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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________ .
Commission file number: 000-26789
BROADBASE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0417081
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
181 Constitution Drive
Menlo Park, CA 94025
(Address of principal executive offices including zip code)
(650) 614-8300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of Registrant's common stock outstanding as of April 30, 2000:
46,513,123
(Reflects a two-for-one stock split of the Registrant's common stock,
effected in the form of a stock dividend which occurred on April 7, 2000)
<PAGE> 2
BROADBASE SOFTWARE, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999.................................................. 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and March 31, 1999............... 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and March 31, 1999............... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 21
Item 2. Changes in Securities and Use of Proceeds.......................... 22
Item 3. Defaults upon Senior Securities.................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................ 22
Item 5. Other Information.................................................. 22
Item 6. Exhibits and Reports on Form 8-K................................... 23
Signatures......................................................... 24
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999(1)
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 217,693 $ 76,642
Short-term investments 19,302 --
Accounts receivable, net 8,067 2,712
Prepaid expenses and other current assets 2,221 1,239
--------- ---------
Total current assets 247,283 80,593
Property and equipment, net 5,660 2,868
Restricted cash 633 633
Other assets 350,490 676
--------- ---------
Total assets $ 604,066 $ 84,770
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 668 $ 559
Accrued compensation 6,280 2,919
Accrued expenses 10,486 2,341
Current portion of bank line of credit,
notes payable and capital lease obligations 1,133 749
Deferred revenue 6,573 4,663
--------- ---------
Total current liabilities 25,140 11,231
--------- ---------
Bank line of credit, notes payable and capital
lease obligations 501 333
--------- ---------
Total liabilities 25,641 11,564
--------- ---------
Stockholders' equity:
Common stock 23 17
Additional paid-in capital 674,198 124,297
Deferred stock compensation (16,185) (8,710)
Notes receivable from stockholders (276) (693)
Accumulated other comprehensive loss (205) (33)
Accumulated deficit (79,130) (41,672)
--------- ---------
Total stockholders' equity 578,425 73,206
--------- ---------
Total liabilities and stockholders' equity $ 604,066 $ 84,770
========= =========
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements.
(1) The balance sheet at December 31, 1999 has been derived from the audited
financial statements as of that date.
3
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BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
Net revenue:
License $ 4,520 $ 1,126
Professional services 1,119 145
Maintenance 662 215
-------- --------
Total net revenue 6,301 1,486
Cost of revenue:
License 607 260
Professional services (1) 1,531 273
Maintenance (2) 288 118
Amortization of acquired core and developed technology 264 --
-------- --------
Total cost of revenue 2,690 651
-------- --------
Gross margin 3,611 835
-------- --------
Operating expenses:
Sales and marketing (3) 7,578 2,656
Research and development (4) 2,764 1,188
General and administrative (5) 1,126 494
Amortization of deferred stock compensation 3,510 925
Amortization of intangible assets and goodwill 11,896 --
Acquired in-process research and development 10,057 --
Merger expenses 6,184 --
-------- --------
Total operating expenses 43,115 5,263
-------- --------
Loss from operations (39,504) (4,428)
Interest income 2,179 113
Interest expense (133) (260)
-------- --------
Net loss $(37,458) $ (4,575)
======== ========
Basic and diluted net loss per share $ (0.92) $ (1.29)
======== ========
Weighted-average shares used in computing
basic and diluted net loss per share 40,532 3,554
======== ========
</TABLE>
(1) Excludes $842,000 and $37,000 of amortization of deferred stock
compensation in 2000 and 1999, respectively.
(2) Excludes $26,000 and $17,000 of amortization of deferred stock
compensation in 2000 and 1999, respectively.
(3) Excludes $889,000 and $357,000 of amortization of deferred stock
compensation in 2000 and 1999, respectively.
(4) Excludes $365,000 and $332,000 of amortization of deferred stock
compensation in 2000 and 1999, respectively.
(5) Excludes $1,387,000 and $182,000 of amortization of deferred stock
compensation in 2000 and 1999, respectively.
See accompanying notes to the Condensed Consolidated Financial Statements.
4
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BROADBASE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (37,458) $ (4,575)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred stock compensation 3,510 925
Depreciation and amortization 451 201
Acquired in-process research and development 10,057 --
Amortization of acquired core and developed technology 264
Amortization of intangible assets and goodwill 11,896 --
Value of common stock issued in severance agreement 276
Changes in balance sheet items:
Accounts receivable (4,283) (344)
Prepaid expenses and other current assets (302) (171)
Accounts payable (5,528) 14
Accrued expenses 6,067 749
Deferred revenue 1,413 440
Proceeds from sublease deposit 103 --
--------- ---------
Net cash used in operating activities (13,534) (2,761)
INVESTING ACTIVITIES:
Purchase of short-term investments (19,428) --
Purchases of property and equipment (1,813) (205)
--------- ---------
Net cash used in investing activities (21,241) (205)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of options 167 15
Proceeds from issuance of common stock from employee stock purchase
program 322 --
Proceeds from issuance of common stock in secondary public offering,
net 175,204 --
Payments to repurchase unvested common stock -- (8)
Repayment of notes receivable from stockholders 417 --
Payments on notes payable (82) (169)
Principal payments on capital lease obligations (17) (16)
Principal payments on equipment line of credit (139) --
--------- ---------
Net cash provided by financing activities 175,872 (178)
Effect of foreign exchange rate changes on cash and cash equivalents (46) 9
--------- ---------
Net increase in cash and cash equivalents 141,051 (3,135)
Cash and cash equivalents:
Beginning of period 76,642 13,990
--------- ---------
End of period $ 217,693 $ 10,855
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 31 $ 98
Supplemental schedule of non cash investing and financing activities:
Purchase of equipment under capital leases -- $ 18
Issuance of common stock in connection with purchase
business combination $ 362,953 --
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
5
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BROADBASE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
Broadbase Software, Inc. (the "Company") was incorporated on November 28,
1995 and develops and markets customer-focused analytic and marketing automation
applications that analyze customer data from multiple touch points, and use that
information to execute marketing campaigns, improve online merchandizing and
content, increase site stickiness and personalize customer interactions.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principals
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly state the Company's
financial position, results of operations, and cash flows for the periods
presented. These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's Form 10-K filed with the Securities
and Exchange Commission on March 13, 2000. Operating results for the three month
period ended March 31, 2000 are not necessarily indicative of results to be
expected for the full fiscal year of 2000 or any future period.
