest ratably over a 36-
month period thereafter. On January 28, 1999, Mr. Backlund received options to
purchase an additional 66,666 shares
52
<PAGE>
of our common stock at an exercise price of $0.39 per share as a result of
meeting revenue objectives in 1998 and in lieu of a portion of his cash bonus
earned in 1998. Mr. Backlund's employment is at will and may be terminated at
any time, with or without formal cause.
Mr. Engelmann's offer letter, dated December 11, 1998, provides for an
initial annual salary of $130,000 commencing on January 18, 1999 and
eligibility for an incentive bonus of up to $40,000. The offer letter also
provides for reimbursement for relocation expenses. Pursuant to the offer
letter, Mr. Engelmann purchased 183,333 shares of our common stock at an
exercise price of $0.39 per share. The shares purchased by Mr. Engelmann are
subject to our right to repurchase all of the shares of common stock upon
termination of his employment. Our right to repurchase his shares at the
original purchase price upon termination lapses with respect to 45,833 shares
on January 18, 2000, and expires ratably as to the remaining shares over a 36-
month period. The repurchase right will expire as to half of the shares of
common stock subject to repurchase at any given time if we are acquired. If we
terminate Mr. Engelmann's employment without cause, we must pay him an amount
equal to two months base salary. Pursuant to the offer letter, on January 28,
1999, Mr. Engelmann purchased an additional 86,666 shares of our common stock
at an exercise price of $0.39 per share, subject to attainment of individual
and corporate objectives, and subject to the same repurchase rights as
described above. We loaned Mr. Engelmann $105,300 pursuant to a partial
recourse secured promissory note representing the purchase price for his
shares. The note bears interest at the rate of 6% per year. The principal sum
of the note will become due and payable in eighteen equal monthly installments
beginning in October 2000. The note is due earlier in the event of our
acquisition or Mr. Engelmann's termination of employment. Mr. Engelmann's
employment is at will and may be terminated at any time, with or without formal
cause.
Mr. Jia's offer letter, dated January 6, 1997, provides for an initial
annual salary of $70,000 commencing January 27, 1997. Mr. Jia received options
to purchase 60,000 shares of our common stock at an exercise price of $0.09 per
share under the 1996 Stock Option Plan, of which options to purchase 15,000
shares vested on January 28, 1998 and the remainder will vest ratably over a 36
month period thereafter. Mr. Jia's employment is at will and may be terminated
at any time, with or without formal cause.
Mr. Ruck's offer letter, dated February 18, 1999, provides for an initial
annual salary of $140,000 commencing March 15, 1999 and eligibility for an
incentive bonus of up to $60,000. Pursuant to the offer letter, Mr. Ruck
purchased 213,333 shares of our common stock at an exercise price of $0.39 per
share. The shares purchased by Mr. Ruck are subject to our right to repurchase
all of the shares of common stock upon termination of his employment. Our right
to repurchase his shares upon termination lapses with respect to 53,333 shares
on March 15, 2000, and expires ratably as to the remaining shares over a 36-
month period. If we terminate Mr. Ruck's employment without cause, within his
first year of employment, our right to repurchase his common stock will be
equal to the shares granted less 4,444 shares for each full month of employment
for Mr. Ruck after March 15, 1999. On March 18, 1999, Mr. Ruck purchased an
additional 33,333 shares of our common stock at an exercise price of $0.39 per
share, subject to the attainment of individual and corporate objectives, and
subject to the same repurchase rights as described above. Also, pursuant to his
offer letter, we loaned Mr. Ruck $96,200 pursuant to a partial recourse secured
promissory note representing the purchase price for his shares. The note bears
interest at the rate of 6% per year. The principal sum of the note will become
due and payable in eighteen equal monthly installments beginning in October
2000. The note is due earlier in the event of our acquisition or Mr. Ruck's
termination of employment. Mr. Ruck's employment is at will and may be
terminated at any time, with or without formal cause.
Mr. Van Siclen's offer letter, dated December 17, 1999, provides for an
annual salary of $150,000 and eligibility for an incentive bonus of up to
$90,000. Mr. Van Siclen received options to purchase 70,000 shares of our
common stock at an exercise price of $121.63 per share, and an option to
purchase an additional 34,000 shares at a purchase price of $103.38 per share.
Mr. Van Siclen's offer letter also calls for 12 additional monthly grants of
options to purchase 5,000 shares at the then-current fair market value, which
Mr. Van Siclen may elect to receive in a single option grant. All such options
were or will be granted under the 1999 Equity Incentive Plan. Options to
purchase 26,000 shares will vest on the first anniversary of the grant date and
the remainder will vest ratably over the 36-month period thereafter. Mr. Van
Siclen's employment is at will and may be terminated at any time, with or
without formal cause.
53
<PAGE>
Indemnification of Directors and Executive Officers and Limitation of
Liability
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages resulting from breach
of fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
. we must indemnify our directors and executive officers to the fullest
extent permitted by Delaware law, subject to very limited exceptions;
. we may indemnify our other employees and agents to the same extent that
we indemnify our directors and executive officers, unless otherwise
required by law, our certificate of incorporation, bylaws or agreements;
and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
We have entered into indemnification agreements with each of our current
directors and executive officers to give them additional contractual assurances
regarding the scope of the indemnification provided in our certificate of
incorporation and bylaws and to provide additional procedural protections.
Presently, there is no pending litigation or proceeding involving any of our
directors, executive officers or employees for which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
We have liability insurance for our directors and officers.
54
<PAGE>
RELATED PARTY TRANSACTIONS
Other than the employment and severance agreements described in
"Management," and the transactions described below, since we were formed there
has not been nor is there currently proposed, any transaction or series of
similar transactions to which we were or will be a party:
. in which the amount involved exceeded or will exceed $60,000; and
. in which any director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
Preferred Stock Financings
In March and June 1996, we sold an aggregate of 1,199,998 shares of Series A
Preferred Stock at a purchase price of $0.30 per share. In May and June 1997,
we sold an aggregate of 2,134,548 shares of Series B Preferred Stock at a
purchase price of $1.9293 per share. In March 1998, we sold an aggregate of
4,161,082 shares of Series C Preferred Stock at a purchase price of $1.6186 per
share, and warrants to purchase 612,079 shares of Series C Preferred Stock at
an exercise price of $1.9293 per share. In October, November and December 1998,
we sold an aggregate of 2,494,142 shares of Series D Preferred Stock at a
purchase price of $2.80668 per share. In June 1999, we sold an aggregate of
2,263,136 shares of Series E Preferred Stock at a purchase price of $8.49 per
share.
Purchasers of our preferred and common stock include, among others, the
following executive officers, directors and holders of more than 5% of our
outstanding stock. All of the share numbers in the following table reflect the
conversion of each outstanding share of Series A Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock into
two-thirds of a share of common stock and the conversion of each outstanding
share of Series B Preferred Stock into 0.7022705 of a share of common stock.
<TABLE>
<CAPTION>
Shares of Preferred Stock
----------------------------------------------
Series A Series B Series C Series D Series E
-------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Stockholder
-----------
Kathryn C. Gould
Entities associated with
Foundation Capital....... -- -- 2,480,419 613,896 146,666
Entities associated with
JK&B Capital............... -- 1,310,408 650,153 485,233 132,861
Entities associated with
Draper
Fisher Jurvetson.......... 333,333 167,030 277,410 202,632 1,313
Entities associated with
Accel Partners............. -- -- 1,063,038 263,098 72,039
Peng T. Ong................. 66,666 -- -- -- --
Mark W. Saul................ 83,333 13,919 -- -- --
</TABLE>
Ms. Gould, one of our directors, is a managing member of Foundation Capital
and may be deemed to own beneficially the shares held by entities associated
with Foundation Capital. Mr. Ong disposed of his shares of Series A Preferred
Stock in 1997. Mr. Saul, one of our directors, is a member of Foundation
Capital but does not own beneficially the shares held by entities associated
with Foundation Capital.
55
<PAGE>
Warrants
On January 9, 1997, in connection with a bridge financing, we issued
warrants to purchase shares of our Series B Preferred Stock with an exercise
price of $1.92932 per share to the following executive officers, directors and
holders of more than 5% of our outstanding stock:
<TABLE>
<CAPTION>
Number of shares
Warrant holder subject to warrant Expiration date
-------------- ------------------ ---------------
<S> <C> <C>
Mark W. Saul............................. 3,412 January 9, 2002
Entities associated with Draper Fisher
Jurvetson............................... 40,950 January 9, 2002
</TABLE>
In October 1999, these warrants were exercised.
In March 1998, in connection with the Series C Preferred Stock financing, we
issued warrants to purchase shares of our Series C Preferred Stock with an
exercise price of $1.92932 per share to the following executive officers,
directors and holders of more than 5% of our outstanding stock. In October
1998, all warrants to purchase Series C Preferred Stock were exercised in
connection with the Series D Preferred Stock financing.
<TABLE>
<CAPTION>
Number of shares
Warrant holder subject to warrant
-------------- ------------------
<S> <C>
Entities associated with Foundation Capital.............. 318,075
Entities associated with Accel Partners.................. 136,317
Entities associated with JK&B Capital.................... 83,371
Entities associated with Draper Fisher Jurvetson......... 35,573
</TABLE>
Loans to Executive Officers
Jeffrey E. Engelmann. In April 1999, we loaned an aggregate of $105,300 to
Mr. Engelmann, our Vice President of Product Marketing and Technology
Partnerships, secured by two promissory notes and a stock pledge agreement, in
connection with his purchase of 270,000 shares of our common stock. In October
1999, the notes were amended to adjust the repayment schedule in the event of
an initial public offering of our common stock. The notes accrue interest at a
rate of 6% per year. Interest is payable annually. The principal sum of each
note will become due and payable in eighteen equal monthly installments
beginning in October 2000. If Mr. Engelmann breaches his obligations under the
notes we may enforce our right to payment of 25% of the principal and any
accrued interest out of any of Mr. Engelmann's assets, but may enforce our
right to payment of the balance due under the notes only out of the stock
subject to the stock pledge agreement. As of December 31, 1999, $109,723
remained outstanding under the notes.
Jozef Ruck. In April 1999, we loaned an aggregate of $96,200 to Mr. Ruck,
our Vice President of Corporate and Channels Marketing, secured by two
promissory notes and a stock pledge agreement, in connection with his purchase
of 246,666 shares of our common stock. In October 1999, the notes were amended
to adjust the repayment schedule in the event of an initial public offering of
our common stock. The notes accrue interest at a rate of 6% per year. Interest
is payable annually. The principal sum of each note will become due and payable
in eighteen equal monthly installments beginning in October 2000. If Mr. Ruck
breaches his obligations under the notes we may enforce our right to payment of
25% of the principal and any accrued interest out of any of Mr. Ruck's assets,
but may enforce our right to payment of the balance due under the notes only
out of the stock subject to the stock pledge agreement. As of December 31,
1999, $100,208 remained outstanding under the notes.
Please refer to "Management--Compensation Committee Interlocks and Insider
Participation" for a description of a loan to Mr. Brauns.
56
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents information as to the beneficial ownership of
our common stock as of December 31, 1999 and as adjusted to reflect the sale of
the common stock in this offering by:
. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
. each of our directors;
. each executive officer listed in the Summary Compensation Table;
. all executive officers and directors as a group; and
. the selling stockholders.
<TABLE>
<CAPTION>
As of December 31, 1999 After Offering
---------------------------------------------------- --------------------------
Shares
Issuable under
Shares Options or
Total Shares Subject to Warrants Percentage of Total Shares Percentage of
Beneficially Repurchase Exercisable Outstanding Shares Beneficially Outstanding
Name Owned Right within 60 days Shares Offered Owned Shares
---- ------------ ---------- -------------- ------------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kathryn C. Gould (1).... 3,250,980 -- 10,000 14.2% 324,085 2,926,895 12.2%
Foundation Capital
entities
70 Willow Road, Suite
200
Menlo Park, CA 94025
JK&B entities (2)....... 2,578,655 -- -- 11.3 465,609 2,113,046 8.8
205 North Michigan
Avenue, Suite 808
Chicago, IL 60601
Peng T. Ong (3)......... 1,933,333 -- -- 8.4 153,333 1,780,000 7.5
Ong Leong Family Trust
UDT June 29, 1999.....
Martin W. Brauns (4).... 1,419,436 808,324 -- 6.2 133,333 1,286,103 5.4
Martin and Margaret
Brauns Trust UDT
January 9, 1995
Accel Partners entities
(5).................... 1,398,175 -- -- 6.1 -- 1,398,175 5.9
428 University Avenue
Palo Alto, CA 94301
Michael A. Backland
(6).................... 249,998 161,318 26,666 1.1 25,000 224,998 *
Jozef Ruck.............. 246,666 246,666 -- 1.1 -- 246,666 1.0
Jack S. Jia (7)......... 194,333 116,317 -- * -- 194,333 *
Mark W. Saul............ 133,530 -- 10,000 * 40,062 93,468 *
Mark C. Thompson........ 20,000 -- 20,000 * 2,000 18,000 *
Ronald E. F. Codd....... 20,000 -- 20,000 * 2,000 18,000 *
All eleven directors and
executive officers as a
group (8).............. 7,904,940 1,680,609 113,332 35.0 704,813 7,200,127 30.1
Draper Fisher Jurvetson
entities (9)........... 1,022,668 -- -- 4.5 184,654 838,014 3.5
Integral Capital
entities (10).......... 751,324 -- -- 3.3 135,661 615,663 2.6
Charter Ventures
entities (11).......... 590,496 -- -- 2.6 106,621 483,875 2.0
The Chatterjee Group
entities (12).......... 537,174 -- -- 2.3 96,991 440,183 1.8
Russell Nakano.......... 420,000 2,500 -- 1.8 8,000 412,000 1.7
Steven Farber........... 204,380 -- -- * 40,000 164,380 *
Douglas and Eva Jones... 159,999 14,444 66,666 * 16,000 143,999 *
Cambridge Technology
Capital
Fund I, L.P............ 117,785 -- -- * 21,267 96,518 *
Lion Investments
Limited................ 117,785 -- -- * 50,000 67,785 *
Charter Growth entities
(13)................... 117,784 -- -- * 21,087 96,697 *
Gary Koh................ 100,000 -- -- * 15,000 85,000 *
John Lee................ 80,722 -- -- * 8,072 72,650 *
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1999 After Offering
---------------------------------------------------- -------------------------
Shares
Issuable under
Shares Options or
Total Shares Subject to Warrants Percentage of Total Shares Prcentage of
Beneficially Repurchase Exercisable Outstanding Shares Beneficially Outstanding
Name Owned Right within 60 days Shares Offered Owned Shares
---- ------------ ---------- -------------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kevin Cochrane.......... 68,666 9,500 -- * 3,867 64,799 *
Henricks Family Trust... 59,600 -- -- * 5,960 53,640 *
Comdisco, Inc........... 58,892 -- -- * 58,892 0 *
Star Bay Partners, L.P.. 58,892 -- -- * 10,633 48,259 *
Trust of Marc Carignan
and Gret Betlan........ 36,666 21,833 7,333 * 3,000 33,666 *
Jones Family Trust dated
July 15, 1985.......... 33,333 -- -- * 3,333 30,000 *
Mark Jones.............. 30,000 -- -- * 3,000 27,000 *
Douglas Mosher.......... 26,666 15,555 -- * 750 25,916 *
Robert Bracey........... 20,000 -- 13,750 * 2,000 18,000 *
Cam Collins............. 20,000 -- 13,750 * 2,000 18,000 *
32 other selling
stockholders as a
group.................. 196,963 47,330 58,981 * 57,790 139,173 *
All selling stockholders
as a group (73
individuals and
entities).............. 14,425,727 1,080,804 237,146 * 2,000,000 12,425,727 *
</TABLE>
- ---------------------
(1) Represents 2,878,855 shares held by Foundation Capital II, L.P., of which
287,885 shares are being offered, 200,077 shares held by Foundation
Capital II Entrepreneurs Fund, L.L.C., of which 20,000 shares are being
offered, and 162,048 shares held by Foundation Capital II Principals Fund,
L.L.C., of which 16,200 shares are being offered. Foundation Management
II, L.L.C. is the general partner of Foundation Capital II, L.P. James C.
Anderson, William B. Elmore, Paul G. Koontz, Kathryn Gould and Michael N.
Schuh are the managing members of Foundation Management II, L.L.C. and
share voting and investment power of the shares. The managing members of
Foundation Management II, L.L.C. disclaim beneficial ownership of the
shares, except to the extent of their direct pecuniary interest in the
shares. Foundation Management II, L.L.C. is the managing member of both
Foundation Capital II Entrepreneurs Fund, L.L.C. and Foundation Capital II
Principals Fund, L.L.C. The managing members of Foundation Management II,
L.L.C. are deemed to beneficially own the shares held by Foundation
Capital II Entrepreneurs Fund, L.L.C. and Foundation Capital II Principals
Fund, L.L.C. and have voting and investment power of the shares. The
managing members of Foundation Management II, L.L.C. disclaim beneficial
ownership of the shares, except to the extent of their direct pecuniary
interest in the shares.
(2) Represents 1,800,630 shares held by JK&B Capital, L.P., of which 325,127
shares are being offered, and 778,025 shares held by JK&B Capital II,
L.P., of which 140,482 shares are being offered. JK&B Management, L.L.C.
is the general partner of JK&B Capital, L.P. and JK&B Capital II, L.P.
David Kronfeld is the sole managing member of JK&B Management, L.L.C. Mr.
Kronfeld is deemed to own beneficially the shares held by JK&B Capital,
L.P. and JK&B Capital II, L.P. and has voting and investment power of the
shares. Mr. Kronfeld disclaims beneficial ownership of the shares, except
to the extent of his direct pecuniary interest in the shares.
(3) Represents 1,933,333 shares of common stock held of record by the Ong-
Leong Family Trust U/D/T 6/29/99, Peng Tsin Ong and Wai Ping-Leong,
trustees, who share voting and investment control.
(4) Represents 1,419,436 shares of common stock held of record by Martin W.
Brauns and Margaret R. Brauns, trustees U/D/T 1/9/95.
(5) Represents 1,097,568 shares held by Accel V L.P., 145,410 shares held by
Accel Internet/Strategic Technology Fund, L.P., 57,325 shares held by
Accel Keiretsu V L.P., 67,112 held by Accel Investors '97 L.P. and 30,760
held by Ellmore C. Patterson Partners. Accel V Associates L.L.C. is the
general partner of Accel V L.P. and has the sole voting and investment
power of the shares held by Accel V L.P. Arthur C. Paterson, ACP Family
Partnership L.P., James R. Swartz, James W. Breyer, The Breyer 1995 Trust
dated 10/4/95, Eugene D. Hill, Swartz Family Partnership L.P., Luke B.
Evnin, J. Peter Wagner, and G. Carter
58
<PAGE>
Sednaoui are the managing members of Accel V Associates L.P. and share
voting and investment power of the shares. The managing members of Accel V
Associates L.L.C. disclaim beneficial ownership of the shares, except to the
extent of their direct pecuniary interest in the shares, Accel
Internet/Strategic Technology Fund Associates L.L.C, is the general partner
of Accel Internet/Strategic Technology Fund L.P. and therefore has the sole
voting and investment power of the shares held by Accel Internet/Strategic
Technology Fund L.P. Arthur C. Paterson, ACP Family Partnership L.P., James
R. Swartz, James W. Breyer, Eugene D. Hill, Swartz Family Partnership L.P.,
Luke B. Evnin, J. Peter Wagner, and G. Carter Sednaoui are the managing
members of Accel Internet/Strategic Technology Fund L.P. and share voting
and investment power of the shares. The managing members of Accel
Internet/Strategic Technology Fund Associates L.L.C. disclaim beneficial
ownership of the shares, except to the extent of their direct pecuniary
interest in the shares. Accel Keiretsu V Associates L.L.C. is the general
partner of Accel Keiretsu V L.P. and has the sole voting and investment
power. Arthur C. Paterson, James R. Swartz, James W. Breyer, Eugene D. Hill,
Luke B. Evnin, J. Peter Wagner, and G. Carter Sednaoui are the managing
members of Accel Keiretsu V L.P. and share voting and investment power of
the shares held by Accel Keiretsu V L.P. The managing members of Accel
Keiretsu V L.L.C. disclaim beneficial ownership of the shares, except to the
extent of their direct pecuniary interest in the shares. Arthur C. Paterson,
James R. Swartz, James W. Breyer, Luke B. Evnin, J. Peter Wagner, and G.
Carter Sednaoui are the general partners of Accel Investors '97 L.P. and
share voting and investment powers of the shares held by Accel Investors '97
L.P. The general partners of Accel Investor '97 L.P. disclaim beneficial
ownership of the shares, except to the extent of their direct pecuniary
interest in the shares. Arthur C. Patterson is the sole general partner of
Ellmore C. Patterson Partners and has sole voting and investment power with
respect to the shares held by Ellmore C. Patterson Partners. Mr. Patterson
disclaims beneficial ownership of the shares except to the extent of his
direct pecuniary interest in the shares.
(6) Includes 116,666 shares of common stock held of record by the Backlund
Family Trust.
(7) Includes 1,000 shares of common stock held by family members, as to which
Mr. Jia disclaims beneficial ownership.
(8) Includes 500 shares held by a relative of one executive officer, as to
which the officer disclaims beneficial ownership.
(9) Of the shares offered, Draper Fisher Associates Fund III is offering
173,391 shares and Draper Fisher Partners, LLC is offering 11,263 shares.
(10) Of the shares offered, Integral Capital Partners IV, L.P. is offering
134,942 shares and Integral Capital Partners IV MS Side Fund, L.P. is
offering 719 shares.
(11) Of the shares offered, Charter Ventures II, L.P. is offering 81,126 shares
and Charter Ventures III LLC is offering 25,495 shares.
(12) Of the shares offered, Quantum Industrial Partners, LDC is offering 48,497
shares, S-C Phoenix Holdings, LLC is offering 32,330 shares, Winston
Partners II, LDC is offering 10,776 shares and Winston Partners II, LLC is
offering 5,388 shares.
(13) Of the shares offered, Charter Growth Capital, L.P. is offering 17,014
shares, Charter Growth Capital Co-Investment Fund, L.P. is offering 3,190
shares and CGC Investors, L.P. is offering 883 shares.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated above, to our knowledge, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options and warrants that
are currently exercisable or exercisable within 60 days of December 31, 1999
are deemed to be outstanding and to be beneficially owned by the person holding
the options or warrants for the purpose of computing the percentage ownership
of that person but are not treated as
59
<PAGE>
outstanding for the purpose of computing the percentage ownership of any other
person. Unless indicated above, the address for each listed stockholder is c/o
Interwoven, Inc., 1195 West Fremont Avenue, Suite 2000, Sunnyvale, California
94087.
The number of shares of common stock outstanding after this offering
includes shares of common stock being offered. The percentage of common stock
outstanding as of December 31, 1999 is based on 22,883,450 shares of common
stock outstanding on that date.
If the underwriters' over-allotment option is exercised in full, 17 selling
stockholders will sell a total of 450,000 shares of common stock. The following
table shows the number of shares subject to the over-allotment option for each
selling stockholder and the shares each will own beneficially after the
offering, assuming that the over-allotment option is exercised in full. If the
over-allotment option is not exercised in full, any shares sold will be
allocated proportionately among the selling stockholders listed below.
<TABLE>
<CAPTION>
Shares Shares Beneficially Owned
Subject After Option Exercise
to ------------------------------
Name Option Number Percentage
---- ------- --------------- --------------
<S> <C> <C> <C>
JK&B Capital, L.P....................... 132,741 1,922,949 8.1%
JK&B Capital II, L.P.................... 57,356 1,922,949 8.1
Draper Fisher Associates Fund III....... 70,791 762,624 3.2
Draper Fisher Partners, LLC............. 4,599 762,624 3.2
Integral Capital Partners IV, L.P....... 55,094 560,276 2.3
Integral Capital Partners IV MS Side
Fund, L.P.............................. 293 560,276 2.3
Charter Ventures II, L.P................ 33,122 440,344 1.8
Charter Ventures III, LLC............... 10,409 440,344 *
Quantum Industrial Partners, LDC........ 19,800 400,583 1.7
S-C Phoenix Holdings, LLC............... 13,200 400,583 1.7
Winston Partners II, LDC................ 4,400 400,583 1.7
Winston Partners II, LLC................ 2,200 400,583 1.7
Mark Saul............................... 24,723 68,745 *
Cambridge Technology Capital Fund I,
L.P.................................... 8,683 87,835 *
Charter Growth Capital, L.P............. 6,946 88,449 *
Charter Growth Capital Co-Investment
Fund, L.P.............................. 1,302 88,449 *
Star Bay Partners, L.P.................. 4,341 43,918 *
=======
450,000
</TABLE>
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
$0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par
value per share.
Common Stock
As of December 31, 1999, there were 22,883,450 shares of common stock
outstanding held by 239 stockholders of record. The number of stockholders does
not include persons whose stock is in nominee or "street name" accounts through
brokers.
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as our board may from time to time determine.
Voting Rights. Each common stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
No preemptive or similar rights. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of Interwoven, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the common stock
and any participating preferred stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding preferred stock and payment
of other claims of creditors. Each outstanding share of common stock is, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
Preferred Stock
We are authorized, subject to the limits imposed by Delaware law, to issue
preferred stock in one or more series, to establish from time to time the
number of shares to be included in each series, to fix the rights, preferences
and privileges of the shares of each wholly unissued series and any of its
qualifications, limitations or restrictions. The board can also increase or
decrease the number of shares of any series, but not below the number of shares
of a given series then outstanding, without any further vote or action by the
stockholders.
The issuance of preferred stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could, among other
things, have the effect of delaying, deferring or preventing a change in
control and may adversely affect the market price of our common stock and the
voting and other rights of the holders of common stock. We have no current plan
to issue any shares of preferred stock.
Warrants
As of December 31, 1999, we had outstanding the following warrants to
purchase our common stock:
<TABLE>
<CAPTION>
Total number of
shares Subject Exercise price Expiration
to Warrants per share date
--------------- -------------- ----------
<S> <C> <C>
6,552 1.93 September 2004
39,096 8.49 July 2006
</TABLE>
In October 1999, warrants to purchase 64,123 shares of common stock were
exercised.
61
<PAGE>
Registration Rights
The holders of approximately 12,360,198 shares of common stock, not
including shares of common stock issuable upon exercise of outstanding
warrants, have the right to require us to register their shares with the
Securities and Exchange Commission so that those shares may be publicly resold.
They and the holders of an additional 58,888 shares of common stock, not
including shares of common stock issuable upon exercise of outstanding
warrants, have the right to require us to include their shares in any
registration statement we file.
Right to demand registration
At any time after April 7, 2000, holders of approximately 12,360,198 shares
of our common stock, not including shares of common stock issuable upon
exercise of outstanding warrants, can request that we file a registration
statement so they can publicly sell their shares. The underwriters of any
underwritten offering will have the right to limit the number of shares to be
included in a registration statement.
Who may make a demand. At any time after April 7, 2000, any holder of shares
of common stock issued upon conversion of Series B Preferred Stock, any number
of holders who together hold an aggregate of at least 954,633 shares of common
stock issued upon conversion of Series C Preferred Stock, any number of holders
who together hold an aggregate of at least 498,829 shares of common stock
issued upon conversion of Series D Preferred Stock, any number of holders who
together hold an aggregate of at least 452,628 shares of common stock issued
upon conversion of Series E Preferred Stock, or the holders of at least 40% of
the shares having registration rights, including some holders of common stock
issued upon conversion of Series A Preferred Stock, have the right to demand
that we file a registration statement on a form other than Form S-3, so long as
the amount of securities to be sold in that registration exceeds $5,000,000. If
we are eligible to file a registration statement on Form S-3, the same holders
of the registration rights described above will have the right to demand that
we file a registration statement on Form S-3, so long as the amount of
securities to be sold in that registration exceeds $1,000,000.
Number of times holders can make demands. We will only be required to file
one registration statement on a form other than Form S-3 for each of two
registrations. If we are eligible to file a registration statement on Form S-3,
we are not required to file more than one registration statement during any 12-
month period.
Postponement. We may postpone the filing of a registration statement for up
to 90 days once in a
12-month period if we determine that the filing would be seriously detrimental
to us or our stockholders.
Piggyback registration rights
If we register any securities for public sale, holders of approximately
12,419,086 shares of common stock, not including shares of common stock
issuable upon exercise of outstanding warrants, will have the right to include
their shares in the registration statement. The underwriters of any
underwritten offering will have the right to limit the number of shares to be
included in a registration statement.
Expenses of registration
We will pay all of the expenses relating to any demand or piggyback
registration. However, we will not pay for any expenses of any demand
registration if the request is subsequently withdrawn by the holders of a
majority of the shares having registration rights, subject to very limited
exceptions.
Expiration of registration rights
The registration rights described above will expire in October 2004. The
registration rights will terminate earlier with respect to a particular
stockholder if that holder owns less than 1% of our outstanding securities or
can resell all of its securities in a three month period under Rule 144 of the
Securities Act and we are subject to the reporting requirements of the
Securities Exchange Act of 1934.
62
<PAGE>
Anti-Takeover Provisions
The provisions of Delaware law, our certificate of incorporation and our
bylaws described below may have the effect of delaying, deferring or
discouraging another person from acquiring control of our company.
Delaware Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations from engaging, under limited circumstances, in a
"business combination," which includes a merger or sale of more than 10% of the
corporation's assets, with any "interested stockholder," or a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of stockholders, for three years following the date
that the stockholder became an "interested stockholder" unless:
. the transaction is approved by the board prior to the date the
"interested stockholder" attained that status;
. upon the closing of the transaction that resulted in the stockholder's
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced; or
. on or subsequent to the date the "business combination" is approved by
the board and authorized at an annual or special meeting of stockholders
by at least two-thirds of the outstanding voting stock that is not owned
by the "interested stockholder."
A Delaware corporation may "opt out" of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not "opted out" of this provision. Section 203 could prohibit
or delay mergers or other takeover or change-in-control attempts and,
accordingly, may discourage attempts to acquire us.
Bylaw Provisions
Our bylaws state that our board of directors is divided into three classes.
The directors in each class will serve for a three-year term, with our
stockholders electing one class each year. For more information on the
classification of our board, please see "Management--Board Composition." This
system of electing and removing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of us,
because it generally makes it more difficult for stockholders to replace a
majority of the directors.
Our bylaws provide that any action required or permitted to be taken by our
stockholders at an annual meeting or a special meeting of the stockholders may
only be taken if it is properly brought before the meeting. Our stockholders
may not take any action by written consent instead of by a meeting. Our
certificate of incorporation provides that our board of directors may issue
preferred stock with voting or other rights without stockholder action. Our
bylaws and certificate of incorporation provide that special meetings of the
stockholders may only be called by our board, the chairman of our board, our
chief executive officer or our president.
Our bylaws provide that we will indemnify officers and directors against
losses that they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in connection with
takeover defense measures. These provisions may have the effect of preventing
changes in our management.
63
<PAGE>
Indemnification of Directors and Executive Officers and Limitation of
Liability
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We have entered into
separate indemnification agreements with our directors and executive officers
that provide them with indemnification protection in the event the certificate
of incorporation is subsequently amended.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officers against losses that they may incur in
investigations and legal proceedings resulting from their services to us,
which may include services in connection with takeover defense measures. These
provisions may have the effect of preventing changes in the management.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C., Ridgefield Park, New Jersey.
Listing
Our common stock is quoted on The Nasdaq Stock Market's National Market
under the symbol "IWOV."
64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock, including shares issued
upon exercise of outstanding warrants or options, in the public market after
this offering could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through the sale of our equity
securities. Sales of substantial amounts of our common stock in the public
market after these restrictions lapse could adversely affect the prevailing
market price and our ability to raise equity capital in the future.
Upon completion of this offering, based on shares outstanding at December
31, 1999, we will have outstanding 23,883,450 shares of common stock, assuming
no exercise of outstanding options and warrants. Of these shares, the 3,622,500
shares sold in our initial public offering, the 3,000,000 shares sold in this
offering and the 26,667 shares sold in the public market after our initial
public offering will be freely tradable without restriction under the
Securities Act unless purchased by our "affiliates." The remaining 17,234,283
shares will become eligible for public sale as follows:
<TABLE>
<CAPTION>
Approximate Number of
Shares Eligible for
Date Future Sale Comment
---- --------------------- -------
<S> <C> <C>
April 5, 2000 2,221,198 Underwriters' lock-up in connection
with our initial public offering
released. These shares may be sold
under Rules 144, 144(k) or 701
April , 2000 10,951,377 Underwriters' lock-up in connection
with this offering released. These
shares may be sold under Rules 144,
144(k) or 701
October 7, 2000 2,669,361 These shares may be sold under Rules
144, 145 or 701
At various times 1,392,347 These shares may be sold under Rules
thereafter 144 or 701
</TABLE>
Lock-Up Agreements
All of our officers and directors and substantially all of our stockholders
signed lock-up agreements in connection with our initial public offering under
which they agreed not to sell, dispose of, loan, pledge or grant any rights
with respect to any shares of common stock or any securities convertible into
or exercisable or exchangeable for shares of common stock without the prior
written consent of Credit Suisse First Boston Corporation until April 5, 2000.
In addition, in connection with this offering, each executive officer, director
and selling stockholder has signed a similar lock-up agreement that extends for
a period of 90 days after the date of this prospectus.
Credit Suisse First Boston Corporation may choose to release some of these
shares from these restrictions prior to the expiration of either lock-up
period, though it has no current intention to do so, except for the shares sold
in this offering.
65
<PAGE>
Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 238,834 shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, these shares may be sold immediately upon the completion of this
offering.
Rule 701
Any of our employees, officers, directors or consultants who purchased his
or her shares under a written compensatory plan or contract may be entitled to
sell his or her shares in reliance on Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell these shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. However, all shares issued under Rule 701 are subject to lock-up
agreements and will only become eligible for sale when the applicable lock-up
agreement expires.
Registration Rights
Upon completion of this offering, the holders of 10,782,636 shares of common
stock, not including shares of common stock issuable upon exercise of
outstanding warrants, will be entitled to require us to register their shares
with the Securities and Exchange Commission so that those shares may be
publicly resold. They and the holders of an additional 16,579 shares of common
stock, not including shares of common stock issuable upon exercise of
outstanding warrants, have the right to require us to include their shares in
any registration statement we file. For a discussion of these rights see
"Description of Capital Stock--Registration Rights." After these shares are
registered, they will be freely tradable without restriction under the
Securities Act.
Stock Options
We have registered under the Securities Act a total of 4,444,828 shares of
common stock reserved for issuance under our stock option and employee stock
purchase plans. As of December 31, 1999, options to purchase 1,543,522 shares
of common stock were issued and outstanding.
Upon the expiration of the 180-day lock-up agreements described above,
121,928 shares of common stock will be subject to vested options, based on
options outstanding as of December 31, 1999. Subject to vesting provisions and
Rule 144 volume limitations applicable to our affiliates, these shares will be
available for sale in the open market immediately after the 180-day lock up
agreements expire, unless the holder is an executive officer, director or
selling stockholder, in which case the shares will be available for sale in the
open market 90 days after the date of this prospectus.
66
<PAGE>
Warrants
As of December 31, 1999, we had outstanding warrants to purchase 45,648
shares of common stock. When these warrants are exercised and the exercise
price is paid in cash the shares must be held for one year before they can be
sold under Rule 144. These warrants also contain "net exercise provisions,"
which allow a holder to exercise the warrant for a lesser number of shares of
common stock in lieu of paying cash. The number of shares which would be issued
in this case would be based upon the market price of the common stock at the
time of the net exercise. If the warrant had been held for at least one year,
the shares of common stock could be publicly sold under Rules 144 and 145.
After the 180-day lock-up agreements described above expire, these warrants
will have been outstanding for at least one year.
67
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 2000, we and the selling stockholders have agreed to sell
to the underwriters named below, for whom Credit Suisse First Boston
Corporation, FleetBoston Robertson Stephens Inc., Dain Rauscher Incorporated,
SoundView Technology Group, Inc. and Adams, Harkness & Hill, Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation............................
FleetBoston Robertson Stephens Inc................................
Dain Rauscher Incorporated........................................
SoundView Technology Group, Inc. .................................
Adams, Harkness & Hill, Inc. .....................................
