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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No. 0-24607
Actuate Corporation
(Exact name of Registrant as specified in its charter)
Delaware 94-3193197
(State of incorporation) (I.R.S. Employer Identification No.)
999 Baker Way, Suite 200
San Mateo, California 94404
(650) 425-2300
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
______________
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Title of Class Outstanding as of September 30, 1999
-------------- -------------------------------------
Common Stock, par value $.001 per share 13,855,962
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Actuate Corporation
Table of Contents
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998..................................................................... 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 1999 and 1998..................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998........................................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 25
Item 6. Exhibits and Reports on Form 8-K ................................................. 25
Signature ................................................................................. 26
</TABLE>
2
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Part I. Financial Information
------------------------------
Item 1. Financial Statements
ACTUATE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(unaudited) 1998 (1)
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 16,099 $ 21,808
Short-term investments ................................................. 7,601 10,922
Accounts receivable, net ............................................... 14,186 5,050
Other current assets ................................................... 959 400
--------- ---------
Total current assets ..................................................... 38,845 38,180
Property and equipment, net .............................................. 2,034 1,405
Goodwill and other purchased intangible assets, net ...................... 8,962 -
Other assets ............................................................. 396 213
--------- ---------
$ 50,237 $ 39,798
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 2,709 $ 1,210
Accrued compensation ................................................... 1,974 1,293
Other accrued liabilities .............................................. 4,266 3,393
Deferred revenue ....................................................... 11,193 7,868
--------- ---------
Total current liabilities ................................................ 20,142 13,764
--------- ---------
Stockholders' equity:
Common stock ........................................................... 14 14
Additional paid-in capital .............................................. 47,672 46,592
Note receivable from officer ............................................ - (40)
Deferred stock compensation ............................................. (157) (393)
Cumulative translation adjustment ...................................... 45 -
Accumulated deficit ..................................................... (17,479) (20,139)
--------- ---------
Total stockholders' equity ............................................... 30,095 26,034
--------- ---------
$ 50,237 $ 39,798
========= ==========
</TABLE>
(1) The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date, but does not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ACTUATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees.......................................... $ 9,047 $ 4,978 $ 23,135 $ 11,987
Services.............................................. 3,460 1,023 7,498 2,777
-------- -------- -------- --------
Total revenues..................................... 12,507 6,001 30,633 14,764
-------- -------- -------- --------
Operating expenses:
Cost of license fees.................................. 252 288 704 819
Cost of services...................................... 1,723 787 3,927 2,316
Sales and marketing................................... 5,749 2,968 13,784 8,435
Research and development.............................. 2,475 1,900 6,811 5,474
General and administrative............................ 958 626 2,450 1,826
Amortization of goodwill and other purchased
intangibles and merger related costs................. 619 - 987 -
-------- -------- -------- --------
Total operating expenses........................... 11,776 6,569 28,663 18,870
-------- -------- -------- --------
Income (loss) from operations........................... 731 (568) 1,970 (4,106)
Interest and other income, net.......................... 317 304 1,027 340
-------- -------- -------- --------
Income (loss) before income taxes....................... 1,048 (264) 2,997 (3,766)
Provision for income taxes.............................. 112 - 337 -
-------- -------- -------- --------
Net income (loss)....................................... $ 936 $ (264) $ 2,660 $ (3,766)
======== ======== ======== ========
Basic income (loss) per share........................... $ 0.07 $ (0.02) $ 0.20 $ (0.64)
======== ======== ======== ========
Shares used in basic per share calculation.............. 13,485 11,043 13,495 5,920
======== ======== ======== ========
Diluted income (loss) per share......................... $ 0.06 $ (0.02) $ 0.18 $ (0.64)
======== ======== ======== ========
Shares used in diluted per share calculation............ 14,959 11,043 14,825 5,920
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ACTUATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities
Net income (loss)......................................................... $ 2,660 $ (3,766)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of deferred compensation................................. 76 236
Amortization of goodwill and other purchased
intangibles.......................................................... 683 -
Depreciation.......................................................... 715 169
Loss on disposal of fixed assets...................................... - 70
Changes in operating assets and liabilities:
Accounts receivable................................................ (9,136) (1,764)
Other current assets............................................... (559) (372)
Accounts payable................................................... 1,499 93
Accrued compensation............................................... 681 81
Other accrued liabilities.......................................... 873 2,052
Deferred revenue................................................... 3,325 1,287
-------- --------
Net cash provided by (used in) operating activities....................... 817 (1,914)
-------- --------
Investing activities
Purchases of property and equipment....................................... (1,344) (482)
Purchases of short-term investments....................................... (2,601) (3,000)
Proceeds from maturity of short-term investments.......................... 5,922 290
Acquisition of Actuate Holding, B.V., net of cash assumed................. (9,645) -
Net change in other assets................................................ (183) (312)
-------- --------
Net cash used in investing activities..................................... (7,851) (3,504)
-------- --------
Financing activities
Proceeds from issuance of common stock.................................... 1,280 31,061
Payments on capital lease obligations..................................... - (249)
-------- --------
Net cash provided by financing activities................................. 1,280 30,812
-------- --------
Net increase (decrease) in cash and cash equivalents...................... (5,754) 25,394
Effect of foreign exchange rate changes on cash........................... 45 -
Cash and cash equivalents at the beginning of the period.................. 21,808 2,901
-------- --------
Cash and cash equivalents at the end of the period........................ $ 16,099 $ 28,295
======== ========
Supplemental disclosure of cash flow information
Interest paid............................................................. $ 56 $ 22
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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ACTUATE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
On June 18, 1999, Actuate Corporation completed the acquisition of Actuate
Holding, B.V. ("BV"). The acquisition was accounted for under the purchase
method of accounting. In accordance with the purchase method of accounting, the
Condensed Consolidated Statements of Operations include BV's operating results
from the date of acquisition.
The accompanying interim condensed consolidated financial statements of
Actuate Corporation are unaudited, but include all normal recurring adjustments
which our management believes to be necessary for the fair presentation of the
financial position, results of operations, and changes in cash flows for the
periods presented. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Despite management's best
effort to establish good faith estimates and assumptions, and to manage the
achievement of the same, actual results may differ.
The interim financial statements should be read in conjunction with the
financial statements and related notes included in our Annual Report on Form 10-
K for the year ended December 31, 1998 as filed with the Securities and Exchange
Commission on March 12, 1999. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. Interim
results of operations for the three and nine months ended September 30, 1999 are
not necessarily indicative of operating results for the full fiscal year.
Revenue Recognition
Revenue from license fees from sales of software products directly to end-user
customers or indirect channel partners is recognized as revenue after execution
of a license agreement or receipt of a definitive purchase order, and shipment
of the product, if no significant vendor obligations remain, there are no
uncertainties surrounding product acceptance, the license fees are fixed and
determinable, and collection of the license fee is considered probable. Our
products do not require significant customization. The majority of end user
license revenues are derived from end user customer orders for specific
individual products. These types of transactions are recognized as revenue upon
shipment of product. Advance payments from end-users, in arrangements in which
the end user customer has the right to future unspecified products, are deferred
and recognized as revenue ratably over the estimated term of the period,
typically one year, during which the end-user is entitled to receive the
products.
License arrangements with e.Business application vendors, resellers and
distributors generally take the form of either (a) fixed price arrangements in
which the contracting entity has the right to the unlimited usage, unspecified
future products, and sublicensing of the licensed software for a specified term
and pursuant to which license fee revenue is deferred and recognized on a
straight-line basis over the term of the license agreement or (b) arrangements
pursuant to which a royalty is paid to us and is recognized as revenue based on
the sell-through of our software.
Service revenues are primarily comprised of revenue from maintenance
agreements, training and
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consulting fees. Revenue from maintenance agreements is deferred and recognized
on a straight-line basis as service revenue over the life of the related
agreement, which is typically one year. Service revenues from training and
consulting are recognized upon completion of the work to be performed.
Net Income (Loss) Per Share
Net income (loss) per share is presented under Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128"). SFAS 128 requires the presentation of basic
earnings (loss) per share and diluted earnings (loss) per share, if more
dilutive, for all periods presented.
In accordance with SFAS 128, basic net income (loss) per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period. Diluted income per share is computed using the weighted-
average number of common and dilutive common equivalent shares outstanding
during the period. Common equivalent shares consist of the shares issuable upon
the exercise of stock options (using the treasury stock method).
Potential common shares of 655,879 and 563,771, using the treasury stock
method, were not included in the computation of diluted loss per share for the
three and nine-month periods ended September 30, 1998, respectively, because we
incurred a loss in these periods and, therefore, its effect would be
antidilutive.
A reconciliation of shares used in the calculation of basic and diluted net
income (loss) per share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) .................................. $ 936 $ (264) $ 2,660 $ (3,766)
-------- -------- -------- --------
Denominator:
Weighted-average common shares outstanding.......... 13,836 11,609 13,818 6,546
Weighted-average shares subject to repurchase....... (351) (566) (323) (626)
-------- -------- -------- --------
Denominator for basic income (loss) per share -
weighted-average common shares..................... 13,485 11,043 13,495 5,920
Weighted-average shares subject to repurchase....... 351 - 323 -
Employee stock options ............................. 1,123 - 1,007 -
-------- -------- -------- --------
Denominator for dilutive income (loss) per share -
weighted-average common shares and assumed
conversions ......................................... 14,959 11,043 14,825 5,920
======== ======== ======== ========
Basic income (loss) per share......................... $ 0.07 $ (0.02) $ 0.20 $ (0.64)
======== ======== ======== ========
Diluted income (loss) per share....................... $ 0.06 $ (0.02) $ 0.18 $ (0.64)
======== ======== ======== ========
</TABLE>
Comprehensive Income
During 1998, we adopted FASB's Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes
new rules for the reporting and
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display of comprehensive income and its components. Comprehensive income
includes foreign currency translation gains and losses and other unrealized
gains and losses that have been previously excluded from net income (loss) and
reflected instead in equity. A summary of comprehensive income (loss) follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
------ ------ ------- --------
<S> <C> <C> <C> <C>
Net income (loss)................................... $ 936 $ (264) $ 2,660 $ (3,766)
Unrealized gain on short-term investments........... 3 - 2 -
Foreign currency translation adjustment............. 42 - 45 -
------ ------ ------- --------
Comprehensive income (loss)......................... $ 981 $ (264) $ 2,707 $ (3,766)
====== ====== ======= ========
</TABLE>
Recent Pronouncement
In December 1998, AICPA issued Statement of Position 98-9, "Modification of
SOP 97-2 With Respect to Certain Transactions", which amends SOP 98-4, to extend
the deferral of application of certain passages of SOP 97-2 provided by SOP 98-4
through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. We have not yet determined the effect of
the final adoption of SOP 98-9 or its effect on how we will account for future
revenues.
2. Acquisition
In June 1999, we acquired all of the outstanding stock of Actuate Holding,
B.V. ("BV") for cash. The total purchase price was $9.6 million, representing a
payment of $6.0 million in cash and the assumption of net liabilities and direct
merger costs of $3.6 million. The acquisition was accounted for as a purchase.
The results of operations of BV and the estimated fair value of assets acquired
and liabilities assumed are included in our financial statements from the date
of acquisition. Goodwill and other intangibles arising from the acquisition are
being amortized on a straight-line basis over periods not exceeding four years.
The following unaudited pro forma financial information assumes the
acquisition occurred at the beginning of the periods in which the acquisition
took place and, for comparative purposes, at the beginning of the immediately
preceding year. These results have been prepared for information purposes only
and are not necessarily indicative of the operating results that would have
occurred had the acquisition been made as discussed above. In addition, they
are not intended to be a projection of future results (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues ...................................................................... $ 32,219 $ 15,658
Net income (loss) ............................................................. $ 328 $ (7,217)
Net income (loss) per share ................................................... $ 0.02 $ (1.22)
</TABLE>
Commitments and Contingencies
In August 1999, we entered into an office building lease agreement, as
amended, for approximately 64,000 square feet of office space located in South
San Francisco, California. We plan to sublease our existing leased facilities
and move our corporate headquarters to the South San Francisco facilities in
February 2000. In conjunction with the signing of the office building lease, we
provided the
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landlord with a letter of credit in the amount of $2.7 million as security
deposit. Minimum lease commitment under the new lease during fiscal 2000, 2001,
2002, 2003, 2004, and thereafter is $1.5 million, $1.8 million, $1,8 million,
$1.8 million, $1.9 million $6.1 million, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the historical
financial information and the notes thereto included in Item 1 of this Quarterly
Report on Form 10-Q and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K
for the year ended December 31, 1998 as filed with the Securities and Exchange
Commission on March 12, 1999.
Except for historical information, the discussion in this Form 10-Q
contains forward-looking statements that involve risks and uncertainties. These
statements refer to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "expect",
"anticipate", "believe", "intend", "plan" and similar expressions. Our actual
results could differ materially from those anticipated in such forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to, the risks discussed in the section titled "Risk Factors" in this
Form 10-Q.
Overview
Actuate Corporation is a leading provider of e.Reporting solutions that
automate the creation and delivery of structured, personalized content,
providing tens of thousands of users with instant access to high-resolution,
customized business information that is seamlessly integrated into a company's
e.Business website.
We sell our software products directly to end user customers through our
direct sales force and through indirect channel partners such as e.Business
application vendors, resellers and distributors. e.Business application vendors
generally integrate our products with their applications and either embed them
into their products or resell them with their products. Our other indirect
channel partners resell our software products to end user customers. We sell
our products outside the United States primarily through our European
subsidiaries and other distributors. Our revenues are derived primarily from
license fees for software products and, to a lesser extent, fees for services
relating to such products, including software maintenance and support, training
and consulting. We were incorporated in California in November 1993 and
reincorporated in Delaware in July 1998. Our principal executive offices are
located at 999 Baker Way, Suite 200, San Mateo, California 94404 and our
telephone number is 650-425-2300.
Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated.
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees........................................... 72% 83% 76% 81%
Services............................................... 28 17 24 19
-------- -------- -------- --------
Total revenues...................................... 100 100 100 100
-------- -------- -------- --------
Cost of revenues:
License fees........................................... 2 5 2 5
Services............................................... 14 13 13 16
-------- -------- -------- --------
Total cost of revenues.............................. 16 18 15 21
-------- -------- -------- --------
Gross profit............................................. 84 82 85 79
-------- -------- -------- --------
Operating expenses:
Sales and marketing.................................... 46 49 45 57
Research and development............................... 20 32 23 37
General and administrative............................. 7 10 8 13
Amortization of goodwill and other purchased
intangibles and merger related costs.................. 5 - 3 -
-------- -------- -------- --------
Total operating expenses............................ 78 91 79 107
-------- -------- -------- --------
Income (loss) from operations............................ 6 (9) 6 (28)
Interest and other income, net........................... 2 5 4 2
Provision for income taxes............................... 1 - 1 -
-------- -------- -------- --------
Net income (loss)........................................ 7% (4)% 9% (26)%
======== ======== ======== ========
</TABLE>
Revenues
Total revenues increased 108% from $6.0 million for the quarter ended September
30, 1998 to $12.5 million for the quarter ended September 30, 1999. Total
revenues increased 107% from $14.8 million for the nine months ended September
30, 1998 to $30.6 million for the nine months ended September 30, 1999. Sales
outside the United States accounted for 10% and 18% of total revenues for the
third quarter of 1998 and 1999, respectively, and 6% and 15% of total revenues
for the nine months ended September 30, 1998 and 1999, respectively. We expect
that revenues from license fees as a percentage of total revenues will remain
the same or decrease as our service revenues continue to grow due to increases
in the installed base of customers receiving maintenance and our planned
expansion of our professional services organization to meet anticipated customer
demands for our professional services.
License fees. Revenues from license fees increased 82% from $5.0 million for
the third quarter of 1998 to $9.0 million for the third quarter of 1999.
Revenues from license fees increased 93% from $12.0 million for the nine months
ended September 30, 1998 to $23.1 million for the nine months ended September
30, 1999. The increase in license fees in absolute dollars was primarily due to
increased sales to new customers and to a lesser extent increased follow-on
sales to existing customers resulting from the expansion of our direct sales
organization and increased acceptance of the Actuate e.Reporting System.
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Services. Service revenues increased 238% from $1.0 million for the third
quarter of 1998 to $3.5 million for the third quarter of 1999. Service revenues
increased 170% from $2.8 million in the nine months ended September 30, 1998 to
$7.5 million for the nine months ended September 30, 1999. The increase in
service revenues was primarily due to the increases in installed base of
customers receiving ongoing maintenance and support and, to a lesser extent,
increases in professional services revenues related to increases in demand for
our professional services.
Cost of revenues
License fees. Cost of license revenues consists primarily of production and
packaging costs, personnel and related costs, and facility costs. Cost of
license revenues decreased from $288,000, or 6% of revenues from license fees,
for the third quarter of 1998 to $252,000, or 3% of revenues from license fees,
for the third quarter of 1999. Cost of license revenues decreased from
$819,000, or 7% of revenues from license fees, for the nine months ended
September 30, 1998 to $704,000, or 3% of revenues from license fees, for the
nine months ended September 30, 1999. The decreases in absolute dollars and as
a percentage of revenues were primarily due to lower packaging costs as there
were no major releases during the quarter. We expect cost of license revenues
to increase in absolute dollars and as a percentage of revenues from license
fees in future periods due to new product releases, localization costs, new
packaging of our products and printing costs associated with revised
documentation materials.
Services. Cost of service consists primarily of personnel and related costs,
facilities costs incurred in providing software maintenance and support,
training and consulting services, as well as third-party costs incurred in
providing training and consulting services. Cost of service increased from
$787,000, or 77% of revenues from service fees, for the third quarter of 1998 to
$1.7 million, or 50% of revenues from service fees, for the third quarter of
1999. Cost of service also increased from $2.3 million, or 83% of revenues from
service fees, for the nine months ended September 30, 1998 to $3.9 million, or
52% of revenues from service fees, for the nine months ended September 30, 1999.
The increase in absolute dollars was due primarily to the increase in the number
of customer support personnel resulting from continued expansion of our support
services organization. The decline as a percentage of service revenues was due
to service revenues increasing at a faster rate than cost of services. We expect
that cost of services will continue to increase in absolute dollars in the
future as we continue to expand both our customer support and professional
services organizations to meet customer demands for our professional services.
We expect that cost of services as a percent of revenues from service fees will
increase in future periods.
Operating Expenses
Sales and marketing. Sales and marketing expenses consist primarily of
compensation, promotional expenses, travel and entertainment, and facility
costs. Sales and marketing expenses increased from $3.0 million, or 49% of
total revenues for the third quarter of 1998 to $5.7 million, or 46% of total
revenues for the third quarter of 1999. Sales and marketing expenses increased
from $8.4 million, or 57% of total revenues for the nine months ended September
30, 1998 to $13.8 million, or 45% of total revenues for the nine months ended
September 30, 1999. The increase in absolute dollars was primarily due to the
hiring of additional sales and marketing personnel, higher sales commissions
associated with increased revenues and increased marketing program expenses.
The decrease as a percentage of total revenues was due primarily to revenues
increasing at a faster rate than sales and marketing expenses. We expect that
sales and marketing expenses will continue to increase in absolute dollars in
future periods as we continue to hire additional sales and marketing personnel,
establish additional sales offices and expand international distribution
channels and increase promotional activities.
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Research and development. Research and development expenses are expensed as
incurred and consist primarily of personnel and related costs associated with
product development. Research and development expenses increased from $1.9
million, or 32% of total revenues for the third quarter of 1998 to $2.5 million,
or 20% of total revenues for the third quarter of 1999. Research and
development expenses increased from $5.5 million, or 37% or total revenues for
the nine months ended September 30, 1998 to $6.8 million, or 23% of total
revenues for the nine months ended September 30, 1999. The increase in research
and development expenses in absolute dollars was primarily due to the hiring of
additional engineering personnel. The decrease as a percentage of total
revenues was due to revenues increasing at a faster rate than research and
development expenses. We believe that a significant level of investment for
research and development is essential to maintain product and technical
leadership and we anticipate that we will continue to devote substantial
resources to research and development and that these expenses will increase in
absolute dollars in future periods.
General and administrative. General and administrative expenses consist
primarily of personnel and related costs for finance, human resources,
information systems and general management, as well as legal and accounting
expenses and amortization of deferred compensation related to certain stock
option grants. General and administrative expenses increased from $626,000, or
10% of total revenues for the third quarter of 1998 to $958,000, or 7% of total
revenues for the third quarter of 1999. General and administrative expenses
increased from $1.8 million, or 13% of total revenues for the nine months ended
September 30, 1998 to $2.5 million, or 8% of total revenues for the nine months
ended September 30, 1999. The increase in general and administrative expenses
in absolute dollars was due primarily to increased personnel and related costs
and professional fees necessary to manage and support our growth. We believe
that general and administrative expenses will increase in absolute dollars in
future periods as we continue to expand our facilities and personnel staff to
meet our growing operations.
Amortization of goodwill and other purchased intangibles and merger related
costs. In June 1999, we acquired all of the outstanding stock of BV for cash.
The total purchase price was $9.6 million, representing a payment of $6.0
million in cash and the assumption of net liabilities and direct merger cots of
$3.6 million. The acquisition was accounted for as a purchase. In the third
quarter of 1999, we recorded a charge of $619,000 for amortization of goodwill
and other purchased intangibles. Goodwill and other purchased intangibles
arising from the acquisition are being amortized on a straight-line basis over
periods not exceeding four years.
Interest and Other Income, Net
Interest and other income, net, is comprised primarily of interest income
earned by us on cash and short-term investments. Interest and other income,
net, for the three and nine months ended September 30, 1998 was $304,000 and
$340,000, respectively, as compared with interest and other income, net of
$317,000 and $1 million for the three and nine months ended September 30, 1999.
The increase was due primarily to the interest earned on the investment of the
proceeds from our initial public offering that was consummated on July 17, 1998.
Provision for Income Taxes
In the three and nine months ended September 30, 1999, we recorded an
income tax provision of $112,000 and $337,000, respectively. The effective tax
rate used is based on our current estimates and forecasts of our taxable income
in multiple domestic and foreign jurisdictions. The estimated annual effective
tax rate is relatively sensitive to the results of operations in various
jurisdictions, and because actual results may differ from such projections in
future periods, the actual effective tax rate could differ materially from this
estimate.
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Liquidity and Capital Resources
Since inception, we have funded operations primarily through cash from
operations and approximately $14.3 million in net proceeds from the private
sales of preferred stock. In July 1998, we completed our initial public
offering whereby we sold 3,140,000 shares of common stock. The net proceeds to
us, after deducting expenses relating to the offering, were $30.9 million.
As of September 30, 1999, we had cash and cash equivalents of $16.1 million
and short-term investments of $7.6 million in highly liquid, high quality debt
securities and a certificate of deposit classified as available-for-sale. We
do not maintain any bank lines of credit. In August 1999, we obtained a letter
of credit through our bank in the amount of $2.7 million as security deposit to
lease our new facilities in South San Francisco.
Net cash provided by operating activities was $817,000 in the nine months
ended September 30, 1999, compared to net cash used in operating activities of
$1.9 million in the nine months ended September 30, 1998. For the nine months
ended September 30, 1999, cash provided by operating activities was primarily
due to earnings plus non-cash expenses, increases in deferred revenues, accounts
payable and other accrued liabilities that were offset by increases in accounts
receivable. Net cash used in operating activities in the nine months ended
September 30, 1998 was due primarily to losses for the period.
From December 31, 1998 to September 30, 1999, deferred revenue increased by
approximately $3.3 million to $11.2 million. The increase in deferred revenue
was due to expanding customer base under maintenance in addition to signing of
several agreements with contractual obligations to deliver future specified
products. SOP 97-2 requires us to defer the revenue from these agreements until
product delivery. We expect that deferred revenue will decline in future
periods in which we deliver the specified products.
Net cash used in investing activities was $3.5 million and $7.9 million in
the nine months ended September 30, 1998 and 1999, respectively. For the nine
months ended September 30, 1999, net cash used in investing activities was
primarily due to the acquisition of BV, and to a lesser extent, the purchase of
property and equipment that was partially offset by the maturity of short-term
investments. For the 1998 period, net cash was used primarily for the purchase
of property and equipment.
Net cash provided by financing activities was $30.8 million and $1.3
million in the nine months ended September 30, 1998 and 1999, respectively. For
the nine months ended September 30, 1998, net cash provided by financing
activities was primarily from the proceeds of our initial public offering that
was completed in July 1998. For the nine months ended September 30, 1999, net
cash provided by financing activities was primarily from the proceeds from stock
purchased under the employee stock purchase plan.
We believe that current cash balances and any cash generated from
operations and from available debt financing, will be sufficient to meet our
cash needs for working capital and capital expenditures for at least the next
twelve months. Thereafter, if cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
obtain credit facilities. The sale of additional equity could result in
additional dilution to our stockholders. A portion of our cash may be used to
acquire or invest in complementary businesses, including the acquisition of our
distributor in Japan, or products or to obtain the right to use complementary
technologies. From time to time, in the ordinary course of business, we
evaluate potential acquisitions of such businesses, products or technologies.
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Year 2000 Compliance
Many existing computer systems and computer programs use only two digits to
identify a year. These systems and programs were designed and developed without
addressing the impact of the upcoming change in the century. If not corrected,
many computer systems and software applications could fail or create erroneous
results before, at or beyond the year 2000. We are currently taking steps to
address Year 2000 readiness in three areas, (i) our products; (ii) our internal
systems (including information technology systems such as financial systems and
non-information technology systems such as the phone system) and (iii) third
party vendors with whom we have a business relationship.
Our Year 2000 readiness plan consists of four phases. Phase One (inventory)
consists of identifying all of our systems, products and relationships that may
be impacted by Year 2000. Phase Two (assessment) involves determining our
current state of Year 2000 readiness for those areas identified in the inventory
phase and prioritizing the areas that need to be fixed based on the importance
to our operations. Phase Three (remediation) will consist of developing a plan
to make those areas identified in the assessment phase Year 2000 ready and
implementing such plan. Phase Four (testing) will consist of testing and
validation of Year 2000 readiness for certain mission critical areas as
determined by us. We are currently in the testing phase with respect to our
products and will continue Year 2000 testing of our products during the
remainder of 1999. We are currently in the remediation phase with respect to our
internal systems and do not anticipate any material costs associated with such
remediation. We plan on completing remediation for any material weaknesses
discovered in our internal systems by November 30, 1999. We have completed the
assessment of the vendors who provide material services to our business and do
not anticipate undergoing any remediation efforts in this area. At this time,
we have not yet developed a contingency plan to address situations that may
result if our products, our internal systems or our vendors are unable to
achieve year 2000 readiness. The cost of developing and implementing such a
plan, if necessary, could be material.
We have expensed costs as incurred in connection with year 2000 readiness
and such costs incurred to date have not been material. We believe that we will
continue to incur costs related to Year 2000 readiness, but at this time we are
unable to determine whether or not future costs associated with achieving Year
2000 readiness will be material. Additional costs incurred may include but are
not limited to, the cost of manufacturing and distributing free upgrades to
products that are not Year 2000 ready, the administrative costs in completing
the Year 2000 project and the cost of fixing or replacing any of our internal
systems.