In January 2000, the Company's Board of Directors approved a two-for-one
stock split of the Company's outstanding shares payable in the form of a
dividend of one additional share of the Company's common stock for every share
owned by stockholders. The stock split became effective on April 7, 2000. All
share and per share data have been adjusted retroactively to reflect this split.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Management determines
the appropriate classification of marketable securities at the time of purchase
and evaluates such designation as of each balance sheet date. To date, all
marketable securities have been classified as available-for-sale and are carried
at fair value with unrealized gains and losses, if any, included as a component
of accumulated other comprehensive loss in stockholders' equity. Interest,
dividend and realized gains and losses are included in interest income.
The following is a summary of available-for-sale securities (in thousands)
<TABLE>
<S> <C>
Cash equivalents:
Money market funds $107,808
Short-term taxable municipals 46,322
Commercial paper 59,547
--------
Total cash equivalents $213,677
========
Short-term investments
Corporate bonds $ 14,307
Government agencies 4,995
--------
Total short-term investments $ 19,302
========
</TABLE>
3. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
Net loss $(37,458) $ (4,575)
Unrealized loss on investments (126) --
Translation gain (loss) (46) 9
-------- --------
Comprehensive loss $(37,630) $ (4,566)
======== ========
</TABLE>
6
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The components of accumulated other comprehensive loss are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31,
2000
---------
<S> <C>
Cumulative unrealized loss on investments $(126)
Cumulative translation loss (79)
-----
Total accumulated other comprehensive loss $(205)
=====
</TABLE>
4. NET LOSS PER SHARE
Net loss per share is presented in accordance with the requirements of
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS
128) which requires dual presentation of basic earnings per share ("EPS") and
diluted EPS.
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and potentially
dilutive shares outstanding during the period. Diluted net loss per share, as
presented, excludes potentially dilutive shares outstanding for all periods as
the effect of the assumed exercise of stock options, warrants and contingently
issued shares is antidilutive due to the Company's net loss.
The following table sets forth the computation of net loss per share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Basic and diluted net loss per share:
Net loss ($37,458) ($4,575)
Weighted-average shares of common stock
outstanding 41,540 5,570
Less weighted-average shares subject to
repurchase (1,008) (2,016)
Weighted-average shares of common stock
outstanding used in computing basic and
diluted net loss per share 40,532 3,554
-------- --------
Basic and diluted net loss per share ($0.92) ($1.29)
======== ========
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions". SOP 98-9
amends SOP 97-2, "Software Revenue Recognition", to require recognition of
revenue using the "residual method" when certain criteria are met. SOP 98-9 also
amends SOP 98-4, an earlier amendment to SOP 97-2, which extended the deferral
of the application of certain passages of SOP 97-2. The Company adopted the
provisions of SOP 98-9 as of January 1, 2000, which did not have a material
affect on our financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin No 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principals to revenue recognition in financial statements.
The Company has reviewed SAB 101 and has determined that it is in compliance
with its requirements. Therefore, the application of SAB 101 will have no impact
on the Company's consolidated results of operations.
6. DEFERRED COMPENSATION ON STOCK OPTION GRANTS
On January 4, 2000, in connection with the hiring of two new officers, the
Company granted an aggregate of 600,000 options to purchase shares of Broadbase
common stock at an exercise price of $27.00 per share. As a result of these
option grants, the Company recorded approximately $12.0 million of deferred
stock compensation, computed as the difference between the options' exercise
price and the fair market value of the Company's stock on the date of grant.
This amount will be amortized to compensation expense over the options' vesting
term, four years, on a graded vesting method.
7
<PAGE> 8
7. SECONDARY STOCK OFFERING
On February 18, 2000, the Company completed a secondary public offering of
6,900,000 shares of its common stock of which 3,900,000 shares were sold by the
Company and 3,000,000 were sold by its stockholders at a price of $47.50 per
share. Offering proceeds to the Company, net of aggregate underwriters discounts
and commissions and related offering expenses, were approximately $175.2
million.
8. ACQUISITION OF RUBRIC, INC.
On February 1, 2000, the Company completed its acquisition of Rubric, Inc.,
a Delaware corporation ("Rubric"), a leading provider of e-marketing software
applications. The Company entered into an Agreement and Plan of Reorganization
with Rubric on December 9, 1999 (the "Merger Agreement").