---------
Total........................................................... 3,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
Several of the selling stockholders have granted to the underwriters a 30-
day option to purchase on a pro rata basis up to 450,000 additional shares from
them at the initial public offering price, less the underwriting discounts and
commissions. The option may be exercised only to cover any over-allotments of
common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and
commissions paid by us.. $ $ $ $
Expenses payable by us.. $ $ $ $
Underwriting discounts
and commissions
paid by selling
stockholders........... $ $ $ $
Expenses payable by the
selling stockholders... $ $ $ $
</TABLE>
We and our executive officers and directors and the selling stockholders
have agreed that we will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act relating to any
additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge, disposition or filing,
without the prior
68
<PAGE>
written consent of Credit Suisse First Boston Corporation for a period of 90
days after the date of this prospectus, except in our case of issuances
pursuant to the exercise of employee stock options outstanding on the date of
this prospectus and grants of employee stock options under plans in effect on
the date of this prospectus.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.
Our common stock is quoted on The Nasdaq National Market under the symbol
"IWOV."
In June 1999, we issued an aggregate of 3,394,719 shares of our Series E
Preferred Stock at a per share price of $5.66 in a private placement. These
shares of Series E Preferred Stock converted into an aggregate of 2,263,136
shares of common stock at $8.49 per share in October 1999. Credit Suisse First
Boston Corporation acted as the placement agent for this private placement, and
it received a customary fee for its services. In addition, Merchant Capital,
Inc., an affiliate of Credit Suisse First Boston Corporation, purchased 229,682
shares of Series E Preferred Stock. These shares of Series E Preferred Stock
converted into 153,121 shares of common stock.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
. In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
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<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling stockholders and
the dealer from whom the purchase confirmation is received that (i) the
purchaser is entitled under applicable provincial securities laws to purchase
the common stock without the benefit of a prospectus qualified under the
securities laws, (ii) where required by law, that the purchaser is purchasing
as principal and not as agent, and (iii) the purchaser has reviewed the text
above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein and the selling stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or these persons. All or a substantial
portion of the assets of the issuer and these persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or these persons in Canada or to enforce a judgment obtained in
Canadian courts against the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
70
<PAGE>
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus. The
underwriters have been represented by Wilson Sonsini Goodrich & Rosati, Palo
Alto, California. Fenwick & West LLP holds 2,750 shares of our common stock.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
September 30, 1999 and for each of the three years in the period ended
December 31, 1998 and the nine months ended September 30, 1999 included in
this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common
stock. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules to the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed
as a part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document are
not necessarily complete. If a contract or document has been filed as an
exhibit to the registration statement, we refer you to the copy of the
contract or document that has been filed. Each statement in this prospectus
relating to a contract or document filed as an exhibit is qualified by the
filed exhibit. The registration statement, including exhibits and schedules,
may be inspected without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C., and copies of all or any part of it
may be obtained from that office after payment of fees prescribed by the
Securities and Exchange Commission.
We file reports, proxy statements and other information with the Securities
and Exchange Commission. Copies of our reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC:
Judiciary Plaza Citicorp Center Seven World Trade
Room 1024 5000 West Madison Street Center
450 Fifth Street, N.W. Suite 1400 13th Floor
Washington, D.C. 20549 Chicago, Illinois 60661 New York,
New York 10048
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The Securities
and Exchange Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.
71
<PAGE>
INTERWOVEN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statement of Changes in Stockholders' Deficit................. F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Interwoven, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' deficit
and of cash flows present fairly, in all material respects, the
financial position of Interwoven, Inc. and its subsidiary at December
31, 1997 and 1998 and September 30, 1999, and the results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1998 and for the nine months ended September
30, 1999, in conformity with accounting principles generally accepted
in the United States. 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 auditing standards
generally accepted in the United States, 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
December 10, 1999
F-2
<PAGE>
INTERWOVEN, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, Pro Forma
----------------- September 30, September 30,
1997 1998 1999 1999
------- -------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 1,019 $ 9,022 $ 12,576
Short-term investments........ -- -- 8,416
Accounts receivable, net...... 140 2,405 2,594
Prepaid expenses.............. -- 179 1,314
Other current assets.......... 37 80 122
------- -------- --------
Total current assets......... 1,196 11,686 25,022
Investments..................... -- -- 1,003
Property and equipment, net..... 188 1,617 2,297
Intangible assets, net.......... -- -- 545
Restricted cash................. -- 605 605
------- -------- --------
$ 1,384 $ 13,908 $ 29,472
======= ======== ========
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.............. $ 213 $ 484 $ 1,179
Accrued liabilities........... 169 1,473 2,592
Debt and leases, current...... 22 258 500
Deferred revenue, current..... -- 627 2,548
------- -------- --------
Total current liabilities.... 404 2,842 6,819
Debt and leases, long-term.... 87 1,257 875
Deferred revenue, long-term... -- 97 --
------- -------- --------
491 4,196 7,694
------- -------- --------
Mandatorily redeemable
convertible preferred stock
4,942,133, 15,163,093 and
18,763,092 shares authorized,
respectively; 4,839,505,
15,060,465 and 18,543,523
shares issued and outstanding,
respectively, actual; no shares
authorized, issued or
outstanding pro forma.......... 4,627 20,464 52,996 $ --
------- -------- -------- --------
Commitments (Note 4)
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par
value, no shares authorized,
issued or outstanding,
actual; 5,000,000 shares
authorized, no shares issued
or outstanding, pro forma.... -- -- -- --
Common Stock, 10,000,000,
16,666,667, 26,666,667 and
100,000,000 shares
authorized, respectively;
2,433,333, 4,909,232,
6,588,846 and 19,059,385
shares, respectively, issued
and outstanding.............. 3 5 7 19
Additional paid-in capital.... (243) 881 (4,590) 48,394
Notes receivable from
stockholders................. (3) (240) (202) (202)
Deferred stock-based
compensation................. -- (1,090) (5,114) (5,114)
Accumulated deficit........... (3,491) (10,308) (21,319) (21,319)
------- -------- -------- --------
Total stockholders' equity
(deficit)................... (3,734) (10,752) (31,218) $ 21,778
------- -------- -------- ========
$ 1,384 $ 13,908 $ 29,472
======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
INTERWOVEN, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- --------------------
1996 1997 1998 1998 1999
------- -------- -------- ----------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License................... $ -- $ 84 $ 3,176 $ 1,570 $ 5,814
Services.................. -- 84 827 539 3,447
------- -------- -------- ------- --------
Total revenues.......... -- 168 4,003 2,109 9,261
Cost of revenues:
License................... -- -- 59 19 147
Services.................. -- 95 1,274 791 3,542
------- -------- -------- ------- --------
Total cost of revenues.. -- 95 1,333 810 3,689
------- -------- -------- ------- --------
Gross profit................ -- 73 2,670 1,299 5,572
Operating expenses:
Research and development.. 328 884 1,797 1,227 2,930
Sales and marketing....... 101 1,519 4,817 2,960 9,058
General and
administrative........... 91 530 1,739 1,135 2,077
Amortization of deferred
stock-based
compensation............. -- -- 812 564 2,685
Amortization of acquired
intangible assets........ -- -- -- -- 249
------- -------- -------- ------- --------
Total operating
expenses............... 520 2,933 9,165 5,886 16,999
Loss from operations........ (520) (2,860) (6,495) (4,587) (11,427)
Interest and other income
(expense), net............. 10 (88) 151 89 416
------- -------- -------- ------- --------
Net loss.................... $ (510) $ (2,948) $ (6,344) $(4,498) $(11,011)
Accretion of mandatorily
redeemable convertible
preferred stock to
redemption value........... -- (261) (1,165) (463) (13,227)
------- -------- -------- ------- --------
Net loss attributable to
common stockholders........ $ (510) $ (3,209) $ (7,509) $(4,961) $(24,238)
======= ======== ======== ======= ========
Basic and diluted net loss
per share.................. $ (0.22) $ (1.36) $ (2.85) $ (1.98) $ (6.51)
======= ======== ======== ======= ========
Shares used in computing
basic and diluted net loss
per share.................. 2,282 2,356 2,633 2,505 3,722
======= ======== ======== ======= ========
Pro forma basic and diluted
net loss per share......... $ (0.74) $ (0.74)
======== ========
Shares used in computing pro
forma basic and diluted net
loss per share............. 8,530 14,957
======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
INTERWOVEN, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(in thousands)
<TABLE>
<CAPTION>
Note
Common Stock Additional Receivable Deferred
-------------- Paid-In from Stock-Based Accumulated
Shares Amount Capital Stockholders Compensation Deficit Total
------ ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 1,933 $ 2 $ 13 $ -- $ -- $ (33) $ (18)
Issuance of Common Stock
for cash............... 200 -- 3 -- -- -- 3
Issuance of Common Stock
for notes receivable... 233 -- 3 (3) -- -- --
Net loss................ -- -- -- -- -- (510) (510)
----- --- ------- ----- ------- -------- --------
Balance at December 31,
1996................... 2,366 2 19 (3) -- (543) (525)
Repurchase of Common
Stock.................. (33) -- (5) -- -- -- (5)
Issuance of Common Stock
on exercise of stock
options................ 100 1 4 -- -- -- 5
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (261) -- -- -- (261)
Net loss................ -- -- -- -- -- (2,948) (2,948)
----- --- ------- ----- ------- -------- --------
Balance at December 31,
1997................... 2,433 3 (243) (3) -- (3,491) (3,734)
Issuance of Common Stock
for notes receivable... 1,333 1 239 (240) -- -- --
Note repayment.......... -- -- -- 3 -- -- 3
Repurchase shares of
Series A mandatorily
redeemable convertible
preferred stock........ -- -- -- -- -- (473) (473)
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (1,165) -- -- -- (1,165)
Issuance of Common Stock
on exercise of stock
options................ 1,143 1 148 -- -- -- 149
Deferred stock-based
compensation........... -- -- 1,902 -- (1,902) -- --
Amortization of stock-
based compensation..... -- -- -- -- 812 -- 812
Net loss................ -- -- -- -- -- (6,344) (6,344)
----- --- ------- ----- ------- -------- --------
Balance at December 31,
1998................... 4,909 $ 5 $ 881 $(240) $(1,090) $(10,308) $(10,752)
===== === ======= ===== ======= ======== ========
Issuance of Common Stock
for services .......... 9 -- 27 -- -- -- 27
Issuance of Common Stock
for
notes receivable ...... 517 -- 202 (202) -- -- --
Repurchase of Common
Stock ................. (98) -- (10) -- -- -- (10)
Note repayment.......... -- -- -- 240 -- -- 240
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (13,227) -- -- -- (13,227)
Issuance of Common Stock
on exercise of stock
options ............... 1,251 2 829 -- -- -- 831
Deferred stock-based
compensation........... -- -- 6,708 -- (6,708) -- --
Amortization of stock-
based compensation .... -- -- -- -- 2,684 -- 2,684
Net loss................ -- -- -- -- -- (11,011) (11,011)
----- --- ------- ----- ------- -------- --------
Balance at September 30,
1999................... 6,588 $ 7 $(4,590) $(202) $(5,114) $(21,319) $(31,218)
===== === ======= ===== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
INTERWOVEN, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------- --------------------
1996 1997 1998 1998 1999
------- -------- -------- ----------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows used in operating
activities:
Net loss.................... $ (510) $ (2,948) $ (6,344) $(4,498) $(11,011)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 17 56 294 194 589
Amortization of deferred
stock-based compensation... -- -- 812 564 2,685
Amortization of acquired
intangible assets.......... -- -- -- -- 249
Issuance of common stock
for services............... -- -- -- -- 27
Non-cash interest expense... 7 135 -- -- --
Provisions for doubtful
accounts................... -- -- 270 -- 18
Changes in assets and
liabilities:
Accounts receivable........ -- (140) (2,535) (1,192) (34)
Prepaid expenses and other
assets.................... (1) (30) (222) (61) (1,177)
Restricted cash............ -- -- (605) (605) --
Accounts payable........... 116 96 271 71 695
Accrued liabilities........ 48 121 1,304 459 994
Deferred revenue........... -- -- 724 317 1,824
------ -------- -------- ------- --------
Net cash used in operating
activities............... (323) (2,710) (6,031) (4,751) (5,141)
------ -------- -------- ------- --------
Cash flows used in investing
activities:
Purchase of property and
equipment.................. (64) (138) (1,723) (1,413) (1,269)
Purchase of investments..... -- -- -- -- (9,428)
Maturities of investments... -- -- -- -- 9
------ -------- -------- ------- --------
(64) (138) (1,723) (1,413) (10,688)
Cash flows from financing
activities:
Proceeds from (repurchases
of) Series A Preferred
Stock, net................. 309 -- (632) (632) --
Proceeds from Series B
Preferred Stock, net....... -- 3,415 -- -- --
Proceeds from Series C
Preferred Stock, net....... -- -- 7,887 6,712 --
Proceeds from Series D
Preferred Stock, net....... -- -- 6,944 -- --
Proceeds from Series E
Preferred Stock, net....... -- -- -- -- 18,462
Proceeds from issuance of
Common Stock............... 3 -- -- -- --
Proceeds from exercise of
stock options.............. -- 5 149 68 831
Proceeds from notes payable,
net of discount............ 75 375 -- -- --
Repayment (issuance) of
stockholders loans......... 10 (11) 3 3 240
Proceeds from bank
borrowings................. -- 76 1,500 574 --
Repurchase of Common Stock.. -- (5) -- -- (10)
Principal payments of debt
and leases................. -- (5) (94) (70) (140)
------ -------- -------- ------- --------
Net cash provided by
financing activities..... 397 3,850 15,757 6,655 19,383
------ -------- -------- ------- --------
Net increase in cash and cash
equivalents................. 10 1,002 8,003 491 3,554
Cash and cash equivalents at
beginning of period......... 7 17 1,019 1,019 9,022
------ -------- -------- ------- --------
Cash and cash equivalents at
end of period............... $ 17 $ 1,019 $ 9,022 $ 1,510 $ 12,576
====== ======== ======== ======= ========
Supplemental cash flow
disclosures:
Cash paid for interest...... $ -- $ -- $ 41 $ 19 $ 94
====== ======== ======== ======= ========
Supplemental non-cash
investing and finance
activities:
Property and equipment
leases..................... $ -- $ 38 $ -- $ -- $ --
====== ======== ======== ======= ========
Issuance of Series A
Preferred Stock upon
conversion of stockholder
loans...................... $ 50 $ -- $ -- $ -- $ --
====== ======== ======== ======= ========
Common Stock issued for
notes receivable........... $ 3 $ -- $ 240 $ 240 $ 202
====== ======== ======== ======= ========
Common Stock issued for
services................... $ -- $ -- $ -- $ -- $ 27
====== ======== ======== ======= ========
Series B Preferred Stock
issued upon conversion of
convertible notes payable
and accrued interest....... $ -- $ 460 $ -- $ -- $ --
====== ======== ======== ======= ========
Issuance of warrants to
purchase Series B Preferred
Stock...................... $ -- $ 106 $ -- $ -- $ --
====== ======== ======== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information for the nine months ended September 30, 1998 is unaudited
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Interwoven, Inc. (the "Company") is a leading provider of software products
and services that help businesses and other organizations manage the
information that makes up the content of their web sites. In the Internet
industry this is often referred to as "web content management." Our flagship
software product, TeamSite, is designed to help customers develop, maintain and
extend large web sites that are essential to their businesses. The Company also
markets and sells its software products and services through its wholly owned
subsidiary in the United Kingdom.
Reincorporation
In June 1999, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company is authorized to issue 75,000,000 shares of $0.001
par value Common Stock and 5,000,000 shares of $0.001 par value Preferred
Stock. The Board of Directors has the authority to issue undesignated Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof. Share and per share information for each of the periods
presented has been retroactively adjusted to reflect the reincorporation.
Basis of Presentation
The condensed consolidated interim financial statements have been prepared
on the same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and cash flows as of September 30, 1999. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of results that may be expected for any other interim period or for
the full fiscal year.
Principles of consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary after elimination of all significant
intercompany accounts and transactions.
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 amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Revenue recognition
In October 1997 and March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP No. 97-2") and Statement of Position No. 98-4, "Deferral of
the Effective Date of a Provision of SOP No. 97-2" ("SOP No. 98-4"). SOP 98-4
defers for one year the application of certain provisions of SOP 97-2. In
December 1998, the AICPA issued Statement of Position No. 98-9, "Modification
of SOP No. 97-2 with Respect to Certain Transactions" ("SOP No. 98-9"), which
is effective for transactions entered into beginning April 1, 1999. SOP 98-9
extends
F-7
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
the effective date of SOP 98-4 and provides additional interpretive guidance.
The adoption of SOP 97-2, SOP 98-4 and SOP 98-9 have not had and are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
The Company's revenues are derived from licenses of its software products
and from services the Company provides to its customers. Revenues are
recognized for the various contract elements based upon vendor-specific
objective evidence of fair value of each element.
License revenues are recognized when persuasive evidence of an agreement
exists, the product has been delivered, no significant post-delivery
obligations remain, the license fee is fixed or determinable and collection of
the fee is probable. The Company does not offer product return rights to
resellers or end users.
Services revenues consist of professional services and maintenance fees.
Professional services primarily consists of software installation and
integration, business process consulting and training. Professional services
are billed on a time and materials basis and revenues are recognized as the
services are performed. Maintenance agreements are typically priced based on a
percentage of the product license fee and have a one-year term, renewable
annually. Services provided to customers under maintenance agreements include
technical product support and unspecified product upgrades. Deferred revenues
from advanced payments for maintenance agreements are recognized ratably over
the term of the agreement, which is typically one year.
Cash, cash equivalents, and investments
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of cash on deposit with banks and high quality
money market instruments. All other liquid investments are classified as either
short-term or long-term investments. Short-term investments consist of
commercial paper and corporate bonds.
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. At September 30, 1999, all investment securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, using available market information and appropriate valuation
methodologies, with unrealized gains and losses reported in stockholders'
equity.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in the statements of
income. There have been no such transactions in the nine months ended September
30, 1999. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
At September 30, 1999, the Company's available-for-sale securities consisted
of the following: Commercial paper $11.9 million; corporate notes $2.0 million,
corporate bonds $.5 million, medium term notes $1.0 million and United States
government agencies $1.0 million and money market funds $3.8 million. Of these
securities, $10.8 million and $8.4 million was classified as cash equivalents
and short-term investments, respectively. The Company had approximately $1.0
million in corporate notes with a maturity that exceeded one year, accordingly
this note was classified as a long-term investment.
As of September 30, 1999 the difference between the fair value and the
amortized cost of available-for-sale securities was insignificant; therefore,
no unrealized gains or losses were recorded in stockholders' equity. For the
nine months ended September 30, 1999, there were no realized gains and losses.
F-8
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
Concentration of credit risk
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist primarily of cash and cash equivalents
and accounts receivable. The Company limits its exposure to credit loss by
placing its cash and cash equivalents with a major financial institution. The
Company's accounts receivable are derived from revenues earned from customers
located in the U.S. and are denominated in U.S. dollars. The Company performs
ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon expected collectibility
of accounts receivable.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues.
<TABLE>
<CAPTION>
Nine Months
Year ended Ended
December 31, September 30,
--------------- ----------------
1997 1998 1998 1999
------ ------ ----------- ----
(Unaudited)
<S> <C> <C> <C> <C>
Company A................................. 20% --% --% --%
Company B................................. 20% --% --% --%
Company C................................. 18% --% --% --%
Company D................................. 11% --% --% --%
Company E................................. 10% --% --% --%
Company F................................. --% 13% 16% --%
Company G................................. --% --% 12% --%
Company H................................. --% --% --% --%
</TABLE>
At December 31, 1997, Company A, B and C accounted for 25%, 22% and 21% of
total accounts receivable, respectively. At December 31, 1998, Company F
accounted for 10% of total accounts receivable. At September 30, 1999 no
customer accounted for 10% of total accounts receivable.
Fair value of instruments
The Company's financial instruments including cash and cash equivalents,
accounts receivable and accounts payable, are carried at cost, which
approximate fair value due to the short-term maturity of these instruments.
Debt and capital lease obligations are carried at cost, which approximates fair
value due to the proximity of the implicit rates of these financial instruments
and the prevailing market rates for similar instruments.
Software development costs
Software development costs incurred in the research and development of new
products and enhancements to existing products are charged to expense as
incurred. Software development costs are capitalized after technological
feasibility has been established. The period between achievement of
technological feasibility, which the Company defines as the establishment of a
working model, until the general availability of such software to customers,
has been short and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs since its inception.
F-9
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
Capitalization of internal-use software costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost
of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998
and provides guidance for the accounting of computer software developed or
obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The Company adopted the provisions of SOP
98-1 in its fiscal year beginning January 1, 1999.
Property and equipment
Property and equipment are stated at historical cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the useful lives of the assets, generally five
years or less, or the shorter of the lease term or the estimated useful lives
of the assets, if applicable.
Impairment of long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 121 requires recognition of impairment of long-
lived assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributed to such assets.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, compensation expense is based on the difference,
if any, on the date of grant between fair value of the Company's stock and the
exercise price. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and the Emerging Issues Task
Force Consensus on Issue No. 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98. Under
the provisions of SFAS No. 128 and SAB No. 98, basic net loss per share is
computed by dividing the net loss attributed to common stockholders for the
period
F-10
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
by the weighted average number of shares of Common Stock outstanding during the
period excluding shares of Common Stock subject to repurchase. Such shares of
Common Stock subject to repurchase aggregated 73,333, 1,737,435, 1,597,862
(unaudited), and 2,154,779 as of December 31, 1997 and 1998 and September 30,
1998 and 1999, respectively.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------- --------------------
1996 1997 1998 1998 1999
------- -------- -------- ----------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss attributable to
common stockholders...... (510) (3,209) (7,509) (4,961) (24,238)
Denominator:
Weighted average shares... 2,282 2,405 3,949 4,614 4,900
Weighted average unvested
shares of Common Stock
subject to repurchase.... -- (49) (1,316) (2,109) (1,178)
------- -------- -------- ------- --------
Denominator for basic and
diluted calculation...... 2,282 2,356 2,633 2,505 3,722
Net loss per share:
Basic and diluted......... $ (0.22) $ (1.36) $ (2.85) $ (1.98) $ (6.51)
======= ======== ======== ======= ========
The following table sets forth potential shares of Common Stock that are not
included in the diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods indicated (in thousands):
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------- --------------------
1996 1997 1998 1998 1999
------- -------- -------- ----------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average effect of
Common Stock equivalents...
Series A Preferred Stock.. 796 1,200 878 921 747
Series B Preferred Stock.. -- 1,235 2,107 2,098 2,135
Series C Preferred Stock.. -- -- 3,092 1,791 4,773
Series D Preferred Stock.. -- -- 359 -- 2,494
Series E Preferred Stock.. -- -- -- -- 1,014
Warrants to purchase
mandatorily redeemable
convertible preferred
stock.................... 1 66 71 70 72
Shares of Common Stock
subject to repurchase.... -- 49 1,316 2,109 1,178
Common Stock options...... 250 1,480 1,870 494 545
------- -------- -------- ------- --------
1,047 4,030 9,693 7,483 12,958
======= ======== ======== ======= ========
</TABLE>
Pro forma net loss per share
Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock outstanding, including the pro forma effects of the
exercise of warrants to purchase Series B Preferred Stock and automatic
conversion of the Company's Series A, B, C, D and E Preferred Stock into shares
of the Company's Common Stock effective upon the closing of the Company's
initial public offering as if such
F-11
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
conversion occurred at the beginning of the period, or at the date of issuance,
if later. The resulting pro forma adjustment for the year ended December 31,
1998 and the nine months ended September 30, 1999 includes (i) an increase in
the weighted average shares used to compute the basic net loss per share of
5,896,280 and 11,234,191, respectively, and (ii) a decrease in the net loss
attributable to common stockholders for the accretion of mandatorily redeemable
convertible preferred stock of $1,165,000 and $13,227,000, respectively. The
calculation of diluted net loss per share excludes potential shares of Common
Stock as their effect would be antidilutive. Pro forma potential Common Stock
consists of Common Stock subject to repurchase rights and incremental shares of
Common Stock issuable upon the exercise of stock options.
Pro forma stockholders' equity
Effective upon the closing of the Company's initial public offering, the
outstanding shares of Series A, B, C, D and E Preferred Stock will
automatically convert into 746,664, 2,134,548, 4,773,161, 2,494,142, and
2,322,024 shares of Common Stock, respectively. The pro forma effects of these
transactions have been reflected in the accompanying pro forma balance sheet at
September 30, 1999.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. As of December 31, 1998 and September
30, 1999, the Company had not had any transactions that are required to be
reported in comprehensive income.
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosure About Segments of an Enterprise and Related Information." The
Company identifies its operating segment based on business activities,
management responsibility and geographic location. During all periods
presented, the Company operated in a single business segment.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.
F-12
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
NOTE 2--ACQUISITION
Effective July 1, 1999, the Company acquired all the assets and liabilities
of Lexington Software Associates Incorporated, which is a provider of
configuration management solutions and development methodologies, including
consulting and education. The acquisition has been accounted for using the
purchase method of accounting. The total purchase price for this acquisition
was approximately $800,000. The purchase price was allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values at the acquisition date. The purchase price consisted of
88,339 shares of the Company's Series E Preferred Stock (estimated fair value
of $500,000), seven-year warrants to purchase 17,668 shares of Series E
Preferred Stock at $5.66 per share (estimated fair value of $77,000) and
acquisition-related expenses (including legal and accountancy fees) of
approximately $223,000. The allocation of the purchase price was as follows:
Allocation of Purchase Price
<TABLE>
<S> <C>
Tangible Assets................................................. $ 385,000
Intangible Assets
Workforce..................................................... 500,000
Goodwill...................................................... 300,000
Liabilities..................................................... (385,000)
---------
$ 800,000
=========
</TABLE>
The amortization of the intangible assets will occur over the estimated
periods to be benefited. The workforce asset will be amortized on the straight-
line basis over two years from the acquisition date, however, retention of the
acquired employees will be evaluated in future periods to assess whether
accelerated amortization of this asset is warranted. The goodwill is expected
to be amortized on a straight-line basis over three years from the acquisition
date. Amortization of acquired intangible asset was $249,000 for the nine
months ended September 30, 1999.
NOTE 3--BALANCE SHEET COMPONENTS (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------------- -------------
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable........................... $ 140 $ 2,675 $2,882
Less: Allowance for doubtful accounts......... -- (270) (288)
----- ------- ------
$ 140 $ 2,405 $2,594
===== ======= ======
</TABLE>
F-13
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
There were no write-offs against the allowance for doubtful accounts in the
years ended December 31, 1997 and 1998 and for the nine months ended September
30, 1999.
<TABLE>
<CAPTION>
December 31,
-------------- September 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Property and equipment, net:
Computer equipment and purchased software.. $ 254 $ 952 $2,096
Furniture and fixtures..................... 10 586 661
Leasehold improvements..................... -- 449 501
----- ------- ------
264 1,987 3,258
Less: Accumulated depreciation and
amortization.............................. (76) (370) (961)
----- ------- ------
$ 188 $ 1,617 $2,297
===== ======= ======
</TABLE>
Property and equipment includes $38,000, $23,000 and $0 of fixed assets
under capital leases at December 31, 1997 and 1998 and September 30, 1999,
respectively. Accumulated depreciation of such assets was $7,000, $8,000 and $0
at December 31, 1997 and 1998 and September 30, 1999, respectively.
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------------- -------------
<S> <C> <C> <C>
Accrued liabilities:
Payroll and related expenses................... $ 59 $ 1,247 $1,787
Other.......................................... 110 226 805
----- ------- ------
$ 169 $ 1,473 $2,592
===== ======= ======
</TABLE>
NOTE 4--DEBT:
In June 1999, the Company amended a financing agreement (the "Financing
Agreement") originally entered into in June 1998, whereby the bank will loan up
to 80% of eligible accounts receivable up to a maximum of $3,000,000 for
working capital purposes. Working capital advances accrue interest at the
bank's prime rate and are payable monthly with principal due one year
subsequent to the date of any advance. The Financing Agreement provides for
additional borrowings of up to $1,500,000 to finance equipment purchases.
Advances for equipment purchases accrue interest at the bank's prime rate plus
.25% and advances are payable monthly for one year subsequent to the date of
any advance. Thereafter, the outstanding balance will be due in 36 monthly
installments. The Agreement requires the Company to comply with certain
financial covenants. The Company was in compliance with all covenants at
December 31, 1998 and for the nine months ended September 30, 1999.
Future minimum principal payments under the Financing Agreement are as
follows (in thousands):
<TABLE>
<S> <C>
Year Ending December 31,
1999................................................................ $ 250
2000................................................................ 500
2001................................................................ 500
2002................................................................ 250
------
$1,500
======
</TABLE>
F-14
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
In January 1997, the Company issued $375,000 of convertible promissory notes
payable. The notes bore interest at 6% per year. In connection with the
issuance of the notes, the Company issued to the note holders warrants to
purchase 82,219 shares of Series B Preferred Stock at $1.29 per share. The
warrants expire at the earlier of November 2001 or upon an initial public
offering of the Company's Common Stock. The Company recorded a $94,000 discount
to the notes for the value of the warrants, which was recognized in 1997 as
additional interest expense.
In May 1997, the principal amounts and accrued interest outstanding for the
notes were converted into 357,182 shares of Series B Preferred Stock (see Note
7).
NOTE 5--COMMITMENTS:
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through May 2003. Rent expense
for the year ended December 31, 1997 and 1998 and for the nine months ended
September 30, 1998 and 1999 totaled $52,000, $557,000, $373,000 (unaudited) and
$743,000, respectively.
Future minimum lease payments under noncancelable operating and capital
leases, as of December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating Sublease
Leases Leases Income
------- --------- --------
<S> <C> <C> <C>
Year Ending December 31,
1999.......................................... $10 $ 938 $356
2000.......................................... 7 951 211
2001.......................................... -- 979 --
2002.......................................... -- 1,009 --
2003.......................................... -- 426 --
--- ------ ----
Total minimum lease payments and sublease
income....................................... 17 $4,303 $567
====== ====
Less: Amount representing interest............ 2
---
Present value of capital lease obligations.... $15
===
</TABLE>
Restricted cash
During fiscal 1998, $605,000 of cash was pledged as collateral on an
outstanding letter of credit relating to the building lease agreement and is
classified as restricted cash on the balance sheet. The restricted cash will be
reduced by $226,875 on the 31st month after the signing of the agreement
provided no event of default has occurred. The Company was in compliance with
all such covenants at December 31, 1998 and September 30, 1999.
NOTE 6--INCOME TAXES:
As of September 30, 1999, the Company had approximately $14,700,000 of
federal and $8,600,000 of state net operating tax loss carryforwards available
to reduce future taxable income. These net operating loss carryforwards begin
to expire in 2010 and 2003 for federal and state tax purposes, respectively.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not
limited to, a cumulative ownership change of more than 50%, as defined, over a
three year period.
F-15
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
Deferred tax assets consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
Sept 30,
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $1,105 $2,882 $5,506
Accruals and reserves............................. 61 235 642
Research credits.................................. 40 120 414
Depreciation...................................... 60 128 0
------ ------ ------
1,266 3,365 6,562
Valuation allowance................................. (1,266) (3,365) (6,436)
------ ------ ------
Net deferred tax assets............................. -- -- 126
Deferred tax liabilities:
Depreciation...................................... -- -- 16
Non-deductible intangible assets.................. -- -- 110
------ ------ ------
Net deferred tax liabilities........................ 0 0 126
Net deferred tax assets............................. $ -- $ -- $ --
====== ====== ======
</TABLE>
The acquisition of Lexington Software Associates was structured as a tax-
free acquisition of stock, therefore, the differences between the recognized
fair values of acquired net assets and their historical tax bases are not
deductible for tax purposes. A deferred tax liability has been recognized for
the differences between assigned fair values of intangibles for book purposes
and the tax bases of such assets.
For financial reporting purposes, the Company has incurred a loss in each
year since its inception. Based on the available objective evidence, management
believes it is more likely than not that the net deferred tax assets will not
be fully realizable. Accordingly, the Company has provided for a valuation
allowance against its net deferred tax assets at December 31, 1997 and 1998 and
September 30, 1999.
NOTE 7--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
At December 31, 1998, mandatorily redeemable convertible preferred stock
consists of the following (in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation Redemption
Series Authorized Outstanding Amount Amount
------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Series A Preferred Stock...... 1,120 1,120 $ 224 $ 626
Series B Preferred Stock...... 3,142 3,040 3,909 4,756
Series C Preferred Stock...... 7,160 7,160 7,726 7,989
Series D Preferred Stock...... 3,741 3,741 7,000 7,093
------ ------ ------- -------
15,163 15,061 $18,859 $20,464
====== ====== ======= =======
</TABLE>
F-16
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
At September 30, 1999, mandatorily redeemable convertible preferred stock
consists of the following (in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation Redemption
Series Authorized Outstanding Amount Amount
------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Series A Preferred Stock...... 1,120 1,120 $ 224 $ 1,650
Series B Preferred Stock...... 3,142 3,040 3,909 7,429
Series C Preferred Stock...... 7,160 7,160 7,726 14,132
Series D Preferred Stock...... 3,741 3,741 7,000 10,149
Series E Preferred Stock...... 3,600 3,483 19,714 19,636
------ ------ ------- -------
18,763 18,544 $38,573 $52,996
====== ====== ======= =======
</TABLE>
The holders of Series A, B, C, and D Preferred Stock have certain rights and
privileges as follows:
Warrants
The Company issued warrants to purchase 20,409, 82,219 and 5,480 in 1996,
1997 and 1998, respectively, shares of Series B Preferred Stock at $1.29 per
share to the holders of the warrants. The warrants expire at the earlier of
November 2001 or upon an initial public offering of the Company's Common Stock.
Voting
Each share of Series A, B, C, and D Preferred Stock has voting rights
equivalent to Common Stock on an "as if" converted basis.
Dividends
Holders of Series A, B, C and D Preferred Stock are entitled to receive non-
cumulative annual dividends of $0.01, $0.10, $0.09 and $0.15 per share,
respectively, when and if declared by the Company's Board of Directors.
Dividends on the Series A, B, C and D Preferred Stock shall be payable in
preference and prior to any payment of any dividend on the Common Stock. The
holders of the Series A, B, C and D will also be entitled to participate in
dividends on the Common Stock, when and if declared by the Board of Directors,
on an as-converted to Common Stock basis. No dividends have been declared from
inception through December 31, 1998.
Liquidation
In the event of any liquidation, dissolution, winding up or merger where
less than 50% of the voting power is maintained by the Company, the holders of
the Series A, B, C, and D Preferred Stock shall be entitled to receive, prior
and in preference to any distribution to the holders of the Common Stock, an
amount equal to $0.20, $1.29, $1.08 and $1.87 per share, respectively, plus any
declared but unpaid dividends. Any amounts remaining after such distribution
shall be distributed among the holders of Series B, C and D Preferred Stock,
and Common Stock on an "as if" converted basis until the holders of Series B, C
and D Preferred Stock have received an aggregate liquidation payment of $2.57,
$2.16 and $2.81, thereafter any remaining amounts shall be distributed among
the holders of Common Stock.
F-17
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
Redemption
Upon the request of holders of at least 50% of the outstanding shares of
Series A, B, C or D Preferred Stock, the shares of all of the preferred stock
may be redeemed in four equal installments beginning in May 2002. The
redemption price for Series A, B, C and D Preferred Stock will be the greater
of the original issuance price for Series A, B, C and D Preferred Stock, $0.20,
$1.29, $1.08 and $1.87 per share, respectively, plus any undeclared and unpaid
dividends and an amount equal to that amount which would result in the holder
of such shares realizing an 8% annually compounded return on the purchase price
or the fair market value of Series A, B, C and D Preferred Stock on the first
redemption date.
Conversion
Each share of Series A, C, and D Preferred Stock is convertible at the
option of the holder into two-thirds of a share of Common Stock at any time,
subject to adjustment for antidilution. Each share of Series B Preferred Stock
is convertible at the option of the holders into .7022705 of a share of Common
Stock at any time, subject to adjustment for antidilution. Each share of Series
A, B, C and D Preferred Stock will be automatically converted upon an initial
public offering of the Company's Common Stock with aggregate proceeds in excess
of $20,000,000 and a price per share of not less than $5.79. The Company has
reserved sufficient shares of Common Stock for issuance upon conversion of the
Series A, B, C and D Preferred Stock.