Although we are dedicating resources toward attaining Year 2000 readiness
there can be no assurance that we will be successful in our effort to achieve
Year 2000 readiness. For example, through ongoing testing of our products to
validate Year 2000 readiness, we have discovered Year 2000 related errors in
certain products, which have not compromised the usability or basic
functionality of the products, and there can be no assurance that additional
Year 2000 errors or defects will not be discovered in our current and future
products. Any failure by us to make our products Year 2000 ready could result
in a decrease in sales of our products, an increase in the allocation of
resources to address Year 2000 problems of our customers without additional
revenue commensurate with such dedication of resources, or an increase in
litigation costs relating to losses suffered by our customers due to such Year
2000 problems. In addition, the failure of our internal systems or our third
party vendors to be Year 2000 ready could prevent us from manufacturing or
shipping products, providing customer support and completing transactions, all
of which could have a material adverse effect on us.
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RISK FACTORS
Actuate operates in a rapidly changing environment that involves numerous
risks and uncertainties. You should carefully consider the following risk
factors before making an investment decision. The risks described below are not
the only ones facing us. Additional risks that we do not yet know of or that we
currently think are immaterial may also harm our business operations. If any of
the following risks actually occur, our business, operating results or financial
condition would be harmed and the trading price of our common stock could
decline. You should also refer to the other information set forth in this
Report on Form 10-Q, including management's discussion and analysis of
financial condition and results of operations and the financial statements and
the notes thereto.
OUR OPERATING RESULTS MAY BE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO
MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE
OF OUR STOCK MAY DECREASE SIGNIFICANTLY.
Our limited operating history and the susceptibility of our operating
results to significant fluctuations makes any prediction of future operating
results unreliable. In addition, we believe that period-to-period comparisons
of our operating results are not necessarily meaningful and you should not rely
on them as indications of our future performance. Our operating results have in
the past, and may in the future, vary significantly due to factors such as the
following:
- demand for our products
- the size and timing of significant orders for our products
- sales cycles of our indirect channel partners
- changes in pricing policies by us or our competitors
- changes in our level of operating expenses and our ability to control
costs budgeting cycles of our customers
- ability to make new products commercially available in a timely manner
- defects in our products and other product quality problems
- failure to meet hiring needs and unexpected personnel changes
- the management and expansion of our international operations
- changes in our sales incentive plans
- continued successful relationships and the establishment of new
relationships with e.Business application vendors
- the impact of consolidation by competitors and indirect channel
partners
- general domestic and international economic and political conditions
- the Year 2000 problem
Because our software products are typically shipped shortly after orders
are received, total revenues in any quarter are substantially dependent on
orders booked and shipped throughout that quarter. Furthermore, several factors
may require us, in accordance with GAAP, to defer recognition of license fee
revenue for a significant period of time after entering into a license
agreement, including:
- whether the license agreement includes both software products that are
then currently available and software products or other enhancements
that are still under development
- whether the license agreement relates entirely to then currently
undeliverable software products
- whether the license agreement includes non-standard acceptance criteria
that may preclude revenue recognition prior to customer acceptance
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In addition, we may in the future experience fluctuations in our gross and
operating margins due to changes in the mix of our domestic and international
revenues and changes in the mix of our direct sales and indirect sales, as well
as changes in the mix among the indirect channels through which our products are
offered.
A significant portion of our total revenues in any given quarter is derived
from existing customers. Our ability to achieve future revenue growth, if any,
will be substantially dependent upon our ability to increase revenues from
license fees and services from existing customers, to expand our sales force and
to increase the average size of our orders. To the extent that such increases
do not occur in a timely manner, our business, operating results and financial
condition would be harmed. Our expense levels and plans for expansion,
including plans to significantly increase our sales and marketing and research
and development efforts, are based in significant part on our expectations of
future revenues and are relatively fixed in the short-term. If revenues fall
below our expectations and we are unable to quickly reduce our spending in
response, our business, operating results and financial condition are likely to
be harmed.
Based upon all of the factors described above, we have a limited ability to
forecast future revenues and expenses, and it is likely that in some future
quarter our operating results will be below the expectations of public market
analysts and investors. In the event that operating results are below
expectations, the price of our common stock could decline.
OUR LIMITED OPERATING HISTORY AND LACK OF PROFITABILITY IN PRIOR YEARS MAKES
FUTURE FORECASTING DIFFICULT.
Actuate was founded in November 1993 and we began shipping the Actuate
Reporting System in January 1996. We have a limited operating history on which
to base an evaluation of our business and prospects.
We incurred net losses of $3.2 million, $7.2 million and $6.1 million in
fiscal 1998, 1997 and 1996, respectively. As of September 30, 1999, we had an
accumulated deficit of approximately $17.5 million. Given our history of losses,
we may not have revenue growth or profitability on a quarterly or annual basis
in the future. While we achieved significant quarter-to-quarter revenue growth
in fiscal 1997 and 1998 and during the first nine months of 1999, our revenues
may not increase in future periods. If we do achieve profitability in any
period, we cannot be certain that we will sustain or increase such profitability
on a quarterly or annual basis. We intend to increase our operating expenses
significantly in future periods. As a result, we will need to generate
significant additional revenues to achieve and maintain profitability.
IF WE DO NOT SUCCESSFULLY EXPAND OUR DISTRIBUTION CHANNELS AND DEVELOP AND
MAINTAIN RELATIONSHIPS WITH E.BUSINESS APPLICATION VENDORS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as e.Business
application vendors, resellers and distributors. Our revenues from license fees
resulting from sales through indirect channel partners in the first nine months
of 1999 and in fiscal 1998 and 1997 were approximately 44%, 41% and 38%,
respectively. Our ability to achieve significant revenue growth in the future
will depend in large part on our success in expanding our sales force and in
further establishing and maintaining relationships with e.Business application
vendors, resellers and distributors. In particular, a significant element of our
strategy is to embed our technology in products offered by e.Business
application vendors for resale to such vendors' customers and end users. We
intend to seek additional distribution arrangements with other e.Business
application
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vendors to embed our technology in their products and expect that these
arrangements will continue to account for a significant portion of our revenues
in future periods. Our future success will depend on the ability of our indirect
channel partners to sell and support our products. If the sales and
implementation cycles of our indirect channel partners are lengthy or variable
or our e.Business application vendors experience difficulties embedding our
technology into their products or we fail to train the sales and customer
support personnel of such indirect channel partners in a timely fashion, our
business, operating results and financial condition would be harmed.
Although we are currently investing, and plan to continue to invest,
significant resources to expand and develop relationships with e.Business
application vendors, we have at times experienced and continue to experience
difficulty in establishing and maintaining these relationships. If we are
unable to successfully expand this distribution channels and secure license
agreements with additional e.Business application vendors on commercially
reasonable terms and extend existing license agreements with existing e.Business
and application vendors on commercially reasonable terms our operating results
would be harmed. Any inability by us to maintain existing or establish new
relationships with indirect channel partners or, if such efforts are successful,
a failure of our revenues to increase correspondingly with expenses incurred in
pursuing such relationships, would harm our business, operating results and
financial condition.
IF THE MARKET FOR WEB BASED REPORTING SOFTWARE DOES NOT GROW AS WE EXPECT OUR
BUSINESS WOULD BE SERIOUSLY HARMED.
The market for web based reporting software products is still emerging and
we cannot be certain that it will continue to grow or that, even if the market
does grow, businesses will adopt our products. If the market for web based
reporting products fails to grow or grows more slowly than we expect, our
business, operating results and financial condition would be harmed. To date,
all of our revenues have been derived from licenses for our reporting software
and related products and services, and we expect this to continue for the
foreseeable future. We have spent, and intend to continue to spend,
considerable resources educating potential customers and indirect channel
partners about web based reporting and our products. However, if such
expenditures do not enable our products to achieve any significant degree of
market acceptance our business, operating results and financial condition would
be harmed.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The market in which we compete is intensely competitive and characterized
by rapidly changing technology and evolving standards. Our competition comes in
five principal forms:
- direct competition from current or future vendors of reporting solutions
such as Seagate Software, Inc. (a division of Seagate Technology,
Inc.),MicroStrategy Incorporated and Brio Technology, Inc.
- indirect competition from vendors of OLAP and query tools such as
Hyperion Solutions Corp., Business Objects S.A., Cognos, Inc. and
Microsoft that integrate reporting functionality with such tools
- indirect competition from enterprise application vendors such as SAP and
Oracle, to the extent they include reporting functionality in their
applications
- competition from e.Business software vendors and Web development tool
vendors
- competition from the information systems departments of current or
potential customers that may develop reporting solutions internally which
may be cheaper and more customized than our products
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Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sales of their products than us. Also, most current and potential
competitors, including companies such as Oracle and Microsoft, have greater name
recognition and the ability to leverage significant installed customer bases.
These companies could integrate competing enterprise reporting software with
their products, resulting in a loss of market share for us. We expect
additional competition as other established and emerging companies enter the web
based reporting software market and new products and technologies are
introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins, longer sales cycles and loss of market
share, any of which would harm our business, operating results and financial
condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the reporting needs of our
prospective customers. For example in February 1999 Brio Technology, Inc.
announced its intention to acquire our competitor SQRIBE Technologies, Inc. Also
current or future indirect channel partners have in the past, or may in the
future, establish cooperative relationships with our current or potential
competitors, thereby limiting our ability to sell our products through
particular distribution channels. It is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Such competition could harm our ability to obtain
revenues from license fees from new or existing customers and service revenues
from existing customers on terms favorable to us. If we are unable to compete
successfully against current and future competitors our business, operating
results and financial condition would be harmed.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS COULD BE SERIOUSLY HARMED.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changing customer demands
and evolving industry standards. Any of these factors can render existing
products obsolete and unmarketable. We believe that our future success will
depend in large part on our ability to support current and future releases of
popular operating systems, databases and e.Business software applications, to
timely develop new products that achieve market acceptance, and to meet an
expanding range of customer requirements. If the announcement or introduction
of new products by us or our competitors or any change in industry standards
causes customers to defer or cancel purchases of existing products our business,
operating results and financial condition would be harmed. As a result of the
complexities inherent in web based reporting, major new products and product
enhancements can require long development and testing periods. In addition,
customers may delay their purchasing decisions in anticipation of the general
availability of new or enhanced versions of our products. As a result,
significant delays in the general availability of such new releases or
significant problems in the installation or implementation of such new releases
could harm our business, operating results and financial condition. If we fail
to successfully develop, on a timely and cost effective basis, product
enhancements or new products that respond to technological change, evolving
industry standards or customer requirements or such new products and product
enhancements fail to achieve market acceptance, our business, operating results
and financial condition may be harmed.
IF WE DO NOT RELEASE NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS IN A
TIMELY MANNER OR IF SUCH NEW PRODUCTS AND ENHANCEMENTS FAIL TO ACHIEVE MARKET
ACCEPTANCE OUR BUSINESS COULD BE SERIOUSLY HARMED.
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We believe that our future success will depend in large part on the success
of new products and enhancements that we make generally available. Prior to the
release any new products or enhancements, the software must undergo a long
development and testing period. To date, the development and testing of new
products and enhancements have taken longer than expected. In the event the
development and testing of new products and enhancements continue to take longer
than expected, the release of new products and enhancements will be delayed. If
we fail to release new products and enhancements in a timely manner, our
business, operating results and financial condition may be harmed. In addition,
if such new products and enhancements do not achieve market acceptance our
business, operating results and financial condition may be harmed.
BECAUSE THE SALES CYCLES OF OUR PRODUCTS ARE LENGTHY AND VARIABLE, OUR QUARTERLY
RESULTS MAY FLUCTUATE.
The purchase of our products by our end user customers for deployment
within a customer's organization typically involves a significant commitment of
capital and other resources, and is therefore subject to delays that are beyond
our control. These delays can arise from a customer's internal procedures to
approve large capital expenditures, budgetary constraints and the testing and
acceptance of new technologies that affect key operations. The sales cycle for
an initial order of our products is typically 3 to 6 months and the sales cycle
associated with a follow-on large scale deployment of our products typically
extends for another 6 to 9 months or longer. We may experience longer sales
cycles in the future. Additionally, sales cycles for sales of our products to
e.Business application vendors tend to be longer, ranging from 6 to 24 months or
more and involve convincing the vendor's entire organization that our products
are the appropriate reporting solution for the vendor's application. This time
period does not include the sales and implementation cycles of such vendors' own
products, which are typically significantly longer than our sales and
implementation cycles. Certain of our customers have in the past, or may in the
future, experience difficulty completing the initial implementation of our
products. Any difficulties or delays in the initial implementation by our end
user customers or our indirect channel partners could cause such customers to
reject our software or lead to the delay or non-receipt of future orders for the
large-scale deployment of our products.
IF WE FAIL TO EXPAND OUR INTERNATIONAL OPERATIONS OUR BUSINESS WOULD BE HARMED.
During the first nine months of 1999 and during fiscal 1998 and 1997, we
derived 15%, 6% and 2% of our total revenues, respectively, from sales outside
the United States. Our ability to achieve revenue growth in the future will
depend in large part on our success in increasing revenues from international
sales. We intend to continue to invest significant resources to expand our
sales and support operations outside the United States and to enter additional
international markets. In order to expand international sales, we must
establish additional foreign operations, expand our international channel
management and support organizations, hire additional personnel, recruit
additional international distributors and increase the productivity of existing
international distributors. If we are not successful in expanding international
operations in a timely and cost-effective manner, our business, operating
results and financial condition could be harmed.
THERE ARE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD HARM OUR
BUSINESS.
In June 1999, we acquired Actuate Holding BV (Actuate BV). Actuate BV has
three operating subsidiaries located in the United Kingdom, France and Germany
whose sole business purpose is the marketing, sale and distribution of our
software products. We have very limited experience in the
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management of international operations. We also have a number of other
distributors located worldwide. International operations are subject to a number
of risks including the following:
- costs of localizing products for foreign countries
- trade laws and business practices favoring local competition
- dependence on local vendors
- compliance with multiple, conflicting and changing government laws and
regulations
- longer sales and payment cycles
- import and export restrictions and tariffs
- difficulties in staffing and managing foreign operations
- greater difficulty or delay in accounts receivable collection
- foreign currency exchange rate fluctuations
- multiple and conflicting tax laws and regulations
- political and economic instability, including recent economic conditions
in Asia.
Because substantially all of our international revenues and costs to date,
with the exception of sales in Japan, have been denominated to date in U.S.
dollars, increases in the value of the United States dollar could increase the
price of our products so that they become relatively more expensive to customers
in the local currency of a particular country, and result in a reduction in
sales and profitability in that country. We believe that an increasing portion
of our revenues and costs will be denominated in foreign currencies. To the
extent such denomination in foreign currencies does occur, gains and losses on
the conversion to U.S. dollars of accounts receivable, accounts payable and
other monetary assets and liabilities arising from international operations may
contribute to fluctuations in our results of operations. Any of the foregoing
factors could harm our business, operating results and financial condition.
Although we may from time to time undertake foreign exchange hedging
transactions to cover a portion of our foreign currency transaction exposure, we
currently do not attempt to cover any foreign currency exposure. If we are not
successful in any future foreign exchange hedging transactions that we engage
in, our business, operating results and financial condition could be harmed.
TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT OUR
INTERNAL SYSTEMS, PROCEDURES AND CONTROLS. IF WE ARE UNABLE TO DO SO
SUCCESSFULLY, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our rapid expansion in the number of employees and the scope of operations
has placed and will continue to place a significant strain on our management,
information systems and resources. For example, we will be relocating our
corporate headquarters to South San Francisco, California, in February 2000. In
addition, we expect that an expansion of our international operations will lead
to increased financial and administrative demands associated with managing our
operations in Europe and managing an increasing number of relationships with
foreign partners and customers and expanded treasury functions to manage foreign
currency risks. Our future operating results will also depend on our ability to
further develop indirect channels and expand our support organization to
accommodate growth in our installed base. If we fail to manage our expansion
effectively our business, operating results and financial condition would be
harmed.
OUR INABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL IN THE FUTURE
WOULD SERIOUSLY HARM OUR BUSINESS.
From January 1997 through September 1999, we increased our headcount from
38 to 255 full-time employees. Furthermore, significant increases in the number
of employees are anticipated during the remainder of 1999 and 2000. In
particular, we currently plan to significantly expand the number of employees in
sales, customer support and marketing. Our success depends to a significant
degree upon
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the efforts of certain key management, sales, customer support and research and
development personnel. We believe that our future success will depend in large
part upon our continuing ability to attract and retain highly skilled
managerial, sales, marketing, customer support and research and development
personnel. Like other software companies, we face intense competition for such
personnel, and we have experienced and will continue to experience difficulty in
recruiting qualified personnel, particularly in the San Francisco Bay Area,
where the employment market for qualified sales, marketing and engineering
personnel is extremely competitive.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers and other key engineering, sales, marketing and support personnel and
none of our officers or key employees is bound by an employment agreement for
any specific term. If we lose the service of one or more of our key employees,
or if one or more of our executive officers or employees decide to join a
competitor or otherwise compete directly or indirectly with us, this could have
a significant adverse effect on our business.
THERE ARE RISKS ASSOCIATED WITH THE SOFTWARE INDUSTRY
The software industry has historically experienced significant periodic
downturns, often in connection with, or in anticipation of, declines in general
economic conditions during which management information systems budgets often
decrease. Such a change in economic conditions could result in a slow down of
the purchase of web based reporting products. If this occurs, our business,
operating results and financial condition may in the future reflect substantial
fluctuations from period to period as a consequence of buying patterns and
general economic conditions in the software industry.
THERE ARE RISKS ASSOCIATED WITH THE POTENTIAL ACQUISITION OF OUR JAPANESE
DISTRIBUTOR
In June 1999 we acquired approximately 8% of the outstanding shares in our
Japanese distributor from one of the distributor's shareholders for
approximately $168,000 in cash. We currently own 17% of our Japanese distributor
and are a party to an agreement with our Japanese distributor and its other
shareholders under which we are likely to (and under certain circumstances,
would bear substantial financial penalties if we did not) acquire all the
outstanding shares of such distributor at some point in the future. Such an
acquisition could be triggered by the shareholders of the Japanese distributor
at their discretion. The purchase price for such acquisition would be based on
a contractual formula in effect on the date of such acquisition. The purchase
price could be paid in shares of our common stock, which may have the effect of
diluting existing stockholders and adversely affecting the price of our common
stock or in cash, reducing the available cash for working capital and other
purposes. We believe that any such acquisition will be accounted for by us as a
"purchase" transaction (as opposed to a pooling of interests). This accounting
treatment could cause us to recognize substantial goodwill and other intangible
asset amortization charges in the quarters and fiscal years immediately
following the date on which such an acquisition is effected. If the acquisition
is accounted for as a "purchase" transaction, it could harm our reported
earnings per share during the periods in which we record the amortization of
intangible assets acquired. Finally, any such acquisition would require
substantial management attention, impose costs on us associated with integrating
the acquired entities, require us to coordinate sales and marketing efforts with
the acquired companies and subject us to additional, and potentially
substantial,
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regulation as an owner of foreign subsidiaries. Any of these factors could harm
our business, operating results and financial condition.
WE MAY BE ADVERSELY IMPACTED IF OUR PRODUCTS, INTERNAL SYSTEMS AND VENDORS OR
THE PRODUCTS OF OUR INDIRECT CHANNEL PARTNERS ARE NOT YEAR 2000 READY.
Any failure of our products, internal systems or third party vendors'
systems to be Year 2000 ready would harm our business. Many currently installed
computer systems and software products are coded to accept only two digit
entries in the date code field. Beginning in the year 2000, these code fields
will need to accept four digit entries to distinguish 21/st/ century dates for
20/th/ century dates. As a result, computer systems and/or software products
used by many companies may need to be upgraded to solve this problem. Although
we are dedicating resources toward attaining Year 2000 readiness for our
products, internal systems and third party vendors, our efforts may not be
successful. For example, during ongoing testing of our products to validate Year
2000 readiness, we have discovered Year 2000 related errors in certain products,
which have not compromised the usability or basic functionality of the products,
and we cannot be certain that we will not discover additional Year 2000 errors
or defects. Our failure to make our products Year 2000 ready could result in a
decrease in sales of our products, an increase in the allocation of resources to
address Year 2000 problems of our customers without additional revenue
commensurate with such dedication of resources, or an increase in litigation
costs relating to losses suffered by our customers due to such Year 2000
problems.
To the extent our products are embedded or bundled with other companies'
products that are not Year 2000 ready, we could be exposed to litigation from
such companies' customers, and our reputation in the marketplace and indirect
sales of our products by our indirect channel partners could be harmed. In
addition, the failure of our internal systems or third party vendors' systems to
be Year 2000 ready could prevent the us from manufacturing or shipping products,
providing customer support and completing transactions, all of which could harm
our business, operating results and financial condition. We currently do not
have a Year 2000 contingency plan for any area and the cost of implementing a
contingency plan could be material.
IF PURCHASING PATTERNS OF OUR CUSTOMERS ARE AFFECTED BY THE YEAR 2000, OUR
BUSINESS COULD BE SERIOUSLY HARMED.
We believe that the purchasing patterns of customers and potential
customers may be impacted by Year 2000 issues. Many companies are expending
significant resources to correct or patch their current software systems to make
such systems Year 2000 ready. These expenditures may result in reduced funds
available to purchase software products such as those offered by us and our
indirect channel partners. Although we have not experienced these effects to
date, if customers defer purchases of business software because of such
expenditures, it would harm our business, operating results and financial
condition.
IF OUR PRODUCT CONTAINS MATERIAL DEFECTS, OUR BUSINESS COULD BE SERIOUSLY
HARMED.
Software products as complex as those offered by us often contain errors or
defects, particularly when first introduced, when new versions or enhancements
are released and when configured to individual customer computing systems. We
currently have known errors and defects in our products. Despite testing
conducted by us, if additional defects and errors, including Year 2000 errors,
are found in current versions, new versions or enhancements of our products
after commencement of commercial
22
<PAGE>
shipment this could result in the loss of revenues or a delay in market
acceptance. The occurrence of any of these events would harm on our business,
operating results and financial condition.
IF A SUCCESSFUL PRODUCT LIABILITY CLAIM IS MADE AGAINST US, OUR BUSINESS WOULD
BE SERIOUSLY HARMED.
Although license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims, it is
possible that such limitation of liability provisions may not be effective as a
result of existing or future laws or unfavorable judicial decisions. We have
not experienced any product liability claims to date. However, the sale and
support of our products may entail the risk of such claims, which are likely to
be substantial in light of the use of our products in business-critical
applications. A product liability claim brought against us could harm our
business, operating results and financial condition.
IF THE PROTECTION OF OUR PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS WILL BE
SERIOUSLY HARMED.
We have two issued U.S. patents and we rely primarily on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect our proprietary technology. For example, we
license our software pursuant to shrink-wrap or signed license agreements, which
impose certain restrictions on licensees' ability to utilize the software. In
addition, we seek to avoid disclosure of our intellectual property, including
requiring those persons with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code.
We seek to protect our software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection.
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 products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. If our means
of protecting our proprietary rights is not adequate or our independently
develop similar technology, our business could be seriously harmed.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS.
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but we cannot be certain that third parties
will not claim infringement by us with respect to current or future products.
We expect web based reporting software product developers will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any such 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. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all. A successful claim of
product infringement against us and our failure or inability to license the
infringed or similar technology could harm our business, operating results and
financial condition.
23
<PAGE>
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR STOCKHOLDERS.
The market price of shares of our common stock has been and is likely to
continue to be highly volatile and may be significantly affected by factors such
the following:
- actual or anticipated fluctuations in our operating results
- announcements of technological innovations
- new products or new contracts announced by us or our competitors
- developments with respect to copyrights or proprietary rights
- conditions and trends in the software and other technology industries
- changes in corporate purchasing of enterprise application software
- the Year 2000 issue
- adoption of new accounting standards affecting the software industry
- changes in financial estimates by securities analysts
- changes in the economic conditions in the United States and abroad
- the purchase or sale of our common stock by "day traders"
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the securities of technology companies. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against such company. If we are
involved in such litigation, it could result in substantial costs and a
diversion of management's attention and resources and could harm our business,
operating results and financial condition.
EXISTING STOCKHOLDERS CAN EXERCISE SIGNIFICANT CONTROL OVER ACTUATE.
As of September 30, 1999, our executive officers and directors and their
affiliates in the aggregate beneficially owned approximately 34% of our
outstanding common stock, assuming no exercise of outstanding stock options. As
a result, these stockholders will be able to exercise control over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of Actuate.
CERTAIN OF OUR CHARTER PROVISIONS AND DELAWARE LAW, MAY PREVENT OR DETER A
CHANGE IN CONTROL OF ACTUATE.
Actuate's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated ("Bylaws"),
contain certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of Actuate or unsolicited acquisition proposals
that a stockholder might consider favorable, including provisions authorizing
the issuance of "blank check" preferred stock and eliminating the ability of
stockholders to act by written consent. In addition, certain provisions of
Delaware law and our 1998 Equity Incentive Plan may also have the effect of
discouraging, delaying or preventing a change in control of Actuate or
unsolicited acquisition proposals. The anti-takeover effect of these provisions
may also have an adverse effect on the public trading price of our common stock.
24
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
We are not involved in any legal proceedings that are material to our
business or fi nancial condition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.17 Office Building Lease between the Actuate and HMS Gateway Office,
L.P. dated August 18, 1999
10.18 First Amendment to Office Building Lease between the Actuate and HMS
Gateway Office, L.P. dated September 30, 1999
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On July 2, 1999, the Company filed a report on Form 8-K relating to the
acquisition of Actuate Holdings, B.V.
On August 30, 1999, the Company filed an amendment of a current report on
Form 8-K previously filed on July 2, 1999, to add financial statements and
exhibits.
25
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 3, 1999.
Actuate Corporation
(Registrant)
By: /s/ DANIEL A. GAUDREAU
--------------------------------------
Daniel A. Gaudreau
Chief Financial Officer, Senior Vice
President of Finance (Principal
Financial and Accounting Officer)
26
<PAGE>
ACTUATE CORPORATION
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
- --------- -------------
10.17 Office Building Lease between the Company and HMS Gateway Office,
L.P. dated August 18, 1999
10.18 First Amendment to Office Building Lease between the Actuate and
HMS Gateway Office, L.P. dated September 30, 1999
27.1 Financial Data Schedule - September 30, 1999
27
<PAGE>
EXHIBIT 10.17
Office Building Lease
by and between
HMS Gateway Office, L.P.,
a Delaware Limited Partnership
and
Actuate Corporation,
a Delaware corporation
<PAGE>
Basic Lease Information
Date: August 18, 1999
Tenant: Actuate Corporation
Address: 999 Baker Way
Suite 200
San Mateo, CA 94404
Landlord: HMS Gateway Office, L.P.
Address: c/o Hines Interests Limited Partnership
651 Gateway Boulevard, Suite 1140
South San Francisco, CA 94080
Leased Premises: Suite 500 and 600, on the 5th and 6th
Floors, respectively, of 701 Gateway Blvd.
