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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K
(Mark one)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999.
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number:
000-24643
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DIGITAL RIVER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1901640
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9625 WEST 76TH STREET, SUITE 150
EDEN PRAIRIE, MINNESOTA 55344
(address of principal executive offices)
(952) 253-1234
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value
-----------------------------
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 filing requirements
for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of March 10, 2000 was $567,031,025.
The number of shares of Common Stock outstanding at March 10, 2000 was
21,756,025 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders are incorporated by reference in Part III of this
Form 10-K to the extent stated herein.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Digital River is a leading provider of comprehensive electronic commerce
outsourcing solutions. The Company is an application service provider that
enables its clients to access its proprietary electronic commerce system over
the Internet. The Company has developed a technology platform that allows it to
provide a suite of electronic commerce services, including Web commerce
development and hosting, transaction processing, fraud screening, digital
delivery, integration to physical fulfillment and customer service. The Company
also provides analytical marketing and merchandising services to assist clients
in increasing Web page view traffic to, and sales through, their Web commerce
systems. Digital River provides an outsourcing solution that allows its clients
to promote their own brands while leveraging Digital River's investment in
infrastructure and technology. As of March 1, 2000, the Company had processed
over 2.7 million cumulative transactions and had contracts with over 6,000
clients, primarily software publishers and online retailers. In January 2000,
the Company announced that it had created the Software and Digital Services
Group to serve the software and digital products market, and the E-Business
Services Group to serve manufacturers, distributors and retailers outside of the
software industry. The Company's clients include 3M Company, Autodesk Inc.,
CompUSA Inc., Adolph Coors Co., Egghead.com, Inc., Fujitsu Ltd., Sega of
America Inc., ScanSoft Inc. and Symantec Corp.
Digital River's proprietary commerce network server, or CNS, technology
serves as the platform for the Company's solutions. The CNS incorporates custom
software applications that enable Web store authoring, electronic software
delivery, fraud prevention, export control, merchandising programs and online
registration, and features a database of more than 100,000 software and digital
products. Using its CNS platform, the Company creates Web commerce systems for
its clients that replicate the look and feel of each client's Web site.
End-users enter the client site and are then seamlessly transferred to the
Company's CNS. End-users can then browse for products and make purchases online,
and once purchases are made, the Company either delivers the products digitally
to the end-user through the Internet or communicates the order through its
integration into a number of third party fulfillment agencies for physical
fulfillment. The Company also provides transaction processing services and
collects and maintains critical information about end-users. This information
can later be used by the Company's clients to facilitate add-on or upgrade sales
and for other direct marketing purposes. The Company actively manages direct
marketing campaigns for its clients, and also delivers purchase information and
Web store traffic statistics to its clients through online reporting.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE. The Internet has emerged as
a significant global communications medium, enabling millions of people to share
information and conduct business electronically. A number of factors have
contributed to the growth of the Internet and its commercial use, including: (i)
the large and growing installed base of personal computers in homes and
businesses; (ii) improvements in network infrastructure and bandwidth; (iii)
easier and cheaper access to the Internet; (iv) increased awareness of the
Internet among consumer and business users; and (v) the rapidly expanding
availability of online content and commerce that increases the value to users of
being connected to the Internet.
The increasing functionality, accessibility and overall usage of the
Internet have made it an attractive commercial medium. Online businesses can
interact directly with end-users, both businesses and consumers, and can
frequently adjust their featured selections, shopping interfaces and pricing.
The ability to reach and serve a large and global group of end-users
electronically from a central location and the potential for personalized
low-cost customer interaction provide additional economic benefits for online
businesses. Unlike traditional retail channels, online businesses do not have
the burdensome costs of managing and maintaining a significant physical retail
store infrastructure or the continuous printing and mailing costs of catalog
marketing. Because of these advantages, online businesses have the potential to
build large, global customer bases quickly and to achieve superior economic
returns over the long term. An increasingly broad base of products is being sold
successfully online, including computers, travel services, brokerage services,
automobiles and music, as well as software products.
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ADVANTAGES OF OUTSOURCING ELECTRONIC COMMERCE. According to a Gartner Group
study, the initial investment in an electronic commerce site that is
functionally equivalent to most industry participants is $1.0 million to $5.0
million and requires an average of five months to implement. A market
differentiating electronic commerce solution requires an expenditure of $5.0 to
$20.0 million. According to the same study, the cost to build an electronic
commerce solution is expected to increase by 25% in each of the next two years.
Additionally, to maintain a scaleable, best of breed commerce solution,
businesses must continue to invest in technology, infrastructure and personnel
of electronic commerce management.
There are a number of advantages to outsourcing electronic commerce,
including: (i) avoiding the large, upfront investment required to purchase and
implement software applications and computer hardware; (ii) a shorter time to
market with an electronic commerce solution; (iii) the opportunity to shift the
ongoing financial and technology risk to a proven service provider; and (iv)
allowing businesses to focus on their specific core competency. Because of these
advantages, the Company believes that an increasing number of businesses will
outsource their electronic commerce needs.
OPPORTUNITY FOR ELECTRONIC COMMERCE OUTSOURCING. The Company believes that
the market for electronic commerce outsourcing in the software and digital
products market as well as among manufacturers, distributors and retailers will
continue to grow rapidly. However, unlike established physical distribution
channels, there is currently no established, comprehensive electronic
distribution source for businesses. The Company believes that providing an
integrated service offering of Web commerce development and hosting, transaction
processing, fraud screening, digital delivery, integration to physical
fulfillment and customer service is complex and requires upfront and ongoing
investments in secure, reliable and scaleable systems. Accordingly, the Company
believes that a substantial market opportunity exists for a comprehensive,
cost-effective, outsourced electronic commerce solution for software publishers
and online retailers as well as for manufacturers, distributors and retailers.
THE DIGITAL RIVER SOLUTION
The Company has developed a technology platform that enables it to provide
a comprehensive suite of electronic commerce services to its clients. The
Company also leverages its merchandising expertise to increase traffic and sales
for its clients. Rather than maintaining its own branded Web store, Digital
River provides an outsourcing solution for Web commerce development and hosting,
transaction processing, digital delivery and merchandising services that enables
its clients to promote their own brands while leveraging Digital River's
investment in infrastructure. In addition, this approach enables Digital River
to leverage its clients' brand investments and the traffic at its clients' sites
to maximize the number of transactions completed through Digital River.
BENEFITS TO CLIENTS. The Company's electronic commerce solution enables its
clients to leverage Digital River's investment in technology, personnel and
infrastructure to provide a business-to-business or business-to-consumer
electronic commerce solution. This provides the client with a cost-effective,
proven solution that allows the clients to focus on their core competency.
Clients have the ability to offer the complete library of their products
directly to end-users from their Web commerce systems, and for software
publishers, through the Company's network of online retailers. This benefit is
particularly significant for smaller software publishers who have limited market
access through traditional distribution methods. The Company's solution also
provides a channel for underdistributed products permitting clients to offer
online their complete product catalog. In addition, through its 100% end-user
registration and data warehousing, Digital River provides clients with valuable
end-user information that can facilitate targeted marketing, upgrade
notification and sophisticated merchandising strategies. Finally, by exploiting
the distribution relationships Digital River has developed with a large network
of online retailers, software publishers can reduce or eliminate the need for
multiple retailer relationships, thereby lowering administrative costs and
reducing the number of master copies of their software in existence for
distribution.
Additionally online retailers can use Digital River's robust CNS technology
to sell software products online without having to build and maintain their own
electronic commerce infrastructure. Digital River enables online retailers to
offer their end-users access to virtually all of Digital River's inventory of
software products without the burden of developing and maintaining relationships
with hundreds of software publishers. Like software publishers, online retailers
enjoy the cost savings from online fulfillment and the database marketing
benefits offered by Digital River. Online retailers can effectively outsource
electronic commerce functionality while building their own brands online. Online
retailers also eliminate the cost and risk associated with carrying inventory
and the risk of inventory
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obsolescence. In addition, niche market and high traffic Web sites can become
online retailers at minimal cost using the Company's solution.
BENEFITS TO END-USERS. Digital River's solution emphasizes convenience by
allowing end-users, both business and consumer, to purchase products online
twenty-four hours a day, seven days a week, or 24x7, from their home or office.
End-users are not required to make a trip to the store, can act immediately on a
purchase impulse and can locate products that are difficult to find. Because
Digital River has a global reach, it can deliver an extremely broad selection to
end-users in rural, international or other locations that cannot support retail
stores. Software and digital products purchased online can either be quickly and
conveniently downloaded and installed through digital delivery or delivered
physically. Using the Company's sophisticated search engine technology,
end-users visiting retailers' online Web stores can access virtually all of
Digital River's inventory of products. End-users also benefit from the
protection of Digital River's archiving service, through which the Company
guarantees replacement of software in the event of accidental destruction
through computer error or malfunction and from Digital River's 24x7 customer
service provided on behalf of its clients.
STRATEGY
The Company's objective is to become a global leader in comprehensive
electronic commerce outsourcing solutions to software publishers and online
retailers through its Software and Digital Services Group as well as to
manufacturers, distributors and retailers through its E-Business Services Group.
The Company intends to achieve its objective through the following key
strategies:
SOFTWARE AND DIGITAL SERVICES GROUP: DEVELOP AND EXPAND RELATIONSHIPS WITH
SOFTWARE PUBLISHERS AND ONLINE RETAILERS. The Company plans to continue to build
its inventory of software products through additional contractual relationships
with software publishers. As of March 1, 2000, the Company had signed contracts
with more than 4,700 software publishers, representing more than 100,000
software products and 4,400 Web stores. The Company believes that its ability to
develop Web hosting relationships with its software publisher clients increases
its reach to end-users and provides the basis for a long-term relationship with
its software publisher clients. The Company further believes that the large
number of software products offered by the Company from its software publisher
clients will be critical to the Company's ability to deliver a compelling
inventory of products to online retailer clients.
Additionally, the Company believes that by increasing the number of points
of entry to its CNS, Digital River will increase the number of transactions over
its network. Accordingly, in addition to expanding and developing relationships
with software publishers, the Company seeks to expand aggressively its network
of online retailer clients. Online retailer clients include traditional
store-based and mail order retailers with a Web presence, online retailers
dedicated to online commerce, as well as high traffic or niche Web site
operators desiring to add electronic commerce functionality. The Company had
contracts with more than 1,300 online retailers as of March 1, 2000. The
Company's model enables it to leverage its clients' marketing resources to
direct traffic to its software trade network.
E-BUSINESS SERVICES GROUP: DEVELOP AND EXPAND RELATIONSHIPS WITH
MANUFACTURERS, DISTRIBUTORS AND RETAILERS. In late 1998, the Company began
exploring electronic commerce outsourcing opportunities outside of the software
industry. During 1999, sales and marketing personnel were hired to develop
contractual relationship to sell the Company's electronic commerce outsourcing
services to manufacturers, distributors and retailers. As of March 1, 2000, the
Company had 22 contracts to provide commerce services such as Web commerce
development and hosting, transaction processing and fraud screening, customer
service, integration into third party physical fulfillment and merchandising and
analytical marketing services. The Company believes that its ability to provide
a proven, cost efficient electronic commerce solution, which can typically be
implemented in a one to eight week time frame, provides the basis for a
long-term relationship with these clients. The Company further believes that
additional electronic commerce outsourcing opportunities may develop as the
relationships with existing clients expand.
PROVIDE CLIENTS VALUE-ADDED SERVICES. The Company believes its growing data
warehouse of end-user purchasing information provides it with a powerful tool to
assist clients with value-added services, such as targeted advertising,
promotions and direct response merchandising. The Company offers merchandising
and analytical
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marketing programs, customer support and communications programs, advertising
placement services, Web commerce system design services, a returns management
module and fraud screening services. The Company intends to continue to expand
its programs and believes that these programs help build stronger partnerships
with its clients, while enabling its clients to increase their Web site sales.
MAINTAIN TECHNOLOGY LEADERSHIP. The Company believes that its CNS
technology has given it a competitive advantage in the market for outsourcing
solutions. The Company will continue to invest in and enhance its CNS technology
in order to increase redundancy, reliability and bandwidth, to expand services
and to reduce costs. By leveraging its fixed-cost infrastructure, Digital River
will improve its ability to provide low cost, high value services to its clients
while utilizing the latest technology.
SERVICES
The Company provides a broad range of services to its clients, including
Web commerce hosting, digital delivery and physical fulfillment services,
transaction processing and fraud screening, customer service and merchandising
and analytical marketing services.
WEB COMMERCE HOSTING. The Company hosts Web commerce activities for all of
its online retailer clients, its E-Business clients and for those software
publisher clients that choose this option. The Company's outsourcing solution is
mission-critical for many of its clients. Therefore, the Company has a data
center that is designed to provide its clients with the performance they require
for continuous Web commerce operations. The data center features redundant, high
speed connections to the Internet, 24x7 security and monitoring, back-up
generators and dedicated power.
Digital River can quickly and efficiently create a Web commerce system for
its clients, which can be accessed easily by clicking on a "buy button" on a
client's existing Web site. The end-user is then transferred to a Web commerce
system hosted on Digital River's CNS, which replicates the look and feel of the
client Web site. The end-user can then shop for products and make purchases
online. By replicating the look and feel of its clients' Web sites, Digital
River supports clients in conducting electronic commerce under their own brands.
Digital River's solution allows clients to choose either digital or, when
available, physical delivery. The transaction information is captured and added
to Digital River's data warehouse. The Company's ability to retrieve and
manipulate this information creates a powerful data mining tool, which can be
used for targeted merchandising to end-users through emails, banner
presentations and special offers.
DIGITAL AND PHYSICAL FULFILLMENT SERVICES. The Company offers clients
access to its electronic software delivery capabilities to permit delivery of
digital products to an end-user's computer via the Internet. Digital delivery
eliminates many of the costs that exist in the physical distribution chain, such
as manufacturing, packaging, shipping, warehousing and inventory carrying and
handling costs. Delivery is fulfilled when a copy is made from the master on the
Company's CNS and is then securely downloaded to the end-user via the Internet.
Digital River's digital distribution model not only reduces costs, thereby
increasing margins available to software publishers and online retailers, but
also solves the shelf space problem constraining product availability and sales.
While most software publishers use the Company's Web hosting services, certain
software publishers use only the Company's digital delivery services, which
provide them with online distribution through the Company's extensive network of
online retailers.
In addition to fulfillment through electronic software delivery, the
Company offers clients physical distribution services. The Company has
contracted with a third party fulfillment agency that maintains an inventory of
physical software products, generally on consignment from the Digital River
clients that select this option, for shipment to end-users. The Company also
communicates orders through its integration into many third party fulfillment
agencies for physical fulfillment for its clients. The Company believes physical
fulfillment services are important to its ability to provide a comprehensive
electronic commerce outsourcing solution.
TRANSACTION PROCESSING AND FRAUD SCREENING. The Company processes
transactions, primarily via credit card, generated by end-users ordering
products through the Company's CNS. The Company obtains customer and payment
information required to process transactions. The fraud screening component of
the CNS uses both rules based and heuristic scoring methods to make a
determination regarding the validity of the order, end-user and
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payment information. As the end-user is entering the order, over 580 data
reviews are processed real time. Depending on the contractual agreement, the
Company either offers the use of its proprietary fraud screening to clients to
either significantly reduce the number of fraudulent transactions or to
completely shift the risk of fraud to Digital River. When a credit card
transaction is completed and approved, and the ordered product has been
delivered, the Company processes the order for payment.
CUSTOMER SERVICE. The Company offers both telephone and email customer
support for products sold through its CNS on behalf of its clients. The Company
will provide end-user assistance on order and delivery questions on a 24x7
basis. The Company has invested and continues to invest heavily in technology
and infrastructure to provide fast, efficient responses to customer inquiries.
The Company also provides archiving service to the end-users that purchase
digital products.
MERCHANDISING AND ANALYTICAL MARKETING SERVICES. The Company offers a range
of merchandising and analytical marketing services to its clients to help them
drive additional traffic to their Web stores. Clients are provided with detailed
reports of transactions on their Web stores, as well as marketing information
related to end-user visits to their Web stores. The CNS captures Web page
visits, banner and pricing information and other data that can be used by the
software publishers and online retailers to analyze their Web stores'
performance.
The Company also offers advanced merchandising services to assist clients
in increasing response rates for their marketing efforts. These services include
email campaigns for special promotions, upgrade notification programs and the
presentation of complementary products, bundled products or other programs
designed to increase average order size based on a targeted end-user profile.
The Company participates in co-op dollar and market development fund programs
with its clients and buys selected banner placements in bulk to support clients'
promotional campaigns. In addition, Digital River tests and analyzes
merchandising techniques, such as promotional pricing and banner advertising,
based on information gathered in the CNS data warehouse.
CLIENTS
Within the Software and Digital Services Group, the Company distributes
software products through a network of software publishers and online retailers.
Online retailer clients include traditional store-based and direct mail
retailers with a Web presence, online retailers dedicated to online commerce, as
well as high traffic or niche Web site operators desiring to add electronic
commerce functionality. In a typical online retailer contract, the Company is
responsible for: (i) a payment to the online retailer based on a percentage of
net sales of software products that the Company distributes through the online
retailer's Web site; (ii) the processing of payments made by end-users; (iii)
the delivery of the software products to end-users; (iv) the payment of
applicable credit card transaction fees; (v) the collection, payment and returns
filing of applicable sales taxes; and (vi) the distribution of a report to the
online retailer detailing related sales activity processed by the Company. The
Company also expects to support traditional physical retailers in developing
their online stores for the sale of software products online. While most
software publishers use the Company's Web hosting services, certain software
publishers use only the Company's "channel services" whereby the software
publishers are provided with digital and physical fulfillment capability through
the Company's extensive network of online retailers. In a typical software
publisher contract, the Company is responsible for: (i) the maintenance of
master copies of software products in a secure format for distribution to
end-users; (ii) a payment to the software publisher for the cost of software
products that the Company distributes through either a retailers' Web site or
through the publisher's host Web site; (iii) the processing of payments made by
end-users; (iv) the delivery of software products to end-users; (v) the payment
of applicable credit card transaction fees; (vi) the collection, payment and
returns filing of applicable sales taxes; and (vii) the distribution of a report
to the software publisher detailing related sales activity processed by the
Company.
As of March 1, 2000, the Company had more than 4,700 contracts with
software publishers and more than 1,300 contracts with online retailers. The
Company's Software and Digital Services Group clients include:
<TABLE>
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SOFTWARE PUBLISHERS ONLINE RETAILERS
- ------------------------------ -------------------------------
<S> <C>
WEB HOSTING AND CHANNEL SERVICES
Adaptec, Inc. CompUSA Inc.
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Autodesk Inc. Cyberian Outpost, Inc.
JASC Software, Inc. Egghead.com, Inc.
ScanSoft, Inc. Micro Warehouse, Inc.
Multiple Zones International, Inc.
Quixtar, Inc.
CHANNEL SERVICES ONLY Staples.com
Lotus Development Corporation US WEST, Inc.
Network Associates, Inc.
QUALCOMM Incorporated
Symantec Corp.
</TABLE>
Within the E-Business Services Group, the Company provides a variety of
electronic commerce services to clients outside of the software industry,
primarily manufacturers, distributors and retailers. These services allow the
client to perform electronic commerce on a business-to-business or
business-to-consumer basis. In a typical E-Business Services contract, the
Company is responsible for: (i) Web commerce system design, hosting and
integration into the client's management system; (ii) the processing of payments
made by end-users; (iii) the communication of orders to the client or the
clients third party fulfillment agency for delivery of the product to end-users;
(iv) the fraud screening and processing of the applicable credit card
transaction to the client's credit card processor; (v) customer service; and
(vi) the distribution of a report to the client detailing related sales activity
processed by the Company.
As of March 1, 2000, the Company had 22 contracts with clients in the
E-Business Services Group, including:
E-BUSINESS SERVICES
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3M Company
Adolph Coors Co.
Fujitsu Ltd.
Sega of America Inc.
The United States Golf Association
Uproar Inc.
SALES AND MARKETING
The Company markets its services directly to clients and prospective
clients. The Company does not operate its own Web store because of its strategy
to serve as a neutral provider of electronic commerce outsourcing solutions.
Generally, the Company's direct marketing to end-users focuses on supporting the
marketing and promotional efforts of its clients in driving traffic to their Web
stores. This direct marketing effort leverages the Company's extensive data
warehouse, which enables the Company to create and quickly implement marketing
programs targeted at specific end-user segments. By providing consistent quality
service, branding client order pages with its name and logo, billing credit card
transactions under the Digital River name and engaging in brand positioning,
advertising and promotion, the Company believes it has established the Digital
River brand as a trusted name for
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electronic software delivery and electronic commerce outsourcing solutions among
current and prospective clients and end-users.
The Company's sales and marketing organization is divided into two groups:
the Software and Digital Services Group and the E-Business Services Group. The
Software and Digital Services Group focuses on software and digital content
publishers and online retailers of all sizes, including traditional physical
retailers, with significant online revenue potential. These sales are typically
complex in nature and involve a lengthy sales cycle. Contracts with larger
clients often involve certain incentives, principally pricing concessions. The
Company makes decisions with respect to contract incentives on a case by case
basis. The E-Business Services Group focuses on manufacturers, distributors and
retailers, generally with total annual revenues of $500 million or more. These
sales are complex in nature and involve a lengthy sales cycle. Both the Software
and Digital Services Group and the E-Business Services Group serve existing
clients and provide them with merchandising and database marketing assistance
designed to increase revenues. As of March 1, 2000, the Company had 114
employees engaged in sales and marketing.
The Company currently markets its services to clients via direct marketing,
print advertising, trade show participation and other media events. The Company
plans to increase its expenditures on direct marketing, seminars and print
advertising, primarily directed at potential E-Business Services clients. In
addition, the Company operates a sales office in the United Kingdom.
TECHNOLOGY
Digital River delivers its electronic commerce outsourcing solution using
its proprietary CNS technology, which enables the sale and distribution of
products via the Internet.
ARCHITECTURE. The Company's scaleable CNS is designed to handle tens of
thousands of different Web commerce systems and millions of products. The CNS
consists of a pool of network servers and a proprietary software application
that serves dynamic Web pages using an Oracle database. The Company's CNS was
designed to scale to support growth by adding CPUs, memory, disk drives and
bandwidth without substantial changes to the application. The CNS software code
is written in modular layers, enabling the Company to quickly adapt in response
to industry changes, including bandwidth opportunities, payment processing
changes, international requirements for taxes and export screening, new
technologies such as Java, XML, DHTML, VRML, SET, banking procedures and
encryption technologies. The CNS product search system allows end-users to
search for items across millions of potential products and thousands of
categories specific to various product specifications, while maintaining a fast
page response that is acceptable to the end-user. The Company uses sophisticated
database indexing coupled with a dynamic cache system to provide flexibility and
speed. These caches help increase the overall speed of each page and facilitate
complex searches across the Company's entire inventory of software products. The
CNS is also been designed to index, retrieve and manipulate all transactions
that flow through the system, including detailed commerce transaction and
end-user interaction data. This enables the Company to create proprietary market
profiles of each end-user and groups of end-users that can be used to create
merchandising campaigns. The Company's CNS is also used for internal purposes,
including reporting and maintenance for fraud detection and prevention, physical
shipping, return authorizations, back order processing and full transaction
auditing and reporting capabilities for all commerce functions.
WEB COMMERCE SYSTEM MAINTENANCE. Clients' Web commerce systems are built
and maintained using the CNS centralized management system. Global changes that
affect all Web commerce systems or groups of Web commerce systems can be made as
easily as changes to an individual Web commerce system. Client Web commerce
systems typically include a main store and may optionally include several "focus
stores" and "channel sites" to which highly targeted traffic may be routed.
Clients may also link specific locations on their Web stores to detailed product
or category areas of the stores in order to better target their end-users'
interests.
SECURITY. Digital River's security systems address access to internal
systems and illegal access to commerce data via the Internet. Internally,
log-ins and passwords are maintained for all systems, with additional log-ins,
passwords and IP access control granted on an individual basis to only the
required commerce areas the person is responsible for. Firewalls prevent
unauthorized access from outside. The Company relies on certain encryption and
authentication technology licensed from third parties to provide secure
transmission of confidential information, such as end-user credit card numbers.
Unix, Oracle and Web server security additionally restrict access from the
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outside to the appropriate transaction data. The CNS security system is designed
not to interfere with the end-user experience. Product wrappers, clearing-house
processing and additional password mechanisms that negatively impact digital
delivery performance are not needed. The CNS security system does not allow
direct access to the clients' products and ensures that an end-user requests
digital delivery through a valid page and has purchased the product.
DATA CENTER OPERATIONS. Continuous data center operations are crucial to
the Company's success. All transaction data is backed up periodically and all
inventory data is archived and kept in fireproof storage facilities. The
Company's network software constantly monitors clients' Web commerce systems and
internal system functions and notifies systems engineers if any unexpected
conditions arise. The Company currently leases seven T1 lines and 4 DS3 lines
from multiple vendors and maintains a policy of adding additional lines if more
than 50% of its bandwidth capacity is utilized. Accordingly, if one line fails
the other lines are able to assume the capacity of the failed line. The
Company's data center is located in a single location at the Company's main
facilities in Eden Prairie, Minnesota. In the event of electrical power failure,
the Company has a back-up power supply system. The Company has also installed a
FM-200 automatic fire suppression system in the data center. The data center
currently incorporates redundant systems consisting of additional servers and
arrays. The Company currently has no automatic switchover in the case of
equipment or software failure, although it has plans to implement further
redundancy in the future.
PRODUCT DEVELOPMENT
Digital River's product development strategy is to enhance the technology
and features of its CNS. To this end, the Company has numerous development
projects in process, including Internet optimization tools, end-user profiling
and collaboration technologies and online interactive customer service. Product
development and operations expenses, which include customer service, data center
operations and telecommunications infrastructure, were $1.5 million, $5.4
million and $16.1 million in 1997, 1998 and 1999, respectively. As of March 1,
2000, the Company employed 91 persons in product development.
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of the CNS and the underlying network
infrastructure. The Internet and the online commerce industry are characterized
by rapid technological change, changes in user and client requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render the Company's existing CNS proprietary technology and systems
obsolete. The Company's success will depend, in part, on its ability to both
license and internally develop leading technologies useful in its business,
enhance its existing services, develop new services and technology that address
the increasingly sophisticated and varied needs of its clients, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of the CNS technology and other
proprietary technology entails significant technical and business risks. The
Company may be unable to use new technologies effectively or adapt its
proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner to
changing market conditions, client requirements or emerging industry standards,
its business could be harmed.
COMPETITION
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future,
particularly in the area of electronic commerce outsourcing both for digital and
software products as well as for industries outside of the software market. The
Company currently competes directly with other providers of electronic commerce
solutions, including CyberSource Corporation, Preview Systems, Inc.,
ReleaseNow.com Corporation and ShopNow.com, Inc. The Company also competes
indirectly with software companies, system integrators and application service
providers that offer tools and services for electronic commerce, including
companies that provide a broad range of Internet and server solutions such as
Microsoft Corporation and Netscape Communications Corporation. The Company also
competes indirectly with a large number of companies that provide tools and
services enabling one or more of the transaction processing functions of
electronic commerce, including transaction control, data security, customer
interaction and database marketing, such as BroadVision, Inc., Open Market,
Inc., CommerceOne, Inc., IBM Global Services, Scient Corp., US Web/CKS
9.
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Corporation, US Internetworking, Corio, Inc. and Qwest Communications
International Inc. In addition to direct competition with other transaction
processing providers and enablers and indirect competition with other providers
of electronic commerce software and systems, the Company competes with companies
that sell and distribute software products via the Internet, including
Amazon.com, Inc., beyond.com Corporation, Ingram Micro Inc. and Tech Data
Corporation. The Company also competes with companies such as AltaVista Company,
a subsidiary of CMGI, America Online, Inc., Excite@Home, Go.com, Lycos, Inc. and
Yahoo! Inc., which specialize in electronic commerce or derive a substantial
portion of their revenues from electronic commerce and may themselves offer, or
provide means for others to offer, software products.
The Company believes that the principal competitive factors in its market
are breadth of services and software product offerings, software publisher and
online retailer relationships, brand recognition, system reliability and
capacity, price, customer service, speed and accessibility and ease of use,
convenience and speed of fulfillment. The online retailers and the other
companies listed above may compete directly with the Company by adopting a
similar business model. Moreover, while some of these companies are also clients
or potential clients of the Company, they may compete with the Company's
electronic commerce outsourcing solution to the extent that they develop
electronic commerce systems or acquire such systems from other software vendors
or service providers.
Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, larger, well-established and well-financed entities may acquire,
invest in or form joint ventures with online competitors as the use of the
Internet and other online services increases. In addition, new technologies and
the expansion of existing technologies, such as price comparison programs that
select specific titles from a variety of Web sites, may direct end-users to
online retailers that compete with the Company, which would increase competitive
pressures on the Company. Increased competition may result in reduced operating
margins, as well as a loss of market share. Further, as a strategic response to
changes in the competitive environment, the Company may from time to time make
certain pricing, service or marketing decisions or acquisitions that could harm
its business. The Company may be unable to compete successfully against current
and future competitors, and any inability to do so could harm the Company's
business.
INTELLECTUAL PROPERTY
The Company regards trademarks, copyrights, trade secrets and other
intellectual property as critical to its success, and relies on trademark, trade
secret protection and confidentiality and license agreements with its employees,
clients, partners and others to protect its proprietary rights. The Company
seeks to protect its proprietary position by, among other methods, filing United
States and foreign patent applications related to its proprietary technology,
inventions and improvements that are important to the development of its
business. Proprietary rights relating to the Company's technologies will be
protected from unauthorized use by third parties only to the extent they are
covered by valid and enforceable patents or are effectively maintained as trade
secrets.
The Company currently has four United States patents issued and nine U.S.
and two foreign patents pending in a number of areas of electronic commerce. The
laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States. The
patent position of high technology companies involves complex legal and factual
questions and, therefore, their validity and enforceability cannot be predicted
with certainty. The Company's patents may be challenged, invalidated, held
unenforceable or circumvented, and the rights granted thereunder may not provide
proprietary protection or competitive advantages to the Company against
competitors with similar technology. Furthermore, others may independently
develop similar technologies or duplicate any technology developed by the
Company. The Company has three registered trademarks, including "Digital River,"
and seven trademark registrations pending. Effective trademark and trade secret
protection may not be available in every country in which the Company's products
and services are made available online. The steps taken by the Company to
protect its proprietary rights may be inadequate and third parties may infringe
or misappropriate the Company's trade secrets, trademarks, trade dress and
similar proprietary rights. Any significant failure by the Company to protect
its intellectual property could harm on the Company's business. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others. Litigation could result
in substantial costs and diversion of management and technical resources, which
could harm the Company's business.
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In addition, other parties may assert infringement claims against the
Company. From time to time, the Company may receive notice of claims of
infringement of other parties' proprietary rights. The defense of any claims,
whether these claims are with or without merit, could be time-consuming, result
in costly litigation and diversion of technical and management personnel, cause
product shipment delays or require the Company to develop non-infringing
technology or enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may be unavailable on terms acceptable to the Company
or at all. In the event of a successful claim of infringement against the
Company and the failure or inability of the Company to develop non-infringing
technology or license the infringed or similar technology on a timely basis, the
Company's business could be harmed.