Series E Preferred Stock
Each share of Series E Preferred Stock has voting rights equivalent to
Common Stock on an "as if" converted basis. Holders of Series E Preferred Stock
are entitled to receive non-cumulative annual dividends of $0.45 per share,
when and if declared by the Company's Board of Directors. Dividends on the
Preferred Stock shall be payable in preference and prior to any payment of any
dividend on the Common Stock. The holders of the Series E Preferred Stock will
also be entitled to participate in dividends on the Common Stock, when and if
declared by the Board of Directors, based on the number of shares of Common
Stock held on an as-converted basis. No dividends have been declared from
inception through September 30, 1999.
In the event of any liquidation, dissolution, winding up or merger where
less than 50% of the voting power is maintained by the Company, the holders of
the Series E Preferred Stock shall be entitled to receive, prior and in
preference to any distribution to the holders of the Common Stock, an amount
equal to $5.66 per share, respectively, plus any declared but unpaid dividends.
Any amounts remaining after such distribution shall be distributed among the
holders of Series E Preferred Stock, and Common Stock on an "as if" converted
basis until the holders of Series E have received an aggregate liquidation
payment of $8.49, thereafter any remaining amounts shall be distributed among
the holders of Common Stock.
Upon the request of holders of at least 50% of the outstanding shares of
Series E Preferred Stock, the shares of all of the preferred stock may be
redeemed in four equal installments beginning in May 2002. The redemption price
for Series E Preferred Stock will be the greater of the original issuance price
for Series E Preferred Stock, $5.66 per share, respectively, plus any
undeclared and unpaid dividends and an amount equal to that amount which would
result in the holder of such shares realizing an 8% annually compounded return
on the purchase price or the fair market value of Series E Preferred Stock on
the first redemption date.
Each share of Series E Preferred Stock is convertible at the option of the
holder into two-thirds of a share of Common Stock at any time, subject to
adjustment for antidilution. Each share of Series E Preferred Stock will be
automatically converted upon an initial public offering of the Company's Common
Stock with aggregate proceeds in excess of $20,000,000 and a price per share of
not less than $8.49. The Company has reserved sufficient shares of Common Stock
for issuance upon conversion of the Series E Preferred Stock.
F-18
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
NOTE 8--COMMON STOCK:
In March 1995, the Company issued 1,933,333 shares of Common Stock to its
founder in exchange for $14,500 in total consideration. Additionally, in March
1996, the Company issued 233,333 shares of Common Stock to an employee in
consideration of a $3,500 promissory note. In addition, the Company issued a
further 200,000 shares of Common Stock in consideration of $3,000 in cash.
Under the terms of the stock purchase agreements, the Company has the right to
repurchase up to 2,166,667 shares of such Common Stock at the original issue
price upon termination. The repurchase rights expired as to 25% of such Common
Stock in January 1997 and the remainder expire ratably over a 36 month period
thereafter with 586,667 and 180,555 shares of Common Stock subject to
repurchase at December 31, 1998 and September 30, 1999.
The Company had reserved shares of Common Stock for issuance as follows (in
thousands):
<TABLE>
<CAPTION>
As of
September 30,
1999
-------------
<S> <C>
Mandatorily redeemable convertible preferred stock:
Series A Preferred Stock..................................... 747
Series B Preferred Stock..................................... 2,135
Series C Preferred Stock..................................... 4,773
Series D Preferred Stock..................................... 2,494
Series E Preferred Stock..................................... 2,400
Exercise of options under stock option plans................... 1,030
------
13,579
======
</TABLE>
Notes receivable from stockholders
In March 1998, the Company issued 1,333,333 shares of Common Stock to an
officer of the Company in exchange for a $240,000 note receivable. The note
bore interest at 6% per year. The note was secured by the underlying stock and
is classified as a note receivable from stockholder in the accompanying balance
sheet at December 31, 1998. Under the terms of the agreement, the Company has
the right to repurchase all of the shares of such stock at the original issue
price upon termination. The repurchase rights expire ratably over a 48 month
period with 1,055,555 and 805,555 shares of Common Stock subject to repurchase
at December 31, 1998 and September 30, 1999, respectively. In June 1999, the
note was paid.
In April 1999 the Company issued a total 516,667 shares of Common Stock to
two officers of the Company in exchange for notes receivable totalling
$201,500. The notes bears interest at the rate of 6% per year. The principal
sum of the notes will become due and payable in eighteen equal monthly
installments beginning in October 2000. The notes are secured by the underlying
stock and are classified as notes receivable from stockholders in the
accompanying balance sheet at September 30, 1999. Under the terms of the
agreement, the Company has the right to repurchase all of the shares of such
stock at the original issue price upon termination. The repurchase rights will
expire as to 25% of such Common Stock in April 2000, and the remainder will
expire ratably over a 36 month period thereafter with 516,667 shares of Common
Stock subject to repurchase at September 30, 1999.
NOTE 9--EMPLOYEE STOCK OPTION PLAN:
In August 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") and in March 1998 it adopted the 1998 Stock Option Plan (the "1998
Plan") (collectively, the "Plans"). The Plans provide for
F-19
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
grants of stock options to employees and consultants of the Company. Options
granted under the Plan may be either incentive stock options or nonqualified
stock options. Incentive stock options ("ISO") may be granted only to employees
(including officers and directors who are also employees) of the Company.
Nonqualified stock options may be granted to employees and consultants of the
Company.
Options under the Plans may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO shall not be less than 100% of the estimated fair
value of the shares on the date of grant and (ii) the exercise price of an ISO
granted to a 10% stockholder shall not be less than 110% of the estimated fair
value of the shares on the date of grant and are for periods not to exceed five
years. Options are immediately exercisable but are subject to repurchase by the
Company at the original exercise price. The repurchase feature generally
expires for 25% of the shares after the first year of service and then expires
ratably over the next 36 months.
The following table summarizes the activity under the Plans for the years
ended December 31, 1997, 1998 and the nine months ended September 30, 1999
(shares in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------- Nine Months ended
1997 1998 September 30, 1999
---------------- ---------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 487 $0.03 1,276 $0.11 622 $ 0.17
Granted................. 1,074 0.14 824 0.21 1,895 3.37
Canceled................ (185) 0.09 (334) 0.18 (236) 0.98
Exercised............... (100) 0.05 (1,144) 0.13 (1,251) 0.91
----- ------ ---------
Outstanding at end of
period................. 1,276 0.11 622 0.17 1,030 4.97
----- ------ ---------
Options exercisable at
end of period.......... 1,276 622 1,030
----- ------ ---------
Weighted average fair
value of options
granted during the
period................. $0.03 $0.05 $ 0.67
===== ===== ========
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding at December 31, 1998 at December 31, 1998
------------------------------------------------ --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
-------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.03-
0.09 206 8.0 $ 0.07 206 $0.07
0.15-
0.21 362 9.4 0.19 362 0.19
0.39 54 9.9 0.39 54 0.39
------------ ---
622 9.0 0.17 622 0.17
============ ===
</TABLE>
F-20
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
The following table summarizes information about stock options outstanding
and exercisable at September 30, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding at September Options Exercisable
30, 1999 at September 30, 1999
------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.15- 0.21 77 8.6 $0.19 77 $0.19
0.39- 1.20 162 9.4 0.64 162 0.64
1.65- 2.25 298 9.7 2.15 298 2.15
7.64-10.01 493 9.9 8.85 493 8.85
----- -----
1,030 9.7 4.97 1,030 4.97
===== =====
</TABLE>
Fair value disclosures
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option-pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
--------------- September 30,
1997 1998 1999
------ ------ -------------
(unaudited)
<S> <C> <C> <C>
Risk-free interest rates..................... 6.5% 6.5% 5.5%
Expected lives (in years).................... 4.0 4.0 4.0
Dividend yield............................... 0.0 0.0 0.0
Expected volatility.......................... 0.0 0.0 0.0
</TABLE>
The compensation cost associated with the Company's stock-based compensation
plans, determined using the minimum value method prescribed by SFAS No. 123,
did not result in a material difference from the reported net income for the
years ended December 31, 1997 and 1998 and for the nine months ended September
30, 1998 and 1999.
1999 Equity Incentive Plan
In July 1999, the Board adopted, subject to stockholder approval, the 1999
Equity Incentive Plan (the "1999 Plan") and reserved 2,900,000 shares of Common
Stock for issuance thereunder. The 1999 Plan authorized the award of options,
restricted stock awards and stock bonuses (each an "Award"). No person will be
eligible to receive more than 1,000,000 shares in any calendar year pursuant to
Awards under the 1999 Plan other than a new employee of the Company who will be
eligible to receive no more than 1,500,000 shares in the calendar year in which
such employee commences employment. Options granted under the 1999 Plan may be
either incentive stock options ("ISO") or nonqualified stock options ("NSO").
ISOs may be granted only to Company employees (including officers and directors
who are also employees). NSOs may be granted to Company employees, officers,
directors, consultants, independent contractors and advisors of the Company.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an ISO
granted to a 10% stockholder may not be less than 110% of the estimated fair
value of the shares on the date of grant. The maximum term of options granted
under the 1999 Plan is ten years.
F-21
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
Members of the Board who are not employees of the Company, or any parent,
subsidiary or affiliate of the Company, are eligible to participate in the 1999
Plan. The option grants under the 1999 Plan are automatic and nondiscretionary,
and the exercise price of the options must be 100% of the fair market value of
the Common Stock on the date of grant. Each eligible director who first becomes
a member of the Board on or after the effective date of the Registration
Statement of which this Prospectus forms a part (the "Effective Date") will
initially be granted an option to purchase 20,000 shares (an "Initial Grant")
on the date such director first becomes a director. Immediately following each
Annual Meeting of the Company, each eligible director will automatically be
granted an additional option to purchase 10,000 shares if such director has
served continuously as a member of the Board since the date of such director's
Initial Grant or, if such director was ineligible to receive an Initial Grant,
since the Effective Date. The term of such options is ten years, provided that
they will terminate three months following the date the director ceases to be a
director or a consultant of the Company (twelve months if the termination is
due to death or disability). All options granted under the Directors Plan will
vest 100% of the shares upon the date of issuance.
Employee Stock Purchase Plan
In July 1999, the Board adopted, subject to stockholder approval, the 1999
Employee Stock Purchase Plan (the "Purchase Plan") and reserved 300,000 shares
of Common Stock for issuance thereunder. On each January 1, the aggregate
number of shares reserved for issuance under this plan will increase
automatically by a number of shares equal to 1% of the Company's outstanding
shares on December 31 of the preceding year. The aggregate number of shares
reserved for issuance under the Purchase Plan shall not exceed 3,000,000
shares. The Purchase Plan will become effective on the first business day on
which price quotations for the Company's Common Stock are available on the
Nasdaq National Market. Employees generally will be eligible to participate in
the Purchase Plan if they are customarily employed by the Company for more than
20 hours per week and more than five months in a calendar year and are not (and
would not become as a result of being granted an option under the Purchase
Plan) 5% stockholders of the Company. Under the Purchase Plan, eligible
employees may select a rate of payroll deduction between 2% and 10% of their W-
2 cash compensation subject to certain maximum purchase limitations. Each
offering period will have a maximum duration of two years and consists of four
six-month Purchase Periods. The first Offering Period is expected to begin on
the first business day on which price quotations for the Company's Common Stock
are available on the Nasdaq National Market. Depending on the Effective Date,
the first Purchase Period may be more or less than six months long. Offering
Periods and Purchase Periods thereafter will begin on February 1 and August 1.
The price at which the Common Stock is purchased under the Purchase Plan is 85%
of the lesser of the fair market value of the Company's Common Stock on the
first day of the applicable offering period or on the last day of that purchase
period. The Purchase Plan will terminate after a period of ten years unless
terminated earlier as permitted by the Purchase Plan.
Deferred stock-based compensation
In connection with certain stock option grants during the year ended
December 31, 1998 and the nine months ended September 30, 1999, the Company
recognized deferred stock-based compensation totaling $1.9 million and $6.7
million, respectively, which is being amortized over the vesting periods of the
applicable options. Amortization expense recognized during the year ended
December 31, 1998 and the nine months ended September 30, 1999 totaled
approximately $812,000 and $2.7 million, respectively.
F-22
<PAGE>
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information for the nine months ended September 30, 1998 is unaudited
NOTE 10--SUBSEQUENT EVENTS:
Stock Split
Prior to the effectiveness of the Company's initial public offering, the
Company's Board of Directors effected a two-for-three reverse stock split of
the outstanding shares of Common Stock. All common share and per share
information included in these financial statements have been retroactively
adjusted to reflect this stock split.
Initial public offering
On October 14, 1999 the Company completed its initial public offering of
Common Stock. A total of 3,622,500 shares were sold by the Company at a price
of $17.00 per share. The offering resulted in net proceeds to the Company of
approximately $56.2 million, net of an underwriting discount of $4.3 million
and estimated offering expenses of $1.2 million.
Conversion of Preferred Stock
Effective upon the closing of the Company's initial public offering, the
outstanding shares of Series A, B, C, D and E Preferred Stock were converted
into 746,664, 2,134,548, 4,773,161, 2,494,142, and 2,322,024 shares of Common
Stock, respectively.
Repayment of debt
On November 24, 1999, the Company repaid its equipment financing agreement
with Silicon Valley Bank. The amount repaid was approximately $1.3 million.
F-23
<PAGE>
[LOGO OF INTERWOVEN APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid by the
Registrant in connection with the sale of the shares of common stock being
registered hereby. None of these expenses will be paid by the selling
stockholders. All amounts are estimates except for the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National
Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 122,048
NASD filing fee.................................................. 30,500
Nasdaq National Market filing fee................................ 17,500
Accounting fees and expenses..................................... 100,000
Legal fees and expenses.......................................... 250,000
Road show expenses............................................... 20,000
Printing and engraving expenses.................................. 250,000
Blue sky fees and expenses....................................... 10,000
Transfer agent, custodial and registrar fees and expenses........ 15,000
Miscellaneous.................................................... 184,952
----------
Total.......................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty
as a director, except for liability:
. for any breach of the director's duty of loyalty to the Registrant or
its stockholders,
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
. under section 174 of the Delaware General Corporation Law (regarding
unlawful dividends and stock purchases), or
. for any transaction from which the director derived an improper personal
benefit.
As permitted by the Delaware General Corporation Law, the Registrant's
Bylaws provide that:
. the Registrant is required to indemnify its directors and officers to
the fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions,
. the Registrant may indemnify its other employees and agents as set forth
in the Delaware General Corporation Law,
. the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions, and
. the rights conferred in the Bylaws are not exclusive.
II-1
<PAGE>
The Registrant has entered into Indemnity Agreements with each of its
current directors and officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
the Registrant's Amended and Restated Certificate of Incorporation and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of the
Registrant regarding which indemnification is sought, nor is the Registrant
aware of any threatened litigation that may result in claims for
indemnification.
Reference is also made to Section 7 of the draft Underwriting Agreement to
be entered into between the Registrant and the underwriters, which will
provide for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provisions
in the Registrant's Amended and Restated Certificate of Incorporation, Bylaws
and the Indemnity Agreements to be entered into between the Registrant and
each of its directors and officers may be sufficiently broad to permit
indemnification of the Registrant's directors and officers for liabilities
arising under the Securities Act.
The Registrant maintains directors' and officers' liability insurance.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit Document Number
---------------- ------
<S> <C>
Form of Underwriting Agreement...................................... 1.01
Registrant's Third Amended and Restated Certificate of
Incorporation...................................................... 3.03
Registrant's Restated Bylaws, as amended............................ 3.04
Third Amended and Restated Investors' Rights Agreement dated June
10, 1999........................................................... 4.02
Form of Indemnity Agreement......................................... 10.01
</TABLE>
Item 15. Recent Sales of Unregistered Securities.
Since inception we have issued and sold the following securities:
1. Through October 8, 1999, we issued and sold an aggregate of 2,620,787
shares of our common stock to employees, consultants, directors, and other
service providers at prices ranging from $0.03 to $10.01 per share under
direct issuances or exercises of options granted under our 1996 Stock Option
Plan and 1998 Stock Option Plan. All shares purchased under our 1996 Stock
Option Plan and 1998 Stock Option Plan are subject to our right to repurchase
such shares at their original exercise price. The repurchase feature generally
expires for 25% of the shares after the first year of service and then expires
ratably over the next 36 months.
2. In March and June 1996, we issued and sold an aggregate of 1,800,000
shares of our Series A Preferred Stock to private investors for an aggregate
purchase price of approximately $360,000. In March 1998, we repurchased
680,000 shares of our Series A Preferred Stock at $0.93 per share. The
remaining 1,120,000 shares of Series A Preferred Stock converted into 746,664
shares of common stock in October 1999.
3. In August 1996, we issued a warrant to a certain bank in connection with
a loan agreement. The warrant was exercised in October 1999 for 6,552 shares
of common stock.
4. In January 1997, in connection with a bridge loan that converted into
Series B Preferred Stock, we issued warrants to private investors to purchase
93,298 shares of Series B Preferred Stock at an exercise price of $1.2862 per
share. These shares of Series B Preferred Stock converted into 65,519 shares
of common stock in October 1999.
5. In May and June 1997, we issued and sold an aggregate of 3,039,505
shares of our Series B Preferred Stock to private investors for an aggregate
purchase price of approximately $3,890,566. These shares of Series B Preferred
Stock converted into 2,134,548 shares of common stock in October 1999.
II-2
<PAGE>
6. In March 1998, we issued and sold an aggregate of 6,241,619 shares of
our Series C Preferred Stock to private investors for an aggregate purchase
price of approximately $6,375,181, and warrants to purchase 918,124 shares of
Series C Preferred Stock at an exercise price of $1.2862 per share. In
connection with the Series D Preferred Stock financing, all warrants to
purchase Series C Preferred Stock were exercised for an aggregate purchase
price of approximately $1,180,891. These shares of Series C Preferred Stock
converted into 4,773,161 shares of common stock in October 1999.
7. In October, November and December 1998, we issued and sold an aggregate
of 3,741,217 shares of our Series D Preferred Stock to private investors for
an aggregate purchase price of approximately $6,996,075. These shares of
Series D Preferred Stock converted into 2,494,142 shares of common stock in
October 1999.
8. In June 1999, we issued and sold an aggregate of 3,394,719 shares of our
Series E Preferred Stock to private investors for an aggregate purchase price
of approximately $19,214,109. These shares of Series E Preferred Stock
converted into 2,263,136 shares of common stock in October 1999.
9. In July 1999, we issued 88,339 shares of Series E Preferred Stock and
warrants to purchase 17,668 shares of Series E Preferred Stock to certain
stockholders of Lexington Software Associates, Inc. in exchange for their
shares of that company. These shares of Series E Preferred Stock converted
into 58,888 shares of common stock in October 1999. These warrants are
exercisable for 11,770 shares of common stock.
10. In July 1999, we issued a warrant to purchase 40,989 of shares of
Series E Preferred Stock to General Electric Company in connection with a
commercial transaction. This warrant is exercisable for 27,326 shares of
common stock.
All sales of common stock made pursuant to the exercise of stock options
were made in reliance on Rule 701 under the Securities Act or on Section 4(2)
of the Securities Act.
All sales of preferred stock and warrants to purchase preferred stock were
made in reliance on Section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act. These sales were made without general
solicitation or advertising. Each purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate the investment and
represented to the Registrant that the shares were being acquired for
investment. The conversion of the preferred stock into common stock in October
1999 was effected in reliance on the exemption provided under Section 3 (a)
(9) of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
1.01* Form of Underwriting Agreement.
2.01** Agreement and Plan of Merger, dated October 1, 1999, between
Interwoven, Inc., a California corporation, and the Registrant.
3.03*** Registrant's Third Amended and Restated Certificate of
Incorporation.
3.04** Registrant's Restated Bylaws, as amended.
4.01** Form of Certificate for Registrant's common stock.
4.02** Third Amended and Restated Investors' Rights Agreement, dated
June 10, 1999.
4.03** Form of Consent concerning the Third Amended and Restated
Investors' Rights Agreement dated June 10, 1999.
5.01 Opinion of Fenwick & West LLP regarding legality of the
securities being registered.
10.01** Form of Indemnity Agreement between Registrant and each of its
directors and executive officers.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
10.02** 1996 Stock Option Plan and related agreements.
10.03** 1998 Stock Option Plan and related agreements.
10.04** 1999 Equity Incentive Plan and related agreements.
10.05** 1999 Employee Stock Purchase Plan and related agreements.
10.06** Regional Prototype Profit Sharing Plan and Trust/Account Standard
Plan Adoption Agreement AA #001.
10.07** Employment Agreement between Interwoven, Inc. and Martin W.
Brauns dated February 27, 1998.
10.08** Offer Letter to David M. Allen from Interwoven, Inc. dated
February 12, 1999.
10.09** Offer Letter to Michael A. Backlund from Interwoven, Inc. dated
May 1, 1998.
10.10** Offer Letter to John Chang from Interwoven, Inc. dated January
20, 1997.
10.11** Offer Letter to Jeffrey E. Engelmann from Interwoven, Inc. dated
December 11, 1998.
10.12** Offer Letter to Steven Farber from Interwoven, Inc. dated June
14, 1997.
10.13** Offer Letter to Jack S. Jia from Interwoven, Inc. dated January
3, 1997.
10.14** Offer Letter to Peng T. Ong from Interwoven, Inc. dated February
29, 1996.
10.15** Offer Letter to Jozef Ruck from Interwoven, Inc. dated February
18, 1999.
10.16** Confidential Separation Agreement and Release, between
Interwoven, Inc. and John Chang dated November 25, 1998.
10.17** Confidential Separation Agreement and Release, between
Interwoven, Inc. and Steven Farber dated February 12, 1998.
10.18** Secured Promissory Notes between Interwoven, Inc. and Jeffrey E.
Engelmann, dated as of April 19, 1999.
10.19** Secured Promissory Notes between Interwoven, Inc. and Jozef Ruck,
dated as of April 21, 1999.
10.20** Build-To-Suit Lease Agreement dated March 18, 1997 between
Sunnyvale Partners Limited Partnership and First Data Merchant
Services Corporation.
10.21** Sublease dated April 24, 1998 between First Data Merchant
Services Corporation and Interwoven, Inc.
10.22** Loan and Security Agreement, dated October 1997, as amended,
between Interwoven, Inc. and Silicon Valley Bank.
10.23** Agreement and Plan of Reorganization, dated June 30, 1999, by and
among Interwoven, Inc., Lexington Software Associates, Inc. and
certain stockholders of Lexington Software Associates, Inc.
10.24+** Standard Sales Agreement effective as of July 28, 1999 between
Registrant and General Electric Company.
10.25+** Preferred Stock Warrant to Purchase Shares of Series E Preferred
Stock of Registrant.
10.26+** Amended and Restated Loan and Security Agreement dated June 24,
1999, between Silicon Valley Bank and Registrant.
10.27** Intellectual Property Security Agreement dated June 24, 1999,
between Silicon Valley Bank and Registrant.
10.28** Amendment to Secured Promissory Note between Interwoven, Inc. and
Jeffrey E. Engelmann, dated as of October 5, 1999.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
10.29** Amendment to Secured Promissory Note between Interwoven, Inc. and
Jozef Ruck, dated as of October 5, 1999.
10.30 Offer Letter to John Van Siclen from Interwoven, Inc. dated
December 17, 1999.
10.31 Assignment of Lease between beyond.com and Interwoven, Inc.
21.01** Subsidiaries of the Registrant
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of PricewaterhouseCoopers LLP, independent accountants.
24.01*** Power of Attorney.
27.01*** Financial Data Schedule
</TABLE>
- ---------------------
* To be filed by amendment
** Incorporated by reference to the exhibit of the same number to the
Registration Statement on Form S-1 (file No. 333-83779) filed July 27,
1999, and all amendments thereto.
*** Previously filed.
+ Portions of this exhibit have been omitted pursuant to an order granting
confidential treatment
(b) The financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of
California, on this 10th day of January, 2000.
INTERWOVEN, INC.
/s/ David M. Allen
By: _________________________________
David M. Allen
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
* President, Chief Executive January 10, 2000
______________________________________ Officer (principal
Martin W. Brauns executive officer) and a
director
/s/ David M. Allen Vice President and Chief January 10, 2000
______________________________________ Financial Officer
David M. Allen (principal financial
officer and principal
accounting officer)
Additional Directors:
Chairman of the Board January , 2000
______________________________________
Peng T. Ong
* Director January 10, 2000
______________________________________
Kathryn C. Gould
* Director January 10, 2000
______________________________________
Mark W. Saul
* Director January 10, 2000
______________________________________
Mark C. Thompson
* Director January 10, 2000
______________________________________
Ronald E.F. Codd
</TABLE>
/s/ David M. Allen
*By:____________________________
David M. Allen,
Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
5.01 Opinion of Fenwich & West LLP regarding legality of the securities
being registered.
10.30 Offer Letter to John Van Siclen from Interwoven, Inc. dated
December 17, 1999.
10.31 Assignment of Lease between beyond.com and Interwoven, Inc.
23.01 Consent of Fenwich & West LLP (included in Exhibit 5.01).
23.02 Consent of PricewaterhouseCoopers LLP, independent accountants.
</TABLE>
<PAGE>
[FENWICK & WEST LLP LETTERHEAD]
EXHIBIT 5.01
January 10, 2000
Interwoven, Inc.
1195 West Fremont Avenue, Suite 2000
Sunnyvale, CA 94087
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
(Registration Number 333-92943) (the "Registration Statement") filed by you with
the Securities and Exchange Commission (the "Commission") on December 17, 1999,
as subsequently amended, in connection with the registration under the
Securities Act of 1933, as amended, of an aggregate of up to 3,450,000 shares of
your Common Stock (the "Shares"), 2,000,000 outstanding and will be sold by
certain selling stockholders (the "Selling Stockholders") and the balance of
which will be issued and sold by you.
In rendering this opinion, we have examined the following:
(1) the Registration Statement, together with the Exhibits filed as a part
thereof;
(2) the prospectus that constitutes a part of the Registration Statement;
(3) your registration statement on Form S-1 (Registration No. 333-83779),
originally filed with the Commission on July 27, 1999, as amended,
together with the Exhibits as a part thereof;
(4) the prospectus prepared in connection with the registration statement
on Form S-1 (Registration No. 333-83779);
(5) your registration statement on Form 8-A (File Number 000-27389) filed
with the Commission on September 20, 1999;
(6) the minutes of meetings and actions by written consent of the
stockholders and boards of directors that are contained in your minute
books and the minute books of your predecessor, Interwoven, Inc., a
California corporation ("Interwoven California"), that are in our
possession;
(7) the stock records for you and Interwoven California that you have
provided to us (consisting of a certificate from your transfer agent
of even date herewith verifying the number of your issued and
outstanding shares of capital stock as of
<PAGE>
January 10, 2000
Page 2
the date hereof, and a list prepared by you of holders of options and
warrants for your capital stock and of any rights to purchase your
capital stock;
(8) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing certain factual and other
representations;
(9) The agreements under which the Selling Stockholders acquired the Stock
to be sold by them as described in the Registration Statement; and
(10) The Custody Agreement, Transmittal Letter and Powers of Attorney
signed by the Selling Stockholders in connection with the sale of
Stock described in the Registration Statement.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity and completeness of all documents submitted
to us as originals, the conformity to originals and completeness of all
documents submitted to us as copies, the legal capacity of all natural persons
executing the same, the lack of any undisclosed termination, modification,
waiver or amendment to any document reviewed by us and the due authorization,
execution and delivery of all documents where due authorization, execution and
delivery are prerequisites to the effectiveness thereof.
For the purposes of this opinion, we have relied as to matters of fact
solely upon our examination of the documents referred to above and have assumed
their current accuracy and completeness.
We are admitted to practice law in the State of California, and we express
no opinion herein with respect to the effect of the laws of any jurisdiction
other than the existing laws of the United States of America, the State of
California and the State of Delaware.
In connection with our opinion expressed below, we have assumed that, at or
prior to the time of the delivery of any shares of Stock, the Registration
Statement will have been declared effective under the Securities Act of 1933, as
amended, and will not have been modified or rescinded, that the offer and sale
of the Shares will be registered under the Registration Statement and that there
will not have occurred any change in law affecting the validity or
enforceability of the Shares.
Based upon the foregoing, it is our opinion that the Shares to be sold by
the Selling Stockholders pursuant to the Registration Statement are validly
issued, fully paid and nonassessable and that the Shares to be issued and sold
by you, when issued and sold in accordance in the manner referred to in the
prospectus constituting a part of the Registration Statement, will be validly
issued, fully paid and nonassessable.
<PAGE>
January 10, 2000
Page 3
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us, if any, in the
Registration Statement, the prospectus constituting a part thereof and any
amendments thereto.
This opinion speaks only as of its date and we assume no obligation to
update this opinion should circumstances change after the date hereof.
Very truly yours,
/s/ Fenwick & West LLP
<PAGE>
EXHIBIT 10.30
December 17, 1999
John van Siclen
35 Bryan Court
Alamo, CA 94507
Re: Employment Agreement
Dear John:
On behalf of Interwoven, Inc. (the "Company"), I am pleased to offer
you employment in the position of Vice President, Business Development reporting
to Martin Brauns, President and CEO. This letter sets out the terms of your
employment with Interwoven which will start on December 20, 1999.
You will be paid a base salary of $6,250.00 semi monthly (which equals
$150,000 per year), less applicable tax and other withholdings. Compensation
will include an incentive bonus of up to $90,000. This bonus will be earned
based on MBOs mutually agreed upon between your manager and yourself. You are
eligible to receive a quarterly draw equivalent to eighty (80%) of your
incentive bonus. You will also be eligible to participate in various Interwoven
fringe benefit plans, including group health insurance, the Interwoven 401(k)
plan, flex spending accounts, Employee Stock Purchase Plan, and paid time off
(PTO) programs.
You will be granted an option to purchase 70,000 shares of Interwoven
common stock under Interwoven's 1999 stock option plan at an exercise price
equal to the fair market value of that stock on your option grant date. Your
option will vest over a period of four years (25% at the end of one year, and
then 1/48 per month thereafter), and will be subject to the terms and conditions
of Interwoven's stock option plan and standard form of stock option agreement,
which you will be required to sign as a condition of receiving the option. You
will receive:
.60,000 total options to be granted at the rate of 5,000 options per
month or sooner at your option,
.34,000 options granted on start date at 85% of the fair market value
on the grant date.
We hope that you and the Company will find mutual satisfaction with
your employment. We are very excited about your joining our team, and we look
forward to a beneficial and fruitful relationship. Nevertheless, your
employment with Interwoven is "at will"; it is for no specified term, and may be
terminated by you or Interwoven at any time, with or without cause or advance
notice. As a condition of your employment, you will be required to sign
Interwoven's standard
<PAGE>
form of employee confidentiality and assignment of inventions agreement, and to
provide Interwoven with documents establishing your identity and right to work
in the United States. Those documents must be provided to Interwoven within
three days after your employment start date.
In the event of any dispute or claim relating to or arising out of
your employment relationship with Interwoven, this agreement, or the termination
of your employment with Interwoven for any reason (including, but not limited
to, any claims of breach of contract, wrongful termination or age, sex, race,
national origin, disability or other discrimination or harassment), you and
Interwoven agree that all such disputes shall be fully, finally and exclusively
resolved by binding arbitration conducted by the American Arbitration
Association in Santa Clara County, California. You and Interwoven hereby waive
your respective rights to have any such disputes or claims tried to a judge or
jury. Provided, however, that this arbitration provision shall not apply to any
claims for injunctive relief by either you or the Company.
This agreement and the confidentiality and stock option agreements
referred to above constitute the entire agreement between you and Interwoven
regarding the terms and conditions of your employment, and they supersede all
prior negotiations, representations or agreements between you and Interwoven.
The provisions of this agreement regarding "at will" employment and arbitration
may only be modified by a document signed by you and the President of
Interwoven.
We look forward to working with you at Interwoven. Please sign and
date this letter on the spaces provided below no later than December 20, 1999 to
acknowledge your acceptance of the terms of this agreement.
Sincerely,
Interwoven, Inc.
By /s/ David M. Allen
----------------------------------
I agree to and accept employment with Interwoven, Inc. on the terms
and conditions set forth in this agreement.
Date: December 20, 1999 /s/ John Van Siclen
-----------------------
<PAGE>
EXHIBIT 10.31
ASSIGNMENT OF LEASE
-------------------
<TABLE>
<CAPTION>
Recitals
- --------
<S> <C>
Section 1. Effective Date of Assignment
Section 2. Assignment
Section 3. Assumption of Lease Obligations/Indemnity
Section 4. Covenants
Section 5. Sublease Cash Security Deposit/Letter of Credit
Section 6. Brokers
Section 7. Condition of Premises
Section 8. Successors and Assigns
Section 9. Governing Law
Section 10. Attorneys' Fees
Section 11. Counterparts
Exhibit A. Master Lease
Exhibit B. Sublease
</TABLE>
This Assignment of Lease ("Assignment") is made to be effective as of the
Effective Date (as defined below) between beyond.com, a Delaware corporation
("Assignor"), and Interwoven, Inc., a California corporation ("Assignee").
Recitals
--------
A. SUNNYVALE PARTNERS LIMITED PARTNERSHIP, an Illinois limited
partnership, as landlord ("Landlord"), and FIRST DATA MERCHANT SERVICES
CORPORATION as tenant ("Tenant"), entered into a lease, made as of March 18,
1997 ("Master Lease"), with respect to premises described in the Master Lease
and commonly known as 1195 West Fremont Boulevard, Sunnyvale, California
("Master Premises").
B. A copy of the Master Lease (with certain confidential economic details
deleted) is attached to this Assignment as Exhibit A.
C. Tenant, as sublessor ("Sublessor"), subleased a portion of the
Premises (the "Subleased Premises") to Software.Net Corporation (whose name was
changed to beyond.com), as sublessee, by means of a an undated Sublease, (the
"Sublease").
D. A copy of the Sublease is attached to this Assignment as Exhibit B.
E. Interwoven occupies the balance of the Master Premises pursuant to a
Sub-Sublease with Tenant. Interwoven is familiar with the Landlord, Sublessor,
the building in which the Subleased Premises are located and the operation of
the Master Premises.
<PAGE>
F. beyond.com desires to assign to Interwoven, and Interwoven desires to
receive an assignment from beyond.com, all of the Subleased Premises which is
identified in the Sublease ("Subleased Premises"). From and after the Effective
Date, Interwoven shall be responsible for and shall assume all obligations of
beyond.com under the Sublease accruing on or after the Effective Date.
G. The assignment of the Subleased Premises is conditioned upon Landlord
and Sublessor both consenting to the terms and conditions of this Assignment.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:
Section 1. Effective Date of Assignment
----------------------------------------
This Assignment shall become effective upon the first day ("Effective
Date") on which each of the following have occurred: (i) this Assignment has
been executed by Assignor and by Assignee, and each has received a copy executed
by the other party; (ii) Assignee has delivered to Assignor $297,454.50 in cash
in the form of a certified bank check as described in clause 5(a); (iii)
Assignee's letter of credit in the amount of $297,454.50 as called for in
Section 5 has been issued with Sublessor as beneficiary; (iv) Sublessor has
released Assignor's letter of credit, as described in clause 5(b); (v) Sublessor
and Master Landlord have consented in writing to this Assignment with no
additions, deletions or amendments; (vi) Assignee has executed the Bill of Sale
for certain personal property and delivered to Assignor the sum of $288,000, by
certified bank check, pursuant to the Bill of Sale; (vii) Assignee has delivered
to Sublessor insurance certificates evidencing all insurance required under the
Sublease, in form acceptable to Sublessor, and (viii) Assignor has tendered
possession of the Subleased Premises to Assignee. If all of the above have not
occurred on or before November 22, 1999, this Assignment shall automatically
terminate and be of no further force and effect. Assignor and Assignee shall
execute a certificate certifying the date that all conditions have been met.
Section 2. Assignment
----------------------
As of the Effective Date, Assignor hereby assigns and transfers to Assignee
all of Assignor's right, title, and interest in the Sublease and Assignee hereby
accepts from Assignor all of Assignor's right, title, and interest, subject to
the terms and conditions set forth in this Assignment. As of the Effective Date.
Assignor releases all right, title and interest it has or may have with respect
to the cash security deposit provided for in Section 30 of the Sublease.