Net Rentable Area: 58,760 rentable square feet
Scheduled Term
Commencement
Date: February 1, 2000
Term: Eight (8) years
Base Rent:
<TABLE>
<CAPTION>
Year Amount/Month
<S> <C> <C>
1 $132,210 (based on $2.25 per rentable square foot)
2 $135,148 (based on $2.30 per rentable square foot)
3 $138,086 (based on $2.35 per rentable square foot)
4 $141,024 (based on $2.40 per rentable square foot)
5 $143,962 (based on $2.45 per rentable square foot)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
6 $146,900 (based on $2.50 per rentable square foot)
7 $149,838 (based on $2.55 per rentable square foot)
8 $152,776 (based on $2.60 per rentable square foot)
</TABLE>
Tenant's Plan
Delivery Date: October 1, 1999
Security Deposit: Letter of Credit in the amount of
$2,700,000, as adjusted pursuant Section
5.15 below.
Parking: 176 parking spaces
Broker: West Bay Commercial Real Estate
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1. Definitions 1
1.01 "Additional Rent"............................................... 1
1.02 "Adjustment Date"............................................... 1
1.03 "Base Building Improvements".................................... 1
1.04 "Base Rent"..................................................... 1
1.05 "Basic Operating Cost".......................................... 1
1.06 "Basic Operating Cost Adjustment"............................... 1
1.07 "Basic Services"................................................ 1
1.08 "Building"...................................................... 2
1.09 "Building Standard Improvements"................................ 2
1.10 "business day".................................................. 2
1.11 "business hours"................................................ 2
1.12 "Common Areas".................................................. 2
1.13 "Estimated Basic Operating Cost"................................ 2
1.14 "Fair Market Rent".............................................. 2
1.15 "Gross Rent".................................................... 2
1.16 "Guarantor"..................................................... 3
1.17 "Hazardous Material"............................................ 3
1.18 "Hazardous Materials Claims".................................... 3
1.19 "Hazardous Materials Laws"...................................... 3
1.20 "Landlord Parties".............................................. 4
1.21 "Leased Premises"............................................... 4
1.22 "Major Vertical Penetrations"................................... 4
1.23 "Net Rentable Area"............................................. 4
1.24 "Permitted Hazardous Materials"................................. 4
1.25 "Permitted Use"................................................. 5
1.26 "Project"....................................................... 5
1.27 "Rent".......................................................... 5
1.28 "Security Deposit".............................................. 5
<PAGE>
1.29 "Substantial Completion"........................................ 5
1.30 "Tenant Extra Improvements"..................................... 6
1.31 "Tenant Improvements"........................................... 6
1.32 "Tenant Parties"................................................ 6
1.33 "Tenant's Plan Delivery Date"................................... 6
1.34 "Tenant's Proportionate Share".................................. 6
1.35 "Term".......................................................... 6
1.36 "Term Commencement Date"........................................ 6
1.37 "Term Expiration Date".......................................... 7
ARTICLE 2. Leased Premises............................................. 7
2.01 Lease........................................................... 7
2.02 Landlord's Reserved Rights...................................... 7
ARTICLE 3. Rent, Term, Use And Basic Operating Costs................... 9
3.01 Term............................................................ 9
3.02 Use............................................................. 10
3.03 Payment of Base Rent And Tenant's Proportionate Share Of
Estimated Basic Operating Cost.................................. 10
3.04 Net Lease....................................................... 10
3.05 Basic Operating Cost............................................ 11
3.06 Adjustment For Variation Between Estimated And Actual........... 14
3.07 Computation Of Basic Operating Cost Adjustment.................. 14
ARTICLE 4. Landlord Covenants.......................................... 15
4.01 Basic Services.................................................. 15
4.02 Extra Services.................................................. 16
4.03 Graphics And Signage............................................ 17
4.04 Tenant Extra Improvements....................................... 17
4.05 Repair Obligation............................................... 18
4.06 Peaceful Enjoyment.............................................. 18
ARTICLE 5. Tenant's Covenants.......................................... 18
5.01 Payments By Tenant.............................................. 18
ii
<PAGE>
5.02 Obligations Of Tenant To Furnish Floor Plans And Approve Plans
And Specificifications.......................................... 18
5.03 Construction Of Tenant Improvements............................. 19
5.04 Taxes On Personal Property And Tenant Extra Improvements........ 19
5.05 Repairs By Tenant............................................... 19
5.06 Waste........................................................... 20
5.07 Assignment Or Sublease.......................................... 20
5.08 Alterations, Additions or Improvements.......................... 22
5.09 Liens........................................................... 23
5.10 Compliance With Laws, Insurance Standards and
Non-Discrimination.............................................. 24
5.11 Entry For Repairs, Inspection, Posting Notices, Etc............. 24
5.12 No Nuisance..................................................... 25
5.13 Subordination; Mortgagee Protection; Reciprocal Easement
Agreements...................................................... 25
5.14 Estoppel Certificate............................................ 26
5.15 Security Deposit................................................ 27
5.16 Tenant's Remedies............................................... 28
5.17 Rules And Regulations........................................... 28
5.18 Prohibition And Indemnity With Respect To Hazardous Material.... 28
5.19 Surrender Of Premises On Termination............................ 29
5.20 Window Coverings................................................ 30
ARTICLE 6. Condition And Operation Of The Building..................... 30
6.01 Exhibit B Controls.............................................. 30
6.02 Alteration...................................................... 30
ARTICLE 7. Casualty, Eminent Domain And Miscellaneous Matters.......... 31
7.01 Landlord's Casualty Insurance................................... 31
7.02 Liability Insurance............................................. 31
7.03 Tenant's Casualty Insurance And Additional Tenant Insurance
Requirements.................................................... 32
7.04 Indemnity And Exoneration....................................... 32
7.05 Waiver Of Subrogation Rights.................................... 33
7.06 Condemnation And Loss Or Damage................................. 34
7.07 Damage And Destruction.......................................... 34
iii
<PAGE>
7.08 Default By Tenant............................................... 36
7.09 Arbitration Of Fair Market Rent................................. 39
7.10 No Waiver....................................................... 41
7.11 Statutory Waivers............................................... 41
7.12 Holding Over.................................................... 42
7.13 Attorneys' Fees................................................. 42
7.14 Amendments...................................................... 42
7.15 Transfers By Landlord........................................... 42
7.16 Severability.................................................... 42
7.17 Notices......................................................... 43
7.18 Building Planning............................................... 43
7.19 No Option....................................................... 43
7.20 Integration and Interpretation.................................. 43
7.21 Quitclaim....................................................... 43
7.22 No Easement For Light, Air And View............................. 43
7.23 No Merger....................................................... 44
7.24 Memorandum Of Lease............................................. 44
7.25 Survival........................................................ 44
7.26 Financial Statements............................................ 44
7.27 No Joint Venture................................................ 44
7.28 Successors And Assigns.......................................... 45
7.29 Applicable Law.................................................. 45
7.30 Time Of The Essence............................................. 45
7.31 Interpretation.................................................. 45
7.32 Parking......................................................... 45
7.33 Brokers......................................................... 45
7.34 Non-Disturbance, Attornment and Subordination Agreement......... 46
7.35 Signage......................................................... 46
iv
<PAGE>
701 GATEWAY LEASE
This Lease is made and entered into as of the date specified in the Basic
Lease Information Sheet attached hereto and incorporated herein by this
reference, by and between HMS Gateway Office, L.P., a Delaware limited
partnership ("Landlord"), and the Tenant identified in the Basic Lease
Information Sheet.
IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS CONTAINED IN THIS
LEASE, THE PARTIES AGREE AS FOLLOWS:
ARTICLE 1.
----------
Definitions
-----------
Certain terms used in this Lease and the Exhibits hereto shall have the
meaning set forth below for each such term. Certain other terms shall have the
meaning set forth elsewhere in this Lease and the Exhibits hereto.
1.01 "Additional Rent" shall mean all monetary obligations of Tenant
---------------
hereunder other than the obligation for payment of Gross Rent.
1.02 "Adjustment Date" Intentionally deleted.
---------------
1.03 "Base Building Improvements" shall mean those improvements of the
--------------------------
Leased Premises that are so defined in Exhibit B.
1.04 "Base Rent" shall mean the basic rent payable by Tenant to Landlord in
---------
the amounts shown on the Basic Lease Information sheet and in the manner
provided in Section 3.03.
1.05 "Basic Operating Cost" shall have the meaning given in Section 3.05.
--------------------
1.06 "Basic Operating Cost Adjustment" for any calendar year shall mean the
-------------------------------
difference, if any, between Estimated Basic Operating Cost and Basic Operating
Cost for that calendar year.
1.07 "Basic Services" shall mean the services provided pursuant to Section
--------------
4.01.
-1-
<PAGE>
1.08 "Building" shall mean the improvements known as 701 Gateway Boulevard
--------
located in South San Francisco, California.
1.09 "Building Standard Improvements" shall mean those improvements of the
------------------------------
Leased Premises that are so defined in Exhibit B-1.
1.10 "business day" shall mean Monday through Friday, except holidays;
------------
"holiday" means those holidays specified by the laws of the United States or the
State of California and all holidays to which maintenance employees of the
Building are entitled from time to time under their union contract or other
agreement.
1.11 "business hours" shall mean the Building hours of operation set forth
--------------
in the Building rules and regulations attached hereto as Exhibit C.
1.12 "Common Areas" shall mean (i) with respect to the Building, the total
------------
square footage of areas of the Building devoted to non-exclusive uses such as
lobbies, fire vestibules, rest rooms, mechanical areas, loading areas, trash
areas, tenant and ground floor corridors, elevator foyers, electrical and
janitorial closets, ground floor lobbies, telephone and equipment rooms, and
other similar facilities maintained for the benefit of Building tenants and
invitees, but shall not mean Major Vertical Penetrations and (ii) with respect
to the Project (excluding the Building), all walkways, roadways, sidewalks,
parkways, driveways, landscaped areas or other similar facilities maintained for
the benefit of Project Tenants and invitees.
1.13 "Estimated Basic Operating Cost" for any calendar month shall mean
------------------------------
Landlord's estimate of Basic Operating Cost for the calendar year within which
such month falls divided by twelve (12) equal monthly installments.
1.14 "Fair Market Rent" shall mean the rate being charged by Landlord in
----------------
the Building for comparable space, taking into consideration: location in the
Building, tenant improvements or allowances existing or to be provided, rental
abatements, lease takeovers/assumptions, moving expenses and other forms of
rental concessions, proposed term of lease, extent of service provided or to be
provided, the ownership of the comparable space, whether or not the transaction
is a sublease, the time the particular rate under consideration became or is to
become effective and any other relevant terms or conditions.
1.15 "Gross Rent" shall mean the total of Base Rent and Tenant's
----------
Proportionate Share of Estimated Basic Operating Cost.
-2-
<PAGE>
1.16 "Guarantor" Intentionally deleted.
---------
1.17 "Hazardous Material" shall mean any (a) oil, flammable substances,
------------------
explosives, radioactive materials, hazardous wastes or substances, toxic wastes
or substances or any other wastes, materials or pollutants which (i) pose a
hazard to the Project or to persons on or about the Project or (ii) cause the
Project to be in violation of any Hazardous Materials Laws; (b) asbestos in any
form, urea formaldehyde foam insulation, transformers or other equipment that
contain dielectric fluid containing levels of polychlorinated biphenyls, or
radon gas; (c) chemical, material or substance defined as or included in the
definition of "hazardous substances", "hazardous wastes", "hazardous materials",
"extremely hazardous waste", "restricted hazardous waste", or "toxic substances"
or words of similar import under any applicable local, state or federal law or
under the regulations adopted or publications promulgated pursuant thereto,
including, but not limited to, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. (S)9601, et seq.;
the Hazardous Materials Transportation Act, as amended, 49 U.S.C. (S)1801, et
seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. (S)1251, et
seq.; Sections 25115, 25117, 25122.7, 25140, 25249.8, 25281, 25316, and 25501 of
the California Health and Safety Code; (d) other chemical, material or
substance, exposure to which is prohibited, limited or regulated by any
governmental authority or may or could pose a hazard to the health and safety of
the occupants of the Project or the owners and/or occupants of property adjacent
to or surrounding the Project, or any other Person coming upon the Project or
adjacent property; and (e) other chemicals, materials or substances which may or
could pose a hazard to the environment.
1.18 "Hazardous Materials Claims" shall mean any enforcement, cleanup,
--------------------------
removal, remedial or other governmental or regulatory actions, agreements or
orders instituted pursuant to any Hazardous Materials Laws; and any claims made
by any third party against Landlord, Tenant or the Project relating to damage,
contribution, cost recovery, compensation, loss or injury resulting from the
presence, release or discharge of any Hazardous Materials.
1.19 "Hazardous Materials Laws" shall mean any federal, state or local
------------------------
laws, ordinances, orders, rules, regulations or policies, now or hereafter in
force, as amended from time to time, in any way relating to the environment,
health and safety, and Hazardous Materials (including, without limitation, the
use, handling, transportation, production, disposal, discharge or storage
thereof) or to industrial hygiene or the environmental conditions on, under or
about the Project, including, without limitation, soil, groundwater and indoor
and ambient air conditions. Landlord hereby notifies Tenant in accordance with
California Health & Safety Code Section 25359.7 that in 1981-82, the Project was
the subject of a state-supervised cleanup of hazardous waste disposed of on the
site by prior occupants. As part of the cleanup approved by the applicable
agencies, some soils containing heavy metals were left in place, covered by
clean fill. These soils are managed in accordance with the requirements of the
applicable agencies and a Declaration of Covenants, Conditions and Restrictions
imposed by Homart Development Co.
-3-
<PAGE>
1.20 "Landlord Parties" means the employees, agents, contractors, officers,
----------------
directors, partners, licensees, invitees and guests of Landlord, Landlord's
affiliates, Landlord's general partners and limited partners.
1.21 "Leased Premises" shall mean the floor area more particularly shown on
---------------
the Exhibit A-1 floor plan attached hereto, containing the Net Rentable Area
specified on the Basic Lease Information sheet.
1.22 "Major Vertical Penetrations" shall mean the area or areas within
---------------------------
Building stairs (excluding the landing at each floor), elevator shafts, flues,
vents, stacks, pipe shafts and vertical ducts and the like, that service more
than one floor of the Building. The area with Major Vertical Penetrations shall
be bounded and defined by the interior surface of the perimeter walls thereof
(or the extended plane of such walls over areas that are not enclosed). Major
Vertical Penetrations shall exclude, however, areas for the specific use of
Tenant or installed at the request of Tenant, such as special stairs or
elevators.
1.23 "Net Rentable Area" shall mean the area or areas of space within the
-----------------
Project determined as follows: (i) Net Rentable Area on a single tenancy floor
is determined by measuring from the inside surface of the outer pane of glass
and extensions of the plane thereof in non-glass areas to the inside surface of
the opposite outer pane of glass and extensions of the plane thereof in non-
glass areas and shall include all areas within the outside walls, excluding
Major Vertical Penetrations and including Tenant's pro rata share of Common
Areas; (ii) Net Rentable Area for a partial floor shall include all space within
the demising walls (measured from the mid-point of the demising walls and, in
the case of exterior walls, measured as defined in (i) above), plus Tenant's pro
rata share of Common Areas. No deductions from Net Rentable Area shall be made
for columns or projections necessary to the Building except for Major Vertical
Penetrations. The Net Rentable Area in the Leased Premises has been calculated
on the basis of the foregoing definition and is hereby stipulated for all
purposes hereof to be the amount stated on the Basic Lease Information sheet,
subject to confirmation by actual measurement by Landlord's architect, at the
request of either party, prior to Tenant's Plan Delivery Date. Any such changes
to the Net Rentable Area in the Leased Premises shall be reflected in the Lease
Commencement Certificate, a sample form of which is attached hereto as Exhibit D
to be executed by Tenant promptly after the Term Commencement Date
1.24 "Permitted Hazardous Materials" shall mean Hazardous Materials which
-----------------------------
are contained in ordinary office supplies of a type and in quantities typically
used in the ordinary course of business within executive offices of similar size
and location, but only if and to the extent that such supplies are transported,
stored and used in full compliance with all Hazardous Materials Laws and
otherwise in a safe and prudent manner. Hazardous Materials which are contained
in ordinary office supplies but which are transported, stored and used in a
manner
-4-
<PAGE>
which is not in full compliance with all Hazardous Materials Laws or which is
not in any respect safe and prudent shall not be deemed to be "Permitted
Hazardous Materials" for the purposes of this Lease.
1.25 "Permitted Use" shall mean executive, professional office and
-------------
corporate administrative office uses in the Leased Premises of a kind
appropriate in a building of the type and quality of the Building; provided,
however, that for the purpose of limiting the type of use permitted by Tenant,
or an assignee of Tenant, but without limiting Landlord's right to lease any
portion of the Building to a tenant of Landlord's choice, "Permitted Use," shall
not include (i) offices of any agency or bureau of the United States or any
state or political subdivision thereof; (ii) offices or agencies of any foreign
government or political subdivision thereof; (iii) offices of any health care
professionals or service organization, except for administrative offices where
no diagnostic, treatment or laboratory services are performed; (iv) schools or
other training facilities that are not ancillary to executive, professional or
corporate administrative office use; (v) retail or restaurant uses; (vi)
broadcast studios or other broadcast production facilities, such as radio and/or
television stations; (vii) product display or demonstration facilities; (viii)
offices at which deposits or bills are regularly paid in person by customers;
and, (ix) personnel agencies, except offices of executive search firms. Landlord
acknowledges that Tenant will be using the Leased Premises as a training
facility for its employees, agents, customers, prospective customers and
partners and will display and demonstrate (but in no event visible from outside
the Premises)Tenant's products within the Leased Premises.
1.26 "Project" shall mean the real property (including without limitation,
-------
the Building, the Common Areas and any other present or hereafter existing
improvements), as such real property may be expanded from time to time by
Landlord, situated in the City of South San Francisco, County of San Mateo and
more particularly described on Exhibit A-2.
1.27 "Rent" shall mean Gross Rent, Additional Rent and any and all other
----
charges of any nature payable by Tenant to Landlord under this Lease.
1.28 "Security Deposit" shall mean the amount specified on the Basic Lease
----------------
Information sheet paid by Tenant to Landlord to be held pursuant to Section
5.15.
1.29 "Substantial Completion" shall mean (and the Leased Premises shall be
----------------------
deemed "Substantially Complete") when (i) installation of Building Standard
Improvements (and Tenant Extra Improvements installed by Landlord's contractor
or Tenant Extra Improvements installed by Tenant's contractor within the time
schedule for performance of such work by Landlord's contractor) has occurred,
(ii) Tenant has direct access to the elevator lobby on the floor (or floors)
where the Leased Premises are located, (iii) Basic Services are available to the
Leased Premises, and (iv) appropriate governmental authorities have issued a
certificate of
-5-
<PAGE>
occupancy for the Leased Premises. Substantial Completion shall be deemed to
have occurred notwithstanding a requirement to complete "punchlist" or similar
corrective work.
1.30 "Tenant Extra Improvements" shall mean the extent to which the Tenant
-------------------------
Improvements in the Leased Premises would exceed in quality or quantity the
Building Standard Improvements. In instances where this Lease refers to Tenant
Extra Improvements as a standard for the provision of services, maintenance,
repair or replacement by Tenant or Landlord, such reference shall be to the
difference in required services, maintenance, repairs or replacements between
the Tenant Improvements as constructed in the Leased Premises and the Building
Standard Improvements, had the Building Standard Improvements been constructed
in the Leased Premises.
1.31 "Tenant Improvements" shall mean the Building Standard Improvements
-------------------
and Tenant Extra Improvements (if any) installed or to be installed for Tenant
as approved by Landlord pursuant to Exhibit B.
1.32 "Tenant Parties" shall mean the employees, agents, contractors,
--------------
officers, directors, partners, licensees, invitees and guests of Tenant.
1.33 "Tenant's Plan Delivery Date" shall mean the date stated on the Basic
---------------------------
Lease Information sheet for delivery of complete plans and specifications
pursuant to Section 5.02 and Exhibit B.
1.34 "Tenant's Proportionate Share" shall mean the percentage that the Net
----------------------------
Rentable Area of the Leased Premises bears to ninety-five percent (95%) of the
total Net Rentable Area of the Building or to the total Net Rentable Area leased
in the Building (if such total is greater than ninety-five percent (95%) of the
total Net Rentable Area) as calculated for each calendar year of the Term.
Notwithstanding the foregoing, Tenant's Proportionate Share shall in no event
exceed 36.316% of the total Net Rentable Area of the Building.
1.35 "Term" shall mean the period from the Term Commencement Date and
----
ending on the Term Expiration Date. The Scheduled Term Commencement Date stated
on the Basic Lease Information sheet represents merely the parties' estimate of
the Term Commencement Date.
1.36 "Term Commencement Date" shall mean the date when the Term commences
----------------------
as determined pursuant to Section 3.01 hereof.
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1.37 "Term Expiration Date" shall mean the date that is the number of years
--------------------
and/or months set forth on the Basic Lease Information after the Term
Commencement Date or such earlier date upon which this Lease is terminated
pursuant to the terms hereof.
ARTICLE 2.
----------
Leased Premises
---------------
2.01 Lease. Landlord leases to Tenant and Tenant leases from Landlord the
-----
Leased Premises upon all of the terms, covenants and conditions set forth
herein.
2.02 Landlord's Reserved Rights. Landlord reserves from the leasehold
--------------------------
estate hereunder, in addition to all other rights reserved by Landlord under
this Lease: (i) all exterior walls and windows bounding the Leased Premises, and
all space located within the Leased Premises for Major Vertical Penetrations,
conduits, electric and all other utilities, air-conditioning, sinks or other
Building facilities that do not constitute Tenant Extra Improvements, the use
thereof and access thereto through the Leased Premises for operation,
maintenance, repair or replacement thereof, and (ii) the right from time to
time, without unreasonable interference with Tenant's use, to install, remove or
relocate any of the foregoing for service to any part of the Building to
locations that will not materially interfere with Tenant's use of the Leased
Premises, to make alterations to the Building, to alter or relocate any portion
of the Common Areas or any other common facility, and to make changes or
alterations or additions to the Project or any portion thereof. Subject to the
rights of Tenant specified in this Lease as to the non-exclusive use of certain
portions of the Common Areas, Landlord shall have the sole and exclusive right
to possession and control of the Common Areas and all other areas of the Project
outside the Leased Premises. Notwithstanding anything in this Section 2.02 to
the contrary, Landlord shall not permit satellite dishes or other
telecommunications equipment located on the roof of the Building to unreasonably
interfere with Tenant's use of the Premises for typical general office uses.
2.03 Right of First Opportunity
--------------------------
(a) Tenant shall have an on-going right to expand into additional space on
any floor of the Building (other than the ground floor), as and if such space
becomes available (space shall be deemed "available" when any lease for any
space within the Building has terminated, either by default, mutual agreement,
or by expiration of the term of such lease, and such space has not been relet to
the tenant under such lease or to a subtenant or assignee of such tenant
immediately thereafter), any such space being referred to herein as "First
Opportunity Space" and such option being referred to herein as the "Right of
First Opportunity."
(b) The Right of First Opportunity shall be subject and subordinate to:
(i) any lease (a "First Lease") hereafter made by Landlord for any increment of
space in the Building that, as
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of the date hereof, is not leased to a third party, which First Lease Landlord
may enter into without regard to the Right of First Opportunity granted in this
Section 2.03; (ii) any renewal or extension of the term of any First Lease,
which extensions or renewals Landlord may enter into without regard to the Right
of First Opportunity granted in this Section 2.03, and (iii) any expansion
option, or right of first refusal or right of first opportunity granted by
Landlord to a third party prior to the date of this Lease.
(c) Not less than six (6) months before the date of expiration of any
third party lease for any First Opportunity Space (or if such third party lease
terminates before its scheduled expiration date, then not later than ten (10)
calendar days after Landlord receives notice of such earlier termination),
Landlord shall notify Tenant in writing of such expiration (or earlier
termination) date. Thereafter, Landlord and Tenant shall negotiate in good
faith for a period not to exceed ten (10) calendar days the terms and conditions
upon which Tenant shall lease the First Opportunity Space. If for any reason
Landlord and Tenant do not mutually agree to the terms and conditions of the
lease for the First Opportunity Space within the ten (10) calendar day time
frame set forth above, Tenant shall have the option, to be exercised on or
before the expiration of the tenth day, to (i) terminate the exercise of the
Right of First Opportunity with respect to the particular First Opportunity
Space in question, or (ii) to elect to lease the First Opportunity Space as set
forth below. If Tenant fails to timely exercise its Right of First Opportunity,
then this Section 2.03 shall be of no further force and effect with respect to
such First Opportunity Space. In the event that Landlord fails to notify Tenant
of the expiration (or earlier termination) date of any third party lease of any
First Opportunity Space pursuant to this Paragraph 2.03(c), this Lease shall not
be void or voidable, nor shall Landlord be liable to Tenant for any loss or
damage resulting therefrom, nor shall such failure affect the obligations of
Tenant or Landlord hereunder, except that Landlord shall notify Tenant in
accordance with this Section 2.03(c) of the next available First Opportunity
Space.
(d) To the extent Tenant elects to lease the First Opportunity Space as
provided in (c)(ii) above, the Base Rent applicable to the First Opportunity
Space added to the Leased Premises shall be the greater of (i) Base Rent Tenant
is then obligated to pay under this Lease, or (ii) Fair Market Rent of the First
Opportunity Space as of the date the First Opportunity Space becomes part of the
Leased Premises. At the time Tenant elects to lease the First Opportunity Space
as provided in (c)(ii) above, Landlord shall notify Tenant of Landlord's
determination of Fair Market Rent for the First Opportunity Space. If Fair
Market Rent is greater than Tenant's current Base Rent, Tenant shall provide
written notice to Landlord within ten (10) calendar days to accept Landlord's
statement of the Fair Market Rent as Base Rent for the First Opportunity Space
or to elect to require that Fair Market Rent for the First Opportunity Space be
determined by Arbitration in accordance with Section 7.09. Failure on the part
of Tenant to require arbitration of Fair Market Rent within the 10-day period
shall constitute and election by Tenant to accept Landlord's determination of
Fair Market Rent.
(e) To the extent Tenant elects to lease the First Opportunity Space in
accordance with (c)(ii) above, Tenant shall take any First Opportunity Space in
an "as-is" condition provided, however, that Landlord shall deliver the First
Opportunity Space in "broom clean" condition.
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<PAGE>
(f) To the extent Tenant elects to lease the First Opportunity Space in
accordance with (c)(ii) above, from and after the commencement date specified in
Section 2.03(c) above with respect to the portion of First Opportunity Space as
to which the Right of First Opportunity has been exercised hereunder, all of the
terms and provisions of this Lease shall apply to such space, except that no
Tenant's Allowance shall be payable by Landlord with respect thereto as provided
in Exhibit B, and the Net Rentable Area contained in such space shall be added
to the Net Rentable Area included within the Leased Premises for all
calculations of Tenant's Share and all other purposes hereunder (with Base Rent
being determined as provided in Section 2.03(d)).
(g) Notwithstanding anything contained in this Lease to the contrary,
Landlord shall have no obligation to lease to Tenant and Tenant shall have no
right to lease from Landlord the First Opportunity Space if Actuate Corporation
(or its successor by merger or consolidation), no longer occupies at least 50%
of the Leased Premises.
ARTICLE 3.