EMPLOYEES
As of March 1, 2000 the Company employed 317 people, including 28 in
administration, 175 in product development and operations and 114 in sales and
marketing. The Company also employs independent contractors and other temporary
employees. None of the Company's employees is represented by a labor union, and
the Company considers its employee relations to be good. Competition for
qualified personnel in the Company's industry is intense, particularly among
software development and other technical staff. The Company believes that its
future success will depend in part on its continued ability to attract, hire and
retain qualified personnel.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the Company's
executive officers as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Joel A. Ronning 43 Chief Executive Officer
Perry W. Steiner 34 President
Robert E. Strawman 40 Chief Financial Officer and Treasurer
Jay A. Kerutis 40 Executive Vice President, Software and Digital
Commerce Services Division
Kelly J. Wical 43 Chief Technology Officer
Draper M. Jaffray 36 Vice President of Business Development
Gregory R.L. Smith 33 Vice President of Finance and Secretary
</TABLE>
Mr. Ronning founded the Company in February 1994 and has been Chief
Executive Officer and a director of the Company since that time. From February
1994 to July 1998, Mr. Ronning was also President of the Company. From May 1995
to December 1999, Mr. Ronning served as Chairman of the Board of Directors of
Tech Squared Inc., a direct catalog marketer of software and hardware products.
From May 1995 to July 1998, Mr. Ronning served as Chief Executive Officer, Chief
Financial Officer and Secretary of Tech Squared. From May 1995 to August 1996,
Mr. Ronning also served as President of Tech Squared. Mr. Ronning founded
MacUSA, Inc., a wholly-owned subsidiary of Tech Squared, and served as a
director of MacUSA from April 1990 to December 1999. From April 1990 to July
1998, Mr. Ronning also served as the Chief Executive Officer of MacUSA. Mr.
Ronning also serves as a director of the Software Publishers Association and
JASC, Inc.
Mr. Steiner joined the Company in July 1998 as President and has
served as a director of the Company since April 1998. From January 1997 to July
1998, Mr. Steiner served as Vice President of Wasserstein Perella & Co., Inc.,
an investment banking firm, and as Vice President of Wasserstein Perella
Ventures, Inc., the general partner of Wasserstein Adelson Ventures, L.P., a
venture capital fund. From June 1993 to December 1996, Mr. Steiner was a
principal of TCW Capital, a group of leveraged buyout funds managed by Trust
Company of the West. Mr. Steiner serves as a director of LapLink.com, Inc. and
was a director of Tech Squared from December 1998 to June 1999.
Mr. Strawman joined the Company in April 1998 as Chief Financial
Officer and Treasurer. From September 1995 to April 1998, Mr. Strawman served as
Director of Finance and Vice President of Finance for Caribou Coffee Company,
Inc., a gourmet coffee retailer. From 1989 to 1995, Mr. Strawman held various
financial positions at Software Etc. Stores, Inc., a specialty retailer of
software, most recently as Chief Financial Officer.
Mr. Kerutis jointed the Company in February 1999 as Vice President of
Sales and has been Executive Vice President, Software and Digital Commerce
Services Division since January 2000. From March 1997 to February 1999, Mr.
Kerutis was Vice President - Retail Channel for Merisel Americas, Inc. From
April 1995 to March 1997, Mr. Kerutis was Vice President - Sales and Marketing
for New Media Corporation. From October 1993 to April 1995, Mr. Kerutis served
as Director - Sales for Merisel Americas, Inc.
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Mr. Wical joined the Company in April 1997 as Chief Technology
Officer. From 1992 to April 1997, Mr. Wical was Director of Development and
Chief Scientist/Architect of the ConText Server Division of Oracle Corporation.
From 1987 to 1992, Mr. Wical was co-founder and Vice President of Research and
Development for Artificial Linguistics, Inc., a developer of text management
software.
Mr. Jaffray joined the Company in December 1996 as Vice President of
Business Development. From January 1996 to December 1996, Mr. Jaffray was a
partner in The Firm, a computer products manufacturers representative. From 1991
to 1995, Mr. Jaffray served as Director of Sales for Tech Squared.
Mr. Smith joined the Company as Controller in June 1997 and has served
as Vice President of Finance since June 1999. Since December 1997, Mr. Smith has
also served as Secretary. From November 1995 to June 1997, Mr. Smith was
Manager, External Reporting and Investor Relations at Secure Computing
Corporation, a developer of network and Internet security products. From June
1988 to November 1995, Mr. Smith held various positions with Ernst & Young LLP.
RISK FACTORS
In addition to the other information provided in this report, the
following risk factors should be considered carefully in evaluating the Company
and our business.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE ARE ENCOUNTERING NUMEROUS RISKS
THAT WE MAY FAIL TO SUCCESSFULLY ADDRESS
We have a limited operating history. We were incorporated in February
1994 and conducted our first online sale through a client's Web store in August
1996. Our business and prospects must be considered in light of the risks
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as electronic commerce. Some
of these risks relate to our ability to:
- maintain or develop relationships with software and online
retailers;
- maintain or develop relationships with E-Business clients and
prospects;
- execute our business and marketing strategy;
- continue to develop and upgrade our technology and
transaction-processing systems;
- provide superior customer service and order fulfillment;
- respond to competitive developments; and
- retain and motivate qualified personnel.
We may not be successful in addressing these risks, and if we are not
successful, our business will suffer. Our current and future expense levels are
based largely on our planned operations and our estimates of future sales. It is
difficult, however, for us to accurately forecast future sales, because our
business is still new and our market is still developing. We may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. As a result, any significant shortfall in sales would immediately
harm our business. As a result of our rapidly evolving business and our limited
operating history, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful and investors should not rely upon our
historical results as an indication of future performance.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT OUR LOSSES TO CONTINUE FOR THE
FORESEEABLE FUTURE
We have incurred significant losses since we were formed. As of
December 31, 1999, we had an accumulated deficit of approximately $45.8 million.
We intend to continue to expend significant financial and management resources
on the development of additional services, sales and marketing, improved
technology and expanded operations. For example, we have invested over $15
million to improve our technology infrastructure so that we can offer our
clients comprehensive e-commerce outsourcing solutions. As a result of these
expenditures, we expect operating losses and negative cash flows to continue for
the foreseeable future. In addition, we anticipate our operating losses may
increase from current levels. Our sales may not increase or even continue at
their current level, and we may not be profitable or generate cash from
operations in future periods.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
12.
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Our quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside our control. Some of these factors include:
our ability to attract and retain software publishers and online
retailers as clients;
our ability to attract and retain E-Business clients;
the introduction of new Web sites, Web stores, services or products by
us or by others;
price competition and margin erosion;
the rate at which the online market for the purchase of software
products continues to emerge;
our ability to continue to upgrade and develop our systems and
infrastructure to meet emerging market needs and remain competitive in
our service offerings;
termination of any account that represents a significant portion of
our sales;
technical difficulties or system downtime;
our ability to attract new personnel as needed as our business grows;
our ability to increase the proportion of sales from online retailers,
which sales generally carry higher gross margins;
the failure of Internet bandwidth to increase over time or any
increase in the cost of Internet bandwidth; and
U.S. and foreign regulations relating to our business.
We also may offer favorable economic terms to certain software
publishers and online retailers in order to attract or retain their business,
which would reduce our gross margins. Due to these factors, our annual or
quarterly operating results may not meet the expectations of securities analysts
and investors. If this happens, the trading price of the common stock would
likely significantly decline.
A LOSS OF ANY CLIENT THAT ACCOUNTS FOR A LARGE PORTION OF OUR SALES
COULD CAUSE OUR REVENUES TO DECLINE
Sales initiated through the Web stores of three software publisher
clients collectively accounted for approximately 25% of our sales in 1998 and
approximately 20% of our sales in 1999. Contracts with these clients are
generally short term in nature. If any one of these contracts is not renewed or
otherwise ends, our revenues could decline and our business could be harmed.
OUR SALES CYCLE IS LENGTHY
We market our services directly to software publishers, online
retailers and E-Business prospects. These relationships are typically complex
and take time to finalize. Due to operating procedures in many large
organizations, a significant amount of time may pass between selection of our
products and services by key decision makers and the signing of a contract. As a
result, the period between the initial sales call and the signing of a contract
with significant sales potential typically ranges from six to twelve months, can
be longer and is difficult to predict. Delays in signing contracts with these
potential clients could harm our business.
THERE ARE A NUMBER OF RISKS ASSOCIATED WITH ELECTRONIC SOFTWARE DELIVERY, OR
ESD, INCLUDING THE MARKET'S POTENTIAL FAILURE TO ACCEPT ESD
Our success will depend in large part on growth in end-user acceptance
of ESD as a method of distributing software products. ESD is a relatively new
method of distributing software products and the growth and market acceptance of
ESD is highly uncertain and subject to a number of risks. Factors that will
influence market acceptance of ESD include:
- the availability of sufficient bandwidth to enable purchasers to
rapidly download software products;
- the cost of time-based Internet access;
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- the number of software products that are available for purchase
through ESD as compared to those available through physical
delivery; and
- the level of end-user comfort with the process of downloading
software via the Internet, including the ease of use and lack of
concern about transaction security.
If ESD does not achieve widespread market acceptance, our business
will be harmed. Even if ESD achieves widespread acceptance, we cannot be certain
that we will overcome the substantial existing and future technical challenges
associated with electronically delivering software reliably and consistently on
a long-term basis. Our failure to do so would harm our business.
WE ARE DEPENDENT ON THE CONTINUED GROWTH OF ELECTRONIC COMMERCE AND DEVELOPMENT
OF THE INTERNET INFRASTRUCTURE
We depend on the growing use and acceptance of the Internet as an
effective medium of commerce by end-users. Rapid growth in the use of and
interest in the Internet and other online services is a recent development. The
acceptance and use of the Internet and other online services may not continue to
develop and a sufficiently broad base of consumers may not adopt, and continue
to use, the Internet and other online services as a medium of commerce. We rely
on purchasers who have historically used traditional means of commerce to
purchase goods or transact business. If we are to be successful, these
purchasers must accept and use the Internet as a means of purchasing goods and
services and exchanging information and we cannot predict the rate at which
these purchasers will do so.
The Internet may fail as a commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies and performance
improvements. If the number of Internet users or their use of Internet resources
continues to grow, it may overwhelm the existing Internet infrastructure. Delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity or increased governmental regulation could
also have a similar effect. In addition, growth in Internet usage that is not
matched by comparable growth in the infrastructure supporting Internet usage
could result in slower response times or impair usage of the Internet.
WE ARE DEPENDENT ON SOFTWARE PUBLISHERS
We are heavily dependent upon the software publishers that supply us
with software, and the availability of this software is unpredictable. Our
contracts with our software publisher clients are generally one year in
duration, with an automatic renewal provision for additional one-year periods,
unless we are provided with a written notice at least 90 days before the end of
the contract. As is common in our industry, we have no long-term or exclusive
contracts or arrangements with any software publishers that guarantee the
availability of software products. We cannot be certain that the software
publishers that currently supply software to us will continue to do so or that
we will be able to establish new relationships with software publishers. If we
cannot develop and maintain satisfactory relationships with software publishers
on acceptable commercial terms, if we are unable to obtain sufficient quantities
of software, if the quality of service provided by these software publishers
falls below a satisfactory standard or if software returned to us exceeds our
clients' expectations, our business could be harmed.
WE ARE DEPENDENT ON ONLINE RETAILERS
Our strategy is dependent upon increasing our sales of software
products through online retailers. We have historically generated substantially
all of our sales from the sale of software to end-users that were initiated
through the Web stores of our software publisher clients. In 1999, less than 8%
of our sales were generated through the Web stores of our online retailer
clients. We may not successfully establish relationships with additional online
retailers and our current relationships may not continue. If we are unable to
expand our relationships with online retailers, we will likely be unable to
continue to grow our business and establish meaningful market share.
WE ARE DEPENDENT ON E-BUSINESS CLIENTS
Our strategy is also dependent upon increasing fee and service
revenues from E-Business clients. Sales related to E-Business clients were less
than 3% in 1999. We may not succeed in establishing and maintaining
relationships with sufficient numbers of E-Business clients to support our
investments in technology and infrastructure. If we are unable to attract and
retain these clients, our business will suffer.
WE MAY BE UNABLE TO SUCCESSFULLY IMPLEMENT OUR DEVELOPMENT AND ACQUISITION
STRATEGY
To extend our e-commerce outsourcing capabilities, we have developed,
and intend to continue developing, our e-Business services. We have also
acquired, and intend to continue acquiring, companies that provide
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outsourcing services to shareware publishers. These business initiatives require
a significant expenditure of management time and sales, marketing and product
development funds. These expenditures may disrupt our ongoing business, distract
management and make it difficult to maintain standards, controls and procedures.
If we make acquisitions outside of our core business, assimilating the acquired
technology, services or products into our operations could be difficult. If we
are unable to successfully implement our new business initiatives, we will not
generate a profitable return on our investment and we will be unable to gain
meaningful market share. If a significant number of clients of the acquired
companies cease doing business with us, our business will suffer.
SYSTEM FAILURES COULD REDUCE THE ATTRACTIVENESS OF OUR PRODUCT AND SERVICE
OFFERINGS
We provide commerce, marketing and delivery services to our clients
and end-users through our CNS transaction-processing and client management
systems. These systems also maintain an electronic inventory of products and
gather consumer marketing information. The satisfactory performance, reliability
and availability of the CNS and the underlying network infrastructure are
critical to our operations, our level of customer service, and our reputation
and ability to attract and retain clients. Our systems and operations are
vulnerable to damage or interruption from:
- fire, flood and other natural disasters; and
- power loss, telecommunications failure, break-ins and similar
events.
We presently have no offsite back-up facilities and do not carry
sufficient business interruption insurance to fully compensate us for losses
that may occur. Despite the use of network security devices, our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions, delays, loss of data or the
inability to accept and fulfill end-user orders. Any systems interruption that
impairs our ability to accept and fill customer orders reduces the
attractiveness of our product and service offerings to clients and end-users,
which could harm our business.
FAILURE TO DEVELOP OUR TECHNOLOGY TO ACCOMMODATE INCREASED CNS TRAFFIC COULD
REDUCE DEMAND FOR OUR SERVICES
We have experienced periodic interruptions, affecting all or a portion
of our systems, which we believe will continue to occur from time to time. We
periodically enhance and expand our technology and transaction-processing
systems, and network infrastructure and other technologies to accommodate
increases in the volume of traffic on the CNS. We may be unable to improve and
increase the capacity of our network infrastructure. We may be unable to
anticipate increases, if any, in the use of the CNS or to expand and upgrade its
systems and infrastructure to accommodate such increases. Our inability to add
software and hardware or to develop and upgrade existing technology,
transaction-processing systems or network infrastructure to handle increased
traffic on the CNS may cause unanticipated system disruptions, slower response
times and poor customer service, including problems filling customer orders, any
of which could harm our business. In addition, additional network capacity may
not be available from third-party suppliers when we need it. Our network and our
suppliers' networks may be unable to maintain an acceptable data transmission
capability, especially if demands on the CNS increase. Our failure to maintain
an acceptable data transmission capability could significantly reduce demand for
our services, which would impair our business.
SECURITY BREACHES COULD HINDER OUR ABILITY TO SECURELY TRANSMIT CONFIDENTIAL
INFORMATION
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary for secure transmission of
confidential information, such as customer credit card numbers. A party who
circumvents our security measures could misappropriate proprietary information
or interrupt our operations. Any compromise or elimination of our security could
harm our business.
We may be required to expend significant capital and other resources
to protect against security breaches or to address problems caused by breaches.
Concerns over the security of the Internet and other online transactions and the
privacy of users may also inhibit the growth of the Internet and other online
services generally, and the Web in particular, especially as a means of
conducting commercial transactions. To the extent that our activities or those
of third-party contractors involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Our security measures may not prevent security breaches and failure to prevent
security breaches could cause our business to suffer.
CURRENT AND POTENTIAL COMPETITORS COULD REDUCE OUR OPERATING MARGINS AND MARKET
SHARE
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The electronic commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future, particularly in
the area of electronic sale and distribution of software products. We currently
compete directly with other providers of electronic commerce solutions,
including CyberSource Corporation, Preview Systems, Inc., ReleaseNow.com
Corporation and ShopNow.com, Inc. We compete indirectly with software companies,
system integrators and application service providers that offer tools and
services for electronic commerce, including companies that provide a broad range
of Internet and server solutions such as Microsoft Corporation and Netscape
Communications Corporation. We also compete indirectly with a large number of
companies that provide tools and services enabling one or more of the
transaction processing functions of electronic commerce, such as transaction
control, data security, customer interaction and database marketing, such as
BroadVision, Open Market, CommerceOne, IBM Global Services, Scient, US Web/CKS,
US Internetworking, Corio and Qwest. In addition to direct competition with
other transaction processing providers and enablers and indirect competition
with other providers of electronic commerce software and systems, we compete
with companies that sell and distribute software products via the Internet,
including Amazon.com, Inc., beyond.com Corporation, Ingram Micro Inc. and Tech
Data Corporation. We also compete with companies such as AltaVista, a subsidiary
of CMGI, America Online, Inc., Excite, Inc., Infoseek Corporation, Lycos, Inc.
and Yahoo! Inc., which specialize in electronic commerce or derive a substantial
portion of their revenues from electronic commerce and may themselves offer, or
provide means for others to offer, software products.
We believe that the principal competitive factors in our market
include:
- breadth of service and product offerings;
- software and shareware publisher and online retailer
relationships;
- brand recognition;
- system reliability and capacity;
- price;
- customer service;
- speed, accessibility and ease of use;
- speed to market;
- scaleability;
- convenience; and
- speed of fulfillment.
The online retailers and the other companies listed above may compete
directly with us by adopting a similar business model. Moreover, while some of
these companies are also clients or potential clients of ours, they may compete
with our electronic commerce outsourcing solution if they develop electronic
commerce systems or acquire such systems from other software and shareware
vendors or service providers.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. In addition,
larger, well-established and well-financed entities may acquire, invest in or
form joint ventures with online competitors as the use of the Internet and other
online services increases. New technologies and the expansion of existing
technologies, such as price comparison programs that select specific titles from
a variety of Web sites, may direct end-users to online retailers that compete
with us, which would increase competitive pressures on us. Increased competition
may result in reduced operating margins, as well as a loss of market share.
Further, in response to changes in the competitive environment, we may from time
to time make pricing, service or marketing decisions or acquisitions that could
harm our business. We may be unable to compete successfully against current and
future competitors, and any inability to do so could harm our business.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE IN ORDER TO SUCCEED
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of the CNS and the underlying network
infrastructure. The Internet and the electronic commerce industry are
characterized by rapid technological change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and
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practices that could render our technology and systems obsolete. Our success
will depend, in part, on our ability to both license and internally develop
leading technologies to enhance our existing services, develop new products,
services and technologies that address the increasingly sophisticated and varied
needs of our clients, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The
development of the CNS technology and other proprietary technology involves
significant technical and business risks. We may fail to use new technologies
effectively or adapt our proprietary technology and systems to customer
requirements or emerging industry standards. If we are unable to adapt to
changing market conditions, client requirements or emerging industry standards,
our business could be harmed.
WE MUST EFFECTIVELY MANAGE OUR RAPID GROWTH IN ORDER TO SUCCEED
We have rapidly and significantly expanded our operations and
anticipate that further significant expansion will be required to address
potential growth in our client base and market opportunities. In 1999, we
increased our number of employees from 116 to 278. This expansion is placing a
significant strain on our managerial, operational and financial resources. Our
new employees include a number of key managerial, technical and operations
personnel who we have not yet fully integrated. We recently acquired three
shareware businesses that required us to integrate two new offices and a number
of new employees. We expect to add additional key personnel in the near future,
including direct sales, marketing and technical personnel. To manage the
expected growth of our operations and personnel, we will be required to:
- improve existing and implement new operational, financial and
management controls, reporting systems and procedures;
- install new management information systems; and
- train, motivate and manage our employees.
We may not be able to install management information and control
systems in an efficient and timely manner, and our current or planned personnel,
systems, procedures and controls may not be adequate to support our future
operations. In addition, we may not be able to hire, train, retain, motivate and
manage required personnel or to successfully identify, manage and exploit
existing and potential market opportunities. If we are unable to manage growth
effectively, our business will be harmed.
OUR CHIEF EXECUTIVE OFFICER IS CRITICAL TO OUR BUSINESS AND HE MAY NOT REMAIN
WITH US IN THE FUTURE
Our future success significantly depends on the continued services and
performance of our senior management, particularly Joel A. Ronning, our Chief
Executive Officer. Our performance also depends on our ability to retain and
motivate our other executive officers and key employees. The loss of the
services of any of our executive officers or other key employees could harm our
business. We have long-term employment agreements only with Mr. Ronning and
Perry W. Steiner, our President. See "Management--Employee Agreements." Our
future success also depends on our ability to identify, attract, hire, train,
retain and motivate other highly skilled technical, managerial, operations,
merchandising, sales and marketing and customer service personnel. Competition
for personnel is intense, and we may be unable to successfully attract,
assimilate or retain sufficiently qualified personnel. The failure to retain and
attract the necessary personnel could harm our business.
PROTECTING OUR INTELLECTUAL PROPERTY IS CRITICAL TO OUR SUCCESS
Trademarks, patents, copyrights, trade secrets and other intellectual
property are critical to our success, and we rely on trademark, trade secret
protection and confidentiality and license agreements with our employees,
clients, partners and others to protect our proprietary rights. We seek to
protect our proprietary position by, among other methods, filing United States
and foreign patent applications related to our proprietary technology,
inventions and improvements that are important to the development of our
business. We currently have four United States patents issued and nine U.S. and
two foreign patents pending in a number of areas of electronic commerce.
Proprietary rights relating to our technologies will be protected from
unauthorized use by third parties only to the extent that they are covered by
valid and enforceable patents or copyrights or are effectively maintained as
trade secrets. The laws of some foreign countries do not protect our
intellectual property rights to the same extent as do the laws of the United
States. The patent position of high technology companies involves complex legal
and factual questions and, therefore, we cannot predict their validity and
enforceability with certainty. Even if issued, our patent applications may be
challenged, invalidated, held unenforceable or circumvented. Further, rights
granted under future patents may not provide us with proprietary protection or
competitive advantages against competitors with similar technology. Others may
independently develop similar technologies or duplicate technologies developed
by us.
We have three registered trademarks, including "Digital River," and
seven trademark registrations pending. Effective trademark and trade secret
protection may not be available in every country in which our products and
17.
<PAGE>
services are made available online. The steps we have taken to protect our
proprietary rights may be inadequate, and third parties may infringe or
misappropriate our trade secrets, trademarks, trade dress and similar
proprietary rights. In addition, others may independently develop substantially
equivalent intellectual property. Any significant failure to protect our
intellectual property in a meaningful manner could harm our business. In
addition, litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Litigation could result in
substantial costs and diversion of management and technical resources, which
could harm our business.
CLAIMS OF INFRINGEMENT OF OTHER PARTIES' INTELLECTUAL PROPERTY RIGHTS COULD
REQUIRE US TO EXPEND SIGNIFICANT RESOURCES
From time to time we may receive notice of claims of infringement of
other parties' proprietary rights. Any future assertions or prosecutions of
claims like these could require us to expend significant financial and
managerial resources. Defending any claim, whether valid or not, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause product shipment delays or require us to develop
non-infringing technology or enter into royalty or licensing agreements. Royalty
or licensing agreements, if required, may be unavailable on terms acceptable to
us, or at all. If a third party succeeds in any infringement action against us
and we fail or are unable to develop non-infringing technology or license the
infringed or similar technology on a timely basis, our business could be harmed.
CLAIMS AGAINST US RELATED TO THE SOFTWARE PRODUCTS THAT WE DELIVER
ELECTRONICALLY COULD ALSO REQUIRE US TO EXPEND SIGNIFICANT RESOURCES
Claims may be made against us for negligence, copyright or trademark
infringement or other theories based on the nature and content of software
products that are delivered electronically and subsequently distributed to
others. Although we carry general liability insurance, our insurance may not
cover potential claims of this type or may not be adequate to cover all costs
incurred in defense of potential claims or to indemnify us for all liability
that may be imposed. Any costs or imposition of liability that is not covered by
insurance or in excess of insurance coverage could harm our business.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO ACHIEVE OUR BUSINESS OBJECTIVES
We require substantial working capital to fund our business. We have
had significant operating losses and negative cash flow from operations since
inception and expect to continue to do so for the foreseeable future. We believe
that our existing capital resources will be sufficient to meet our capital
requirements for at least the next 12 months. However, our capital requirements
depend on several factors, including the rate of market acceptance of our
products, the ability to expand our client base, the growth of sales and
marketing and other factors. If capital requirements vary materially from those
currently planned, we may require additional financing sooner than anticipated.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution, or these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
Additional financing may not be available when needed on terms favorable to us
or at all. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures, which
could harm our business.
CHANGES IN GOVERNMENT REGULATION COULD LIMIT OUR INTERNET ACTIVITIES OR RESULT
IN ADDITIONAL COSTS OF DOING BUSINESS OVER THE INTERNET
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, export control laws and laws or regulations directly applicable to
electronic commerce. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet covering issues such as:
- user privacy;
- pricing;
- content;
- copyrights;
- distribution; and
- characteristics and quality of products and services.
18.
<PAGE>
Furthermore, the growth and development of the market for electronic
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of additional laws or regulations may decrease the growth of the
Internet or other online services, which could, in turn, decrease the demand for
our products and services and increase our cost of doing business, or otherwise
harm our business.
The applicability of existing laws governing issues such as property
ownership, copyrights, encryption and other intellectual property issues,
taxation, libel, export or import matters, obscenity and personal privacy to the
Internet is uncertain. The vast majority of these laws were adopted prior to the
advent of the Internet and related technologies. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes to the laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the Internet
marketplace. Uncertainty could reduce demand for our services or increase the
cost of doing business due to increased costs of litigation or increased service
delivery costs.
In addition, as our services are available over the Internet in
multiple states and foreign countries, these jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each state or
foreign country. We are qualified to do business only in Connecticut, Minnesota
and Washington. Failure to qualify as a foreign corporation in a jurisdiction
where we are required to do so could subject us to taxes and penalties and could
result in our inability to enforce contracts in these jurisdictions. New
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other
electronic services could harm our business.
WE MAY NOT SUCCEED IN DEVELOPING A SUCCESSFUL INTERNATIONAL PRESENCE
Although we sell software products and services to end-users outside
the United States, we might not succeed in expanding our international presence.
Conducting business outside of the United States is subject to certain risks,
including:
- changes in regulatory requirements and tariffs;
- reduced protection of intellectual property rights;
- difficulties in distribution;
- the burden of complying with a variety of foreign laws; and
- political or economic constraints on international trade or
instability.
In addition, some software exports from the United States are subject
to export restrictions as a result of the encryption technology in the software
and we may become liable to the extent we violate these restrictions. We may be
unable to market, sell and distribute our products and services in local markets
and we cannot be certain that one or more of these factors will not harm our
future international operations, and consequently, our business.
NEW OBLIGATIONS TO COLLECT OR PAY SALES TAX COULD HARM OUR BUSINESS
We do not currently collect sales, use or other similar taxes with
respect to ESD or shipments of software products into states other than
Connecticut, Minnesota and Washington. However, one or more local, state or
foreign jurisdictions may seek to impose sales or use tax collection obligations
on out-of-state companies like ours that engage in electronic commerce. Any new
operation in states outside Connecticut, Minnesota and Washington could subject
shipments into those states to state sales or use taxes under current or future
laws. In addition, any failure by an E-Business client to collect obligatory
sales or use taxes could cause the relevant jurisdiction to attempt imposing
that obligation on us. A successful assertion by one or more states or any
foreign country that we should collect sales, use or other taxes on the sale of
merchandise through ESD or E-Business or shipments of software could harm our
business.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE DUE TO BROAD MARKET AND INDUSTRY
FACTORS BEYOND OUR CONTROL
The trading price of our common stock has been and is likely to
continue to be highly volatile and could be subject to wide fluctuations in
response to factors such as:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
19.
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- new products or services that we or our competitors offer;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online commerce
industries;
- changes in the economic performance and/or market valuations of
other Internet, online service industries;
- changes in the economic performance and/or market valuations of
other Internet, online service or retail companies;
- our announcements of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National
Market and the market for Internet-related and technology companies in
particular, has experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of these
companies. The trading prices of many technology companies' stocks are at or
near historical highs and these trading prices and multiples are substantially
above historical levels. These trading prices and multiples may not be
sustained. These broad market and industry factors may cause the market price of
our common stock to decline, regardless of our actual operating performance. In
the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
that company. Litigation, if instituted, could result in substantial costs and a
diversion of management's attention and resources, which would harm our
business.
PROVISIONS OF OUR CHARTER DOCUMENTS, OTHER AGREEMENTS AND DELAWARE LAW MAY
INHIBIT POTENTIAL ACQUISITION BIDS FOR US
Certain provisions of our Amended and Restated Certificate of
Incorporation, Bylaws, other agreements and Delaware law could make it more
difficult for a third party to acquire us, even if a change in control would be
beneficial to our stockholders.
YEAR 2000 PROBLEMS WITH OUR INTERNAL SYSTEMS AND THIRD-PARTY SYSTEMS OF
SUPPLIERS COULD CREATE SIGNIFICANT POTENTIAL LIABILITY FOR US AND REQUIRE US TO
EXPEND SUBSTANTIAL MANAGEMENT AND FINANCIAL RESOURCES
Many installed computer systems and software products were programmed
to accept only two digits in the date code field. As of January 1, 2000, it
became necessary for these code fields to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20."
Like many other companies, Year 2000 computer issues create risks for
us. If our internal management information systems and external electronic
commerce information systems do not correctly recognize the process date
information beyond the year 1999, there could be an adverse impact on our
operations. To address potential Year 2000 issues with our internal and external
systems, we have evaluated these systems. We believe we have completed all
activities to evaluate and remediate year 2000 problems. We have also worked
with key suppliers of products and services to determine that their operations
and products are Year 2000 compliant. The failure of a major supplier to become
Year 2000 Compliant on a timely basis, or a conversion that is incompatible with
our systems could harm our business. In addition, our business may be harmed if
our end-users are unable to use their credit cards due to the Year 2000 issues
that are not rectified by their credit card vendors.
We have a contingency plan for handling year 2000 problems that were
not detected and corrected prior to their occurrence, and we are continuing to
assess any exposure areas in order to determine what additional steps are
advisable. We are prepared to use backup systems and have developed other
alternative contingency plans for other critical functions where computer
systems are essential. To date, we have not experienced any material year 2000
problems. However, if all of our potential year 2000 problems were not properly
identified or if adequate assessment and remediation are not timely effected
with respect to any year 2000 problems, our business could be harmed. Moreover,
any year 2000 compliance problems facing our suppliers or vendors could also
harm our business.
20.
<PAGE>
ITEM 2. PROPERTIES.
The Company currently leases approximately 55,000 square feet of
office and warehouse space in two facilities in Eden Prairie, Minnesota. Both
agreements expire on July 31, 2003. The Company also leases on a month to month
basis approximately approximately 900 square feet of office space in suburban
London that houses its European sales office. In addition, the Company leases on
a short term basis offices in Cheshire, Connecticut and Issaquah, Washington
with space of 1,700 and 800 square feet, respectively. The Company believes that
its facilities will be adequate to accommodate the Company's needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company may be involved in litigation relating
to claims arising out of its ordinary course of business. The Company presently
is not subject to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "DRIV." Public trading of the Common Stock commenced on August
11, 1998. Prior to that, there was no public market for the Common Stock. The
following table sets forth, for the periods indicated, the high and low sale
price per share of the Common Stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
1998 HIGH LOW
<S> <C> <C>
Third Quarter (from August 11, 1998) $ 13.25 $ 5.00
Fourth Quarter $ 44.00 $ 5.63
1999
First Quarter $ 61.38 $ 27.44
Second Quarter $ 51.38 $ 19.56
Third Quarter $ 36.13 $ 18.25
Fourth Quarter $ 43.63 $ 19.63
2000
First Quarter (through March 10, 2000) $ 37.38 $ 23.81
</TABLE>
As of March 10, 2000 there were approximately 332 holders of record of
the Company's Common Stock. On March 10, 2000, the last sale price reported on
the Nasdaq National Market System for the Company's Common Stock was $31.38 per
share.