Section 3. Assumption of Lease Obligations/Indemnity
-----------------------------------------------------
Effective as of the Effective Date, Assignee assumes and agrees to perform
and fulfill all the terms, covenants, conditions, and obligations accruing on or
after the Effective Date and required to be performed and fulfilled by Assignor
as sublessee under the Sublease, including the making of all payments due to
Sublessor under the Sublease or payable by Assignor as Sublessee under the
Sublease, all as they become due and payable. Assignee shall indemnify, defend
and hold harmless Assignor from and against any and all claims, costs,
2
<PAGE>
expenses, liabilities, obligations and damages of any nature whatsoever arising
from Assignee's default under the Sublease (collectively "Claims"). Without
limiting the foregoing, if any Claim is made against Assignor, Assignee shall
defend Assignor with counsel reasonably acceptable to Assignor.
Section 4. Covenants
---------------------
(a) Assignor covenants as follows: (i) that the copy of the Sublease
attached as Exhibit B is a true and accurate copy of the Sublease as of the
Effective Date and that there exists no other agreement affecting Assignor's
tenancy under the Sublease; (ii) the copy of the Master Lease attached as
Exhibit A, to the best of Assignor's knowledge, is a true and accurate copy of
the Master Lease as of the Effective Date; and (iii) the Sublease is in full
effect and, to the best of Assignor's knowledge, no defaults exist under the
Sublease, nor any acts or events which, with the passage of time or the giving
of notice or both, could become defaults.
(b) Assignee covenants as follows: (i) that it has read the Master Lease
attached hereto and the Sublease; and (ii) that as of the Effective Date it
shall have made such investigations of the Subleased Premises as it deems
necessary to determine that the Subleased Premises are acceptable to it.
Section 5. Sublease Cash Security Deposit/Letter of Credit
-----------------------------------------------------------
(a) On or before the Effective Date, Assignee shall pay Assignor
$297,454.50 in cash in the form of a certified bank check in exchange for
Assignor's assignment to Assignee of all of Assignor's right, title and interest
in the $297,454.50 cash security deposit provided for in Section 30 of the
Sublease ("Sublease Security Deposit").
(b) On or before the Effective Date, Assignee shall deliver to Sublessor
$297,454.50 in the form of an irrevocable letter of credit (the "Letter of
Credit Security Deposit") issued by a bank acceptable to Sublessor and in form
and substance acceptable to Sublessor (the "Letter of Credit") and otherwise in
full compliance with Section 30 of the Sublease. Concurrently with the delivery
to Sublessor of Assignee's Letter of Credit Security Deposit, Sublessor shall
cause Assignor's letter of credit (which Sublessor currently holds as security
under Section 30 of the Sublease) to be released provided, however, no such
release shall occur unless and until Sublessor has received and approved
Assignee's Letter of Credit Security Deposit. The release by Sublessor of
beyond.com's letter of credit on or before November 22, 1999 shall be a
condition to the effectiveness of Assignor's assignment hereunder. If Assignor's
letter of credit is not released on or before such date, on twenty-four hours
written notice Assignor may rescind this Assignment at any time until its letter
of credit is released.
Section 6. Brokers
-------------------
Assignor and Assignee acknowledge that no real estate broker brought about
this assignment transaction. Each party hereby agrees to indemnify the other
party against claims of any person claiming by, through or under the first party
in connection with this assignment transaction.
3
<PAGE>
Section 7. Condition of Premises
---------------------------------
Assignor makes no representations or warranties with regard to the
conditions of the Subleased Premises. Assignee is in occupancy of the building
in which the Subleased Premises are located and is familiar with the building
systems that service the building and with the custom and practice of Sublessor.
Assignee may investigate the Subleased Premises and all parts thereof prior to
signing this Assignment. To the best of beyond.com's knowledge, without
investigation, beyond.com has received no notice that the Subleased Premises are
in violation of any ordinance, rule, code or regulation of any governmental
agency.
Section 8. Successors and Assigns
----------------------------------
This Assignment shall be binding on and inure to the benefit of the parties
to it, their successors-in-interest, and assigns.
Section 9. Governing Law
-------------------------
This Assignment shall be governed by and construed in accordance with
California law.
Section 10. Attorneys' Fees
----------------------------
If either party commences an action against the other in connection with
this Assignment, the Sublease, for indemnity or any matter related thereto, the
prevailing party will be entitled to recover costs of suit and reasonable
attorneys' fees.
Section 11. Counterparts
-------------------------
This Assignment may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
The parties have executed this Assignment as of the date first above
written.
Assignor: beyond.com, a Delaware corporation
By: /s/ Garry Stuib
-------------------------
Title: Director of HR
-------------------------
Assignee: Interwoven, Inc., a Delaware corporation
By: David M. Allen
-------------------------
Title: V.P. & CFO
-------------------------
4
<PAGE>
Consent of Master Landlord
--------------------------
First Data Merchant Services Corporation ("First Data"), Tenant under the
Master Lease and Sublandlord under the Sublease and Sunnyvale Partners Limited
Partnership ("Sunnyvale Partners"), Landlord under the Master Lease, hereby
consent to this Assignment of the Sublease to Assignee and Sunnyvale Partners
confirms that the consent given hereby satisfies the requirements for giving
consent as set forth in the Master Lease regarding this Assignment and First
Data confirms that the consent given hereby satisfies the requirements for
giving consent as set forth in the Sublease regarding this Assignment. However,
Assignor and Assignee remain otherwise subject to all terms and conditions of
Section 18 of the Sublease as set forth in the Master Lease. By so consenting to
the Assignment of the Sublease, Sunnyvale Partners and First Data do not hereby
consent to become a party to the Assignment. If the Master Lease is terminated
prior to the termination of the Sublease, the Sublease shall terminate
simultaneously therewith and Assignee's rights to possess to any portion of the
Subleased Premises arise solely from the provisions of the Sublease and neither
the Sublease nor this consent shall be deemed as granting Assignee any greater
tenancy rights than Subtenant under the Sublease. Nothing in this Consent or the
Assignment shall be deemed to be either (i) a modification of or an amendment to
the Sublease or Master Lease; or (ii) a release of beyond.com from its
obligations under the Sublease or a modification of any of beyond.com's
obligations under the Sublease. First Data hereby consents to the right of
beyond.com to cure any defaults by Assignee under the Sublease provided such
defaults are cured within the time periods set forth in the Sublease.
Notwithstanding any provision to the contrary in this Consent, nothing contained
herein shall operate as a consent to or approval or ratification by First Data
or Sunnyvale Partners of any of the provisions of the Assignment or as a
representation or warranty by First Data or Sunnyvale Partners, and neither
First Data nor Sunnyvale Partners shall be bound or estopped in any way by the
provisions of the Assignment. In addition, nothing herein shall be construed to
waive any future or present breach or default on the part of beyond.com under
the Sublease.
Sunnyvale Partners
Sunnyvale Partners Limited Partnership,
a California limited partnership
By: /s/ James Small
--------------------------------
Title: General Partner
First Data Merchant Services Corporation,
a Florida corporation
By: /s/ David Schlapbach
--------------------------------
Title:
--------------------------------
<PAGE>
EXHIBIT A
BUILD-TO-SUIT LEASE AGREEMENT
-----------------------------
Landlord: SUNNYVALE PARTNERS LIMITED PARTNERSHIP
Tenant: FIRST DATA MERCHANT SERVICES CORPORATION
March 18, 1997
<PAGE>
EXHIBIT A
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
1. Description........................................................... 1
2. Term and Occupancy.................................................... 1
3. Rent.................................................................. 2
4. Construction.......................................................... 3
5. Use................................................................... 7
6. Condition of demised Premises......................................... 8
7. Maintenance and Repairs............................................... 8
8. Alterations........................................................... 9
9. Signs................................................................. 11
10. Services.............................................................. 11
11. Compliance with Law................................................... 12
12. Landlord's Title, Authority, and Quiet Enjoyment; Tenant's Authority.. 13
13. Subordination......................................................... 13
14. Assignment and Sublease............................................... 14
15. Lease Extension....................................................... 15
16. Impositions........................................................... 16
17. Insurance............................................................. 18
18. Destruction and Restoration........................................... 20
19. Condemnation.......................................................... 22
20. Default by Tenant..................................................... 26
21. Landlord's Remedies................................................... 27
22. Default by Landlord................................................... 28
23. Tenant's Remedies..................................................... 28
</TABLE>
i
<PAGE>
EXHIBIT A
<TABLE>
<C> <S> <C>
24. Delivery of Executed Lease............................................ 29
25. Termination........................................................... 29
26. Notices............................................................... 29
27. Brokerage............................................................. 30
28. Estoppel.............................................................. 30
29. Hazardous Substances.................................................. 30
30. Holdover.............................................................. 32
31. Surrender............................................................. 32
32. Liens................................................................. 33
33. Interest; Late Charge................................................. 34
34. Inspections........................................................... 34
35. Transfer of Landlord's Interest....................................... 34
36. Indemnity............................................................. 35
37. Modifications of Lease................................................ 35
38. Memorandum of Lease................................................... 36
39. Paragraph Captions.................................................... 36
40 Entire Agreement...................................................... 36
41. Choice of Law and Interpretation...................................... 36
42. Prevailing Party...................................................... 36
43. Exhibits.............................................................. 36
44. Guarantee............................................................. 37
45. Independent Covenants................................................. 37
46. Entry by Landlord..................................................... 37
47. [Deleted by intent of parties.]....................................... 37
48. Survival of Obligations............................................... 37
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
49. Lease Subject to Landlord's Acquisition of Demised Premises........... 38
50. Americans With Disabilities Act....................................... 38
51. Reports by Tenant..................................................... 39
52. Option to Purchase.................................................... 39
53. No Third Party Beneficiaries.......................................... 41
54. Counterparts.......................................................... 41
55. Consents and Approvals................................................ 41
56. Limitation on Damages................................................. 41
57. Tenant's Property..................................................... 41
</TABLE>
<TABLE>
<C> <C> <S>
Exhibit A - Legal Description
Exhibit B - Site Plan
Exhibit C - Plans
Exhibit C-1 - Construction Schedule
Exhibit D - Schedule of Rents
Exhibit E - Lease Term Agreement
Exhibit F - Memorandum of Lease
Exhibit G - Landlord's Development Costs
Exhibit H - Permitted Exceptions
Exhibit I - Escrow Agreement
</TABLE>
iii
<PAGE>
THIS BUILD-TO-SUIT LEASE AGREEMENT (this "Lease") is made as of the 18th day of
March, 1997 (the "date hereof") between SUNNYVALE PARTNERS LIMITED PARTNERSHIP,
an Illinois limited partnership, having its principal office at c/o Ridge
Sunnyvale, Inc., c/o Ridge Capital Corporation, 257 East Main Street,
Barrington, Illinois 60010 (hereinafter referred to as "Landlord"), and FIRST
DATA MERCHANT SERVICES CORPORATION, having its principal office at 5660 New
Northside Drive, Suite 1400, Atlanta, Georgia 30328 (hereinafter referred to as
"Tenant").
W I T N E S S E T H:
- - - - - - - - - -
Landlord, for and in consideration of the rents, covenants and agreements
hereinafter set forth on the part of Tenant to be paid, kept, observed and
performed does hereby lease unto Tenant, and Tenant does hereby take subject to
the conditions herein expressed, all that parcel of land situated in the City of
Sunnyvale, County of Santa Clara, State of California and legally described on
Exhibit A attached hereto and made a part hereof (the "Land"), together with all
improvements located and to be constructed thereon by Landlord, which are
hereinafter called "Landlord's Improvements." Landlord's Improvements and all
improvements, machinery, building equipment, fixtures and other property of
Landlord, real, personal or mixed (except Tenant's trade fixtures and any other
property of Tenant), installed or located thereon, together with all additions,
alterations and replacements thereof are collectively referred to herein as the
"Improvements." The Land and the Improvements are sometimes hereinafter
collectively referred to as the "Demised Premises". The structure located upon
and being a part of the Demised Premises which is constructed to be used as a
two story office building containing approximately 80,000 "useable square feet"
(as defined in Paragraph 4 below) is hereinafter referred to as the "Building".
1. Description. Landlord will cause Landlord's Improvements (including
the Building and other site improvements depicted on the Site Plan attached
hereto and made a part hereof as Exhibit B) to be constructed in substantial
accordance with the plans and specifications enumerate on Exhibit C (the
"Plans"). Landlord agrees that Landlord shall not make any modifications or
changes to the Plans without Tenant's prior written consent. Landlord further
agrees to make any changes to the Plans requested by Tenant in writing and if
the change requested by Tenant increases or decreases the cost of the Demised
Premises, the Base Rent provided for herein shall be adjusted in accordance with
the provisions of the formula provided on Exhibit D.
2. Terms and Occupancy. A. The term of this Lease shall commence on the
Construction Completion Date, as provided in Paragraph 4 below (hereinafter
referred to as the "Commencement Date"), and shall end on the date which is the
last day of the month that includes the twelfth (12th) anniversary of the
Commencement Date (hereinafter referred to as the "Expiration Date"), unless the
term be extended or earlier terminated as provided herein.
Landlord shall notify Tenant of the anticipated Construction Completion
Date. Landlord agrees to notify Tenant promptly from time to time of any changes
in the anticipated Construction Completion Date. Tenant shall have the right to
enter the Demised Premises during the approximately ninety (90) day period
preceding the Construction Completion Date for the purpose of installing its
equipment and Tenant does hereby agree to assume all risk of loss or
<PAGE>
damage to such equipment, and to indemnify, defend, and hold harmless Landlord
from and against any loss or damage to such equipment and all liability, loss or
damage arising from any injury to the property of Landlord, or its contractors,
subcontractors or materialmen, and any death or personal injury to any person or
persons arising out of such installation. Landlord agrees to cooperate with
Tenant so that Tenant's contractors and tradespeople will be permitted to
reasonably perform their work without material interference. Tenant agrees to
cooperate with Landlord so that Landlord's contractors and tradespeople will be
permitted to reasonably perform their work without material interference.
B. Notwithstanding anything else in this Lease to the contrary, Tenant
shall have the right to terminate this Lease as of the end of the eighth (8th)
Lease Year (the "Early Termination Date") provided that Tenant shall (a) notify
Landlord in writing of its election to terminate at least one (1) year prior to
the Early Termination Date, and (b) pay to the Landlord, concurrently with the
notification to Landlord hereunder, a termination fee by certified or cashier's
check or wire transfer of available funds ("Termination Amount") equal to the
discounted present value (using Landlord's financing interest rate) amount
needed to reduce the remaining unamortized principal balance due on the
indebtedness originally incurred by Landlord to finance the Landlord's
Development Costs (as defined in Paragraph 19F) to [deleted text]. If Tenant
gives such notice as required hereunder and pays the Termination Amount
concurrently therewith, this Lease shall be deemed terminated as to all rights
or obligations hereunder (except such rights and obligations as Landlord and
Tenant would otherwise have upon normal expiration of the term of this Lease).
Any such notice hereunder, not accompanied by the Termination Amount as provided
hereinabove, shall be deemed invalid and of no force or effect. Upon Landlord's
closing on the permanent loan for the financing of the Landlord's Development
Costs, Landlord shall provide to Tenant a copy of the twenty (20) year permanent
loan amortization (the "Loan Amortization"), which shall include the principal
amount that will be due at the end of the eighth (8th) Lease Year.
Tenant shall have the right to pay the Termination Amount to any mortgagee
of the Demised Premises or other person with a lien on the Demised Premises or
the rents derived therefrom, but Tenant shall have no such obligation to do so
unless such obligation is specifically set forth in a non-disturbance or other
agreement between Tenant and such mortgagee or other lienholder. Notwithstanding
the foregoing, Tenant acknowledges and agrees that any payment to any such
mortgagee or other lienholder shall only be effectuated by a two-party or two-
payee certified or cashier's check, made payable to both Landlord and any such
mortgagee or other lienholder.
3. Rent. The annual base rental ("Base Rent") shall be calculated in
accordance with the provisions set forth on the Schedule of Rents attached
hereto and made a part hereof as Exhibit D. Base Rent shall be paid monthly, in
advance, in equal installments, without offset or deduction by wire transfer in
accordance with separate instruction given by Landlord to Tenant, on the
Commencement Date and on the first day of each month thereafter during the term
hereof; provided however, that if the term of this Lease shall commence on a
date other than the first day of a calendar month or end on a date other than
the last day of a calendar month (i) the first and last month's Base Rent shall
be prorated based upon the ratio that the number of days in the term within such
month bears to the total number of days in such month, and (ii) Base Rent
reserved for the calendar month of any scheduled rent escalation shall be
equitably adjusted upon due
2
<PAGE>
consideration of the number of days in such month falling within the preceding
Lease Year (as herein defined) and the number of days in such month falling
within the current Lease Year. For purposes of this Lease, the term "Lease Year"
shall mean the 12-month period commencing on the Commencement Date and each 12-
month period thereafter during the term of this Lease (and any renewal or
extension thereof), provided that, if the Commencement Date is not the first day
of a calendar month, the first "Lease Year" shall be the period commencing on
the Commencement Date and ending on the last day of the twelfth (12th) full
calendar month following the Commencement Date and all Base Rent payable for the
month in which the Commencement Date occurs shall be paid on the first day of
the following calendar month. Notwithstanding the foregoing, on or prior to the
date of closing under the Sale Agreement (as defined herein), Tenant shall also
deposit into escrow with First American Title Guaranty Company the sum of Two
Million Dollars ($2,000,000.00) to cover a portion of the Landlord's Development
Costs which shall be disbursed in accordance with the Escrow Agreement attached
hereto as Exhibit I.
4. Construction.
A. Landlord agrees, at Landlord's sole cost and expense, to cause
construction of Landlord's Improvements in accordance with the following
schedule:
(a) Landlord shall use all reasonable efforts to commence the Site
Preparation Phase (as defined in that certain Real Estate Purchase and Sale
Agreement and Joint Escrow Instructions dated March 18, 1997 (the "Sale
Agreement") between Regis Homes of Northern California, Inc. and Landlord)
as soon as possible following the date Landlord acquires the Land and in
any event on or before the date four (4) business days following the date
Landlord acquires the Land (the "Estimated Construction Commencement
Date"), in accordance with the Plans and in accordance with the
construction schedule attached hereto as Exhibit C-1 (the "Construction
Schedule") and shall diligently pursue construction in an effort to
complete Landlord's Improvements on or before the Estimated Construction
Completion Date (as herein defined); provided, however, if delay is caused
or contributed to by act or neglect of Tenant, or those acting for or under
Tenant including, without limitation, changes ordered by Tenant, or delays
caused by labor disputes, casualties, acts of God or the public enemy,
governmental embargo restrictions, shortages of fuel, labor, or building
materials, action or non-action of public utilities, or of local, State or
Federal governments affecting the work, or other similar causes beyond the
Landlord's reasonable control, then the time of commencement of said
construction shall be extended for the additional time caused by such delay
(such delays are each hereinafter referred to as an "excused delay"). The
date on which Landlord actually commences construction of Landlord's
Improvements shall be referred to as the "Construction Commencement Date."
(b) Landlord shall use all reasonable efforts to substantially
complete construction of Landlord's Improvements as soon as possible
following the Construction Completion Date in accordance with the
Construction Schedule attached hereto as Exhibit C-1, as may be extended by
excused delays (the
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"Estimated Construction Completion Date"). The date on which Landlord
substantially completes construction of Landlord's Improvements (except for
work to be performed by Tenant) shall be referred to as the "Construction
Completion Date." Landlord acknowledges that Tenant will suffer significant
damages if Landlord fails to deliver the Demised Premises on or before the
Estimated Construction Completion Date and that time is of the essence with
respect to Landlord's completion of the Landlord's Improvements as required
herein. If Landlord fails to cause the Landlord's Improvements to be
substantially completed on or before the Estimated Construction Completion
Date, as said date may be extended from time to time due to excused delays,
Landlord shall be obligated to pay to Tenant the following sums for each
day after the Estimated Construction Completion Date until the Construction
Completion Date up to the maximum of sixty-five (65) days of delay and
thereafter, Landlord shall be liable for Tenant's actual damages for the
delay (which shall include Tenant's actual costs incurred in connection
with holding over at its present location and/or renting reasonably
acceptable substitute space): (a) for the first thirty (30) days of delay,
the sum of One Thousand Dollars ($1,000.00) per day for each calendar day
of delay; (b) for the thirty-first (31st) day through the sixtieth (60th)
day of delay, the sum of Two Thousand Five Hundred Dollars ($2,500.00) per
day for each calendar day of delay; and (c) for the sixty-first (61st) day
through the sixty-fifth (65th) day of delay, the sum of Seven Thousand Five
Hundred Dollars ($7,500.00) per day for each calendar day of delay.
Notwithstanding the foregoing, in no event shall Landlord be liable to
Tenant for any punitive, special, incidental, indirect or consequential
damages of any kind whatsoever, each of which is hereby excluded by
agreement of the parties regardless of whether or not any party has been
advised of the possibility of such damages. Landlord shall pay the sums
calculated above (other than actual damages accrued after the 95th day of
delay) within thirty (30) days after the Commencement Date. In connection
with the foregoing, Landlord agrees to deposit into escrow for the benefit
of Tenant all damages received from Regis Contractors of Northern
California, L.P. pursuant to Section 1.7 of that certain Construction
Management Agreement dated March 18, 1997. Tenant agrees to deliver to
Landlord an accounting of Tenant's actual damages upon request.
B. Tenant or its architect will from time to time upon written request of
Landlord or Landlord's construction lender certify that the construction of
Landlord's Improvements has been completed to that point to the reasonable
satisfaction of Tenant. Notwithstanding the foregoing, nothing contained herein
shall be deemed to abrogate, waive or compromise any of Tenant's rights
hereunder with respect to the construction and completion of Landlord's
Improvements.
C. In the event this Lease has not been terminated pursuant to Paragraph
49 of the Lease, Landlord and Tenant promptly shall execute a document
substantially in the form attached hereto as Exhibit E and made a part hereof,
to establish the Commencement Date and the Expiration Date.
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D. The following phrases have the meanings set forth below:
(a) The phrase "commence[d][s] construction of Landlord's
Improvements" as used herein means issuance of all necessary permits needed
to commence construction, a building permit, execution of a construction
contract or contracts for the completion of Landlord's Improvements in
accordance with the Plans, execution of this Lease, and excavation work has
commenced.
(b) The phrase "substantial[ly] complete[ed] [ion] [of] construction
of Landlord's Improvements as used in this Lease shall mean the
municipality having jurisdiction thereof issues a certificate of occupancy
permitting Tenant to occupy Landlord's Improvements or takes such other
action as may be customary to permit occupancy or use thereof for the
purposes provided herein and Landlord's Improvements are otherwise ready
for beneficial use and occupancy by Tenant subject to completion of any
punchlist items (as defined herein) by Landlord and Landlord's architect
certified to Tenant in writing that Landlord's Improvements have been
constructed and completed in a good and workmanlike manner in substantial
accordance with the Plans and that to the best of its knowledge the Plans
comply with applicable laws, including without limitation all building
codes, zoning ordinances and regulations and the Act (as defined herein)
and Landlord's Improvements are otherwise ready for beneficial use and
occupancy by Tenant subject to completion of any punchlist items by
Landlord; provided, however, the issuance of a certificate of occupancy or
such other action as may be customary to permit occupancy or use thereof
and the issuance of the architect's certificate shall not be a condition to
payment of rent or commencement of the term if failure to secure such
certificate of occupancy or action or architect's certificate is caused by
the act or neglect of Tenant or if matters required for issuance are the
responsibility of Tenant.
(c) The phrase "usable square feet" means the square feet contained
within the inside of the exterior walls of the Building.
E. Within fifteen (15) days after the Construction Completion Date,
Tenant, Landlord and Landlord's Architect shall prepare and execute a punchlist
(the "punchlist") of incomplete and incorrect items which shall include details
of construction and mechanical and electrical adjustments which are minor in
character and do not materially interfere with Tenant's use or enjoyment of the
Demised Premises in accordance with the provisions of this Lease, and may also
include landscaping and other items which do not materially affect Tenant's use
of the Demised Premises but which cannot be immediately completed because of
weather, or any items listed on the Plans or the Construction Schedule as items
to be completed after substantial completion of the Landlord's Improvements, if
any (such items are sometimes hereinafter referred to as "punchlist items").
Landlord shall use all reasonable efforts to complete the punchlist items as
soon as possible after its receipt of the punchlist, and to minimize disruption
of Tenant's business and other inconveniences to Tenant, subject to excused
delays. If Landlord fails to complete the punchlist items within ninety (90)
days after the receipt by Landlord of the completed punchlist by Tenant, subject
to excused delays, then Tenant shall have the right, but not the obligation, to
complete the punchlist items and the Landlord shall reimburse Tenant for its
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reasonable out-of-pocket expenditures in connection therewith upon presentation
of invoices in sufficient detail and upon waivers covering performance of the
work. Nothing herein contained shall be deemed or construed to permit Tenant to
offset against Base Rent or other charges payable by Tenant hereunder. Landlord
shall deliver to Tenant "as built" working drawings of the Landlord's
Improvements within sixty (60) days after completion of the punchlist items.
Landlord shall maintain a retainage of a minimum of ten percent (10%) of
the cost of the so-called tenant improvement portion of the Landlord
Improvements (the "TI Work") or, based on an estimated approximate cost of for
the TI Work. The aforementioned retainage shall not be released until the
punchlist items for TI Work have been completed to Tenant's reasonable
satisfaction.
F. Landlord shall at its own expense correct or repair any parts of
Landlord's Improvements that fail to conform with the requirements of the Plans
during the period of construction of Landlord's Improvements (unless Tenant is
willing to accept such non-conforming work and so notifies Landlord thereof in
writing). Landlord shall correct any defects in the construction of Landlord's
Improvements not caused by Tenant which appear within a period of one (1) year
from the Construction Completion Date, but not otherwise. Landlord shall obtain
for the joint benefit of Landlord and Tenant, a joint, non-exclusive assignment
of all contractor, subcontractor, equipment, material and manufacturers'
warranties relating to the Landlord's Improvements which shall contain a minimum
of a one (1) year warranty period commencing with the contractors' or
subcontractors' completion of the work included in Landlord's Improvements (the
"Warranties"). Furthermore, on the Construction Completion Date, Landlord shall
assign to Tenant the non-exclusive right to enforce any and all Warranties and
Landlord agrees to reasonably cooperate with Tenant's pursuit of any and all
claims under the Warranties.
G. Tenant shall have the right to request that changes be made to the
Plans. Within ten (10) days after Tenant's requests, Landlord shall provide an
estimate of the amount that the change will increase or decrease the cost of
completing the Landlord's Improvements and the time adjustment to the
Construction Schedule, if any. If Tenant approves the change following receipt
of the estimates, Landlord shall submit a change order to its contractors to
implement the change requested by Tenant. The estimated increase or decrease in
the time required to complete the Landlord's Improvements resulting from
Tenant's change shall be reflected as an adjustment to the Construction Schedule
and shall be deemed an "excused delay" and any net increase or decrease in
Landlord's construction costs due to Tenant's change order, shall be borne by or
credited to Tenant, as the case may be, by means of an adjustment to the
Schedule of Rents in accordance with the formula established on Exhibit D.
H. If due to change orders initiated by Tenant, Landlord's Development
Costs exceed the amount of [deleted text] then concurrent with any such change
order, Tenant agrees to deposit into the escrow created by the Escrow Agreement
(as defined in Paragraph 3 hereof) the total amount of any such increase in
Landlord's Development Costs in excess of [deleted text]. Notwithstanding the
foregoing, upon the closing of the permanent financing for the Demised Premises
occurring on or after the Commencement Date, Landlord shall reimburse Tenant for
all such increased costs and the Base Rent shall be adjusted in accordance with
the formula
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established on Exhibit D; provided, however, Base Rent shall not be adjusted
until such time as Tenant is reimbursed hereunder.
5. Use.
A. The Demised Premises shall be used and occupied for general office
purposes and for any other purpose which does not violate any applicable law,
rule, ordinance or regulation of any applicable government authority having
jurisdiction ("Tenant's Use"). Landlord represents that, to its actual
knowledge, the Demised Premises are currently zoned "O," Administrative-
Professional District and R1.7/PD, low medium density residential district under
the zoning ordinance of the City of Sunnyvale, California, which zoning
classification, to Landlord's actual knowledge, will not restrict or limit
Tenant's Use; provided, however, Landlord makes no representation as to whether
a special use permit, zoning variance or comparable relief from the local zoning
ordinance is required to conduct Tenant's Use, and if such special use, variance
or comparable relief is required, Tenant shall obtain the same (at its sole cost
and expense). Landlord further represents, to its actual knowledge without
independent investigation or inquiry and subject to the foregoing proviso, that
there are no other zoning ordinances or any other prohibitions restricting or
limiting Tenant's Use in any material respect. In addition, Tenant may use all
or any part of the Demised Premises for any lawful purpose then permitted by
local zoning ordinances and the certificate of occupancy, if available;
provided, however, Tenant may not use or occupy the Demised Premises, or
knowingly permit the Demised Premises to be used or occupied (including without
limitation subleasing the Demised Premises or any part thereof or assigning this
Lease to any other party conducting a business other than Tenant's Use) or in
such a manner as to cause the value or usefulness of the Demised Premises, or
any part thereof, substantially to diminish (reasonable wear and tear excepted).
Tenant shall have the exclusive right to use of and shall have full access to
the Demised Premises twenty-four (24) hours per day, seven (7) days per week,
three hundred sixty-five (365) days per year during the term.
B. Tenant may, if Tenant so elects, and for Tenant's sole use, install and
operate within the Building microwave ovens and install and operate within the
Building vending machines to dispense hot and cold beverages, ice cream, candy,
food and cigarettes; such machines shall be maintained in a neat and sanitary
condition and shall comply with all applicable laws and ordinances. Tenant shall
also have the right to use, install and operate within the Building, all
telecommunication lines and other telecommunication and electronic facilities
relating to services to be provided to Tenant and its subtenants and Landlord
agrees to provide all necessary easements upon the Demised Premises reasonably
required by said service provider. Upon termination of the Lease, and if so
requested by Landlord, Tenant shall, at its sole cost and expense, in a good and
workmanlike manner and in as expeditious a manner as possible, remove any or all
such items from the Demised Premises, to the extent required by Landlord. Tenant
further agrees to repair any damage to the Demised Premises caused by the
removal of such items. In connection with any easements granted hereunder to
service providers, Landlord reserves the right to condition any such grant upon
receipt of acknowledgment from the relevant service provider(s) that such
service provider agrees to vacate the easement, and relinquish all of its rights
in the Demised Premises, effective upon the termination of the Lease.
Notwithstanding anything contained herein to the contrary, if the Lease is in
full force and effect as of the thirteenth (13th) anniversary of the
Commencement Date and Tenant is not then in default
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hereunder, Landlord waives its rights hereunder to require Tenant to remove from
the Demised Premises any or all of the items referred to above, upon termination
of this Lease.
6. Condition of Demised Premises. Landlord shall construct and Tenant
shall reasonably accept Landlord's Improvements in accordance with the Plans. As
of the Commencement Date, Landlord's Improvements shall be in good working order
and condition and, subject to the items on or to be inserted on the punchlist,
constructed in substantial accordance with the Plans.
7. Maintenance and Repairs.
A. Except as otherwise provided herein, during the term of this Lease,
Tenant shall, at Tenant's sole expense, keep the Demised Premises in good
working order, condition and repair and in compliance with all applicable laws
and shall perform all routine maintenance thereof and all necessary repairs
thereto, interior and exterior, structural and nonstructural ordinary and
extraordinary, foreseen or unforeseen, of every nature, kind and description.
When used in this Paragraph 7, "repairs" shall include all necessary
replacements, renewals, alterations, additions and betterments. If Tenant cannot
keep the Demised Premises or any portion thereof in good working order,
condition and repair, then Tenant shall replace the same in a first-class
manner. Tenant shall comply with manufacturers' recommended schedules for
warranty work. Tenant shall furnish its own cleaning services. All repairs and
replacements made by Tenant shall be at least equal in quality to the original
work and shall be made by Tenant in accordance with all applicable laws. The
necessity for or adequacy of maintenance, repairs and replacements shall be
measured by the standards which are appropriate for improvements of similar
construction and class, provided that Tenant shall in any event make all repairs
and replacements necessary to avoid any structural damage or other damage or
injury to the Demised Premises.
B. Notwithstanding the provisions of Paragraph 7.A., and Tenant's
obligations to pay for all repairs, in the event that at any time during the
term of this Lease after the expiration of the twentieth (20th) Lease Year
(commencing with the Third Extension Term), Tenant reasonably determines that
capital expenditures are required to be expended by Tenant in connection with
maintaining,, repairing or replacing the roof or structural components of the
Building, or replacing the parking areas, Building plumbing, electrical heating,
ventilation, or cooling equipment, sprinkler systems, or making any other
capital expenditure required by subsequent law (any such capital expenditure
being herein referred to as a "Specified Capital Item"), then the Tenant shall
submit to Landlord a proposed budget for such capital expenses for the Specified
Capital Items and obtain Landlord's prior written approval thereof, which
approval shall not be unreasonably withheld or delayed. Upon Tenant's obtaining
Landlord's prior written approval of such Specified Capital Items and Tenant
completing such work in accordance with the requirements set forth in this Lease
then and in that event, the Landlord agrees that it shall reimburse Tenant for
an amount ("Reimbursement Amount") equal to the actual costs incurred in
connection with the Specified Capital Item previously approved by Landlord and
multiplied by a fraction, the numerator of which is the portion of the useful
life of such Specified Capital Items remaining after the then existing term and
the denominator of which is the useful life of such Specified Capital Item
(i.e., by way of example, in the event that the approved cost for an approved
Specified Capital Item was One Thousand Dollars ($1,000) and the useful life of
such Specified Capital Item was eight (8) years and such work was commenced at
the end of the
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twentieth (20th) Lease Year, then in such event, Landlord should reimburse
Tenant for Five Hundred Dollars ($500) as the Reimbursement Amount. The "useful
life" of a Specified Capital Item shall be determined using the United States
Internal Revenue Service standard depreciation schedule in effect on the date
that the applicable capital expenditure is made. Notwithstanding anything
contained herein to the contrary, in the event that the Tenant exercises its
option to extend the term of the Lease, then simultaneous with the exercise of
such renewal option, the Tenant shall pay to Landlord an amount equal to the
difference between the Reimbursement Amount and the amount Landlord would have
paid as a Reimbursement Amount had the term been extended by the Extension Term
at the time such Specified Capital Item was commenced (i.e., by way of example,
in the event that the Specified Capital Item was One Thousand Dollars ($1,000)
and that the useful life of the Specified Capital Item was eight (8) years, with
such work having been commenced at the end of the twentieth (20th) Lease Year,
whereby Landlord reimbursed Tenant a Reimbursement Amount of Five Hundred
Dollars ($500), then simultaneous with the exercise of its option to extend the
Term for the Fourth Extension Term, the Tenant would pay to Landlord an amount
equal to Five Hundred Dollars ($500)). The allocation of the costs of Specified
Capital Items as set forth in this Paragraph 7.B. shall not relieve Tenant of
Tenant's maintenance and repair obligation sunder this Lease.
8. Alterations. Tenant may install tenant finishes in the Demised
Premises and make interior alterations, additional installations, modifications,
substitutions, improvements and decorations (collectively, "Alterations") in and
to the Demised Premises, subject only to the following conditions:
(i) any Alterations shall be made at Tenant's sole cost and expense so
that the Demised Premises shall at all times be free of liens for labor and
materials supplied to the Demised Premises;
(ii) without the prior written approval of Landlord, Tenant shall make
no Alterations (x) which are structural in nature or adversely affect in
any way the structure of the Demised Premises; or (y) which adversely
affect or could render void or invalidate any Warranties under this Lease.
In addition, without the prior written approval of Landlord, Tenant shall
make no Alterations to any portion of the exterior or elevation of the
Building.
(iii) any Alterations shall be performed in a good and workmanlike
manner and in compliance with all applicable laws and requirements of
governmental authorities having jurisdiction and applicable insurance
requirements and shall not violate any term of any agreement or restriction
to which the Demised Premises are subject;
(iv) Tenant, at its sole cost and expense, shall cause its contractors
to maintain builder's risk insurance and such other insurance (including,
without limitation, workers compensation insurance) as is then customarily
maintained for such work, all with insurers licensed by the State of
California;
(v) At least fifteen (15) days prior to Tenant's commencement of any
Alterations costing in excess of One Million Dollars ($1,000,000.00), the
plans and specifications therefor shall be submitted to Landlord for
Landlord's review and
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approval, which approval shall not be unreasonably withheld or delayed
provided that the provisions of this subparagraph (v) shall not apply to
initial tenant improvements needed to locate a subtenant in the Demised
Premises; and
(vi) To the extent not inconsistent with the requirement set forth
above, ten shall not be required to obtain Landlord's consent to
Alterations which are a subtenant's initial tenant improvements.