In connection with the acquisition, the Company issued approximately 6.0
million shares of its common stock in exchange for all outstanding shares of
Rubric capital stock, and converted outstanding options and warrants to acquire
Rubric capital stock into options and warrants to acquire approximately 1.2
million shares of the Company's common stock. Of the shares issued,
approximately 600,000 shares of the Company's common stock are being held in
escrow for a period of one year following the acquisition for the purpose of
providing a fund against which the Company may seek indemnification from former
Rubric stockholders for any breaches of representations, warranties or covenants
under the Merger Agreement.
The transaction was accomplished by merging a wholly owned subsidiary
of the Company into Rubric. Rubric survived the merger and became a wholly owned
subsidiary of the Company. The Company accounted for the transaction as a
purchase, and the merger is intended to qualify as a tax-free reorganization.
Under the purchase method, the purchase price of Rubric was allocated to the
specific tangible and intangible assets acquired and liabilities assumed from
Rubric pursuant to an independent valuation. The total Rubric purchase price was
$371.8 million and included $301.7 million for the issuance of our common stock,
$61.3 million for the exchange of options to purchase our common stock and $8.8
million of acquisition related costs consisting primarily of direct transactions
costs and involuntary termination benefits. As a result the Company recorded a
charge to operations upon consummation of the transaction related to acquired
in-process research and development of approximately $10.1 million. Also, the
Company incurred merger-related costs of approximately $7.2 million, of which
$1.0 million were included in the Company's 1999 results of operations. This
amount included $2.0 million of payments to Rubric to fund its working capital
requirements prior to the close of the merger, $2.2 million of employee bonuses
paid upon successful completion of the merger, $800,000 of costs to announce the
merger, and $2.2 million of costs associated with combining the operations of
the two companies including $1.4 million for assumed customer integration costs,
$400,000 for severance and related costs and $400,000 for write-off of redundant
assets and other costs. The Company expects to incur additional merger related
costs in the second quarter of 2000 as it completes Rubric-committed product
implementations. In addition, the Company recorded approximately $362.0 million
of intangible assets and goodwill on its balance sheet, which will result in
amortization expense of approximately $66.9 million for 2000, $72.7 million for
2001, $72.7 million for 2002, $72.1 million for 2003, $71.6 million for 2004 and
$6.0 million for 2005. Accumulated amortization of intangible assets and
goodwill totaled $12.2 million at March 31, 2000.
The following unaudited pro forma summary results of operations data have
been prepared assuming that the Rubric acquisition had occurred at the beginning
of the periods presented. The consolidated results are not necessarily
indicative of results of future operations nor of results that would have been
occurred had the acquisition been consummated as of the beginning of the periods
presented. The pro forma information excludes the impact of the one-time charges
related to in-process research and development costs of $10.1 million and the
merger related costs of approximately $7.2 million
<TABLE>
<CAPTION>
Three months ended
-------------------------
March 31, March 31,
2000 1999
-------- ---------
(in thousands, except
per share data)
<S> <C> <C>
Net revenue $ 6,587 $ 1,808
Net loss $(30,751) $(24,738)
Basic and diluted net loss per share $ (0.76) $ (2.59)
</TABLE>
8
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9. PENDING ACQUISITION OF APERIO, INC.
On March 27, 2000, the Company entered into a definitive agreement to
acquire all the outstanding capital stock of Aperio, Inc. in exchange for
approximately 550,000 shares of its common stock and the issuance of options to
purchase an additional approximately 130,000 shares of the Company's common
stock, in a transaction to be accounted for as a purchase business combination.
Consummation of the transaction, which is subject to receiving any necessary
regulatory approvals and other customary closing conditions, is expected in May
or June 2000.
10. SUBSEQUENT EVENT
On May 3, 2000, in connection with the desired retention of employees
whose primary equity participation in the Company is "out of the money" options,
the Company granted an aggregate of 806,000 options to purchase shares of
Broadbase common stock at an exercise price of $1.00 per share. The Company did
not cancel or modify any outstanding stock options in connection with these new
option grants. As a result of these option grants, the Company will record
approximately $12.3 million of deferred stock compensation, computed as the
difference between the options' exercise price and the fair market value of the
Company's stock on the date of grant. This amount will be amortized to
compensation expense over the options' vesting term, two to four years, on a
graded vesting method.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the financial statements and
notes included under Item 1 of this report. This discussion contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. We may identify these statements by the
use of words such as "believe," "expect," "anticipate," "intend," "plan" and
similar expressions. These forward-looking statements involve many risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those we discuss in "Risk Factors That May Affect Future Results" and elsewhere
in this report. These forward-looking statements speak only as of the date of
this report, and we caution you not to rely on these statements without also
considering the risks and uncertainties associated with these statements and our
business that are addressed in this report.
OVERVIEW
We incorporated in November 1995 and from that date through December 1997
were in the development stage, conducting research and developing our initial
products. In the fourth quarter of 1997, we introduced Foundation. This software
product was originally designed to enable organizations to build and manage
datamarts for their customer information. In the third quarter of 1998, we began
offering applications, built on Foundation, which provide analysis for customer
relationship management. In May 1999 we expanded our suite by introducing new
applications designed for Internet sales channels, Internet marketing and other
customer-focused e-business applications, as well as new versions of our
existing applications. Throughout these periods, we expanded our organization by
hiring personnel in key areas, particularly sales, marketing and research and
development. We grew from a total of 41 full-time employees at December 31, 1997
to 75 full-time employees at December 31, 1998 to 131 full-time employees at
December 31, 1999. As of March 31, 2000 we had 214 full-time employees and
intend to hire a significant number of employees in the future. This expansion
places significant demands on our management and operational resources. To
manage this rapid growth, we are investing in and implementing scaleable
operational systems, procedures and controls.