The Company has never declared or paid any cash dividends on its
capital stock. The Company intends to retain any future earnings to support
operations and to finance the growth and development of the Company's business
and does not anticipate paying cash dividends for the foreseeable future.
Since January 1, 1999, the Company has sold and issued the following
unregistered securities:
In February 1999, the Company granted to Linda Ireland, a vice
president of the Company, outside of its equity incentive plans, options
representing an aggregate of 61,296 shares of the Company's Common Stock at an
exercise price of $29.1875 per share. Ms. Ireland left the Company in October
1999 prior to exercising any portion of this option and the option was cancelled
in full.
From January 5, 1999 to September 3, 1999, warrants were exercised
to purchase 55,734 shares of Common Stock with a weighted average exercise
price of $2.50.
In April 1999, pursuant to an Agreement and Plan of Merger by and
among the Company, Maagnum Internet Group, Inc., a Connecticut corporation
("Maagnum"), and Cyrus Maaghul, the sole shareholder of Maagnum, Maagnum merged
with and into the Company (the "Merger"). At the effective time of the Merger,
21.
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Mr. Maaghul's shares of Maagnum common stock converted into the right to receive
from the Company cash and 88,809 shares of Common Stock of the Company and up to
an additional 320,161 shares of Common Stock that may be earned by Mr. Maaghul
upon the achievement of certain business goals over the 24-month period
following the closing date of the Merger. In addition, pursuant to a Stock
Purchase Agreement dated April 1, 1999 by and between the Company and Meiman
Kentjana, a key employee of Maagnum, in consideration for Mr. Kentjana's
agreement to waive certain rights with respect to Maagnum, the Company issued to
Mr. Kentjana on the closing date of the Merger 22,841 shares of Common Stock and
gave him the right to receive up to an additional 192,374 shares of Common Stock
that may be earned by Mr. Kentjana upon the achievement of certain business
goals over the 24-month period following the closing date of the Merger.
In the quarter ended September 30, 1999, Messrs. Maaghul and Kentjana
of Maagnum collectively received earn-out payments in the form of 48,095 shares
of Common Stock valued at $1,046,000.
Also in April 1999, pursuant to an Asset Purchase Agreement by and
among the Company, Public Software Library Ltd., a Texas limited partnership
("Seller"), and the partners of Seller, the Company purchased substantially all
of the assets and assumed certain liabilities of Seller in exchange for an
aggregate of 161,842 shares of Common Stock of the Company.
In June 1999, pursuant to an Agreement and Plan of Merger and
Reorganization by and among the Company, Universal Commerce, Incorporated, a
Delaware corporation ("RegNow"), and certain stockholders of RegNow (the
"Stockholders"), RegNow merged with and into the Company (the "RegNow Merger").
At the effective time of the RegNow Merger, the Stockholders received from the
Company cash and 306,884 shares of Common Stock of the Company. In addition, the
Stockholders may receive additional shares of Common Stock upon the achievement
of certain revenue goals over the 12-month period following the closing date of
the RegNow Merger.
In October 1999, pursuant to an Asset Purchase Agreement by and among
the Company, Walnut Creek CDROM, Inc. ("Walnut Creek"), and the sole shareholder
of Walnut Creek, the Company purchased certain assets of Walnut Creek in
exchange for cash and 143,885 shares of Common Stock of the Company.
The sales and issuances of the unregistered securities in the
transactions described above were deemed to be exempt from registration under
the Act in reliance upon Section 4(2) of the Act, Regulation D promulgated
thereunder, Regulation S promulgated thereunder, or Rule 701 promulgated under
Section 3(b) of the Act, as transactions by an issuer not involving any public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
securities issued in such transactions. All recipients had adequate access,
through their relationship with the Company, to information about the Company.
There were no underwritten offerings employed in connection with the
sales and issuances of the unregistered Securities in any of the transactions
set forth above.
22.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ -------------- ------------- ------------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales...................................... $ 75,050 $ 20,911 $ 2,472 $ 111 $ -
Cost of sales.............................. 61,012 17,487 2,052 95 -
------------ -------------- ------------- ------------- ----------
Gross profit............................. 14,038 3,424 420 16 -
Operating expenses:
Sales and marketing...................... 17,636 9,514 1,501 68 3
Product development and operations 16,145 5,432 1,528 230 130
General and administrative............... 4,172 3,171 929 415 32
Amortization of goodwill and acquisition
related costs............................ 6,886 - - - -
----------- --------------- ------------- ------------- ----------
Total operating expenses............... 44,839 18,117 3,958 713 165
----------- --------------- ------------- ------------- ----------
Loss from operations....................... (30,801) (14,693) (3,538) (697) (165)
Interest income.......................... 3,148 895 53 8 22
----------- --------------- ------------- ------------- ----------
Net loss................................... $ (27,653) $ (13,798) $ (3,485) $ (689) $ (143)
=========== =============== ============= ============= ==========
Basic and diluted net loss per share (1)... $ (1.36) $ (1.01) $ (0.46) $ (0.13) $ (0.03)
=========== =============== ============= ============= ==========
Shares used in per share computation (1)... 20,312 13,691 7,514 5,333 5,333
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- -------------- ------------ ------------ ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 15,120 $ 63,503 $ 2,126 $ 800 $ 487
Short-term investments..................... 24,387 10,894 - - -
Working capital (deficit) 28,777 70,563 1,244 (451) 478
Total assets............................... 87,142 80,328 3,405 1,202 635
Accumulated deficit........................ (45,776) (18,123) (4,325) (840) (152)
Total stockholders' equity (deficit)....... 73,077 74,587 2,329 (58) 627
</TABLE>
- ----------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method employed to determine the number of shares used to
compute per share amounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH "SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS REPORT. EXCEPT FOR THE HISTORICAL INFORMATION
CONTAINED HEREIN, THE DISCUSSION IN THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE
COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE FORWARD-LOOKING
STATEMENTS ARE BASED ON THE CURRENT EXPECTATIONS OF THE COMPANY, AND THE COMPANY
ASSUMES NO OBLIGATION TO UPDATE THIS INFORMATION. THE CAUTIONARY STATEMENTS MADE
IN THIS REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.
OVERVIEW
The Company is a leading provider of comprehensive electronic commerce
outsourcing solutions. The Company was incorporated in February 1994 and
commenced offering products for sale through its clients' Web stores in August
1996. From inception through August 1996, the Company had no sales, and its
activities related primarily to the development of its Commerce Network Server
("CNS") technology related to electronic commerce. In 1996, the Company began to
focus its business development efforts on the software industry, building its
inventory of
23.
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software products through contracts with software publishers. In 1997, the
Company began to develop software distribution relationships through contracts
with online retailers. In the second quarter of 1999 the Company added
approximately 3,000 software publisher clients through its acquisition of three
electronic commerce outsourcing providers to the shareware publishing industry,
Maagnum Internet Group, Public Software Library and Universal Commerce,
Incorporated. As of December 31, 1999, the Company had approximately 4,800
software publisher clients and 1,300 online retailer clients that it serves
under its Software and Digital Services Group. In late 1998, the Company began
to offer it's comprehensive electronic commerce outsourcing services in the form
of a transaction fee-based e-commerce service to clients outside of the software
industry. As of December 31, 1999, the Company had contracts with 22 clients
that it serves under its E-Business Services Group.
The Company derives its revenue primarily from sales of third-party
software. The Company has contractual relationships with its software publisher
and online retailer clients which obligate the Company to pay to the client a
specified percentage of each sale. Revenues from the sale of software products,
net of estimated returns, are recognized upon either delivery through electronic
software delivery ("ESD") or shipment of the physical product to the end-user.
The amount payable to the software publisher or online retailer is reported as
cost of sales. The Company bears full credit risk with respect to substantially
all sales. In late 1998, the Company began formally offering e-commerce service
for products other than third-party software, under its E-Business Services
Group. The Company derives its revenue from development fees, transaction
processing and hosting fees as well as service fees. Most E-Business revenue is
recognized as services are performed, with the exception of annual fees and
certain integration fees which are recognized evenly over the term of the
contract. The Company generated less than 3% of its 1999 revenue from E-Business
Services. There can be no assurance that the Company will derive any significant
revenue from this service.
The Company has a limited operating history upon which investors may
evaluate its business and prospects. Since inception, the Company has incurred
significant losses, and as of December 31, 1999, had an accumulated deficit of
approximately $45.8 million. The Company intends to expend significant financial
and management resources on the development of additional services, sales and
marketing, technology and operations to support larger-scale operations and
greater service offerings. As a result, the Company expects to incur additional
losses and continued negative cash flow from operations for the foreseeable
future, and such losses are anticipated to increase significantly from current
levels. There can be no assurance that the Company's sales will increase or even
continue at their current level or that the Company will achieve or maintain
profitability or generate cash from operations in future periods. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as electronic
commerce. To address these risks, the Company must, among other things, maintain
existing and develop new relationships with software publishers, online
retailers and E-Business clients, implement and successfully execute its
business and marketing strategy, continue to develop and upgrade its technology
and transaction-processing systems, provide superior customer service and order
fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks, and the failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's current and future expense levels are based
largely on its planned operations and estimates of future sales. Sales and
operating results generally depend on the volume and timing of orders received,
which are difficult to forecast. The Company may be unable to adjust spending in
a timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in sales would have an immediate adverse effect on the
Company's business, financial condition and results of operations. In view of
the rapidly evolving nature of the Company's business and its limited operating
history, the Company is unable to accurately forecast its sales and believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
24.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated condensed statements of operations as a percentage of total
revenues for the years indicated.
<TABLE>
<CAPTION>
------------------------------------------
1999 1998 1997
-------------- -------------- ----------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 81.3 83.6 83.0
-------------- -------------- ----------
Gross profit 18.7 16.4 17.0
-------------- -------------- ----------
Operating expenses:
Sales and marketing 23.5 45.5 60.7
Product development and operations 21.5 26.0 61.8
General and administrative 5.6 15.2 37.6
Amortization of goodwill and other acquisition
related costs 9.1 - -
-------------- -------------- ----------
Total operating expenses 59.7 86.7 160.1
-------------- -------------- ----------
Loss from operations (41.0) (70.3) (143.1)
-------------- -------------- ----------
Interest income, net 4.2 4.3 2.1
-------------- -------------- ----------
Net loss (36.8)% (66.0)% (141.0)%
============== ============== ==========
</TABLE>
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
SALES. The Company derives its revenue primarily from sales of
third-party software. The Company recognizes revenue from the sale of
software products upon delivery through ESD or shipment of the physical
product to the end-user. The majority of sales are comprised of the gross
selling price of the software sold by the Company, net of estimated returns,
plus any outbound shipping and handling charges, as well as gross revenue
generated by certain merchandising activities. For these type of sales, the
Company bears credit and delivery risk with respect to the sale. For sales
where the Company does not bear the risk of credit, the Company records a net
service fee. Additionally, the Company realizes development fees, transaction
processing and hosting fees, and service fees from its E-Business Services
clients. The E-Business Services revenue represented less than 3% of the
total Company revenue in 1999. The Company's sales increased to $75.1 million
in 1999 from $20.9 million in 1998 and $2.5 million in 1997. The sales
increases in 1999 and 1998 were a result of significant growth in the number
of the Company's clients, the increasing market acceptance of ESD and
merchandising activities implemented which increased the average sales
generated by the Company's software publisher clients. The 1999 sales growth
was also a function of the acquisitions of the three shareware outsourcing
companies during 1999. International sales represented approximately 22%, 24%
and 31% of sales in the years ended December 31, 1999, 1998 and 1997,
respectively.
GROSS PROFIT. Cost of sales consists primarily of the amount payable to the
software publishers and online retailers for product sold to the end-user and
outbound and inbound shipping and distribution costs for physical product. Cost
of sales for services provided to E-Business clients consists of the labor and
direct costs of providing e-commerce services to the client. Cost of sales
increased to $61.0 million from $17.5 million and $2.1 million in 1999, 1998 and
1997, respectively, reflecting the Company's growth in sales. During 1999, 1998
and 1997, the Company's gross profit margins were 18.7%, 16.4% and 17.0%,
respectively. The gross profit margin increased in 1999 as compared to 1998
primarily due to the increased number of processed fee-based transactions as
well as cost efficiencies implemented in the physical distribution process and
the termination of certain low-margin client contracts. The gross profit margin
declined in 1998 as compared to 1997 primarily as a result of the addition of
certain lower margin software publishers in the second half of 1997 and the
higher cost impact of a greater proportion of sales in 1998 involving physical
shipments. In each of the years ended December 31, 1999, 1998 and 1997, less
than 3% of the Company's revenue was generated from the high-margin E-Business
services. The
25.
<PAGE>
Company expects that an increasing percentage of its revenue will be generated
from E-Business services. The Company also believes that Internet commerce and
related services will become more competitive in the near future. Accordingly,
the Company may reduce or alter its pricing structure and policies in the future
and any change could reduce gross margins.
SALES AND MARKETING. Sales and marketing expense consists primarily of
personnel and related expenses, advertising and promotional expenses, credit
card chargebacks and bad debt expense, and credit card transaction fees. Sales
and marketing expense increased to $17.6 million from $9.5 million and $1.5
million in 1999, 1998 and 1997, respectively, resulting from additional sales
and marketing personnel and related expenses, increased advertising and
promotional expense, increased bad debt expense and increased credit card
transaction fees due to the increased sales. The primary components of the
increase in 1999 from 1998 were an increase in wages, benefits and consulting
fees of $4.3 million and an increase in credit card chargebacks, bad debt
expense and credit card transaction fees of $3.0 million. As a percentage of
sales, sales and marketing expense decreased to 23.5% in 1999 from 45.5% in
1998, primarily reflecting the Company's increased sales volume. The primary
components of the increase in 1998 from 1997 were an increase in advertising and
marketing expenditures of $3.2 million and an increase in wages and benefits of
$1.5 million. As a percentage of sales, sales and marketing expense decreased to
45.5% in 1998 from 60.7% in 1997, primarily reflecting the Company's increased
sales volume. The Company expects that sales and marketing expense will continue
to increase in absolute dollars as the Company continues to build its sales and
marketing infrastructure and to develop marketing programs.
PRODUCT DEVELOPMENT AND OPERATIONS. Product development and operations
expense consists primarily of personnel and related expenses and consulting
associated with developing, enhancing and maintaining the Company's CNS and
related facilities, internal systems and telecommunications infrastructure as
well as customer service and phone order functions. Product development and
operations expense increased to $16.1 million from $5.4 million and $1.5 million
in 1999, 1998 and 1997, respectively. The increase was primarily related to
increased personnel and consulting costs related to developing, enhancing and
maintaining the Company's CNS, customer service and related facilities on a 24
hour a day, seven day per week basis. The primary components of the increase in
1999 from 1998 were an increase in wages, benefits and temporary employee costs
of $3.7 million and an increase in consulting costs of $4.4 million. As a
percentage of sales, product development and operations expense decreased to
21.5% in 1999 from 26.0% in 1998, primarily reflecting the Company's increased
sales volume. The primary components of the increase in 1998 from 1997 were an
increase in consulting costs of $1.4 million and an increase in wages and
benefits of $1.2 million. As a percentage of sales, sales and marketing expense
decreased to 26.0% in 1998 from 61.8% in 1997, primarily reflecting the
Company's increased sales volume. The Company believes that continued investment
in product development and operations is critical to attaining its strategic
objectives and, and as a result, expects product development and operations
expenses will continue to increase in absolute dollars.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
principally of executive, accounting and administrative personnel and related
expenses, including deferred compensation expense, professional fees, and
investor relations expenses. General and administrative expense increased to
$4.2 million from $3.2 million and $929,000 in 1999, 1998 and 1997,
respectively, primarily due to increased personnel related expense and
professional fees and investor relations cost associated with being a public
company. The primary components of the increase in 1999 from 1998 were an
increase in wages and benefits of $204,000 and an increase in professional fees
of $535,000. As a percentage of sales, general and administrative expense
decreased to 5.6% in 1999 from 15.2% in 1998, primarily reflecting the Company's
increased sales volume. The primary components of the increase in 1998 from 1997
were an increase in deferred compensation expense of $1.2 million and an
increase in wages and benefits of $346,000. As a percentage of sales, general
and administrative expense decreased to 15.2% in 1998 from 37.6% in 1997,
primarily reflecting the Company's increased sales volume. The Company expects
general and administrative expense to increase in absolute dollars in the
future, particularly as the Company continues to build infrastructure to support
growth and incurs costs associated with being a public company. As a percentage
of sales, these expenses are expected to decrease as sales increase.
INTEREST INCOME. Interest income consists of earnings on the Company's
cash, cash equivalents and short-term investments. Interest income increased to
$3.1 million from $895,000 and $53,000 in 1999, 1998 and 1997, respectively,
resulting from changes in average cash and cash equivalent balances. The Company
expects interest income to decrease in the future as cash is used to fund
operations and is used for investments in infrastructure.
INCOME TAXES. The Company paid no income taxes in 1999, 1998 and 1997. The
Company has incurred a net loss for each period since inception. As of December
31, 1999, the Company had approximately $56.3 million of net operating loss
carryforwards for federal income tax purposes, which expire beginning in 2009.
Due to the uncertainty of future profitability, a valuation allowance equal to
the deferred tax asset has been recorded. Certain changes in ownership that
resulted from the sales of Common and Preferred Stock will limit the future
annual realization of the tax net operating loss carryforwards to a specified
percentage under Section 382 of the Internal Revenue Code.
26.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In August 1998, the Company completed its initial public offering in which
the Company sold 3,000,000 shares of Common Stock. Net proceeds to the Company
were $22.7 million after expenses. In December 1998, the Company completed a
follow-on public offering in which the Company sold 2,200,000 shares of Common
Stock. Net proceeds to the Company were $48.1 million after expenses. Prior to
the Company's initial public offering and follow-on offering, the Company
financed its operations primarily through the private placement of equity
securities, which yielded an aggregate of $19.3 million of net proceeds.
Net cash used in operating activities in 1999, 1998 and 1997 was $13.6
million, $9.0 million and $2.6 million, respectively. Net cash used for
operating activities in each of these periods was primarily the result of net
losses, offset in part by goodwill amortization and earn-out charges, increases
in accounts payable and increases in depreciation and amortization.
Net cash used in investing activities in 1999, 1998 and 1997 was $37.5
million, $14.5 million and $984,000, respectively. Net cash used in investing
activities in each of these periods was primarily the result of the purchases of
property and equipment and the purchase of investments in 1999 and 1998.
Additionally, $4.1 million of cash was used for cash paid for acquisition, net
of cash received. The property and equipment purchased consisted primarily of
computer hardware and software.
Net cash provided by financing activities in 1999, 1998 and 1997 was $2.7
million, $84.9 million and $4.9 million, respectively. The cash provided by
financing activities was the result of proceeds from the sales of the Company's
Common Stock in 1998 and 1997, the sale of the Company's Series A Preferred
Stock in April 1998 and the exercise of options and warrants in 1999 and 1998.
As of December 31, 1999 the Company had approximately $15.1 million of cash
and cash equivalents, $24.4 million of short-term investments and $14.8 million
of long-term investments. The Company's principal commitments consisted of
obligations outstanding under operating leases. Although the Company has no
material commitments for capital expenditures, it anticipates an increase in the
rate of capital expenditures consistent with its anticipated growth in
operations, infrastructure and personnel. The Company anticipates that it will
expend approximately $22.0 million over the next 24 months on capital
expenditures based on the Company's current anticipated growth rate. The Company
further anticipates that it will expend approximately $30.0 million over the
next 24 months on product development based on the Company's current anticipated
growth rate in operations. The Company may also use cash to acquire or license
technology, products or businesses related to the Company's current business.
The Company also anticipates that it will continue to experience significant
growth in its operating expenses for the foreseeable future and that its
operating expenses will be a material use of the Company's cash resources.
The Company believes that existing sources of liquidity will provide
adequate cash to fund its operations for at least the next 18 months, although
the Company may seek to raise additional capital during that period. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurances that
financing will be available in amounts or on terms acceptable to the Company, if
at all.
YEAR 2000 COMPLIANCE
Prior to January 1, 2000, there was a great deal of concern regarding the
ability for computers to accurately recognize and process dates due to the
century change. Most reports to date indicate that computer systems are
functioning normally and compliance and remediation work leading up to Year 2000
was effective in preventing problems. The Company has not experienced any
material Year 2000 difficulties or disruptions and does not expect to over the
course of time. However, the Company will continue to monitor the potential for
disruptions throughout the year and has in place techniques that can be used in
case of a failure to allow the Company to continue to process commerce activity.
Should a significant disruption occur due to a future Year 2000 problem, it will
likely have a material adverse effect on the Company.
The Company's cost to analyze the Year 2000 issue was under $25,000 and the
ongoing costs are expected to be minor. Additionally, the Company did not defer
any development or information technology spending because of Year 2000, other
than for a period of three weeks around the year change.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in the
27.
<PAGE>
United States and as such are not subject to material foreign currency exchange
rate risk. The Company has no long-term debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Financial Statements and Notes thereto appear beginning
at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
ANDFINANCIAL DISCLOSURE.
None.
PART III
Certain information required in Part III of this Report is
incorporated by reference to the Company's Proxy Statement in connection with
the Company's 2000 Annual Meeting to be filed in accordance with Regulation 14A
under the Securities Exchange Act of 1934, as amended.
ITEM 10. Directors and Executive Officers of the Registrant.
(a) Identification of Directors:
The information concerning the Company's directors and nominees is
incorporated by reference to the Company's Proxy Statement in connection with
the Company's 2000 Annual Meeting to be in accordance with Regulation 14A under
the Securities Exchange Act of 1934, as amended.
(b) Identification of Executive Officers:
Please refer to the section entitled "Executive Officers" in part I,
Item 1 hereof.
(c) Compliance with Section 16(a) of the Exchange Act:
Based solely upon a review of Forms 3 and 4 and amendments
thereto furnished to the Company pursuant to Rule 16a-3(e) during the
1999 fiscal year and Form 5 and amendments thereto furnished to the
Company with respect to fiscal year 1999, no director, officer, or
beneficial owner of more than 10 percent of any class of equity
security of the Company has failed to file on a timely basis, as
disclosed by the above forms, reports required by Section 16(a) of the
Securities Exchange Act of 1934, as amended during the 1999 fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in Item 11 of Part III of this report is
incorporated by reference to the Company's Proxy Statement in connection with
the Registrant's 2000 Annual Meeting to be filed in accordance with
Regulation14A under the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in Item 12 of Part III of this report is
incorporated by reference to the Company's Proxy Statement in connection with
the Registrant's 2000 Annual Meeting to be filed in accordance with
Regulation14A under the Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in Item 13 of Part III of this Report is
incorporated by reference to the Company's Proxy Statement in connection with
the Registrant's 2000 Annual Meeting to be filed in accordance with
Regulation 14A under the Securities Exchange Act of 1934, as amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
28.
<PAGE>
(1) Index to Consolidated Financial Statements and Report of
Independent Public Accountants.
The consolidated financial statements required by this item are submitted
in a separate section beginning on page F-1 of this report.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
(2) Financial Statement Schedules.
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable or is
included in the financial statements or notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect.
3.2(1) Bylaws of the Registrant, as currently in effect.
4.1(1) Specimen Stock Certificate.
10.1(1) Form of Indemnity Agreement between Registrant and each of its directors and executive officers.
10.2(1) 1998 Stock Option Plan.
10.3(1) Distributor Agreement dated April 23, 1997 by and between Corel Corporation and the Registrant.
10.4(1) Employment and Non-Competition Agreement effective May 25, 1998 by and between Joel A. Ronning and the Registrant.
10.5(1) Fujitsu Modification Agreement dated December 11, 1997 by and between Joel A. Ronning, the Registrant, Fujitsu
Limited and MacUSA, Inc.
10.6(1) Heads of Agreement for International Agreement dated February 25, 1998 by and between Christopher J. Sharples,
David A. Taylor and the Registrant.
10.7(1) Stock Subscription Warrant for Shares of Common Stock dated February 26, 1998 by and between Christopher Sharples
and Registrant.
10.8(1) Termination of Lease Letter dated April 30, 1998 by and between Tech Squared, Inc. and Registrant.
10.9(1) Services Agreement dated July 30, 1998 by and between Tech Squared, Inc. and Registrant.
10.10(1) Stock Option Agreement dated December 28, 1995 by and between Joel A. Ronning and MacUSA, Inc.
10.11(1) Form of Registration Rights Agreement by and between Wasserstein Adelson Ventures, L.P., certain other investors
and Registrant.
29.
<PAGE>
10.12(1) Form of Conditional Warrant to Purchase Common Stock dated April 22, 1998 by and between Wasserstein Adelson
Ventures, L.P. and Registrant.
10.13(1) Form of Warrant to Purchase Common Stock by and between certain investors and Registrant.
10.14 (1) Form of Registration Rights Agreement by and between certain investors and Registrant.
10.15(1) Consent to Assignment and Assumption of Lease dated April 22, 1998 by and between CSM Investors, Inc., IntraNet
Integration Group, Inc. and Registrant.
10.16(1) Employment Agreement effective July 30, 1998 by and between Perry W. Steiner and the Registrant.
10.17 Assignment of Lease dated April 21, 1998 by and between Intranet Integration Group, Inc. and Registrant.
10.18 Lease Agreement dated January 18, 2000 between Property Reserve, Inc. and Registrant.
21.1(1) Subsidiaries of Digital River, Inc.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney. Reference is made to the signature page.
27.1 Financial Data Schedule
</TABLE>
- ----------------------------
+ Confidential treatment has previously been granted for portions of this
exhibit.
(1) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement on Form S-1 (File No. 333-56787), declared
effective on August 11, 1998.
(b) The Registrant filed no reports on Form 8-K in the fourth quarter
of 1999.
(c) See Exhibits listed under Item 14(a)(3).
(d) The financial statement schedules required by this item are listed
under 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Eden Prairie, State of Minnesota, on the 30th day of March 2000.
DIGITAL RIVER, INC.
By: /s/ JOEL A. RONNING
Joel A. Ronning
CHIEF EXECUTIVE OFFICER AND DIRECTOR
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Joel A. Ronning and Robert E.
Strawman and each of them, jointly and severally, his attorneys-in-fact, each
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.
30.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ JOEL A. RONNING Chief Executive Officer and Director March 30, 2000
(Principal Executive Officer)
- --------------------------------
Joel A. Ronning
/s/ ROBERT E. STRAWMAN Chief Financial Officer and Treasurer March 30, 2000
(Principal Financial and Accounting
- -------------------------------- Officer)
Robert E. Strawman
/s/ PERRY W. STEINER President and Director March 30, 2000
- --------------------------------
Perry W. Steiner
/s/ WILLIAM LANSING Director March 30, 2000
- --------------------------------
William Lansing
/s/ THOMAS F. MADISON Director March 30, 2000
- --------------------------------
Thomas F. Madison
/s/ J. PAUL THORIN Director March 30, 2000
- --------------------------------
J. Paul Thorin
/s/ CHRISTOPHER J. SHARPLES Director March 30, 2000
- --------------------------------
Christopher J. Sharples
/s/ TIMOTHY C. CHOATE Director March 30, 2000
- --------------------------------
Timothy C. Choate
</TABLE>
31.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital River, Inc.:
We have audited the accompanying consolidated balance sheets of Digital
River, Inc. and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital River, Inc. and
Subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 26, 2000
F-1
<PAGE>
DIGITAL RIVER, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $15,120 $63,503
Short-term investments 24,387 10,894
Accounts receivable, net allowance of $593 and $129 2,455 1,487
Prepaid expenses and other 880 420
------- -------
Total current assets 42,842 76,304
------- -------
PROPERTY AND EQUIPMENT:
Property and equipment 8,993 4,539
Less- Accumulated depreciation (1,714) (625)
------- ------
Net property and equipment 7,279 3,914
LONG-TERM INVESTMENTS 14,832 -
GOODWILL, net of accumulated 22,050 -
amortization of $5,560
OTHER ASSETS 139 110
------- -------
Total assets $87,142 $80,328
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $11,020 $3,880
Accrued payroll 1,909 807
Other accrued liabilities 1,136 1,054
------- -------
Total current liabilities 14,065 5,741
------- -------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value, 45,000,000 shares
authorized; 20,699,244 and 19,544,791 shares issued and
outstanding 207 195
Additional paid-in capital 119,445 93,883
Deferred compensation (637) (1,368)
Accumulated other comprehensive income (loss) (162) -
Accumulated deficit (45,776) (18,123)
------- -------
Total stockholders' equity 73,077 74,587
------- -------
Total liabilities and stockholders' equity $87,142 $80,328
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
DIGITAL RIVER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
SALES $ 75,050 $ 20,911 $ 2,472
COST OF SALES 61,012 17,487 2,052
-------- ------- -------
Gross profit 14,038 3,424 420
OPERATING EXPENSES:
Sales and marketing 17,636 9,514 1,501
Product development and operations 16,145 5,432 1,528
General and administrative 4,172 3,171 929
Amortization of goodwill and acquisition 6,886 - -
related costs (note 2)
-------- ------- -------
Total operating expenses 44,839 18,117 3,958
-------- ------- -------
LOSS FROM OPERATIONS (30,801) (14,693) (3,538)
INTEREST INCOME 3,148 895 53
-------- ------- -------
Net loss $(27,653) $(13,798) $(3,485)
-------- ------- -------
-------- ------- -------
BASIC AND DILUTED NET LOSS PER SHARE $ (1.36) $ (1.01) $ (0.46)
-------- ------- -------
-------- ------- -------
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 20,312 13,691 7,514
-------- ------- -------
-------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DIGITAL RIVER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Deferred Other
--------------- Paid-In Compen- Comprehensive
Shares Amount Capital sation Income
------ ------ ------- ------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 5,333 $ 53 $ 729 $ - $ -
Convertible debentures exchanged for
common stock 1,018 10 987 - -
Sales of common stock 2,831 28 4,746 - -
Common stock issued in Fujitsu
agreement 60 1 100 - -
Net loss - - - - -
------- ----- ------- ------ -
BALANCE, December 31, 1997 9,242 92 6,562 - -
-
Sales of common stock 8,679 87 80,581 - -
Sales of preferred stock
subsequently converted to
common stock 1,000 10 2,815 - -
Exercise of options and warrants 624 6 1,346 - -
Deferred compensation related to
stock options and warrants - - 2,579 (2,579) -
Deferred compensation expense - - - 1,211 -
Net loss - - - - -
------- ----- ------- ------ -
BALANCE, December 31, 1998 19,545 195 93,883 (1,368) -
Common stock issued for
acquisitions and earn-out
arrangements 777 8 22,801 - -
Net common stock exchanged
in Tech Squared transition
(Note 2) (350) (3) 235 - -
Exercise of options and warrants 727 7 2,416 - -
Stock options granted for services - - 110 - -
Deferred compensation expense - - - 731 -
Unrealized loss on investments - - - - (162)
Net loss - - - - -
------- ----- -------- ------ -----------
BALANCE, December 31, 1999 20,699 $207 $119,445 $ (637) $ (162)
======= ===== ======== ====== ===========
</TABLE>
<TABLE>
Total
Stockholder's Comprehensive
Accumulated Equity Income
Deficit (Deficit) (Loss)
------- ----------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ (840) $ (58) $ -
Convertible debentures exchanged for
common stock - 997 -
Sales of common stock - 4,774 -
Common stock issued in Fujitsu
agreement - 101 -
Net loss (3,485) (3,485) (3,485)
------- ------- -------
BALANCE, December 31, 1997 (4,325) 2,329 $(3,485)
=======
Sales of common stock - 80,668 -
Sales of preferred stock
subsequently converted to
common stock - 2,825 -
Exercise of options and warrants - 1,352 -
Deferred compensation related to
stock options and warrants - - -
Deferred compensation expense - 1,211 -
Net loss (13,798) (13,798) (13,798)
-------- ------- --------
BALANCE, December 31, 1998 (18,123) 74,587 $(13,798)
========
Common stock issued for
acquisitions and earn-out
arrangements - 22,809 -
Net common stock exchanged
in Tech Squared transition
(Note 2) - 232 -
Exercise of options and warrants - 2,423 -
Stock options granted for services - 110 -
Deferred compensation expense - 731 -
Unrealized loss on investments - (162) (162)
Net loss (27,653) (27,653) (27,653)
-------- -------- --------
BALANCE, December 31, 1999 $(45,776) $ 73,077 $(27,615)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DIGITAL RIVER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (27,653) $ (13,798) $ (3,485)
Adjustments to reconcile net loss to net cash used in operating
activities:
Goodwill amortization and earn-out charges 6,606 - -
Depreciation and amortization 1,552 604 195
Deferred compensation expense 731 1,211 -
Common stock and options issued for services 110 - 101
Change in operating assets and liabilities:
Accounts receivable and prepaid expenses (1,226) (1,713) (184)
Accounts payable 5,122 3,160 607
Accrued payroll and other accrued liabilities 1,184 1,505 206
---------- ---------- ---------
Net cash used in operating activities (13,574) (9,031) (2,560)
---------- ---------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments (106,467) (15,894) -
Proceeds from sales of investments 78,000 5,000 -
Cash paid for acquisitions, net of cash received (4,077) - -
Purchases of equipment (4,783) (3,531) (920)
Patent acquisition costs (117) (62) (64)
---------- ---------- ---------
Net cash used in investing activities (37,464) (14,487) (984)
---------- ---------- ---------
FINANCING ACTIVITIES:
Sales of preferred and common stock - 83,543 4,774
Exercise of options and warrants 2,423 1,352 -
Other 232 - 96
---------- ---------- ---------
Net cash provided by financing activities 2,655 84,895 4,870
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (48,383) 61,377 1,326
CASH AND CASH EQUIVALENTS, beginning of year 63,503 2,126 800
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 15,120 $ 63,503 $ 2,126
---------- ---------- ----------
---------- ---------- ----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Convertible debentures exchanged for common stock, net of direct
costs $ - $ - $ 998
---------- ---------- ----------
---------- ---------- ----------
Preferred stock converted to common stock $ - $ 2,825 $ -
---------- ---------- ----------
---------- ---------- ----------
Common stock issued in acquisitions $ 21,713 $ - $ -
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 and 1998
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Digital River, Inc., a Delaware corporation, and its wholly owned
subsidiaries (collectively, the Company) provide a suite of electronic
commerce services to its clients, including web store development and
hosting, transaction processing, electronic software delivery, fraud
screening, customer service and analytical marketing. Through contractual
relationships with software publishers and online retailers, the Company
offers software products for sale via the Internet. Beginning in late 1998,
the Company also began to offer electronic commerce services to companies
outside of the software vertical market.