Any Alteration shall, when completed, be of such character as not to reduce
the value or utility of the Demised Premises or the Building to which such
Alteration is made below its value or utility to Landlord immediately before
such Alteration, nor shall such Alteration alter the exterior of the
Improvements or reduce the area or cubic content of the Building, nor change the
character of the Demised Premises or the Building as to use without Landlord's
express written consent.
No change, alteration, restoration or new construction shall be in or
connect the Improvements with any property, building or other improvement
located outside the boundaries of the Land, nor shall the same obstruct or
interfere with any existing easement.
Tenant shall notify Landlord in writing 30 days prior to commencing any
alterations, additions or improvements to the Demised Premises so that Landlord
shall have the right to record and post notices of nonresponsibility on the
Demised Premises. Within a reasonable time period prior to commencing the
alterations, additions or improvements, ten shall provide Landlord with copies
of all plans and specifications prepared in connection with any such alteration,
addition or improvement, as well as copies of each material amendment and change
thereto, if and when applicable.
All of Tenant's generators and uninterruptible power supply equipment (but
in no event including the primary HVAC system serving the Building), trade
fixtures, movable partitions, furniture, machinery and furnishings installed by
Tenant or assignees, subtenants or licensees of Tenant shall remain the property
of the owner thereof with the right of removal, whether or not affixed and or
attached to the real estate and the owner thereof shall be entitled to remove
the same or any part thereof during the term or at the end of the term provided
herein, provided that such owner shall repair any damage caused by such removal.
Except as otherwise provided herein, all Alterations made or installed by Tenant
shall remain the Property of Tenant and Tenant shall have the right to remove
the Alterations at any time during the term hereof provided Tenant shall repair
any damage resulting therefrom and leave the Demised Premises in a commercially
reasonable condition. Notwithstanding the foregoing, any Alterations remaining
on the Demised Premises at the end of the term shall become the property of the
Landlord without payment therefor by Landlord, and shall be surrendered to
Landlord at the expiration of the term of this Lease; provided however, if the
Lease term ends prior to the thirteenth (13th) anniversary of the Lease
Commencement Date, if so requested by Landlord, Tenant shall, at its sole cost
and expense and in as expeditious a manner as possible remove any or all of such
Alterations from the Demised Premises, to the extent required by Landlord.
Tenant further agrees to repair any damage resulting therefrom and leave the
Demised Premises in a commercially reasonable condition.
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9. Signs.
A. Tenant may install, at its expense and pursuant to the Plans, a
monument identification sign containing Tenant's name at a location depicted on
Exhibit B unless such location would cause a violation of applicable laws in
which event said monument identification sign shall be moved to a location
mutually acceptable to the parties. Tenant shall also have the right to place
any additional signs at the Demised Premises without the prior consent of
Landlord, provided that such sign or signs (a) do not cause any structural
damage or other damage to the Building; (b) do not violate applicable
governmental laws, ordinances, rules or regulations; (c) do not violate any
existing restrictions affecting the Demised Premises; and (d) are compatible
with the architecture of the Building and the landscaped area adjacent thereto.
Tenant shall remove all signage from the Demised Premises at the end of the
term.
B. Landlord may place signs on the Demised Premises identifying Tenant
prior to the Construction Completion Date, provided Tenant has approved each
sign, such approval not to be unreasonably withheld.
10. Services.
A. Landlord shall provide all utility equipment, distribution systems,
fixtures and parts to the Demised Premises in accordance with the Plans, and
shall in all other respects prepare the Demised Premises to accept all utilities
to be used by Tenant during the term of the Lease as contemplated by the Plans
including all connection, tap-in and impact fees, any charges for the
underground installation of electric, gas or other utilities or services, and
other charges relating to the extension of or change in the facilities necessary
to provide the Demised Premises with adequate utilities services. Tenant shall
contract for and pay directly or the cost of usage of all utilities including
all charges for water, heat, gas, light, garbage, electricity, telephone,
sewage, steam, power or other public or private utility services. If after
Landlord's installation of the utility systems required to be provided herein,
any bond, charge or fee is required by the state in which the Demised Premises
are located, or any city or other agency, subdivision, or instrumentality
thereof, or by any utility company furnishing services or utilities to the
Demised Premises, as a condition precedent to continuing to furnish utilities or
services to the Demised Premises, such bond, charge or fee shall be deemed to be
a utility charge payable by Tenant. To the extent existing utility easements on
the Demised Premises are not sufficient to provide utility and communication
services to the Demised Premises for Tenant's use, Landlord agrees to grant
additional easements to utility providers, including telecommunication and
electronic service providers, if reasonably required by Tenant.
B. The Demised Premises shall include all of the improvements shown on the
Site Plan, including, without limitation, exclusive use of the paved parking as
set forth on the Site Plan.
C. Tenant acknowledges that any one or more of the services provided for
in Paragraph 10 hereof may be interrupted or suspended by reason of accident,
repair, alterations or improvements necessary to be made, strike, lockout,
misuse or neglect by Tenant or Tenant's agents, employees or invitees, or by
shortages of fuel or other energy supplies to be provided by public or private
utilities or supplies or by other matters, and Landlord shall not be liable to
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Tenant therefore, nor shall Tenant have any right to terminate the Lease or
other rights against Landlord in the event of a failure, interruption or
suspension of any of the aforesaid services.
11. Compliance with Law.
A. Landlord covenants that the Demised Premises (except trade fixtures,
equipment, machinery or any other item constructed or installed by Tenant) will
materially conform as of the Commencement Date to any applicable laws, orders,
statutes, ordinances, rules, regulations and requirements of federal, state and
municipal governments, including, without limitation, all applicable rules and
regulations of the Board of Fire Underwriters and any requirements of the
certificate of occupancy or any permit with respect to the Demised Premises and
the sidewalks, curbs, roadways, alleys, entrances or other facilities adjacent
or appurtenant thereto. Landlord shall be responsible for procuring building and
other permits and licenses necessary for construction of Landlord's
Improvements.
B. Tenant shall throughout the term of this Lease, at ten's sole cost,
materially comply with or remove or cure any violation of any applicable laws,
orders, statutes, ordinances, rules, regulations and requirements of federal,
state and municipal governments, including, without limitation, any applicable
laws, orders, statutes, ordinances, rules, regulations and requirements of any
federal, state or local government relating to occupational safety and health
(collectively, the "OSHA Regulations"), all applicable rules and regulations of
the Board of Fire Underwriters and any requirements of the certificate of
occupancy or any permit with respect to the Demised Premises and the sidewalks,
curbs, roadways, alleys, entrances or railroad track facilities adjacent or
appurtenant thereto, and whether the compliance, curing or removal of any such
violation and the costs and expenses necessitated thereby shall have been
foreseen or unforeseen, ordinary or extraordinary, and whether or not the same
shall be presently within the contemplation of Landlord or Tenant or shall
involve any change of governmental policy, or require structural or
extraordinary repairs, alterations or additions by Tenant and irrespective of
the costs thereof; provided, however, that Landlord shall be responsible, at
Landlord's sole cost, to make all repairs needed for the Demised Premises to
comply with all laws if said repair is required within one (1) years after the
Commencement Date and is necessary due to a defect in the construction of the
Landlord's Improvements including without limitation, a failure to construct the
Landlord's Improvements so that the Demised Premises are in compliance with all
laws as of the Commencement Date. Tenant, at its sole cost and expense, shall
comply with all agreements, contracts, easements, restrictions, reservations or
covenants, if any, affecting the Demised Premises or hereafter created by Tenant
and consented to, in writing, by Tenant or requested, in writing, by Tenant.
Tenant shall also comply with, observe and perform all provisions and
requirements of all policies of insurance at any time in force with respect to
the Demised Premises and shall comply with all development permits issued by
governmental authorities issued in connection with development of the Demised
Premises. Tenant shall procure and maintain all permits and licenses required
for the transaction of Tenant's business at the Demised Premises, including with
limitation, any special use permit, zoning variance or comparable zoning relief
necessary for Tenant's Use.
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12. Landlord's Title, Authority, and Quiet Enjoyment: Tenant's Authority.
A. Landlord represents that it will have, as of the Commencement Date,
marketable fee simple title to the Demised Premises, subject to the exceptions
to title currently encumbering the Demised Premises as described in Exhibit H,
and any additional exceptions to title created in connection with Landlord's
acquisition or development of the Demised Premises, or financing of such
acquisition or development (collectively referred to herein as the "Permitted
Exceptions"). Landlord represents that any such additional exceptions to title
created in connection with Landlord's acquisition or development of the Demised
Premises or financing of such acquisition or development shall not materially
interfere with Tenant's intended use of the Demised Premises. Any lien claims
properly bonded over or insured over by title insurance shall be deemed to be
Permitted Exceptions hereunder.
B. Landlord represents and warrants that it has full and complete
authority to enter into this Lease under all of the terms, conditions and
provisions set forth herein, and so long as Tenant keeps and substantially
performs each and every term, provision and condition herein contained on the
part of Tenant to be kept and performed, Tenant shall peacefully and quietly
enjoy the Demised Premises without hindrance or molestation by Landlord or by
any other person claiming by, through or under Landlord, subject to the terms of
the Lease. Without limiting the foregoing, Landlord covenants to perform all
obligations to be performed by Landlord and to pay as and when due all amounts
to be paid by Landlord under any mortgage, deed of trust, ground lease or other
instrument encumbering the Demised Premises. Each individual executing this
Lease on behalf of Landlord represents and warrants to Tenant that he or she is
duly authorized to do so.
C. Tenant represents and warrants that it has full and complete authority
to enter into this Lease under all of the terms, conditions and provisions set
forth herein.
D. Tenant hereby approves the condition of Landlord's title to the Demised
Premises. This Lease shall be subject to the Permitted Exception sand Landlord
shall not permit or cause any easements, covenants, restrictions, conditions or
other changes in Landlord's title which would materially and adversely impact
Tenant's Use. Landlord shall notify Tenant in writing prior to permitting or
causing any easements, covenants, restrictions, or conditions to be placed of
record.
13. Subordination. The priority of this Lease and the leasehold estate of
Tenant created hereunder are and shall be subject and subordinate to the lien of
any mortgage, deed of trust, sale-leaseback, ground lease or similar
encumbrance, whether such encumbrance is placed against the fee or leasehold
estate, affecting the Demised Premises and to all renewals, modifications,
consolidations, replacements and extensions thereof, and advances thereunder;
provided, however, with respect to any mortgage, deed of trust, sale-leaseback,
ground lease or similar encumbrance such subordination shall be subject to
receipt by Tenant of a nondisturbance agreement in form reasonably required by
any such lienholder or ground Lessor (collectively, a "Mortgagee") and
reasonably acceptable to Tenant. Tenant agrees at any time hereafter, upon
twenty (20) days prior written notice, to execute and deliver any instruments,
releases or other documents that may reasonably be required for the purpose of
subjecting and subordinating this Lease, as above provided, to the lien of any
such mortgage, deed of trust, ground lease, sale-
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leaseback or similar encumbrance in a form reasonably acceptable to Tenant and
the holder of such mortgage, provided said subordination provides that all
insurance proceeds and condemnation awards will be made available for the
restoration of the Demised Premises, as provided herein, and that Tenant's
rights hereunder will not be disturbed unless Tenant is in default beyond all
applicable cure periods. Any fee which Landlord's lender or ground lessor may
charge for such agreement shall be paid by Landlord.
In the event of any act or omission of Landlord constituting a default by
Landlord, Tenant shall not exercise any remedy until Tenant has given Landlord
and any mortgagee, ground lessor or sale-leaseback lessor of the Demised
Premises that has provided Tenant with written notice of its interest in the
Demised Premises and a notice address for each such party a prior thirty (30)
day written notice of such act or omission and until a reasonable period of time
to allow Landlord or the mortgagee, ground lessor or sale-leaseback lessor to
remedy such act or omission shall have elapsed following the giving of such
notice; provided, however, if such act or omission cannot, with due diligence
and in good faith, be remedied within such thirty (30) day period, then Landlord
or any such mortgagee, ground lessor or sale-leaseback lessor shall be allowed
such further period of time as may be reasonably necessary provided that it
commence remedying the same with due diligence and in good faith within said
thirty (30) day period.
If any Mortgagee shall succeed to the rights of Landlord under this Lease
or to ownership of the Demised Premises, whether through possession or
foreclosure or the delivery of a deed to the Demised Premises, then, upon
written request of such mortgagee so succeeding to Landlord's rights hereunder,
Tenant shall attorn to and recognize such mortgagee, ground lessor or sale-
leaseback lessor as Tenant's landlord under this Lease, and shall promptly
execute and deliver any instrument that such mortgagee may reasonably request to
evidence such attornment (whether before or after making of the mortgage, ground
lease or sale-leaseback lease). In the event of any other transfer of Landlord's
interest hereunder, upon the written request of the transferee and Landlord,
Tenant shall attorn to and recognize such transferee as Tenant's landlord under
this Lease and shall promptly execute and deliver any instrument that such
transferee and Landlord may reasonably request to evidence such attornment.
14. Assignment and Sublease. Tenant, if there is no Material Breach (as
herein defined) by Tenant hereunder, shall have the right to assign this Lease
or to sublease all or any portion of the Demised Premises, without Landlord's
written consent in accordance with the terms of this Paragraph 14.
Tenant may assign this Lease or sublet the Demised Premises to an affiliate
or subsidiary more than fifty percent (50%) of the voting stock of which is
owned directly or indirectly by the direct or remote parent of Tenant (without
Landlord's consent, upon prior written notice to Landlord) and further Tenant'
interest in this Lease may be assigned to and assumed by a successor to Tenant
pursuant to a purchase of all or substantially all of the assets of Tenant in
connection with the sale of such assets or to any entity which acquires all of
Tenant's capital stock (without Landlord's consent upon prior written notice to
Landlord).
Any assignment or sublease shall require the assignee or subtenant to
comply with all terms of this Lease except for any sublease term, which shall be
at Tenant's discretion (but in no event extend beyond the term of this Lease),
and a copy of such sublease or assignment shall be
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delivered to Landlord at least ten (10) days prior to the commencement of such
sublease or assignment.
Any assignee shall assume, by instrument in form and content satisfactory
to Landlord, the due performance of all of Tenant's obligation sunder this
Lease, including any accrued obligations at the time of the effective date of
the assignment, and such assumption agreement shall state that the same is made
by the assignee for the express benefit of Landlord as a third party beneficiary
thereof.
Each sublease permitted by this Paragraph 14 shall be subject and
subordinate to all of the terms, covenants and conditions of this Lease and to
all of the rights of Landlord hereunder; and in the event this Lease shall
terminate before the expiration of such sublease, the sublessee thereunder will,
at Landlord's option, attorn to Landlord and waive any rights the sublessee may
have to terminate the sublease or to surrender possession thereunder, as a
result of the termination of this Lease.
Tenant agrees to pay on behalf of Landlord any and all costs of Landlord or
otherwise occasioned by such assignment or subletting, including without
limitation, the cost of any alteration, addition, improvement or other
renovation or refurbishment to the Demised Premises made in connection with such
assignment or subletting and any cost imposed by any governmental authority in
connection with any of the foregoing.
Any assignment or subletting under this Paragraph 14 shall not relieve
Tenant (or any guarantor of Tenant's obligations under the Lease or any
assignee) of its obligations hereunder. Any assignment or subletting of this
Lease which is not in compliance with the provisions of this Paragraph 14 shall
be of no effect and void. Except as permitted in this Paragraph 14, Tenant shall
not transfer, sublet, assign or otherwise encumber its interest in the Lease or
the Demised Premises, unless consented to by Landlord.
No assignment or subleasing hereunder shall relieve Tenant from any of
Tenant's obligation sin this Lease contained.
All profits from any such assignment or subletting shall be the property of
Tenant and not Landlord.
15. Lease Extension. If this Lease shall not have been terminated pursuant
to any provisions hereof and there is no Material Breach (as defined herein) by
Tenant hereunder at the time set for exercise of the Extension Terms (as herein
defined) and at the time set for commencement thereof, then Tenant may, at
Tenant's option, extend the term of this Lease for five (5) successive
additional terms of four (4) years each (each an "Extension Term," collectively
the "Extension Terms") commencing on the expiration of the original term, or the
immediately preceding Extension Term, as the case may be. Tenant may exercise
such option by giving Landlord written notice at least ten (10) months prior to
the expiration of the original or the immediately preceding Extension Term, as
the case may be. Upon the giving by Tenant to Landlord of such written notice
and the compliance by Tenant with the foregoing provisions of this Paragraph 15,
this Lease shall be deemed to be automatically extended upon all the
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Covenants, agreements, terms, provisions and conditions set forth in this Lease,
except that Rent for each such Extension Term shall be as provided on Exhibit D.
If Tenant fails or omits to so give to Landlord the written notice referred
to above, Landlord shall provide Tenant with written notice of Tenant's failure
to exercise the Extension Term, and upon receipt of such notice, Tenant shall be
allowed fifteen (15) days to exercise the extension option allowed for herein.
If Landlord fails to provide such notice, Tenant's renewal option shall expire
upon the expiration of the then current term. Failure to respond to Landlord's
notice within such fifteen (15) days shall be deemed to be a waiver by Tenant of
its extension option hereunder.
16. Impositions.
A. Tenant covenants and agrees to pay during the term of this Lease, as
Additional Rent, before any fine, penalty, interest or cost may be added thereto
for the nonpayment thereof, all impositions described herein that accrue on or
after the Commencement Date, which include without limitation, all real estate
taxes, special assessments, water rates and charges, sewer rates and charges,
including any sum or sums payable for future sewer or water capacity increases,
charges for public utilities, street lighting, excise levies, licenses, permits,
inspection fees, other governmental charges, and all other charges or burdens of
whatsoever kind and nature (including costs, fees, and expenses of complying
with any restrictive covenants or similar agreements to which the Demised
Premises are subject), incurred in the use, occupancy, ownership, operation,
leasing or possession of the Demised Premises, without particularizing by any
known name or by whatever name hereafter called, and whether any of the
foregoing be general or special, ordinary or extraordinary, foreseen or
unforeseen (all of which are sometimes herein referred to as "Impositions"),
which at any time during the term may have been or may be assessed, levied,
confirmed, imposed upon, or become a lien on the Demised Premises, or any
portion thereof, or any appurtenance thereto, rents or income therefrom, and
such easements or rights as may now or hereafter by appurtenant to appertain to
the use of the Demised Premises.
B. If, at any time during the term of this Lease, any method of taxation
shall be such that there shall be levied, assessed or imposed on Landlord, or on
the Basic Rent or Additional Rent, or on the Demised Premises or on the value of
the Demised Premises, or any portion thereof, a capital levy, sales or use tax,
gross receipts tax or other tax on the rents received therefrom, or a franchise
tax, or an assessment, levy or charge measured by or based in whole or in part
upon such rents or value, Tenant covenants to pay and discharge the same, it
being the intention of the parties hereto that the rent to be paid hereunder
shall be paid to Landlord absolutely net without deduction or charge of any
nature whatsoever foreseeable or unforeseeable, ordinary or extraordinary, or of
any nature, kind or description, except as in this Lease otherwise expressly
provided. Nothing in this Lease contained shall require Tenant to pay any
municipal, state or federal net income or excess profits taxes assessed against
Landlord, or any municipal, state or federal net income or excess profits taxes
assessed against Landlord, or any municipal, state or federal capital levy,
estate succession, inheritance or transfer taxes of Landlord, or corporation
franchise taxes imposed upon any corporate owner of the fee of the Demised
Premises.
C. Tenant covenants to furnish Landlord, within 30 days after the date
upon which an Imposition or other tax, assessment, levy or charge is payable by
Tenant, official receipts of
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the appropriate taxing authority, or other appropriate proof satisfactory to
Landlord, evidencing the payment of the same. The certificate, advice or bill of
the appropriate official designated by law to make or issue the same or to
receive payment of any imposition or other tax, assessment, levy or charge may
be relied upon by Landlord as sufficient evidence that such Imposition or other
tax, assessment, levy or charge is due and unpaid at the time of the making or
issuance of such certificate, advice or bill, unless Tenant provides Landlord
with evidence to the contrary.
D. At Landlord's written demand after any Event of Default (as defined in
Section 20 hereinafter) and for as long as such Event of Default is uncured, or
upon the request of any Mortgagee of the Demised Premises, (but only after an
Event of Default and for as long as such Event of Default is uncured) Tenant
shall pay to Landlord the known or estimated yearly real estate taxes and
assessments payable with respect to the Demised Premises in monthly payments
equal to one-twelfth of the known or estimated yearly real estate taxes and
assessments next payable with respect to the Demised Premises. From time to time
Landlord may re-estimate the amount of real estate taxes and assessments, and in
such event Landlord shall notify Tenant, in writing, of such re-estimate and fix
future monthly installments for the remaining period prior to the next tax and
assessment due date in an amount sufficient to pay the re-estimated amount over
the balance of such period after giving credit for payments made by Tenant on
the previous estimate. If the total monthly payments made by Tenant pursuant to
this Paragraph 16D shall exceed the amount of payments necessary for said taxes
and assessments, such excess shall be credited on subsequent monthly payments of
the same nature; but if the total of such monthly payments so made under this
paragraph shall be insufficient to pay such taxes and assessments when due, then
Tenant shall pay to Landlord such amount as may be necessary to make up the
deficiency.
E. Tenant shall have the right at its own expense to contest the amount or
validity, in whole or in part, of any Imposition by appropriate proceedings
diligently conducted in good faith, but only after Tenant provides Landlord or
the Mortgagee reasonable security, or Tenant makes payment of such Imposition,
unless such payment, or a payment thereof under protest, would operate as a bar
to such contest or interfere materially with the prosecution thereof, in which
event, notwithstanding the provisions of Paragraph 16A hereof Tenant may
postpone or defer payment of such Imposition if neither the Demised Premises nor
any portion thereof would, by reason of such postponement or deferment, be in
danger of being forfeited or lost, and (b) Tenant is not then in Material Breach
of this Lease. Upon the termination of any such proceedings, Tenant shall pay
the amount of such Imposition or part thereof, if any, as finally determined in
such proceedings, the payment of which may have been deferred during the
prosecution of such proceedings, together with any costs, fees, including
attorney's fees, interest, penalties, fines and other liability in connection
therewith, and upon such payment Landlord shall return all amounts or
certificates deposited with it in respect to the contest of such Imposition, as
aforesaid, or, at the written direction of Tenant, Landlord shall make such
payment out of the funds on deposit with Landlord and the balance, if any, shall
be returned to Tenant. Tenant shall be entitled to the refund of any Imposition,
penalty, find and interest thereon received by Landlord which have been paid by
Tenant or which have been paid by Landlord but for which Landlord has been
previously reimbursed in full by Tenant. Landlord shall not be required to join
in any proceedings referred to in this Paragraph 16E unless the provisions of
any law, rule or regulation at the time in effect shall require that such
proceedings be brought by or in the name of Landlord, in which event Landlord
shall join in such proceedings
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or permit the same to be brought in Landlord's name upon compliance with such
conditions as Landlord may reasonably require. Landlord shall not ultimately be
subject to any liability or the payment of any fees, including attorney's fees,
costs and expenses in connection with such proceedings. Tenant agrees to pay all
such fees (including reasonable attorney's fees), costs and expenses or, on
demand, or make reimbursement to Landlord for such payment, Of Landlord is
provided a certificate of deposit or other interest bearing instrument as
security for the payment of the contested Imposition, during the time when any
such certificate of deposit or other interest bearing instrument is on deposit
with Landlord, and prior to the time when the same is returned to Tenant or
applied against the payment, removal or discharge of Impositions, as above
provided, Tenant shall be entitled to receive all interest paid thereon, if any.
Cash deposits shall not bear interest.
17. Insurance.
A. During the term of this Lease, during any extension thereof, and during
any holdover period, Tenant shall at its cost and expense procure and keep in
force a policy of comprehensive public liability insurance, with limits of not
less than $1,000,000 for injury to any one person, $2,000,000 as to any one
accident, and $100,000 as to property damage, all on a per occurrence basis
which policy shall name Landlord and its managing agent as additional insureds.
A certificate of such insurance shall be delivered to Landlord prior to the
Commencement Date and shall provide that same may not be cancelled or lowered in
amounts without prior written notice of not less than thirty (30) days to
Landlord and Landlord's mortgagee. Notwithstanding the foregoing, Tenant may
insure the foregoing risks under its blanket policy or elect to self-insure such
risks as provided in Paragraph 17E below. Any such liability insurance shall
contain a contractual liability endorsement covering Tenant's indemnification
obligations under this Lease.
B. During the term of this Lease and any extension thereof, Tenant, at its
sole cost and expense, shall obtain and continuously maintain in full force and
effect, policies of insurance covering the Improvements constructed, installed
or located on the Demised Premises naming the Landlord, as loss payee as its
interest may appear, against (a) loss or damage by fire; (b) loss or damage from
such other risks or hazards now or hereafter embraced by an "Extended Coverage
Endorsement,) including, but not limited to, windstorm, hail, explosion,
vandalism, riot and civil commotion, damage from vehicles, smoke damage, water
damage and debris removal; (c) loss for flood if the Demised Premises are in a
designated flood or flood insurance area; (d) loss for damage by earthquake if
the Demised Premises are located in an earthquake-prone area; (e) loss from so-
called explosion, collapse and underground hazards; and (f) loss or damage from
such other risks or hazards of a similar or dissimilar nature which are now or
may hereafter be customarily insured against with respect to improvements
similar in construction, design, general location, use and occupancy to the
Improvements. At all times, such insurance coverage shall be in an amount equal
to 100% of the then "full replacement cost" of the Improvements. "Full
Replacement Cost" shall be interpreted to mean the cost of replacing the
improvements without deduction for depreciation or wear and tear, and it shall
include a reasonable sum for architectural, engineering, legal, administrative
and supervisory fees connected with the restoration or replacement of the
Improvements in the event of damage thereto or destruction thereof. If a
sprinkler system shall be located in the Improvements, sprinkler leakage
insurance shall be procured and continuously maintained by Tenant and Tenant's
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sole cost and expense. Tenant shall cause to be inserted in the policy of
insurance required by this Paragraph 17B the so-called "waiver of subrogation"
clause as to Landlord and Landlord's insurer.
C. During the term of this Lease and any extension thereof, TENANT shall
maintain Workman's Compensation Insurance in accordance with the laws of the
State of California.
D. Tenant shall maintain insurance coverage (including loss of use and
business interruption coverage) upon Tenant's business and upon all personal
property of Tenant or the personal property of others kept, stored or maintained
on the Demised Premises against loss or damage by fire, windstorm or other
casualties or causes for such amount as Tenant may desire, and Tenant agrees
that such policies shall contain a waiver of subrogation clause as to Landlord
and Landlord's insurer.
E. Tenant's right to self-insure with respect to liability insurance is
conditioned upon Tenant or Tenant's guarantor maintaining a net work of at least
$100,000,000.00. Tenant shall furnish Landlord written confirmation that Tenant
has elected to self-insure with respect to liability insurance (if that is the
case), and if so, that Tenant's or Tenant's guarantor's net worth is at least
$100,000,000.00 as evidenced by audited financial statements of Tenant or
Tenant's guarantor or an affidavit from Tenant's or Tenant's guarantor's chief
financial officer. If Tenant self-insures with respect to liability insurance,
then Tenant agrees to indemnify, defend, and hold Landlord harmless from and
against any loss, damage, costs, fees (including attorneys, fees), claims,
demands, actions, causes of action, judgements, suits and liability that was or
would have been covered by the insurance policy or policies replaced by self-
insurance and such self-insurance shall not affect the nonliability of Landlord
under Paragraph 17F as to any loss or damage caused by the period described
therein. The indemnification contained in this Paragraph 17E is in addition to,
and not in lieu of, any covenants or obligations of Tenant contained in the
other Paragraphs of this Lease. If Tenant so elects to become a self-insurer
with respect to liability insurance, Tenant shall deliver to Landlord notice in
writing of the required coverages which it is self-insuring setting forth the
amount, limits, and scope of the self-insurance in respect to each type of
coverage self-insured. Tenant, at Landlord's request, shall provide to
Landlord's mortgagee or assignee a certificate satisfactory to such mortgagee or
assignee setting forth the self-insured coverages, if any, and stating that all
losses shall be payable to such mortgagee and/or assignee as its interests may
appear.
Nothing in this Paragraph shall prevent Tenant from taking out insurance of
the kind and in the amount provided for under the preceding paragraphs of this
Paragraph under a blanked insurance policy or policies (certificates thereof
reasonably satisfactory to Landlord shall be delivered to Landlord) which may
cover other properties owned or operated by Tenant as well as the Demised
Premises; provided, however, that any such policy of blanket insurance of the
kind provided for shall specify therein the amounts thereof exclusively
allocated to the Demised Premises or Tenant shall furnish Landlord and the
holder of any fee mortgage with a written statement from the insurers under such
policies specifying the amounts of the total insurance exclusively allocated to
the Demised Premises; and provided, further, however, that such policies of
blanket insurance shall, as respects the Demised Premises, contain the various
provisions required of such an insurance policy by the foregoing provisions of
this Paragraph 17.
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F. Tenant hereby releases Landlord (and Landlord's assignees, employees,
agents and servants) and waives any claims it may have against Landlord from any
liability for damage to or destruction of Tenant's trade fixtures, personal
property (including also property under the care, custody, or control of
Tenant), machinery, equipment, furniture, fixtures and business interests on the
Demised Premises, except arising from Landlord's or Landlord's assignees',
employees', agents' or servants' negligence. This Paragraph shall apply
especially, but not exclusively, to damage or destruction caused by the flooding
of basements or other subsurface areas, or by refrigerators, sprinkling devices,
air conditioning apparatus, water, snow, frost, steam, excessive heat or cold,
falling plaster, broken glass, sewage, gas, odors or noise, or the bursting or
leaking of pipes or plumbing fixtures, and shall apply equally, whether any such
damage results from the act or omission of other tenants or occupants in the
Demised Premises or any other persons, and whether such damage be caused by or
result from any of the aforesaid, or shall be caused by or result from other,
circumstances of a similar or dissimilar nature.
G. Tenant shall require each of its contractors and tradespeople to carry
contractors liability/completed operations insurance, in the amounts specified
in Paragraph 17A above, from companies licensed to do business in the State of
California.
H. Upon expiration of the term of this Lease, the unearned premiums upon
any insurance policies or certificates thereof lodged with Landlord by Tenant
shall be payable to Tenant, provided that Tenant shall not then be in default in
keeping, observing or performing the terms and conditions of this Lease.
18. Destruction and Restoration.
A Tenant covenants and agrees that in case of damage to or destruction of
the Improvements after the Commencement Date of the term of this Lease, by fire
or otherwise, Tenant, at its sole cost and expense, shall promptly restore,
repair, replace and rebuild the same as nearly as possible to the condition that
the same were in immediately prior to such damage or destruction with such
changes and alterations (made in conformity with Paragraph 8 hereof) as may be
reasonably acceptable to Landlord or required by law. Tenant shall forthwith
give Landlord such written notice of such damage or destruction upon the
occurrence thereof and specify in such notice, in reasonable detail, the extent
thereof. Such restoration, repairs, replacements, rebuilding, changes and
alterations, including the cost of temporary repairs for the protection of the
Demised Premises, or any portion thereof, pending completion thereof are
sometimes hereinafter referred to as the "Restoration." The Restoration shall be
carried on and completed in accordance with the provisions and conditions of
Paragraphs 8 and 18B hereof. If the net amount of the insurance proceeds (after
deduction of all costs, expenses and fees related to recovery of the insurance
proceeds) recovered by Landlord and held by Landlord and Tenant as co-trustees
is reasonably deemed insufficient by Landlord to complete the Restoration of
such improvements (exclusive of Tenant's personal property and trade fixtures
which shall be restored, repaired or rebuilt out of Tenant' separate funds),
Tenant shall, upon request of Landlord, deposit with Landlord and Tenant, as co-
trustees, a cash deposit equal to the reasonable estimate of the amount
necessary to complete the Restoration of such improvements less the amount of
such insurance proceeds available.
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B. All insurance moneys recovered by Landlord and held by Landlord and
Tenant as co-trustees on account of such damage or destruction, less Landlord's
reasonable out-of-pocket costs, if any, to Landlord of such recovery, shall be
applied to the payment of the costs of the Restoration and shall be paid out
from time to time as the Restoration progresses upon the written request of
Tenant, accompanied by a certificate of the architect or a qualified
professional engineer in charge of the Restoration stating that as of the date
of such certificate (a) the sum requested is justly due to the contractors,
subcontractors, materialmen, laborers, engineers, architects, or persons, firms
or corporations furnishing or supplying work, labor, services or materials for
such Restoration, or is justly required to reimburse Tenant or any expenditures
made by Tenant in connection with such Restoration, and when added to all sums
previously paid out by Landlord does not exceed the value of the Restoration
performed to the date of such certificate by all of said parties; (b) except for
the amount, if any, stated in such certificates to be due for work, labor,
services or materials, there is no outstanding indebtedness known to the person
signing such certificate, after due inquiry, which is then due for work, labor,
services or materials in connection with such Restoration, which, if unpaid,
might become the basis of a mechanic's lien or similar lien with respect to the
Restoration or a lien upon the Demised Premises, or any portion thereof; and (c)
the costs, as estimated by the person signing such certificate, of the
completion of the Restoration required to be done subsequent to the date of such
certificate in order to complete the Restoration do not exceed the sum of the
remaining insurance moneys, plus the amount deposited by Tenant, if any,
remaining in the hands of Landlord after payment of the sum requested in such
certificate.
Tenant shall furnish Landlord within thirty (30) days after Tenant's
receipt of each progress payment with evidence reasonably satisfactory to
Landlord that Tenant has paid all bills in respect to any work, labor, services
or materials performed, furnished or supplied in connection with such
Restoration which was covered by the previous progress payment. Landlord shall
not be required to pay out or consent to any additional insurance moneys where
Tenant fails to supply satisfactory evidence of the payment of work, labor,
services or materials performed, furnished or supplied, as aforesaid. If the
insurance moneys in the hands of Landlord and Tenant as co-trustees, and such
other sums, if any, deposited with Landlord and Tenant as co-trustees pursuant
to this Paragraph 18, shall be insufficient to pay the entire costs of the
Restoration, Tenant agrees to pay any deficiency promptly insurer, and provided
further that notwithstanding that the insurance moneys are insufficient to pay
the cost of the Restoration, Tenant shall continue to be liable for full payment
of Base Rent, Additional Rent and any other amounts due and payable hereunder.
Upon completion of the Restoration and payment in full thereof by Tenant,
Landlord shall within a reasonable period of time thereafter, turn over to
Tenant all insurance moneys or other moneys then remaining upon submission of
proof reasonably satisfactory to Landlord that the Restoration has been paid for
in full and the damaged or destroyed Building and other improvements repaired,
restored or rebuilt as nearly as possible to the condition they were in
immediately prior to such damage or destruction, or with such changes or
alterations as may be made in conformity with Paragraphs 8 and 18A hereof.
C. No destruction of or damage to the Demised Premises, or any portion
thereof, by fire, casualty or otherwise shall permit Tenant to surrender this
Lease or shall relieve Tenant form its liability to pay to Landlord the Base
Rent and Additional Rent payable under this Lease
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or from any other such obligations under the Lease, and Tenant waives any rights
now or hereafter conferred upon Tenant by present or future law or otherwise to
quit or surrender this Lease or the Demised Premises, or any portion thereof, to
Landlord or to any suspension, diminution, abatement or reduction or rent on
account of any such damage or destruction.
D. Landlord agrees, subject to the provisions of Paragraph 8 and 18
hereof, to in all instances turn over and make available to Tenant all insurance
moneys contemplated by Paragraph 18B hereof.