Our revenue comes principally from licenses of our software products, with
the balance coming from maintenance and professional services. We adopted the
provisions of Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition", as amended by SOP No. 98-4, "Deferral of the Effective Date of
Certain Provisions of SOP No. 97-2" and SOP No. 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions", which
requires recognition of revenue using the residual method when certain criteria
are met. Under SOP No. 97-2 we recognize license revenue when persuasive
evidence of an agreement exists, delivery of the product has occurred, no
significant company obligations with regard to installation or implementation of
the software remain, the fee is fixed or determinable and collectibility is
probable. In a typical application license transaction, our professional
services group connects our product to the customer's systems and data sources.
Upon completion of that connection, no significant obligations remain with
respect to implementation, and we recognize the revenue related to that license.
The actual connection process can often be completed in two to four weeks.
However, the timing of the commencement and completion of this process is
subject to factors that may be beyond our control, as this process requires
access to the customer's facilities and coordination with the customer's
personnel following delivery of the software. As a result, we typically do not
recognize the license revenue from an application license until one to three
months after our product is shipped to the customer. License revenue generated
by distributors and other resellers is recognized upon receipt of a reseller
report of sale and our shipment of the licensed software. Maintenance and
support revenue associated with new product licenses and maintenance revenue
resulting from renewed maintenance
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<PAGE> 10
contracts are deferred and recognized ratably over the contract period.
Professional services revenue is recognized when services are performed.
Currently, businesses that license our products generally license one or more
Broadbase applications, together with Foundation and adapters to interface with
the customers' existing data sources. Customers generally receive nonexclusive,
perpetual licenses to use our products for a specified number of servers and
named concurrent users. After the initial license, they may purchase licenses
for additional servers and users as needed. In addition, customers often
purchase professional services from us, including training services, although
they may use other consulting organizations. Customers that license our products
also usually purchase maintenance contracts, which provide software upgrades,
when and if available, and technical support over a stated term, typically 12
months.
We sell our products through our direct sales force and through indirect
sales channels. Direct sales are made by our direct sales force in North
America, Germany, the United Kingdom and the Netherlands. Our indirect sales
channels include software application vendors, resellers and distributors
located in the United States, Japan and the Netherlands. Sales through indirect
sales channels accounted for approximately 17% of our total net revenue for the
three months ended March 31, 2000.
Revenue from customers outside North America represented 26% of our total net
revenue for the three months ended March 31, 2000. Approximately 61% of our
international revenue was derived from our direct and indirect sales force in
Europe and 39% of our international revenue was derived from sales by our
distributors in Japan. We intend to continue to expand our international
operations and commit significant management time and financial resources to
developing our direct and indirect international sales channels. International
revenue may not, however, increase as a percentage of total net revenue.
We have experienced substantial net losses since our inception due to the
significant costs incurred to develop our technology and products, to recruit
and train personnel for our engineering, sales, marketing, professional services
and administration departments and the costs associated with our acquisition of
Rubric, Inc. As of March 31, 2000, we had an accumulated deficit of $79.1
million. We expect to continue to incur substantial losses for the foreseeable
future.
RECENT EVENTS
On February 1, 2000, we acquired privately-held Rubric, Inc. Rubric's product
automates the planning, execution and measurement of marketing campaigns. In
connection with this acquisition, we issued approximately 6.0 million shares of
our common stock in exchange for all outstanding shares of Rubric capital stock,
and converted all outstanding options and warrants to acquire Rubric capital
stock into options and warrants to purchase approximately 1.2 million shares of
our common stock. We accounted for the transaction as a purchase, and the
acquisition is intended to qualify as a tax-free reorganization.
On February 18, 2000, we completed a secondary public offering of 6,900,000
shares of our common stock of which 3,900,000 shares were sold by Broadbase and
3,000,000 were sold by our stockholders at a price of $47.50 per share. Offering
proceeds to Broadbase, net of aggregate underwriters discounts and commissions
and related offering expenses, were approximately $175.2 million.
On March 27, 2000, we entered into a definitive agreement to acquire all the
outstanding capital stock of Aperio, Inc. in exchange for approximately 550,000
shares of our common stock and the issuance of options to purchase approximately
130,000 shares of our common stock, in a transaction to be accounted for as a
purchase business combination. Consummation of the transaction, which is subject
to receiving any necessary regulatory approvals and other customary closing
conditions, is expected in May or June 2000.
RESULTS OF OPERATIONS
NET REVENUE
License. Net license revenues increased from $1.1 million in the first
quarter of 1999 to $4.5 million in the first quarter of 2000. This increase is
attributable to increases in the number of customers licensing our products, and
the increase in the average revenue per license transaction. The increase in
customers reflects the expansion of our direct sales force and our indirect
sales channels, and the increase in the average revenue per license transaction
results from our customers' licensing our applications together with Foundation.
In addition, both the increase in number of customers and the average revenue
per license transaction reflects our introductions of new e-business
applications. We intend to continue to expand both our direct and indirect sales
channels.
Professional services. Professional services revenue is recognized as the
services are performed. Professional services revenue increased from $145,000 in
the first quarter of 1999 to $1.1 million in the first quarter of 2000. The
growth in professional services
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<PAGE> 11
revenue in the three months ended March 31, 2000 compared to the same period of
1999 reflects the expansion of our installed base of customers.