The Company was incorporated in 1994 and conducted its first online sale
through a client's Web store in August 1996. The Company has experienced
significant losses of $45.8 million since inception and has experienced
significant negative cash flows from operations. The Company anticipates it
will continue to have net losses and negative cash flows from operations for
the foreseeable future and that such losses are anticipated to increase
significantly from current levels.
The Company's prospects must be considered in light of the risks frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce. To
address these risks, the Company must, among others things, maintain existing
and develop new relationships with independent software publishers, online
retailers and other companies outside of the software market, maintain and
increase its client base, implement and successfully execute its business and
marketing strategy, continue to develop and upgrade its technology and
transaction-processing systems, provide superior customer service and order
fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel. There can be no assurances that the Company
will be successful in addressing such risks, and the failure to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Digital River,
Inc. and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments, primarily
high grade commercial paper and money market accounts, that are readily
convertible into known amounts of cash and that have original maturities of
three months or less, to be cash equivalents.
INVESTMENTS
F-6
<PAGE>
Investments held by the Company are classified as available for sale
securities and are carried at their market value with cumulative unrealized
gains or losses recorded as a component of accumulated other comprehensive
income (loss) within stockholders' equity.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is being depreciated under the
straight-line method using lives of three to seven years. Impairment losses
are recorded on long-lived assets in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. Impairment losses are
measured by comparing the fair value of assets, as determined by discounting
the future cash flows at a market rate of interest, to their carrying amount.
GOODWILL
Goodwill has been recorded as a result of certain acquisitions made by the
Company and is being amortized under the straight-line method using a life of
three years.
PATENTS
The costs of developing patents are amortized over a three-year period
utilizing the straight-line method of amortization once the patent
application is filed. Patents are included in other assets on the
accompanying consolidated balance sheets, net of accumulated amortization of
$262,000 and $174,000 as of December 31, 1999 and 1998, respectively.
REVENUE RECOGNITION
The Company derives its revenue primarily from sales of third-party software.
The Company has contractual relationships with its software publisher and
online retailer clients which obligate the Company to pay to the client a
specified percentage of each sale. For the majority of sales, the Company
takes title to the merchandise, is at risk of loss for collecting all sales
proceeds, is responsible for delivery of the merchandise and takes returns
from customers. The Company records the full sales amount as revenue upon
verification of credit card authorization and either electronic delivery or
physical shipment of the merchandise. The amount payable to the software
publisher or online retailer is reported as cost of sales. The Company bears
full credit risk with respect to these sales. In certain cases, the Company
does not take title to merchandise or bear credit risk on a sale, in which
case the Company records a net service fee amount as revenue. Sales to
foreign customers accounted for 22%, 24% and 31% of sales for the years ended
December 31, 1999, 1998 and 1997, respectively. One client accounted for 18%
of sales for the year ended December 31, 1997. No clients accounted for more
than 10% of sales in the years ended December 31, 1999 and 1998.
ADVERTISING COSTS
F-7
<PAGE>
The costs of advertising are charged to sales and marketing expense as
incurred. For the years ended December 31, 1999, 1998 and 1997, the Company
incurred advertising expense of $2,442,000, $2,569,000 and $292,000,
respectively.
PRODUCT DEVELOPMENT
Costs associated with the development of new products and services are
charged to operations as incurred. Those costs totaled $7,464,000, $3,392,000
and $1,393,000, for the three years ended December 31, 1999, 1998 and 1997,
respectively.
NET LOSS PER SHARE
Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the year. The
computation of diluted earnings per common share is similar to the
computation of basic loss per common share, except that the denominator is
increased for the assumed conversion of convertible securities and the
exercise of dilutive options using the treasury stock method. The weighted
average shares used in computing basic and diluted loss per share were the
same for the three years ended December 31, 1999, 1998 and 1997. Options,
warrants and the Series A Preferred Stock totaling 3,898,313, 2,883,059 and
1,056,642 for the three years ended December 31, 1999, 1998 and 1997,
respectively, were excluded from the computation of earnings per share as
their effect is antidilutive.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
SEGMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in 1998. The Company has determined that it does not
have any separately reportable business segments as of December 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company will be required to adopt SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," in fiscal year 2001. The
Company does not currently engage in any derivative or hedging activities and
therefore expects there will be no impact to the financial statements upon
adoption of this standard.
2. ACQUISITIONS AND PURCHASES OF ASSETS:
F-8
<PAGE>
In 1999, the Company acquired or purchased the assets of Maagnum Internet
Group ("Maagnum"), Public Software Library Ltd., Universal Commerce,
Incorporated ("RegNow"), and Walnut Creek CDROM, Inc. for an aggregate $4.5
million in cash and 724,261 shares of common stock. In addition the former
shareholders of Maagnum and RegNow have earn-out arrangements which allow
them to receive up to approximately 900,000 additional shares of common stock
and $2 million in cash upon attaining certain business goals for a period of
12 to 24 months following the close of each respective acquisition.
Former Maagnum shareholders collectively received earn-out payments of 48,095
shares of common stock valued at $1,046,000 in 1999. The Company charged
such amount to compensation expense and this is included as amortization of
goodwill and acquisition related costs in the accompanying Consolidated
Statements of Operations. This amount would have increased general and
administrative expense had it been reported outside of that caption.
Each of the above transactions was accounted for using the purchase method.
The purchase price in each transaction was allocated substantially to
goodwill and other intangibles, which are being amortized over three years.
If any earn-out payments, as listed above, are earned, they will be
recognized as compensation expense in the period in which the required
milestones are achieved.
The following unaudited pro forma condensed results of operations for the
year ended December 31, 1999 and 1998 have been prepared as if each of the
above four transactions had occurred on January 1, 1998:
Year Ended December 31, 1999 1998
- -------------------------------------------------------------
Sales $ 79,092,000 $ 28,611,000
Loss from operations (34,366,000) (23,563,000)
Net loss (31,319,000) (22,943,000)
Basic and diluted loss
per share (1.50) (1.59)
This financial information does not purport to represent results that would
actually have been obtained if the transactions had been in effect on January 1,
1998 or any future results that may in fact be realized.
In December 1999, the Company completed its acquisition of certain assets of
Tech Squared Inc., whereby the Company purchased Tech Squared assets
consisting of 3.0 million shares of the Company's common stock and $1.2
million of cash in exchange for 2.65 million shares of the Company's common
stock. The impact of this transaction was to reduce common stock outstanding
by 350,000 shares and is presented on the accompanying Consolidated Statement
of Stockholders' Equity net of expenses incurred in conjunction with the
transaction.
3. INCOME TAXES:
F-9
<PAGE>
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
currently enacted tax rates. No income taxes were paid in any of the years
presented.
As of December 31, 1999, the Company had net operating loss carryforwards of
approximately $56,300,000. Included in this amount is approximately
$19,100,000 of deductions resulting from disqualifying dispositions of stock
options. When these deductions are realized for financial statement purposes
they will not result in a reduction in income tax expenses, rather the
benefit will be recorded as additional paid-in-capital. These income tax net
operating loss carryforwards expire beginning in the year 2009. Because of
the uncertainty of future realization, a valuation allowance equal to the
deferred tax asset has been recorded.
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net operating loss carryforwards $ 19,704,000 $ 6,739,000
Nondeductible reserves and accruals 252,000 71,000
Depreciation and amortization 459,000 (35,000)
Valuation allowance (20,415,000) (6,775,000)
-----------------------------------
$ - $ -
</TABLE>
Ownership changes resulting from the issuance of additional equity will limit
future annual realization of the tax net operating loss carryforwards to a
specified percentage of the value of the Company under Section 382 of the
Internal Revenue Code.
LEASE COMMITMENTS
The Company leases its main facility. Total rent expense, including common
area maintenance charges, recognized under this lease was $378,000 and
$172,000 for the years ended December 31, 1999 and 1998, respectively.
Subsequent to year end, the Company entered into an additional lease
agreement for a second facility. The minimum annual rents under these leases
at December 31, 1999 are as follows:
Years ending December 31:
2000 $ 440,000
2001 440,000
2002 440,000
2003 257,000
----------
$1,577,000
F-10
<PAGE>
5. STOCKHOLDERS' EQUITY:
COMMON STOCK SALES
In August 1998, the Company completed its initial public offering in which
the Company sold 3,000,000 shares of common stock at an offering price of
$8.50 per share. Net proceeds to the Company after underwriting and other
offering expenses was $22.7 million.
In December 1998, the Company completed a secondary offering in which the
Company sold 2,200,000 shares of common stock at $23.50 per share. Net
proceeds to the Company after underwriting and other offering expenses were
$48.1 million. The proceeds from the offerings have been or will be used for
general corporate purposes, including continued investment in product
development, expansion of sales and marketing activities and working capital.
PREFERRED STOCK
During April 1998, the Company sold 1,500,000 shares of its $.01 par value
Series A Preferred Stock in a private placement transaction. Net proceeds to
the Company totaled $2,825,000. The preferred stock was converted to common
stock on a 2-for-3 basis in conjunction with the closing of the Company's
initial public offering of common stock in August 1998.
CONVERTIBLE DEBENTURES
During 1996 the Company issued convertible debentures totaling $998,000.
These debentures were converted to common stock in February 1997 at a
conversion rate of $1.13 per share.
WARRANTS
Warrants to purchase 371,086 shares of common stock issued principally in
conjunction with sales of common stock at an exercise price of $3.00 per
share were outstanding as of December 31, 1999. The warrants expire at
various dates between February and August 2003.
6. STOCK OPTIONS:
The Company's 1998 Stock Option Plan (the SOP) was adopted by the Board of
Directors in June 1998 as an amendment and restatement of the Amended and
Restated 1995 Stock Option Plan. The SOP provides for the granting of stock
options to purchase up to 3,283,333 shares of common stock. Options granted
to employees under the plan expire no later than ten years after the date of
grant. The exercise price must be at least 100% of the fair market value of
the shares at the date of grant for incentive options. The SOP covers both
incentive and nonstatutory stock options. Incentive stock options
F-11
<PAGE>
granted to employees who immediately before such grant owned stock directly
or indirectly representing more than 10% of the voting power of all the stock
of the Company, expire no later than five years from the grant date unless
the option exercise price is at least 110% of the fair market value of the
stock.
In 1999, the Company's Board of Directors adopted the 1999 Non-Officer Stock
Option Plan (the NOP). The NOP provides for the granting of stock options to
purchase up to 1,300,000 shares of common stock and has terms similar to
those of the SOP.
In addition to shares granted under the SOP and NOP, during 1998 the Company
has granted options to purchase 605,882 shares of common stock at an exercise
price of $8.50 per share to certain members of management outside of both
plans.
A summary of change in outstanding options under the SOP and NOP is as follows:
<TABLE>
<CAPTION>
Options Outstanding Weighted Average $/Share
-----------------------------------------------
<S> <C> <C>
Balance,
December 31, 1996 338,665 $0.60
Grants 496,817 1.66
Cancelled (42,672) 1.69
-----------------------------------------------
Balance,
December 31, 1997 792,810 1.20
Grants 1,389,570 8.93
Exercised 220,350) 1.63
Cancelled (91,673) 5.10
-----------------------------------------------
Balance,
December 31, 1998 1,870,357 6.70
Grants 2,131,636 21.51
Exercised (601,172) 2.76
Cancelled (308,035) 24.83
-----------------------------------------------
Balance,
December 31, 1999 3,092,786 16.50
</TABLE>
A summary of information about stock options outstanding at December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------- ---------------------------
Weighted
Exercise Number Avg. Life Number Weighted
Price Outstanding Remaining Exercisable Avg. Price
- ----- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
$0.38-1.69 225,309 7 years 68,770 $ 1.04
F-12
<PAGE>
3.00 478,950 8 years 31,104 3.00
7.25-12.50 641,086 8.5 years 329,002 8.68
19.50-24.81 1,874,682 9.5 years 221,533 20.79
26.88-31.13 307,200 9 years - -
----------- --------- --------- ------- ------
$0.38- 31.13 3,527,227 9 years 650,409 $11.73
</TABLE>
The Company recorded deferred compensation for the difference between the
grant price and the deemed fair value of the Company's common stock on
options to purchase 454,468 shares at exercise prices of $3.00 to $7.50
during May and June 1998. In addition, the Company recognized $110,000 in
expense during 1999 related to options granted for consulting services.
The Company has elected to apply the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Accordingly, the Company
accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Compensation
cost for stock options is measured as the excess, if any, of the fair value
of the Company's common stock at the date of grant over the stock option
exercise price. Had compensation costs for these plans been determined
consistent with SFAS No. 123, the Company's net loss would have been adjusted
to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net loss:
As reported $(27,653,000) $(13,798,000) $(3,485,000)
Pro forma (35,204,000) (15,037,000) (3,565,000)
Basic and diluted loss per share:
As reported (1.36) (1.01) (0.46)
Pro forma (1.73) (1.10) (0.47)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used: risk-free interest rates of 6%, 5.5% and 6%; no expected
dividends; expected lives of five years; and a volatility factor of 1.1, 1.3
and 1.1 in 1999, 1998 and 1997, respectively. The weighted average fair value
of the options granted in 1999, 1998 and 1997 was $17.21, $8.36 and $1.04,
respectively.
7. RELATED-PARTY TRANSACTIONS:
Prior to the acquisition by the Company of certain assets of Tech Squared,
Inc. as further described in Note 2, the Company's CEO owned 43% of Tech
Squared Inc. where he spent a portion of his time working as Tech Squared's
Chairman. The Company paid to Tech Squared a total of $254,000, $453,000 and
$168,000 in 1999, 1998 and 1997, respectively for rent, fulfillment fees and
other direct expenses.
F-13
<PAGE>
In February 1998, two stockholders, one of which is a director for the
Company, entered into an agreement with the Company whereby the stockholders
will help establish and oversee the international operations for the Company
for a term of three years. As consideration, the stockholders each received
warrants to purchase 100,000 shares of common stock, at $3.00 per share.
Deferred compensation has been reflected for the estimated fair value of the
services and is being recognized over the term of the agreement.
In connection with an investment in the Company in 1994, Fujitsu Limited
(Fujitsu) obtained certain rights with respect to the Company's common stock
and the operations of the Company's business. In December 1997, in exchange
for the issuance of 60,000 shares of the Company's common stock, Fujitsu
agreed to relinquish most rights under the agreement. In 1997, the Company
recorded a charge to expense for the fair value of the Common shares issued
totaling $101,250.
F-14
<PAGE>
EXHIBIT 10.17
ASSIGNMENT OF LEASE
THIS ASSIGNMENT is executed as of this 21ST day of APRIL, 1998, by
INTRANET INTEGRATION GROUP, INC., a Minnesota corporation ("Assignor"), in favor
of DIGITAL RIVER, INC., a Delaware corporation ("Assignee").
RECITALS
Assignor, as Tenant, and CSM Investors, Inc., a Minnesota corporation,
as Landlord ("Landlord") entered into that certain Lease (the "Lease")
dated April 24, 1996 regarding 32,919 square feet of space in the
Golden Triangle Business Center, located at 9625-9675 West 76th Street,
Eden Prairie, Minnesota (the "Premises").
Assignor desires to sell, transfer, convey and assign to Assignee, and
Assignee desires to acquire and assume Assignor's interest in the
Lease, according to the terms and conditions set forth hereinbelow.
NOW, THEREFORE, in consideration of the mutual promises herein and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by both parties, Assignor and Assignee agree as follows:
1.) RECITALS. The foregoing recitals are correct and are incorporated
herein.
2.) ASSIGNMENT AND ASSUMPTION. As of the Effective Date (defined
below):
(i) Assignor hereby assigns, transfers and conveys the Tenant's interest in the
Lease to Assignee and (ii) Assignee hereby assumes and agrees to perform all of
the obligations of the Tenant under the Lease that arise from and after the
Effective Date hereof in accordance with the terms and conditions set forth in
the Lease.
3.) REPRESENTATIONS AND WARRANTIES. Assignor represents and warrants to
Assignee as follows:
(a) A true and complete copy of the Lease is attached hereto as EXHIBIT
A and it is the only instrument and agreement in effect between
Landlord and Assignor. The Lease contains the entire agreement between
Landlord and Assignor concerning the Premises. The Lease is in full
force and effect and has not in any way been modified, amended,
terminated or rescinded.
(b) To the best of Assignor's knowledge, there exists no default nor
any event that, with the passing of time or delivery of notice or both,
would constitute a default under the Lease.
<PAGE>
(c) Rent and all other amounts due and payable by Assignor under the
Lease (collectively, the "Rent") are current and no Rent or other
amount is presently due and payable by Assignor to Landlord, including
any retroactive adjustments to Rent.
(d) Assignor has not issued or received any notice of cancellation,
termination or any other document affecting the Lease in any way, and
has no knowledge of any violation of any governmental statute,
regulation or ordinance relating to the Premises or the Lease.
(e) Assignor has good right to assign and transfer the Lease (subject
to obtaining the Consent of Landlord). The Lease is free and clear of
all charges and encumbrances.
(f) Assignor has received no notice of actual or threatened reduction
or curtailment of any utility service supplied to the Premises, nor of
any action or proceeding in condemnation, eminent domain, or
foreclosure in connection with or relating to the Premises.
(g) Assignor has no notice of any actual or threatened cancellation or
suspension of any certificates of occupancy for all or any portion of
the Premises.
(h) Assignor is not in default in any of its legal obligations or
liabilities regarding the Premises.
(i) To the best of Assignor's knowledge, Assignor's current use of the
Premises does not violate any federal, state, local or other
governmental building, zoning, health, accessibility, safety, planning,
subdivision, or other law, ordinance, or regulation, or any applicable
private restriction, and such use is a legal conforming use.
(j) Assignor has not received any notice of, nor is Assignor aware of,
any action, litigation, investigation, condemnation, violation, or
proceeding of any kind from any federal, state or local government
entity against Assignor relating to any portion of the Premises.
(k) Assignor is not aware of any defects in the structures or other
improvements on the Premises, including but without limitation the
roof, fixtures, systems or structure of such improvements.
Assignee is relying on the accuracy of the foregoing representations and
warranties in entering into this Agreement. The foregoing representations and
warranties are a material inducement to Assignee to enter into this Agreement.
4.) EFFECTIVE DATE. The Effective Date of this Assignment shall be July
15, 1998, or such earlier date as may be mutually agreed by Assignor and
Assignee.
5.) DELIVERY OF OCCUPANCY.
(a) As of May 1, 1998, Assignee shall have access to approximately
1,500 square feet of the Premises as shown cross-hatched on the plan
attached hereto as EXHIBIT B (the
2.
<PAGE>
"Partial Premises"). Assignee shall pay rent to Assignor in the amount
of Three Thousand and no/100 Dollars ($3,000.00) in consideration for
such early occupancy, which amount shall be due and payable on or
before May 1, 1998 and shall be considered gross rent, inclusive of all
base rent, additional rent, operating costs, real estate taxes, utility
costs and all other charges, fees, costs and expenses. Prior to May 1,
1998, Assignor shall remove all personal property and all other items
from the Partial Premises and shall deliver the Partial Premises in
broom/vacuum clean condition, at Assignor's expense.
(b) Assignee shall pay all costs and expenses in connection with
setting up the Partial Premises for Assignee's use.
(c) During said early occupancy of the Partial Premises, Assignor will
make available to Assignee 20 of 24 frames on one of its T-1 Lines.
Assignee will work with the MIS Director of Assignor on accessing such
line to not disrupt Assignor's systems. Any costs associated with
activating such T-1 Line shall be at the cost of Assignee and Assignee
further agrees to diligently work toward its own T-1 Line in a
reasonable and timely fashion.
(d) On the Effective Date, Assignor shall deliver all of the Premises
to Assignee in broom/vacuum clean condition. If such occupancy
commences on a date other than the first of a calendar month, then base
rent, additional rent and other charges under the Lease, and any other
operating expenses in connection with the Premises, shall be prorated
between Assignor and Assignee as of the date of such occupancy.
(e) The raised floor production area within the Premises shall remain
intact and shall not be altered by Assignor. Without limitation, the
raised floor, air conditioning equipment and fixtures, and fire safety
equipment and systems shall not be removed or altered by Assignor.
However, Assignor shall remove its computer equipment and personal
property.
6.) HVAC CERTIFICATION. Prior to the Effective Date, Assignor shall
deliver to Assignee a certification from a licensed, bonded and insured HVAC
contractor that all heating, ventilating and air conditioning equipment serving
the Premises is in proper working order.
7.) SECURITY DEPOSIT. Prior to the execution of this Agreement,
Assignee deposited with Assignor the sum of Twenty Thousand and no/100 Dollars
($20,000.00). Contemporaneously with the execution of this Assignment, Assignee
has deposited with Assignor an additional sum of Eleven Thousand and no/100
Dollars ($11,000.00). Said total of Thirty-one Thousand and no/100 Dollars
($31,000.00) shall be a security deposit for the performance by Assignee of the
terms and covenants of the Lease hereby assumed by Assignee. If Assignee fails
to keep and perform the terms and covenants of the Lease assumed by Assignee and
Assignor incurs loss or damage as a result of Landlord pursuing such payment or
performance from Assignor, then Assignor shall have the right to apply such
portion of said deposit as may be necessary to reimburse Assignor for such loss
or damage sustained. Said deposit shall be returned to Assignee, less any
depletion thereof as a result of the provisions of
3
<PAGE>
this paragraph, upon the expiration or termination of the Lease. If, at
any time prior to the expiration or termination of the Lease, Assignor is
released from liability under the Lease, then the entire deposit shall be
promptly returned to Assignee.
8.) MISCELLANEOUS. The headings used herein are for convenience only
and are not to be used in interpreting this Agreement. This Agreement shall be
construed, enforced and interpreted under the laws of the State of Minnesota.
This Agreement is the entire agreement between Assignor and Assignee regarding
the subject matter hereof; any prior agreements are superseded hereby. This
Agreement may not be modified, amended or changed orally, but only by an
agreement in writing signed by the parties hereto. Neither party shall be deemed
to have waived any rights under this Agreement unless such waiver is given in
writing and signed by such party. If any provision of this Agreement is invalid
or unenforceable, such provision shall be deemed to be modified to be within the
limits of enforceability or validity, if feasible; however, if the offending
provision cannot be so modified, it shall be stricken and all other provisions
of this Agreement in all other respects shall remain valid and enforceable. In
the event of a breach or default under this Agreement, the non-defaulting party
shall be entitled to recover reasonable attorneys' fees and court costs incurred
to enforce its rights regarding such default or breach.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment of
Lease of the day and year first above written.
ASSIGNOR:
INTRANET INTEGRATION GROUP,
INC.
Dated: 4-21-98 By: /s/ Jeffrey Sjobeck
--------------------------- ----------------------------
Its: CEO
ASSIGNEE:
DIGITAL RIVER, INC.
Dated: 4-21-98 By: /s/ Joel Ronning
--------------------------- ----------------------------
Its: President
4.
<PAGE>
EXHIBIT A TO ASSIGNMENT OF LEASE
LEASE
ARTICLE 1. LEASE TERMS
1.1 LANDLORD AND TENANT. This Lease ("Lease") is entered into this 24TH day of
April, 1996 by and between CSM INVESTORS, INC., a Minnesota corporation,
("Landlord") and INTRANET INTEGRATION GROUP, INC. d/b/a TECHNICAL PUBLISHING
SOLUTIONS, INC., a Minnesota corporation, ("Tenant").
1.2 PREMISES. Landlord hereby rents, leases, lets and demises to Tenant the
following described property ("Premises") as illustrated on the site plan
attached hereto as EXHIBIT A: approximately 15,242 square feet of warehouse
space and 17,677 square feet of office space (32,919 total square feet) in the
GOLDEN TRIANGLE BUSINESS CENTER located at 9625-9675 West 76th Street in Eden
Prairie, Minnesota, and consisting of approximately 149,215 square feet
("Building"). A floor plan of the Premises and a description of improvements, if
any, to be constructed are attached hereto as EXHIBITS B AND C.
1.3 LEASE TERM. The term of this Lease shall commence on AUGUST 1, 1996
("Commencement Date") and shall terminate eighty-four (84) months thereafter on
July 31, 2003, unless sooner terminated as hereinafter provided. In the event
that Tenant does not vacate the Premises upon the expiration or termination of
this Lease, Tenant shall be a tenant at will for the holdover period and all of
the terms and provisions of this Lease shall be applicable during that period,
except that Tenant shall pay Landlord as base rental for the period of such
holdover an amount equal to two (2) times the base rent which would have been
payable by Tenant had the holdover period been a part of the original term of
this Lease, together with all additional rent as provided in this Lease. Tenant
agrees to vacate and deliver the Premises to Landlord upon Tenant's receipt of
notice from Landlord to vacate. The rental payable during the holdover period
shall be payable to Landlord on demand. No holding over by Tenant, whether with
or without the consent of Landlord, shall operate to extend the term of this
Lease. Landlord agrees to provide Tenant early occupancy of the Premises on July
1, 1996 under the same terms and conditions contained herein, exclusive of rent
and operating expenses.
<TABLE>
<S> <C> <C> <C> <C> <C>
1.4 BASE RENT. BASE RENT IS: MONTHS MONTHLY BASE RENT PER SQ. FT.
------------------- ---------------- ----------------
1-84 $20,519.51 $7.48
1.5 PERMITTED USE: OPERATION OF A COMPUTER ASSISTED, DOCUMENT BASED PRINTING FACILITY, AND DISTRIBUTION OF
HARDWARE AND SOFTWARE PRODUCTS.
1.6 SECURITY DEPOSIT: NONE ($0.00)
1.7 PRO-RATA SHARE: TWENTY-TWO AND 06/100 PERCENT (22.06%) SUBJECT TO ADJUSTMENT AS PROVIDED IN SECTION 2.2 HEREOF.
1.8 ADDRESSES. LANDLORD'S ADDRESS: TENANT'S ADDRESS:
------------------- -----------------
CSM INVESTORS, INC. INTRANET INTEGRATION GROUP, INC.
2575 UNIVERSITY AVENUE WEST, SUITE 150 9625 WEST 76TH STREET, SUITE 150
ST. PAUL, MN 55114-1024 EDEN PRAIRIE, MN 55344
(612) 646-1717
</TABLE>
ARTICLE 2. RENT, OPERATING EXPENSES AND SECURITY DEPOSIT
2.1 BASE RENT. Tenant agrees to pay monthly as base rent during the term of this
Lease the sum of money set forth in Section 1.4 of this Lease, which amount
shall be payable to Landlord at the address shown above. One monthly installment
shall be due and payable on or before the first day of each calendar month
succeeding the Commencement Date during the term of this Lease; provided, if the
Commencement Date should be a date other than the first day of a calendar month,
the monthly rental set forth above shall be prorated to the end of that calendar
month, and all succeeding installments of rent shall be payable on or before the
first day of each succeeding calendar month during the term of this Lease.
Tenant shall pay, as additional rent, all other sums due under this Lease.
Notwithstanding anything in this Lease to the contrary, if Landlord, for any
reason whatsoever (other than Tenant's default), cannot deliver possession of
the Premises to the Tenant on the Commencement Date, this Lease shall not be
void or voidable, nor shall Landlord be liable for any loss or damage resulting
therefrom, nor shall the expiration of the term be extended, but all rent shall
be abated until Landlord delivers possession. Notwithstanding the above, in the
event Landlord has not delivered the Premises to the Tenant on or before
September 1, 1996 due to non-Tenant caused delays, Tenant may terminate this
lease with no further obligation.
Landlord and Tenant agree that the base rental rate contained herein is based on
construction costs estimated at $566,390.00. Tenant agrees to contribute
$75,000.00 towards construction of the Premises, payable to Landlord in
$25,000.00 lump sum payments, the first payable upon lease execution by both
parties, the second payable thirty (30) days following lease execution, and the
third due sixty (60) days after lease execution.
Construction cost increases or savings of $30,000.00 or less above or below the
estimated construction cost of $566,390.00 shall be amortized at nine percent
(9%) over the original term of this Lease and added or subtracted from the
monthly base rental. Tenant improvement cost savings above $30,000.00 shall
benefit the Landlord, and additional tenant improvement costs of more than
$30,000.00 over $566,390.00 shall be paid to Landlord upon finalization of
tenant improvement costs, at which time Landlord and Tenant agree to enter into
a lease addendum depicting the new base rental rate, if such rate is adjusted as
contained in this section.