----------
Rent, Term, Use And Basic Operating Costs
-----------------------------------------
3.01 Term. Except as otherwise provided herein, the Term shall commence
----
upon the later of Substantial Completion of the Leased Premises (as such date
may be adjusted pursuant to the provisions of paragraph 8 of Exhibit B to this
Lease) or the Scheduled Term Commencement Date and shall continue in full force
for the Term. If the Leased Premises are Substantially Complete prior to the
Scheduled Term Commencement Date, Tenant shall have the option to take occupancy
and the Term Commencement Date shall be the date of such occupancy. If the
Leased Premises are not Substantially Complete by the Scheduled Term
Commencement Date for any reason, Landlord shall not be liable for any claims,
damages or liabilities by reason thereof, but the Term Commencement Date shall
be the day when the Leased Premises are Substantially Complete. Landlord shall
provide Tenant as much notice as circumstances reasonably allow of the date when
Landlord expects to achieve Substantial Completion, based upon the progress of
the work. Should the Term Commencement Date be a date other than the Scheduled
Term Commencement Date, either Landlord or Tenant, at the request of the other,
shall promptly execute a declaration specifying the Term Commencement Date.
Tenant's obligation to pay Rent and its other obligations under this Lease shall
commence upon the Term Commencement Date (except as expressly otherwise provided
herein with respect to obligations arising earlier). Notwithstanding anything in
this Lease to the contrary, if the Term Commencement Date does not occur on or
before April 1, 2000 solely as a result of Landlord's action (as opposed to
Tenant's Delay or a force majeure event), Tenant shall receive an abatement of
Base Rent following the Term Commencement Date for each day delay in the Term
Commencement Date resulting from such Landlord's action; provided however, if
the Term Commencement Date does not occur on or before August 1, 2000, solely as
a result of Landlord's action, Tenant shall have the right to terminate this
Lease by providing Landlord with written notice of its election to terminate by
August 10, 2000. If Tenant fails to terminate this Lease as provided above, time
being of the essence, this Lease shall remain in full force and
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effect in accordance with the terms set forth herein. As used herein, "force
majeure event" shall mean any event or circumstance outside the control of the
parties, including without limitation, strikes, embargoes, governmental
regulations, inability to obtain permits, acts of God, war or other strife.
3.02 Use. Tenant shall use the Leased Premises solely for the Permitted Use
---
and for no other use or purpose.
3.03 Payment of Base Rent And Tenant's Proportionate Share Of Estimated
------------------------------------------------------------------
Basic Operating Cost. Tenant shall pay the Base Rent with adjustments and in the
- --------------------
manner hereinafter set forth.
(a) Base Rent shall be payable in advance on or before the first day
of each calendar month during the Term and any extensions or renewals thereof,
provided however, Base Rent for the first full calendar month following the Term
Commencement Date shall be paid in advance immediately upon execution of this
Lease. Tenant's Proportionate Share of Estimated Basic Operating Cost shall be
payable in advance on or before the first day of each calendar month during the
Term and any extensions or renewals thereof. If the Term commences on other than
the first day of a calendar month, then Gross Rent (consisting of Base Rent plus
Tenant's Proportionate Share of Estimated Basic Operating Cost) provided for
such partial calendar month shall be prorated and the prorated amount shall be
paid on the first day of the calendar month following the Term Commencement Date
together with any other amounts payable on that day. If the Term terminates on
other than the last day of a calendar month, then Gross Rent provided for such
partial calendar month shall be prorated and the prorated installment shall be
paid on the first day of the calendar month preceding the Term Expiration Date.
All payments due under this paragraph shall be payable in advance, without
demand and without reduction, abatement, counterclaim or setoff, at the address
specified on the Basic Lease Information or at such other address as may be
designated by Landlord in the manner provided for giving notice under Section
7.17 hereof.
(b) Intentionally deleted.
(c) Intentionally deleted.
3.04 Net Lease. This is a Net Lease. Base Rent shall be paid to Landlord
---------
absolutely net of all costs and expenses. The provisions for payment of Basic
Operating Cost by means of periodic payment of Tenant's Proportionate Share of
Estimated Basic Operating Cost and the Basic Operating Cost Adjustment are
intended to pass on to Tenant and reimburse Landlord for Tenant's Proportionate
Share of all costs and expenses of the nature described in Section 3.05.
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<PAGE>
3.05 Basic Operating Cost.
--------------------
(a) Basic Operating Cost shall mean all expenses and costs (but not specific
costs that are separately billed to and paid by specific tenants) of every
kind and nature that Landlord shall pay or incur or become obligated to pay
or incur (including, without limitation, costs incurred by managers and
agents that are reimbursed by Landlord) because of or in connection with the
management, maintenance, preservation, ownership and operation of the
Project and its supporting facilities directly servicing the Project (as
allocated to the Project in accordance with generally accepted accounting
principles, consistently applied) including, but not limited to the
following:
(1) Wages, salaries and reimbursable expenses and benefits of all on-site and
off-site personnel engaged in the operation, maintenance and security of the
Project and the direct costs of training such employees limiting such
charges only to amounts directly allocable to services rendered by the
employees and personnel for the benefit of the Project.
(2) Costs of the property management office and office operation, but in no
event shall such costs exceed those customarily charged by other landlords
of comparable buildings located in the Northern San Mateo County area.
(3) All supplies, materials and rental equipment used in the operation and
maintenance of the Project, including, without limitation, temporary lobby
displays and events, the cost of erecting, maintaining and dismantling art
work and similar decorative displays commensurate with operation of a first-
class office building, but excluding the cost of any and all art work
purchased and owned by Landlord solely for aesthetic purposes.
(4) Utilities, including, without limitation, water, power, gas, sewer, waste
disposal, communication and cable TV facilities, heating, cooling, lighting
and ventilation of the Project.
(5) Assessments, fees or other charges levied by the Gateway Owners' Association
or other similar body with respect to the maintenance, repair and operation
of the Gateway development.
(6) All maintenance, janitorial and service agreements for the Project and the
equipment therein, including, but not limited to, alarm service, window
cleaning, elevator maintenance, and maintenance and repair of sidewalks,
landscaping, Building exterior and service areas.
(7) A management cost recovery equal to three percent (3%) of all revenue
(excluding such management cost recovery) derived from the Project, without
limitation, all Rent hereunder, all rent and other payments derived from
other tenants in the Building,
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<PAGE>
parking revenues and other revenues derived from licensees of any other part of
or right in the Building.
(8) Legal and accounting services for the Project, including, but not limited
to, the costs of audits by certified public accountants of Basic Operating
Cost records; provided, however, that legal expense shall not include the
cost of (i) negotiating lease terms for prospective tenants, (ii)
negotiating termination or extension of leases with existing tenants, (iii)
proceedings against or with any other specific tenant, or (iv) legal costs
incurred in connection with development and/or construction of the Project.
(9) All insurance premiums and costs, including but not limited to, the
premiums and cost of fire, casualty, liability, rental abatement and
earthquake insurance applicable to the Project and Landlord's personal
property used in connection therewith (and all amounts paid as a result of
loss sustained that would be covered by such policies but for "deductible"
or self-insurance provisions); provided, however, that Landlord may, but
shall not be obligated to, carry earthquake insurance.
(10) Repairs, replacements and general maintenance (except for repairs and
replacements (i) paid for from the proceeds of insurance, (ii) paid for
directly by Tenant, other tenants or any third party, or (iii) for the
benefit solely of tenants of the Project other than Tenant to the extent
that Tenant could not obtain similar services from Landlord without an
obligation to reimburse Landlord for the entire cost thereof under the
provisions of this Lease).
(11) All real estate or personal property taxes, possessory interest taxes,
business or license taxes or fees, service payments in lieu of such taxes
or fees, annual or periodic license or use fees, including, but not limited
to, all of the following: (i) all real estate taxes and assessments, and
all other taxes relating to, or levied, assessed or imposed on, the
Project, or any portion thereof, or interest therein; (ii) all taxes,
assessments, charges, levies, fees, excises or penalties, general and
special, ordinary and extraordinary, unforeseen as well as foreseen, of any
kind and nature imposed, levied upon, measured by or attributable to
Landlord's equipment, furniture, fixtures and other property located in, or
used in connection with, the Project, or levied upon, measured by or
reasonably attributable to the cost or value of any of the foregoing; (iii)
all other taxes (including, without limitation, value added taxes),
assessments, charges, levies, fees, or penalties, general and special,
ordinary and extraordinary, unforeseen as well as foreseen, of any kind and
nature imposed, levied, assessed, charged or collected by any governmental
authority or other entity either directly or indirectly (A) for or in
connection with public improvements, user, maintenance or development fees,
transit, parking, housing, employment, police, fire, open space, streets,
sidewalks, utilities, job training, child care or other governmental
services or benefits, (B) upon or with respect to the development,
possession, leasing, operation, management, maintenance, alteration,
repair, use or occupancy of, or business operations in, the Project (C)
upon, against or measured by the area of the
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<PAGE>
Project, or uses made thereof, or leases made to tenants thereof, or all or
any part of the rents collected or collectible from tenants thereof, and
(D) for environmental matters or as a result of the imposition of
mitigation measures, including parking taxes, employer parking regulations,
or fees, charges or assessments as a result of the treatment of the
Project, or any portion thereof or interest therein, as a source of
pollution or storm water runoff; (iv) any tax or excise, however described,
imposed in addition to, or in substitution partially or totally of, any or
all of the foregoing taxes, assessments, charges or fees; and (v) any and
all costs, expenses and attorneys' fees paid or incurred by Landlord in
connection with any proceeding or action to contest in whole or in part,
formally or informally, the imposition, collection or validity of any of
the foregoing taxes, assessments, charges or fees. If by law any Real
Property Taxes may be paid in installments at the option of the taxpayer,
then Landlord shall include within Real Property Taxes only those
installments (including interest, if any) which would become due by
exercise of such option. Real estate taxes shall not include (i)
inheritance or estate taxes imposed upon or assessed against the Project,
or any part thereof or interest therein, (ii) taxes computed upon the basis
of the net income derived from the Project by Landlord or the owner of any
interest therein, or (iii) tax penalties incurred as a result of Landlord's
failure to make payment and/or to file any tax or informational returns
when due, except to the extent caused by Tenant's failure to pay Gross Rent
as required hereunder.
(12) Amortization (together with reasonable financing charges) of capital
improvements made to the Project (i) to comply with the requirements of
law, ordinance rule or regulation, (ii) to replace items which Landlord
would be obligated to maintain under this Lease; or (iii) to improve the
operating efficiency of the Project; provided, however, that in the case of
improvements made solely for efficiency purposes, the amount chargeable as
a Basic Operating Cost in any year shall not exceed Landlord's reasonable
determination of the efficiency achieved either in direct cost savings,
avoidance of cost increases or a combination of both. As used in this
Section 3.05.(a)(12), "amortization" shall mean allocation of the cost
equally to each year of useful life of the items being amortized or a
shorter period equal to the number of years required to recover the cost of
said item of capital improvement out of the savings in operating efficiency
derived therefrom. Notwithstanding the foregoing, however, Landlord may
treat as expenses (chargeable in the year incurred) and not as capital
costs items that are less than two percent (2%) of Estimated Basic
Operating Cost for the year in question.
(b) Notwithstanding anything to the contrary contained in the Lease, Basic
Operating Cost shall not include costs incurred during the Term in
connection with the removal, transportation or storage of Hazardous
Materials found in the ground water or soil of the Project, unless such
Hazardous Materials resulted from the acts of an unidentifiable party or
from an identifiable party that is unwilling or unable to cover such cost
after reasonable efforts have been made by Landlord to pursue reimbursement
from such
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<PAGE>
party, even if such efforts are undertaken following the expiration or
earlier termination of this Lease. Any costs incurred during a calendar
year during the Term in connection with the removal, transportation or
storage of Hazardous Materials that are deemed Basic Operating Costs under
this Section in excess of $100,000 for such calendar year shall be
amortized (together with reasonable financing charges) over the Term of the
Lease.
(c) Notwithstanding any other provision herein to the contrary, if the Project
is not fully occupied during any year of the Term, an adjustment shall be
made in computing Basic Operating Cost for such year so that Basic
Operating Cost shall be computed as though the Project had been fully
occupied during such year; provided, however, that in no event shall
Landlord collect in total, from Tenant and all other tenants of the
Project, an amount greater than one hundred percent (100%) of the actual
Basic Operating Cost during any year of the Term. Tenant acknowledges that
the Basic Operating Costs shall include expenses and costs associated with
the management, preservation, ownership and operation of the Common Areas
that are, from time to time, allocated by Landlord, in its sole but
reasonable discretion, between the Building and other buildings, presently
or hereafter existing at the Project, and Tenant agrees to pay as
Additional Rent, Tenant's share, as reasonably determined by Landlord, of
such Basic Operating Cost as so allocated by Landlord.
3.06 Adjustment For Variation Between Estimated And Actual. If the
-----------------------------------------------------
Basic Operating Cost Adjustment for any calendar year is a positive number
(i.e., actual cost exceeds estimated cost) Tenant shall pay to Landlord,
pursuant to Landlord's billing therefor (submitted pursuant to Section 3.07),
Tenant's Proportionate Share of the Basic Operating Cost Adjustment within
thirty (30) days after presentation of Landlord's statement. If the Basic
Operating Cost Adjustment for any calendar year is a negative number (i.e.,
estimated cost exceeds actual cost), then Landlord at Landlord's option shall
pay Tenant's Proportionate Share of the Basic Operating Cost Adjustment to
Tenant in cash, within ten (10) days after the Basic Operating Cost Adjustment
is finally determined, or credit said amount against future installments of
Estimated Basic Operating Cost payable by Tenant hereunder. Should the Term
commence or terminate at any time other than the first day of a calendar year,
Tenant's Proportionate Share of the Basic Operating Cost Adjustment shall be
prorated for the exact number of calendar days during such calendar year that
fall within the Term.
3.07 Computation Of Basic Operating Cost Adjustment. Landlord shall,
----------------------------------------------
within a reasonable period of time after the end of any calendar year for which
Estimated Basic Operating Cost differs from Basic Operating Cost, give written
notice thereof to Tenant. The notice shall contain or be accompanied by a
statement of the Basic Operating Cost during such calendar year (prepared by a
certified public accountant), and a computation of Basic Operating Cost
Adjustment. Landlord's failure to give such notice and statement within a
reasonable period of time after the end of any calendar year for which a Basic
Operating Cost Adjustment is due
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shall not release either party from the obligation to make the adjustment
provided for in Section 3.06.
ARTICLE 4.
----------
Landlord Covenants
------------------
4.01 Basic Services. Landlord shall:
--------------
(a) Administer the initial improvement of the Leased Premises in accordance with
Exhibit B.
(b) Furnish Tenant during Tenant's occupancy of the Leased Premises:
(i) Hot and cold water at those points of supply provided for general use
of other tenants in the Project; central heat and air conditioning in
season, at such times as Landlord normally furnishes these services to
other tenants in the Project and at such temperatures and in such
amounts as are consistent with the temperatures and amounts provided by
other landlords of comparable buildings in the Northern San Mateo
County area or as may be permitted or controlled by applicable laws,
ordinances, rules and regulations.
(ii) Routine maintenance, repairs, structural and exterior maintenance
(including exterior glass and glazing), painting and electric lighting
service for all public areas and special service areas of the Project
in the manner and to the extent deemed by Landlord to be standard for
comparable buildings in the Northern San Mateo County Area, subject to
the limitation contained in Section 4.06.
(iii) Janitorial service on a five (5) days-a-week basis, excluding holidays,
such days being Monday through Friday.
(iv) An electrical system to convey power delivered by public utility or
other providers selected by Landlord, in its sole and absolute
discretion (and Tenant hereby acknowledges and agrees not to obtain any
electrical or other utility services from vendors other than those so
selected by Landlord) in amounts sufficient for normal office
operations as provided in similar office buildings, but not to exceed a
total allowance of five (5) watts per square foot of Net Rentable Area
during normal office hours (which includes an allowance for lighting of
the Leased Premises at the maximum wattage per square foot of Net
Rentable Area permitted under applicable laws, ordinances, orders,
rules and regulations), provided that no single item of electrical
equipment consumes more than 0.5 kilowatts at rated capacity or
requires a voltage other than 120 volts, single phase. If Tenant's
electrical requirements, as estimated by Landlord based upon rated
capacity (or based upon metered consumption, at Landlord's option and
at Tenant's expense), exceed such amounts, Tenant shall pay the full
amount of such excess together with any additional cost
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necessary to provide such excess capacity; and provided that if the
installation and operation of said electrical equipment requires
additional air conditioning capacity above that provided by the
Building Standard Improvements, then the additional air conditioning
installation and operating costs shall be paid by Tenant.
(v) Building Standard lamps, bulbs and ballasts used in the Leased
Premises.
(vi) Security service for the Project; provided, however, that the security
service shall be provided by a card reader access system to the
Building and to Tenant's floors, and by unarmed personnel and shall not
include alarm systems for a special surveillance of the Leased
Premises; and provided further that Landlord shall not be liable to
Tenant or any third party for any breach of security or any losses due
to theft, burglary, battery or for damage done or injury inflicted by
persons (other than the employees of Landlord) in or on the Project.
(vii) Public elevator service on a twenty-four hours, seven days-a-week basis
and a freight elevator serving the floors on which the Leased Premises
are situated during hours designated by Landlord.
(c) Landlord shall not be liable for damages to either person or property, nor
shall Landlord be deemed to have evicted Tenant, nor shall there be any
abatement of Rent (except as specified below), nor shall Tenant be relieved
from performance of any covenant on its part to be performed hereunder by
reason of (i) deficiency in the provision of Basic Services, (ii) breakdown
or malfunction of lines, cables, wires, pipes, equipment or machinery
utilized in supplying or permitting Basic Services or telecommunications, or
(iii) curtailment or cessation of Basic Services due to causes or
circumstances beyond the reasonable control of Landlord. Landlord shall use
reasonable diligence to make such repairs as may be required to lines,
cables, wires, pipes, equipment or machinery within the Project to provide
restoration of Basic Services and, where the cessation or interruption of
Basic Service has occurred due to circumstances or conditions beyond Project
boundaries, to cause the same to be restored, by diligent application or
request to the provider thereof. In no event shall any mortgagee or the
beneficiary under any deed of trust referred to in Section 5.13 be or become
liable for any default of Landlord under this Section 4.01.(c).
Notwithstanding the foregoing, if the Basic Services are interrupted as a
result of Landlord's gross negligence or willful misconduct and such
interruption materially adversely affects Tenant's use of the Premises for
the conduct of its business and such interruption continues for a period of
three (3) consecutive business days, Tenant shall receive an abatement of
Base Rent from the time of the interruption of Basic Services until Basic
Services are restored so as to not materially adversely affect Tenant's use
of the Premises for the conduct of its business.
4.02 Extra Services. Landlord shall provide to Tenant at Tenant's sole cost
--------------
and expense (and subject to the limitations hereinafter set forth) the
following:
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(a) Such extra cleaning and janitorial services required by reason of any Tenant
Improvements in excess of that which would be required for Building Standard
Improvements;
(b) Additional air conditioning and ventilating capacity required by reason of
any electrical, data processing or other equipment or facilities or services
required to support the same, in excess of that which would be required for
Building Standard Improvements;
(c) Maintaining and replacing above Building Standard lamps, bulbs, and ballasts
after initial installation;
(d) Heating, ventilation, air conditioning or extra electrical service provided
by Landlord to Tenant (i) during hours other than normal business hours,
(ii) on Saturdays (after normal business hours), Sundays, or holidays, said
heating, ventilation and air conditioning or extra service to be furnished
solely upon the prior request of Tenant;
(e) Repair and maintenance service which is the obligation of Tenant hereunder;
(f) Any Basic Service in amounts reasonably determined by Landlord to exceed the
amounts required to be provided under Section 4.01.(b), but only if Landlord
elects to provide such additional or excess service. Tenant shall pay
Landlord the cost of providing such additional services, together with an
administration fee equal to ten percent (10%) of such cost (which
administration fee shall be used by Landlord to reduce Operating Expenses
for all tenants of the Building), within ten (10) days following
presentation of an invoice therefor by Landlord to Tenant. The cost
chargeable to Tenant for all extra services shall constitute Additional
Rent.
4.03 Graphics And Signage. Landlord shall provide, at no cost to
--------------------
Tenant, the initial identification of Tenant on a proportionate share (based on
Net Rentable Area) of space on the directory located in the main lobby of
Building and at the entrance to the Premises. All signs, notices and graphics of
every kind or character, visible in or from public corridors, the Common Area or
the exterior of the Leased Premises shall be subject to Landlord's prior written
approval which Landlord shall have the right to withhold in its absolute and
sole discretion.
4.04 Tenant Extra Improvements. All Tenant Extra Improvements shall be
-------------------------
installed at Tenant's cost, such installation to be made and paid for pursuant
to the provisions of Exhibit B. For purposes hereof, "costs" shall include, but
without limitation, all building permit fees for Tenant Extra Improvements (not
included in the permit fees paid with respect to the Building), payments to
design consultants for services and disbursements, and such inspection fees as
Landlord may incur and reimbursement to Landlord for permit and other fees
Landlord has prepaid on behalf of Tenant that are fairly attributable to the
Tenant Extra Improvement Work. Landlord shall not seek the benefits of
depreciation deductions or income tax credit
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allowances for federal or state income tax reporting purposes with respect to
any Tenant Extra Improvements for which Tenant has fully reimbursed Landlord
under this Section 4.05.
4.05 Repair Obligation. Landlord's obligation with respect to repair as
-----------------
part of Basic Services shall be limited to (i) the structural portions of the
Building, (ii) the exterior wall of the Building, including glass and glazing,
(iii) the roof, (iv) mechanical, electrical, plumbing and life safety systems
that are considered Base Building Improvements, and (v) Common Areas. Landlord
shall have the right but not the obligation upon reasonable prior written notice
to Tenant to undertake work of repair that Tenant is required to perform under
this Lease and that Tenant fails or refuses to perform in a timely and efficient
manner. All costs incurred by Landlord in performing any such repair for the
account of Tenant shall be repaid by Tenant to Landlord upon demand, together
with an administration fee equal to ten percent (10%) of such costs; provided,
however, that administration fees shall not be included in "income" for purposes
of calculating Landlord's management cost recovery under Section 3.05.(a)(7).
4.06 Peaceful Enjoyment. Tenant shall peacefully have, hold and enjoy the
------------------
Leased Premises, subject to the other terms hereof, provided that Tenant pays
the Rent and performs all of Tenant's covenants and agreements herein contained.
This covenant and the other covenants of Landlord contained in this Lease shall
be binding upon Landlord and its successors only with respect to breaches
occurring during its and their respective ownership of Landlord's interest
hereunder.
ARTICLE 5.
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Tenant's Covenants
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5.01 Payments By Tenant. Tenant shall pay Rent at the times and in the
------------------
manner herein provided. All obligations of Tenant hereunder to make payments to
Landlord shall constitute Rent and failure to pay the same when due shall give
rise to the rights and remedies provided for in Section 7.08.
5.02 Obligations Of Tenant To Furnish Floor Plans And Approve Plans And
------------------------------------------------------------------
Specifications. Tenant shall deliver to Landlord a detailed floor plan layout,
- --------------
together with written instructions sufficiently detailed to prepare plans and
specifications, obtain approval by Tenant's Plan Delivery Date and enable
Landlord to let firm contracts for installation of the Tenant Improvements
desired by Tenant in the Leased Premises pursuant to Exhibit B. Upon completion
of the Tenant Improvements, Tenant shall provide Landlord, at Tenant's expense,
with a complete set of plans on mylar and specifications reflecting the actual
conditions of the Tenant Improvements as constructed in the Leased Premises,
together with a copy of such plans on diskette in the AutoCAD format or such
other format as may then be in common use for computer assisted design purposes.
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5.03 Construction Of Tenant Improvements. Landlord shall cause its
-----------------------------------
contractor to install Tenant Improvements pursuant to Exhibit B. All building
permit and municipal inspection fees payable with respect to such work shall be
paid to Landlord by Tenant in the same manner as that provided for payment of
the cost of Tenant Extra Improvements pursuant to Section 4.04 hereof. All
additions to or improvements of the Leased Premises, whether of Building
Standard Improvements or Tenant Extra Improvements installed pursuant to Section
4.04, shall be and become the property of Landlord upon installation and shall
be surrendered to Landlord upon termination of this Lease by lapse of time or
otherwise, subject to Tenant's rights of removal with respect thereto in the
same manner as provided in Section 5.08 hereof. Although Tenant Extra
Improvements become the property of Landlord upon installation, they are
intended to be for the convenience of Tenant and are not intended to be a
substitute for Rent or any part thereof and Tenant may, to the extent permitted
by law, avail itself of any tax benefits (depreciation or otherwise) from the
Tenant Extra Improvements.
5.04 Taxes On Personal Property And Tenant Extra Improvements. In addition
--------------------------------------------------------
to, and wholly apart from its obligation to pay Tenant's Proportionate Share of
Basic Operating Costs, Tenant shall be responsible for and shall pay prior to
delinquency taxes or governmental service fees, possessory interest taxes, fees
or charges in lieu of any such taxes, capital levies, or other charges imposed
upon, levied with respect to or assessed against its personal property, on the
value of its Tenant Extra Improvements, on its interest pursuant to this Lease
or on any use made of the Leased Premises or the Common Areas by Tenant in
accordance with this Lease. To the extent that any such taxes are not separately
assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced to
Tenant by Landlord. Landlord may require by written notice to Tenant that Tenant
shall install and maintain all required intrabuilding network cable and other
communications wires and cables necessary to serve the Leased Premises from the
point of presence in the Building of a telecommunications provider selected by
Landlord in its reasonable discretion (and Tenant hereby acknowledges and agrees
not to obtain any telecommunications services within the Building from vendors
other than those so selected by Landlord in its reasonable discretion).
5.05 Repairs By Tenant. Tenant shall maintain and repair the Leased and
-----------------
keep the same in good condition. Tenant shall not be obligated to repair any
damage (i) caused by Landlord or Landlord's Parties, (ii) covered by insurance
maintained by Landlord and not otherwise covered by insurance maintained or
required to be maintained by Tenant hereunder, (iii) covered and paid for by
Landlord's contractor's and (iv) covered by Operating Expenses. Tenant's
obligation shall include, without limitation, the obligation to maintain and
repair all walls, floors, ceilings and fixtures and to repair all damage caused
by Tenant or Tenant Parties to the utility outlets and other installations in
the Leased Premises or anywhere in the Project, whatever the scope of the work
of maintenance or repair required. Tenant shall repair all damage caused by
removal of Tenant's movable equipment or furniture or the removal of any Tenant
Extra Improvements or Alterations (hereinafter defined) permitted or required by
Landlord, all as provided in Section 5.19. At the request of Tenant, Landlord
shall perform the
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work of maintenance and repair constituting Tenant's obligation pursuant to this
Section 5.05 and as an "extra service" to be rendered pursuant to Section
4.02.(e) at Tenant's sole cost and expense including the administration fee
referred to therein. Any work of repair and maintenance performed by or for the
account of Tenant by persons other than Landlord shall be performed by
contractors approved by Landlord prior to commencement of the work and in
accordance with procedures Landlord shall from time to time establish. All such
work shall be performed in compliance with all applicable laws, ordinances,
rules and regulations and Tenant shall provide to Landlord copies of all permits
and records of inspection issued or obtained by Tenant in connection therewith
to establish such compliance. Nothing herein contained, however, shall be deemed
to impose upon Tenant the obligation to perform work of maintenance or repair
required by reason of Landlord's negligence or wrongful acts or those of
Landlord Parties. In performing the obligations under this Section, Tenant shall
notify Landlord of any repairs that could affect the mechanical, electrical,
HVAC, life safety or other systems of the Building.