Maintenance. Maintenance revenue is recognized on a straight-line basis over
the period support is provided, usually one year. Maintenance revenue increased
from $215,000 in the first quarter of 1999 to $662,000 in the first quarter of
2000. The growth in maintenance revenue in the three months ended March 31, 2000
compared to the same period of 1999 reflects the expansion of our installed base
of customers.
COST OF REVENUE
Cost of license. The cost of licenses consists primarily of royalties paid to
third parties and the cost of product manuals, media, packaging and shipping.
The cost of licenses increased from $260,000 in the first quarter of 1999 to
$607,000 in the first quarter of 2000, primarily as a result of increased
license revenue. Our cost of licenses has varied significantly from quarter to
quarter. These variations are due primarily to changes in the mix of products
sold, since our products require payment of royalties to third parties at
differing rates.
Cost of professional services. The cost of professional services consists
primarily of personnel costs associated with providing consulting services and
training services. The cost of professional services increased from $273,000 in
the first quarter of 1999 to $1.5 million in the first quarter of 2000,
primarily as a result of the hiring of additional professional services
personnel to support our growing customer base. Full time professional services
personnel grew from 6 at March 31, 1999 to 27 at March 31, 2000. We plan to
continue expanding our professional services group and, accordingly, expect the
dollar amount of our cost of professional services to increase.
Cost of maintenance. The cost of maintenance consists primarily of personnel
costs associated with providing maintenance and support services. The cost of
maintenance increased from $118,000 in the first quarter of 1999 to $288,000 in
the first quarter of 2000, primarily as a result of the hiring additional
support personnel to support our growing customer base. Full time support
personnel grew from 4 at March 31, 1999 to 7 at March 31, 2000. We plan to
continue expanding our maintenance and support group and, accordingly, expect
the dollar amount of our cost of maintenance to increase.
Amortization of acquired core and developed technology. Amortization of
acquired core and developed technology was $0 for the three months ended March
31, 1999 and $264,000 for the three months ended March 31, 2000. For the three
months ended March 31, 2000, the amount represents two months of amortization of
the acquired developed technology recorded upon the acquisition of Rubric on
February 1, 2000. The useful life of the acquired core and developed technology
acquired is 1 and 5 years, respectively.
OPERATING EXPENSES AND OTHER ITEMS
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, benefits, bonuses, commissions, travel, promotional expenses and the
facilities cost for the various domestic and international field sales offices.
Sales and marketing expenses increased from $2.7 million in the first quarter of
1999 to $7.6 million in the first quarter of 2000. These increases in sales and
marketing expenses resulted primarily from higher salary, recruiting, benefits,
travel and facilities costs associated with the hiring of additional sales and
marketing personnel, the expansion of our domestic and international sales
organizations, and increased marketing programs. Full time sales and marketing
personnel grew from 30 at March 31, 1999 to 84 at March 31, 2000. We plan to
continue expanding our sales and marketing organization, and expect our sales
and marketing expenses to increase.
Research and development. Research and development expenses consist primarily
of salaries for development personnel and related costs associated with the
development of new products, the enhancement of existing products, localization,
quality assurance and testing. Research and development expenses increased from
$1.2 million in the first quarter of 1999 to $2.8 million in the first quarter
of 2000. These increases in research and development expenses were due to the
hiring of additional personnel and to other expenses associated with the
development of new products. Full time research and development personnel grew
from 27 at March 31, 1999 to 75 at March 31, 2000. We plan to continue expanding
our research and development organization, and expect our research and
development expenses to increase.
General and administrative. General and administrative expenses consist
primarily of salaries of executive, financial, human resource and information
services personnel as well as outside professional fees. General and
administrative expenses increased from $494,000 in the first quarter of 1999 to
$1.1 million in the first quarter of 2000. These increases in general and
administrative expenses were primarily due to increased staffing required to
support our expanded operations in the United States and abroad and increased
costs of outside professional services and costs to utilize additional
management information systems services. Our full time general and
administrative personnel grew from 11 at March 31, 1999 to 20 at March 31, 2000.
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Amortization of deferred compensation. We amortized deferred compensation
expense of approximately $3.5 million for the three months ended March 31, 2000.
This compensation expense relates to options awarded to individuals in all
operating expense categories. In addition, in connection with the hiring of two
new officers, we granted options to purchase common stock in the first three
months of 2000 for which we recorded additional deferred compensation of
approximately $12.0 million and in May 2000, in connection with the desired
retention of employees whose primary equity participation in Broadbase is "out
of the money" options, we granted options to purchase common stock for which we
will record approximately $12.3 million of deferred stock compensation in the
second quarter of 2000. Deferred compensation is computed as the difference
between the options' exercise price and the fair market value of our stock on
the date of grant and is amortized to compensation expense using a graded
vesting method over the vesting periods of the options.
Amortization of intangible assets and goodwill. Amortization of intangible
assets and goodwill was $0 for the three months ended March 31, 1999 and $11.9
million for the three months ended March 31, 2000. For the three months ended
March 31, 2000, the amount represents two months of amortization of the
specifically identified intangible assets and goodwill recorded upon the
acquisition of Rubric on February 1, 2000, based upon an independent valuation.
The estimated useful lives of the goodwill and other intangibles are 3 to 5
years. We expect to record additional intangible assets and goodwill in
connection with our proposed acquisition of Aperio expected to close in May or
June 2000.