2.2 OPERATING EXPENSES. Tenant shall also pay as additional rent Tenant's pro
rata share of the operating expenses of Landlord for the Building. Landlord may
invoice Tenant monthly for Tenant's pro rata share of the estimated operating
expenses for each calendar year, which amount shall be adjusted from
time-to-time by Landlord based upon anticipated operating expenses. Within six
(6) months following the close of each calendar year, Landlord shall provide
Tenant an accounting showing in reasonable detail the computations of additional
rent due under this Section. In the event the accounting shows that the total of
the monthly payments made by Tenant exceeds the amount of additional rent due by
Tenant under this section, the accounting shall be accompanied by evidence of a
credit to Tenant's account. In any event the accounting shows that the total of
the monthly payments made by Tenant is less than the amount of additional rent
due by Tenant under this Section, the accounting shall be accompanied by an
invoice for the additional rent. Notwithstanding any other provisions in this
lease, during the year in which this Lease terminates, Landlord, prior to the
termination date, shall have the option to invoice Tenant for Tenant's pro rata
share of the operating expenses based upon the previous year's operating
expenses. If this Lease shall terminate on a day other than the last day of a
calendar year, the amount of any additional rent payable by Tenant applicable to
the year in which the termination shall occur shall be prorated on the ratio
that the number of days from the commencement of the calendar year to and
including such termination date bears to 365. Tenant agrees to pay any
additional rent due under this Section within ten (10) days following receipt of
the invoice or accounting showing additional rent due. Tenant's pro rata share
set forth in Section 1.7 shall, subject to reasonable adjustment by Landlord, be
equal to a percentage based upon a fraction, the numerator of which is the total
area of the Premises as set forth in Article 1 and the denominator of which
shall be the net rentable area of the Building, as the same may change from time
to time.
2.3 DEFINITION OF OPERATING EXPENSES. The term "operating expenses" includes all
expenses incurred by Landlord with respect to the maintenance and operation of
the Building, including, but not limited to, the following: maintenance, repair
and replacement costs; electricity, fuel, water, sewer, gas and other common
Building utility charges; equipment used for maintenance and operation of the
Building; operational expenses; exterior window washing and janitorial services;
trash and snow removal; landscaping and pest control; management fees, not to
exceed four percent (4%) of gross rents, wages and benefits payable to employees
of Landlord whose duties are directly connected with the operation and
maintenance of the Building; all services, supplies, repairs, replacements or
other expenses for maintaining and operating the Building or project including
parking and common areas; improvements made to the Building which are required
under any governmental law or regulation that was not applicable to the Building
at the time it was constructed; installation of any device or other equipment
which improves the operating efficiency of any system within the Premises and
thereby reduces operating expenses; all other expenses which would
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generally be regarded as operating, repair, replacement and maintenance
expenses; all real property taxes and installments of special assessments,
including dues and assessments by means of deed restrictions and/or owners'
associations which accrue against the Building during the term of this Lease and
legal fees incurred in connection with actions to reduce the same; and all
insurance premiums Landlord is required to pay or deems necessary to pay,
including fire and extended coverage, and rent loss and public liability
insurance, with respect to the Building. Operating expenses which, for tax
purposes would be considered capital improvements, will be amortized over the
useful life of the expense.
2.4 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance premiums
paid by Landlord for the Building is caused by Tenant's use of the Premises or
if Tenant vacates the Premises and causes an increase in such premiums, then
Tenant shall pay as additional rent the amount of such increase to Landlord.
ARTICLE 3. OCCUPANCY AND USE
3.1 USE. Tenant warrants and represents to Landlord that the Premises shall be
used and occupied only for the purpose as set forth in Section 1.5. Tenant shall
occupy the Premises, conduct its business and control its agents, employees,
invitees and visitors in such a manner as is lawful, reputable and will not
create a nuisance. Tenant shall not permit any operation which emits any odor or
matter which intrudes into other portions of the Building or otherwise interfere
with, annoy or disturb any other lessee in its normal business operations or
Landlord in its management of the Building. Tenant shall not permit any waste on
the Premises to be used in any way which would, in the opinion of Landlord, be
extra hazardous on account of fire or which would, in any way, increase or
render void the fire insurance on the Building.
3.2 SIGNS. No sign of any type or description shall be erected, placed or
painted in or about the Premises or Building which are visible from the exterior
of the Premises, except those signs submitted to Landlord in writing, and which
signs are in conformance with Landlord's sign criteria, which is attached hereto
as EXHIBIT D.
3.3 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Tenant, at Tenant's sole cost
and expense, shall comply with all laws, ordinances, orders, rules and
regulations of state, federal, municipal or other agencies or bodies having
jurisdiction over the use, condition or occupancy of the Premises. Tenant will
comply with the reasonable rules and regulations of the Building adopted by
Landlord. Landlord shall have the right at all times to change and amend the
rules and regulations in any reasonable manner as may be deemed advisable for
the safety, care, cleanliness, preservation of good order and operation or use
of the Building or the Premises. All rules and regulations of the Building will
be sent by Landlord to Tenant in writing and shall thereafter be carried out and
observed by Tenant.
3.4 WARRANTY OF POSSESSION. Landlord warrants that it has the right and
authority to execute this Lease, and Tenant, upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in this
Lease, shall have possession of the Premises during the full term of this Lease
as well as any extension or renewal thereof. Landlord shall not be responsible
for the acts or omissions of any other lessee or third party that may interfere
with Tenant's use and enjoyment of the Premises, however, Landlord shall join
Tenant in protecting Tenant's rights to quiet enjoyment with respect to acts of
any third party.
3.5 RIGHT OF ACCESS. Landlord or its authorized agents shall, during reasonable
business hours and in the presence of a Tenant representative, except in the
case of an emergency, have the right to enter the Premises to inspect the same,
to show the Premises to prospective purchasers, lessees, mortgagees, insurers or
other interested parties, and to alter, improve or repair the Premises or any
other portion of the Building. Tenant hereby waives any claim for damages for
injury or inconvenience to or interference with Tenant's business, any loss of
occupancy or use of the Premises, and any other loss occasioned thereby. Tenant
shall not change Landlord's lock system or in any other manner prohibit Landlord
from entering the Premises. Landlord shall have the right to use any and all
means which Landlord may deem proper to open any door in an emergency without
liability therefor. Tenant shall permit Landlord to erect, use, maintain and
repair pipes, cables, conduits, plumbing, vents and wires in, to and through the
Premises as often and to the extent that Landlord may now or hereafter deem to
be necessary or appropriate for the proper use, operation and maintenance of the
Building.
ARTICLE 4. UTILITIES AND ACTS OF OTHERS
4.1 BUILDING SERVICES. Tenant shall pay when due, all charges for utilities
furnished to or for the use or benefit of Tenant or the Premises. Tenant shall
have no claim for rebate of rent on account of any interruption in service.
4.2 THEFT OR BURGLARY. Landlord shall not be liable to Tenant for losses to
Tenant's property or personal injury caused by criminal acts or entry by
unauthorized persons into the Premises or the Building, unless such loss or
injury is caused by the criminal act or gross negligence of the Landlord or its
representatives.
ARTICLE 5. REPAIRS AND MAINTENANCE
5.1. LANDLORD REPAIRS. Landlord shall not be required to make any improvements,
replacements or repairs of any kind or character to the Premises or the Building
during the term of this Lease except as are set forth in this Section. Landlord
shall maintain only the roof, foundation, parking and common areas, the
structural soundness of the exterior walls, doors, corridors, and other
structures serving the Premises, provided, that Landlord's cost of maintaining,
replacing and repairing the items set forth in this Section are operating
expenses subject to the additional rent provisions in Section 2.2 and 2.3.
Landlord shall not be liable to Tenant, except as expressly provided in this
Lease, for any damage or inconvenience, and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any repairs, alterations or
additions made by Landlord under this Lease.
5.2 TENANT REPAIRS. Tenant shall, at all times throughout the term of this
Lease, including renewals and extensions, and at its sole expense, keep and
maintain the Premises in a clean, safe, sanitary and first class condition and
in compliance with all applicable laws, codes, ordinances, rules and
regulations. Tenant's obligations hereunder shall include, but not be limited
to, the maintenance, repair and replacement, if necessary, of all heating,
ventilation, air conditioning, lighting and plumbing fixtures and equipment,
fixtures, motors and machinery, all interior walls, partitions, doors and
windows, including the regular painting thereof, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term "repairs" shall include replacements or renewals when
necessary, and all such repairs made by the Tenant shall be equal in quality and
class to the original work. The Tenant shall keep and maintain all portions of
the Premises and the sidewalk and areas adjoining the same in a clean and
orderly condition, free of accumulation of dirt, rubbish, snow and ice. If
Tenant fails, refuses or neglects to maintain or repair the Premises as required
in this Lease after notice shall have been given Tenant, in accordance with this
Lease, Landlord may make such repairs without liability to Tenant for any loss
or damage that may accrue to Tenant's merchandise, fixtures or other property or
to Tenant's business by reason thereof, and upon completion such thereof, Tenant
shall pay to Landlord all costs plus fifteen percent (15%) for overhead incurred
by Landlord in making repairs such upon presentation to Tenant of bill therefor.
Landlord agrees to assign all applicable warranties on equipment to Tenant upon
completion of the tenant improvements.
5.3. TENANT DAMAGES. Tenant shall not allow any damage to be committed on any
portion of the Premises or Building or common areas, and at the termination of
this lease, by lapse of time or otherwise, Tenant shall deliver the Premises to
Landlord in as good condition as existed at the Commencement Date of this Lease,
ordinary wear and tear excepted. The cost and expense of repairs necessary to
restore the condition of the Premises shall be borne by Tenant.
ARTICLE 6. ALTERATIONS AND IMPROVEMENTS
6.1 LANDLORD IMPROVEMENTS. If construction to the Premises is to be performed by
Landlord prior to or during Tenant's occupancy, Landlord will complete the
construction of the improvements to the Premises in accordance with plans and
specifications agreed to by Landlord and Tenant, which plans and specifications
are attached hereto as EXHIBITS B AND C. Within seven (7) days of receipt of
plans and specifications, Tenant shall execute a copy of the plans and
specifications and, if applicable, change orders setting forth the amount of any
costs to be borne by Tenant. In the event Tenant fails to execute the plans and
specifications and change orders within the seven (7) day period, Landlord may,
at its sole option, dictate this Lease cancelled or notify Tenant that the base
rent shall commence on the completion date even though the improvements to be
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<PAGE>
constructed by Landlord may not be complete. Any changes or modifications to the
approved plans and specifications shall be made and accepted by written change
orders or agreement signed by Landlord and Tenant and shall constitute an
amendment to this Lease. Tenant shall have the option to choose one contractor
to bid on the tenant improvement work depicted in EXHIBITS B AND C, subject to
Landlord's reasonable selection criteria, and Tenant shall have the right to
participate in the selection of the general contractor in cooperation with
Landlord.
6.2 TENANT IMPROVEMENTS. Tenant shall not make or allow to be made any
alterations or physical additions in or to the Premises without first obtaining
the written consent of Landlord, which consent may in the sole and absolute
discretion of Landlord be denied. Any alterations, physical additions or
improvements to the Premises made by Tenant shall at once become the property of
Landlord and shall be surrendered to Landlord upon the termination of this
Lease; provided, however, Landlord, at its option, may require Tenant to remove
any physical additions and/or repair any alterations in order to restore the
Premises to the conditions existing at the time Tenant took possession, all
costs of removal and/or alterations to be borne by Tenant. This clause shall not
apply to moveable equipment or furniture owned by Tenant, which may be removed
by Tenant at the end of the term of this Lease if Tenant is not then in default
and if such equipment and furniture are not subject to any other rights, liens
and interests of Landlord.
ARTICLE 7. CASUALTY AND INSURANCE
7.1 SUBSTANTIAL DESTRUCTION. If all or a substantial portion of the Premises or
the Building should be totally destroyed by fire or other casualty, or if the
Premises or the Building should be damaged so that rebuilding cannot reasonably
be completed within one hundred eighty (180) working days after the date of
written notification by Tenant to Landlord of the destruction, or if insurance
proceeds are not made available to Landlord, or are inadequate, for restoration,
this Lease shall terminate at the option of Landlord by written notice to Tenant
within sixty (60) days following the occurrence, and the rent shall be abated
for the unexpired portion of the Lease effective as of the date of the written
notification.
7.2 PARTIAL DESTRUCTION. If the Premises should be partially damaged by fire or
other casualty, and rebuilding or repairs can reasonably be completed within one
hundred eighty (180) working days from the date of written notification by
Tenant to Landlord of the destruction, and insurance proceeds are adequate and
available to Landlord for restoration, this Lease shall not terminate, and
Landlord shall at its sole risk and expense proceed with reasonable diligence to
rebuild or repair the Building or other improvements to substantially the same
condition in which they existed prior to the damage. If the Premises are to be
rebuilt or repaired and are untenantable in whole or in part following the
damage, and the damage or destruction was not caused or contributed to by act or
negligence of Tenant, its agents, employees, invitees or those for whom Tenant
is responsible, the rent payable under this Lease during the period for which
the Premises are untenantable shall be adjusted to such an extent as may be fair
and reasonable under the circumstances. In the event that Landlord fails to
complete the necessary repairs or rebuilding within one hundred eighty (180)
working days from the date of written notification by Tenant to Landlord of the
destruction, Tenant may at its option terminate this Lease by delivering written
notice of termination to Landlord, whereupon all rights and obligations under
this Lease shall cease to exist.
7.3 PROPERTY INSURANCE. Landlord shall not be obligated in any way or manner to
insure any personal property (including, but not limited to, any furniture,
machinery, goods or supplies) of Tenant upon or within the Premises, any
fixtures installed or paid for by Tenant upon or within the Premises, or any
improvements which Tenant may construct on the Premises. Tenant shall maintain
property insurance on its personal property and shall also maintain plate glass
insurance. Tenant shall have no right in or claim to the proceeds of any policy
of insurance maintained by Landlord even if the cost of such insurance is borne
by Tenant as set forth in Article 2.
7.4 WAIVER OF SUBROGATION. Anything in this Lease to the contrary withstanding,
Landlord and Tenant hereby waive and release each other of and from any and all
right of recovery, claim, action or cause of action, against each other, their
agents, officers and employees for any loss or damage that may occur to the
Premises, the improvements of the Building or personal property within the
Building, by reason of fire or the elements, regardless of cause or origin,
including negligence of Landlord or Tenant and their agents, officers and
employees. Landlord and Tenant agree immediately to give their respective
insurance companies which have issued policies of insurance covering all risk of
direct physical loss, written notice of the terms of the mutual waivers
contained in this Section.
7.5 HOLD HARMLESS. Landlord shall not be liable to Tenant's employees, agents,
invitees, licensees or visitors, or to any other person, for an injury to person
or damage to property on or about the Premises caused by any act or omission of
Tenant, its agents, servants or employees, or of any other person entering upon
the Premises under express or implied invitation by Tenant, or caused by the
improvements located on the Premises becoming out of repair, the failure or
cessation of any service provided by Landlord (including security service and
devices), or caused by leakage of gas, oil, water or steam or by electricity
emanating from the Premises. Tenant agrees to indemnify and hold harmless
Landlord of and from any loss, reasonable attorney's fees, expenses or claims
arising out of any such damage or injury.
7.6 PUBLIC LIABILITY INSURANCE. Tenant shall during the term hereof keep in full
force and effect at its expense a policy or policies of public liability
insurance with respect to the Premises and the business of Tenant, on terms and
with companies approved in writing by Landlord, in which both Tenant and
Landlord shall be covered by being named as insured parties under reasonable
limits of liability not less than $1,000,000, or such greater coverage as
Landlord may reasonably require, combined single limit coverage for injury or
death. Such policy or policies shall provide that thirty (30) days' written
notice must be given to Landlord prior to cancellation thereof. Tenant shall
furnish evidence satisfactory to Landlord at the time this Lease is executed
that such coverage is in full force and effect.
ARTICLE 8. CONDEMNATION
8.1 SUBSTANTIAL TAKING. If all or a substantial part of the Premises are taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
the taking would prevent or materially interfere with the use of the Premises
for the purpose for which it is then being used, this Lease shall terminate and
the rent shall be abated during the unexpired portion of this Lease effective on
the date physical possession is taken by the condemning authority. Tenant shall
have no claim to the condemnation award or proceeds in lieu thereof, except that
Tenant shall be entitled to a separate award for the cost of removing and moving
its personal property.
8.2 PARTIAL TAKING. If all or a substantial part of the Premises are taken for
any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in Section 8.1 above, the rent payable
under this Lease during the unexpired portion of the term shall be adjusted to
such an extent as may be fair and reasonable under the circumstances. Tenant
shall have no claim to the condemnation award or proceeds in lieu thereof,
except that Tenant shall be entitled to a separate award for the cost of
removing and moving its personal property.
ARTICLE 9. ASSIGNMENT OR SUBLEASE
9.1 LANDLORD ASSIGNMENT. Landlord shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and in
the Building. Any such sale, transfer or assignment shall operate to release
Landlord from any and all liabilities under this Lease arising after the date of
such sale, assignment or transfer.
9.2 TENANT ASSIGNMENT. Tenant shall not assign, in whole or in part, this Lease,
or allow it to be assigned, in whole or in part, by operation of law or
otherwise (including without limitation by transfer of a majority interest of
stock, merger, or dissolution, which transfer of majority interest of stock,
merger or dissolution shall be deemed an assignment) or mortgage or pledge the
same, or sublet the Premises, in whole or in part, without the prior written
consent of Landlord, which consent shall not be unreasonably withheld, and in no
event shall said such assignment or sublease ever release Tenant or any
guarantor from any obligation or liability hereunder. Notwithstanding anything
in this Lease to the contrary, in the event of any assignment or sublease, any
option or right of first refusal granted to Tenant shall not be assignable by
Tenant to any assignee or sublessee. No assignee or sublessee of the Premises or
any portion thereof may assign or sublet the Premises or any portion thereof.
Notwithstanding the above, Landlord hereby consents to an assignment of this
Lease to Intranet Solutions, Inc. upon finalization of the merger between
Intranet Integration Group, Inc. and MacGregor Sports & Fitness, Inc.
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9.3 CONDITIONS OF ASSIGNMENT. If Tenant desires to assign or sublet all or any
part of the Premises, it shall so notify Landlord at least thirty (30) days in
advance of the date on which Tenant desires to make such assignment or sublease.
Tenant shall provide Landlord with a copy of the proposed assignment or sublease
and such information as Landlord might request concerning the proposed sublessee
or assignee to allow Landlord to make informed judgments as to the financial
condition, reputation, operations and general desirability of the proposed
sublessee or assignee. Within fifteen (15) days after Landlord's receipt of
Tenant's proposed assignment or sublease and all required information concerning
the proposed sublease or assignee, Landlord shall have the following options:
(1) consent to the proposed assignment or sublease, and, if the rent due and
payable by any assignee or sublessee under any such permitted assignment or
sublease (or a combination of the rent payable under such assignment or sublease
plus any bonus or any other consideration or any payment incident thereto)
exceeds the rent payable under this Lease for such space, Tenant shall pay to
Landlord all such excess rent and other excess consideration within ten (10)
days following receipt thereof by Tenant; or (2) refuse, with reasonable
judgement, to consent to the proposed assignment or sublease, which refusal
shall be deemed to have been exercised unless Landlord gives Tenant written
notice providing otherwise. Upon the occurrence of an event of default, if all
or any part of the Premises are then assigned or sublet, Landlord, in addition
to any other remedies provided by this Lease or provided by law, may, at its
option, collect directly from the assignee or sublessee all rents becoming due
to Tenant by reason of the assignment or sublease, and Landlord shall have a
security interest in all properties on the Premises to secure payment of such
sums. Any collection directly by Landlord from the assignee or sublessee shall
not be construed to constitute a novation or a release of Tenant or any
guarantor from the further performance of its obligations under this Lease.
9.4 RIGHTS OF MORTGAGE. Tenant accepts this Lease subject and subordinate to any
recorded mortgage presently existing or hereafter created upon the Building and
to all existing recorded restrictions, covenants, easements and agreements with
respect to the Building. Landlord is hereby irrevocably vested with full power
and authority to subordinate Tenant's interest under this Lease to any first
mortgage lien hereafter placed on the Premises, and Tenant agrees upon demand to
execute additional instruments subordinating this Lease as Landlord may require.
If the interests of Landlord under this Lease shall be transferred by reason of
foreclosure or other proceedings for enforcement of any first mortgage or deed
of trust on the Premises, Tenant shall be bound to the transferee (sometimes
called the "Purchaser") at the option of the Purchaser, under the terms,
covenants and conditions of this Lease for the balance of the term remaining,
including any extensions or renewals, with the same force and effect as if the
Purchaser were Landlord under this Lease, and, if requested by the Purchaser,
Tenant agrees to attorn to the Purchaser, including the first mortgagee under
any such mortgage if it be the Purchaser, as its Landlord. Notwithstanding the
foregoing, Tenant shall not be disturbed in its possession of the Premises so
long as Tenant is not in default hereunder.
9.5 TENANT'S STATEMENT. Tenant agrees to furnish, from time to time, within ten
(10) days after receipt of a request from Landlord or Landlord's mortgagee, a
statement certifying, if applicable, the following: Tenant is in possession of
the Premises; the Premises are acceptable; the Lease is in full force and
effect; the Lease is unmodified; Tenant claims no present charge, lien, or claim
or offset against rent; the rent is paid for the current month, but is not
prepaid for more than one month and will not be prepaid for more than one month
in advance; there is no existing default by reason of some act or omission by
Landlord; and such other matters as may be reasonably required by Landlord or
Landlord's mortgagee. Tenant's failure to deliver such statement, in addition to
being a default under this Lease, shall be deemed to establish conclusively that
this Lease is in full force and effect except as declared by Landlord, that
Landlord is not in default of any of its obligations under this Lease, and that
Landlord has not received more than one month's rent in advance. Tenant agrees
to furnish, from time to time, within ten (10) days after receipt of a request
from Landlord, a current financial statement of Tenant, certified as true and
correct by Tenant.
ARTICLE 10. LANDLORD'S LIEN AND SECURITY AGREEMENT (Intentionally deleted)
ARTICLE 11. DEFAULT AND REMEDIES
11.1 DEFAULT BY TENANT. The following shall be deemed to be events of default
("Default") by Tenant under this Lease: (1) Tenant shall fail to pay when due
any installment of rent or any other payment required pursuant to this Lease;
(2) Tenant shall abandon any substantial portion of the Premises; (3) Tenant
shall fail to comply with any term, provision or covenant of this Lease, other
than the payment of rent, and the failure is not cured within ten (10) days
after written notice to Tenant; (4) Tenant shall file a petition or an
involuntary petition is filed against Tenant under any applicable federal or
state bankruptcy or insolvency taw or Tenant admits that it cannot meet its
financial obligations as they become due; or if a receiver or trustee shall be
appointed for all or substantially all of the assets of Tenant; or Tenant shall
make a transfer in fraud of creditors or shall make an assignment for the
benefit of creditors; or (5) Tenant shall do or permit to be done any act which
results in a lien being filed against the Premises or the Building and/or
project of which the Premises are a part, except that Tenant shall have the
right to seek satisfaction of said lien after posting a bond of one hundred
twenty-five percent (125%) of the lien amount.
In the event that an order for relief is entered in any case under Title 11,
U.S.C. (the "Bankruptcy Code") in which Tenant is the debtor and: (A) Tenant as
debtor-in-possession, or any trustee who may be appointed in the case (the
"Trustee") seeks to assume the Lease, then Tenant, or Trustee if applicable, in
addition to providing adequate assurance described in applicable provisions of
the Bankruptcy Code, shall provide adequate assurance to Landlord of Tenant's
future performance under the Lease by depositing with Landlord a sum equal to
the lesser of twenty-five percent (25%) of the rental and other charges due for
the balance of the Lease term or six (6) months' rent ("Security"), to be held
(without any allowance for interest thereon) to secure Tenant's obligation under
the Lease, and (B) Tenant, or Trustee if applicable, seeks to assign the Lease
after assumption of the same, then Tenant, in addition to providing adequate
assurance described in applicable provisions of the Bankruptcy Code, shall
provide adequate assurance to Landlord of the proposed assignee's future
performance under the Lease by depositing with Landlord a sum equal to the
Security to be held (without any allowance or interest thereon) to secure
performance under the Lease. Nothing contained herein expresses or implies, or
shall be construed to express or imply, that Landlord is consenting to
assumption and/or assignment of the Lease by Tenant, and Landlord expressly
reserves all of its rights to object to any assumption and/or assignment of the
Lease. Neither Tenant nor any Trustee shall conduct or permit the conduct of any
"fire", "bankruptcy", "going out of business" or auction sate in or from the
Premises.
11.2 REMEDIES FOR TENANT'S DEFAULT. Upon the occurrence of a Default as defined
above, Landlord may elect either (i) to cancel and terminate this Lease and this
Lease shall not be treated as an asset of Tenant's bankruptcy estate, or (ii) to
terminate Tenant's right to possession only without cancelling and terminating
Tenant's continued liability under this Lease. Notwithstanding the fact that
initially Landlord elects under (ii) to terminate Tenant's right to possession
only, Landlord shall have the continuing right to cancel and terminate this
Lease by giving ten (10) days' written notice to Tenant of such further
election, and shall have the right to pursue any remedy at law or in equity that
may be available to Landlord.
In the event of election under (ii) to terminate Tenant's right to possession
only, Landlord may, at Landlord's option, enter the Premises and take and hold
possession thereof, without such entry into possession terminating this Lease or
releasing Tenant in whole or in part from Tenant's obligation to pay all amounts
hereunder for the full stated term. Upon such reentry, Landlord may remove all
persons and property from the Premises and such property may be removed and
stored in a public warehouse or elsewhere at the cost and for the account of
Tenant, without becoming liable for any loss or damage which may be occasioned
thereby. Such reentry shall be conducted in the following manner: without resort
to judicial process or notice of any kind if Tenant has abandoned or voluntarily
surrendered possession of the Premises; and, otherwise, by resort to judicial
process. Upon and after entry into possession without termination of the Lease,
Landlord may, but is not obligated to, relet the Premises, or any part thereof,
to any one other than the Tenant, for such time and upon such terms as Landlord,
in Landlord's sole discretion, shall determine. Landlord may make repairs to the
Premises to the extent deemed by Landlord necessary or desirable to relet the
Premises.
Upon such reentry, Tenant shall be liable to Landlord as follows:
<TABLE>
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A. For all attorneys' fees incurred by Landlord in connection with exercising any remedy hereunder;
B. For the unpaid installments of base rent, additional rent or
other unpaid sums which were due prior to such reentry,
including interest and late payment fees, which sums shall be
payable immediately.
C. For the installments of base rent, additional rent, and other
sums falling due pursuant to the provisions of this Lease for
the period after reentry during which the Premises remain
vacant, including late payment charges and interest, which
sums shall be payable as they become due hereunder.
-4-
<PAGE>
D. For all expenses incurred in releasing the Premises, including
leasing commissions, attorneys' fees, and costs of alteration
or repairs, which shall be payable by Tenant as they are
incurred by Landlord; and
E. While the Premises are subject to any new lease or leases made
pursuant to this Section, for the amount by which the monthly
installments payable under such new lease or leases is less
than the monthly installment for all charges payable pursuant
to this Lease, which deficiencies shall be payable monthly.
</TABLE>
Notwithstanding Landlord's election to terminate Tenant's right to possession
only, and notwithstanding any reletting without termination, Landlord, at any
time thereafter, may elect to terminate this Lease, and to recover (in lieu of
the amounts which would thereafter be payable pursuant to the foregoing, but not
in diminution of the amounts payable as provided above before termination), as
damages for loss of bargain and not as a penalty, an aggregate sum equal to the
amount by which the rental value of the portion of the term unexpired at the
time of such election is less than an amount equal to the unpaid base rent,
percentage rent, and additional rent and all other charges which would have been
payable by Tenant for the unexpired portion of the term of this Lease, which
deficiency and all expenses incident thereto, including commissions, attorneys'
fees, expenses of alterations and repairs, shall be due to Landlord as of the
time Landlord exercises said election, notwithstanding that the term had not
expired. If Landlord, after such reentry, leases the Premises, then the rent
payable under such new lease shall be conclusive evidence of the rental value of
the unexpired portion of the term of this Lease.
If this Lease shall be terminated by reason of bankruptcy or insolvency of
Tenant, Landlord shall be entitled to recover from Tenant or Tenant's estate, as
liquidated damages for loss of bargain and not as a penalty, the amount
determined by the immediately preceding paragraph.
11.3 LANDLORD'S RIGHT TO PERFORM FOR ACCOUNT OF TENANT. If Tenant shall be in
Default under this Lease, Landlord may cure the Default at anytime for the
account and at the expense of Tenant. If Landlord cures a Default on the part of
Tenant, Tenant shall reimburse Landlord upon demand for any amount expended by
Landlord in connection with the cure, including, without limitation, attorneys'
fees and interest.
11.4 INTEREST, ATTORNEY'S FEES AND LATE CHARGE. In the event of a Default by
Tenant: (1) If a monetary default, interest shall accrue on any sum due and
unpaid at the rate of the lesser of eighteen percent (18%) per annum or the
highest rate permitted by law and, if Landlord places in the hands of an
attorney the enforcement of all or any part of this Lease, the collection of any
rent due or to become due or recovery of the possession of the Premises, Tenant
agrees to pay Landlord's costs of collection, including reasonable attorney's
fees for the services of the attorney, whether suit is actually filed or not.
Other remedies for nonpayment of rent notwithstanding, if the monthly rental
payment or any other payment due from Tenant to Landlord is not received by
Landlord on or before the fifth (5th) day of the month for which the rent is
due, a late payment charge of five percent (5%) of such past due amount shall
become due and payable in addition to such amounts owed under this Lease.
11.5 ADDITIONAL REMEDIES, WAIVERS, ETC.
<TABLE>
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A. The rights and remedies of Landlord and Tenant set forth herein
shall be in addition to any other right and remedy now and
hereafter provided by law. All rights and remedies shall be
cumulative and not exclusive of each other. Landlord or Tenant
may exercise its rights and remedies at any times, in any
order, to any extent, and as often as Landlord or Tenant deems
advisable without regard to whether the exercise of one right
or remedy precedes, concurs with or succeeds the exercise of
another.
B. A single or partial exercise of a right or remedy shall not
preclude a further exercise thereof, or the exercise of another
right or remedy from time to time.
C. No delay or omission by Landlord or Tenant in exercising a
right or remedy shall exhaust or impair the same or constitute
a waiver of, or acquiescence to, a Default.
D. No waiver of Default shall extend to or affect any other
Default or impair any right or remedy with respect thereto.
E. No action or inaction by Landlord or Tenant shall constitute a
waiver of Default.
F. No waiver of a Default shall be effective unless it is in writing
and signed by Landlord or Tenant.
</TABLE>
ARTICLE 12. RELOCATION (INTENTIONALLY DELETED)
ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES
13.1 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY TENANT, AS A MATERIAL
CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF
THE PARTIES: THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR
TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN
WRITING IN THIS LEASE.
13.2 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED
EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT.
13.3 LIMITATION OF WARRANTIES. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE
ARE AND SHALL BE NO IMPLIED WARRANTIES OR MERCHANTABILITY, HABITABILITY, FITNESS
FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND
THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS
LEASE. LANDLORD AGREES TO PROVIDE TENANT A COPY OF THE CERTIFICATE OF OCCUPANCY
UPON THE COMPLETION OF THE IMPROVEMENTS.
ARTICLE 14. MISCELLANEOUS
14.1 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to the
benefit of Landlord and Tenant and their respective heirs, personal
representatives, successors and assigns. It is hereby covenanted and agreed that
should Landlord's interest in the Premises cease to exist for any reason during
this Lease, then notwithstanding the happening of such event this Lease
nevertheless shall remain unimpaired and in full force and effect, and Tenant
hereunder agrees to attorn to the then owner of the Premises.
14.2 USE OR RENT TAX. If applicable in the jurisdiction where the Premises are
issued, Tenant shall pay and be liable for all rental, sales and use taxes or
other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Landlord under the terms of this Lease.
Any such payment shall be paid concurrently with the payment of the rent,
additional rent, operating expenses or other charge upon which the tax is based
as set forth above.
14.3 ACT OF GOD. Landlord shall not be required to perform any covenant or
obligation in this Lease, or be liable in damages to Tenant, so long as the
performance or non-performance of the covenant or obligation is delayed, caused
or prevented by an act of God, force majeure or by Tenant.
14.4 HEADINGS. The section headings appearing in this Lease are inserted only as
a matter of convenience and in no way define, limit, construe or describe the
scope or intent of any Section.