5.06 Waste. Tenant shall not commit or allow any waste or damage to be
-----
committed in any portion of the Leased Premises.
5.07 Assignment Or Sublease.
----------------------
(a) If Tenant intends to assign this Lease or sublet the Leased Premises or any
part thereof, Tenant shall give Landlord written notice of such intent.
Tenant's notice shall set forth the date any such assignment or sublease
shall commence and be accompanied by an exact copy of the proposed
agreements between Tenant and the proposed assignee or subtenant. Tenant
shall provide Landlord with (i) any additional information or documents
reasonably requested by Landlord, within ten (10) days after receiving
Tenant's notice (Landlord hereby acknowledging that Landlord may only
request such additional information one time after receiving Tenant's
notice), and (ii) an opportunity to meet and interview the proposed assignee
or subtenant, if requested by Landlord.
(b) Landlord shall then have a period of twenty (20) days following such
interview and receipt of such additional information (or thirty (30) days
from the date of Tenant's original notice if Landlord does not request
additional information or an interview) within which to notify Tenant in
writing that Landlord elects either (A) to terminate this Lease as to the
space so affected as of the date so specified by Tenant in its notice under
Section 5.07(a) above, in which event Tenant will be relieved of all further
obligations hereunder as to such space, or (B) to permit Tenant to assign
this Lease or sublet such space, subject, however, to prior written approval
of the proposed assignee or sublessee by Landlord. The approval by Landlord
of the proposed assignee or sublessee shall not to be unreasonably withheld
or delayed so long as: (i) the use of the Leased Premises by such proposed
assignee or sublessee would be a Permitted Use; (ii) the proposed assignee
or sublessee is of sound financial condition as reasonably determined by
Landlord; (iii) the proposed assignee's or sublessee's use will not involve
the storage, use, treatment or disposal of any Hazardous Material (except
for Permitted Hazardous Materials
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transported, stored and used in accordance with the provisions of this
Lease); (iv) the proposed use or the proposed assignee or sublessee would
not cause the violation of any covenant or agreement of Landlord to any
third party or would permit any other tenant to terminate its lease; and,
(v) the proposed subtenant or assignee does not then lease or occupy any
other space in the Building or if the proposed subtenant or assignee does
then lease or occupy space in the Building, Landlord cannot itself
accommodate such existing occupant's expansion needs within the Building. If
Landlord fails to notify Tenant in writing of such election within said
period or if Tenant assigns or subleases (in the aggregate with any other
assignment or subleasing hereunder) less than fifty percent (50%) of the Net
Rentable Area of the Leased Premises, Landlord shall be deemed to have
waived option (A) above, but written approval by Landlord of the proposed
assignee or sublessee shall be required. Failure by Landlord to approve a
proposed subtenant or assignee shall not cause a termination of this Lease,
and the sole remedy of Tenant shall be an action for injunctive or
declaratory relief. Notwithstanding anything herein to the contrary,
Landlord's written approval shall not be required for any assignment of the
Lease or sublet of the Leased Premises by Tenant to any person, corporation
or entity which controls, is controlled by or is under common control with
Tenant, or to any corporation or entity resulting from a merger or
consolidation with Tenant, or to any person, corporation or entity which
acquires all the assets of Tenant as a going concern in the business that is
being conducted on the Premises, provided that, before such assignment shall
be effective, such assignee shall assume, in full, the obligations of Tenant
under this Lease. For purposes hereof, "control" shall mean the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of a person, firm or corporation, whether through
the ownership of voting securities, by contract or otherwise. In the event
of an assignment or subletting pursuant to this Section, Tenant shall
promptly thereafter notify Landlord of such assignment or subletting
(including the name of such assignee or sublessee) and Tenant agrees to
execute such documentation as reasonably requested by Landlord to
memorialize such assignment or subletting.
(c) Any rent or other consideration realized by Tenant under any such sublease
and assignment in excess of the Rent payable hereunder, after amortization
of the reasonable cost of Tenant Extra Improvements for which Tenant has
paid and reasonable subletting and assignment costs, shall be divided and
paid as follows: (i) so long as after such assignment or subletting, the
original Tenant named herein shall occupy not less than fifty percent (50%)
of the Net Rentable Area of the Leased Premises, fifty percent (50%) to
Tenant and fifty percent (50%) to Landlord; and (ii) in all other cases,
twenty five-percent (25%) to Tenant and seventy-five percent (75%) to
Landlord.
(d) In any subletting undertaken by Tenant, Tenant shall use commercially
reasonable efforts to obtain not less than Fair Market Rent for the space so
sublet. In any assignment of this Lease in whole or in part, Tenant shall
seek to obtain from the assignee consideration reflecting a value of not
less than Fair Market Rent for the space subject to such
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<PAGE>
assignment. Tenant shall provide to Landlord, upon Landlord's demand, true
and correct executed copies of the documents constituting such sublease or
assignment and any amendments thereof during the Term.
(e) No assignment or subletting by Tenant shall relieve Tenant of any obligation
under this Lease. Any assignment or subletting that conflicts with the
provisions hereof shall be void. No consent by Landlord to any subletting
or assignment shall constitute a consent to any other assignment or
subletting nor shall it constitute a waiver of any of the provisions of this
Section 5.07 as they apply to any such future sublettings or assignments.
(f) Any assignee shall assume in writing, for the express benefit of Landlord,
all of the obligations of Tenant under this Lease, provided that no such
assumption shall be deemed a novation or other release of the prior Tenant.
Following any assignment, the obligations for which the prior Tenant remains
liable under this Lease shall include, without limitation, any obligations
arising in connection with any amendments to this Lease executed by Landlord
and the assignee, whether or not such amendments are made with knowledge or
consent of the prior Tenant.
(g) Intentionally deleted.
(h) Any improvements, additions, or alterations to the Building or the Project
that are required by any law, ordinance, rule or regulation, or are deemed
necessary or appropriate by Landlord as a result of any subletting or
assignment hereunder, shall be installed and provided without cost or
expense to Landlord. Landlord may condition its consent to any proposed
sublessee or assignee on the construction of improvements reasonably deemed
necessary or appropriate by Landlord by reason of the subletting or
assignment.
(i) Landlord may hire outside consultants to review all assignment and
subletting documents and information. Tenant shall reimburse Landlord for
the reasonable cost thereof, including reasonable attorneys' fees, on
demand.
(j) Without liability to Tenant, Landlord shall have the right to offer and to
lease space in the Building, or in any other property, to any party,
including without limitation parties with whom Tenant is negotiating, or
with whom Tenant desires to negotiate, concerning assignment or subletting
the Leased Premises, or any portion thereof.
5.08 Alterations, Additions or Improvements. Tenant shall not make or
--------------------------------------
allow to be made any alterations, additions or improvements in or to the Leased
Premises (collectively, "Alterations") without obtaining the prior written
consent of Landlord. Landlord's consent shall not be unreasonably withheld with
respect to proposed Alterations that (i) comply with all applicable laws,
ordinances, rules and regulations, (ii) are compatible with the Building and its
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mechanical, electrical, HVAC and life safety systems; (iii) will not interfere
with the use and occupancy of any other portion of the Building by any other
tenant or their invitees; (iv) do not affect the structural portions of the
Building; and, (v) do not and will not, whether alone or taken together with
other improvements, require the construction of any other improvements or
alterations within the Building. In determining whether or not to consent to
proposed Alterations, Landlord shall have the right (without limitation) to
review plans and specifications for proposed Alterations, construction means and
methods, the identity of any contractor or subcontractor to be employed on the
work of Alterations, and the time for performance of such work. Tenant shall
supply to Landlord any documents and information reasonably requested by
Landlord in connection with the exercise of its rights hereunder. Landlord may
hire outside consultants to review such documents and information and Tenant
shall reimburse Landlord for the reasonable cost thereof, including reasonable
attorneys' fees, upon demand. All Alterations permitted hereunder shall be made
and performed by Tenant or, at Landlord's election, may be performed by
Landlord, without cost or expense to Landlord; provided however, the cost for
Landlord to perform such work in excess of the cost and expense that Tenant
would have incurred, using its own qualified contractors, to perform such
Alteration work shall not be Tenant's responsibility. Tenant shall pay Landlord,
upon completion of any Alteration, a reasonable fee for Landlord's supervision
and administration of the installation thereof; provided, however, that such fee
(not to exceed 5% of the cost of the Alteration) shall not be deemed to be
"income" for purposes of calculating management cost recovery under Section
3.05.(a)(7). The obligations of the parties with respect to removal of
Alterations shall be controlled by Section 5.19; provided, however, that
Landlord shall notify Tenant at the time Landlord consents to any Alteration, if
Landlord will require the removal of such Alterations upon termination of this
Lease.
5.09 Liens. Tenant shall keep the Leased Premises and the Project
-----
from any liens arising out of any (i) work performed or material furnished to or
for the Leased Premises, and (ii) obligations incurred by or for Tenant or any
person claiming through or under Tenant. Tenant shall, within ten (10) days
following the imposition of any such lien, cause such lien to be released of
record by payment or posting of a bond fully satisfactory to Landlord in form
and substance. Landlord shall have the right at all times to post and keep
posted on the Leased Premises any notices permitted or required by law, or that
Landlord shall deem proper for the protection of Landlord, the Leased Premises,
the Project and any other party having an interest therein, from mechanics',
materialmen's and other liens. Landlord may cause such liens to be released by
any means it deems proper, including, without limitation, payment of any such
lien, at Tenant's sole cost and expense. All costs and expenses incurred by
Landlord in causing such liens to be released shall be repaid by Tenant to
Landlord immediately upon demand, together with an administration fee equal to
ten percent (10%) of such costs and expenses. In addition to all other
requirements contained in this Lease, Tenant shall give to Landlord at least ten
(10) business days prior written notice before commencement of any construction
on the Leased Premises.
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<PAGE>
5.10 Compliance With Laws, Insurance Standards and Non-Discrimination.
----------------------------------------------------------------
(a) Tenant shall comply with all federal, state and local laws, ordinances,
orders, rules, regulations and policies (collectively, "Laws"), now or
hereafter in force, as amended from time to time, in any way related to the
use, condition or occupancy of the Leased Premises, regardless of when they
become effective, including, without limitation, all applicable Hazardous
Materials Laws and the Americans with Disabilities Act of 1990, as amended.
Tenant shall immediately deliver to Landlord a copy of any notices received
from any governmental agency in connection with the Leased Premises. It is
the intention of Tenant and Landlord that the obligations of Tenant under
this Section 5.10 shall apply irrespective of the scope of work required to
achieve such compliance. Tenant shall promptly cure and satisfy all
Hazardous Materials Claims arising out of or by reason of the activities or
businesses of Tenant, its sub-tenants, or Tenant Parties or any employees,
agents, contractors, officers, directors, partners, licensees, invitees and
guests of Tenant's sub-tenant. Nothing done by Tenant in its use or
occupancy of the Leased Premises shall create, require or cause imposition
of any requirement by any governmental authority for structural or other
upgrading of or improvement to the Project.
(b) Tenant shall not occupy or use, or permit any portion of the Leased Premises
to be occupied or used, for any business or purpose that is disreputable or
productive of fire hazard, or permit anything to be done that would increase
the rate of fire or other insurance coverage on the Project and/or its
contents. If Tenant does or permits anything to be done that shall increase
the cost of any insurance policy required to be carried hereunder, then
Tenant, at Landlord's option, shall not be in default under this Lease, but
shall reimburse Landlord, upon demand, for any such additional premiums.
Landlord shall deliver to Tenant a written statement setting forth the
amount of any such insurance cost increase and showing in reasonable detail
the manner in which it has been computed.
(c) Tenant herein covenants by and for himself or herself, his or her heirs,
executors, administrators and assigns, and all persons claiming under or
through him or her, and this Lease is made and accepted upon and subject to
the following conditions: That there shall be no discrimination against, or
segregation of, any person or group of persons on account of race, color
creed, religion, sex, marital status, national origin or ancestry in the
leasing, subleasing, transferring, use' occupancy, tenure or enjoyment of
the Leased Premises herein leased, nor shall Tenant, or any person claiming
under or through him or her, establish or permit any such practice or
practices of discrimination or segregation with reference to the selection,
location, number, use or occupancy of tenants, lessees, subtenants,
sublessees or vendees in the Leased Premises herein leased.
5.11 Entry For Repairs, Inspection, Posting Notices, Etc. After
----------------------------------------------------
reasonable notice (except in emergencies where no such notice shall be
required), Landlord or Landlord Parties shall have the right to enter the Leased
Premises to inspect the same, to clean, to perform such work as may be permitted
or required hereunder, to make repairs to or alterations of the
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Project or other tenant spaces therein, to deal with emergencies, to post such
notices as may be permitted or required by law to prevent the perfection of
liens against Landlord's interest in the Project or to exhibit the Leased
Premises to prospective tenants, purchasers, encumbrancers or others, or for any
other purpose as Landlord may deem necessary or desirable; provided, however,
that Landlord shall not unreasonably interfere with Tenant's business
operations. Tenant shall not be entitled to any abatement of Rent by reason of
the exercise of any such right of entry.
5.12 No Nuisance. Tenant shall conduct its business and control
-----------
Tenant Parties without creating any nuisance, or interfering with, annoying,
endangering or disturbing any other tenant or Landlord in its operation of the
Project. Tenant shall not place any loads upon the floor, walls or ceiling of
the Leased Premises that endanger the structure nor place any harmful liquids or
Hazardous Material in the drainage system of the Building. Tenant shall not
permit any vibration, noise or odor to escape from the Leased Premises and shall
not do or permit anything to be done within the Leased Premises which would
adversely affect the quality of the air in the Building.
5.13 Subordination; Mortgagee Protection; Reciprocal Easement Agreements.
-------------------------------------------------------------------
(a) Tenant agrees that this Lease and the rights of Tenant hereunder are subject
and subordinate to the holder of or beneficiary under any mortgage or deed
of trust whether now or in the future encumbering the Project (the "Mortgage
Lender") and to any and all advances made thereunder, and interest thereon,
and all modifications, renewals, supplements, consolidations and
replacements thereof. Tenant's obligation to subordinate hereunder is
contingent upon Mortgage Lender's agreement to not-disturb Tenant's
occupancy of the Premises in accordance with this Lease. Tenant agrees,
however, that the Mortgage Lender may at its option, unilaterally elect to
subordinate, in whole or in part, by an instrument in form and substance
satisfactory to such Lender, the lien of such mortgage or deed of trust to
this Lease. In such case, Tenant agrees to execute promptly and to deliver
to Landlord or such Mortgage Lender any such subordination instrument or
instruments requested by such Lender and agrees that if it fails or refuses
to do so within 15 days after written request therefor by Landlord or such
Mortgage Lender, such failure or refusal shall constitute a default by
Tenant under this Lease, but such failure or refusal shall in no way affect
the validity or enforceability of any such subordination made by such
Mortgage Lender.
(b) Any successor in interest to any Mortgage Lender shall not be bound by (i)
any payment of Gross Rent for more than one (1) month in advance, or (ii)
any amendment or modification of this Lease made without the written consent
of the Mortgage Lender. Nothing herein contained shall be deemed to impose
upon the person or party succeeding to the interest of Landlord as a result
of the enforcement of such mortgage or first deed of trust by any Mortgage
Lender, any obligation for defaults on the part of Landlord, and any person
or party succeeding to possession of the Project as a successor to Landlord
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shall be subject to Landlord's obligations hereunder only during the period
of such persons' or party's ownership.
(c) Tenant shall not sue, seek any remedy or enforce any right against Landlord
until (a) Tenant gives written notice to any Mortgage Lender and (b) a
reasonable time (not to exceed 90 days) for such Mortgage Lender, at its
option, to remedy the act or omission has elapsed following the giving of
notice by Tenant to Mortgage Lender required hereunder, including, without
limitation, time to obtain possession from Landlord by power of sale or
judicial foreclosure, it being agreed that the Mortgage Lender shall have no
obligation to Tenant to cure or remedy any act or omission of Landlord.
(d) Tenant agrees that this Lease and the rights of Tenant hereunder are subject
and subordinate to any reciprocal easement agreements whether now or in the
future affecting the Project (the "REA's"); provided, however, any future
REA's shall not materially adversely affect any specific rights granted to
Tenant hereunder with respect to parking or access. Tenant agrees to
execute promptly and to deliver to Landlord any subordination instrument or
instruments requested by Landlord and agrees that if it fails or refuses to
do so within 15 days after written request therefor by Landlord, such
failure or refusal shall constitute a default by Tenant under this Lease,
but such failure or refusal shall in no way affect the validity or
enforceability of any such subordination.
5.14 Estoppel Certificate. Within ten (10) business days of a written
--------------------
request from Landlord, Tenant shall execute estoppel certificates addressed to
(i) any mortgagee or prospective mortgagee of Landlord or, (ii) any purchaser or
prospective purchaser of all or any portion of, or interest in, the Project, on
a form specified by Landlord, certifying as to such facts (if true) and agreeing
to such notice provisions and other matters as such mortgagee(s) or purchaser(s)
may reasonably require; provided, however, that in no event shall any such
estoppel certificate require an amendment of the provisions hereof, although
Tenant shall be bound by the statements made in such certificate. In the event
that Tenant fails or refuses to deliver such an estoppel certificate to Landlord
within ten (10) days of a written request from Landlord, then Landlord may give
to Tenant a second notice, reiterating the request that Tenant execute an
estoppel certificate in the form specified by Landlord and stating that, if
Tenant fails to do so within five (5) days of the receipt by Tenant of such
second notice from Landlord, Tenant shall be deemed to be bound by the
statements set forth in the form of certificate which Landlord requested that
Tenant deliver. In the event that Tenant fails to deliver an estoppel
certificate in the form specified by Landlord within five (5) days of the
receipt by Tenant of such second notice from Landlord, Tenant shall conclusively
be deemed, without exception, to have acknowledged the correctness of the
statements set forth in the form of certificate which Landlord requested that
Tenant deliver, and Tenant shall be estopped from denying the correctness of
each such statement, such that a mortgage or purchaser may rely on the
correctness of the statements in such form of certificate, as if made and
certified by Tenant. A failure by Tenant to deliver an estoppel certificate in
the form specified by Landlord within
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fifteen (15) business days of the receipt by Tenant of an initial request from
Landlord for such certificate shall also constitute a material breach of this
Lease by Tenant.
5.15 Security Deposit. Upon execution of this Lease, Tenant shall
----------------
deliver to Landlord the Letter of Credit described below as security for
Tenant's performance of all of Tenant's covenants and obligations under this
Lease; provided, however, that neither the Letter of Credit nor any Letter of
Credit Proceeds (as defined below) shall be deemed an advance rent deposit or an
advance payment of any other kind, or a measure of Landlord's damages upon
Tenant's default. The Letter of Credit shall be maintained in effect from the
date hereof through the sixth anniversary of the Term Commencement Date;
provided however, at any time during the Term, Tenant may deliver to Landlord a
substitute Letter of Credit satisfying the conditions hereof, in which event,
Landlord shall promptly return the previously delivered Letter of Credit to
Tenant. Landlord shall not be required to segregate the Letter of Credit
Proceeds from its other funds, and in no event shall Letter of Credit Proceeds
or any portion thereof be deemed to be held in trust for Tenant. No interest
shall accrue or be payable to Tenant with respect to the Letter of Credit
Proceeds. Landlord may (but shall not be required to) draw upon the Letter of
Credit and use the proceeds therefrom (the "Letter of Credit Proceeds") or any
portion thereof to cure any Event of Default under this Lease or to compensate
Landlord for any damage Landlord incurs as a result of Tenant's failure to
perform any of its obligations hereunder, it being understood that any use of
the Letter of Credit Proceeds shall not constitute a bar or defense to any of
Landlord's remedies set forth in herein. In such event and upon written notice
from Landlord to Tenant specifying the amount of the Letter of Credit Proceeds
so utilized by Landlord and the particular purpose for which such amount was
applied, Tenant shall immediately deliver to Landlord an amended Letter of
Credit or a replacement Letter of Credit in an amount equal to one hundred
percent (100%) of the amount specified below. Tenant's failure to deliver such
replacement Letter of Credit to Landlord within five (5) business days of
Landlord's notice shall constitute an Event of Default hereunder. If Tenant is
not in default at the expiration of the 6th anniversary of the Term Commencement
Date, Landlord shall promptly return to Tenant the Letter of Credit or the
balance of the Letter of Credit Proceeds then held by Landlord; provided,
however, that in no event shall any such return be construed as an admission by
Landlord that Tenant has performed all of its obligations hereunder. No
mortgagee of Landlord, nor any purchaser at any judicial or private foreclosure
sale of the Premises or any portion thereof, shall be responsible to Tenant for
such Letter of Credit or any Letter of Credit Proceeds unless such holder or
purchaser shall have actually received the same.
(b) As used herein, Letter of Credit shall mean an unconditional,
irrevocable letter of credit (hereinafter referred to as the "Letter of Credit")
issued by a major national bank satisfactory to Landlord in its sole and
absolute discretion (the "Bank"), drawings under which may be made at an office
of the Bank located in San Francisco, California naming Landlord as beneficiary,
in the amounts set forth below, and otherwise in form and substance satisfactory
to Landlord. The amount of the Letter of Credit shall initially be Two Million
Seven Hundred Thousand Dollars ($2,700,000) and shall decline on February 1,
2001 and each anniversary
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thereafter by $450,000. The Letter of Credit shall be maintained in said amounts
for so long as the Letter of Credit is required to be maintained pursuant to
subparagraph (a), above. The Letter of Credit shall be for an initial term of
not less than one year, shall be automatically renewed as provided below, and
shall provide: (i) that Landlord may make partial and multiple draws thereunder,
up to the face amount thereof, (ii) that Landlord may draw upon the Letter of
Credit up to the full amount thereof, as determined by Landlord, and the Bank
will pay to Landlord the amount of such draw upon receipt by the Bank of a sight
draft signed by Landlord and accompanied by a written certification from
Landlord to the Bank stating either: (A) that a breach of this Lease has
occurred and is continuing under this Lease or (B) that Landlord has received
notice from the Bank that the Letter of Credit will not be renewed by the Bank
for at least one year beyond the then applicable expiration date; and (iii)
that, in the event of Landlord's assignment or other transfer of its interest in
this Lease, the Letter of Credit shall be freely transferable by Landlord,
without charge and without recourse, to the assignee or transferee of such
interest and the Bank shall confirm the same to Landlord and such assignee or
transferee. The Letter of Credit shall further provide that it will be deemed
automatically renewed without an amendment for a period of not less than one
year unless at least thirty (30) days prior to the expiration date the Bank
notifies Landlord in writing that the Bank elects not to renew the Letter of
Credit, whereupon Landlord shall be authorized in accordance with clause (ii)(B)
above to draw upon the Letter of Credit. In the event that the Bank shall have
notified Landlord that the Letter of Credit will not be renewed for at least one
year beyond the then applicable expiration date, then Landlord shall be entitled
to draw on the Letter of Credit as provided above, and shall hold the proceeds
of such draw as Letter of Credit Proceeds pursuant to subparagraph (a) above,
provided that such drawing shall not constitute a waiver of Landlord's right to
declare a default under this Lease.
5.16 Tenant's Remedies. Tenant shall look solely to Landlord's interest
-----------------
in the Building and the insurance proceeds received therefrom (subject, however,
to the right of any Mortgage Lender hereunder) for recovery of any judgment from
Landlord. Landlord and Landlord Parties shall not be personally liable for any
such judgment. Any lien obtained to enforce any such judgment and any levy of
execution thereon shall be subject and subordinate to any lien, mortgage or deed
of trust to which Section 5.13 applies or may apply.
5.17 Rules And Regulations. Tenant shall comply with the Rules and
---------------------
Regulations for the Project attached as Exhibit C and such amendments thereto as
Landlord may adopt from time to time with prior notice to Tenant. Landlord shall
not be liable to Tenant for or in connection with the failure of any other
tenant of the Building to comply with any rules and regulations applicable to
such other tenant under its lease.
5.18 Prohibition And Indemnity With Respect To Hazardous Material.
------------------------------------------------------------
Tenant shall not cause or permit any Hazardous Material to be brought upon, kept
or used in or about the Leased Premises by Tenant or Tenant Parties without the
prior written consent of Landlord, save
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and except only for Permitted Hazardous Materials, which Tenant may bring, store
and use in reasonable quantities for their intended use in the Leased Premises,
but only in full compliance with all Hazardous Materials Laws and otherwise in a
safe and prudent manner. If Tenant breaches the obligations stated in the
preceding sentence, or if contamination of the Leased Premises by Hazardous
Material occurs for which Tenant is or Tenant Parties are responsible, or if
Tenant's activities or those of Tenant Parties (or those of its subtenants)
result in or cause a Hazardous Materials Claim, then Tenant shall indemnify,
defend, protect and hold Landlord and Landlord Parties harmless from and against
any and all claims, judgments, damages, penalties, fines, costs, expenses,
liabilities or losses (including, without limitation, diminution in value of the
Leased Premises, damages for the loss or restriction on use of rentable or
useable space or of any amenity of the Leased Premises, damages arising from any
adverse impact on marketing of space, and sums paid in settlement of claims,
reasonable attorneys' fees, consultants' fees and experts' fees) (collectively,
"Claims") which arise during or after the Term as a result of such
contamination. This indemnification of Landlord by Tenant includes, without
limitation, costs incurred in connection with any investigation of site
conditions or any clean-up, remedial, removal or restoration work required by
any federal, state or local governmental agency or political subdivision because
of Hazardous Material present in the soil or ground water on or under the Leased
Premises due to the activities of Tenant and Tenant's Parties. The foregoing
indemnity shall survive the expiration or earlier termination of this Lease.
5.19 Surrender Of Premises On Termination. On or before the ninetieth
------------------------------------
(90th) day preceding the Term Expiration Date, Tenant shall notify Landlord in
writing of the precise date upon which Tenant plans to surrender the Leased
Premises to Landlord. On expiration of the Term, Tenant shall quit and surrender
the Leased Premises to Landlord, broom clean, in good order, condition and
repair as required by Section 5.05, with all of Tenant's movable equipment,
furniture, trade fixtures and other personal property removed therefrom. Unless
Tenant has obtained Landlord's agreement in writing that it can remove an
Alteration or item of Tenant Improvements, all Alterations and Tenant
Improvements shall be surrendered with the Leased Premises in good condition and
repair, reasonable wear and tear (but only to an extent consistent with the
Leased Premises remaining in good condition and repair) and casualty damage
excepted. Any property of Tenant not removed hereunder shall be deemed, at
Landlord's option, to be abandoned by Tenant and Landlord may store such
property in Tenant's name at Tenant's expense, and/or dispose of the same in any
manner permitted by law. If Landlord desires to have the Leased Premises, or any
part or parts thereof, restored to a condition that existed prior to
installation of any Tenant Extra Improvements or to their condition prior to
making any Alteration thereto, Landlord shall so notify Tenant in writing not
later than sixty (60) days prior to the regularly scheduled Term Expiration Date
(or if this Lease is sooner terminated, upon the date of such termination); and
upon receipt of such notice, Tenant shall, at Tenant's sole cost and expense, so
restore the Leased Premises, or such part or parts thereof, before the regularly
scheduled Term Expiration Date (or if this Lease is sooner terminated, within
ten (10) days thereafter), so long as Landlord has previously notified Tenant,
in accordance with Section 5.08 above, that Landlord requires such Alterations
or Tenant Improvements to be removed upon
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termination of this Lease. Tenant shall repair at its sole cost and expense, all
damage caused to the Leased Premises or the Project by removal of Tenant's
movable equipment or furniture and such Tenant Improvements and Alterations as
Tenant shall be allowed or required to remove from the Leased Premises by
Landlord. If the Leased Premises are not surrendered as of the end of the Term
in the manner and condition herein specified, Tenant shall indemnify, defend,
protect and hold Landlord and Landlord Parties harmless from and against any and
all Claims resulting from or caused by Tenant's delay or failure in so
surrendering the Leased Premises, including, without limitation, any Claims made
by any succeeding tenant due to such delay or failure. Tenant acknowledges that
Landlord will be attempting to lease the Leased Premises with any such lease to
be effective upon expiration of the Term, and failure to surrender the Leased
Premises could cause Landlord to incur liability to such successor tenant for
which Tenant shall be responsible hereunder to the full extent thereof.