19. Condemnation.
A. If, during the term of this Lease, the entire Demised Premises shall be
taken as the result of the exercise of the power of eminent domain (hereinafter
referred to as the "Proceedings"), this Lease and all right, title and interest
of Tenant hereunder shall cease and come to an end on the date of vesting of
title pursuant to such Proceedings and Landlord shall be entitled to and shall
receive the total award made in such Proceedings; provided that Tenant shall
have the right to state a claim separate from Landlord's claim against the
condemning authority for Tenant's moving costs and the loss of the bargain of
this Lease, to the extent that such a claim by Tenant does not otherwise reduce
Landlord's award.
In any taking of the Demised Premises, or any portion thereof, whether or
not this Lease is terminated as in this paragraph provided, Tenant shall not be
entitled to any portion of the award for the taking of the Demised Premises or
damage to the Improvements, except as otherwise provided for in Paragraph 19C
with respect to the restoration of the Improvements, or for the estate or
interest of Tenant therein, all such award, damages, consequential damages and
compensation being hereby assigned to Landlord, and Tenant hereby waives any
right it now has or may have under present or future law to receive any separate
award of damages for its interest in the Demised Premises, or any portion
thereof, or its interest in this Lease, expect that Tenant shall have,
nevertheless, the limited right to prove in the Proceedings and to receive any
award which may be made for damages to or condemnation for Tenant's movable
trade fixtures and equipment, and for Tenant's relocation costs in connection
therewith.
B. If, during the initial term of this Lease, or any extension or renewal
thereof, less that the entire Demised Premises, but more than 15% of the floor
area of the Building, or more than 25% of the land area of the Demised Premises,
or more than 20% of the parking spaces, shall be taken in any such Proceeding,
this Lease shall, upon vesting of title in the Proceedings, terminate as to the
portion of the Demised Premises so taken, and Tenant may, at its option,
terminate this Lease as to the remainder of the Demised Premises, Tenant shall
not have the right to terminate this Lease pursuant to the preceding sentence
unless (a) the business of Tenant conducted in the portion of the Demised
Premises taken cannot reasonably be carried on with substantially the same
utility and efficiency in the remainder of the Demised Premises (or any
substitute space securable by Tenant pursuant to clause (b) hereof ) and (b)
Tenant cannot construct or secure or Landlord cannot provide substantially
similar space to the space so taken, on the remainder of the Demised Premises,
or Landlord cannot provide replacement parking spaces on additional property
located in close proximity to the Demised Premises that are reasonably
acceptable to Tenant. Such termination as to the remainder of the Demised
Premises shall be effected by notice in writing given not more than 60 days
after the date of vesting of title
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in such Proceedings, and shall specify a date not more than 60 days after the
giving of such notice as the date for such termination. Upon the date specified
in such notice, the term of this Lease, and all right, title and interest of
Tenant hereunder, shall cease and come to an end. If this Lease is terminated as
in this Paragraph 19B provided, Landlord shall be entitled to and shall receive
the total award made in such Proceedings, Tenant hereby assigning any interest
in such award, damages, consequential damages and compensation to Landlord, and
Tenant hereby waiving any right Tenant has now or may have under present or
future law to receive any separate award of damages for its interest in the
Demised Premises, or any portion thereof, or its interest in this Lease except
as otherwise provided in Paragraph 19A. The right of Tenant to terminate this
Lease, as in this Paragraph 19B provided, shall be exercisable only upon
condition that Tenant is not then in default in the performance of any of the
terms, covenants or conditions of this Lease on its part to be performed, and
such termination upon Tenant's part shall become effective only upon compliance
by Tenant with all such terms, covenants and conditions to the date of such
termination. In the event that Tenant elects not to terminate this Lease as to
the remainder of the Demised Premises, the rights and obligations of Landlord
and Tenant shall be governed by the provisions of Paragraph 19C hereof.
C. If 15%, or less, of the floor area of the Building, or 25%, or less, of
the land area of the Demised Premises or 20% or less, of the parking spaces
shall be taken in such Proceedings, or if more than 15% of the floor area of the
Building or more than 25% or the land area of the Demised Premises or more than
20% of the parking spaces is taken (but less than the entire Demised Premises),
and this Lease is not terminated as in Paragraph 19B hereof provided, this Lease
shall, upon vesting of title in the Proceedings, terminate as to the parts so
taken, and Tenant shall have no claim or interest in the award, damages,
consequential damages and compensation, or any part thereof except as otherwise
provided in Paragraph 19A. Landlord shall be entitled to and shall receive the
total award made in such Proceedings, Tenant hereby assigning any interest in
such award, damages, consequential damages and compensation to Landlord, and
Tenant hereby waiving any right Tenant, has now or may have under present or
future law to receive any separate award of damages for its interest in the
Demised Premises, or any portion thereof, or its interest in this Lease except
as otherwise provided in Paragraph 19A. The net amount of the award (after
deduction of all costs and expenses, including attorney's fees), shall be held
by Landlord as trustee and applied as hereinafter provided. Tenant, in such
case, covenants and agrees, at Tenant's sole cost and expense (subject to
reimbursement to the extent hereinafter provided), promptly to restore that
portion of the Improvements on the Demised Premises not so taken to a complete
architectural and mechanical unit for the use and occupancy of Tenant as in this
Lease provided. In the event that the net amount of the award (after deduction
of all costs and expenses, including attorney's fees) that may be received by
Landlord and held by Landlord as trustee in any such Proceedings as a result of
such taking is insufficient to pay all costs of such restoration work, Tenant
shall deposit with Landlord as trustee such additional sum as may be required
upon the written request of Landlord so long as Tenant has participated in the
Proceedings or otherwise provided reasonably adequate assurances to Landlord
that Tenant has the financial resources to fund such additional sum; provided,
however, Landlord shall retain ultimate control over any final settlement or
litigation with the condemning authority, and provided further that
notwithstanding that the net amount of the award may be insufficient to pay all
costs of the restoration work, Tenant shall continue to be liable for payment of
Base Rent, Additional Rent and any other amount due and payable hereunder, which
amounts shall not be abated except as provided in Paragraph 19E below. The
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provisions and conditions in Paragraph 8 applicable to changes and alterations
shall apply to Tenant's obligations to restore that portion of the Improvements
to a complete architectural and mechanical unit. Landlord agrees in connection
with such restoration work to apply so much of the net amount of any award
(after deduction of all costs and expenses, including attorney's fees) that may
be received by Landlord and held by Landlord as trustee in any such Proceedings
as a result of such taking to the costs of such restoration work thereof and the
said net award as a result of such taking shall be paid out from time to time to
Tenant, or on behalf of Tenant, as such restoration work progresses upon the
written request of Tenant, which shall be accompanied by a certificate of the
architect or the registered professional engineer in charge of the restoration
by a certificate of the architect of the registered professional engineer in
charge of the restoration work stating that (a) the sum requested is justly due
to the contractors, subcontractors, materialmen, laborers, engineers, architects
or other persons, firms or corporations furnishing or supplying work, labor,
services or materials for such restoration work or as is justly required to
reimburse Tenant for expenditures made by Tenant in connection with such
restoration work, and when added to all sums previously paid out by Landlord as
trustee does not exceed the value of the restoration work performed to the date
of such certificate; and (b) the net amount of any such award as a result of
such taking remaining in the hands of Landlord, together with the sums, if any,
deposited by Tenant with Landlord as trustee pursuant to the provisions hereof,
will be sufficient upon the completion of such restoration work to pay for the
same in full. If payment of the award as a result of such taking, as aforesaid,
shall not be received by Landlord in time to permit payments as the restoration
work progresses (except in the event of an appeal of the award by Landlord),
Tenant shall not be required to proceed with any restoration work until payment
of such award is received by Landlord; provided, however, delay in payment of
such amount shall not release Tenant of its obligation to pay Base Rent,
Additional Rent and other amounts due and payable hereunder during any such
delay and there shall be no abatement of Base Rent, Additional Rent or any other
amounts except as provided in Paragraph 19E below. If Landlord appeals an award
and payment of the award is delayed pending appeal Tenant shall, nevertheless,
perform and fully pay for such work without delay, and payment of the amount to
which Tenant would have been entitled had Landlord how appealed the award (in an
amount not to exceed the net award prior to such appeal) shall be made by
Landlord to Tenant as restoration progresses pursuant to this Paragraph 19C, in
which event Landlord shall be entitled to retain an amount equal to the sum
disbursed to Tenant pursuant to the preceding sentence out of the net award as
and when payment of such award is received by Landlord. Tenant shall also
furnish Landlord as trustee with each certificate hereinabove referred to,
together with evidence reasonably satisfactory to Landlord that there are no
unpaid bills in respect to any work, labor, services or materials performed,
furnished or supplied, or claimed to have been performed, furnished or supplied,
in connection with such restoration work [relating to prior payments made by
Landlord to Tenant], and that no liens have been filed against the Demised
Premises, or any portion thereof. Landlord as trustee shall not be required to
pay out any funds when there are unpaid bills for work, labor, services or
materials performed, furnished or supplied in connection with such restoration
work relating to prior payments made by Landlord to Tenant, or where a lien for
work, labor, services or materials performed, furnished or supplied has been
placed against the Demised Premises, or any portion thereof. Upon completion of
the restoration work and payment in full therefor by Tenant, and upon submission
of proof reasonably satisfactory to Landlord that the restoration work has been
paid for in full and that the Improvements have been restored or rebuilt to a
complete architectural and mechanical unit for the use and occupancy of Tenant
as provided in this Lease, Landlord as trustee shall pay over to Tenant any
portion of the cash deposit furnished by Tenant then remaining; provided,
however, any other amounts awarded
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in such Proceedings (and made available for restoration) which remain following
restoration. The Demised Premises shall be the property of Tenant and Landlord
shall have not claim thereto.
D. In the event of any partial termination of this Lease as a result of
any such proceedings, Tenant shall pay to Landlord all Base Rent and all
Additional Rent and other charges payable hereunder with respect tot hat portion
of the Demised Premises so taken in such Proceedings with respect to which this
Lease shall have terminated justly apportioned to the date of such termination.
From and after the date of vesting of title in such Proceedings, Tenant shall
continue to pay the Base Rent and Additional Rent and other charges payable
hereunder, as in this Lease provided, to be paid by Tenant, subject to
abatement, if any, as provided for in Paragraph 19E hereof.
E. In the event of a partial taking of the Demised Premises under
Paragraph 19C hereof, or a partial taking of the Demised Premises under
Paragraph 19B hereof, followed by Tenant's election not to terminate this Lease,
the fixed Base Rent payable hereunder during the period from and after the date
of vesting of title in such Proceedings to the termination of this Lease shall
not be reduced unless Tenant shall have completed the restoration work with its
own funds in accordance with the provisions of the Lease and Landlord shall have
applied the net amount of any award to reduce the indebtedness secured by any
financing encumbering the Demised Premises or otherwise to reduce the amount of
Landlord's Development Costs (as herein defined), in which event fixed Base Rent
payable hereunder shall be reduced to a sum equal to the product of the Base
Rent provided for herein multiplied by a fraction, the numerator of which shall
be Landlord's Development Costs less any amounts so paid to and applied by
Landlord less Tenant's $2,000,000 contribution, and the denominator of which
shall be Landlord's Development Costs less Tenant's $2,000,000 without regard
to any amounts so paid to and applied by Landlord.
F. Anything herein to the contrary notwithstanding, upon the occurrence of
any Proceedings which would otherwise result in a termination of this Lease,
Tenant shall, as a condition precedent to such termination so long as Tenant has
participated in such proceedings, (provided, however, Landlord shall retain
ultimate control over any final settlement or litigation with the condemning
authority), pay to Landlord an amount, reasonably estimated by Landlord, equal
to the excess, if any, of the unamortized portion of Landlord's Development
Costs, less the $2,000,000 referred to below, over the net award to be received
by Landlord after deduction of all costs of the Proceedings. In making the
foregoing calculation, Landlord shall use an interest rate equal to the interest
rate associated with the project financing from time to time during the term of
this Lease. "Landlord's Development Costs" Shall mean and include any and all
amounts incurred by Landlord in connection with the acquisition and development
of the Demised Premises, including, without limitation, consideration paid for
acquisition of the Demised Premises, costs for required off-site improvements,
including relocating electric lines underground, all architectural, engineering,
environmental, land planning and other consulting fees, all title and survey
expenses, any and all fees and expenses associated with procuring construction
and/or other financing for the project, any other costs or expenses that would
not have been incurred by Landlord had Landlord not been involved in the
acquisition of the Demised Premises, and all attorneys' fees associated with any
of the foregoing. A preliminary estimate of Landlord's Development Costs (which
includes Tenant's initial contribution of $2,000,000 as deposited into escrow
under Paragraph 3) is attached hereto and made a part
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hereof as Exhibit G; provided, however, the parties agree and acknowledge that
the amounts and categories of costs and expenses set forth on Exhibit G
represent an estimate of such items only and that Landlord anticipates changes
in, additions to and modifications of such items, including, without
limitation, changes, additions and modifications of such items as development
of the project and construction of the Demised Premises progresses including,
without limitation, changes, additions and modifications relating to actual
design and construction costs, and in securing construction and permanent
financing for the project from time to time. The parties agree to update the
estimate provided for in Exhibit G within sixty (60) days after the
Commencement Date and attach the updated Exhibit G initialed and dated by the
parties in place of the Exhibit G attached as of the date hereof.
20. Default by Tenant. The occurrence of any one or more of the following
events shall constitute an "Event of Default" by Tenant:
A. The failure by Tenant to make any payment of rental or any other
payment required to be made by Tenant hereunder, and any interest for late
payment thereof, as and when due, where such failure shall continue for a period
of five (5) days after receipt by Tenant of a written notice thereof from
Landlord.
B. The failure by Tenant to observe or perform any of the covenants,
conditions or provisions of this Lease (other than the failure by Tenant
described in subparagraph E below) where such failure shall continue for a
period of thirty (30) days after receipt by Tenant of written notice thereof
from Landlord; provided, however, that if the nature of Tenant's default is such
that it cannot be cured solely by payment of money (and in the reasonable
judgement of Landlord said default is susceptible to cure) and that more than
thirty (30) days may be reasonably required for such cure, then Tenant shall not
be deemed to be in default if Tenant shall commence such cure within such thirty
(30) day period and shall thereafter diligently prosecute such cure to
completion.
C. (a) the making of any general arrangement or any assignment by Tenant
for the benefit of creditors;
(b) the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or a petition of reorganization or arrangement under
any law relating to bankruptcy (unless, in the case of a petition filed
against Tenant, the petition is dismissed within ninety (90) days of the
date filed);
(c) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets; and
(d) the attachment, execution or other judicial seizure of
substantially all of Tenant's assets.
D. An assignment or subletting by Tenant in violation of Paragraph 14
hereof.
E. The failure by Tenant in keeping, observing or performing any of the
terms contained in this Lease, other than those referred to in Subparagraphs 14
A, B, C and D above, and which exposes Landlord to criminal liability, and such
default shall continue after written.
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notice thereof given from Landlord to Tenant, and Tenant fails to proceed timely
and promptly with all due diligence and in good faith to cure the same and
thereafter to prosecute the curing of such default with all due diligence, it
being intended that in connection with a default which exposes Landlord to
criminal liability that Tenant shall proceed immediately to cure or correct
such condition with continuity and with all due diligence and in good faith.
21. Landlord's Remedies. In the event of any Material Breach of this
Lease by Tenant, then Landlord, in addition to other rights or remedies it may
have, shall have the right to terminate this Lease, or without terminating this
Lease, terminate Tenant's right to possession of the Demised Premises, and in
either event Tenant shall immediately surrender possession of the Demised
Premises to Landlord and if Tenant fails to do so, Landlord may, without
prejudice to any other remedy it may have for possession or arrearage of
rentals, enter upon and take possession of the Demised Premises and expel or
remove Tenant and any other person who may be occupying the Demised Premises or
any part thereof, with or without legal proceedings, by force if necessary,
without being liable for prosecution or any claim or damage therefor. In such
event, Landlord shall be entitled to recover from Tenant all reasonable damages
incurred by Landlord by reason of Tenant's default, including without
limitation, the cost of recovering possession of the Demised Premises, expenses
of reletting including reasonable renovation and alteration of the Demised
Premises, reasonable attorney's, fees, real estate commissions, and any other
sum of money, late charges and damages caused by Tenant to Landlord. As used
herein, "Material Breach" shall mean any breach by Tenant in any of the terms
and conditions of this Lease which upon an Event of Default would have a
material and adverse impact of any kind upon Landlord and/or the Demised
Premises, as opposed to a technical breach by Tenant which is de minimis in
nature.
If Tenant's right to possession of the Demised Premises is terminated
without termination of the Lease, Landlord shall be entitled to enforce all of
Landlord's rights and remedies under the Lease, including the right to recover
the rent as it becomes due hereunder. Should Landlord elect to relet the
Demised Premises or any part thereof, Landlord may do so for such term or terms
and at such rental or rentals and upon such other terms and conditions as
Landlord may deem appropriate. Rental and other amounts received by Landlord in
connection with such reletting shall be applied against the amounts due from
Tenant hereunder after deducting any expenses insured by Landlord with respect
to such reletting as provided above. Tenant shall pay any deficiency to
Landlord. Such deficiency shall be calculated on a cumulative basis with all
excess payments received by Landlord from such reletting to be applied against
future amounts due from Tenant and any deficiencies to be paid monthly. No such
reentry or taking possession of the Demised Premises by Landlord shall be
construed as an election on its part to terminate this Lease, unless a written
notice of such intention by given to Tenant, in which event Tenant's obligations
to Landlord shall forthwith cease, or unless the termination thereof be decreed
by a court of competent jurisdiction.
In the event Landlord terminates this Lease in accordance with this
Paragraph, then, Tenant shall be liable and shall pay to Landlord, the sum of
all rent and other payments owed to date to Landlord, all sums owed to date to
third parties (including without limitation, all Impositions) hereunder accrued
to the date of such termination, all reasonable amounts required to be spent by
Landlord to fulfill any of Tenant's obligations which Tenant did not fulfill
prior to termination by Landlord, plus, as damages, an amount equal to the
present value discounted at
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ten percent (10%) of (i) the total rental payments hereunder for the remaining
portion of the term of the Lease, calculated as if such term expires on the date
set forth in paragraph 2, unless Tenant has extended this Lease, in which case
such calculation shall be as if the term expires on the final day of the
extension term then in effect, less (ii) the fair market rental value of the
Demised Premises for such remaining period. Nothing herein contained shall
limit or prejudice the right of Landlord to prove for and obtain, as damages by
reason of such expiration or termination, an amount equal to the maximum allowed
by any statute or rule of law in effect at the time when, and governing the
proceedings in which, such damages are to be proved, whether or not such amount
be greater, equal to or less than the amount of the difference referred to
above.
Landlord shall have the obligation to mitigate its damages to the extent
required by state law.
In addition to the aforesaid remedies, Landlord shall be entitled to pursue
any other remedy now or hereafter available to Landlord at equity or under the
laws or judicial decisions of the state where the demised Premises is located or
by statute or otherwise. All rights and remedies of Landlord herein enumerated
shall be cumulative, and the exercise or the commencement of the exercise by
Landlord of any one or more of such rights or remedies should not preclude the
simultaneous or later exercise by Landlord of any or all other rights or
remedies. Tenant shall pay, upon demand, all of Landlord's costs, including
reasonable attorneys' fees and court costs, incident to the enforcement of
Tenant's obligations hereunder. A receipt by Landlord of rent with knowledge of
the breach of any covenant hereof (other than breach of the obligation to pay
the portion of such rent paid) shall not be deemed a waiver of such breach, and
no waiver by Landlord of any provisions of this Lease shall be deemed to have
been made unless expressed in writing and signed by Landlord. Without limiting
the generality of the foregoing, no failure by Landlord to insist upon the
performance of any of the terms of this Lease or to exercise any right or
remedy consequent upon a breach thereof shall constitute a waiver of such breach
or any of the terms of this Lease, and no express waiver shall affect any
default other than the default specified in the express waiver and that only for
the time and to the extent therein stated. One or more waivers by Landlord
shall not be construed as a waiver of a subsequent breach of the same covenant,
term or condition. In addition to other remedies in this Lease provided,
Landlord shall be entitled to seek a restraint by injunction of the violation or
attempted or threatened violation of the covenants, conditions and provisions of
this Lease.
22. Default by Landlord. The following shall constitute a "Material
Breach" by Landlord:
The failure by Landlord to observe or perform any of the covenants,
conditions or provisions of this Lease where such failure shall continue for a
period of thirty (30) days after receipt by Landlord of written notice thereof
from Tenant; provided , however, that if the nature of Landlord's default is
such that it cannot be cured solely by payment of money and that more than
thirty (30) days may be reasonably required for such cure, then Landlord shall
not be deemed to be in default if Landlord shall commence such cure within such
thirty (30) day period and shall thereafter diligently prosecute such cure to
completion.
23. Tenant's Remedies. In the event of any Material Breach of this Lease
by Landlord, then Tenant in addition to other rights or remedies it may have at
law or in equity
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subject to the terms of this Lease), at Tenant's sole option, may perform such
obligations of Landlord provided that Tenant has furnished to any party having
a recorded mortgage, deed of trust, ground lease or similar lien against the
Demised Premises (for which Tenant has received written notice) with written
notice of such default and such party has failed to cure the same within the
limits prescribed herein for Landlord to cure such default, and Tenant may
invoice Landlord for the costs and expenses thereof, which invoice Landlord
shall promptly pay. Notwithstanding the foregoing, despite such notice and
expiration of such sure period, no rent or other payments due from Tenant may
be offset by Tenant, and Tenant shall have no right to perform any obligation
of Landlord unless such performance by Tenant is necessary to prevent imminent
injury or damage to persons or Tenant's property.
24. Delivery of Executed Lease. Deleted by intent of parties.
25. Termination. Deleted by intent of parties.
26. Notices. All notices shall be sent by registered mail, return receipt
requested, or by recognized overnight courier providing proof of delivery, to
the following addresses;
<TABLE>
<S> <C>
To Landlord: To Tenant:
Sunnyvale Limited Partnership First Data Merchant Services
Ridge Sunnyvale, Inc., Corporation
c/o Ridge Capital Corporation Attention: David L. Schlapbach,
Attention: James G. Martell Director of Real Estate
257 East Main Street and Counsel
Barrington, Illinois 60010 5660 New Northside Drive
Suite 1400
Atlanta, Georgia 30328
With a copy to: With a copy to:
Gardner, Carton & Douglas First Data Merchant Services
Attention: Glen W. Reed Corporation
321 North Clark Street Attention: Roger L. Pierce, President
Suite 3400 700 Hansen way
Chicago, Illinois 60610-4795 Palo Alto, CA 94303
</TABLE>
Any notice shall be deemed to have been given three (3) days after the date
deposited in the United States mail, or on the first business day after sending
when delivery by recognized overnight courier providing proof of delivery, in
the manner aforesaid.
Either party, by written notice to the other, shall have the right to change
the addresses for notice(s) to be sent to such party, and to add or substitute
entities to which a copy of any notice shall be sent by the other party.
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27. Brokerage. Landlord and Tenant acknowledge that no real estate broker
brought about this lease transaction. Landlord hereby indemnifies Tenant
against the claims of any party claiming by, through or under Landlord in
connection with this Lease transaction, and Tenant hereby indemnifies Landlord
against the claims of any party claiming by, through or under Tenant in
connection with this Lease transaction.
28. Estoppel. Landlord and Tenant shall, at any time upon not less than
twenty (20) days prior written notice, execute and deliver to a prospective new
landlord, lender, or assignee or subtenant of Tenant, as the case may be, a
statement in writing (i) certifying that this Lease in unmodified and in full
force and effect (or if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to the party's knowledge, any uncured defaults
on the part of the other party hereunder, or so specifying such defaults if any
are claimed, and (iii) other reasonable requests that relate to the Lease.
29. Hazardous Substances.
A. For purposes of this Paragraph 29, "Hazardous Substance" means:
(i) "Hazardous Substances" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C.
(S)9601 et. seq., as amended, and all regulations promulgated thereunder,
the Federal Clean Air Act, as amended (42 U.S.C. (S)7401 et seq.) and the
Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C. (S)1317 et seq. as
amended and all regulation promulgated thereunder;
(ii) "Hazardous Waste" as defined by the Resource Conservation and
Recovery Act ("RCRA"), 42 U.S.C. (S)6602 et. seq. as amended and all
regulations promulgated thereunder;
(iii) Any pollutant or contaminant or hazardous, dangerous or toxic
chemicals materials or substances within the meaning of any other applicable
federal, state or local law, regulation, ordinance or requirement (including
consent decrees and administrative orders) relating to or imposing liability
or standards of conduct concerning any hazardous, toxic or dangerous waste,
substance or material, all as amended or hereafter amended;
(iv) More than 100 gallons of crude oil which is liquid at standard
conditions of temperature and pressure (80 degrees Fahrenheit and 14.7
pounds per square inch absolute);
(v) Any radioactive material, including any source, special nuclear or
by-product material as defined in 42 U.S.C. (S)2011 et. seq. as amended or
hereafter amended, and all regulations promulgated thereunder;
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(vi) Friable asbestos or any asbestos which becomes friable during the
term of this Lease; and
(vii) Anything defined as a hazardous, toxic or radioactive material,
waste or substance or the use, transportation or disposal of which is
regulated under applicable California laws or rules and regulations issued
pursuant thereof;
(all of the foregoing statutes, laws, ordinance, rules, regulations, and common
law theories being sometimes hereinafter collectively referred to as "Envlaws").
B. Landlord and Tenant acknowledge the environment condition of the Land
as described in that certain Site Management Plan prepared by Geomatrix
Consultants dated September 5 , 1996, a copy of which Landlord has provided to
Tenant. Prior to the Construction Completion Date, Landlord shall cause to be
performed all asbestos and soil removal and disposal or other remediation
provided for under and in compliance with Section 4.4.7 of the Sale Agreement,
as well as all additional environmental clean-up of Hazardous Substances as
required by Section 4.4.7 of the Sale Agreement. Landlord shall indemnify,
defend and hold Tenant harmless from all damages, costs, losses, expenses
(including but not limited to reasonable attorney's fees and engineering fees)
arising from any breach by Landlord of the preceding covenant; provided however,
the foregoing indemnification shall terminate upon the expiration of one (1)
year from the Construction Completion Date. Notwithstanding the foregoing, in
no event shall Tenant have the right to terminate this Lease or have any right
of set-off arising out of any breach or claimed breach by Landlord in its
obligations hereunder; it being expressly acknowledged and agreed that the Base
Rent and Additional Rent, and all other charges and sums payable by Tenant
hereunder, shall commence at the times provided herein and shall continue to be
payable as provided under this Lease.
C. Tenant shall not allow any Hazardous Substance to be brought on to the
Demised Premises and shall not conduct or authorize the generation,
transportation, storage, treatment or disposal at the Demised Premises, of any
Hazardous Substance other than in quantities incidental to the conduct of
Tenant's Use and in compliance with Envlaws; provided, however, nothing herein
contained shall permit Tenant to allow any so-called "acutely hazardous",
"ultra-hazardous", "imminently hazardous chemical substance or mixture" or
comparable Hazardous Substance to be located on or about the Demised Premises.
D. If the presence, release, threat of release, placement on or in the
Demised Premises, or the generation, transportation, storage, treatment, or
disposal at the Demised Premises of any hazardous substances as a result of
Tenant's operations at the Demised Premises (i) gives rise to liability
(including, but not limited to, a responses action, remedial action, or removal
action) under Envlaws, (ii) causes a significant public health effect, or (iii)
pollutes or threatens to pollute the environment, Tenant shall promptly take any
and all remedial and removal action necessary to clean up the Demised Premises
and mitigate exposure to liability arising from the hazardous substance, whether
or not required by law.
E. Tenant shall indemnify, defend and hold Landlord harmless from all
damages costs, losses, expenses (including, but not limited to, actual
attorneys', fees and engineering fees) arising from or attributable to the
existence of any hazardous substances at the Demised Premises
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as a result of Tenant's operations at the Demised Premises, and (ii) any
breach by Tenant of any of its covenants contained in this Paragraph 29.
F. Upon request by Landlord during the term of this Lease, prior to the
exercise of any Extension Term, Tenant shall undertake and submit to Landlord an
environmental audit from an environmental consulting firm reasonably acceptable
to Landlord which audit shall evidence Tenant's compliance with this Paragraph
29. Tenant shall bear the cost of such environmental audit unless such audit
discloses that Tenant has complied with the provisions of this Paragraph 29 in
which event Landlord shall pay for such audit.
G. Landlord or Tenant shall give the other prompt written notice upon
discovery of any Hazardous Substance at or adjacent to the Demised Premises.
Landlord and Tenant's obligations under this Paragraph 29 shall survive
termination of the Lease.
30. Holdover. Should Tenant continue to occupy the Demised Premises after
expiration of the term or any renewal thereof and provided Landlord has notified
Tenant thirty (30) days prior to the expiration of the term or any renewal term
that Landlord is negotiating or has executed a lease with a third party for the
Demised Premises or any portion thereof, Tenant shall be deemed to be occupying
the Demised Premises without claim or right and Tenant shall pay Landlord all
costs arising out of loss or liability resulting from delay by Tenant in so
surrendering the Demised Premises as above provided and shall pay a charge for
each day of occupancy an amount equal to 150 % the Base Rent (on a per diem
basis) then reserved hereunder. In the event Landlord has failed to notify
Tenant in writing within thirty (3) days prior to the expiration of the term or
any renewal term that Landlord is negotiating or has executed a lease with a
third party or the Demised Premises or any portion thereof, Tenant shall be
entitled to occupy the Demised Premises for a period of sixty (60) days
following expiration of the term for any renewal term on the same terms and
conditions as such term or renewal term (including Base Rental and additional
rental). Should Tenant continue to occupy the Demised Premises following such
sixty (60) day period, Tenant shall be deemed to be occupying the Demised
Premises without claim or right and Tenant shall pay Landlord as a full measure
of all loss or liability resulting from delay b Tenant in so surrendering the
Demised Premises as above provided a charge for each day of occupancy on amount
equal to 200% of the Base Rent and Additional Rent ( on a per diem bases then
reserved hereunder.
31. Surrender.
A. Under any termination or expiration of this Lease, Tenant shall
surrender the Demised Premises in the same condition as existed at the
Commencement Date, except for normal wear and tear and damage caused by the fire
or other casualty; provided, however, that nothing in this Paragraph 31 is
intended to change or diminish Tenant's obligations under any other part of this
Lease. Tenant shall remove the Alterations it is required to remove pursuant to
the terms of Paragraph 8 hereof. Any damage to the Demised Premises resulting
from the removal of such Alterations shall be required by Tenant at Tenant's
expense. If the Demised Premises be no surrendered as above set forth, Tenant
shall indemnify, defend and hold Landlord harmless against loss or liability
resulting from the delay by Tenant in so surrendering the Demised Premises,
including, without limitation any claim made by any succeeding occupant founded
on such delay.
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All property of Tenant not removed on or before the last day of the term of
this Lease (subject to Tenant's right to occupy the Demised Premises following
expiration of the term of this Lease as set forth in Paragraph 30 hereof or
within fifteen (15) days thereafter shall be deemed abandoned. Tenant hereby
appoints Landlord its agent t remove all property of Tenant from the Demised
Premises upon termination of this Lease and to cause its transportation and
storage for Tenant's benefit, all at the sole cost and risk of Tenant and
Landlord shall not be liable for damage, theft, misappropriation or loss thereof
and Landlord shall not be liable in any manner in respect thereto. Tenant shall
pay all costs and expenses of such removal transportation and storage. Tenant
shall reimburse Landlord upon demand of or any expenses incurred by Landlord
with respect to removal or storage of abandoned property and with respect to
restoring said Demised Premises to good order, condition and repair.
32. Liens. Landlord shall deliver the Demised Premises to the Tenant free
of all mechanic's and materialmen's liens or bond over all such mechanic's and
materialmen'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 Demised Premises, or to
charge the rentals payable hereunder for any claim in favor of any person
dealing with Tenant, including those who furnish material or perform labor for
any construction or repairs, and Tenant covenants and agrees that it shall not
mortgage, encumber or pledge this Lease or any interest therein. The preceding
sentence shall not be construed as prohibiting Tenant from making Alterations as
provided in Paragraph 8 above or from permitting any other mechanics or
materialmen's lienable work to be performed as long as such work is not
prohibited by this Lease. Tenant agrees to indemnify and hold Landlord harmless
from any lien filed against the Demised Premises on account of work performed by
or on behalf of Tenant and from any and all losses, costs, damages, expenses,
liabilities, suites, penalties, claims and damages (including reasonable
attorney fees) arising from or relating to such lien. After Tenant's receipt of
notice or actual knowledge of the placing of any lien or encumbrance against the
Demised Premises, Tenant shall immediately give Landlord written notice thereof.
Tenant shall within ten (10) days therefrom remove such lien by payment or bond.
If Tenant shall fail to discharge such mechanic's lien within such period,
then, in addition to any other right or remedy of Landlord, Landlord may, but
shall not be obligated to, discharge the same by paying to the claimant the
amount claimed to be due by procuring the discharge of such lien as to the
Demised Premises by deposit in the court having jurisdiction of such lien, a
cash sum sufficient to secure the discharge of the same, or by the deposit of a
bond or other security with such court sufficient in form, content and amount to
procure the discharge of such lien, or in such other manner as is now or may in
the future be provide by present or future law for the discharge of such lien as
a lien against the Demised Premises. Any amount paid by Landlord, or the value
of any deposit so made by Landlord, together with all costs, fees and expenses
in connection therewith (including reasonable attorneys' fees of Landlord),
together with interest thereon at the rate se forth in Paragraph 33 hereof,
shall be repaid by Tenant to Landlord on demand by Landlord and if unpaid my be
treated as Additional Rent.
All materialmen, contractors, artisans, mechanics, laborers and any other
person now or hereafter furnishing any labor, services, material, supplies or
equipment to Tenant with respect to the Demised Premises, or any portion
thereof, are hereby charged with notice that they must
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look exclusively to Tenant to obtain payment for the same. Notice is hereby
given that Landlord shall; not be liable for any labor, services, materials,
supplies, skill, machinery, fixtures or equipment furnished or to be furnished
to Tenant upon credit, and that no mechanic's lien or other lien for any such
labor, services, materials, supplies, machinery, fixtures or equipment shall
attach to or affect the estate or interest of Landlord in and to the Demised
Premises, or any portion thereof.
33. Interest; Late Charge. Base Rent payable pursuant to Paragraph 3
hereof by Tenant to Landlord under this Lease, if not paid when due, and any
other charges payable by Tenant hereunder not paid when due, including any
charges, expenses, liabilities or fees in connection with a default by Tenant,
shall accrue interest at the rate of prime (as announced from time to time by
the First National Bank of Chicago) plus one percent (1%) per annum from the due
date until paid, said interest to be in addition to Base Rent and other charges
under this Lease and to be paid to Landlord by Tenant upon demand. In addition,
if any installment of Base Rent and other charges payable pursuant to this
Lease by Tenant to Landlord is not paid within five (5) days after receipt by
Tenant of a written notice thereof from Landlord, Tenant shall pay Landlord a
late charge in an amount equal to two percent (2%) of the amount then due to
defray the increased cost of collecting late payments.
34. Inspections. Landlord, its agents or employees may, after providing
Tenant with at least twenty-four (24) hours prior notice except in an emergency
situation, to (a) exhibit the Demised Premises to prospective purchasers or
lenders; (b) inspect the Demised Premises to see that Tenant is complying with
its obligations hereunder; and (c) exhibit the Demised Premises during the last
six (6) months of the term to prospective tenants; provided that Landlord shall
comply at all times with Tenant's reasonable security requirements.
35. Transfer of Landlord's Interest. Tenant acknowledges that Landlord has
the right to transfer its interest in the Demised Premises and in this Lease at
any time after the date which is eighteen (18) months after the Commencement
Date and subject to the provisions of Paragraph 52 hereof, and Tenant agrees
that in the event of any such transfer Landlord shall automatically be released
from all liability under this Lease except of any liabilities accruing prior to
the date of transfer for which Tenant has identified in an estoppel certificate
or by written notice to Landlord, and Tenant agrees to look solely to such
transferee for the performance of Landlord's obligations hereunder; provided,
however, any such transferee shall be deemed to have assumed the obligations of
Landlord hereunder subject to the conditions and limitations herein contained.