14.5 NOTICE. All rent and other payments required to be made by Tenant shall be
payable to Landlord at the address set forth in Section 1.8. All payments
required to be made by Landlord to Tenant shall be payable at the address set
forth in Section 1.8, or at any other address within the United States as Tenant
may specify from time to time by written notice. Any notice or document required
or permitted to be delivered by the terms of this Lease shall be deemed to be
delivered (whether or not actually received) when deposited in the United States
Mail, postage prepaid, certified mail, return receipt requested, addressed to
the parties at the respective addresses set forth in Section 1.8.
-5-
<PAGE>
14.6 TENANT'S AUTHORITY. If Tenant executes this Lease as a corporation, each of
the persons executing this Lease on behalf of Tenant does hereby personally
represent and warrant that Tenant is a duly authorized and existing corporation,
that Tenant is qualified to do business in the state in which the Premises are
located, that the corporation has full right and authority to enter into this
Lease, and that each person signing on behalf of the corporation is authorized
to do so. In the event any representation or warranty is false, all persons who
execute this Lease shall be liable, individually, as Tenant.
14.7 HAZARDOUS SUBSTANCES. Tenant, its agents or employees, shall not bring or
permit to remain on the Premises or Building any asbestos, petroleum or
petroleum products, explosives, toxic materials, or substances defined as
hazardous wastes, hazardous materials, or hazardous substances under any
federal, state, or local law or regulation ("Hazardous Materials"). Tenant's
violation of the foregoing prohibition shall constitute a material breach and
default hereunder and Tenant shall indemnify, hold harmless and defend Landlord
from and against any claims, damages, penalties, liabilities, and costs
(including reasonable attorney fees and court costs) caused by or arising out of
(i) a violation of the foregoing prohibition by Tenant or (ii) the presence of
any Hazardous Materials on, under, or about the Premises or the Building during
the term of the Lease caused by or arising, in whole or in part, out of the
actions of Tenant, its agents or employees. Tenant shall clean up, remove,
remediate and repair any soil or ground water contamination and damage caused by
the presence and any release of any Hazardous Materials in, on, under or about
the Premises or the Building during the term of the Lease caused by or arising,
in whole or in part, out of the actions of Tenant, its agents or employees, in
conformance with the requirements of applicable law. Tenant shall immediately
give Landlord written notice of any suspected breach of this paragraph; upon
learning of the presence of any release of any Hazardous Materials, and upon
receiving any notices from governmental agencies pertaining to Hazardous
Materials which may affect the Premises or the Building. The obligations of
Tenant hereunder shall survive the expiration of earlier termination, for any
reason, of this Lease. Notwithstanding the above, Landlord agrees to hold Tenant
harmless for Hazardous Materials in, on or about the Building prior to or during
Tenant's occupancy, which were not caused or contributed by the Tenant, its
employees, customers or representatives.
14.8 SEVERABILITY. If any provision of this Lease or the application thereof to
any person or circumstances shall be invalid or unenforceable to any extent, the
remainder of this Lease and the application of such provisions to other persons
or circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.
14.9 LANDLORD'S LIABILITY. If Landlord shall be in default under this Lease and,
if as a consequence of such default, Tenant shall recover a money judgment
against Landlord, such judgment shall be satisfied only out of the right, title
and interest of Landlord in the Building as the same may then be encumbered and
neither Landlord nor any person or entity comprising Landlord shall be liable
for any deficiency. In no event shall Tenant have the right to levy execution
against any property of Landlord nor any person or entity comprising Landlord
other than its interest in the Building as herein expressly provided. Landlord
agrees to maintain an equity interest of $200,000.00 in the Building at all
times during the term of this Lease.
14.10 BROKERAGE. Landlord and Tenant each represents and warrants to the other
that there is no obligation to pay any brokerage fee, commission, finder's fee
or other similar charge in connection with this Lease, other than fees due to
Gary Lally of Hoyt Properties, which are the responsibility of Landlord. Each
party covenants that it will defend, indemnify and hold harmless the other party
from and against any loss or liability by reason of brokerage or similar
services alleged to have been rendered to, at the instance of, or agreed upon by
said indemnifying party. Notwithstanding anything herein to the contrary,
Landlord and Tenant agree that there shall be no brokerage fee or commission due
on expansions, options or renewals by Tenant.
14.11 MANAGEMENT AGENT. Landlord hereby notifies Tenant that the person
authorized to execute this Lease and manage the Premises is CSM Corporation, a
Minnesota corporation, which has been appointed to act as the agent in leasing
management and operation of the Building for owner and is authorized to accept
service of process and receive or give receipts for notices and demands on
behalf of Landlord. Landlord reserves the right to change the identity and
status of its duly authorized agent upon written notice to Tenant.
14.12 SUBMISSION OF LEASE. Submission of this Lease to Tenant for signature does
not constitute a reservation of space or an option to lease. This Lease is not
effective until execution by and delivery to both Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease effective the
day and year first above written.
<TABLE>
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LANDLORD: TENANT:
CSM INVESTORS, INC. INTRANET INTEGRATION GROUP, INC.,
BY: /s/ David Carland BY: /s/ Jeffrey Sjobeck
--------------------------- ---------------------------
ITS: V.P. ITS: CFO & Secretary
--------------------------- ---------------------------
</TABLE>
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<PAGE>
GUARANTEE OF LEASE
WHEREAS, INTRANET INTEGRATION GROUP, INC. d/b/a TECHNICAL PUBLISHING SOLUTIONS,
INC., a Minnesota corporation, hereinafter referred to as "Tenant" has requested
that a certain Lease of even date herewith be executed by and between Tenant and
CSM INVESTORS, INC., a Minnesota corporation, hereinafter referred to as
"Landlord", covering certain premises located at 9625 West 76th Street, Suite
150, in Eden Prairie, Minnesota.
WHEREAS, the Landlord requires as a condition to its execution of said Lease
that the undersigned ("Guarantor") guarantee the full performance of the
obligations of Tenant under said Lease; and
WHEREAS, the Guarantor is desirous that Landlord enter into said Lease with
Tenant.
NOW THEREFORE, to induce Landlord to enter into said Lease, and in consideration
of the execution of said Lease by Landlord, the Guarantor hereby unconditionally
guarantees the full performance of each and all of the terms, covenants and
conditions of said Lease to be kept and performed by said Tenant, including the
payment of all rentals and other charges to accrue thereunder, up to the total
value of Landlord's investment in tenant improvements to the Premises, and the
Guarantor agrees as follows:
1. That the covenants and agreement on its part shall continue in favor of
the Landlord notwithstanding any extension, modification, or alteration
of said Lease entered into by and between the parties thereto, or their
successors or assigns, or notwithstanding any assignment of said Lease,
with or without the consent of the Landlord and no extension,
modification, alteration or assignment of the above-referred to Lease
shall in any manner release or discharge the Guarantor, except as
contained herein, and it does hereby consent thereto.
2. That this Guarantee will continue unchanged by a (i) bankruptcy,
reorganization or insolvency of the Tenant or any successor or assignee
thereof or by any disaffirmance of abandonment by a trustee of Tenant,
(ii) disability or other defense of Tenant, or (iii) the cessation for
any cause from any cause whatsoever of the liability of Tenant.
3. That Tenant may not, without prior written approval of Landlord, assign
this Guarantee of Lease in whole or in part, and no assignment or
transfer of the Lease shall operate to extinguish or diminish the
liability of the Guarantor hereunder.
4. That the liability of the Guarantor under this Guarantee of Lease shall
be primary and that in any right of action which shall accrue to
Landlord under the Lease, the Landlord may at its option proceed
against the Guarantor without having commenced any action, or having
obtained any judgment against the Tenant.
5. That the Guarantor agrees to pay Landlord's reasonable attorneys' fees
and all costs and other expenses incurred in any collection or
attempted collection or in any negotiations relative to the obligations
hereby guaranteed or enforcing this Guarantee of Lease against the
Guarantor, individually and jointly.
6. That it does hereby waive notice of any demand by the Landlord as well
as notice of default in the payment of rent or any other amounts
contained or reserved in the Lease.
7. Notwithstanding the above, this Guarantee of Lease shall become null
and void upon the earlier of the finalization of the merger between
Intranet Integration Group, Inc. and MacGregor Sports & Fitness, Inc.,
or receipt by Intranet Integration Group, Inc. or its assignees of a
minimum of $3,000,000.00 of equity financing.
The use of the singular herein shall include the plural. The obligation of two
or more parties shall be joint and several. The terms and provisions of this
Guarantee shall be binding upon and inure to the benefit of the respective
successors and assigns of the parties herein named.
IN WITNESS WHEREOF, the Guarantor has caused this Guarantee to be executed as of
the date set forth on Page 1 of the Lease (if Guarantor shall be a corporation,
the authorized officers must sign on behalf of the corporation. This Guarantee
must be executed by the president or vice president and the secretary or
assistant secretary).
By: /s/ Robert Olson
------------------------------------
ROBERT OLSON
Home Address: ------------------------------------
------------------------------------
Home Phone:
------------------------------------
Social Security #:
------------------------------------
Date: 4-24-96
------------------------------------
<PAGE>
EXHIBIT A
[FLOOR PLAN OMITTED]
<PAGE>
EXHIBIT B
[FLOOR PLAN OMITTED]
<PAGE>
[Letterhead]
IntraNet
SOLUTIONS, INCORPORATED September 18, 1997
Helping Companies Manage and XXX Information
Mr. Bruce Carland
CSM Investors, Inc.
2575 University Avenue West, Suite 150
St. Paul, MN 55114-1024
Dear Mr. Carland:
Pursuant to the lease agreement dated April 24, 1996 by and between IntraNet
Integration Group, Inc. (Tenant) and CSM Investors, Inc. (Landlord), Mr.
Robert F. Olson entered into a guarantee of this lease. Paragraph 7 of this
guarantee included the provision "this Guarantee shall become null and void
upon the earlier of the finalization of the merger between IntraNet
Integration Group, Inc. and MacGregor Sports & Fitness, Inc. or the receipt
by IntraNet Integration Group, Inc. or its assignees of a minimum of
$3,000,000 of equity financing".
This correspondence is intended to document Landlord's acknowledgement of the
occurrence of the factors which have voided the guarantee noted above. Please
find enclosed the Report on Form 8-K filed by IntraNet Solutions, Inc.
(IntraNet) (entity created by the merger of IntraNet Integration Group, Inc.
and MacGregor Sports & Fitness, Inc.) that documents the completion of the
merger required by the guarantee agreement. Please also find enclosed a copy
of the Form 10QSB for the period ended June 30, 1997 filed by IntraNet that
includes the details of the recent $4 million private placement equity
financing completed by the company.
Please sign where indicated below acknowledging Landlord's agreement that the
guarantee of Robert Olson pursuant to the above noted lease has been voided.
Please then return this correspondence back to me in the enclosed envelope.
If you have any questions, please contact me at 612-903-2003.
Sincerely,
/s/ Jeffrey J. Sjobeck
----------------------------
Jeffrey J. Sjobeck
Chief Financial Officer
AGREEMENT OF VOIDED PERSONAL GUARANTY:
Pursuant to the lease agreement dated April 24, 1996 by and between IntraNet
Integration Group, Inc. (Tenant) and CSM Investors, Inc. (Landlord), Landlord
agrees and consents to the voiding of the personal guaranty of
Mr. Robert F. Olson.
/s/ David Carland
----------------------
Signed
David Carland
----------------------
Print Name
V.P.
----------------------
Title
10-2-97
----------------------
Date
<PAGE>
EXHIBIT B TO ASSIGNMENT OF LEASE
[FLOOR PLAN OMITTED]
<PAGE>
Exhibit 10.18
TECHNOLOGY PARK
LEASE AGREEMENT
THIS LEASE AGREEMENT made and entered into this 18TH day of JANUARY,
2000 between PROPERTY RESERVE, INC. (hereinafter referred to as "Landlord"),
whose address for purposes hereof is 10 East South Temple Street, Suite 400,
Salt Lake City, Utah 84133-1103 and DIGITAL RIVER, INC., A DELAWARE CORPORATION
(hereinafter referred to as "Tenant"), whose address for purposes hereof is
9600-9700 West 76th Street, Eden Prairie, Minnesota 55344.
This LEASE AGREEMENT consists of the SPECIFIC LEASE PROVISIONS written here
below, the GENERAL LEASE PROVISIONS attached hereto as Exhibit "A," and all
other EXHIBITS attached hereto. In the event there is a conflict between the
SPECIFIC LEASE PROVISIONS and the GENERAL LEASE PROVISIONS, the SPECIFIC LEASE
PROVISIONS shall prevail.
SPECIFIC LEASE PROVISIONS
1. LEASED PREMISES. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord, subject to the terms and conditions of this Lease
Agreement, those certain premises hereinafter described, and referred to as the
"Leased Premises," consisting of approximately 22,253 rentable square feet (see
Paragraph 14(d)) in the building known as Technology Park I & II, located at
9600 - 9700 West 76th Street, Eden Prairie, Minnesota 55344 (hereinafter
referred to as the "Project"), together with the right in common with others to
the use of any and all common entrance ways, lobbies, restrooms, elevators,
drives, parking areas, stairs, and other similar access and service ways and
common areas in or adjacent to and used in common with the building of which
said Leased Premises are a part. The Leased Premises are described below and
reflected on the plan attached hereto and made a part hereof as Exhibit "B":
2. TERM. Subject to and upon the terms and conditions set forth herein,
this Lease Agreement shall continue in force for a term of forty-two (42) months
and eighteen (18) days, beginning on the 14th day of January, 2000("Beginning
Date") and ending on the 31st day of July, 2003 ("Expiration Date").
3. RENTAL PAYMENT.
a. Tenant shall pay to Landlord on the first day of each month
during the term of this Lease Agreement in legal tender of the United States of
America, without prior notice or demand and without any offset or deduction
whatsoever, at the office of the Landlord, or at such place or to such property
manager as Landlord may from time to time designate in writing, rental comprised
of both Base Rental ("Base Rental") described below and Additional Rent
("Additional Rent") as hereinafter described. Tenant shall, however, be required
to pay the first month's rent and security deposit upon execution of this Lease
Agreement. Base Rental and Additional Rent are sometimes referred to hereafter
as Rent ("Rent").
b. Tenant agrees that if any rental payment or other money due
hereunder from Tenant to Landlord remains unpaid five (5) calendar days after
said amount is due, a late charge shall be paid to Landlord by Tenant in the
amount of the greater of five (5%) percent of such payment due or fifty ($50.00)
dollars provided that in no event shall such charge be greater
<PAGE>
than that permitted by law. Tenant agrees that such amount is a reasonable
estimate of Landlord's collection and administrative expenses.
c. Base Rental is: $/Month
January 14, 2000 - January 31, 2000$9,384.68 February
1, 2000 - July 31, 2003 $16,162.50
4. OPERATING EXPENSES. Tenant shall also pay, as Additional Rent,
Tenant's Proportionate Share of the following Operating Expenses of the Project,
which are estimated in 1999 to be $3.21 per square foot per annum, or Five
Thousand Nine Hundred Eighty-Four and 78/100 Dollars ($5,984.78) per month.
<TABLE>
<S> <C>
a. TENANT'S PROPORTIONATE SHARE: Tenant's Proportionate Share is 13.73%
b. TAX AND INSURANCE EXPENSES.
</TABLE>
i. Tenant agrees to pay, as Additional Rent, Tenant's
Pro Rata Share of the Project's Tax and Insurance Expenses. At or prior to the
commencement of the Lease, and at any time during the Lease Term, Landlord may
deliver to Tenant a written estimate of the Tax and Insurance Expenses, and the
monthly Rent shall be increased by one-twelfth (1/12) of said estimated
Additional Rent. In the case of a multi-building Project, if such Project's Tax
and Insurance Expenses are not separately assessed against the Building but are
assessed against the Project as a whole, Landlord shall reasonably determine the
portion of such Project's Taxes and Insurance Expenses allocable to the Building
in which the Leased Premises are located.
ii. Tax and Insurance Expenses shall mean: (A) all ad
valorem, rental, sales, use, and other taxes (other than Landlord's income
taxes), special assessments (which shall be paid by Landlord over the longest
period permitted by the assessing authority and not include those special
assessments attributable to the initial development or construction of the
building or development) and other governmental charges, and all assessments due
to deed restrictions and/or owner's associations which accrue against the
Project during the term of this Lease; and (B) all insurance premiums paid by
Landlord with respect to the Project including, without limitation, public
liability, casualty, rental, and property damage insurance.
c. COMMON AREA MAINTENANCE.
i. Tenant agrees to pay, as Additional Rent, Tenant's
Pro Rata Share of the Common Area Maintenance Expenses. At or prior to the
commencement of the Lease, and at any time during the Lease Term, Landlord may
deliver to Tenant a written estimate of the Common Area Maintenance, and the
monthly Rent shall be increased by one-twelfth (1/12) of said estimated
Additional Rent. In the case of a multi-building Project, if such Project's
Common Area Maintenance is not separately assessed against the Building but are
assessed against the Project as a whole, Landlord shall reasonably determine the
portion of such Project's Common Area Maintenance allocable to the Building in
which the Leased Premises are located.
ii. Common Area Maintenance shall mean all expenses
incurred by Landlord for the maintenance, repair, and operation of the Project
(excluding only structural soundness of the roof, foundation, and exterior
walls), including but not limited to management fees, common area utilities,
maintenance and repair, common area mechanical systems (if
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Landlord provides maintenance services), system surveys, supplies, material,
water and sewer, common area janitorial services, exterior lighting maintenance,
maintenance of elevators, where applicable, and common area mechanical systems,
supplies, maintenance equipment, tools used in Project, landscaping, trash,
security, wages and fringe benefits payable to employees of Landlord whose
duties are connected with the operation and maintenance of the Project, amounts
paid to contractors or subcontractors for work or services performed in
connection with the operation and maintenance of the Project, all services,
supplies, repairs, replacements or other expenses for maintaining, repairing and
operating the Project including, without limitation, common areas and parking
areas and roof, exterior walls and foundation work that is not related to
structural soundness. It shall include landscape maintenance, landscape
irrigation repairs, pest and rodent control, parking lot repairs and
maintenance, parking lot sweeping, exterior lighting, exterior signage and roof
repair and maintenance. Common Area Maintenance does not include the cost of any
capital improvement to the Project other than the reasonably amortized cost of
capital improvements which result in the reduction of insurance or Common Area
Maintenance Expenses. Further, Common Area Maintenance shall not include repair,
restoration or other work occasioned by fire, windstorm or other casualty with
respect to which Landlord actually receives insurance proceeds, income and
franchise taxes of Landlord, expenses or commissions incurred in procuring and
leasing to tenants, expenses for the renovating of space for new tenants,
interest or principal payments on any mortgage or other indebtedness of
Landlord, compensation paid to any employee of Landlord above the grade of
building superintendent, or depreciation allowance or expense, and those
additional costs included in Exhibit E.
d. ANNUAL STATEMENT A Statement showing the actual Tax and
Insurance and the actual Common Area Maintenance Expenses, and Tenant's
proportionate share thereof, (hereinafter referred to as the "Statement of
Actual Adjustment") shall be delivered by Landlord to Tenant within 180 days
after any calendar year in which Additional Rent was paid by or due from Tenant.
Within ten (10) days after the delivery by Landlord to Tenant of such Statement
of Actual Adjustment, Tenant shall pay Landlord the amount of any Additional
Rent shown on such Statement. If such Statement shows that Tenant has paid more
than the amount of Additional Rent actually due from Tenant for the preceding
calendar year, and if Tenant is not in default under this Lease Agreement,
Landlord shall credit the amount of such excess to the next Additional Rent
payment due from Tenant. Landlord shall be obligated to refund to Tenant
Tenant's pro rata share of the amount of any refund, rebate or the like less
fees to attain the refund, rebate or the like) of taxes/assessments that were
paid by Tenant (directly or as Additional Rent) regardless of whether such
refund, rebate, or the like is received by Landlord after the expiration of the
term of the Lease.
e. PRORATION
i. If the Commencement Date of this Lease is a day
other than the first day of a month, or if the Termination Date of this Lease is
a day other than the last day of a month, the amount of Additional Rent shown as
due by Tenant on the Statement of Actual Adjustment shall reflect a proration
based on the ratio of the number of days this Lease was in effect during the
month to the actual number of days in the month.
ii. If any data necessary to calculate Additional
Rent are unavailable so that the calculation cannot be timely made, Landlord's
reasonably determined estimate shall be used in lieu thereof.
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iii. If the term of this Lease Agreement expires on
other than the last day of a calendar year, then the Tenant's Proportionate
Share of the Estimated Operating Expenses and Actual Operating Expenses shall be
prorated for said year. If the Lease Agreement shall expire or otherwise
terminate with any operating expenses owed by the Tenant, Tenant shall
immediately pay the balance due. Landlord shall pay any refund due Tenant. The
provisions of this paragraph shall survive the termination of the Lease
Agreement.
f. LANDLORD'S RIGHTS The failure of Landlord to exercise its
rights hereunder to estimate Additional Rent and to require payment of such
shall not constitute a waiver of Landlord's rights which rights may be exercised
from time to time at Landlord's discretion.
g. TENANT'S ADDITIONAL COST If the nature of Tenant's business
or use of the Leased Premises is such that additional costs are incurred by
Landlord for cleaning, sanitation, trash collection or disposal services, Tenant
agrees to pay as Additional Rent to Landlord the amount of such additional costs
upon demand.
5. SECURITY DEPOSIT. Upon execution of this Lease Agreement, Tenant
shall deposit with Landlord the sum of $16,162.50. Such deposit shall not earn
interest for Tenant and shall be used for the purposes set forth in the General
Provisions attached hereto.
6. PROPOSED USE. Tenant represents, covenants, and warrants that the
Leased Premises will be used lawfully for the following purposes and for no
other purposes: GENERAL OFFICE AND WAREHOUSE STORAGE, INCLUDING CUSTOMER
SERVICE, COMPUTER DATA CENTER, AND OTHER RELATED OPERATIONS.
7. IMPROVEMENTS. Tenant agrees it is leasing the Premises in an "as-is"
condition, and that Landlord shall not be required to make any improvements to
the Premises, except that, Landlord, at Landlords cost, shall demise the
premises including the separation of utilities from the adjacent premises.
8. SERVICE AND REPAIRS.
a. UTILITIES. Tenant shall pay for all gas, electricity,
water, sewer, and telephone service utilized in the operations of Tenant's
business. Landlord further reserves the right to have separate meters
installed for any of these services.
b. INITIAL LIGHTING. Landlord shall provide initial lamps,
bulbs, starters and ballasts used on the Leased Premises; Tenant agrees, at
his expense, to maintain and replace such lamps, bulbs, starters and ballasts.
c. HVAC MAINTENANCE. Landlord agrees to have a third party
mechanical contractor certify that the heating and air-conditioning units
servicing the Premises are in good working condition as of the Beginning Date
of this Lease. By signing this Lease Agreement Tenant accepts, subject to the
above certification the HVAC in as is condition and Tenant shall, at its own
cost and expense, enter into a regularly scheduled preventative
maintenance/service contract for servicing all heating and air-conditioning
systems and equipment servicing the Leased Premises. The maintenance
contractor and the contract must be approved by Landlord which approval shall
not unreasonably be withheld. The service contract must include all services
suggested by the equipment manufacturer within the operation/maintenance
manual and
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must become effective (and a copy be delivered to Landlord) within thirty (30)
days of the date Tenant takes possession of the Leased Premises. If the Tenant
fails to enter into such service contract as required, Landlord shall have the
right to do so on Tenant's behalf and Tenant agrees to pay Landlord the cost and
expense of same upon demand.
d. ROUTINE MAINTENANCE. Landlord shall provide only routine
maintenance, and painting to the structure, 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.
e. REPAIRS BY TENANT. The Tenant will keep, maintain and
preserve the Leased Premises in substantially the same condition the Premises
are in as of the Beginning date, subject to the provisions of this Lease
Agreement. When and if needed, at the Tenant's sole cost and expense, the Tenant
will make all interior repairs and replacements including but not limited to
interior walls, doors and windows, floors, floor coverings, light bulbs,
plumbing fixtures, heating/air conditioning systems, hot water systems, and
electrical fixtures. Tenant shall also make all repairs and replacements to
Tenant's overhead garage and exterior pedestrian doors. The Tenant will also
repair and replace at its sole cost and expense any broken windows and/or damage
to the building or Premises caused by the Tenant or its employees, agents,
guests or invitees during the Lease term hereof. Not withstanding any contrary
or inconsistent provision of this Lease Agreement, Tenant shall not be
responsible for any maintenance, repair or replacement caused by or required due
to the negligence or willful misconduct of Landlord, its employees, agents,
invitees or contractors, which maintenance, repairs and or replacements shall
promptly performed by Landlord at its expense.
If Tenant fails to make such repairs or replacements promptly, Landlord
may, at its option, make such repairs or replacements, and Tenant shall repay
the cost thereof to the Landlord as Additional Rent on demand. However, Tenant
shall not suffer any repair work costing over $5,000 to be performed by Tenant
or Tenant's agents without Landlord's prior written consent.
f. ADDITIONAL SERVICES. In the event Tenant desires any of the
aforementioned services in amounts in excess of those deemed by Landlord to be
Project standard, and in the event Landlord elects to provide such additional
services, Tenant shall pay Landlord as Additional Rent hereunder the cost of
providing such additional services.
9. PARKING. Tenant shall be entitled to use stalls in the parking areas
of the Project in common with all other tenants of the Project. Tenant agrees
not to overburden the parking areas and to cooperate with Landlord and the other
tenants in the use of the parking areas. Landlord reserves the right to
determine whether the parking areas are overburdened, and, if so, to allocate
parking spaces between Tenant and the other tenants of the Project. Landlord
shall reserve the right to designate handicapped, loading, reserved, and visitor
parking stalls.
10. BROKER'S COMMISSION. Landlord agrees that it shall be responsible
to Welsh Companies, Inc, and to Landlord's broker, CB Richard Ellis, for payment
of their fees and commissions in connection with the execution of this Lease.
Tenant represents and warrants to Landlord that Tenant has not entered into any
agreements other than with Welsh Companies, Inc, nor will Tenant enter into any
agreement in the future whereby Landlord would be obligated to pay any broker's
commission or finder's fee in connection with Tenant's execution of this Lease
Agreement. Tenant agrees to indemnify Landlord against, and to hold Landlord
harmless from, all liabilities arising from any such claim. Tenant agrees to pay
for any broker representation it
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may desire or require during any negotiation for expansion or contraction of
the Leased Premises. Landlord will pay for any representation it obtains.
11. GRAPHICS. Landlord at Tenant's cost, shall provide and install one
sign complying with the sign criteria, of the Landlord. Sign to be installed
within sixty days of the signing of this Lease Agreement. All graphics of
Tenant, visible in or from public corridors or the exterior of the Leased
Premises, shall require Landlord's prior written approval. All of the above
shall be in accordance with the Project's Rules and Regulations.
12. GUARANTY. Intentionally omitted.
13. TENANT'S NOTICE ADDRESS. Digital River, Inc., 9625 West 76th
Street, Eden Prairie, Minnesota 55344, Attention: Corporate Secretary.
14. OTHER.
(a) DEFAULTS BY LANDLORD. If Landlord is in default or breach
of this Lease, Landlord shall cure any such default within thirty (30) days
after written notice of the same from Tenant, or such longer period as is
reasonably necessary to cure the default, provided that the cure is commenced
within said thirty (30) day period and provided that Landlord continues to
diligently prosecute such cure. In any event, however, if said default or breach
is curable within sixty (60) days under normal business conditions and is not
cured within sixty (60) days after notice thereof, or if said default or breach
is not cured and Landlord is not diligently pursuing such cure, then Tenant
shall have the right (in addition to any other available rights or remedies) to
cure the default or breach and shall have the right to recover the costs thereby
incurred from Landlord or to offset such amounts from the rent payment(s) next
coming due under this Lease.
(b) CONSENT, APPROVAL AND DISCRETION. At any time that
Landlord's or Tenant's consent, approval or discretion is required or is to be
implemented, a reasonableness standard shall be deemed to apply, and neither
party shall unreasonably withhold, condition or delay its consent or approval,
nor exercise discretion in an unreasonable manner.
(c) YEAR 2000 ISSUES. Landlord represents and warrants that it
has performed or caused to be performed a reasonable and thorough analysis of
the so-called Year 2000 problem with respect to the Building and the Premises
and that Landlord has no knowledge of any uncured problems with respect to the
same, including but not limited to with respect to all operating and computer
systems and all software used in connection with the operation, maintenance
and/or management of the Building and/or accounting, billing and/or data
processing concerning the Building. Landlord shall indemnify Tenant and shall
otherwise be liable to Tenant for any loss or damage incurred by Tenant as a
result of any of said systems or software not being Year 2000 compliant.
(d) Effective January 17, 2000, (i) Tenant's Premises shall be
increased by approximately 120 square feet ("Server Room") as further depicted
in attached Exhibit "F", from 22,253 square feet to 22,373 square feet, (ii)
Tenant's pro rata share shall be increased from 13.73% to 13.80%, and (iii)
Tenant's Base Rent shall remain as indicated in Paragraph 3 (c). Tenant will
allow the adjacent tenant, Medtronics, reasonable access to the Server Room
through January 16, 2000.
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15. EXHIBITS. The following exhibits are attached hereto and pertain to
this Lease Agreement:
<TABLE>
<S> <C> <C>
1. Exhibit A General Lease Provisions
2. Exhibit B A Plan of the Demised Premises
3. Exhibit C Improvement Items
4. Exhibit D Rules and Regulations
5. Exhibit E Additional Common Area Maintenance Exclusions
6. Exhibit F Server Room
</TABLE>
IN WITNESS WHEREOF, the parties have executed this Lease Agreement the day and
year first above written.
LANDLORD:. TENANT:
PROPERTY RESERVE, INC. DIGITAL RIVER, INC.
By: /s/ WAYNE G. FACER By: /s/ PERRY W. STEINER
------------------------------- ----------------------------
Its: WAYNE G. FACER, PRESIDENT Its: PRESIDENT
------------------------------ ---------------------------
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(Master)
EXHIBIT "A"
GENERAL LEASE PROVISIONS
These following General Lease Provisions shall become effective when
attached to the signed Lease Agreement containing the Specific Lease Provisions
and shall, together with the Exhibits, form the Lease Agreement.
1. ABANDONMENT. Tenant shall not vacate without payment of Rent nor
abandon the Leased Premises at any time during the term of this Lease Agreement,
nor permit the Leased Premises to remain unoccupied for a period longer than
fifteen (15) consecutive days during the term of this Lease Agreement. If Tenant
shall abandon, vacate without payment of Rent, or surrender the Leased Premises,
or be dispossessed by process of law or otherwise, any personal property
belonging to Tenant and left on the Leased Premises shall, at the option of the
Landlord, be deemed abandoned and title thereto shall vest to Landlord. If
Tenant vacates the Leased Premises but continues to pay all sums due hereunder
and otherwise complies with the terms hereof, it shall not be considered
abandonment.
2. ASSIGNMENT OR SUBLEASE. Tenant shall not, either voluntarily or by
operation of law, assign, encumber, pledge, or otherwise transfer or hypothecate
all or any part of Tenant's leasehold estate hereunder, or permit the Leased
Premises to be occupied by anyone other than Tenant or Tenant's employees, or
sublet the Leased Premises or any portion thereof, without Landlord's prior
written consent in every instance, which Landlord shall not unreasonably
withhold, condition or delay. Tenant shall give Landlord written notice of such
desire at least thirty (30) days in advance of the date on which Tenant desires
to make such assignment or sublease, which notice shall include the name,
address, evidence of financial capability, and other pertinent information
regarding the proposed assignee or sublessee.
a. No assignment or subletting by Tenant shall relieve Tenant
of any obligations under this Lease Agreement. Any attempted transfer of this
Lease Agreement by Tenant without the consent of Landlord shall be null and void
and, at the option of Landlord, shall cause termination of this Lease Agreement.