5.20 Window Coverings. All window coverings shall be provided by Tenant, at
----------------
its sole cost and expense, and shall comply with Landlord's standard Building
window covering. Tenant shall not place or maintain any window coverings, blinds
or drapes on any exterior window, other than those in compliance with Landlord's
standards, without Landlord's prior written approval which Landlord shall have
the right to grant or withhold in its absolute and sole discretion. Tenant
acknowledges that breach of this covenant will directly and adversely affect the
exterior appearance of the Project or the operation of the heating, ventilation
or air conditioning systems.
ARTICLE 6.
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Condition And Operation Of The Building
---------------------------------------
6.01 Exhibit B Controls. Landlord's entire obligation with respect to the
------------------
condition of the Leased Premises, its suitability for Tenant's uses and the
improvement requirements with respect thereto shall be as stated in Exhibit B.
Landlord shall have no other obligation of any kind or character, express or
implied, with respect to the condition of the Leased Premises, Building or
Project or the suitability thereof for Tenant's purposes, and Tenant
acknowledges that it has neither received nor relied upon any representation or
warranty made by or on behalf of Landlord with respect to such matters.
6.02 Alteration. Landlord may, at any time and from time to time: (i) make
----------
alterations, structural modifications, seismic modifications or additions to the
Building; (ii) change, add to, eliminate or reduce the extent, size, shape or
configuration of any aspect of or improvement (including the Building) within
the Project or its operations; (iii) change the arrangement, character, use or
location of corridors, stairs, toilets, mechanical, plumbing, electrical or
other operating systems or any other parts of the Building; and (iv) change the
name, number or designation by which the Building or the Project is commonly
known. None of the
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foregoing acts shall be deemed an actual or constructive eviction of Tenant,
shall entitle Tenant to any reduction of Rent or shall result in any liability
of Landlord to Tenant. Landlord shall have the exclusive rights to the airspace
above and around, and the subsurface below, the Leased Premises and other
portions of the Building, including, without limitation, the exclusive right to
use all exterior walls, roofs and other portions of the Building for signs,
notices and other promotional purposes.
ARTICLE 7.
----------
Casualty, Eminent Domain And Miscellaneous Matters
--------------------------------------------------
7.01 Landlord's Casualty Insurance. Landlord shall maintain, or cause to be
-----------------------------
maintained, a policy or policies of insurance with the premiums thereon fully
paid in advance, issued by and binding upon an insurance company of good
financial standing, insuring the Project against loss or damage by fire or other
insurable hazards (that may include earthquake loss if Landlord elects to
maintain such coverage) and contingencies for the full insurable value thereof,
or, in the alternative, insuring for eighty percent (80%) of the replacement
cost thereof (or such minimum amount as shall be required to eliminate operation
of coinsurance provisions), exclusive of excavations and foundations; provided,
however, that Landlord shall not be obligated to insure any of Tenant's
furniture, equipment, machinery, trade-fixtures, goods or supplies ("Tenant's
Personal Property"), or any Tenant Extra Improvements or Alterations that Tenant
may make upon the Leased Premises. If the annual premiums charged Landlord for
such casualty insurance exceed the standard premium rates because the nature of
Tenant's operations result in extra-hazardous or higher than normal risk
exposure, then Tenant shall, upon receipt of appropriate premium invoices,
reimburse Landlord for such increases in premium. All insurance proceeds payable
under Landlord's insurance carried hereunder shall be payable solely to
Landlord, and Tenant shall have no interest therein.
7.02 Liability Insurance. Landlord (with respect to the Project) and Tenant
-------------------
(with respect to the Leased Premises and Project) shall each maintain or cause
to be maintained a policy or policies of commercial general liability insurance
with the premiums thereon fully paid in advance, issued by and binding upon an
insurance company of good financial standing, such insurance to afford minimum
protection of not less than Five Million Dollars ($5,000,000.00) for bodily
injury, or death in any one occurrence and of not less than One Million Dollars
($1,000,000.00) for property damage in any one occurrence. The coverages
required to be carried shall be extended to include, but not to be limited to,
blanket contractual liability, personal injury liability (libel, slander, false
arrest and wrongful eviction), and broad form property damage liability.
Tenant's contractual liability insurance shall apply, without limitation, to all
of Tenant's indemnity obligations under this Lease. The certificate evidencing
Tenant's insurance coverage required hereunder shall state that the insurance
includes the liability assumed by Tenant under this Lease and that Tenant's
insurance is primary with any other insurance available to Landlord or any other
named insured being excess. Upon request of
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Tenant, Landlord shall provide Tenant reasonable evidence that the insurance
required to be maintained hereunder by Landlord is in full force and effect.
7.03 Tenant's Casualty Insurance And Additional Tenant Insurance
-----------------------------------------------------------
Requirements.
- ------------
(a) Tenant shall provide insurance coverage during the Term against loss or
damage by fire and such other risks as are from time to time included in an
"all risk" policy (including without limitation sprinkler leakage and water
damage), insuring the full insurable value of any Tenant Extra Improvements,
any Alterations, Tenant's trade fixtures, furnishings, equipment, and all
other items of personal property of Tenant, insuring the full replacement
cost thereof.
(b) All policies required to be carried by Tenant under this Article 7 shall be
written with financially responsible companies with a Best & Company rating
of "B+" or better, and all evidence of insurance provided to Landlord shall
contain an endorsement showing that Landlord and Mortgage Lender are
included as an additional insured and an endorsement whereby the insurer
agrees not to cancel or alter the policy without at least thirty (30) days'
prior written notice to Landlord and all named and additional insureds. Any
deductible or self-insurance provisions under any insurance policies
maintained by Tenant shall be subject to Landlord's prior written approval
which shall not be unreasonably withheld.
(c) Prior to the Term Commencement Date and thereafter, from time to time,
promptly upon request by Landlord, Tenant shall furnish Landlord and any
additional insureds with copies of policies or certificates of insurance,
evidencing Tenant's maintenance and renewal of the required coverages. If
Tenant fails to provide such evidence of insurance required hereunder,
Landlord shall be authorized (but not required) to procure such coverage in
the amounts stated with all costs thereof to be charged to Tenant and paid
upon written invoice therefor as Additional Rent together with an
administrative fee equal to ten percent (10%) of such costs.
7.04 Indemnity And Exoneration.
-------------------------
(a) Landlord shall not be liable to Tenant (i) for any loss, damage or injury to
person or property caused by theft, fire, vandalism, assault, battery, act
of God, acts of the public enemy, acts of terrorists or criminals, riot,
strike, insurrection, war, court order, requisition or order of governmental
body or authority, whether or not the negligence of Landlord was a partial
cause of such loss, damage or injury, or (ii) that occur by reason of the
active negligence or willful misconduct of Tenant or Tenant Parties, or
(iii) for any damage or inconvenience which may arise through repair or
alteration of any part of the Project or failure to make any such repair
except as expressly otherwise provided in Sections 7.04.(c), 7.06 and 7.07.
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<PAGE>
(b) Tenant shall indemnify, defend, protect and hold Landlord and Landlord
Parties harmless from and against any and all Claims arising out of or
related to claims of injury to or death of persons, damage to property
occurring or resulting directly or indirectly from the use or occupancy of
the Leased Premises or activities of Tenant or its employees in or about the
Leased Premises or Project; provided, however, that the foregoing indemnity
shall not be applicable to claims arising by reason of the active negligence
or willful misconduct of Landlord or Landlord Parties, unless covered by
insurance required to be carried by Tenant under the terms of this Lease.
(c) Landlord shall indemnify, defend, protect and hold Tenant and Tenant Parties
harmless from and against any and all claims, judgments, damages, penalties,
fines, costs, expenses, liabilities or losses arising out of or related to
claims of injury to or death of persons, damage to property occurring or
resulting directly or indirectly from the use or occupancy of those portions
of the Project other than the Leased Premises or activities of Landlord or
Landlord Parties in or about the Leased Premises or Project, such indemnity
to include, without limitation, the obligation to provide all costs of
defense against any such claim; provided, however, that the foregoing
indemnity shall not include claims arising by reason of the active
negligence or willful misconduct of Tenant or Tenant Parties.
(d) Tenant shall indemnify, defend and protect Landlord and hold and save
Landlord harmless of and from any and all loss, claims, proceedings, cost,
damage, injury, causes of action, liabilities or expense arising out of or
in any way related to work or labor performed, materials or supplies
furnished to or at the request of Tenant or in connection with performance
of any work done for the account of Tenant in the Leased Premises or the
Project.
7.05 Waiver Of Subrogation Rights. Anything in this Lease to the contrary
----------------------------
notwithstanding, Landlord and Tenant each waive all rights of recovery, claim,
action or cause of action, against the other, Tenant Parties or Landlord
Parties, as applicable, for any loss or damage that may occur to the Leased
Premises, or any improvements thereto, or the Project or any personal property
of such party therein, by reason of fire, the elements, or any other cause that
could be insured against under the terms of an "all risk" insurance policy or
other casualty insurance coverages which are required to be obtained pursuant to
this Lease, regardless of cause or origin, including negligence of the other
party, Landlord Parties or Tenant Parties, as applicable; and each party
covenants that no insurer shall hold any right of subrogation against such other
party. Tenant shall advise its insurers of the foregoing and such waiver shall
be a part of each policy maintained by Tenant that applies to the Leased
Premises, any part of the Project or Tenant's use and occupancy of any part
thereof.
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7.06 Condemnation And Loss Or Damage.
-------------------------------
(a) If the Leased Premises or any portion of the Project shall be taken or
condemned for any public purpose to such an extent as to render the Leased
Premises untenantable as reasonably determined by Landlord, this Lease
shall, at the option of either party, forthwith cease and terminate as of
the date of taking. All proceeds from any taking or condemnation of the
Leased Premises shall belong to and be paid to Landlord subject to the
rights of any Mortgage Lender; provided, however, that Landlord shall
cooperate with Tenant if Tenant seeks to recover at its cost and expense,
proceeds, damages or awards paid to compensate for damage to or taking of
Tenant's Personal Property.
(b) If a temporary taking of all or a portion of the Leased Premises occurs,
there shall be no abatement of Rent and Tenant shall remain fully obligated
for performance of all of the covenants and obligations on its part to be
performed pursuant to the terms of this Lease. All proceeds awarded or paid
with respect thereto shall belong to Tenant.
7.07 Damage And Destruction. If a fire or other casualty in the Leased
----------------------
Premises occurs, Tenant shall immediately give notice thereof to Landlord. The
following provision shall then apply:
(a) If the damage is limited solely to the Leased Premises and the Leased
Premises can, in the reasonable opinion of Landlord, be made tenantable with
all damage repaired within six (6) months from the date of damage or
destruction, then Landlord shall diligently rebuild the same. If Landlord
rebuilds the Leased Premises, Tenant shall repair and restore Tenant Extra
Improvements or any Alterations, or, at Tenant's election, Landlord may
repair and rebuild the Tenant Extra Improvements or Alterations, at Tenant's
expense.
(b) If portions of the Project outside the boundaries of the Leased Premises are
damaged or destroyed (whether or not the Leased Premises are also damaged or
destroyed) and the Leased Premises and the Project can, in the reasonable
opinion of Landlord, both be made tenantable with all damage repaired within
six (6) months from the date of damage or destruction, and provided that
Landlord determines that such reconstruction is economically feasible, then
Landlord shall be obligated to do so; provided, however, that Landlord shall
have no obligation to repair or restore Tenant Extra Improvements or
Alterations unless Tenant elects to have Landlord do so at Tenant's expense
as provided in Section 7.07.(a).
(c) If neither Section 7.07.(a) nor 7.07.(b) above applies, Landlord shall
notify Tenant within sixty (60) days after the date of such damage and
destruction and either Tenant or Landlord may terminate this Lease within
thirty (30) days after the date of such notice; provided, however, that
Landlord shall have the right to elect to reconstruct the Project and the
Leased Premises, in which event Landlord shall notify Tenant within said
sixty (60) day period and Tenant shall thereupon have no right to terminate
this Lease.
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Notwithstanding the foregoing, if the Project and the Leased Premises have
not be reconstructed within twelve (12) months following the date of such
damage and destruction, Tenant shall have the right to terminate this Lease
by providing written notice to Landlord within ten (10) days following the
expiration of such twelve (12) month period. If Tenant fails to terminate
this Lease as provided above, time being of the essence, this Lease shall
remain in full force and effect in accordance with the terms set forth
herein.
(d) During any period when Tenant's use of the Leased Premises is significantly
affected by damage or destruction, Gross Rent shall abate proportionately
until such time as the Leased Premises are made tenantable as reasonably
determined by Landlord, and no portion of the Rent so abated shall be
subject to subsequent recapture; provided, however, that there shall be no
such abatement except to the extent that the amount thereof is compensated
for and recoverable from the proceeds of rental abatement or business
interruption insurance maintained by Landlord with respect to this Lease,
the Leased Premises or the Project which Landlord agrees to maintain with
respect to this Lease, the Leased Premises or the Project, so long as such
insurance is available on commercially reasonable terms, and, if such
insurance is not available on commercially reasonable terms, Landlord agrees
to notify Tenant of its decision to cancel such insurance so that Tenant, at
its sole discretion, may obtain business interruption insurance, if it so
desires.
(e) The proceeds from any insurance paid by reason of damage to or destruction
of the Building or any part thereof, the Building Standard Improvements or
any other element, component or property insured by Landlord shall belong to
and be paid to Landlord subject to the rights of any mortgagee of Landlord's
interest in the Project or the beneficiary of any deed of trust that
constitutes an encumbrance thereon. If this Lease is terminated by either
party as a consequence of a casualty in accordance with any of the
provisions of this Section 7.07.(e), all proceeds of insurance required to
be maintained either by Landlord or Tenant shall be paid to Landlord subject
to the rights of any mortgagee of Landlord's interest in the Project or the
beneficiary of any deed of trust that constitutes an encumbrance thereon;
provided, however, that Tenant shall be paid all proceeds of insurance
payable in connection with Tenant's trade fixtures, furnishings, equipment
and all other items of personal property of Tenant and any Tenant Extra
Improvements and Alterations required to be removed from the Leased Premises
upon termination of this Lease.
(f) If the Leased Premises, or any part thereof, or any portion of the Building
necessary for Tenant's use of the Leased Premises, are damaged or destroyed
during the last twelve (12) months of the Term, or any extension thereof,
Landlord or Tenant may terminate this Lease by giving written notice thereof
to the other party within thirty (30) days after the date of the casualty,
in which case this Lease shall terminate as of the date of the casualty.
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(g) Except to the extent expressly provided in this Lease, nothing contained in
this Lease shall relieve Tenant of any liability to Landlord or to
Landlord's insurance carriers that Tenant may have under law or under the
provisions of this Lease in connection with any damage to the Leased
Premises or the Building by fire or other casualty.
7.08 Default By Tenant.
-----------------
(a) Events Of Default. The occurrence of any of the following shall constitute
-----------------
an event of default ("Event of Default") on the part of Tenant:
(1) Abandonment. Abandonment of the Leased Premises for a continuous
-----------
period in excess of five (5) business days. Tenant waives any right to
notice Tenant may have under Section 1951.3 of the Civil Code of the
State of California, the terms of this Section 7.08.(a)(1) being deemed
such notice to Tenant as required by said Section 1951.3;
(2) Nonpayment Of Rent. Failure to pay any installment of Gross Rent or
------------------
items of Additional Rent, upon the date when payment is due, such
failure continuing for a period of five (5) business days after receipt
of written notice of such failure; provided, however, that Landlord
shall not be required to provide such notice more than twice during any
calendar year with respect to non-payment of Gross Rent, the third such
non-payment constituting default without requirement of notice;
(3) Other Obligations. Failure to perform any obligation, agreement or
-----------------
covenant under this Lease other than those matters specified in Sections
7.08.(a)(1) and 7.08.(a)(2), such failure continuing for fifteen (15)
business days after written notice of such failure (or with respect to
non-monetary obligations only, such longer period as is reasonably
necessary to remedy such default, provided that Tenant shall
continuously and diligently pursue such remedy at all times until such
default is cured);
(4) General Assignment. A general assignment by Tenant or Guarantor for
------------------
the benefit of creditors;
(5) Bankruptcy. The filing of any voluntary petition in bankruptcy by
----------
Tenant or Guarantor, or the filing of an involuntary petition by
Tenant's or Guarantor's creditors, which involuntary petition remains
undischarged for a period of thirty (30) days. If under applicable law
the trustee in bankruptcy or Tenant has the right to affirm this Lease
and continue to perform the obligations of Tenant hereunder, such
trustee or Tenant shall, in such time period as may be permitted by the
bankruptcy court having jurisdiction, cure all defaults of Tenant
hereunder outstanding as of the date of the affirmance of this Lease
and provide to Landlord such adequate assurances as may be necessary to
ensure Landlord of the continued performance of Tenant's obligations
under this Lease;
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(6) Receivership. The employment of a receiver to take possession of
------------
substantially all of Tenant's assets or the Leased Premises, if such
receivership remains undissolved for a period of ten (10) business
days after creation thereof;
(7) Attachment. The attachment, execution or other judicial seizure of
----------
all or substantially all of Tenant's assets or the Leased Premises, if
such attachment or other seizure remains undismissed or undischarged
for a period of ten (10) business days after the levy thereof;
(8) Insolvency. The admission by Tenant or Guarantor in writing of its
----------
inability to pay its debts as they become due, the filing by Tenant or
Guarantor of a petition seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief
under any present or future statute, law or regulation, the filing by
Tenant or Guarantor of an answer admitting or failing timely to
contest a material allegation of a petition filed against Tenant or
Guarantor in any such proceeding or, if within thirty (30) days after
the commencement of any proceeding against Tenant or Guarantor seeking
any reorganization, or arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future
statute, law or regulation, such proceeding shall not have been
dismissed.
(b) Remedies Upon Default.
---------------------
(1) Termination. If an Event of Default occurs, Landlord shall have the
-----------
right, with or without notice or demand, immediately (after expiration
of the applicable grace periods specified herein) to terminate this
Lease, and at any time thereafter recover possession of the Leased
Premises or any part thereof and expel and remove therefrom Tenant and
any other person occupying the same, by any lawful means, and again
repossess and enjoy the Leased Premises without prejudice to any of
the remedies that Landlord may have under this Lease, or at law or
equity by reason of Tenant's default or of such termination.
(2) Continuation After Default. Even though Tenant has breached this
--------------------------
Lease and/or abandoned the Leased Premises, this Lease shall continue
in effect for so long as Landlord does not terminate Tenant's right to
possession under Section 7.08.(b)(1) hereof, and Landlord may enforce
all of its rights and remedies under this Lease, including (but
without limitation) the right to recover Rent as it becomes due.
Landlord has the remedy described in Section 1951.4 of the Civil Code
of the State of California or any successor code section (Landlord may
continue the Lease in effect after Tenant's breach and abandonment and
recover rent as it becomes due, if Tenant has the right to sublet or
assign, subject only to reasonable limitations). Acts of maintenance,
preservation or efforts to lease the Leased Premises or the
appointment of receiver upon application of Landlord to protect
Landlord's interest under this Lease shall not constitute an election
to terminate Tenant's right to possession.
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(c) Damages Upon Termination. Should Landlord terminate this Lease pursuant to
------------------------
the provisions of Section 7.08.(b)(1) hereof, Landlord shall have all the
rights and remedies of a landlord provided by Section 1951.2 of the Civil
Code of the State of California, or successor code section. Upon such
termination, in addition to any other rights and remedies to which Landlord
may be entitled under applicable law, Landlord shall be entitled to recover
from Tenant: (i) the worth at the time of award of the unpaid Rent and other
amounts which had been earned at the time of termination; (ii) the worth at
the time of award of the amount by which the unpaid Rent which would have
been earned after termination until the time of award exceeds the amount of
such Rent loss that the Tenant proves could have been reasonably avoided;
(iii) the worth at the time of award of the amount by which the unpaid Rent
for the balance of the Term after the time of award exceeds the amount of
such Rent loss that the Tenant proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which, in the ordinary course of things, would be likely to result
therefrom. The "worth at the time of award" of the amounts referred to in
(i) and (ii) shall be computed with interest at ten percent (10%) per annum
or the highest lawful rate, whichever is the lower. The "worth at the time
of award" of the amount referred to in (iii) shall be computed by
discounting such amount at the "discount rate" of the Federal Reserve Bank
of San Francisco in effect as of time of award plus one percent (1%) and,
where rental value is a material issue, shall be based upon competent
appraisal evidence.
(d) Computation Of Rent For Purposes Of Default. For purposes of computing
-------------------------------------------
unpaid Rent that would have accrued and become payable under this Lease
pursuant to the provisions of Section 7.08.(c), unpaid Rent shall consist of
the sum of:
(1) the total Base Rent for the balance of the Term, plus
(2) a computation of the Basic Operating Cost for the balance of the Term,
the assumed Basic Operating Cost for the calendar year of the default
and each future calendar year in the Term to be equal to the Basic
Operating Cost for the calendar year prior to the year in which
default occurs compounded at a per annum rate equal to the mean
average rate of inflation for the preceding five (5) calendar years as
determined by reference to the Consumer Price Index -- all items for
the San Francisco-Oakland-San Jose Area, All Urban Consumers,
published by the Bureau of Labor Statistics of the United States
Department of Labor (Base Year 1982-84=100), or such successor index
as may be established to provide a measure of the current purchasing
power of the dollar.
(e) Late Charge. In addition to its other remedies, after written notice of its
-----------
intention to invoke this paragraph because of previous late payments by
Tenant, Landlord shall have the right to add to the amount of any payment
required to be made by Tenant hereunder that is not paid on or before the
date the same is due, an amount equal to Two Hundred Fifty Dollars ($250.00)
plus five percent (5%) of the delinquency for each month or portion thereof
that the delinquency remains outstanding, the parties agreeing that
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Landlord's damage by virtue of such delinquencies would be difficult to
compute and the amount stated herein represents a reasonable estimate
thereof. The provision for a late charge set forth in this Section
7.08.(e), and any collection of a late charge by Landlord, shall not be
deemed a waiver of any breach or Event of Default by Tenant under this
Lease. The late charge shall be due upon demand by Landlord at any time
after failure to pay any installment of Rent, and in the case of Gross Rent,
without waiting for expiration of the period specified in Section
7.08.(a)(2).
(f) Remedies Cumulative. All of the remedies permitted or available to Landlord
-------------------
under this Lease, or at law or in equity, shall be cumulative and not
alternative and invocation of any such right or remedy shall not constitute
a waiver or election of remedies with respect to any other permitted or
available right or remedy.
7.09 Arbitration Of Fair Market Rent. If Tenant disputes the amount
-------------------------------
claimed by Landlord as Fair Market Rent, and such dispute cannot be resolved by
mutual agreement, the dispute shall be submitted to arbitration. The award
rendered in any such arbitration may be entered in any court having jurisdiction
and shall be final and binding between the parties. The arbitration shall be
conducted and determined in the City of South San Francisco in accordance with
the then-prevailing commercial arbitration rules of the American Arbitration
Association or its successor for arbitration of commercial disputes except to
the extent that the procedures mandated by said rules shall be modified as
follows:
(a) Tenant shall make demand for arbitration in writing within thirty (30) days
after service of Landlord's determination of Fair Market Rent given under
Section 3.03.(b), specifying therein the name and address of the person to
act as the arbitrator on its behalf. The arbitrator shall be qualified as a
real estate appraiser familiar with the Fair Market Rent of first-class
commercial office space in the downtown San Francisco Financial District who
would qualify as an expert witness over objection to give testimony
addressed to the issue in a court of competent jurisdiction. Failure on the
part of Tenant to make a timely and proper demand for such arbitration shall
constitute a waiver of the right thereto. Within ten (10) business days
after the service of Tenant's demand for arbitration, Landlord shall have
the right to give notice in writing to Tenant of Landlord's adjusted
determination of Fair Market Rent. Within ten (10) business days following
Tenant's receipt of such notice, if Tenant and Landlord have not agreed upon
Fair Market Rent, Tenant shall notify Landlord in writing that Tenant
desires to renew its demand for arbitration. Failure on the part of Tenant
to give such notice shall constitute a waiver of the right to such
arbitration, and Tenant shall be deemed to have accepted Landlord's adjusted
determination of Fair Market Rent. Within ten (10) business days after the
receipt of such notice, Landlord shall give notice to Tenant, specifying the
name and address of the person designated by Landlord to act as arbitrator
on its behalf who shall be similarly qualified. If Landlord fails to notify
Tenant of the appointment of its arbitrator, within or by the time above
specified, then the arbitrator appointed by Tenant shall be the arbitrator
to determine the issue.
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(b) If two (2) arbitrators are chosen pursuant to Section 7.09.(a) above, the
arbitrators so chosen shall meet within ten (10) business days after the
second arbitrator is appointed and, if within ten (10) business days after
such first meeting the two arbitrators shall be unable to agree promptly
upon a determination of Fair Market Rent, they shall appoint a third
arbitrator, who shall be a competent and impartial person with
qualifications similar to those required of the first two arbitrators
pursuant to Section 7.09.(a). If they are unable to agree upon such
appointment within five (5) business days after expiration of said ten (10)
day period, the third arbitrator shall be selected by the parties
themselves, if they can agree thereon, within a further period of ten (10)
business days. If the parties do not so agree, then either party, on behalf
of both, may request appointment of such a qualified person by the then
Chief Judge of the United States District Court having jurisdiction over the
City and County of San Francisco, acting in his private non-judicial
capacity. Request for appointment shall be made in writing with a copy
given to the other party. Each party agrees that said Judge shall have the
power to make the appointment, provided, however, if the Chief Judge does
not make a determination within ten (10) days of request by either party for
the appointment of a third arbitrator, appointment of such third arbitrator
shall be made in accordance with the selection procedure of the commercial
arbitration rules of the American Arbitration Association or its successor
for arbitration of commercial disputes. The three (3) arbitrators shall
decide the dispute, if it has not previously been resolved, by following the
procedure set forth in Section 7.09.(c) below.