Acquired in-process research and development. Acquired in-process research
and development was $0 for the three months ended March 31, 1999 and $10.1
million for the three months ended March 31, 2000. For the three months ended
March 31, 2000, the amount represents one time charges recorded upon the
acquisition of Rubric related to in-process research and development which had
not reached technological feasibility and, in the opinion of management, had no
alternative future use.
Merger expenses. In connection with the acquisition of Rubric we recorded
merger and integration costs of approximately $7.2 million of which $1 million
was expensed in the fourth quarter of 1999 and $6.2 million was expensed in the
first quarter of 2000. This amount included $2.0 million of payments to Rubric
to fund its working capital requirements prior to the close of the merger, $2.2
million of employee bonuses paid upon successful completion of the merger,
$800,000 of costs to announce the merger, and $2.2 million of costs associated
with combining the operations of the two companies including $1.4 million for
customer integration costs, $400,000 for severance and related costs and
$400,000 for write-off of redundant assets and other costs. We expect to incur
additional merger related costs in the second quarter of 2000 as we complete
Rubric-committed product implementations.
Interest income. Interest income consists of interest earned on our cash,
cash equivalents and short-term investments. Interest income increased from
$113,000 in the first quarter of 1999 to $2.2 million in the first quarter of
2000 due to higher invested cash balances in 2000 as a result of the investment
of proceeds of $57.8 million from our initial public offering in September 1999
and the investment of proceeds of $175.2 million from our secondary public
offering in February 2000.
Interest expense. Interest expense decreased from $260,000 in the first
quarter of 1999 to $133,000 in the first quarter of 2000 due primarily to the
conversion, upon our initial public offering in September 1999, of $8.3 million
of convertible debentures issued in December 1998.
Income taxes. There was no federal income tax provision in any period
presented due to our net operating losses. We had deferred tax assets of
approximately $13.2 million as of December 31, 1999. Realization of deferred tax
assets is dependent on future earnings, if any, the timing and amount of which
are uncertain. Accordingly, a valuation allowance, in an amount equal to the net
deferred tax assets as of December 31, 1999, has been established to reflect
these uncertainties. Our deferred tax assets primarily relate to net operating
loss and tax credit carryforwards. As of December 31, 1999, we had federal net
operating loss carryforwards of approximately $29.1 million and state net
operating loss carryforwards of approximately $13.6 million. We also had federal
and state research and development tax credit carryforwards of approximately
$500,000 and $300,000, respectively. The net operating loss and tax credit
carryforwards will expire at various dates beginning in 2004, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating loss and tax
credit carryforwards before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totaled $13.5 million and $2.8 million
in the first three months of 2000 and 1999, respectively. In the first three
months of 2000, net cash used in operating activities resulted primarily from
our net loss of $37.5 million and increase in accounts receivable of $4.3
million offset in part by the non cash write-off of acquired in-process research
and development of $10.1 million and the non cash amortization of intangible
assets and goodwill of $11.9 million recorded in connection with our acquisition
of Rubric on February 1, 2000, and to a lesser extent the amortization of
deferred stock compensation of $3.5 million. In the first three months of 1999,
net cash used in operating activities resulted primarily from our net loss of
$4.6 million offset in part by the amortization of deferred stock compensation
as well as increases in current liabilities, including deferred revenue and
accrued expenses. The increase in deferred revenue consisted primarily of
prepayments of licenses from Japanese distributors and prepayment of maintenance
fees.
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Our investing activities used cash of $21.2 million and $205,000 in the first
three months of 2000 and 1999, respectively. Net cash used in investing
activities in the first three months of 2000 was the result of the purchase of
short term investments of $19.4 million and capital expenditures of $1.8 million
for computer and communications equipment, purchased software, office equipment,
furniture, fixtures and leasehold improvements. For the first three months of
1999 net cash used in investing activities was primarily due to capital
expenditures.
Our financing activities provided net cash of $175.9 million in the first
three months of 2000 and used cash of $178,000 in the first three months 1999.
Net cash provided from financing activities in the first three months of 2000
resulted primarily from the net proceeds of $175.2 million from our secondary
public offering in February 2000 and to a lesser extent the proceeds from the
issuance of common stock from the employee stock purchase program and the
repayment of notes receivable from our stockholders. Net cash used by financing
activities in the first three months of 1999 resulted primarily from the
payments on notes payable.
As of March 31, 2000, we had $237.0 million of cash, cash equivalents and
short-term investments. We believe that cash, cash equivalents and short-term
investments on hand will be sufficient to fund our operations, including working
capital and capital equipment purchase requirements for the next 12 months.
However, we may need to raise additional funds in future periods through public
or private financing, or other arrangements to fund our operations and potential
acquisitions, if any, over a long-term basis until we achieve profitability, if
ever. We cannot be certain that we would be able to obtain additional financing
on favorable terms, if at all. Failure to raise capital when needed could
seriously harm our business and results of operations. If additional funds are
raised through the issuance of equity securities, the percentage of ownership of
our stockholders would be reduced. Furthermore, these equity securities might
have rights, preferences or privileges senior to our common stock.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and the other information in
this report before investing in our common stock. The risks described below are
not the only ones we face. Additional risks that we are aware of or that we
currently believe are immaterial may become important factors that affect our
business. If any of the following risks occur, or if others occur, our business,
operating results and financial condition could be seriously harmed. The trading
price of our common stock could decline due to any of these risks, and you may
lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED.