The giving of consent by Landlord in one instance shall not preclude the need
for Tenant, and its successors and assigns, to obtain Landlord's consent to
further transfers.
b. In the event Tenant shall propose to assign or sublet the
Leased Premises and request the consent of Landlord to any assignment or
subletting, or if Tenant shall request consent of Landlord to any other act
Tenant proposes to do, as herein provided, then Tenant shall pay Landlord's
reasonable attorney's fees incurred in connection therewith. Any assignment or
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subletting shall not relieve Tenant from responsibility under the Lease
Agreement, and Tenant shall therefore remain liable for the faithful performance
of the Lease Agreement in case of breach or default by assignee or sublessee.
c. If the proposed Base Rental between Tenant and any
Sublessee is greater the Base Rental of this lease, then such excess rental
shall be deemed Additional Rent owed by Tenant to Landlord.
d. Tenant shall not publicly advertise the Rent for which
Tenant is willing to sublet the space; and all public advertisements of the
assignment of the Lease Agreement or sublet of Leased Premises, or any portion
thereof, shall be subject to prior approval in writing by Landlord.
e. In any assignment or transfer, each assignee or transferee,
other than Landlord, shall assume, as provided herein, all obligations of the
Tenant under this Lease Agreement which relate to all or a portion of the Leased
Premises assigned or sublet, as the case may be, and shall be and remain liable
jointly and severally with Tenant for the payment of the Rent and for due
performance of all the terms, covenants, conditions, and agreements herein
contained on Tenant's part to be performed during the term of this Lease
Agreement.
f. No consent by Landlord to any assignment or subletting by
Tenant shall relieve Tenant of any obligation to be performed by the Tenant
under this Lease Agreement, whether accruing before or after such assignment or
subletting, unless granted by Landlord to Tenant in writing. The consent by
Landlord to any assignment or subletting shall not relieve Tenant from the
obligation to obtain Landlord's express written consent to any other assignment
or subletting. Any assignment or subletting which is not in compliance with this
Lease Agreement shall be void, and, at the option of Landlord, shall constitute
a material default by Tenant under this Lease Agreement.
3. ATTORNEY'S FEES. In the event either party places the enforcement of
this Lease Agreement, 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 files suit upon the same, the nonprevailing (or
defaulting) party shall pay the other party's reasonable attorney's fees and
court costs, in any proceeding, whether at trial, or appeal therefrom, or on any
petition for review, or in bankruptcy.
4. BINDING. Each individual executing this Lease Agreement on behalf of
Tenant and Landlord represents and warrants that he/she is duly authorized to
execute and deliver this Lease Agreement on behalf of Tenant and Landlord, and
that this Lease Agreement is binding upon each in accordance with its terms.
This Lease Agreement shall not be considered binding until it has been fully
executed by Landlord and Tenant.
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5. CARE OF LEASED PREMISES. Tenant shall not commit or allow any waste
or damage to be committed on any portion of the Leased Premises. Tenant shall
not permit the Leased Premises to be used for any purpose other than stated in
the Lease Agreement.
a. No later than the last day of the Term, Tenant will remove
all Tenant's personal property and repair all damage done by or in connection
with installation or removal of said property and surrender the Leased Premises
(together with all keys, access cards, or entrance passes to the Leased Premises
and/or the Project) in as good a condition as they were at the beginning of the
Term, reasonable wear and tear, unrepaired casualty that was either not caused
by Tenant or covered by insurance (or that would have been covered by insurance
depicted in Paragraph 25), and condemnation excepted. All property of Tenant
remaining in the Leased Premises after expiration of the Term shall be deemed
conclusively abandoned and may be removed by Landlord, and Tenant shall
reimburse Landlord for the cost of removing the same, subject, however, to
Landlord's right to require Tenant to remove any improvements or additions made
to the Leased Premises by Tenant pursuant to this Lease Agreement, unless
previously agreed to otherwise by the parties in writing,.
b. In doing any work related to the installation of Tenant's
furnishings, fixtures, or equipment in the Leased Premises, Tenant will use only
contractors or workmen consented to by Landlord in writing prior to the time
such work is commenced. Landlord may condition its consent upon its receipt of
evidence of workers compensation insurance acceptable lien waivers from such
contractors or workmen. Tenant shall promptly remove any lien or claim of lien
for material or labor claimed against the Leased Premises or Project, or both,
by such contractors or workmen, if such claim should arise, and hereby
indemnifies and holds Landlord harmless from and against any and all loss, cost,
damage, expense, or liabilities including, but not limited to, attorney's fees
incurred by Landlord as a result of or in any way related to such claims or such
liens. Landlord hereby consents to Tenant using for the improvements depicted in
Exhibit C the following contractors: Ron Conrad Construction (general
contractor), Network Designs (cabling), Facilitech (plumbing and electrical).
c. Tenant agrees that all personal property brought into the
Leased Premises by Tenant, its employees, licensees, and invitees shall be at
the sole risk of Tenant, and Landlord shall not be liable for theft thereof or
of money deposited therein or for any damages thereto, such theft or damage
being the sole responsibility of Tenant.
d. Upon termination of this Lease Agreement Landlord shall
have the right to reenter and resume possession of the Leased Premises.
Landlord's costs of post termination cleanup required to return the Leased
Premises to as good a condition as existed at time of occupancy by Tenant, with
normal wear and tear excepted, shall be billed to and promptly paid by Tenant.
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6. CHOICE OF LAW. All rights and remedies of Landlord and Tenant under
this Lease Agreement shall be cumulative and none shall exclude any other rights
or remedies allowed by law. All of the terms hereof shall be construed and
enforced according to the laws of the State in which the Leased Premises are
located.
7. COMMON AREAS--UTILITY ACCESS. The Leased Premises shall include the
appurtenant right to use, in common with others, the lobbies, entrances, stairs,
elevators, restrooms, and other public portions of the Project. Landlord retains
the right to make changes in the common areas as it solely deems to be in the
best interest of the Project. All of the outside walls and windows of the Leased
Premises, and any space in the Leased Premises used for shafts, stacks, pipes,
conduits, ducts, and electric or other utilities, custodial sinks or other
Project facilities, are part of the rentable area of the Leased Premises;
however, the right to the use thereof and access thereto through the Leased
Premises for the purposes of operation, maintenance, and repair, are reserved to
Landlord.
8. CONDITION OF PREMISES. Tenant's taking possession of the Leased
Premises shall be deemed conclusive evidence that, as of the date of taking
possession, the Leased Premises are in good order and satisfactory condition,
subject to (i) structural latent defects and (ii) the "punch list" conditions in
paragraph 33. No promise of Landlord to alter or remodel, repair, or improve the
Lease Premises or the Project, and no representation, express or implied,
respecting any matter or thing relating to the Leased Premises, the Project or
this Lease Agreement, including, without limitation, the condition of the Leased
Premises, has been made to Tenant by Landlord other than as may be contained
herein or in a separate Exhibit or Addendum attached to this Lease Agreement and
incorporated herein or separately signed by Landlord and Tenant. Landlord agrees
to have a third party contractor certify that the heating and air-conditioning
systems, restroom plumbing, electrical service and the hot water systems
servicing the Premises are in good operating condition as of the Beginning Date.
9. DAMAGE TO LEASED PREMISES. If all or a portion of the Leased
Premises are rendered untenantable by damage from any casualty that would be
insured against under a standard fire and extended coverage insurance policy
(irrespective of whether Landlord carries self insurance), the damage shall be
repaired forthwith by and at the expense of Landlord, provided such repairs can
be, in Landlord's opinion, completed within one hundred twenty (120) days after
notice to Landlord of the occurrence of such damage, without the payment of
repair, overtime or other premiums. Except as set forth herein below, until such
repairs are completed, the rent shall be abated in proportion to the part of the
Leased Premises which is unusable by Tenant in the conduct of its business.
Should the damage be caused by a casualty that would not be insured against
under a standard fire and extended coverage insurance policy, Landlord shall
have no obligation to repair or rebuild. Should Landlord elect not to repair or
rebuild, this lease may be terminated by thirty (30) days' notice to tenant.
There shall be no abatement of rent by reason of any portion of the Leased
Premises being unusable for a period of less than two days.
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Landlord's opinion as to completion date of any repair shall be given to Tenant
in writing within thirty (30) days of the occurrence of the damage.
10. DAMAGE OR DESTRUCTION --TENANT'S ELECTION TO TERMINATE. In case of
any significant damage or destruction mentioned herein, which Landlord is
required or undertakes to repair as provided herein, Tenant may terminate this
Lease Agreement by written notice to Landlord any time prior to completion of
the required repairs if Landlord has not restored and rebuilt the Leased
Premises (exclusive of any property of Tenant or improvements installed by
Tenant located therein) to substantially the same condition as existed
immediately prior to such damage or destruction within one hundred twenty
(120)days after notice to Landlord of the occurrence of such damage or
destruction, or such longer period as Landlord has estimated, plus such
additional period thereafter (not exceeding three months) as shall equal the
aggregate period Landlord may have been delayed in doing so by acts of God,
adjustment of insurance, labor trouble, governmental controls, unavailability of
materials, or any other cause beyond Landlord's reasonable control.
11. DAMAGE NEAR END OF TERM. Notwithstanding anything to the contrary
contained in this Lease Agreement, Landlord shall not have any obligation
whatsoever to repair, reconstruct, or restore the Leased Premises or the Project
when such damage occurs during the last twelve (12) months of the Lease term or
any extension thereof, and when the cost of repair exceeds twenty percent (20%)
of the value of the Leased Premises or the Project.
12. EVENTS OF DEFAULT BY TENANT. The following shall constitute events
of default by Tenant: (a) If Tenant shall fail to make any payment due under
this Lease Agreement, and such failure shall continue for ten (10) days after
written notice by Landlord; (b) if a default exists in the performance of any of
the other covenants or conditions which Tenant is required to observe and to
perform, and such default shall continue for thirty (30) days after written
notice by Landlord or such longer period as reasonably required if Tenant
commences and diligently pursues the cure of default within said thirty (30) day
period; (c) if the interest of Tenant under this Lease Agreement is levied upon,
or is under execution or other legal process, or if any petition shall be filed
by or against Tenant to declare Tenant as bankrupt or to delay, reduce, or
modify Tenant's debts or obligations, which petition or case is not dismissed
within sixty days thereafter; (d) if any petition shall be filed or other action
taken to reorganize or modify Tenant's capital structure if Tenant be a
corporation or other entity; (e) if Tenant is declared insolvent, or if any
assignment of Tenant's property is made for the benefit of creditors or if a
receiver or trustee is appointed for Tenant or its property; (f) if Tenant
vacates without payment of rent or abandons the Leased Premises during the term
of this Lease Agreement or any extensions thereof; or (g) if Tenant makes any
transfer of any interest in the Leased Premises not in accordance with the
requirements of this Lease Agreement, then Landlord may treat the occurrence of
any one or more of the foregoing events as a breach of this Lease Agreement and
thereupon, at Landlord's option, Landlord shall have one or more of the
following described remedies in addition to all other rights and remedies
provided at law or in equity:
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a. .Landlord may terminate this Lease Agreement and forthwith,
in accordance with applicable law, repossess the Leased Premises and remove all
persons or property therefrom, and be entitled to recover as damages a sum of
money equal to the total of (i) the cost of recovering the Leased Premises (ii)
the unpaid rent owed thereon from due date plus interest thereon at the rate of
18% per annum or the maximum rate permitted by applicable law, whichever is
lower, (iii) the difference between the present value of the balance of the rent
for the remainder of the term, discounted to the present at 8% per annum, minus
the aggregate fair market rental value of the Leased Premises for the remainder
of the Lease Term, and (iv) any other sum of money and damages owed by Tenant to
Landlord;
b. Landlord shall also be entitled to terminate Tenant's right
of possession in accordance with applicable law and to repossess the Leased
Premises, without demand or notice of any kind to Tenant (except as expressly
required herein or by applicable laws), by summary proceedings, any other
applicable action or proceeding, or otherwise, all without terminating this
Lease Agreement, in which event Landlord may, but shall be under no obligation
to, relet the same for the account of Tenant for such rent and upon such terms
as shall be satisfactory to Landlord. None of these actions will be deemed an
acceptance of surrender of the Leased Premises. For the purpose of such
reletting Landlord is authorized to decorate or to make any repairs, changes,
alterations, or additions in or to the Leased Premises that may be necessary or
convenient, and (i) if Landlord shall fail or refuse to relet the Leased
Premises, or (ii) if the same are relet and a sufficient sum shall not be
realized from such reletting, after paying the unpaid Base Rental due hereunder
earned or unpaid at the time of reletting, plus interest thereon at the rate set
forth herein, the cost of recovering possession, and all of the costs and
expenses of such decoration, repairs that are Tenant's obligations hereunder,
changes, alterations, and additions, and the reasonable expense of such
reletting including tenant improvement costs based on a proration of the ratio
of the remaining Lease Term as it compares to the new tenant lease term, and of
the collection of the rent accruing therefrom to satisfy the payment of the rent
provided for in this Lease Agreement, then Tenant shall pay to Landlord as
damages a sum equal to the amount of the rental reserved in this Lease Agreement
for such period or periods, or if the Leased Premises have been relet, Tenant
shall satisfy and pay any such deficiency upon demand therefor from time to
time; and Tenant agrees that Landlord may file suit to recover any sums falling
due under the terms of this Lease Agreement from time to time on one or more
occasions without Landlord being obligated to wait until expiration of the term
of this Lease Agreement and without barfing or affecting in any manner
Landlord's right to bring a later action or actions for further damages; nor
shall such reletting be construed as an election on the part of Landlord to
terminate this Lease Agreement unless a written notice of such intention be
given to Tenant by Landlord. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to terminate this Lease
Agreement for such previous breach.
c. Without prejudice to any other remedy for default, Landlord
may perform any obligation or make any payment required to cure a default by
Tenant. The cost of
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performance, including attorneys' fees and all disbursements, shall immediately
be paid by Tenant to Landlord upon demand as Additional Rent.
13. DEFECTS. Tenant agrees to report in writing to Landlord any
defective condition in or about the Leased Premises known to Tenant, and further
agrees to attempt to contact Landlord by telephone immediately in such instance.
14. EMINENT DOMAIN
a. In the event the Leased Premises are taken pursuant to
powers of eminent domain, all awards for the taking other than awards for
interruption of Tenant's business shall belong solely to Landlord, and Tenant
shall make no claim therefor.
b. In the event of a partial taking, which does not result in
a termination of this Lease Agreement, rent shall be abated in proportion to the
part of the Leased Premises so made unusable by said partial taking, and any
award for the taking shall belong solely to Landlord.
c. No temporary taking of the Leased Premises and/or of
Tenant's rights therein or under this Lease Agreement shall terminate this Lease
Agreement or give Tenant any right to any abatement of rent hereunder; and any
award made to Tenant by reason of any such temporary taking shall belong
entirely to Tenant, and Landlord shall not be entitled to share therein. The
Tenant and Landlord will work together to cause the governmental agency
responsible for the taking to restore the Leased Premises and Project, after the
taking, to their original condition prior to the taking.
d. If the whole of the Leased Premises, or so much thereof as
to render the balance unusable by Tenant, shall be taken by any governmental
authority under power of Eminent Domain, this Lease Agreement shall
automatically terminate as of the date of such condemnation, or as of the date
possession is taken by the condemning authority, whichever is earlier. No award
for any partial or entire taking shall be apportioned, and Tenant hereby assigns
to Landlord any award which may be made in such taking or condemnation, together
with any and all rights of Tenant now or hereafter arising in or to the same or
any part thereof, provided, however, that nothing contained herein shall be
deemed to give Landlord any interest in or to require Tenant to assign to
Landlord any award made to Tenant for the taking of personal property,
equipment, and fixtures belonging to Tenant and/or for the interruption of or
damage to Tenant's business or for Tenant's unamortized cost of improvements
installed by Tenant and/or the cost of moving and/or the lost value of Tenant's
unexpired Lease Agreement term.
15. ENTIRE AGREEMENT. This instrument, along with any exhibits and
attachments or other documents affixed hereto or referred to herein, constitute
the entire and exclusive agree-ment between Landlord and Tenant relative to the
Leased Premises herein described, and this
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Agreement and said exhibits and attachments and other documents may be altered
and/or revoked only by an instrument in writing signed by both Landlord and
Tenant. Landlord and Tenant hereby agree that all prior written and oral
agreements, understandings and/or practices relative to the leasing of the
Leased Premises are merged in or revoked by this Lease Agreement.
16. ESTOPPEL CERTIFICATE. Tenant shall at any time and from time to
time, upon not less than ten (10) days prior written notice from Landlord,
execute, acknowledge and deliver to Landlord or to other parties as Landlord may
direct, a statement in writing, (a) certifying that this Lease Agreement is
modified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease Agreement as so modified is in
full force and effect), the date to which the rental and other charges are paid
in advance, and the amount of the Base Rental, Estimated Operating Expense
Adjustment, and the commencement and termination dates of the Lease Agreement,
and (b) acknowledging that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, or specifying such defaults if any
are claimed. Any such statement may be relied upon by any prospective purchaser
or encumbrancer of all or any portion of the real property of which the Leased
Premises are a part. Tenant's failure to deliver such statement within such time
shall be conclusive upon Tenant that: (i) this Lease Agreement is in full force
and effect, without modification except as may be represented by Landlord, (ii)
there are no uncured defaults in Landlord's performance, and (iii) not more than
one month's Base Rental, or Estimated Operating Expense Adjustment installment,
has been paid in advance. If Landlord desires to finance or refinance the
Project, or any part thereof, Tenant agrees to deliver to any lender designated
by Landlord such financial statements of Tenant as may be reasonably required by
such financial institution. All such financial statements shall be received by
Landlord in confidence and shall be used only for the purpose herein set forth.
17. FORCE MAJEURE. Any prevention, delay, or stoppage of work to be
performed by Landlord or Tenant which is due to strikes, labor disputes,
inability to obtain labor, materials, equipment, or reasonable substitutes
therefor, acts of God, governmental restrictions or regulations or controls,
judicial orders, enemy or hostile government actions, civil commotion, fire or
other casualties, or other causes beyond the reasonable control of the party
obligated to perform hereunder, shall excuse performance of the work by that
party for a period equal to the duration of that prevention, delay, or stoppage.
Nothing herein shall excuse or delay Tenant's obligation to pay rent or other
charges under this Lease Agreement, except as otherwise provided in this Lease
Agreement.
18. NO HAZARDOUS SUBSTANCES ALLOWED. Tenant shall not cause or permit
any "Hazardous Substances," as defined below, except in amounts as permitted by
law, to be brought upon or kept or used in or about the Premises or the Project
by Tenant, its agents, employees, contractors, or invitees. Notwithstanding
anything contained in this Lease, Tenant shall in no event be liable with
respect to (i) any Hazardous Substances brought onto or installed on the Leased
Premises prior to the Beginning Date of this Lease Agreement, or (ii) with
respect to the violation of any Hazardous Substance Laws prior to the Beginning
Date of this Lease, or (iii)
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Hazardous Substances used, stored, generated or released by anyone other than
Tenant, its agents, invitees or employees, (iv) any violation of any Hazardous
substance laws by anyone other than Tenant, its agents, invitees or employees.
a. Tenant shall at all times and in all respects comply with
all local, state, and federal laws, ordinances, regulations and orders
(collectively, "Hazardous Substances Laws") relating to industrial hygiene,
environmental protection, or the use, analysis, generation, manufacture,
storage, disposal, or transportation of any Hazardous Substances.
b. As used in this Agreement, the term "Hazardous
Substances" means any hazardous or toxic substances, materials or wastes,
including, but not limited to, those substances, materials, and wastes listed
in the United States Department of Transportation Hazardous Materials Table
(49 CFR 172.101) or by the Environmental Protection Agency as hazardous
substances (40 CFR Part 302) and amendments thereto, or such substances,
materials and wastes which are or become regulated under any applicable
local, state or federal law including, without limitation, any material,
waste or substance which is (i) petroleum or any fraction thereof, (ii)
asbestos, (iii) polychlorinated biphenyls, (iv) defined as a "hazardous
waste" under relevant state statutes or any rule promulgated thereunder, (v)
designated as a "hazardous substance" pursuant to Section 311 of the Clean
Water Act, 33 U.S.C. Sections 1251, ET Seq. (33 U.S.C. Sections 1321) or
listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. Sections
1317), (vi) defined as a "hazardous waste" pursuant to Section 1004 of the
Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901, ET Seq. (42
U.S.C. Sections 6903) or (vii) defined as "hazardous substance" pursuant to
Section 101 of the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. Sections 9601, ET Seq. (42 U.S.C. Sections 9601).
c. Tenant shall indemnify, defend (by counsel acceptable to
Landlord), protect, and hold harmless Landlord, and each of Landlord's partners,
directors, officers, employees, agents, attorneys, successors, and assigns, from
and against any and all claims, liabilities, penalties, fines, judgments,
forfeitures, losses (including, without limitation), diminution in the value of
the Premises or the Building, damages for the loss or restriction on use of
rentable or usable space or of any amenity of the Premises or the Building,
costs or expenses (including attorneys' fees, consultant fees, and expert fees)
for the death of or injury to any person or damage to any property whatsoever,
arising from or caused in whole or in part, directly or indirectly, (a) by the
presence in, on, under, or about the Premises, or any discharge or release in or
from the Premises of any Hazardous Substances, or Tenant's use, analysis,
storage, transportation, disposal, release, threatened release, discharge, or
generation of Hazardous Substances to, in, on, under, about, or from the
Premises or the Building, or (b) Tenant's failure to comply with any Hazardous
Substances Law. Tenant's obligations under this Section shall include, without
limitation, and whether foreseeable or unforeseeable, any and all costs incurred
in connection with any investigation of site conditions, and any and all costs
of any required or necessary repair, cleanup, detoxification, or decontamination
of the Premises or the Building, and the preparation and implementation of any
closure, remedial action, or other required plans in
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connection therewith. Tenant's obligations under this Section shall survive the
expiration or earlier termination of the term of the Lease. For purposes of the
release and indemnity provisions hereof, any acts or omissions of Tenant, or by
employees, agents, assignees, contractors, or subcontractors of Tenant or others
acting for or on behalf of Tenant (whether or not they are negligent,
intentional, willful, or unlawful), shall be strictly attributable to Tenant.
d. Tenant acknowledges and agrees that it shall not be
unreasonable for Landlord to withhold its consent to any proposed assignment,
subletting, or transfer of Tenant's interest in this Lease if (a) the
anticipated use of the Premise by the proposed assignee, subtenant, or
transferee (collectively, a "Transferee") involves the generation, storage, use
treatment, or disposal of Hazardous Substances; (b) the proposed Transferee has
been required by any prior landlord, lender, or governmental authority to make
remedial action in connection with Hazardous Substances contaminating a
property, if the contamination resulted from such Transferee's actions or use of
the property in question; or (c) the proposed Transferee is subject to an
enforcement order issued by any governmental authority in connection with the
use, disposal, or storage of a Hazardous Substance.
e. Landlord does hereby represent to Tenant that, to the best
of Landlord's knowledge, no toxic or hazardous substances have been deposited in
or located on the Leased Premises on the commencement date of the lease except
in the amounts as permitted by law.
19. HOLD HARMLESS:
a. BY TENANT: Tenant hereby agrees to indemnify and hold
Landlord harmless from and against any injury, expense, damage, liability, or
claim imposed on Landlord by any person or entity, whether due to damage to the
Leased Premises or the Project, claims for injuries to the person or property of
any other tenant of the Project or of any other person in or about the Project
for any purpose whatsoever, or due to administrative or criminal action by a
governmental authority, whether such injury, expense, damage, liability, or
claim results either directly or indirectly from the act, omission, negligence,
misconduct, or breach of any provisions of this Lease Agreement by Tenant, the
agents, servants, or employees of Tenant, or any other person entering upon the
Leased Premises under express or implied invitation or consent of Tenant. Tenant
further agrees to reimburse Landlord for any costs or expenses, including, but
not limited to, court costs and reasonable attorney's fees which Landlord may
incur in investigating, handling, or litigating any such claim or any action by
a governmental authority.
b. BY LANDLORD: Landlord hereby agrees to indemnify and hold
Tenant harmless from and against any injury, expense, damage, liability, or
claim imposed on Tenant by any person or entity, whether due to damage to the
Leased Premises or the Project, claims for injuries to the person or property of
any other tenant of the Project or of any other person in or about the Project
for any purpose whatsoever, or due to administrative or criminal action by a
governmental authority, whether such injury, expense, damage, liability, or
claim results either
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directly or indirectly from the act, omission, gross negligence, misconduct, or
breach of any provisions of this Lease Agreement by Landlord, the agents,
servants, or employees of Landlord, or any other person entering upon the Leased
Premises under express or implied invitation or consent of Landlord. Landlord
further agrees to reimburse Tenant for any costs or expenses, including, but not
limited to, court costs and reasonable attorney's fees, which Tenant may incur
in investigating, handling, or litigating any such claim or any action by a
governmental authority
20. HOLDING OVER. In the event of holding over by Tenant, after
expiration or termination of this Lease Agreement without the written consent of
Landlord, Tenant shall pay to Landlord one and one-half times the total of Base
Rental which Tenant was obligated to pay for the month immediately preceding the
end of the term of this Lease Agreement, for each month or any part thereof of
any such holdover period, together with any Additional Rent. No holding over by
Tenant after the termination of this Lease Agreement shall operate to extend the
Lease Agreement term. In the event of any unauthorized holding over, Tenant
shall indemnify Landlord against all claims for damages by any other tenant
against Landlord to whom Landlord may have leased all or any part of the Leased
Premises covered hereby effective upon the termination of this Lease Agreement.
Any holding over with the written consent of Landlord shall thereafter
constitute this Lease Agreement a lease from month to month, and Landlord or
Tenant may terminate it upon not less than thirty (30) days prior written
notice.
21. IMPROVEMENT DELAYS CAUSED BY TENANT. If Tenant shall cause any of
the following delays in the completion of Landlord's Work, then the beginning
date of the Lease Agreement shall be altered: (i) delay caused because Tenant's
requirements for materials or installations are different from Landlord's
"Project Standard Improvements" (the basic improvement package Landlord offers
to tenants of the Project), (ii)delay in the payment of any sum due from Tenant
pertaining to Landlord's Work, (iii) delay in performance or completion by a
party employed by Tenant, (iv) delay by reason of compliance with applicable
laws arising from Tenant's design of Tenant's Improvements, (v) delay by reason
of changes in the work ordered by Tenant or by reason of any Change Order, (vi)
delay by reason of the malfunctioning of any item or aspect of Tenant's
Improvements which was designed by Tenant.
a. In the event of any such delay mentioned above then,
notwithstanding the provisions of the Lease Agreement or any other provision of
Exhibit B, the Beginning Date of the Lease Agreement shall be the earlier of (i)
the date Landlord would have completed Landlord's Work had it not been for
Tenant's delay, or (ii) the earliest Beginning Date as provided in this Lease
Agreement. Any and all cost related to either the illegality or malfunctioning
of any item or aspect of Tenant's Improvements, which arises from Tenant's
design, plans, specifications, or working drawings, shall be borne solely by
Tenant, notwithstanding Landlord's approval or installation of the same.
22. IMPROVEMENTS, ALTERATIONS, AND ADDITIONS. Tenant shall not make or
allow to be made any alterations or physical additions in or to the Leased
Premises which affect the
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structure or any other improvements in excess of the amount stated in the
Specific Lease Provisions without first obtaining the written consent of
Landlord. All work shall be done by contractors approved by Landlord. Landlord's
approval or consent shall not be unreasonably withheld or delayed and approval
shall state if the alterations or physical additions shall be removed or
reinstalled by Tenant upon the Expiration Date. Any and all such alterations,
physical additions, or improvements, when made to the Leased Premises by Tenant,
shall at once become the property of Landlord and shall be surrendered to
Landlord upon the termination of this Lease Agreement by lapse of time or
otherwise unless agreed to otherwise in the required Landlord's approval above;
provided, however, this clause shall not apply to movable equipment or furniture
owned by Tenant. Tenant shall comply with all government, local building code
and permitting requirements and provide Landlord with evidence of compliance.
Tenant shall give Landlord written notice five (5) days prior to employing any
laborer or contractor to perform work on the Leased Premises so that Landlord
may post a notice of nonresponsibility if allowed by law. Landlord reserves the
right to require Tenant, at Tenant's expense, to remove such alterations,
physical additions, or improvements upon termination of this Lease Agreement and
to repair any damage caused by such removal. Landlord hereby consents to the
improvements and alterations set forth and/or shown on Exhibit "C" attached
hereto, which shall be performed ( if at all) at Tenant's sole cost and expense
and shall not be required to be removed or reinstalled upon the Expiration Date.
23. IMPROVEMENTS OBLIGATIONS OF TENANT. Intentionall omitted.
24. INCONVENIENCE DAMAGE. No damages, compensation, or claim shall be
payable by Landlord for inconvenience, loss of business, or annoyance arising
from any repair or restoration of any portion of the Leased Premises or other
portion of the Project. Landlord shall use commercially reasonable efforts to
effect such repair or restoration promptly and in such manner as to not
unreasonably interfere with Tenant's use and occupancy.
25. INSURANCE BY LANDLORD. Landlord shall maintain during the term of
this Lease Agreement an all-risk commercial property policy insuring the
project, common areas, and personal property owned by Landlord, in amounts equal
to replacement value. Landlord shall not be obligated to insure any furniture,
equipment, machinery, goods, or supplies owned by Tenant or which Tenant may
bring or obtain upon the Leased Premises, or any additional improvements which
Tenant may construct thereon. If the annual premiums charged Landlord for such
insurance exceed the standard premium rates because of the nature of Tenant's
operations, then Tenant shall, upon receipt of appropriate premium invoices,
reimburse Landlord for such increases in premium. Landlord may, should it choose
to do so, self insure all or part of the above referenced risks. Should Landlord
choose to self insure any insurance risks, the cost demonstrated by a bid from a
reputable insurance company shall be included in the cost of insurance for
expense reimbursement purposes.
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26. INSURANCE BY TENANT. Tenant shall, at all times during the term of
this Lease Agreement, insure Tenant's personal property including any additional
improvements made by Tenant, while in or upon the Leased Premises, with an
all-risk policy. In addition, Tenant shall maintain a policy or policies of
Commercial General Liability Insurance with the premiums thereon fully paid on
or before due date, issued by an insurance company having at least an A.M. Best
rating of A or better and licensed to do business within the state the Project
is located. The limits afforded by said liability policy shall not be less than
One Million Dollars ($1,000,000) combined single occurrence limit for personal
injury and property damage and $2,000,000 annual aggregate. Landlord shall be
added as an additional insured thereto, and said policy shall not be canceled or
substantially modified without first giving Landlord thirty (30) days written
notice thereof. In addition, Tenant shall maintain Workers Compensation
insurance as required by statute. Tenant shall furnish, within thirty (30) days
of Landlord's request and approval, a certificate of insurance, acceptable to
Landlord, evidencing the Commercial General Liability and Workers Compensation
coverages referred to herein and naming Landlord and Property Manager as
additional insured as to the General Liability Insurance.
27. LAWS, ORDINANCES, REGULATIONS, AND AMERICANS WITH DISABILITIES ACT.
Landlord shall comply, at its sole cost, with all laws, ordinances, orders,
roles and regulations (state, federal, municipal, or promulgated by other
agencies or bodies having any jurisdiction thereof) relating to the use (based
upon the approved use for Tenant hereunder), condition, or occupancy of the
Leased Premises. Tenant shall comply, at its sole cost, with requirements of the
Americans with Disabilities Act which provides for the removal of architectural
barriers that prevent equal access to disabled persons on the interior of the
Leased Premises. To the extent that barrier removal relates to access on the
exterior of the Project, the obligation shall be that of the Landlord.