(c) Where the issue cannot be resolved by agreement between the two arbitrators
selected by Landlord and Tenant or settlement between the parties during the
course of arbitration, the issue shall be resolved by the three arbitrators
in accordance with the following procedure. The arbitrators selected by
each of the parties shall state in writing his determination of the Fair
Market Rent, supported by the reasons therefor with counterpart copies to
each party. The arbitrators shall arrange for a simultaneous exchange of
such proposed resolutions. The role of the third arbitrator shall be to
select which of the two proposed resolutions most closely approximates his
determination of Fair Market Rent. The third arbitrator shall have no right
to propose a middle ground or any modification of either of the two proposed
resolutions. The resolution he chooses as most closely approximating his
determination shall constitute the decision of the arbitrators and be final
and binding upon the parties.
(d) If any arbitrator fails, refuses or is unable to act, his successor shall be
appointed by him, but in the case of the third arbitrator, his successor
shall be appointed in the same manner as provided for appointment of the
third arbitrator. The arbitrators shall attempt to decide the issue within
ten (10) business days after the appointment of the third arbitrator. Any
decision in which the arbitrator appointed by Landlord and the arbitrator
appointed by Tenant concur shall be binding and conclusive upon the parties.
Each party shall pay the fees and costs of its own counsel. The losing
party shall pay the fees and costs of the arbitrators and of the expert
witnesses (if any) of the prevailing party as well as those of
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its expert witnesses. For purposes hereof, the losing party shall be that
party whose selected arbitrator's statement of Fair Market Rent was not
selected by the third arbitrator.
(e) The arbitrators shall have the right to consult experts and competent
authorities with factual information or evidence pertaining to a
determination of Fair Market Rent, but any such consultation shall be made
in the presence of both parties with full right on their part to cross-
examine. The arbitrators shall render their decision and award in writing
with counterpart copies to each party. The arbitrators shall have no power
to modify the provisions of this Lease.
7.10 No Waiver. Failure of Landlord or Tenant to declare any default
---------
immediately upon occurrence thereof, or delay in taking any action in connection
therewith, shall not waive such default, but Landlord or Tenant, as the case may
be, shall have the right to declare any such default at any time thereafter. No
waiver by Landlord of an Event of Default, or any agreement, term, covenant or
condition contained in this Lease, shall be effective or binding on Landlord
unless made in writing and no such waiver shall be implied from any omission by
Landlord to take action with respect to such Event of Default or other such
matter. No express written waiver by Landlord of any Event of Default, or other
such matter, shall affect or cover any other Event of Default, matter or period
of time, other than the Event of Default, matter and/or period of time specified
in such express waiver. One or more written waivers by Landlord of any Event of
Default, or other matter, shall not be deemed to be a waiver of any subsequent
Event of Default, or other matter, in the performance of the same provision of
this Lease. Acceptance of Rent by Landlord hereunder, or endorsement of any
check, shall not, in and of itself, constitute a waiver of any breach or Event
of Default or of any agreement, term, covenant or condition of this Lease,
except as to the payment of Rent so accepted, regardless of Landlord's knowledge
of any concurrent Event of Default or matter. Landlord may, at its election,
apply any Rent received from Tenant to the oldest obligation outstanding from
Tenant to Landlord, any endorsement or other statement of Tenant to the contrary
notwithstanding. No course of conduct between Landlord and Tenant, and no
acceptance of the keys to or possession of the Leased Premises before the
termination of the Term by Landlord or any employee of Landlord shall constitute
a waiver of any such breach or of any term, covenant or condition of this Lease
or operate as a surrender of this Lease. All of the remedies permitted or
available to Landlord under this Lease, or at law or in equity, shall be
cumulative and not alternative and invocation of any such right or remedy shall
not constitute a waiver or election of remedies with respect to any other
permitted or available right or remedy.
7.11 Statutory Waivers. Tenant hereby waives the benefits of: (i)
-----------------
Sections 1932 and 1933(4) of the California Civil Code (pertaining to the
termination of a hiring); (ii) 1941 and 1942 of the California Civil Code
(pertaining to the obligations of a landlord to maintain premises and the rights
of a tenant to make certain repairs or terminate a lease); (iii) Section
1263.260 of the California Code of Civil Procedure (pertaining to the removal of
improvements
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upon condemnation); and, (iv) Section 1265.130 of the California Code of Civil
Procedure (pertaining to the termination of a lease upon condemnation).
7.12 Holding Over. If Tenant holds over after expiration or termination
------------
of this Lease without the written consent of Landlord, Tenant shall pay for each
month of hold-over tenancy one and one-half the Gross Rent that Tenant was
obligated to pay for the month immediately preceding the end of the Term for
each month or any part thereof of any such hold-over period together with such
other amounts as may become due hereunder. No holding over by Tenant after the
Term shall operate to extend the Term. If Tenant holds over without consent,
Tenant shall indemnify, defend, protect and hold Landlord and Landlord Parties
harmless from and against any and all claims, judgments, damages, penalties,
fines, costs, expenses, liabilities or losses for damages by any other tenant or
third person to whom Landlord may have leased or offered to lease all or any
part of the Leased Premises covered hereby effective on or after the termination
of this Lease, together with all loss, cost, expense, damages and liabilities in
connection with any such reletting, including, without limitation, reasonable
attorneys' fees and Landlord's lost revenues. Any holding over with the consent
of Landlord in writing shall thereafter constitute this Lease a lease from month
to month.
7.13 Attorneys' Fees. If either party places the enforcement of this
---------------
Lease, or any part thereof, or the collection of any Rent due, or to become due
hereunder, or recovery of the possession of the Leased Premises in the hands of
an attorney or collection agency, or files suit upon the same, or seeks a
judicial declaration of rights hereunder, the prevailing party shall recover its
reasonable attorneys' fees, court costs and collection agency charges. As used
herein, "prevailing party" shall mean the party who substantially prevails in
the matter at issue, including without limitation, a party who dismisses an
action for recovery hereunder in exchange for payment of the sums allegedly due,
performance of covenants allegedly breached or consideration substantially equal
to the relief sought in the action.
7.14 Amendments. This Lease may not be altered, changed or amended,
----------
except by an instrument in writing signed by both parties.
7.15 Transfers By Landlord. Landlord shall have the right to transfer and
---------------------
assign, in whole or in part, all of its rights and obligations hereunder and in
the Project. Upon transfer by Landlord of its interest in the Project, and upon
the transferee's assumption of Landlord's obligations hereunder, no further
liability or obligations shall thereafter accrue against the transferring or
assigning person as Landlord hereunder.
7.16 Severability. If any term or provision of this Lease, or the
------------
application thereof to any person or circumstances, shall to any extent be
invalid or unenforceable, the remainder of this Lease, or the application of
such provision to persons or circumstances other than those as to
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which it is invalid or unenforceable, shall not be affected thereby, and each
provision of this Lease shall be valid and shall be enforceable to the extent
permitted by law.
7.17 Notices. All notices, demands, consents and approvals that may or
-------
are required to be given by either party to the other hereunder shall be in
writing and shall be deemed to have been fully given by personal delivery or
when deposited in the United States mail, certified or registered, postage
prepaid, or by national overnight courier service and addressed to the party to
be notified at the address for such party specified on the Basic Lease
Information sheet, or to such other place as the party to be notified may from
time to time designate by at least fifteen (15) days notice to the notifying
party. Personal delivery of notices to Tenant may in all events be made by
leaving a copy of the notice, addressed to Tenant, at the Leased Premises.
Tenant appoints as its agent to receive the service of all default notices and
notice of commencement of unlawful detainer proceedings the person in charge of
or apparently in charge of or occupying the Leased Premises at the time, and, if
there is no such person, then such service may be made by attaching the same on
the main entrance of the Leased Premises.
7.18 Building Planning. Intentionally deleted.
-----------------
7.19 No Option. Submission of this instrument for examination or
---------
signature by Tenant does not constitute a reservation of or an option for lease,
and it is not effective as a lease or otherwise until execution and delivery by
both Landlord and Tenant.
7.20 Integration and Interpretation. The terms of this Lease are
------------------------------
intended by the parties as a final expression of their agreement with respect to
such terms as are included in this Lease and may not be contradicted by evidence
of any prior or contemporaneous agreement, arrangement, understanding or
negotiation (whether oral or written). The parties further intend that this
Lease constitutes the complete and exclusive statement of its terms, and no
extrinsic evidence whatsoever may be introduced in any judicial proceeding
involving this Lease. The language in all parts of this Lease shall in all cases
be construed as a whole and in accordance with its fair meaning and not
restricted for or against any party, regardless of which party may have drafted
the provision in question, it being agreed that this is a negotiated agreement.
7.21 Quitclaim. Upon expiration or earlier termination of this Lease,
---------
Tenant shall, immediately upon request of Landlord, execute, acknowledge and
deliver to Landlord a recordable deed quit-claiming to Landlord all interest of
Tenant in the Leased Premises, the Project and this Lease.
7.22 No Easement For Light, Air And View. This Lease conveys to Tenant
-----------------------------------
no rights for any light, air or view. No diminution of light, air or view, or
any impairment of the
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visibility of the Leased Premises from inside or outside the Building, by any
structure or other object that may hereafter be erected (whether or not by
Landlord) shall entitle Tenant to any reduction of Rent under this Lease,
constitute an actual or constructive eviction of Tenant, result in any liability
of Landlord to Tenant, or in any other way affect this Lease or Tenant's
obligations hereunder.
7.23 No Merger. The voluntary or other surrender or termination of this
---------
Lease by Tenant, or a mutual cancellation thereof shall not work a merger, but,
at Landlord's sole option, shall either terminate all existing subleases or
subtenancies or shall operate as an assignment to Landlord of all such subleases
or subtenancies.
7.24 Memorandum Of Lease. Tenant shall, upon request of Landlord,
-------------------
execute, acknowledge and deliver a short form memorandum of this Lease (and any
amendment hereto or consolidation hereof), in form suitable for recording. In no
event shall this Lease or any memorandum thereof be recorded without the prior
written consent of Landlord, and any attempt to do so shall constitute a default
by Tenant.
7.25 Survival. All of Tenant's covenants and obligations contained in
--------
this Lease shall survive the expiration or earlier termination of this Lease. No
provision of this Lease providing for termination in certain events shall be
construed as a limitation or restriction of Landlord's rights and remedies at
law or in equity available upon a breach by Tenant of this Lease.
7.26 Financial Statements. If Landlord intends to sell all or any
--------------------
portion of the Building or Project (or any interest therein), or obtain a loan
secured by the Building or Project (or any interest therein), then Tenant shall,
within fifteen (15) days of Landlord's written request, furnish Landlord with
financial statements, dated no earlier than one (1) year before such request,
certified as accurate by Tenant, or, if available, audited financial statements
prepared by an independent certified public accountant with copies of the
auditor's statement, reflecting Tenant's then current financial condition, or
the financial condition of the individuals comprising Tenant, in such form and
detail as Landlord may reasonably request. Notwithstanding the foregoing,
provided that Tenant is a publicly traded company, the obligation to provide
financial statements set forth in this Section 7.26 shall be satisfied by
Tenant's delivery to Landlord of the then most recent publicly filed financial
statements.
7.27 No Joint Venture. This Lease shall not be construed to create a
----------------
partnership, joint venture or similar relationship or arrangement between
Landlord and Tenant hereunder.
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7.28 Successors And Assigns. This Lease shall be binding upon and inure
----------------------
to the benefit of Landlord, its successors and assigns (subject to the
provisions hereof, including, but without limitation, Section 5.16); and shall
be binding upon and inure to the benefit of Tenant, its successors, and to the
extent assignment may be approved by Landlord hereunder, Tenant's assigns.
7.29 Applicable Law. All rights and remedies of Landlord and Tenant
--------------
under this Lease shall be construed and enforced according to the laws of the
State of California. Any actions or proceedings brought under this Lease, or
with respect to any matter arising under or out of this Lease, shall be brought
and tried only in courts located in the County of San Mateo, California
(excepting appellate courts).
7.30 Time Of The Essence. Time is of the essence of each and every
-------------------
covenant herein contained.
7.31 Interpretation. Except as specifically provided otherwise in this
--------------
Lease, Landlord may act in its sole and absolute discretion when required to act
hereunder. The term, "including" shall mean "including, without limitation." All
indemnities contained herein shall survive termination of this Lease with
respect to any act, condition or event that is the subject matter of such
indemnity and that occurs prior to the Term Expiration Date. Notwithstanding
anything herein to the contrary, all provisions of this Lease which require the
payment of money or the delivery of property after the Term Expiration Date
shall survive termination of the Lease.
7.32 Parking. Tenant shall be entitled to the non-preferential and non-
-------
exclusive use of the number of parking spaces in the Common Areas set forth in
the Basic Lease Information for which right Tenant shall pay the monthly fee per
space established by Landlord from time to time for the applicable type of
space, plus any tax or assessment imposed by any governmental authority in
connection with the parking privileges provided to Tenant pursuant to this
Lease. Said monthly fees shall be paid whether or not Tenant uses said spaces;
provided, however, that Landlord hereby waives its right to collect such parking
fees from Tenant for the spaces during the Term of this Lease, except to the
extent that Landlord is required to impose a parking fee by any governmental
regulation now or hereafter applicable to any part of all of the Project, or to
Landlord or Tenant. Landlord may assign any unreserved and unassigned parking
spaces and/or make all or a portion of such spaces reserved, if it determines
that it is necessary for orderly and efficient parking. Landlord at any time may
substitute existing surface parking with an equivalent number of parking spaces
in a parking structure located on the Project.
7.33 Brokers. Tenant and Landlord each represent and warrant to the
-------
other that it has had no dealing with any broker or agent other than the Broker
set forth on the Basic Lease Information. Tenant and Landlord each indemnify,
defend and hold the other party harmless
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from and against any and all liabilities for commissions or other compensation
or charges claimed by any other broker or agent based on dealings with the
indemnifying party with respect to this Lease. The foregoing indemnity shall
survive termination or earlier expiration of this Lease.
7.34 Non-Disturbance, Attornment and Subordination Agreement. Within
-------------------------------------------------------
thirty days after full execution of this Lease by Landlord and Tenant, Landlord
shall deliver to Tenant a commercially reasonable non-disturbance, attornment
and subordination agreement (the "Non-Disturbance Agreement") executed by
Landlord's Lender, Wells Fargo Bank, N.A. Tenant shall not record the Non-
Disturbance Agreement or a copy or memorandum thereof. If Landlord fails to
deliver such Non-Disturbance Agreement by the expiration of such thirty day
period, Tenant shall have the right, as Tenant's sole and exclusive remedy,
within five (5) business days after the expiration of such thirty day to
terminate this Lease by providing written notice of such termination to Landlord
and to receive a return of the Letter of Credit. If Tenant fails to terminate
this Lease as provided above, time being of the essence, this Lease shall remain
in full force and effect in accordance with the terms set forth herein.
7.35 Signage. Tenant shall have the exclusive right to install two (2)
-------
tenant identification signs at the top of the Building (the "Signs"), at
Tenant's sole cost and expense, subject to Landlord's approval of the plans and
specifications thereof (including, without limitation, the design, location, and
size) and in accordance with all applicable laws, ordinances, rules and
regulations and any private restrictions imposed against the Property (the
"Applicable Requirements"). Tenant shall erect the Signs in accordance with the
approved plans and specifications, in a good and workmanlike manner, and at all
times thereafter, Tenant shall maintain, at its sole cost and expense, the Signs
in a good, clean and safe condition and in accordance with the Applicable
Requirements, including all repairs and replacements thereto. Upon the
occurrence of any Event of Default and/or upon termination of this Lease, Tenant
shall promptly remove the Signs, in which event Tenant shall be responsible for
and shall repair any damage to the Building resulting therefrom. Tenant's
exterior signage rights hereunder are personal to Actuate Corporation (or to a
successor by merger or consolidation) and may not be assigned or transferred
except with the prior written consent of Landlord, which consent may be given or
withheld in Landlord's sole and absolute discretion. Tenant shall be responsible
for obtaining all permits and approvals (governmental and private) necessary for
the installation and maintenance of the Signs; provided however, Landlord shall,
at Tenant's cost and expense, reasonably cooperate with Tenant in obtaining any
such permits or approvals.
If Actuate Corporation (or its successor by merger or consolidation) no
longer occupies at least one full floor of the Leased Premises, Tenant's signage
rights hereunder shall terminate and be of no further force or effect and Tenant
shall promptly remove the Signs, in which event Tenant shall be responsible for
and shall repair any damage to the Building resulting therefrom. Upon
completion of any removal of the Signs, Tenant's right under this Section 7.35
shall terminate. If Tenant fails to remove the Signs as required under this
Section 7.35, Landlord
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shall have the right, at Tenant's expense, to remove the
Signs. Tenant shall indemnify, defend and protect Landlord and hold Landlord
harmless of and from any and all, proceedings, loss, cost, damage, causes of
action, liabilities, injury or expense arising out of or related to claims of
injury to or death of persons or damage to property occurring or resulting
directly or indirectly from the installation or maintenance of the Signs on the
Building.
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IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
day and year first above written.
Landlord HMS GATEWAY OFFICE, L.P.
By: Hines Gateway Office, L.P.,
General Partner
By: Hines Interests Limited Partnership,
General Partner
By: Hines Holdings, Inc.,
General Partner
By: /s/ James C. Buie, Jr.
--------------------------------
Name: James C. Buie, Jr.
------------------------------
Title: Executive Vice President
-----------------------------
Tenant ACTUATE CORPORATION
a Delaware corporation
By: /s/ Dan Gaudreau
--------------------------
Name: Dan Gaudreau
-------------------------
Title: SVP - Finance, CFO
-----------------------
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EXHIBIT A-1
"Leased Premises Depiction"
(graphic depiction of Floors 5 & 6 floor plan)
-1-
<PAGE>
EXHIBIT A-2
"Project"
Parcel 4 as designated on the Map entitled Parcel Map 98-082 of the Lands of HMS
Gateway Office, L.P. which map was filed in the office of the Recorder of the
County of San Mateo, State of California, on June 9, 1999 in Book 71 of Parcel
Maps at page(s) 71 of Parcel Maps at page(s) 57
-1-
<PAGE>
EXHIBIT B
---------
INITIAL IMPROVEMENT OF THE LEASED PREMISES
------------------------------------------
1. Improvements. The Base Building Improvements described in paragraph
------------
2 shall be furnished and installed within the Leased Premises substantially in
accordance with the plans and specifications for the Building without cost or
expense to Tenant. Any work in addition to Base Building Improvements is
referred to herein as Tenant Improvements and shall be furnished and installed
within the Leased Premises substantially in accordance with plans and
specifications to be prepared by Tenant and approved by Landlord in accordance
with this Exhibit B and shall be furnished and installed at the expense of
Tenant, except for the amount of the Landlord's Contribution ("Landlord's
Contribution") described in Paragraph 12 and in Administration of Work described
in Paragraph 8 of this Exhibit B. For purposes hereof, the cost of the Tenant
Improvements shall include all costs associated with the design and construction
of the Tenant Improvements, including, without limitation, all building permit
fees, payments to design consultants for services and disbursements, all
demolition and other preparatory work premiums for insurance and bonds, general
conditions, such inspection fees as Landlord may incur, reimbursement to
Landlord for permit and other fees Landlord may incur that are fairly
attributable to the Tenant Improvement work and the cost of installing any
additional electrical capacity or telecommunications capacity required by
Tenant.
2. The Base Building Improvements shall consist of those items listed
on the attached Schedule 1.
3. Tenant's Architect, Engineers and Contractors. Tenant shall select
---------------------------------------------
architects, engineers and contractors from a list of approved architects,
engineers and contractors to be provided to Tenant by Landlord. In the event
that Tenant desires to use an architect, engineer or contractor not on the list
provided by Landlord, Tenant may request the consent of Landlord to the use of
such architect, engineer or contractor, which consent may be given or withheld
in Landlord's sole and absolute discretion. The cost of preparing all plans and
specifications for the Tenant Improvements (including without limitation the
Conceptual Plans referred to in Paragraph 4 of this Exhibit B and the Working
Drawings referred to in Paragraph 5 of this Exhibit B), and the cost of
preparing any change thereto shall be paid by Tenant, although Tenant may apply
the Landlord's Contribution to the payment of such costs in accordance with the
provisions of Paragraph 12 of this Exhibit B.
4. Submittal of Conceptual Plans. Tenant shall submit to Landlord
-----------------------------
conceptual plans for the Tenant Improvements (the "Conceptual Plans"), including
architectural, electrical and reflected ceiling drawings within twenty-one (21)
days after the full execution of the Lease. Such Conceptual Plans shall be for
the general information of Landlord, and to assist in the coordination of the
design and construction of the Tenant Improvements, but receipt of such
Conceptual Plans by Landlord shall not constitute an approval by Landlord of the
design or
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specifications shown thereon. Landlord shall, within five (5) business days
following receipt by Landlord of such plans from Tenant, review, comment on and
return the Conceptual Plans to Tenant, marked "Approved," "Approved as Noted" or
"Disapproved as Noted, Revise and Resubmit." If the Conceptual Plans are
returned to Tenant marked "Approved," the Conceptual Plans shall be deemed
approved by Landlord and the procedure set forth in Paragraph 5 below shall be
followed. If the Conceptual Plans are returned to Tenant marked "Approved as
Noted," the Conceptual Plans so submitted shall be deemed approved by Landlord
and the procedure set forth in Paragraph 5 below shall be followed; provided
however, in preparing the Working Drawings, Tenant shall cause Tenant's
Architect to incorporate Landlord's noted items into the Working Drawings. If
the Conceptual Plans are returned to Tenant marked "Disapproved as Noted, Revise
and Resubmit," Tenant shall cause such plans to be revised, taking into account
the reasons for Landlord's disapproval, and shall resubmit revised plans to
Landlord for review within five (5) days after return of the Conceptual Plans to
Tenant by Landlord. The same procedure shall be repeated until Landlord fully
approves the Conceptual Plans.
5. Submittal of Working Drawings. Following the approval by Landlord
-----------------------------
of the Conceptual Plans, Tenant shall deliver to Landlord one (1) set of
reproducible sepia and three (3) sets of blue-lined prints of working drawings
and specifications (hereinafter referred to collectively as the "Working
Drawings") for the Tenant Improvements prepared at Tenant's sole cost and
expense (although Tenant may apply the Landlord's Contribution to the payment of
such cost in accordance with the provisions of Paragraph 12 of this Exhibit B)
by an architect ("Tenant's Architect") licensed in the State of California and
selected by Tenant from the list provided by Landlord in accordance with
Paragraph 3 of this Exhibit B or specifically approved in writing by Landlord.
If the draft of the Working Drawings was prepared on a computer-assisted design
("CAD") system, Tenant shall also deliver to Landlord a diskette containing the
Working Drawings in the AutoCAD format. Within five (5) business days of the
receipt by Landlord of a draft of Working Drawings from Tenant, Landlord shall
return to Tenant one (1) sepia set of the Working Drawings marked "Approved,"
"Approved as Noted" or "Disapproved as Noted, Revise and Resubmit." If the
Working Drawings are returned to Tenant marked "Approved," the Working Drawings,
as so submitted, shall be deemed approved by Landlord. If the Working Drawings
are returned to Tenant marked "Approved as Noted," the draft of the Working
Drawings shall be deemed approved by Landlord; provided however, in preparing
the final approved Working Drawings, Tenant shall cause Tenant's Architect to
incorporate Landlord's noted items into the Working Drawings. If the Working
Drawings are returned to Tenant marked "Disapproved as Noted, Revise and
Resubmit," Tenant shall cause such Working Drawings to be revised, taking into
account the reasons for Landlord's disapproval and shall resubmit revised plans
to Landlord for review. The same procedure shall be repeated until Landlord
fully approves the Working Drawings. The Working Drawings shall be consistent
with, and a logical extension of, the Conceptual Plans approved by Landlord in
accordance with Paragraph 4 of this Exhibit B. Tenant shall be solely
responsible for: (i) the completeness of the Working Drawings; (ii) the
conformity of the Working Drawings with the existing conditions in the Building
and the Leased Premises; (iii) the compatibility of the Working Drawings with
the shell or the core or the mechanical, plumbing, life safety or electrical
systems of the Building
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(including obtaining, at Tenant's sole cost and expense, mechanical and
electrical drawings from Flack & Kurtz Consulting Engineers, LLP); and (iv) the
compliance of the Working Drawings with all applicable regulations, laws,
ordinances, codes and rules, including, without limitation, the Americans With
Disabilities Act. When the Working Drawings are approved by Landlord and Tenant,
they shall be acknowledged as such by Landlord and Tenant signing each sheet of
the Working Drawings. If the Working Drawings were prepared on a computer-
assisted design ("CAD") system, Tenant shall also deliver to Landlord a diskette
containing the approved Working Drawings in the AutoCAD format. Tenant shall
cause the Conceptual Plans and Working Drawings to be prepared, submitted to
Landlord and, where required, revised so as to obtain the approval of the
Working Drawings by Landlord on or before Tenant's Plan Delivery Date.
6. Landlord's Review Responsibilities. Tenant acknowledges and agrees
----------------------------------
that Landlord's review and approval, if granted, of all Conceptual Plans and
Working Drawings by Landlord is solely for the benefit of Landlord and to
protect the interests of Landlord in the Building and the Leased Premises, and
Landlord shall not be the guarantor of, nor in any way or to any extent
responsible for, the correctness or accuracy of any Conceptual Plans or Working
Drawings or of the compliance of the Conceptual Plans or Working Drawings with
applicable regulations, laws, ordinances, codes and rules or of the conformance
or compatibility of the Conceptual Plans or Working Drawings with existing
conditions in the Building or Leased Premises or with the shell or the core or
the mechanical, plumbing, life safety or electrical systems of the Building.
Tenant shall require and be solely responsible for insuring that its architects,
engineers and contractors verify all existing conditions in the Building,
insofar as they are relevant to, or may affect, the design and construction of
the Tenant Improvements, and Landlord shall have no liability to Tenant for any
inaccuracy or incorrectness in any of the information supplied by Landlord with
regard to existing conditions. Tenant shall be solely responsible for, and
Landlord specifically reserves the right to require Tenant to make at any time
and from time to time during the construction of the Tenant Improvements, any
changes to the Conceptual Plans and the Working Drawings necessary to obtain any
permit or to comply with all applicable regulations, laws, ordinances, codes and
rules or to achieve the compatibility, as reasonably determined by Landlord, of
the Conceptual Plans and Working Drawings with the shell and the core and the
mechanical, plumbing, life safety and electrical systems of the Building and any
third-party warranties.
7. Pricing The Work.
----------------
(a) Upon completion of the Working Drawings for the Tenant
Improvements, Tenant shall cause its architect to deliver to Landlord the number
of copies of the Working Drawings which Landlord may reasonably request for use
in obtaining bids for the work and in the course of construction. Upon receipt
of such copies, Landlord shall elect, by written notice to Tenant and in
accordance with Paragraph 7(b) or (c) below, as applicable, either to solicit
bids from two (2) general contractors for the work shown on the Working Drawings
or to solicit bids from subcontractors for the work.