Tenant agrees to look solely to Landlord's interest in the Demised Premises for
the recovery of any judgment from Landlord, it being agreed that Landlord, or if
Landlord is a partnership, its partners whether general or limited, or if
Landlord is a corporation, its directors, officers or shareholders, or if
Landlord is a limited liability company, its members or manners, shall never be
personally liable for such judgement. Without limiting the generality of the
foregoing, Tenant agrees that Landlord may transfer its interest in this Lease
to any entity controlled by, controlling or under common control with Landlord,
that acquires the Demised Premises and from and after such transfer Landlord
shall be released from liability, as aforesaid.
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36. Indemnity. (a) To the fullest extent allowed by law, Tenant shall at
all times Indemnify, defend and hold Landlord harmless against and from any and
all claims by or on behalf of any person or persons, firm or firms, corporation
or corporations, arising from the conduct or management, or from any work or
things whatsoever done in or about the Demised Premises, and will further
indemnify, defend and hold Landlord harmless against and from any and all claims
arising during the term of this Lease, or arising from any breach or default on
the part of Tenant in the performance of any covenant or agreement on the part
of Tenant to be performed, pursuant to the terms of this Lease, or arising from,
any act or negligence of Tenant, its agents, servants, employees or licensees,
or arising from any accident, injury or damage whatsoever caused to any person,
firm or corporation occurring during the term of this Lease, in or about the
Demised Premises or upon the sidewalk and the land adjacent thereto, and from
and against all costs, attorneys' fees, expenses and liabilities incurred in or
about any such claim or action or proceeding by counsel reasonably satisfactory
to Landlord. Tenant's obligations under this Paragraph 36 shall be insured by
contractual liability endorsement on Tenant's policies of insurance required
under the provision of Paragraph 17 hereof.
(b) Landlord shall protect, indemnify and hold Tenant harmless from
and against any and all loss, claims, liability or costs (including court
costs and attorneys' fees) incurred by reason of: (a) any damage to any
property or any injury (including but not limited to death) to any person
occurring in, or on or about the Demised Premises or the Building to the
extent that such injury or damage shall be proximately caused by the
Landlord's affirmative acts of negligence or willful misconduct of Landlord
or its agents, servants or employees; provided, however, that such
indemnification shall be limited to the extent of the sum of: (i) amounts
of insurance proceeds recovered by Landlord under insurance policies
carried by Landlord for such injury or damage, after deductibles, or
insurance process that would have been received in the event Landlord had
not elected to self-insure, and (ii) the deductible amounts for such claims
under such insurance policies. The provisions of this Article shall survive
the termination of the Lease with respect to any claims or liability
occurring prior to such termination.
(c) Notwithstanding the foregoing indemnification obligations,
Landlord and Tenant both hereby release the other and the other's officers
directors, partners, employees and agents from any claim with the
indemnified party might have to the extent that the cost of any such claim
is reimbursed by insurance proceeds recovered by the releasing party, and
both landlord and Tenant shall confirm that their insurance providers shall
similarly waive all such claims.
37. Modification of Lease. The terms, covenants and conditions of this
Lease may not be changed orally but only by an instrument in writing signed by
the party against whom enforcement of the change is sought. The failure of
either party hereto to insist in any one or more cases upon the strict
performance of any term, covenant or condition of this Lease to be
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performed or observed by the other party hereto shall not constitute a waiver of
relinquishment for the future of any such term, covenant or condition.
38. Memorandum of Lease. Neither party shall record this Lease or any of
the exhibits and/or riders attached hereto, but shall enter into a "short form"
or Memorandum of Lease in recordable form attached hereto as Exhibit F and made
a part hereof, which shall set forth the parties, the legal description of the
land, a description of the Demised Premises, the Commencement Date and
Expiration Date of the term of the Lease, and any options to renew, options to
purchase or rights of first refusal granted hereunder.
39. Paragraph Captions. Paragraph captions herein are for Landlord's and
Tenant's convenience only, and neither limit no amplify the provisions of this
Lease.
40. Entire Agreement. This Lease represents the entire agreement between
Landlord and Tenant and supersedes all prior agreements, both written and oral.
The terms, covenants and conditions of this Lease shall be binding upon and
shall inure to the benefit of Landlord and Tenant and therein respective
executors, administrators, heirs, distributees, legal representatives successors
and assignees.
41. Choice of Law and Interpretation. This Lease shall be governed by the
internal law of the State in which the Demised Premises is situated, without
considering such state's choice of law rules. Should any provision of this
Lease require judicial interpretation, it is agreed that the court interpreting
or construing the same shall not apply a presumption that the terms of any such
provision shall be more strictly construed against one party or the other by
reason of the rule of construction that a document is to be construed most
strictly against the party who itself or through its agent prepared the same, it
being agreed that the agents of all parties hereto have participated in the
preparation of this Lease.
42. Prevailing Party. If either party hereto files a lawsuit against the
other party relating to performance or non-performance under this Lease, and the
court has entered a judgment in favor of one party on one or more counts and no
judgment in favor of the other party on any counts, then the non-prevailing
party shall pay the prevailing party's reasonable attorney's fees and costs in
connection with the lawsuit.
43. Exhibits. Attached hereto and made a par thereof are the following:
Exhibit A - Legal Description
Exhibit B - Site Plan
Exhibit C - Plans
Exhibit C-1 Construction Schedule
Exhibit D - Schedule of Rents
Exhibit E - Lease Term Agreement
Exhibit F - Memorandum of Lease
Exhibit G - Landlord's Development Costs
Exhibit H - Permitted Exceptions
Exhibit I - Escrow Agreement
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44. Guarantee. All obligations on the part of Tenant to be paid, performed
and complied with are unconditionally guaranteed by First Data Corporation (the
"Guarantor") according to the provisions of the Guarantee executed by Guarantor
in a form prepared by Landlord.
45. Independent Covenants. It is the express intent of Landlord and
Tenant that (a) the obligations of Landlord and Tenant hereunder shall be
separate and independent covenants and agreements and that the Base Rent and
Additional Rent, and all other charges and sums payable by Tenant hereunder,
shall commence at the times provided herein and shall continue to be payable in
all events; (b) all cost or expenses of whatsoever character or kind, general or
special, ordinary or extraordinary, foreseen or unforeseen, and of ever kind and
nature whatsoever that may be necessary or required in and about the Demised
Premises, or any portion thereof, and Tenant's possession or authorized use
thereof during the term of this Lease, shall be paid by Tenant and all
provisions of this Lease are to be interpreted and construed in light of the
intention expressed in this Paragraph 45; (c) the Base Rent specified in
Paragraph 3 shall be absolutely net to Landlord so that this Lease shall yield
net to Landlord the Base Rent specified in Paragraph 3 in each year during the
term of this Lease (unless extended or renewed at a different Base Rent; (d) all
Impositions, insurance premiums, utility expenses, repair and maintenance
expenses, and all other costs, fees, interest, charges, expenses, reimbursements
and obligations of every kind and nature whatsoever relating to the Demised
Premises, or any portion thereof, which may arise or become due during the term
of this Lease, or any extension or renewal thereof, shall be paid or discharged
by Tenant as Additional Rent.
46. Entry by Landlord. Subject to the provisions of Section 34 hereof,
Tenant agrees to permit Landlord or Landlord's mortgagee and authorized
representative of Landlord or Landlord's mortgagee to enter upon the Demised
Premises at all reasonable times during ordinary business hours for the purpose
of inspecting the same and making any necessary repairs to comply with any laws,
ordinances, rules, regulations or requirements of any public body, or the Board
of Fire Underwriters, or any similar body; provided that Landlord shall comply
at all times with Tenant's reasonable security requirements. Nothing herein
contained shall imply any duty upon the part of Landlord to do any such work
which, under any provision of this Lease, Tenant may be required to perform and
the performance thereof by Landlord shall not constitute a waiver of Tenant's
default in failing to perform the same. Landlord may, during the progress of
any work, keep and store upon the Demised Premises all necessary material, tools
and equipment. Landlord shall not in any event be liable for inconvenience,
annoyance, disturbance, loss of business or other damage to Tenant by reason of
making repairs or the performance of any work in or about the Demised Premises,
or on account of bringing material, supplies and equipment into, upon or through
the Demised Premises during the course thereof, and the obligations of Tenant
under this Lease shall not be thereby affected in any manner whatsoever;
provided, however, Landlord shall use all reasonable efforts to conduct any
entry into the Demised Premises so as to interfere with the Business of Tenant
as little as reasonably practical under the circumstances.
47. [Deleted by intent of parties.]
48. Survival of Obligations. Except as otherwise provided herein to the
contrary, all obligations of Tenant hereunder not fully performed as of the
expiration or earlier termination of
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the term of this Lease shall survive the expiration of earlier termination of
the term hereof for a period of one (1) YEAR.
49. Lease Subject to Landlord's Acquisition of Demised Premises. Anything
herein to the contrary notwithstanding, it is agreed and acknowledged by the
parties hereto that as of the date hereof, Landlord does not own the Demised
Premises. Therefore, anteing herein to the contrary notwithstanding, the
rights, duties and obligations of Landlord and Tenant hereunder are expressly
subject to and contingent upon acquisition by Landlord of the Demised Premises
by December 31 , 1997 ("Contingency Date"), upon terms and conditions
acceptable to Landlord, in its sole and absolute discretion, including, without
limitation, procuring project financing on terms and conditions acceptable to
Landlord. In the event Landlord has not acquired the Demised Premises by the
Contingency Date on term and conditions acceptable to Landlord, as aforesaid,
Landlord shall notify Tenant, and either party may terminate this Lease at any
time thereafter (but prior to the date Landlord acquires the Demised Premises)
by delivering written notice of such termination to the other party, whereupon
the parties shall be released and discharged from any and all obligations and
liabilities not therefore accrued under this Lease provided, however, in the
event the Lease is so terminated, Tenant shall pay to Landlord, within ten (10)
days from the date Landlord has submitted a written statement to Tenant
requesting such payment, all amounts incurred by Landlord has submitted a
written statement to Tenant requesting such payment all amounts incurred by
Landlord in connection with the proposed acquisition and development of the
Land, including, without limitation, any earnest money deposit, any costs for
required off-site improvements, including sewer and road improvements, all
architectural, engineering, environmental, land planning and other consulting
fees, all title and survey expenses, all costs associated with the proposed
subdivision of Land, any and all fees and expenses associated with procuring
construction and/or other financing for the project, any other costs or expenses
that would not have been incurred by Landlord had Landlord not been involved in
the acquisition and proposed development of the Land and all attorneys, fees
associated with any of the foregoing. Landlord agrees to use all reasonable
efforts to acquire the Demised Premises on terms and conditions acceptable to
Landlord, as aforesaid.
50. Americans With Disabilities Act.
A. In the event that any alteration or repair to the Demised Premises is
undertaken by Tenant with or without Landlord's consent, or is undertaken by
Landlord at Tenant's request during the term of this Lease (including any
renewal or extension thereof) such alteration or repair (i) shall be designed
and constructed in full compliance with the Americans With Disabilities Act, as
amended from time to time (the "Act") if such alteration or repair is undertaken
by Tenant, and (II) shall be designed by Tenant in full compliance with the Act
in such alteration or repair is undertaken by Landlord at Tenant's request, and
the cost of any such design, alteration or repair to the Demised Premises shall
be borne by Tenant, including without limitation (a) the cost of any such
design, alteration or repair required as a result of (i) Tenant or an assignee
or subtenant being deemed a "Public Accommodation" or the Demised Premises being
deemed a "Place of Public Accommodation" or (ii) such alteration or repair being
deemed to affect an "Area of Primary Function" (as such terms are defined in the
Act); and (b) the cost of the installation or implementation of any "Auxiliary
Aid" required under the Act as a result of the operation of any business within
the Demised Premises. In addition, Tenant shall be responsible for all costs
and expenses incurred or to be incurred in order to cause the Demised Premises
and the operation of any business within the Demised Premises to comply with the
Act, and, if
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Tenant fails to keep and maintain the Demised Premises in compliance with the
Act, Landlord shall have the right but not the obligation, at Tenant's sole
cost and expense, to enter the Demised Premises and cause the Demised Premises
to be put into compliance with the Act; and Tenant shall indemnify, defend and
hold Landlord harmless from and against any and all costs, claims and
liabilities, including without limitation, attorneys' fees arising from or
related to Tenant's failure to maintain and keep the Demised Premises in
compliance with the Act.
B. In connection with its construction of the Landlord's Improvements
pursuant to Paragraph 4 hereof, Landlord represents and warrants that the
Landlord's Improvements to be constructed in accordance with the Plans will
comply in all material respects with all applicable laws, including without
limitation, the Act, and Landlord covenants that the Demised Premises delivered
to Tenant as of the Construction Completion Date shall comply in all material
respects with all applicable laws, including without limitation, the Act.
Landlord shall indemnify, defend and hold Tenant harmless from all damages,
costs, losses, expenses (including but not limited to reasonable attorneys'
fees) arising from any breach by Landlord of the preceding covenant; provided
however the foregoing indemnification shall terminate upon the expiration of one
(1) year from the Construction Completion Date. Notwithstanding the foregoing,
in no event shall Tenant have the right to terminate this Lease or have any
right of set-off arising out of any breach or claimed breach by Landlord in its
obligations hereunder; it being expressly acknowledged and agreed that the Base
Rent and Additional Rent, and all other charges and sums payable by Tenant
hereunder, shall commence at the times provided herein and shall continue to be
payable as provided herein.
51. Reports by Tenant. Upon request by Landlord at any item after 135
days after the end of the applicable fiscal year of Tenant, Tenant shall deliver
to Landlord (within 15 days after receipt of written request) a copy of the
audited financial statement of any guarantor of Tenant's obligations under this
Lease. If such audited statements are not available, Tenant may provide such
statements certified by such guarantor's chief financial officer as being true
and correct, in accordance with generally accepted principals of accounting
consistently applied over the applicable periods. Said financial statements
shall only be required in connection with a proposed sale or mortgaging of the
Demised Premises and shall be held in confidence by Landlord and any such
proposed purchases or lender or their respective successors or assigns.
Notwithstanding the foregoing, Tenant shall cause First Data Corporation to
submit annual audited financial statements to Landlord and Landlord's mortgagee
in the manner set forth herein if First Data Corporation ceases to be a publicly
traded company.
52. Option to Purchase. Subject to the provisions hereinafter set forth,
and provided that Tenant is not then in default hereunder, Landlord hereby
grants to Tenant the option to purchase the Demised Premises upon the following
terms and conditions:
A. Landlord shall notify Tenant thirty (30) days prior to the date that it
intends to make the Demised Premises available for sale to third parties.
Included with such notice shall be the proposes purchase price for the Demised
Premises,, as well s any other relevant economic terms being offered by
Landlord. In no event shall Landlord have the right to convey the Demised
Premises or otherwise make the Demised Premises available for sale to third
parties until eighteen (18) months after the Commencement Date.
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B. If, at any time after notice is delivered to Tenant as set forth
above, Landlord enters into a serious negotiation with a prospective purchaser
to purchase the Demised Premises, then Landlord shall notify Tenant in writing
of (i) the fact of such negotiation, (ii) the purchase price agreed to between
Landlord and such prospective purchaser, and (iii) the other relevant agreed
upon economic terms upon which such purchaser would acquire the Demised
Premises, and Tenant must within ten (10) business days thereafter, by written
notice to Landlord, elect to exercise the option to purchase the Demised
Premises upon all of the same terms and conditions as are contained in
Landlord's notice to Tenant in which event the parties shall enter into a
definitive agreement incorporation said terms and conditions. If Tenant does
not elect to purchase, Landlord shall have the right to sell to a third party
on the same terms and conditions provided to Tenant or shall submit any
modified terms to Tenant in accordance with the above. In no event shall
Tenant be afforded more than three (3) opportunities to exercise its option
hereunder, in connection with more than three (3) different offers from three
(3) different third parties.
C. If Tenant exercises its option to purchase hereunder, the closing of
such purchase shall occur on the date set forth in the definitive agreement
entered into between Landlord and Tenant. At the closing, Tenant shall pay the
purchase price via cash or wire transfer of immediately available funds to
Landlord, and Landlord shall deliver to Tenant a general warranty deed (or
equivalent) to the Demised Premises conveying good and marketable fee simple
title in Tenant to the Demised Premises, subject to no liens, encumbrances or
other exceptions to title other than the Permitted Exceptions and taxes for the
current year, and any exceptions to title that have been caused by Tenant or
that Tenant has accepted in writing ( other than any mortgages or other liens,
which must be discharged by Landlord at or prior to such closing). On the
closing date, Landlord and Tenant shall also execute and deliver such other
documents and instruments as are customary in similar transactions and/or
reasonably necessary to implement the terms and conditions of this Lease, and to
allow Tenant to obtain an extended coverage ALTA owner's title policy insuring
Tenant's fee simple ownership of the Demised Premises in accordance with the
above.
D. Landlord covenants and agrees that if any exceptions to title other
than the Permitted Exceptions shall be revealed by the deed or title policy,
Landlord will at its sole cost and expense clear the title of such exceptions as
soon as reasonably practical but, in any event, within six (6) months after the
intended closing date (unless Tenant shall in writing extend such period), and
the actual closing (including the payment of the purchase price) of such
purchase of the Demised Premises shall be delayed until the title thereto has
been cleared. Until such time as Tenant's purchase of the Demised Premises is
closed as hereinabove provided, Tenant shall continue to occupy and possess the
Demised Premises under the terms and conditions of this Lease. If for any
reason such purchase is not closed, this Lease shall continue in full force and
effect as if Tenant had not exercised the aforesaid option to purchase, and
Tenant shall be entitled to retroactively exercise any option for any Extension
Term to the extent the normal option election date occurred after Tenant
exercised its option to purchase the Demised Premises.
E. Upon Tenant`s notice to Landlord of the exercise of Tenant's option to
purchase, Landlord shall provide Tenant with copies of all surveys, title
insurance policies, title instruments and other such documents in Landlord's
possession pertaining to the Demised Premises. Tenant shall pay for the cost of
the title insurance policy, the cost to prepare any
40
<PAGE>
survey required by Tenant and the cost of any escrow or closing services, and
any cost or expense in connection with any endorsements to the title policy
requested by Tenant. Landlord shall be responsible for the cost of compliance
with any subdivision, lot split or similar regulations which are applicable to
or in connection with the conveyance of the Demised Premises to Tenant. All
rents shall be pro-rated between the parties as of the date of closing. Tenant
shall pay the cost of any documentary stamp taxes required for recording the
deed, as well as any transfer taxes. Any other maters at closing not
specifically provided for herein shall be handled and the cost hereof charged
to one or the other or both of the parties as shall be the ordinary custom and
practice for the handling of such matters or the apportioning of the cost
hereof then prevalent in the City of Sunnyvale, Santa Clara County,
California.
F. The option hereunder may only be exercised by Tenant or a subsidiary,
affiliate or related entity of Tenant. If neither Tenant or a subsidiary,
affiliate or related entity is then occupying all or a portion of the Demised
Premises, Tenant shall have no rights hereunder.
53. No Third Party Beneficiaries. The obligations of Tenant set forth
hereunder (including, without limitation, the obligations set forth in Sections
5A, 7A, 11B and 50), are covenants from Tenant to Landlord only and do not
create any third party beneficiaries of such obligations.
54. Counterparts. This Lease may be executed in counterparts, each of
which shall be deemed an original but all of which together shall constitute but
one and the same instrument.
55. Consents and Approvals. Landlord and Tenant agree that any consents
or approvals to be provided by either party will not be unreasonably withheld or
delayed unless specifically provided otherwise herein.
56. Limitation on Damages. In no event shall Landlord or Tenant be liable
under any theory of tort, contract, strict liability or other legal or equitable
theory for any punitive, special, incidental, indirect or consequential damages,
each of which is hereby excluded by agreement of the parties regardless of
whether or not any party has been advised of the possibility of such damages.
57. Tenant's Property. All fixtures, equipment, improvements and
appurtenances attached to, or built into, the Demised Premises that are
installed by Tenant at Tenant's expense shall be Tenant's property until the
termination of this Lease. All of the foregoing items installed at Tenant's
expense as well as all paneling, partitions and business and trade fixtures and
communication and office equipment which are installed in the Demised Premises
by Tenant, and all furniture, furnishing and other articles of movable personal
property owned by Tenant and located in the Demised Premises or the Building
(all of which are hereinafter referred to as "Tenant's Property") shall belong
to TENANT, may be removed by Tenant at any time during the term hereof, and may
be removed by Tenant at the end of the term hereof or within fifteen (15) days
thereafter, whether as a result of the normal expiration of the term of this
Lease or of the early termination of this Lease pursuant to the terms hereof (as
a result of Tenant's default hereunder or otherwise). Tenant shall repair any
damage resulting from the removal of Tenant's Property and leave the Demised
Premises in a commercially reasonable condition. Any items of
41
<PAGE>
Tenant's Property not so removed shall, if not required to be so removed by
Tenant pursuant to Paragraph 8 hereof, be deemed abandoned and retained by
Landlord as its property thereafter.
Landlord waives any landlord or other lien it may have on Tenant's Property
and shall not seek to enforce same, whether upon Tenant's default or otherwise.
42
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as
of the day and year first above written.
LANDLORD:
SUNNYVALE PARTNERS LIMITED
PARTNERSHIP, an Illinois limited partnership
By: Ridge Sunnyvale, Inc.
Its: General Partner
By: /s/ James Small
-------------------------------
Its: President
-------------------------------
TENANT:
FIRST DATA MERCHANT SERVICES
CORPORATION, a Florida corporation
By: /s/ David Schlapbach
-----------------------------------
Its: Assistant Secretary
-----------------------------------
<PAGE>
XXX
Legal Description
-----------------
Real Property in the City of Sunnyvale, County of Santa Clara, State of
California described as follows:
Beginning at the Southeasterly corner of that certain 5.58 acre parcel of land
described in the Deed to Stauffer Chemical Company, a California Corporation as
said Deed is filed for record in Book 1331 Official Records, Page 256 in the
Office of the Recorder of said County said Point of Beginning being in the
centerline of Fremont Avenue;
Thence from said Point of Beginning, south 89 degrees 48' West along said
centerline of Fremont Avenue 409.86 feet to the Easterly line of the land
described in the Deed to said Stauffer Chemical Company, filed for record in
Book 2891 Official Records, Page 325 in the Office of the Recorder of Said
County;
Thence continuing South 89 degrees 48' West along said centerline 143.22 feet to
the centerline of Stevens Creek as shown on the Map of the I.J. Truman
Subdivision No. 2 filed for record October 3, 1904 in Vol. "F-3" of Maps, Page
99 in the Office of the Recorder of said County last said point being also the
Southwesterly corner of Lot 24 of said subdivision;
Thence leaving Fremont Avenue and running along the centerline of Stevens Creek
and the Westerly boundary of Lot 24 as shown on said Subdivision Map the
following courses:
North 50 degrees West 46.20 feet; thence North 15 degrees 45' West (North 16
degrees 45' West Truman Sub.) 118.80 feet; thence North 1 degree East 135.30
feet; thence North 37 degrees 30' East 264.00 feet; thence North 74 degrees East
178.20 feet; thence North 35 degrees 15' East 126.72 feet; thence North 23
degrees 30' East 96.66 feet; thence North 61 degrees 45' East to the point of
intersection of said centerline of Stevens Creek with the Northerly prolongation
of the Easterly line of said 5.58 acre parcel; thence South 0 degrees 01' West
leaving said boundary of Lot 24, along said prolongation and Easterly line,
823.39 feet to the Point of Beginning.
Excepting therefrom the lands described in the Deed from said Stauffer Chemical
Company to the State of California recorded in Book 5541 Official Records, Page
263 in the Office of the Recorder of said County:
Commencing at the Southeasterly corner of that certain 5.58 acre parcel of land
conveyed to Stauffer Chemical Company, a Corporation, by Deed recorded February
16, 1946 in Book 1331 at Page 256, official Records of Santa Clara County;
Thence along the Easterly line of said parcel and the Northerly prolongation
thereof North 1 degree 00' 41" East 823.39 feet to the general Westerly line of
the parcel of land conveyed to Stauffer Chemical Company, a Corporation, by Deed
recorded June 10, 1954 in Book 2891 at Page 325, Official Records of Santa Clara
County; thence along last said line South 62 degrees 40' 37" West, 197.03 feet
to a line parallel with and distant 48.00 feet Westerly, at right angles, from
<PAGE>
the "ME" line of the Department of Public Works' Survey for the State Freeway
in Santa Clara County, Road V-SC1-114-A; thence along said parallel line South
16 degrees 01' 13" East, 479.62 feet; thence, South 9 degrees 06' 48" East,
167.07 feet; thence along a tangent curve to the right with a radius of 40.00
feet, through an angle of 99 degrees 50' 37", an arc length of 69.70 feet to a
line parallel with and distant 60.00 feet, Northerly, at right angles, from
the centerline of Fremont Avenue (60.00 feet wide); thence along last said
parallel line, North 89 degrees 16; 11: West, 115.00 feet; thence south 76
degrees 50' 32" West, 124.99 feet; thence South 0 degrees 43' 49" West 30.00
feet to said centerline; thence along last said line South 89 degrees 16' 11"
East 278.00 feet to the point of commencement.
2
<PAGE>
EXHIBIT B
THE PREMISES
------------
18
<PAGE>
EXHIBIT B
SUBLEASE
BY AND BETWEEN
FIRST DATA MERCHANT SERVICES CORPORATION,
A SUBSIDIARY OF FIRST DATA CORPORATION
SUBLESSOR
AND
SOFTWARE.NET CORPORATION
SUBTENANT
<PAGE>
EXHIBIT B
TABLE OF CONTENTS
Incorporation of Recitals........................................... 1
Demise and Term..................................................... 1
Subtenant Improvements Allowance.................................... 2
Subtenant Alterations............................................... 3
Use................................................................. 3
Subordinate to Main Lease........................................... 4
Compliance with Main Lease.......................................... 4
Performance by Sublessor............................................ 5
No Breach of Main Lease............................................. 5
No Privity of Estate................................................ 5
Indemnity........................................................... 5
Rent................................................................ 6
Condition of Premises............................................... 7
Consents and Approvals.............................................. 7
Notice.............................................................. 7
Termination of Main Lease........................................... 8
i
<PAGE>
EXHIBIT B
Maintenance and Repair.............................................. 8
Assignment and Sublettings.......................................... 8
Insurance........................................................... 9
Right to Cure Subtenant's Defaults and Damages...................... 9
Remedies of Sublessor............................................... 10
Brokerage........................................................... 11
Waiver of Jury Trial and Right to Counterclaim...................... 11
No Waiver........................................................... 11
Complete Agreement.................................................. 11
Successors and Assigns.............................................. 11
Interpretation...................................................... 12
Consent of Landlord Under Main Lease................................ 12
Holding Over........................................................ 12
Security Deposit.................................................... 12
Counterparts........................................................ 13
No Offer............................................................ 13
Hazardous Materials................................................. 13
ii
<PAGE>
EXHIBIT B
Signage.............................................................. 13
Parking.............................................................. 14
iii
<PAGE>
SUBLEASE
--------
THIS SUBLEASE ("Sublease") is made and dated as of the ___ day of, _______
1998, by and between FIRST DATA MERCHANT SERVICES CORPORATION, a Florida
corporation, having an address of 5660 New Northside Drive, Suite 1400, Atlanta,
Georgia 30328 ("Sublessor") and SOFTWARE.NET CORPORATION, a California
corporation having an address of 1195 West Fremont Avenue, Sunnyvale, California
("Subtenant").
WITNESSETH:
-----------
WHEREAS, Sublessor is tenant under that certain Build-To-Suit Lease
Agreement dated as of March 18, 1997 (the "Main Lease") with Sunnyvale Partners
Limited Partnership, an Illinois limited partnership ("Overlandlord") as
landlord, whereby Overlandlord leased to Sublessor land and improvements
consisting of a to-be constructed two-story office building containing
approximately 75,197 rentable square feet of office space located at 1195 West
Fremont Avenue, Sunnyvale; California (the "Building");
WHEREAS, the Building has since been constructed; and
WHEREAS, Sublessor desires to sublet a portion of the Building comprised of
approximately 52,185 rentable square feet located on the first and second floors
of the Building as more particularly shown and described on Exhibit B attached
hereto and incorporated herein by this reference (the "Premises") to Subtenant,
and Subtenant desires to sublet the Premises from Sublessor,
WHEREAS, the parties are agreeable to entering into a sublease of the
Premises on the terms and conditions set forth below; and
WHEREAS, unless otherwise defined in this Sublease, all capitalized terms
used herein have the meanings set out for them in the Main Lease.
AGREEMENT
---------
NOW, THEREFORE, for and in consideration of the mutual promises set forth
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby, acknowledged, Sublessor and Subtenant hereby agree as follows:
1. Incorporation of Recitals. The foregoing recitals are incorporated
into and made a part of this Sublease as if each were specifically recited
herein.
2. Demise and Term. Sublessor hereby subleases the Premises to
Subtenant, and Subtenant hereby hires and accepts the Premises from Sublessor.
The Premises shall include the non-exclusive appurtenant right to the use, in
common with others, of the lobbies, entrances, stairs, corridors, elevators and
other public portions of the Building. The term of this Sublease (the "Term")
shall be the period commencing July 1, 1998 (the "Commencement Date"), and
ending at 12:01 a.m. on the date which is sixty-two (62) months after the
Commencement Date (the "Expiration Date"), unless sooner terminated as herein
provided. Subtenant shall have no option to renew or extend the term of this
Sublease or to expand the Premises.
<PAGE>
3. Subtenant Improvements and Allowance. Sublessor agrees to
contribute a maximum amount of One Dollar and no/100 ($1.00) per square foot of
rentable area of the Premises for the completion of the Subtenant Improvements
(as hereinafter defined) ("Allowance") as more specifically set forth in this
Section 3.
a. Subtenant Improvements shall mean such items of general
applicability to office space that Subtenant desires to be installed in the
interior of the Premises. Subtenant shall deliver to Sublessor a space plan for
the Premises (the "Space Plan"), which Space Plan shall be subject to the
approval of Sublessor, which approval shall not be unreasonably withheld. Upon
Sublessor's approval of the Space Plan, Subtenant shall engage and pay for the
services of a licensed architect to prepare complete and detailed working
drawings and specifications for the construction of the Subtenant Improvements,
showing thereon all Subtenant Improvements (the "Drawings"). The Drawings shall
be subject to the approval of Sublessor, which approval shall not be
unreasonably withheld. If Sublessor should disapprove such Drawings, Sublessor
shall specify to Subtenant the reasons for its disapproval and Subtenant shall
cause the same to be revised to meet the Sublessor and Subtenant's mutual
reasonable satisfaction and Subtenant shall resubmit the same to Sublessor, as
so revised. It is understood by the parties that Subtenant has elected to retain
a general contractor and arrange for the construction and installation of the
Subtenant Improvements itself in a good and workmanlike manner [ by labor union
contractors and subcontractors?] (the "Work"). Subtenant shall submit to
Sublessor the name of the general contractor and major subcontractors for
Sublessor's approval, which shall not be unreasonably withheld, or, at
Sublessor's option, Subtenant shall select its general contractor and major
subcontractors from a list pre-approved by Sublessor. If Sublessor shall reject
the general contractor or any major subcontractor, Sublessor shall advise
Subtenant of the reasons in writing and Subtenant shall choose another
contractor. Along with Subtenant's notice of its general contractor and major
subcontractors, Subtenant shall notify Sublessor of it estimate of the total
costs of the Work and, at Sublessor's option, Subtenant must provide to
Sublessor adequate assurance that Subtenant has the financial resources to pay
for such costs. Subtenant's contractors shall be duly licensed and shall obtain
and provide to Sublessor with certificates evidencing worker's compensation,
public liability and property damage insurance in amounts and forms and with
companies satisfactory to Sublessor. Subtenant's agreement with its contractors
shall require such contractors to provide daily cleanup of the work area to the
extent such clean up is necessitated by the Work, and to take reasonable steps
to minimize interference with other tenants' use and occupancy of the Building.
Subtenant and Subtenant's contractors shall comply with any other reasonable
rules, regulations or requirements that Sublessor or Overlandlord shall impose.
Subtenant may request reasonable changes in the Drawings provided that no change
shall be made to the Drawings without Sublessor's prior written approval, which
shall not be unreasonably withheld or delayed; (b) no such request shall effect
any structural change in the Building or otherwise render the Premises or
Building in violation of applicable laws; (c) Subtenant shall be responsible for
all costs of same; and (d) such requests shall constitute agreement by Subtenant
to any delay in completion caused by Sublessor's reviewing and processing such
change. Subtenant shall promptly pay any and all costs and expenses in
connection with or arising out of the performance of the Work and shall furnish
to Sublessor evidence of such payment upon request. Subtenant agrees not to
suffer or permit any mechanic, materialman, architect, broker or other lien to
be placed or filed against the Premises or the Building. In case any such lien
shall be filed, Subtenant shall immediately file and release such lien of
record. If Subtenant shall fail to have such lien immediately satisfied and
released, Sublessor may, on Subtenant's behalf, without being responsible for
any investigation as to the validity of such lien and without limiting any other
remedies Sublessor may have, pay the same and Subtenant shall upon demand pay
Sublessor the amount so paid.
2
<PAGE>
b. Upon completion of the Work, Subtenant may submit to Sublessor
a request in writing for the Allowance which request shall include: (i) as-built
drawings showing all of the Subtenant Improvements; (ii) a detailed breakdown of
final and total costs, together with receipted invoices showing payment thereof;
(iii) a certified written statement from the architect that the Subtenant
Improvements have been completed in compliance with the Drawings; (iv) final
lien waivers and releases from the architect, general contractor and all
subcontractors and suppliers; and (iv) a copy of a certificate of occupancy for
the Premises. Provided the request includes all of the foregoing, Sublessor
shall pay the Allowance to Subtenant within 30 days of Sublessor's receipt of
such request and all supporting documentation.
c. Subtenant hereby acknowledges and agrees that it is Subtenant's
sole and exclusive responsibility to cause the Premises and Drawings to comply
with all applicable laws, including the Americans with Disabilities Act and
other ordinances, orders, roles, regulations and requirements of all
governmental authorities having jurisdiction thereof. Notwithstanding anything
to the contrary contained in the Sublease or herein, Sublessor's participation
in the preparation of the Space Plan, the Drawings and/or the Subtenant
Improvements shall not constitute any representation or warranty, express or
implied, that the (i) Drawings are in conformity with applicable codes,
regulations or roles or (ii) the Subtenant Improvements, if built in accordance
with the Drawings will be suitable for Subtenant's intended purposes. Subtenant
acknowledges and agrees that the Subtenant Improvements are intended for use by
Subtenant and the requirements for such improvements are not within the special
knowledge of Sublessor.
d. Subtenant shall repair or replace (or at Sublessor's election,
reimburse Sublessor for the cost of repairing or replacing) any portion of the
Building or Premises or Sublessor's property damage, lost or destroyed in
connection with the Work and shall indemnify, defend and hold Sublessor harmless
from and against any and all losses, costs, damages, expenses and liabilities,
including without limitation reasonable attorneys fees, incurred by Sublessor in
connection with the Work, including but not limited claims based on personal
injury or property damage, contract claims and/or lien claims.
e. There shall be no delay in the Commencement Date or the payment
of rent due to any delay in the Work.
4. Subtenant Alterations. Subtenant shall not make any alterations,
additions, or improvements to the Sublet Premises without the prior consent of
Sublessor. Sublessor's approval of the Drawings in accordance with Section 3
hereof shall be considered "prior consent" to the Work for proposes of this
section. All alterations, installations, removals and restoration shall be
performed in a good and workmanlike manner so as not to damage or alter the
primary structure or structural qualities of the Building and other improvements
situated on the Sublet Premises or of which the Sublet Premises are a part. All
alterations, installations, removals and restoration shall in addition be
subject to the requirements of Section 3 hereof (with the exception of the
payment of the Allowance, which is a one-time Allowance payable only in
connection .with the Work). All alterations, additions or improvements to the
Sublet Premises, including the Work, shall, at Sublessor's sole discretion,
either be removed by Subtenant prior to the end of the Term or earlier
termination thereof, or shall remain on the Premises at the end of the Term.
5. Use. Subtenant shall occupy and use the Premises only for research
and development and general office purposes and otherwise in strict compliance
with the allowable uses set forth in Section 5 of the Main Lease. Subtenant
shall not commit or suffer to be
3
<PAGE>
committed any annoyance waste, nuisance or any act or thing which is against
public policy, or which may disturb the quiet enjoyment of Sublessor or any
other tenant or occupancy of the Building. Subtenant agrees not to deface or
damage the Building in any manner. Subtenant shall not use the Premises for
any unlawful purposes.