28. LEASE MEMORANDUM. Neither this Lease Agreement, nor any notice nor
memorandum regarding the terms hereof, shall be recorded by Tenant without the
prior written consent of the Landlord.
29. LIMITATION OF LANDLORD'S LIABILITY. The obligations of Landlord
under this Lease Agreement do not constitute personal obligations of Landlord or
of the individual partners, directors, officers, employees, or shareholders of
Landlord or its partners, and Tenant shall look solely to the property that is
the Project described in this Lease Agreement and to no other assets of Landlord
for satisfaction of any liability in respect of this Lease Agreement, and Tenant
will not seek recourse against any other property of Landlord or against the
individual partners, directors, officers, employees, or shareholders of Landlord
or its partners or any of their personal assets for such satisfaction.
30. NAME OF PROJECT. Tenant shall not use the name of the Project for
any purpose other than as an address of business to be conducted by the Tenant.
Landlord and its agents shall
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have the right to change the name, number, or designation of the Project without
liability to Tenant upon fourteen (14) days prior written notice to Tenant.
31. NO JOINT VENTURE. This Lease Agreement shall not be deemed or
construed to create or establish any relationship of partnership or joint
venture or similar relationship or arrangement between Landlord and Tenant
hereunder.
32. NOTICES. All notices, demands, consents, and approvals, which 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 when personally delivered
or delivered by a nationally recognized over night courier, or, if the notice is
deposited in the United States mail, certified or registered, return receipt
requested, postage prepaid, and addressed to the party to be notified at the
address for such party specified in this Lease Agreement (with copies to
Property Reserve, Inc., 10 E. South Temple Street, Suite 400, Salt Lake City,
Utah 84133, and Kirton and McConkie, 60 E. South Temple Street, Suite 1800, Salt
Lake City, UT 84145), then the notice shall be deemed fully given on earlier of
(i) the date of delivery, if delivered personally or by courier, or (ii) the
date set forth on the receipt, or (iii) three (3) days after the notice is
deposited in the mail.
a. Either party may change its address for notice by at least fifteen
(15) days written notice to the other party. Tenant hereby appoints as its agent
to receive the service of all dispossessory or distraint proceedings and notices
thereunder the person in charge of or occupying the Leased Premises at the time,
and, if no person shall be in charge of or occupying the same, then, if allowed
by law, such service may be made by attaching the same on the main entrance of
the Leased Premises.
33. OCCUPANCY DELAY. In the event that the Leased Premises should not
be ready for occupancy for any reason, this Lease Agreement shall not be void or
voidable, and Landlord shall not be liable or responsible for any claims,
damages, or liabilities in connection therewith or by reason thereof, and the
term of this Lease Agreement shall be for the same term of months as set forth
in the Lease Agreement, but the beginning date shall be effective only from the
time that the Leased Premises are prepared for occupancy in accordance with the
terms and conditions set forth herein. Should the term of this Lease Agreement
begin on a date other than the beginning date, Landlord and Tenant will, at the
request of either, execute a declaration specifying the revised beginning the
term of this Lease Agreement. In such event rental under this Lease Agreement
shall not commence until said revised beginning date, and the stated term in
this Lease Agreement shall thereupon commence and the expiration date shall be
extended so as to give effect to the full stated term. Notwithstanding anything
to the contrary contained herein, Tenant may terminate this Lease if Landlord is
unable to deliver the Premises to Tenant by February 15, 2000. Within five (5)
days after Tenant receives Landlord's notice that the Leased Premises are ready
for occupancy, Tenant shall inspect the Leased Premises, and except for items
specified by Tenant to Landlord within five (5) days of Tenant's inspection,
Tenant shall be deemed to have accepted the Leased Premises in their then
condition, "as is." The existence of
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"punch list" (as that term is generally used in the construction industry) items
shall not postpone the beginning date of this Lease Agreement.
34. PEACEFUL ENJOYMENT. Tenant shall occupy and may peacefully have,
hold, and enjoy the Leased Premises, subject to the other provisions hereof,
provided that Tenant pays the rent herein recited and performs all of Tenant's
covenants and agreements herein contained, including the observance of all
reasonable rules and regulations made by Landlord from time to time pursuant to
this Lease Agreement. It is understood and agreed that this covenant and any and
all other covenants of Landlord contained in this Lease Agreement shall be
binding upon Landlord and its successors only with respect to breaches occurring
during its and their respective ownerships of Landlord's interest hereunder.
35. PERSONAL PROPERTY TAX. Tenant shall be liable for and shall pay,
not later than ten (10) days before delinquency, all taxes levied against any
personal property or trade fixture placed by Tenant, in or about the Leased
Premises. Landlord may, after written notice to Tenant, pay any such levy or
tax, regardless of the validity of such levy, but only under proper protest if
so requested by Tenant in writing. Additionally, if the assessed value of
Landlord's property is increased by the inclusion of the value placed upon any
of the personal property or trade fixture of Tenant, Landlord may, after written
notice to Tenant, pay those taxes which are based upon such increased
assessment; regardless of the validity thereof, but only with proper protest if
so requested by Tenant in writing. In such an event Tenant shall, upon demand,
repay to Landlord taxes so levied and paid by Landlord, or that portion of such
taxes resulting from such increase in the assessment. Tenant shall have the
right, in the name of the Landlord and with Landlord's full cooperation, at no
cost to Landlord, to bring suit in any court of competent jurisdiction to
recover the amount of any such taxes so paid under protest. Any amounts so
recovered shall belong to Tenant.
36. PROHIBITED ACTIVITIES. Tenant shall not do or permit anything to be
done in or about the Leased Premises nor bring or keep anything therein which
will in any way increase the existing rate of or affect any fire or other
insurance upon the Project or any of its contents, or cause cancellation of any
insurance policy coveting said Project or any part thereof or any of its
contents. Tenant shall not do or permit anything to be done in or about the
Leased Premises which will in any way obstruct or interfere with the rights of
other tenants or occupants of the Project or injure or annoy them, or use or
allow the Leased Premises to be used for any improper, immoral, unlawful, or
objectionable purpose, nor shall Tenant cause, maintain, or permit any nuisance
in, on, or about the Leased Premises. Tenant shall not violate any of the rules
and regulations of the Project.
a. Tenant shall not do or permit to be done on or about the
Leased Premises, and the Landlord shall not do or permit to be done outside the
Leased Premises any of the following: (a) any violation of any federal, state or
local law, ordinance, or any regulation, ordinance, order or directive of a
governmental agency as such statutes, ordinances, regulations,
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orders, or directives now exist or may hereafter come into effect and concern
the use, safety, or environment of the Property; (b) any violation of any
Certificate of Occupancy covering or affecting the use of the Property or any
part thereof; (c) commit any public or private nuisance.
37. RELOCATION. If the size of the Leased Premises is less than Ten
Thousand (10,000) rentable square feet, Landlord reserves the right to relocate
Tenant during the Term of this Lease Agreement or any renewal thereof, to
similar or higher quality space within the Project. If Landlord exercises this
right to relocate Tenant, then any and all costs incident to said relocation
shall be the responsibility of Landlord, said costs to be determined prior to
relocation of Tenant.
38. REPAIRS AND INSPECTION ENTRY. Tenant shall permit Landlord or its
agents or representatives to enter into and upon any part of the Leased Premises
at all reasonable hours to inspect same, clean, make repairs, alterations, or
additions thereto or for any reasonable purpose as Landlord may deem necessary
or desirable, and Tenant shall not be entitled to any abatement or reduction
sums due under this Lease Agreement by reason thereof.
39. RESERVATIONS BY LANDLORD. Landlord reserves the right to do any or
all of the following, to the extent that Tenant's use of the Leased Premises and
the rights under this Lease Agreement are not adversely affected thereby in the
reasonable judgement of the Landlord:
a. Make changes, additions improvements, or deletions to, or
to reduce, partition, or otherwise eliminate the Common Areas, including,
without limitation, changes in the location, size shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, and hallways.
b. Close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Leased Premises remains available.
c. Designate other land to be part of the Common Area where
the additional Common Area is available for the use and benefit of tenants of
the Project.
d. Expand the Project.
40. RULES AND REGULATIONS. Landlord shall have the right to make and
enforce rules and regulations (the "Rules and Regulations") consistent with this
Lease Agreement for the purposes of regulating access, parking, use of the
common areas in the Leased Premises, and promoting safety, order, cleanliness,
and good service to the Project. Tenant will promptly comply with all such Rules
and Regulations. The parties acknowledge that the Rules and Regulations attached
hereto as Exhibit "D" are presently the Rules and Regulations now in effect;
however, Landlord, may at its option and at any time, reasonably amend and
modify said Rules and Regulations, and Tenant, upon receipt of written notice of
same, shall be obligated to comply with said Rules and Regulations. Landlord
shall uniformly apply and enforce all Rules and regulations against all tenants
of the Project.
16
<PAGE>
41. SALES TAX. In addition to the rental payments hereunder, all state,
county, and municipal transaction privilege (sales) taxes or similar excise
taxes imposed by any state, county, municipality, or other governmental entity
relative to the rental activity under this Lease Agreement, if required, shall
be reimbursed to the Landlord by the Tenant as Additional Rent.
42. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord,
without payment of interest to Tenant, as security for Tenant's full and
faithful performance of every provision of this Lease Agreement. Landlord may
comingle the deposit with other funds of Landlord and may apply the deposit to
the cost of performing any obligation which Tenant fails to perform within the
time required by this Lease Agreement, but such application shall not be
Landlord's exclusive remedy for Tenant's default. If any portion of said deposit
is applied by Landlord, Tenant shall pay the sum necessary to replenish the
deposit to its original amount upon demand by Landlord. Should Landlord sell its
interest in the Project during the Term hereof, and if Landlord deposits with
the purchaser thereof the then unappropriated funds deposited by Tenant as
aforesaid, Landlord shall thereupon be discharged from any further liability
with respect to the Security Deposit. Notwithstanding the foregoing, Landlord
shall comply with any laws or regulations in effect and related to the handling
of Security Deposits in commercial rental agreements. The Security Deposit shall
increase pro rata for any expansion space added to the Leased Premises.
43. SEVERABILITY. If any term or provision of this Lease Agreement, or
the application thereof to any person or circumstances, shall to any extent be
invalid or unenforceable, the remainder of this Lease Agreement, or the
application of such provision to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby, and each
provision of this Lease Agreement shall be valid and shall be enforceable to the
extent permitted by law.
44. SERVICES INTERRUPTION. It is understood that Landlord does not
warrant that any of the services referred to above, or any other services which
Landlord may supply, will be free from interruption. Tenant acknowledges that
any one or more such services may be suspended or reduced by reason of accident
or repairs, alterations, or improvements necessary to be made, by strikes or
accident or by any cause beyond the reasonable control of Landlord, or by orders
or regulations of any federal, state, county, or municipal authority.
a. Any such interruption or suspension of services shall never
be deemed an eviction of or disturbance to Tenant's use and possession of the
Leased Premises or any part thereof, or render Landlord liable to Tenant for
damages by abatement of rent, or otherwise relieve Tenant of performance of
Tenant's obligation under this Lease Agreement. Landlord will use commercially
reasonable efforts to restore service to full operations, and in the event of a
strike to secure parties not involved in the labor dispute to provide minimum
services.
17
<PAGE>
45. SUBORDINATION TO MORTGAGES. This Lease Agreement shall
automatically be subject and subordinate to the lien of any mortgage or deed of
trust given by Landlord which does now or may hereafter encumber the Project of
which the Leased Premises form a part, and to all renewals, modifications,
consolidations, replacements, and extensions thereof. Landlord shall also have
the right to assign its interest in this Lease Agreement for security purposes
to any mortgagee or trust deed beneficiary. Tenant agrees that it will execute,
within five (5) days of Landlord's request, any appropriate instrument or
certificate that Landlord or any mortgagee or trust deed beneficiary may require
to further document this subordination, provided that such mortgagee or trust
deed beneficiary shall agree to (a) honor this Lease Agreement and all of
Tenant's rights hereunder and (b) not to disturb Tenant's right to possess the
Leased Premises so long as Tenant complies with all of the terms and conditions
of this Lease Agreement. Tenant further agrees that it will provide any such
mortgagee or trust deed beneficiary with any evidence required to show the
authority of Tenant to execute any such subordination instrument or certificate
and will, if so requested by any such mortgagee or trust deed beneficiary,
provide to that person or entity a copy of any notice Tenant gives or is
required to give Landlord under this Lease Agreement. In the event of the
enforcement by the mortgagee or the beneficiary under such mortgage or deed of
trust of the remedies provided for by law or by such mortgage or deed of trust,
or in the event Landlord gives a deed-in-lieu-of-foreclosure to such mortgagee
or trust deed beneficiary, Tenant will, upon request of any person or party
succeeding to the interest of Landlord as a result of such enforcement or
termination; automatically become the Tenant of such successor in interest
without change in the terms or other provisions of this Lease Agreement,
provided, however, that such successor in interest shall not be bound by (i) any
payment of rent or additional rent for more than one month in advance, (ii) any
amendment or modification of this Lease Agreement made without the written
consent of such mortgagee or such beneficiary or their successor in interest, or
(iii) any defaults of Landlord under this Lease Agreement which remain uncured
at the time such successor in interest obtains title to the Project. Tenant
shall execute and deliver any instrument or instruments confirming the
attornment herein provided for.
a. In the event of
any act or omission by Landlord by reason of which Tenant may claim the right
to terminate this Lease Agreement or claim a defense or offset against the
Base Rental due hereunder, Tenant agrees not to exercise any such right
until: (i) Tenant has notified the mortgagee or trust deed beneficiary in
writing of such act or omission by Landlord, and (ii) Tenant has given the
mortgagee or trust deed beneficiary (a) thirty (30) days after written notice
of the same from Tenant, or such longer period as is reasonably necessary to
cure the act or ommission, provided that the cure is commenced within said
thirty (30) day period and provided that mortgagee or trust deed beneficiary
continues to diligently prosecute such cureor (b) the time as shall be
reasonably required for Landlord or a receiver appointed at the request of
Landlord to obtain possession of the Property.
18
<PAGE>
46. SUCCESSORS AND ASSIGNS. This Lease Agreement shall be binding upon
and inure to the benefit of Landlord, its successors and assigns, 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 permitted
assigns.
47. TENANT TO KEEP THE LEASED PREMISES LIEN FREE. Tenant shall keep the
Leased Premises and Project free from any mechanic's liens arising from any work
performed, material furnished, or obligations incurred by Tenant, and shall
obtain from its contractor lein releases if required by Landlord. Tenant shall
keep Landlord informed of the status of any contest and shall defend, indemnify,
and hold harmless Landlord from and against any such lien or claim or action
thereon, together with costs of suit and reasonable attorneys' fees incurred by
Landlord in connection with any such claim or action.
48. TENANT'S PROPERTY. Landlord shall not be required to carry
insurance of any kind on Tenant's personal property, and shall not be obligated
to repair any damage thereto or replace the same for any reason.
49. TENANTS REQUESTS. Tenant shall pay all the out of pocket legal
expenses incurred by Landlord as a result of requests from Tenant to exercise
its rights granted under this Lease Agreement, except for litigation in which
the Tenant is the prevailing party.
50. TENANT'S RIGHT TO AUDIT. Tenant may audit Landlord common area
operating costs in order to verify the accuracy of operating expense charges,
provided that:
a. Tenant specifically designates the calender year(s) that
Tenant intends to audit, which must be within the Term of this Lease Agreement.
b. Such audit will be conducted only by a licensed firm,
unaffiliated with Tenant, with prior Landlord approval, and during regular
business hours at the office where Landlord maintains Operating Expense records,
and only after Tenant gives Landlord fourteen (14) days' notice.
c. Tenant shall pay for all costs associated with audit UNLESS
THE AUDIT DISCLOSES THAT LANDLORD OVERSTATED BY AT LEAST 3% THE AMOUNT OF
ADDITIONAL RENT WHICH WAS DUE FOR THE AUDITED YEAR OR YEARS, IN WHICH CASE
LANDLORD WILL PAY FOR ALL COSTS ASSOCIATED WITH THE AUDIT UP TO $1,000.00..
d. If audit yields a result that Tenant has underpaid the
Tenant will reimburse Landlord upon receipt of invoice.
19
<PAGE>
e. Tenant shall deliver to Landlord a copy of the results
of such audit within fifteen (15) days of its receipt by Tenant. No audit
shall be conducted at any time that Tenant is in default of any of the terms
of the Lease Agreement. No subtenant shall have any right to conduct an audit
and no assignee shall conduct an audit for any period during which such
assignee was not in possession of the Leased Premises. Any refund due Tenant
as a result of such audit shall be paid by Landlord upon receipt of audit and
invoice from Tenant.
51. TIME OF THE ESSENCE. Time shall be of the essence of this
Agreement.
52. TOTAL DESTRUCTION. A total destruction of the Project shall
automatically terminate this Lease Agreement.
53. WAIVER. Failure of either 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 said party shall have the right to
declare any such default at any time thereafter. Landlord's acceptance of rent
will not be deemed a waiver of any Tenant breach or default existing at the time
of payment, except a default in the payment of money, and then only to the
extent of the mount received by Landlord. Tenant's payment of Rent will not be
deemed a waiver of any Landlord breach or default existing at the time of
payment.
54. WAIVER OF JURY TRIAL. To the full extent allowed by law, the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or cross-action whatsoever arising out of or in any way
connected with this lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of the Premises, or any claim for injury or damage, or the
enforcement of any remedy under any statute or otherwise.
55. WAIVER OF TIME LIMITATIONS. In the event Tenant shall have any
claim or cause of action against Landlord arising out of or otherwise related to
this lease, Tenant must file such action with a court of competent jurisdiction
within the time period required by Minnesota law; otherwise, such claim or cause
of action shall be deemed waived and permanently barred by the passage of time
and be void.
56. WAIVER OF SUBROGATION. Landlord and Tenant do each hereby release
the other from any and all liability or responsibility (to the other or to
anyone claiming through or under the other by way of subrogation or otherwise)
for any loss or damage to property caused by perils insured against by the
policies to be carried pursuant to this Lease, or if Landlord elects to self
insure, perils that would have been covered by the insurance required under
paragraph 25 even if the cause of such peril or damage shall have been the
negligence of the other party or of anyone for whom such party may be
responsible. Such waiver of subrogation shall be effective with respect to such
loss or damage, and each policy hereunder shall contain a clause or endorsement
to the effect that any such release shall not adversely affect or impair said
policies or prejudice the right of the releasing party to recover thereunder.
Landlord and Tenant each agree that their
20
<PAGE>
policies shall include such a clause or endorsement. The failure to obtain a
clause or endorsement providing such waiver of subrogation shall in no manner
limit or restrict the validity and enforceability of the waivers of subrogation
herein contained.
21
<PAGE>
TECHNOLOGY PARK I & II
EXHIBIT B
[FLOOR PLANS OMITTED]
<PAGE>
EXHIBIT B
<PAGE>
EXHIBIT C
Digital River, Inc. Phone: 612.253.1234
9625 W. 76th St. Fax: 612.253.8497
Eden Prairie, MN 55344
FACSIMILE
January 10, 2000
TO: Bob Cote
CB Richard Ellis
FAX: 612-924-4858
FR: Dave Barber
P - 612-253-8875
F - 612-253-8497
[email protected]
RE: Construction
Here are the 5 main areas we are planning construction. See page 2:
1. Remove office
2. Remove wall between the two offices
3. Remove office and conference room.
4. A. Remove office
B. Remove office. Medtronics needs this room until January 17th.
5. We do not plan on removing this at this time, but may want to in the future.
Page 1 of 2
<PAGE>
EXHIBIT C
[FLOORPLANS OMITTED]
<PAGE>
EXHIBIT "D"
RULES AND REGULATIONS
1. The doors, sidewalks, passages, exits, and entrances shall be used
for ingress and egress and shall not be obstructed. Tenant shall use reasonable
efforts to keep such areas clean and free from rubbish.
2. Loitering anywhere in the Project shall not be permitted. Landlord
reserves the right to exclude or expel from the Project any person who, in the
judgment of Landlord, is under the influence of liquor or drugs or who shall in
any manner do any act in violation of the Rules and Regulations of the Project.
3. Alterations in any way to the interior or exterior of the Leased
Premises including attaching pictures, certificates, licenses, and similar items
may be done only in a reasonable manner, subject to review by Landlord.
4. Tenant shall not alter, paint, cover, obstruct, screen, tint,
install curtains, draperies, blinds, or shades, or obscure any window, shall not
affix any signs, advertisements, or notices on or to any window, and shall not
have any window treatment other than building standard as established by
Landlord, without the written consent of Landlord.
5. All Tenant identification in the public areas of the Project must be
installed and approved by Landlord based on the standard sign age as established
by Landlord.
6. The location of electrical, telephone, computer or other wiring
and of related outlets must be pre-approved prior to installation in writing by
Landlord. Such items shall be installed by qualified personnel in accordance
with building codes applicable to the Project and the Leased Premises.
7. No items of unusual size or weight shall be used or placed in the
Project without Landlord's written permission. In no event shall any floor be
overloaded as determined by a competent engineer.
8. The moving of any of Tenant's business or personal furniture,
equipment, inventory, or other items in or out of the Project or Leased Premises
will be at a time and in a manner designated by Landlord.
9. No Tenant shall use or keep any foul or noxious gas or substance
which may in any manner be offensive or objectionable to Landlord or other
occupants of the Project. No noises, vibrations, odors, or activities bothersome
to other Tenants will be allowed in the Leased Premises or on the grounds of the
Project.
10. No animals, fish, birds, etc., are allowed within the Project
without Landlord's written permission.
11. The Tenant is prohibited from storing goods, wares, or merchandise
in the Project or Leased Premises in areas not acceptable to Landlord for
storage. No auction, public or private, will be permitted in the Leased
Premises.
12. All Tenant requests for service or maintenance to the Landlord will
be made by notifying the Landlord or its agents at a designated location.
Landlord's agents or contractors shall not perform any work or do anything
outside of their regular or contracted duties unless under special written
instructions from the Landlord.
13. All keys shall be obtained from Landlord, and all keys shall be
returned to Landlord upon termination or expiration of Tenant's Lease. No
duplicate keys shall be made without Landlord's approval. Tenant is responsible
to control the keys to the Leased Premises, and Tenant shall pay for lost keys.
Tenant shall not change the locks or install other locks on the doors without
Landlord's written approval. If Landlord gives Tenant written approval to change
locks, then Tenant will provide Landlord with keys.
1
<PAGE>
14. Tenant is responsible to lock and secure all doors to the Leased
Premises after regular business hours or after entering or leaving on
nonbusiness days. Landlord is not responsible to respond to after-hours tenant
lock-outs
15. The following acts shall not be allowed or suffered to be done nor
conditions allowed to exist upon the Leased Premises or any part thereof:
a. Any violation of any federal, state, or municipal statute or
ordinance, or any regulation, order, or directive of a
governmental agency, as such statutes, ordinances, regulations,
orders, or directives now exist or may hereafter provide
concerning the use and safety of the Leased Premises.
b. Any violation of any certificate of occupancy covering or
affecting the use of the Leased Premises or any part hereof.
c. Any public or private nuisance.
d. The display or distribution of drug paraphernalia or sexually
related paraphernalia, except as the same may be legally dispensed
by a physician or surgeon, dentist, or pharmacist, duly licensed
to practice such profession in the State.
e. The manufacture, distribution, sales, or dispensing in any manner
of illegal drugs, or any type of illegal drug activity or
consumption.
f. The sale or dispensing of alcoholic beverages.
g. The showing, displaying, viewing, renting, or selling of movie
films within the Leased Premises which would be classified or
rated as "X or R-rated" under present standards or criteria for
such classification and rating.
h. Gambling.
i. The establishment or maintenance of a bawdy house, bar, nightclub,
or tavern.
j. Any other act or condition which shall be lewd, obscene, or
licentious.
k. Performance of abortions.
l. Mark, or drive nails, screw or drill into, the partitions,
woodwork or plaster or otherwise deface its premisses or any part
thereof.
m. Smoking shall not be permitted in or around any offices, interior
common corridors, restrooms, lobby areas, elevators, stairwells,
or building entrances.
16. Landlord shall have the right to regulate parking throughout the
Project in a manner beneficial to the entire Project. Landlord shall have the
right to re-stripe parking stalls, lanes, and other areas as Landlord deems
reasonably necessary to control parking and access. Landlord may refuse to
permit any person who violates the rules to park in the parking lot, and any
violation of the rules shall subject the car to removal. No extended period
parking for campers, trailers, motor homes, emergency equipment, or other
nonstandard sized vehicles is permitted.
17. Tenant shall not use the Project, Leased Premises, or parking
facilities for housing or sleeping without the written consent of the Landlord.
2
<PAGE>
18. Landlord shall in no case be liable for damages for any error with
regard to the admission to or exclusion from the Leased Premises of any person.
In the case of invasion, mob riot, public excitement, or other circumstances
rendering such action advisable in Landlord's opinion, Landlord reserves the
right to prevent access to the Leased Premises during the continuance of the
same by such action as Landlord may deem appropriate, including closing doors
and restricting access to public areas of the Project.
19. Each Tenant shall see that appliances and utilities are shut off as
appropriate before Tenant or Tenant's employees leave the Leased Premises.
Tenant is required to prevent controllable waste or damage in all aspects of the
Leased Premises from any default or carelessness. All Tenants shall keep the
doors to the Project's corridors closed at all times, except for ingress and
egress, unless door is equipped with an approved magnetic door holder.
20. No Tenant shall install any radio or television antenna, or
satellite dish, loudspeaker, or other device on the roof or exterior walls of
the Project without Landlord's written permission.
21. Each Tenant shall store all its refuse or waste within its Leased
Premises and dispose of such refuse or waste only in accordance with Project
rules and all applicable local, state, and federal regulations and laws.
22. Tenant is not allowed to disturb, solicit, or canvass any occupant
of the Project and shall cooperate to prevent same. Canvassing, soliciting,
distributing handbills or any other written material, or peddling in the Project
is prohibited.
23. Tenant agrees to enforce and, as necessary, to acquaint all persons
doing business with Tenant with the Project's Rules and Regulations.
24. The failure of Landlord to enforce any of the Rules and Regulations
against any other Tenant in the Project shall not be deemed a waiver of any of
such Rules and Regulations. Landlord shall not be liable to Tenant for violation
of any of the Rules and Regulations or the breach of any covenant or condition
in any lease by any other Tenant in the Project.
25. Landlord shall control and operate the public portions of the
Project, and the public facilities, and heating and air conditioning, as well as
facilities furnished for the common use of Tenant. Such control and operation
shall be accomplished in a manner consistent with the best interests Of the
tenants in general. Tenant shall not obstruct, alter or in any way impair the
effective operation of the heating and air conditioning, electrical, fire,
safety, or lighting systems, and Tenant shall not tamper with or change any of
the thermostats or temperature control valves in the Project except those that
are in Tenant's space and are provided for Tenant's use.
26. Tenant shall not use or keep in the Leased Premises or in the
Project any kerosene, gasoline, or other inflammable or combustible fluid or
material, nor use any method or heating or air conditioning not acceptable to
Landlord.
27. All damage done to the Leased Premises or the Project by the
installation or removal of any property of Tenant, or done by Tenant's property
while in the Leased Premises, shall be repaired at the expense of Tenant.
28. Plumbing fixtures and appliances shall be used only for their
intended purposes, and Tenant shall not deposit any sweepings, rubbish, rags, or
other unsuitable substances therein. Damage resulting from misuse shall be paid
for by Tenant.
<PAGE>
29. Landlord shall not be responsible for any loss or theft or damage
to personal property in the Leased Premises or the Project from any cause
whatsoever, whether or not such loss, theft, or damage occurs when the Leased
Premises or other portions of the Project are locked against entry.
30. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
31. In the event of any conflict between these Rules and Regulations
and any lease with Tenant, the provisions of the lease shall be controlling.
<PAGE>
EXHIBIT E
COMMON AREA MAINTENANCE EXCLUSIONS
Common Area Maintenance shall not include costs of any of the following:
1. costs associated with the operation of the business of the entity which
constitutes Landlord, which costs are not directly related to
maintaining or operating the PROJECT (by way of example, the formation
of the entity, internal accounting and legal matters, including but not
limited to preparation of tax returns and financial statements and
gathering of data therefor, costs of defending any lawsuits unrelated
to maintaining or operating the PROJECT, costs of selling, syndicating,
financing, mortgaging or hypothecating any of Landlord's interest in
the PROJECT, and costs of any disputes between Landlord and its
employees;
2. any expense representing an amount paid for products or services (other
than overall property management) to a person or entity relating to or
affiliated with Landlord which is in excess of the fair market value of
such services and products;
3. fees incurred in disputes with tenants;
4. costs of remediation of Hazardous Materials which are (i) in or on the
PROJECT as of the date of this Lease and which are classified as
Hazardous materials as of the date of this Lease under laws in
effect as of the date of this Lease, or (ii) which are subsequently
brought onto the PROJECT by Landlord or with the express consent of
Landlord and which are on the date of their introduction on to the
PROJECT classified as Hazardous Materials under laws in effect as of
the date of such introduction, excluding in the case of both
(i) and (ii) above, lawful use and disposition of reasonable quantities
of supplies used in the ordinary course of operation and maintenance
of like projects;
5. any management fee in excess of the lesser of (i) that expressly
permitted herein or (ii) management fees generally available or
negotiable in the Minneapolis-St. Paul metropolitan area for
properties comparable to the Project;
6. franchise, transfer, inheritance or capital stock taxes or taxes
imposed upon or measured by the income or profits of Landlord;
7. any accrued and unfunded pension or other benefits for any personnel;
8. the cost incurred by Landlord in performing work or furnishing any
service to or for a tenant of space in the PROJECT (including Tenant)
at such tenant's cost and expense, regardless of the amount billed or
received by Landlord for performing such work or furnishing such
services;
9. advertising, marketing or promotional expenditures;
10. accounting fees, other than those incurred in connection with the
operation of the Property and the preparation of statements required
pursuant to the provisions of this Lease and similar provisions of
other leases of space in the PROJECT;
10
<PAGE>
11. costs and expenses (including court costs, attorneys' fees and
disbursements) related to or arising under or in connection with
disputes with tenants, any lessor under a lease or any holder of a
mortgage or disputes which result in punitive damages being assessed
against Landlord, or disputes relating to claims of personal injury or
property damage;
12. costs incurred to correct any misrepresentation by Landlord expressly
made herein;
13. late fees, penalties, interest charges or similar costs incurred
by Landlord;
14. unrecovered expenses resulting directly from the negligence or willful
misconduct of Landlord, its agents, servants or employees;
15. costs incurred due to violation by Landlord or any tenant of the
PROJECT of the terms of any lease or any laws, rules, regulations or
ordinances applicable to the PROJECT;
16. any rent, additional rent, imposition or other charge payable under any
real estate lease (including any ground or "sandwich" lease) or
sublease to or assumed by Landlord;
17. the cost of the acquisition or leasing of any artwork;
18. any compensation paid to clerks, attendants or other persons in
commercial concession sales operated by Landlord or any affiliate of
Landlord;
19. costs of complying with Americans with Disabilities Act for other
tenant interior spaces.
11
<PAGE>
EXHIBIT F
[FLOORPLANS OMITTED]
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No.'s 333-67085 and 333-79269.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 27, 2000
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,120
<SECURITIES> 24,387
<RECEIVABLES> 3,048
<ALLOWANCES> 593
<INVENTORY> 104
<CURRENT-ASSETS> 42,842
<PP&E> 8,993
<DEPRECIATION> 1,714
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0
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<COMMON> 207
<OTHER-SE> 72,870
<TOTAL-LIABILITY-AND-EQUITY> 87,142
<SALES> 75,050
<TOTAL-REVENUES> 75,050
<CGS> 61,012
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<OTHER-EXPENSES> 44,177
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