We are still in the early stages of our development. Our revenue and income
potential is unproven and depends on emerging, rapidly changing markets and on
acceptance of products that we have only recently introduced. Because our
operating history is limited and our product offerings are evolving, it is
difficult to evaluate our business and our future prospects. Additionally,
because we have only recently introduced our products, it is difficult to
predict whether our products will continue to be accepted by the market and the
level of revenues we can expect to derive from sales of our products.
Rubric was also in the early stages of its development and had licensed its
eMA product to a limited number of customers. It is difficult to predict the
effect our recent acquisition of Rubric will have on our business.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WE EXPECT TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE.
We incurred net losses and losses from operations for each period from our
inception through the first three months of 2000. As of March 31, 2000, we had
accumulated net losses of approximately $79.1 million. We have not achieved
profitability and we expect to continue to incur substantial losses for the
foreseeable future. We expect to incur increasing sales and marketing, research
and development and general and administrative expenses. As a result, we will
need to significantly increase our revenue to achieve profitability. Although
our revenue grew significantly in 1999 and the first three months of 2000, our
growth may not continue at the current rate or at all.
WE EXPECT OUR QUARTERLY REVENUE AND OPERATING RESULTS TO FLUCTUATE.
Our revenue and operating results are likely to vary significantly from
quarter to quarter. The factors that affect our quarterly operating results
include:
- the demand for our products, particularly our e-business applications;
- the size and timing of customer orders for our products and our
professional services;
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- increased expenses for sales and marketing, product development and
administration;
- changes in the level of sales of professional services as compared to
product licenses;
- changes in the mix of our domestic and international sales; and
- changes in general economic and market conditions.
Our quarterly revenue increased 324% from the first quarter of 1999 to the first
quarter of 2000. We do not believe that this rate of growth is indicative of the
growth in revenues, if any, that we can expect in the future. Accordingly, we
believe that period-to-period comparisons of our operating results may not be
meaningful and you should not rely on these comparisons as an indication of our
future performance. Our operating results may fall below the expectations of
investors. In this event, the market price of our common stock would likely
fall.
OUR OPERATING EXPENSES ARE INCREASING AND WE WOULD NOT BE ABLE TO REDUCE THEM
QUICKLY, WHICH COULD RESULT IN LOWER THAN EXPECTED OPERATING RESULTS IF WE DO
NOT ACHIEVE EXPECTED REVENUE LEVELS.
We plan to significantly increase our operating expenses as we expand our
sales, marketing, research and development, professional services, customer
support and administrative groups. These expenses will be incurred before we
generate any revenues from this increased spending. If we do not significantly
increase revenues as a result of these efforts, we will not achieve
profitability. Our operating expenses are based on our expectations of future
revenues and are relatively fixed in the short term. As a result, we would not
be able to reduce spending quickly if our revenue was lower than we had
projected. Our ability to accurately forecast our quarterly revenue is limited
because of our limited operating history, the rapidly evolving nature of our
market and the sales cycle for our products, which can be long and
unpredictable. If our revenue falls below our expectations in any quarter, or if
we increase our spending ahead of our revenue growth, our operating results will
be lower than expected.
THE UNPREDICTABLE TIMING OF OUR SALES AND IMPLEMENTATION CYCLE MAKES IT
DIFFICULT TO FORECAST OUR OPERATING RESULTS.
Our products can have a long and unpredictable sales cycle. Consequently, we
face difficulty predicting the quarter in which sales to expected customers will
occur. This contributes to the uncertainty of our future operating results.
Potential customers often require time to weigh the costs and benefits of our
products compared to those of in-house development and integration efforts. As a
result, our sales cycle has typically ranged from approximately two to four
months, although it can take longer, particularly for sales to traditional
"bricks and mortar" companies.
In a typical application license transaction, a portion of the implementation
of our products is performed by our professional services group, which connects
our products to the customer's systems and data sources. Upon completion of that
connection, no significant obligations remain with respect to implementation,
and we recognize the revenue related to that license. The actual connection
process can often be completed in approximately two to four weeks. However, the
timing of the commencement and completion of this connection process is subject
to factors that may be beyond our control, as this process requires access to
the customer's facilities and coordination with the customer's personnel after
delivery of the software. As a result, we typically do not recognize the license
revenue from an application license until one to three months after our product
is shipped to the customer. Uncertainty as to when our product can be connected
at the customer's facilities makes it more difficult to forecast our operating
results and can result in significant variability in our period to period
results.
OUR ACQUISITION OF RUBRIC MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND
MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING PERSONNEL, TECHNOLOGY AND
OPERATIONS.
We may not realize the benefits from our acquisition of Rubric to the extent
that we anticipate, or at all. We may not be able to successfully assimilate the
additional personnel, operations, acquired technology and products into our
business. In particular, we will need to assimilate and retain key professional
services, engineering and marketing personnel. The Chief Executive Officer of
Rubric no longer works for us and other key Rubric personnel may decide not to
continue to work for us. The integration of Rubric into our operations will be a
complex, time consuming and expensive process and may disrupt our operations if
it is not completed efficiently or in a timely manner. Among the challenges we
may face in this regard are demonstrating to customers and suppliers that the
acquisition will not result in adverse changes in client service standards or
dilution or distraction to our business focus, retaining key personnel in the
transition and ensuring that Rubric's eMA product can be successfully integrated
with our products. Neither we nor Rubric has experience in integrating
operations on a scale similar to this acquisition, and the difficulties of
integrating our businesses could be larger than we anticipate. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses.