6. Subordinate to Main Lease. This Sublease is and shall be subject and
subordinate to the Main Lease. A copy of the Main Lease (from which certain
economic terms have been excised) is attached hereto as Exhibit A and made a
part hereof. Sublessor agrees that it will not voluntarily enter into any
agreement with Overlandlord which would result in the termination of the Main
Lease prior to the Expiration Date or which would negatively affect the rights
or obligations of Subtenant under this Sublease. Sublessor shall notify
Subtenant of any involuntary change.
7. Compliance with Main Lease. Except as set forth in the immediately
succeeding sentence, the terms, covenants and conditions of the Main Lease (the
"Incorporated Provisions") are incorporated herein by reference. Sections
1,2,3,4,6, 7(B), 8, 9, 15, 16(E), 17(E), 22, 23, 44 and 52 and Exhibits B, C, D,
E, F, G and I of the Main Lease are specifically excluded from the Incorporated
Provisions. Except to the extent that the Incorporated Provisions are
inapplicable or are modified by the provisions of this Sublease, the
Incorporated Provisions binding or inuring to the benefit of the landlord
thereunder shall, in respect of this Sublease, bind or inure to the benefit of
Sublessor, and the Incorporated Provisions, binding or inuring to the benefit of
the tenant thereunder shall, in respect of this Sublease, bind or inure to the
benefit of Subtenant with the same force and effect as if such Incorporated
Provisions were completely set forth in this Sublease, and as if the words
"Landlord" and "Tenant" or words of similar import, wherever the same appear in
the Incorporated Provisions, were construed to mean, respectively, "Sublessor
and "Subtenant" in this Sublease, and as if the words "Premises," or words of
similar import, wherever the same appear in the Incorporated Provisions, were
construed to mean "Premises" in this Sublease, and as if the word "Lease," or
words of similar import, wherever the same appear in the Incorporated
Provisions, were construed to mean this "Sublease."
(a) The time limits contained in the Main Lease for the giving of
notices, making of demands or performing of any act, condition or covenant
on the part of the tenant thereunder, or for the exercise by the tenant
thereunder of any right, remedy or option, are changed for the purposes of
incorporation herein by reference by shortening the same in each instance
by 5 days, so that in each instance Subtenant shall have 5 days less time
to observe or perform hereunder than Sublessor has as the tenant under the,
Main Lease, except that:
(i) any such time limits which are 7 days or less shall instead
be shortened in each instance by 3 business days, and
(ii) any such time limits which are 3 days or less shall instead
be shortened in each instance so that such time limits shall expire 1
business day prior to the expiration of such time limits under the
Main lease.
(b) If any of the express provisions of this Sublease shall conflict
with any of the Incorporated Provisions, such conflict shall be resolved in
every instance in favor of the express provisions of this Sublease. If
Subtenant receives any notice or demand from Overlandlord under the Main
Lease, Subtenant shall deliver a copy thereof to Sublessor by overnight
courier the next business day or as soon thereafter as is reasonably
possible but in no event later than two business days after Subtenant's
receipt of such notice. If
4
<PAGE>
Sublessor receives any notice of default from Overlandlord under the Main
Lease, Sublessor shall deliver a copy thereof to Subtenant by overnight
courier the next business day or as soon thereafter as is reasonably
possible but in no event later than two business days after Sublessor's
receipt of such notice.
8. Performance by Sublessor. Sublessor shall not be required to furnish,
supply or install anything required under any article of the Main Lease.
Sublessor shall have no liability or responsibility whatsoever for
Overlandlord's failure or refusal to perform under the Incorporated Provisions.
Subtenant shall have the right to instruct Overlandlord with respect to the
performance by Overlandlord of Overlandlord's obligations as landlord under the
Main Lease. Upon Sublessor's receipt of a written notice from Subtenant that
Sublessor has failed to perform an obligation under the Incorporated Provisions,
(because of a failure of Overlandlord to perform its obligation under the Main
Lease) then Sublessor may, at its sole and exclusive option either (a) use its
reasonable efforts to cause Overlandlord to observe and perform the same,
provided, however, that Sublessor does not guarantee Overlandlord's compliance
with the Incorporated Provisions, or (b) direct Subtenant to pursue its claim
directly against Overlandlord which shall be done at Subtenant's sole cost and
expense. Subtenant shall not in any event have any rights in respect of the
Premises greater than Sublessor's rights under the Main Lease. Notwithstanding
any provision to the contrary contained herein, as to Incorporated Provisions,
Sublessor shall not be required to make any payment or perform any obligation,
and Sublessor shall have no liability to Subtenant for any matter whatsoever,
except for (i) Sublessor's obligation to pay the rent due under the Main Lease,
and (ii) Sublessor's obligation to use reasonable efforts, upon the written
request of Subtenant, to cause Overlandlord to observe and/or perform its
obligations under Main Lease (or, in the alternative, to direct Subtenant to
pursue its claim against Overlandlord). Sublessor shall not be responsible for
any failure or interruption, for any reason whatsoever, of the services or
facilities that may be appurtenant to or supplied at the Building, by
Overlandlord or otherwise, including, without limitation, heat, air
conditioning, water, elevator service and cleaning service, if any; and no
failure to furnish, or interruption of, any such services or facilities shall
give rise to any: (i) abatement, diminution or reduction of Subtenant's
obligations under this Sublease; (ii) constructive eviction, whether in whole or
in part; or (iii) liability on the part of Sublessor.
9. No Breach of Main Lease. Subtenant shall not do or permit to be done
any act or thing which may constitute a breach or violation of any term,
covenant or condition of the Main Lease.
10. No Privity of Estate. Nothing contained in this Sublease shall be
construed to create privity of estate or privity of contract between Subtenant
and Overlandlord.
11. Indemnity. Subtenant hereby does and shall indemnify, defend and hold
harmless Sublessor from and against all losses, costs, damages, expenses and
liabilities, including, without limitation, reasonable attorneys' fees, which
Sublessor may incur or pay by reason of: (i) Subtenant's use, occupancy or
management of the Premises; (ii) any accidents, damages or injuries to persons
or property occurring in, on or about the Premises; (iii) any breach or default
hereunder on Subtenants part; (iv) any work done by or on behalf of Subtenant in
or to the Premises, (v) the breach or inaccuracy of any representation or
warranty made by Subtenant hereunder, or (vi) any act, omission or negligence
occurring in, on or about the Premises on the part of Subtenant and/or its
officers, employees, agents, customers, invitees or any person claiming through
or under Subtenant.
5
<PAGE>
12. Rent.
(a) Subtenant shall pay to Sublessor base rent (the "Base Rent") as
follows:
<TABLE>
<CAPTION>
Period Monthly Rent Per Square Foot Monthly Rent Annual Rent
------- ---------------------------- ------------ -------------
<S> <C> <C> <C>
July 1, 1998 - June 30, 1999 $2.85 $148,727.25 $l,784,727.00
July 1, 1999 - June 30, 2000 $2.96 $154,467.60 $1,853,611.20
July 1, 2000 - June 30, 2001 $3.08 $160,729.80 $1,928,757.60
July 1, 2001 - June 30, 2002 $3.20 $166,992.00 $2,003,904.00
July 1, 2002 - June 30, 2003 $3.33 $173,776.05 $2,085,312.60
</TABLE>
(b) Subtenant shall pay the Monthly Base Rent to Sublessor in advance
of the first day of each month during the Term at the offices of Sublessor
identified at the beginning of this Sublease or elsewhere as Sublessor
shall direct. Subtenant shall pay to Sublessor the first installment of
Monthly Base Rent upon Subtenant's execution of this Sublease. In addition
to the Monthly Base Rent, Subtenant shall also be responsible for and pay
the applicable material or service provider (including as the ease may be,
Sublessor Or Overlandlord) directly for any and all other amounts payable
with respect to providing: (i) gas, heat, air conditioning, electricity,
telephone, water, sewer, security services and janitorial services to the
Premises; and (ii) Subtenant's Proportionate Share (as defined in the
following sentence) of all costs with respect to the Building's common area
and systems, and the Building structure, including without limitation costs
of maintenance, repair and replacement of the Building structure common
area and systems, costs of utilities and security for the common areas and
a property management fee to the property manager selected by Sublessor or
Overlandlord; and (iii) Subtenant's Proportionate Share of any other
operating expenses to be paid by Sublessor under the Main Lease, including
without limitation, the Impositions and insurance costs. Subtenant's
Proportionate Share shall be Sixty-Five and one-half percent (65.5%). All
of the foregoing amounts shall be hereinafter collectively referred to as
the "Additional Charges".
(c) "Rent" (which term shall include the Base Rent and my Additional
Charges) shall be paid promptly when due, without notice or demand therefor
and without deduction, abatement, counterclaim or setoff of any amount for
any reason whatsoever. Base Rent and Additional Charges shall be paid to
Sublessor by good unendorsed check of Subtenant at the address of Sublessor
set forth at the beginning of this Sublease or to such other person and/or
at such other address as Sublessor may from time to time designate by
notice to Subtenant. No payment by Subtenant or receipt by Sublessor of any
lesser amount than the amount stipulated to be paid hereunder shall be
deemed other than on account of the earliest stipulated Base Rent or
Additional Charges due under this Sublease; nor shall any endorsement or
statement on any check or letter be deemed an accord and satisfaction, and
Sublessor may accept any check or payment without prejudice to Sublessor's
right to recover the balance due or to pursue any other remedy available to
Sublessor.
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<PAGE>
(d) Upon the execution of (i) this Sublease by both Sublessor and
Subtenant and (ii) consent to this Sublease by Overlandlord as provided
herein, Subtenant shall be authorized to take possession of the Premises
seven (7) days prior to the Commencement Date for the limited purpose of
installing its equipment. Subtenant hereby agrees that if Subtenant takes
possession of the Premises prior to the Commencement Date, then from and
after the date Subtenant takes possession of the Premises (the "Possession
Date"), all of Subtenant's obligations and duties under this Sublease shall
be effective. Notwithstanding anything in this Sublease to the contrary,
with the exception of the Allowance, Subtenant shall pay all charges
incurred by Subtenant (including but not limited to fees, if any, charged
by Overlandlord) in connection with Subtenant's relocation to the Premises,
the installation of all equipment and utility services for the Premises
which axe required by Subtenant, including, but not limited to, telephones,
computers, and additional electric service.
13. Condition of Premises. Sublessor shall deliver the Premises to
Subtenant on the Commencement Date in "as is/where is" condition. Sublessor
shall have no obligations under this Sublease or otherwise to perform any work,
alterations, installations or to remove any asbestos or asbestos containing
material (collectively, "ACM"), if any, from the Premises or elsewhere.
Sublessor makes no representations or warranties whatsoever with respect to the
presence of ACM in the Premises. In making and executing this Sublease,
Subtenant has relied solely on such investigations, examinations and inspections
as Subtenant has chosen to make. Subtenant acknowledges that Sublessor has
afforded Subtenant the opportunity for full and complete investigations,
examinations, and inspections of the Premises.
14. Consents and Approvals. In any instance when Sublessor's consent or
approval is required under this Sublease, Sublessor's refusal to consent to or
approve any matter or thing shall be deemed reasonable and in good faith if such
consent or approval has not been obtained from Overlandlord; provided however,
Sublessor covenants to use reasonable efforts, at the sole cost and expense of
Subtenant (including, without limitation, reasonable attorneys' fees and
expenses), to obtain the consent or approval of Overlandlord and will indicate
to Overlandlord in those cases where its approval is conditioned upon
Overlandlord's approval that it has no objection thereto and agrees that if such
consent of Overlandlord shall not be required, Sublessor shall not unreasonably
withhold or delay its consent to such matter. In the event that Subtenant shall
seek the approval by or consent of Sublessor and Sublessor shall fail or refuse
to give such consent or approval, Subtenant shall not be entitled to any damages
from Sublessor for any withholding or delay of such approval or consent by
Sublessor.
15. Notice. All notices, consents, approvals, demands and requests which
are required or desired to be given by either party to the other hereunder shall
be in writing and shall be personally delivered, sent by telefax or by reputable
overnight courier delivery service or sent by United States registered or
certified mail and deposited in a United States post office, return receipt
requested and postage prepaid. Notices, consents, approvals, demands and
requests which are served upon Sublessor or Subtenant in the manner provided
herein shall be deemed to have been given or served for all purposes hereunder
on the day personally delivered or refused, the next business day after sending
by overnight courier as aforesaid, on the third business day after mailing as
aforesaid, or, if via telefax, on the date of transmission. All notices,
consents, approvals, demands, and requests given to Sublessor or Subtenant shall
be addressed to the address set forth at the beginning of this Sublease with
notices to Sublessor being addressed to the attention of Vice President - Real
Estate with a copy at the same time and in the same manner to Property
Administration, First Data Card Services Group, 11204 Chicago Circle, Omaha, NE
68154, Attention: Eileen Murdoch. Either party may from time to time change the
names and/or
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<PAGE>
addresses to which notices, consents, approvals, demands and request shall be
addressed by a notice given in accordance with the provisions of this Paragraph.
16. Termination of Main Lease. If for any reason the term of the Main
Lease shall terminate prior to the Expiration Date, this Sublease shall
thereupon be terminated and Sublessor shall not be liable to Subtenant by reason
thereof unless both (a) Subtenant shall not then be in default hereunder, and
(b) said termination shall have been effected because of the breach or default
of Sublessor as tenant under the Main Lease.
17. Maintenance and Repairs. Subtenant shall, at Subtenant's sole cost
and expense, keep and maintain the Premises in good condition and repair,
including without limitation, all necessary maintenance and repairs to all
portions of the Premises and all exterior entrances, all glass, window
casements, show window moldings, all partitions, doors, doorjambs, door closers
and hardware fixtures exclusive of normal maintenance services. All damage or
injury to the Building and/or common areas in which the same are located, caused
by the negligence of Subtenant, its employees, agents or visitors, shall be
repaired by Subtenant at Subtenant's sole cost and expense. Subtenant shall
promptly replace any portion of the Premises which cannot be fully repaired,
regardless of whether the benefit of such replacement extends, beyond the Term.
It is the intention of Sublessor and Subtenant that, at all times during the
Term, Subtenant shall, at its cost, maintain the Premises in compliance with all
applicable laws and in the same condition as existed upon the Commencement Date
of the Sublease, reasonable wear and tear excepted. Notwithstanding the
foregoing, Sublessor hereby agrees to perform the repair obligations for the
Building as described in Section 7(A) of the Main Lease and Subtenant agrees to
reimburse Sublessor for its Proportionate Share of such repair costs after the
opportunity to review Sublessor's receipts for such repair costs. The cost of
any repair which is capital in nature shall be amortized on a straight line
basis over its useful life ("Useful Life") at an interest rate not to exceed ten
percent (10%) and Subtenant shall reimburse Sublessor the amount equal to
Subtenant's Proportionate Share of the annualized amortization during the Term
of this Sublease. The Useful Life of a capital item shall be determined using
the United States Internal Revenue Service standard depreciation schedule in
effect on the date that the applicable capital expenditure is made. Subtenant
shall also reimburse Subtenant's Proportionate Share of the annualized
amortization of any improvement or replacement which is capital in nature,
provided that the item is intended to result in a cast savings, then only to the
extent of saving actually realized. Subtenant shall not be required to reimburse
Sublessor for any changes, alterations or improvements to any portion of the
Building first required by any law or regulation prior to the Term Commencement
Date, to the extent not attributable to Subtenant's use and occupancy of the
Premises.
18. Assignment and Subletting. Subtenant shall not, by operation of law,
merger, consolidation or otherwise, assign, sell, mortgage, pledge or in any
manner transfer this Sublease or any interest therein, or sublet the Premises or
any part or parts thereof, or grant any concession or license or otherwise
permit occupancy of all or any part of the Premises by any person, except with
the prior written consent of Sublessor. Sublessor shall not unreasonably
withhold its consent to an assignment of this Sublease by Subtenant (which
assignment may nevertheless require the consent of Overlandlord), provided that
the assignee proposed by Subtenant shall demonstrate to the reasonable
satisfaction of Sublessor that such proposed assignee has a net worth and
financial capacity equal to or greater than the net worth and financial capacity
of Subtenant. Neither the consent of Sublessor to an assignment, subletting,
concession or license, nor the references in this Sublease to assignees,
subtenants, concessionaires or licensees, shall in any way be construed to
relieve Subtenant of the requirement of obtaining the consent of
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<PAGE>
Sublessor to any further assignment, subletting, concession or license for all
or any part of the Premises. In the event Sublessor consents to any assignment
of this Sublease, the assignee shall execute and deliver to Sublessor an
agreement in form and substance satisfactory to Sublessor whereby the assignee
shall assume all of Subtenant's obligations under this Sublease from and after
the date of the assignment. Notwithstanding any assignment or subletting,
including, without limitation, any assignment or subletting permitted or
consented to, the original Subtenant named herein and any other person(s) who at
any time was or were Subtenant shall remain fully liable on this Sublease, and
if this Sublease shall be amended, modified, extended or renewed, the original
Subtenant named herein and any other person(s) who at any time was or were
Subtenant shall remain fully liable on this Sublease as so amended, modified,
extended or renewed. Any violation of any provision of this Sublease by any
assignee, subtenant or other occupant shall be deemed a violation by the
original Subtenant named herein, the then Subtenant and any other person(s) who
at any time was or were Subtenant, it being the intention and meaning that the
original Subtenant named herein, the then Subtenant and any other person(s) who
at any time was or were Subtenant shall all be liable to Sublessor for any and
all acts or omissions of any and all assignees, subtenants and other occupants
of the Premises claiming by, through or under Subtenant. If this Sublease shall
be assigned or if the Premises or any part thereof shall be sublet or occupied
by any person or persons other than the original Subtenant named herein,
Sublessor may collect rent from any such assignee and/or any subtenants or
occupants, and apply the net amounts collected to the Base Rent and Additional
Charges, but no such assignment, subletting, occupancy or collection shall be
deemed a waiver of any of the provisions of this Paragraph, or the acceptance of
the assignee, subtenant or occupant as Subtenant, or a release of any person
from the further performance by such person of the obligations of Subtenant
under this Sublease.
19. Insurance. Subtenant shall provide and maintain throughout the term
of this Sublease a policy or policies of comprehensive public liability
insurance in standard form naming Sublessor and Overlandlord as additional
insurance and otherwise complying with Section 17 of the Main Lease with limits
of not less than $2,000,000.00 combined single limit for both bodily injury or
death and for property damage, including water damage. A policy, binder or other
reasonable satisfactory evidence of such insurance shall be delivered to
Sublessor by Subtenant no less than ten (10) days before the Possession Date.
Subtenant shall procure and pay for renewals or replacements of such insurance
from time to time before the expiration thereof, and Subtenant shall deliver to
Sublessor such renewal or replacement policy or binder or other reasonably
satisfactory evidence of such insurance at least 30 days before the expiration
of any existing policy. All such policies shall be issued by companies licensed
to do business in the State of California and shall contain a provision whereby
the same cannot be cancelled or modified unless Sublessor is given at least 30
days' prior written notice by certified or registered mail of such cancellation
or modification.
20. Right to Cure Subtenant's Defaults and Damages. If Subtenant shall at
any time fail to make any payment or perform any other obligation of Subtenant
hereunder within the applicable cure period, if any, then Sublessor shall have
the right, but not the obligation, after five days' notice to Subtenant, or
without notice to Subtenant in the case of any emergency, and without waiving or
releasing Subtenant from any obligations of Subtenant hereunder, to make such
payment or perform such other obligation of Subtenant in such manner and to such
extent as Sublessor shall deem necessary, and in exercising any such right, to
pay any incidental costs and expenses, employ attorneys, and incur and pay
reasonable attorneys' fees. Subtenant shall pay to Sublessor upon demand all
sums so paid by Sublessor and all incidental costs and expenses of Sublessor in
connection therewith, together with interest thereon at the rate of 2% per
calendar month or any part thereof or the then maximum rate of interest which
may lawfully
9
<PAGE>
be collected from Subtenant, whichever shall be less, from the date of the
making of such expenditures.
21. Remedies of Sublessor.
(a) "Default" shall mean a default by Subtenant under any provision
of this Sublease which default has not been cured within any applicable
grace or cure period.
(b) If a Default occurs, Sublessor shall have, in addition to all its
rights and remedies contained in the Incorporated Provisions pursuant to
Section 4 hereof, the following rights and remedies; all of Sublessor's
rights and remedies under this Sublease are distinct, separate and
cumulative, and none will exclude any other right or remedy allowed by law:
(i) Sublessor may, with or without notice of such election and
with or without entry or other action by Sublessor, immediately
terminate this Sublease, in Which event the Term of this Sublease
shall end and all right, rifle, and interest of Subtenant hereunder
shall expire; or
(ii) Sublessor may enforce the provisions of this Sublease and
may enforce and protect the rights of the Sublessor hereunder by a
suit or suits in equity or at law for the specific performance of any
covenant or agreement herein or for the enforcement of any other
appropriate legal or equitable remedy, including the recovery of all
moneys due or to become due under any of the provisions of this
Sublease.
(c) If Sublessor elects to terminate Subtenants right to possession
only without terminating this Sublease, Sublessor, at Sublessor's option,
may enter into the Premises, remove Subtenant's signs and other evidences
of tenancy, and take and hold possession thereof without such entry and
possession terminating this Sublease or releasing Subtenant, in whole or in
part, from Subtenant's obligation to pay Rent under this Sublease for the
full Term, and in the case Sublessor elects to terminate the Sublease or to
terminate possession only, Subtenant will immediately pay to Sublessor, if
Sublessor so elects, a sum equal to the then present value (as defined in
the following sentence) of the entire amount of the Rent specified in
Section 9 of this Sublease for the remainder of the Term, plus any other
sums then due under this Sublease, less the fair rental value of the
Premises for such period. In calculating this sum, present value shall be
computed on the basis of a discount rate of six percent per annum. In the
alternative, upon and after entry into possession without termination of
the Sublease, Sublessor will use its best efforts to relet all or any part
of the Premises for Subtenant's account for such rent and for such time and
upon such terms as Sublessor in Sublessor's sole discretion may determine.
Sublessor will not be required to observe any instruction given by
Subtenant about such reletting. Subtenant will, upon demand, pay the cost
of Sublessor's expenses of the reletting. If the consideration collected by
Sublessor upon any such reletting for Subtenant's account is not sufficient
to pay monthly the full amount of the Rent due under this Sublease,
together with the costs of Sublessor's expenses, Subtenant will pay to
Sublessor the amount of each monthly deficiency upon demand.
(d) Subtenant will pay upon demand all of Sublessor's costs,
charges, and expenses, including reasonable attorneys' fees, and fees and
expenses of agents and
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<PAGE>
others retained by sublessor in any litigation, negotiation or transaction
in which Sublessor seeks to enforce the terms or provisions of this
sublease.
22. Brokerage. Sublessor and Subtenant each represents to the other that
except for the Staubach Company ("Sublessor's Broker") and Colliers Parrish
International, Inc ("Subtenant's Broker")(collectively, the "Sublease Brokers"),
no broker or other person had any part, or was instrumental in any way, in
bringing about this Sublease. Sublessor agrees to pay the Sublessor's Broker for
services rendered in connection with this Sublease pursuant to the Agreement
(the "Broker Agreement") between Sublessor and the Sublessor's Broker. By its
execution hereof Sublessor's Broker agrees to pay Subtenant's Broker one-half of
Sublessor's Broker's commission. Sublessor and Subtenant each agree to
indemnify, defend and hold harmless the other from and against, any claims made
by any broker or any person, other than the Sublease Brokers, for a brokerage
commission, finder's fee, or similar compensation, by reason of or in connection
with this Sublease, and any loss, liability, damage, cost and expense
(including, without limitation, reasonable attorneys' fees) in connection with
such claims if such broker or other person had, or claimed to have, dealings
with such party in bringing about this Sublease. The provisions of this
Paragraph 22 shall survive the expiration or termination of this Sublease.
23. Waiver of Jury Trial and Right to Counterclaim. Subtenant hereby
waives all right to trial by jury in any summary or other action, proceeding or
counterclaim arising out of or in any way connected with this Sublease. With the
exception of any compulsory counterclaims, Subtenant also hereby waives all
right to assert or interpose a counterclaim in any summary proceeding or other
action or proceeding to recover or obtain possession of the Premises unless
legally required to do so to preserve the claim.
24. No Waiver. The failure of Sublessor to insist in any one or more
cases upon the strict performance or observance of any obligation of Subtenant
hereunder or to exercise any right or option contained herein shall not be
construed as a waiver or relinquishment for the future of any such obligation of
Subtenant or any right or option of Sublessor. Sublessor's receipt and
acceptance of Base Rent or Additional Charges, or Sublessor's acceptance of
performance of any other obligation by Subtenant, with knowledge of Subtenant's
breach of any provision of this Sublease, shall not be deemed a waiver of such
breach. No waiver by Sublessor of any term, covenant or condition of this
Sublease shall be deemed to have been made unless expressed in writing and
signed by Sublessor.
25. Complete Agreement. There are no representations, agreements,
arrangements or understandings, oral or written, between the parties relating to
the subject matter of this Sublease which are not fully expressed in this
Sublease. This Sublease cannot be changed or terminated orally or in any other
manner other than by a written agreement executed by both parties.
26. Successors and Assigns. The provisions of this Sublease, except as
herein otherwise specifically provided, shall extend to, bind and inure to the
benefit of the parties hereto and their respective personal representatives,
heirs, successors and permitted assigns. In the event of any assignment or
transfer of the leasehold estate under the Main Lease, the transferor or
assignor, as the case may be, shall be and hereby is entirely relieved and freed
of all obligations under this Sublease arising after the date of any such
assignment or transfer, except that Sublessor shall not be relieved and freed of
its payment obligations to Overlandlord under the Main Lease which payment
obligations are greater than the payment obligations of Subtenant to Sublessor
hereunder unless Overlandlord and Sublessor otherwise agree.
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<PAGE>
27. Interpretation. Irrespective of the place of execution or performance,
this Sublease shall be governed by and construed in accordance with the laws of
the state where the Premises is located. If any provision of this Sublease or
the application thereof to any person or circumstance shall, for any reason and
to any extent, be invalid or unenforceable, the remainder of this Sublease and
the application of that provision to other persons or circumstances shall not be
affected but rather shall be enforced to the extent permitted by law. The table
of contents, captions, headings and titles, if any, in this Sublease are solely
for convenience of reference and shall not affect its interpretation. This
Sublease shall be construed without regard to any presumption or other rule
requiring construction against the party causing this Sublease to be drafted.
Each covenant, agreement, obligation or other provision of this Sublease shall
be deemed and construed as a separate and independent covenant of the party
bound by, undertaking or making same, not dependent on any other provision of
this Sublease unless otherwise expressly provided. All pronouns and any
variations thereof shall be deemed to refer to the masculine, feminine or
neuter, singular or plural, as the identity of the parties may require. The word
"person" as used in this Sublease shall mean a natural person or persons, a
partnership, a corporation or any other form of business or legal association
or. entity. This Sublease may be executed in counterparts or with counterpart
signature pages.
28. Consent of Landlord Under Main Lease. This Sublease shall not be
operative or effective for any purpose whatsoever unless and until Overlandlord
shall have given its written consent as provided hereto and any conditions
precedent with respect to such consent have been satisfied or waived. Sublessor
shall have no obligation to satisfy any such conditions precedent provided,
however, that Subtenant may, but shall not be obligated to, satisfy any such
conditions precedent and Sublessor shall reasonably cooperate with Subtenant (at
no cost or expense to Sublessor) in this regard.
29. Holding Over. Subtenant shall pay Sublessor a sum for each day that
Subtenant retains possession of the Premises or any part thereof after
termination of this Sublease, by lapse of time or otherwise, equal to two (2)
times the Rent payable hereunder, and Subtenant shall also pay damages
consequential as well as direct, sustained by Sublessor by reason of such
retention. Nothing in this Section contained, however, shall be construed or
operate as a waiver of Sublessor's right of reentry or any other right of
Sublessor under this Sublease or of Overlandlord under the Main Lease.
30. Security Deposit. Subtenant agrees to deposit with Sublessor, upon
the execution of this Sublease, $297,454.50 in cash (the "Cash Security Deposit"
and $594,909.00 in the form of an irrevocable letter of credit issued by a bank
acceptable to Sublessor in form and substance satisfactory to Sublessor (the
"Letter of Credit") (the "Cash Security Deposit" and the "Letter of Credit" are
sometimes hereinafter collectively referred to as the "Security Deposit"), which
Security Deposit is security for the full and faithful performance by Subtenant
of every term, provision, covenant, and condition of this Sublease. The Cash
Security Deposit will be held by Sublessor, provided however, that Sublessor
will have no obligation to segregate the amount from Sublessor's other funds.
Upon the occurrence of a Default by Subtenant in respect to any of the terms,
provisions, covenants, or conditions of this Sublease, including, but not
limited to, payment of Rent, Sublessor may use, apply, or retain the whole or
any part of the Cash Security Deposit so deposited for the payment of any such
Rent in default, or for any other sum which Sublessor may expend or be required
to expend by reason of Subtenant's Default, including without limitation, any
damage or deficiency in the reletting of the Premises, whether such damage or
deficiency accrued before or after any reentry by Sublessor. If any of the Cash
Security Deposit is so used, Subtenant, on written demand by Sublessor, will
promptly pay to Sublessor such additional sum as may be necessary to restore the
deposit to the original amount
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set forth in this Section. In addition, upon the occurrence of a default by
Subtenant in respect to any of the terms, provisions, covenants or conditions of
this Sublease, including, but not limited to, payment of Rent, Sublessor may
also draw on the Letter of Credit and apply such amount to the payment of any
sum in default or any other sum which Sublessor may require or deem necessary to
spend or incur by reason of Subtenant's default. In such event, Subtenant shall,
upon demand, increase the Letter of Credit by the amount so applied to replenish
the Letter of Credit. Notwithstanding the foregoing, in the event of a
nonmonetary Default by Subtenant, Sublessor shall give Subtenant 48 hours
advance written notice prior to using any portion of the Security Deposit. The
Letter of Credit shall be payable to Sublessor or its successors and assigns and
have an expiration date no earlier than the one-year anniversary of the
Commencement Date and be automatically renewable for consecutive one year
periods through and including the Expiration Date. If not renewed at least
thirty (30) days prior to the end of each such one-year period, Sublessor shall
be permitted to draw the full amount of the Letter of Credit. The Letter of
Credit shall expressly provide, among other things, that Sublessor may draw
under it by presentation of a sight draft and a written certification by
Sublessor that Sublessor is then entitled to draw the amount of the draft.
Sublessor's right to draw upon the Cash Security Deposit and/or the Letter of
Credit shall be cumulative, and Sublessor shall be entitled to draw upon either
or both, and shall not be required to deplete either portion of the Security
Deposit before proceeding to draw on the other portion of the Security Deposit.
Provided Subtenant is not in material default of this Sublease, the principal
sum of the Letter of Credit shall be reduced by fifty (50%) on the first day
of the thirteenth (13th ) month of the Sublease Term. If Subtenant fully and
faithfully complies with all of the terms, provisions covenants, and conditions
of this Sublease, the Cash Security Deposit, or any balance thereof will be
returned to Subtenant after the last to occur of the following:
(a) the time fixed as the expiration of the Term of this Sublease;
(b) the surrender of the Premises by Subtenant to Sublessor in
accordance with this Sublease;
(c) the receipt of Sublessor of all sums due pursuant to the
Sublease. Except as otherwise required by law, Subtenant will not be
entitled to any interest on such Cash Security Deposit.
31. Counterparts. This Sublease may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute but one and the same instrument.
32. No Offer. The submission of this Sublease shall not be deemed to be
an offer, an acceptance, or a reservation of the Premises; and Sublessor shall
not be bound hereby until Sublessor has delivered to Subtenant a fully executed
copy of this Sublease, signed by both of the parties on the last page of this
Sublease in the spaces herein provided. Until such delivery, Sublessor reserves
the right to exhibit and lease the Premises to other prospective tenants.
33. Hazardous Materials. Subtenant shall comply with any and all EnvLaws.
Subtenant shall not (a) cause, permit or allow the presence of any Hazardous
Substance on the Premises, or (b) conduct or authorize the use, generation,
release, transportation, storage, treatment or disposal of Hazardous Substances
at the Premises.
34. Signage. Subject to the prior consent of Sublessor and Overlandlord
and provided all such signage complies with all applicable governmental laws,
ordinances, rules or
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regulations, does not cause any structural damage or other damage to the
Building, does not violate any existing restrictions affecting the Building, and
is compatible with the architecture of the Building and the landscaped are
adjacent thereto, Subtenant shall have the right to install, as Subtenant's sole
cost and expense: (a) door signage at the entrance to the Premises; and (b) a
monument sign and directional signage. Subtenant shall remove all signage from
the Premises at the end of the Term.
35. Parking. Subtenant shall have the non-exclusive right to the parking
spaces allocated to the Premises at a ratio of approximately 4 parking space to
1,000 rentable square feet of Premises at no additional charge. Subtenant, its
agents, employees, invitees and contractors shall comply with Building rules and
regulations applicable to use of the parking areas.
37. Rules and Regulations; Common Areas. Subtenant shall comply with all
reasonable rules and regulations and all subsequent amendments and modifications
established by Sublessor or Overlandlord with respect to the Building and common
areas thereof; and shall cause its employees, customers, contractors, agents and
invitees to so comply. Without liability to Subtenant and without effecting an
eviction or disturbance of Subtenant's use or possession or giving rise to any
claim for set-offs or abatement of Rent, and without imposing any obligation on
Sublessor or Overlandlord to undertake any of the same, Sublessor (or
Overlandlord, as the case may be) shall have the right to: (a) make changes,
repairs, additions or alterations to the common areas of the Building, including
without limitation changes in the location, size, shape-and number of driveways,
entrances, parking areas, loading areas, ingress/egress, direction of traffic,
landscaped areas and walkways and changes in the arrangement or location of
entrances or passageways, doors and doorways, corridors, stairs, toilets or
other public parts of the Building; (b) close any of the common areas for
maintenance purposes, including entrances, doors, corridors or other facilities;
(c) perform any acts related to the safety, protection, preservation, reletting
or improvement of the Building; (d) change the name or street address of the
Building or suite number of the Premises; (e) to require all persons entering or
leaving the Building to identify themselves to security personnel by
registration or otherwise; and (f) to close the Building after-hours and on
week-ends.
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IN WITNESS WHEREOF, Sublessor and Subtenant have executed this Sublease as
of the day and year first above written.
SUBLESSOR: FIRST DATA MERCHANT SERVICES CORPORATION, a
Florida corporation
By: /s/ David Schlapbach
---------------------------------------
Name: David Schlapbach
-------------------------------------
Title: Assistant Secretary
------------------------------------
SUBTENANT: SOFTWARE.NET CORPORATION, a California
corporation
By: /s/ Michael J. Praisner
---------------------------------------
Name: Michael J. Praisner
-------------------------------------
Title: CFO
-----------------------------------
The undersigned Sublease Brokers join in this Lease for purposes of agreeing to
be bound by the provisions of Paragraph 22 hereof.
THE STABAUCH COMPANY COLLIER'S PARISH INTERNATIONAL, INC.
By: /s/ Anthony Lautmann By: /s/ Robert Shepherd
--------------------------------- ---------------------------------
Name: Anthony Lautmann Name: Robert Shepherd
------------------------------- -------------------------------
Title: President, NW Corp Svcs Title: Senior Vice President
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15
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ACKNOWLEDGED AND CONSENTED TO:
Sunnyvale Partners Limited Partnership, landlord under the Main Lease,
hereby consents to the sublease of the Premises described in the foregoing
Sublease and confirms that the consent given hereby satisfies the requirements
for landlord's consent of the subletting of the Premises set forth in the Main
Lease.
SUNNYVALE PARTNERS LIMITED PARTNERSHIP
By: /s/ James G. Martell
-----------------------------------
Name: James G. Martell
---------------------------------
Title: President Ridge Sunnyvale Inc.
--------------------------------
President
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EXHIBIT A
THE MAIN LEASE
--------------
17
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Exhibit 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated December 10, 1999, relating to the consolidated financial
statements of Interwoven, Inc., which appears in such Registration Statement.
We also consent to the references to us under the headings "Experts" and
"Selected Consolidated Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 10, 2000