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(b) Landlord shall obtain bids from general contractors, and (i)
Tenant may, within five (5) business days of the receipt by Tenant of the notice
of election from Landlord to use a general contractor, notify Landlord in
writing of the names of not more than two (2) general contractors from the list
described in Paragraph 3 above or from such other contractors as otherwise
approved by Landlord in its sole and absolute discretion from which Tenant would
like bids solicited; (ii) Landlord shall solicit bids from any such general
contractors named in the notice from Tenant and from any other contractors from
which Landlord desires to solicit bids; and (iii) Landlord shall be entitled to
receive a fee for the supervision of the general contractor in an amount equal
to the sum of (A) five percent (5%) of the cost of constructing the Tenant
Improvements in the Leased Premises up to the amount of the Landlord's
Contribution, plus (B) two and one-half percent (2.5%) of the cost of
constructing the Tenant Improvements in the Leased Premises that exceed the
amount of the Landlord's Contribution. Upon receipt of bids from the contractors
from which bids were solicited, excluding any Contractor that does not submit a
bid within the time period specified by Landlord in the request for bids,
Landlord shall notify Tenant of the amount of each of the bids, and shall select
the general contractor whose bid for the work (taking into account, in
Landlord's good faith judgment, all factors associated with the bids, including
without limitation, quality of materials to be used, estimated completion time
and reputation of subcontractors to be used) is the lowest. Tenant shall have
five (5) business days after receipt of notice from Landlord regarding the
selection of the contractor in which to give written notice to Landlord of
Tenant's objection to the selected bid. If Tenant accepts or fails to object
within the time set forth above, the bid shall be deemed approved. If Tenant
timely objects to the bid, Tenant shall meet with Landlord, the Tenant's
architect and the selected general contractor within five (5) business days to
discuss mutually acceptable revisions. All costs of changes required by any such
revisions shall be the sole responsibility of Tenant. Following such revisions,
Landlord shall submit to Tenant, as soon as reasonably practicable, a revised
bid from the selected contractor, and the same procedure will be followed as set
forth above until Tenant has approved the bid. In revising the bid Landlord may,
if it deems appropriate, resolicit bids from the other originally solicited
contractors.
(c) Intentionally deleted.
(d) Tenant shall be responsible for paying in accordance with the
provisions of Section 11 below all amounts in excess of the Landlord's
Contribution necessary to complete construction of the Tenant Improvements (the
"Construction Payment").
8. Administration Of Work.
----------------------
(a) After acceptance of bids, Landlord shall administer the
construction of Tenant Improvements in accordance with the Working Drawings;
provided, however, that Landlord shall not be required to install any Tenant
Improvements that do not conform to the approved Working Drawings, or conflict
with elements of the approved Working Drawings, or do not comply with applicable
regulations, laws, ordinances, codes and rules; such conformity being the
obligation of Tenant.
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<PAGE>
(b) All Tenant Improvements shall be constructed by the general
contractor or subcontractors selected for the work with the exception of floor
coverings, wall finishes, mill work security systems (which shall not be
connected to the life safety systems of the Building) and work stations which
may be constructed, installed or provided by Tenant subject to the limitation
hereinafter set forth. Furthermore, Tenant shall furnish and install all
telephone equipment and wiring and office equipment and wiring, all of which
shall be constructed, installed or provided by Tenant subject to the limitations
hereinafter set forth.
(c) All materials or equipment furnished and installed by Tenant
shall be installed in a manner that conforms with the construction schedule
established by Landlord and Tenant, and the work of installation shall be
handled in such a manner as to maintain harmonious labor relations and as not to
interfere with or delay the work of Landlord's contractors. No portion of the
work to be performed by Landlord's contractor shall be dependent upon completion
of any work of construction or installation to be performed by Tenant, and the
work to be performed by Landlord's contractor shall have priority over any work
to be performed by Tenant. Tenant's contractors, subcontractors and materialmen
shall be subject to prior approval by Landlord and shall be subject to the
administrative supervision of Landlord or Landlord's general contractor and
rules of the site. Contractors, subcontractors and materialmen engaged by Tenant
shall take the necessary steps to insure, so far as may be possible, the
progress of the work without interruption on account of strikes, work stoppage
or similar causes for delay. In the event that Tenant's contractors or
subcontractors do not promptly cause any pickets to be withdrawn and all other
disruptions to the operations of the Building promptly to cease, or in the event
that Landlord notifies Tenant that Landlord has in good faith concluded that
picketing or other disruptive activities are an imminent threat, Tenant shall
immediately cause the withdrawal from the job of all its contractors,
subcontractors or materialmen involved in the dispute. Any delay caused to
Landlord's contractor attributable to performance on the part of Tenant of any
work of installing or furnishing floor coverings, wall finishes, mill work
office equipment work stations, telephone equipment and wiring or office
equipment and wiring shall constitute Tenant's Delay, and in addition to the
obligations set forth in Paragraph 8 below, Tenant shall be obligated to pay all
cost and expense incurred by Landlord in connection therewith. No portion of any
work to be performed by Tenant shall be taken into account in determining
whether or not the Leased Premises are Substantially Complete.
(d) Tenant shall require that each of its contractors,
subcontractors and materialmen maintain commercial general liability insurance
in an amount of not less than Three Million Dollars ($3,000,000.00) on a
combined single limit basis and all worker's compensation insurance required by
law.
(e) Landlord shall provide access and entry to the Leased Premises
to Tenant at times consistent with the construction schedule established by
Landlord and Tenant for the work and subject to all the terms and conditions of
the Lease and this Exhibit B (except that Tenant shall not be responsible for
payment of Gross Rent solely as a result of such access and entry). Upon and
following any entry into the Leased Premises by Tenant prior to the
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commencement of its Term, Tenant shall perform all of the obligations of Tenant
applicable under the Lease during the Term (except the obligation to pay Base
Rent and Tenant's Proportionate Share of Basic Operating Cost), including,
without limitation, obligations pertaining to insurance, indemnity, compliance
with laws and hazardous materials. In addition to the indemnity obligations of
Tenant under the Lease, Tenant shall indemnify, defend and protect Landlord and
hold Landlord harmless of and from any and all claims, proceedings, loss, cost,
damage, causes of action, liabilities, injury or expense arising out of or
related to claims of injury to or death of persons or damage to property
occurring or resulting directly or indirectly from the presence in the Leased
Premises or the Project of Tenant's contractors or representatives or the
activities of Tenant or its contractors or representatives in or about the
Leased Premises or Project during the construction period, such indemnity to
include, but without limitation, the obligation to provide all costs of defense
against any such claims. This indemnity shall survive the expiration or sooner
termination of the Lease.
9. Obligation of Tenant To Provide As-Built Plans. Within thirty (30)
----------------------------------------------
day of Substantial Completion, Tenant shall cause Tenant's Architect to provide
Landlord with a complete set of plans on mylar and specifications reflecting the
actual conditions of the Tenant Improvements as constructed in the Leased
Premises, together with a copy of such plans on diskette in the AutoCAD format
or such other format as may then be in common use for computer assisted design
purposes.
10. Reimbursement and Compensation. Tenant shall reimburse Landlord for
------------------------------
all actual costs incurred by Landlord in connection with the design and review
of Conceptual Plans and Working Drawings for the Tenant Improvements, and
Landlord shall be entitled to receive the fee provided in Paragraph 7 of this
Exhibit B. Landlord may obtain any reimbursement or compensation required
hereunder by deducting the amount of such reimbursement or compensation from
Landlord's Contribution.
11. Tenant Payments. Landlord and Tenant shall make progress payments
---------------
on a pro rata basis (in the proportion that the Landlord's Contribution and the
Construction Payment bear to the total cost for constructing the Tenant
Improvements) from time to time as the Tenant Improvements are constructed or as
other cost related to the Tenant Improvements are incurred. Tenant shall pay to
Landlord its pro rata share within 10 days after billing by Landlord of any
progress payment, and Landlord shall pay its pro rata share and Tenant's share
of any progress payments directly to the general contractor or subcontractors,
as appropriate. Landlord shall be entitled to suspend or terminate construction
of the Tenant Improvements and to declare Tenant in default in accordance with
the terms of the Lease, if payment by Tenant of its pro rata share of any
progress payment has not been received by Landlord within the timeframe
specified above.
12. Landlord's Contribution. Landlord shall provide a total of up to
-----------------------
Two Million Fifty Six Thousand Six Hundred and 00/100ths Dollars ($2,056,600);
"Landlord's Contribution"), as provided in this Paragraph 12 toward the payment
for the design (which is based on a maximum Landlord Contribution of $35.00 per
rentable square foot) and construction of the Tenant Improvements in the Leased
Premises. Landlord shall in accordance with this
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<PAGE>
Exhibit B apply Landlord's Contribution to the cost of designing and
constructing the Tenant Improvements and for the other purposes specifically
provided in this Exhibit B. The obligation of Landlord to make any one or more
payments pursuant to the provisions of this Paragraph 12 or to proceed with the
construction of the Tenant Improvements shall be suspended without further act
of the parties during any such time as there exists an event of default under
the Lease or any event or condition which, with the passage of time or the
giving of notice or both would constitute such an event of default. Nothing in
this Paragraph 12 shall affect the obligations of Tenant under the Lease with
respect to any alterations, additions and improvements within the Leased
Premises, including, without limitation, any obligation to obtain the prior
written consent of Landlord hereto.
13. Designation of Tenant's Representative. Tenant hereby designates
--------------------------------------
Bruce Tews as its representative in connection with the design and construction
of the Tenant Improvements, and Landlord shall be entitled to rely upon the
decisions and agreements made by such representative as binding upon Tenant.
14. Tenant's Delay. If Landlord shall be delayed in Substantial
--------------
Completion as a result of:
(a) Tenant's failure to obtain approval of the Working Drawings
by Landlord on or before Tenant's Plan Delivery Date; or,
(b) Tenant's change(s) in Working Drawings after approval of the
Working Drawings by Landlord, provided that Tenant shall not change the Working
Drawings without the prior written consent of Landlord, which consent shall not
be unreasonably withheld unless such change could reasonably be expected to
delay Substantial Completion; or,
(c) Any changes initiated by reason of the disapproval of any
Conceptual Plans, Working Drawings or bids; or
(d) Tenant's request for materials, finishes or installations
other than Building Standard Improvements which require a longer time than
Building Standard Improvements to obtain, install or complete; or,
(e) Tenant's failure to comply with Landlord's contractor's or
subcontractor's schedule; or,
(f) An event of default by Tenant under the Lease or the
existence of any event or condition which, with the passage of time or the
giving of notice or both would constitute such an event of default; or,
(g) Delays caused by Tenant in construction, (all of the
foregoing being referred to herein collectively as "Tenant's Delay"), then
Tenant shall pay to Landlord, as Additional Rent, one day's Gross Rent for each
day of Tenant's Delay. In addition, and notwithstanding any provision to the
contrary contained in the Lease, if Substantial Completion
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is delayed due to Tenant's Delay, the Term Commencement Date shall be the
earlier of the date of Substantial Completion or the date when Substantial
Completion would have occurred if there had been no Tenant's Delay. Tenant
acknowledges that the length of any Tenant's Delay is to be measured by the
duration of the delay in Substantial Completion caused by the event or conduct
constituting Tenant's Delay, which may exceed the duration of such event or
conduct due to the necessity of rescheduling work or other causes. Landlord
agrees to give Tenant notice promptly following any event or conduct
constituting Tenant's Delay.
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SCHEDULE 1 TO EXHIBIT B
Base Building Improvements
1. Perimeter panels and exterior glass windows installed to enclose each floor
of the Leased Premises;
2. Drywall, fire taped, covering all core walls, stairwells, shafts; excluding
interior columns, corridors and perimeter windows;
3. Concrete floors for the Leased Premises;
4. Installation of a base building sprinkler system including sprinkler heads
at the minimum density required by code;
5. Finished men's and women's restrooms on each floor of the Leased Premises;
6. A telephone and electrical room on each floor of the Leased Premises, with a
vertical chase between floors;
7. A vertical bus and panel board riser supplying electric power for the
service sufficient to operate an average of approximately 5.0 watts per
rentable square foot for general electrical use by Tenant, including
lighting;
8. Finished fire stairs designed to meet current governmental codes;
9. One drinking fountain for each floor of the Leased Premises;
10. Grading and site work;
11. Building foundation and structure;
12. Utility services to the Base Building, including:
. domestic water
. fire sprinkler service
. sanitary sewer
. electricity (distribution to the main electrical room of each floor)
. gas (servicing the shell equipment)
. Four conduits (with each conduit having a four inch diameter) from
the main electrical room in the Building to a service vault outside of the
Building
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<PAGE>
owned by Landlord or Pacific Bell Telephone and accessible to Pacific Bell
Telephone and such other telecom service providers as may offer such service
in the geographic area, for installation of telecommunications services by
Tenant;
13. Heating, ventilation, and air conditioning system, including HVAC risers
installed to each floor of the Leased Premises, but exclusive of horizontal
distribution (ductwork) and control equipment within the Leased Premises;
14. Central DDC for Energy Management System for the Base Building mechanical
system. DDC links to VAV control systems in the Leased Premises may be
installed, at Tenant's expense, but shall not be part of Base Building Work;
15. Three (3) Elevators;
16. Landscaping, including an automatic irrigation system;
17. Surface parking area;
18. One (1) supplemental chilled-water loops allowing Tenant to install as
necessary supplemental roof-mounted cooling units (any such tie-would be at
Tenant's sole cost and expense, and subject to Landlord prior approval, and
is not included in Base Building Work);
19. Fire alarm system, speaker, strobes and emergency exit lights as required by
code for a shell building; and
20. All main (1st floor) lobby finishes.
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EXHIBIT B-1
DEFINITION OF BUILDING STANDARD IMPROVEMENTS
For the purposes of the definition set forth in Section 1.09 of the Lease,
Building Standard Improvements would consist of:
A. Partitions.
----------
One (1) linear foot of ceiling height partition per twelve (12) square
feet of Net Rentable Area less Common Areas. All required partitions will be
5/8" gypsum board, painted with two coats of latex on 2-1/2" metal studs at 24"
on center, with 2-l/2" base.
B. Doors and Hardware.
------------------
One (1) full height, solid core, plain sliced maple door with a clear
anodized aluminum frame and polished chrome lever handle latch set hardware per
three hundred (300) square feet of Net Rentable Area less Common Areas.
C. Ceiling.
-------
A 23"x24"x5/8" thick tegular-style mineral fiber acoustical ceiling
throughout the Leased Premises.
D. Lighting.
--------
One (l) 2'x4' recessed fluorescent lighting fixture with anodized
aluminum parabolic shaped louvers, including initial lamping, per seventy-five
(75) square feet of Net Rentable Area less Common Areas. Common Areas on all
office floors shall have lighting selected by Landlord.
E. Electrical Outlets.
------------------
One (l) duplex wall-mounted convenience outlet mounted at standard
locations with white plastic cover plate for each one hundred twenty (120)
square feet of Net Rentable Area less Common Areas.
F. Telephone Outlets.
-----------------
One (l) telephone wall outlet mounted at standard locations for each
two hundred ten (210) square feet of Net Rentable Area less Common Areas with
pull wire through the partition.
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G. Floor Covering.
--------------
Building Standard carpet or a credit of $15.00 per square yard of
carpeted area.
H. Switch.
------
One (1) dual light switch, rocker type, mounted at standard locations
with white plastic cover plate for each three hundred (300) square feet of Net
Rentable Area less Common Areas.
I. Window Covering.
---------------
Horizontal aluminum one-inch-slat blinds for exterior windows.
J. Life Safety Systems.
-------------------
Rapid Response fire sprinkler heads to conform with typical Tenant
partition layout, utilizing the Building Standard partition and lighting, for
light hazard occupancy design criteria. Manual fire alarm pull stations, exit
lights, and audible fire alarm speakers shall be provided at the Building stair
doors and elevator lobbies.
K. HVAC.
----
The HVAC system for the Leased Premises to suit normal general office
space utilizing the Building Standard lighting fixtures.
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EXHIBIT C
---------
BUILDING RULES AND REGULATIONS
1. Sidewalks, doorways, halls, stairways, vestibules and other similar
areas shall not be obstructed by any Tenant or used by them for purpose other
than ingress to and egress from their respective Leased Premises, and for going
from one part of the Building to another part.
2. Plumbing fixtures shall be used only for their designated purpose, and
no foreign substances of any kind shall be deposited therein. Damage to any such
fixture resulting from misuse by Tenant or any employee or invitee of Tenant
shall be repaired at the expense of Tenant.
3. Nails, screws and other attachments to the Building require prior
written consent from Landlord.
4. All contractors and technicians rendering any installation service to
Tenant shall be subject to Landlord's approval and supervision prior to
performing services. This applies to all work performed in the Building,
including, but not limited to, installation of telephone, telegraph equipment,
and electrical devices, as well as all installation affecting floors, walls,
woodwork, windows, ceilings, and any other physical portion of the Building.
5. Movement in or out of the Building of furniture, office equipment, or
other bulky material which requires the use of elevators, stairways, or Building
entrance and lobby shall be restricted to hours established by Landlord. All
such movement shall be under Landlord's supervision, and the use of an elevator
for such movements shall be made restricted to the Building's freight elevators.
Rearrangements with Landlord shall be made regarding the time, method, and
routing of such movement, and Tenant shall assume all risks of damage and pay
the cost of repairing or providing compensation for damage to the Building, to
articles moved and injury to persons or public resulting from such moves.
Landlord shall not be liable for any acts or damages resulting from any such
activity.
6. Corridor doors, when not in use, shall be kept closed.
7. Tenant shall cooperate with Landlord in maintaining the Leased Premises.
Tenant shall not employ any person for the purpose of cleaning the Leased
Premises other than the Building's cleaning and maintenance personnel.
8. Deliveries of water, soft drinks, newspapers, or other such items to any
Leased Premises shall be restricted to hours established by Landlord and made by
use of the freight elevators if Landlord so directs.
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9. Nothing shall be swept or thrown into the corridors, halls, elevator
shafts, or stairways. No birds, fish, or animals of any kind shall be brought
into or kept in, on or about the Leased Premises.
10. No cooking shall be done in the Leased Premises except in connection
with convenience lunch room or beverage service for employees and guests (on a
non-commercial basis) in a manner which complies with all of the provisions of
the Lease and which does not produce fumes or odors.
11. Food, soft drink or other vending machines shall not be placed within
the Leased Premises without Landlord's prior written consent.
12. Tenant shall not use or keep on its Leased Premises any kerosene,
gasoline, or inflammable or combustible fluid or material other than limited
quantities reasonably necessary for the operation and maintenance of office
equipment.
13. Tenant shall not tamper with or attempt to adjust temperature control
thermostats in the Leased Premises. Landlord shall make adjustments in
thermostats on call from Tenant.
14. Tenant shall comply with all requirements necessary for the security of
the Leased Premises, including the use of service passes issued by Landlord for
after hours movement of office equipment/packages, and signing security register
in Building lobby after hours.
15. Landlord will furnish Tenant with a reasonable number of initial keys
for entrance doors into the Leased Premises and may charge Tenant for additional
keys, thereafter. All such keys shall remain the property of Landlord. No
additional locks are allowed on any door of the Leased Premises without
Landlord's prior written consent and Tenant shall not make any duplicate keys,
except those provided by Landlord. Upon termination of this Lease, Tenant shall
surrender to Landlord all keys to the Leased Premises, and give to Landlord the
combination of all locks for safes and vault doors, if any, in the Leased
Premises.
16. Landlord retains the right, without notice or liability to any tenant,
to change the name and street address of the Building.
17. Canvassing, peddling, soliciting, and distribution of handbills in the
Building are prohibited and each tenant will cooperate to prevent these
activities.
18. The Building hours of operation are (excluding holidays):
7:00 A.M. to 6:00 P.M. Monday through Friday
19. Landlord reserves the right to rescind any of these rules and
regulations and to make future rules and regulations required for the safety,
protection, and maintenance of the
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Building, the operation and preservation of good order thereof, and the
protection and comfort of the tenants and their employees and visitors. Such
rules and regulations, when made and written notice given the Tenant, shall be
binding as if originally included herein.
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Exhibit D
Sample Form Of
Lease Commencement Certificate
Office Building
Re: The Gateway
_____ Gateway Boulevard, Suite ______
So. San Francisco, CA 94080
This is to certify that [Tenant's Name and Suite Number] has opened/
--------------------------------------
closed on [Date]
BILLING ADDRESS Rentable Area
---------------------
Lease Commencement
NAME Date
-------------------------- ------------------------------
ADDRESS Lease Expiration Date
----------------------- ------------
CITY, STATE, ZIP Rental Payment Commencement
-------------- Date
------------------------------ ------------------------------
ATTN: Final Tenant Construction
------------------------- Overage
---------------------------
ATTN:
-------------------------
Payment due from Tenant
Insurance Certificate
submitted (Y/N)
---------------------
Security Deposit received
-----------
By: By:
--------------------------- -------------------------------
[TENANT or TENANT'S Agent] Agent for HMS GATEWAY
OFFICE, L.P.
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EXHIBIT 10.18
First Amendment to Office Building Lease
This First Amendment To Office Building Lease (this "Amendment") is made as
of September 30, 1999, by and between HMS Gateway Office, L.P., a Delaware
limited partnership ("Landlord"), and Actuate Corporation, a Delaware
corporation ("Tenant").
Recitals
A. Landlord and Tenant have previously entered into that certain Office
Building Lease dated as of August 18, 1999 (the "Lease"), which Lease covers
certain premises commonly known as Suite 500 and 600, on the 5th and 6th Floors,
respectively, of the building situated at 701 Gateway Boulevard, South San
Francisco, California (the "Original Premises"). Capitalized terms used but not
defined herein shall have the meanings set forth in the Lease.
B. Landlord desires to lease to Tenant and Tenant desires to lease from
Landlord an additional approximately 5,520 square feet located on a portion of
the third (3rd) floor of the Building, commonly known as Suite 380 (the
"Additional Space").
C. Landlord and Tenant desire to modify the Lease to reflect the addition of
the Additional Space to the Original Premises, all upon and subject to the
terms, covenants and conditions herein set forth.
Agreement
Now Therefore, in consideration of the agreements of Landlord and Tenant
herein contained and other valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:
1. Leased Premises
Section 1.21 of the Lease is hereby amended such that the Leased Premises
shall mean the floor area more particularly shown on the floor plan attached
hereto as Exhibit A, containing the Net Rentable Area specified on the Basic
Lease Information sheet attached hereto as Exhibit B.
2. Base Rent
Section 1.04 of the Lease is hereby amended such that the Base Rent shall
mean the basic rent payable by Tenant to Landlord in the amounts shown on the
Basic Lease Information sheet attached hereto as Exhibit B and in the manner
provided in Section 3.03 of the Lease.
1
<PAGE>
3. Tenant's Proportionate Share
The last sentence of Section 1.34 of the Lease is hereby deleted in its
entirety and the following is substituted therefor: "Notwithstanding the
foregoing, Tenant's Proportionate Share shall in no event exceed 39.72% of the
total Net Rentable Area of the Building."
4. Parking
The number of non-preferential and non-exclusive parking spaces that Tenant
is entitled to use pursuant to the terms of the Lease shall be increased to 193.
5. Security Deposit
The initial amount of the Letter of Credit required pursuant to Paragraph
5.15 of the Lease shall be increased by an amount equal to Two Hundred Forty-
Eight Thousand Four Hundred Dollars ($248,400), such that the total amount of
the Letter of Credit initially required pursuant to Paragraph 5.15 of the Lease
shall be Two Million Nine Hundred Forty-Eight Thousand Four Hundred Dollars
($2,948,400).
6. Landlord's Contribution
Landlord's Contribution, as set forth in Paragraph 12 of Exhibit B to the
Lease, shall equal a total of up to Two Million Two Hundred Forty-Nine Thousand
Eight Hundred Dollars ($2,249,800).
7. Substitution of Basic Lease Information
The Basic Lease Information sheet attached to the Lease is hereby deleted in
its entirety and the Basic Lease Information sheet attached hereto as Exhibit B
is hereby substituted therefor.
8. Miscellaneous
(a) Except as expressly amended hereby, the Lease shall remain unmodified and
in full force and effect. As modified hereby, the Lease is hereby ratified and
confirmed in all respects. In the event of any inconsistencies between the
terms of this Amendment and the Lease, the terms of this Amendment shall
prevail.
(b) This Amendment shall bind and inure to the benefit of Landlord and Tenant
and their respective legal representatives and successors and assigns.
signatures on next page
2
<PAGE>
In Witness Whereof, Landlord and Tenant have executed this Amendment as of
the date first above written.
Landlord: HMS Gateway Office, L.P.
a Delaware limited partnership,
By: Hines Gateway Office, L.P.,
General Partner
By: Hines Interests Limited Partnership,
General Partner
By: Hines Holdings, Inc.,
General Partner
By: /s/ James C. Buie, Jr.
------------------------------
Name: James C. Buie, Jr.
-----------------------------
Title: Executive Vice President
----------------------------
Tenant: Actuate Corporation,
a Delaware corporation
By: /s/ Dan Gaudreau
-----------------------
Name: Dan Gaudreau
---------------------
Title: SVP Finance, CFO
--------------------
3
<PAGE>
Exhibit A to First Amendment to Office Building Lease
"Leased Premises Depiction"
(graphic depiction of Floor 3 floor plan)
A-1
<PAGE>
Exhibit B to First Amendment to Office Building Lease
Basic Lease Information
Date: August 18, 1999
Tenant: Actuate Corporation
Address: 999 Baker Way
Suite 200
San Mateo, CA 94404
Landlord: HMS Gateway Office, L.P.
Address: c/o Hines Interests Limited Partnership
651 Gateway Boulevard, Suite 1140
South San Francisco, CA 94080
Leased Premises: Suite 500 and 600, on the 5th and 6th
Floors, respectively, and a portion of the
3rd floor of 701 Gateway Blvd.
Net Rentable Area: 64,160 rentable square feet
Scheduled Term
Commencement
Date: February 15, 2000
Term: Eight (8) years
Base Rent:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Amount/Month
1 $144,360 (based on $2.25 per rentable square foot)
2 $147,568 (based on $2.30 per rentable square foot)
3 $150,776 (based on $2.35 per rentable square foot)
4 $153,984 (based on $2.40 per rentable square foot)
5 $157,192 (based on $2.45 per rentable square foot)
6 $160,400 (based on $2.50 per rentable square foot)
7 $163,608 (based on $2.55 per rentable square foot)
8 $166,816 (based on $2.60 per rentable square foot)
</TABLE>
B-1
<PAGE>
Tenant's Plan
Delivery Date: October 1, 1999
Security Deposit: Letter of Credit in the amount of
$2,943,000, as adjusted pursuant Section
5.15 below.
Parking: 192 parking spaces
Broker: West Bay Commercial Real Estate
B-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,099
<SECURITIES> 7,601
<RECEIVABLES> 15,972
<ALLOWANCES> 1,786
<INVENTORY> 0
<CURRENT-ASSETS> 38,845
<PP&E> 3,497
<DEPRECIATION> 1,463
<TOTAL-ASSETS> 50,237
<CURRENT-LIABILITIES> 20,142
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 30,081
<TOTAL-LIABILITY-AND-EQUITY> 50,237
<SALES> 23,135
<TOTAL-REVENUES> 30,633
<CGS> 704
<TOTAL-COSTS> 4,631
<OTHER-EXPENSES> 24,032
<LOSS-PROVISION> 486
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 2,997
<INCOME-TAX> 337
<INCOME-CONTINUING> 2,660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,660
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.18
</TABLE>