OUR PROFITABILITY WILL BE DELAYED AND THEREAFTER REDUCED AS A RESULT OF
ACCOUNTING CHARGES RELATING TO THE ACQUISITION OF RUBRIC.
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We accounted for the Rubric acquisition using the purchase method of
accounting. Under the purchase method, the purchase price of Rubric was
allocated based on an independent valuation, to the specific tangible and
intangible assets acquired and liabilities assumed from Rubric. As a result, we
recorded a charge to operations upon consummation of the transaction related to
acquired in-process research and development of approximately $10.1 million. We
also recorded merger-related costs of approximately $7.2 million, of which $1.0
million were included in the our 1999 results of operations. We expect to incur
additional merger related costs in the second quarter of 2000 as we complete
Rubric-committed product implementations. Also, we recorded approximately $362.0
million of intangible assets and goodwill on our balance sheet which will result
in amortization expense of $66.9 million for 2000, $72.7 million for 2001, $72.7
million for 2002, $72.1 million for 2003, $71.6 million for 2004 and $6.0
million for 2005. We expect to record intangible assets and goodwill in
connection with our acquisition of Aperio as well as potential future
acquisitions. These charges will delay and thereafter reduce our profitability.
WE NEED TO ATTRACT, TRAIN AND RETAIN ADDITIONAL QUALIFIED PERSONNEL IN A
COMPETITIVE EMPLOYMENT MARKET.
Our success depends on our ability to attract, train and retain qualified,
experienced employees. There is substantial competition for experienced
management, engineering, sales and marketing personnel, particularly in the
market segment in which we compete. If we are unable to retain our existing key
personnel, or to attract, train and retain additional qualified personnel, we
may experience inadequate levels of staffing to develop and sell our products
and perform services for our customers.
The market price of our common stock has fluctuated substantially since our
initial public offering in September 1999. We have relied historically on our
ability to attract employees using equity incentives, and any perception by
potential and existing employees that our equity incentives are less attractive
could harm our ability to attract and retain qualified employees.
We believe that our success will depend on the continued services of our
executive officers. These employees serve "at-will" and may elect to pursue
other opportunities at any time. The loss of any of our executive officers could
harm our business. Several of our executive officers joined us only recently and
have had a limited time to work together. For example, three of our executive
officers have joined us since January 2000 and two others joined us upon the
completion of our acquisition of Rubric in February 2000. We cannot assure you
that our new executive officers will be able to work effectively together to
manage our growth and continuing operations. If we are unable to expand our
sales and marketing organizations in a timely manner, our growth could be
limited.
OUR GROWTH DEPENDS ON MARKET ACCEPTANCE OF OUR APPLICATIONS DESIGNED FOR
INTERNET-BASED SYSTEMS AND RUBRIC'S EMA PRODUCT.
We first introduced applications designed for Internet-based systems in May
1999, and Rubric first introduced its eMA product in May 1998. We expect that
our future growth will depend significantly on revenue from licenses of these
applications, eMA and related services. There are significant risks inherent in
introducing these new products. Market acceptance of these new products will
depend on the growth of the market for e-business solutions. This growth may not
occur. We cannot assure you that our new e-business applications or eMA will
meet customer performance expectations. If they do not meet customer
expectations or the market for these products fails to develop or develops more
slowly than we expect, our business would be harmed.
OUR BUSINESS WILL SUFFER IF WE DO NOT INCREASE MARKET AWARENESS OF OUR PRODUCTS
BY SIGNIFICANTLY EXPANDING OUR SALES CAPABILITIES.
We sell our products primarily through our direct sales force. We must
significantly expand our direct sales operations to increase market awareness of
our products and increase revenue. We cannot be certain that we will be
successful in these efforts. Our products and services require sophisticated
sales efforts. As a result, our ability to increase our direct sales operation
will depend on our ability to recruit, train and retain top sales people with
advanced sales skills and technical knowledge. There is a shortage of sales
personnel with these qualifications, and competition for qualified personnel is
intense in our industry.
The introduction of our new e-business applications has required us to hire
new sales personnel with the skills required to sell these products. As a
result, most of our current direct sales force has been with us for a relatively
short period. During 1999, we added 12 direct sales representatives to our
direct sales force, which represents 52.2% of our total direct sales
representatives and 24.0% of our total sales personnel as of December 31, 1999.
In the first three months of 2000 we added an additional 9 direct sales
representatives. New sales personnel require training and take time to achieve
full productivity. If we are unable to hire or retain qualified sales personnel,
or if newly hired personnel fail to develop the necessary skills or reach
productivity more slowly than anticipated, our business could be harmed.
WE ARE DEPENDENT ON MARKETING, TECHNOLOGY AND DISTRIBUTION RELATIONSHIPS THAT
MAY GENERALLY BE TERMINATED AT ANY TIME, AND IF OUR CURRENT AND FUTURE
RELATIONSHIPS ARE NOT SUCCESSFUL, OUR GROWTH MAY BE LIMITED.
We rely on marketing and technology relationships with a variety of companies
which, in part, generate leads for the sale of our products. These marketing and
technology relationships include relationships with:
- system integrators and consulting firms;
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- vendors of e-commerce and Internet software;
- vendors of software designed for customer relationship management or for
management of organizations' operational information;
- vendors of key technology and platforms;
- demographic data providers; and
- an application service provider and an Internet hoster.
If we cannot maintain successful marketing and technology relationships or
cannot enter into additional marketing and technology relationships, we may have
difficulty expanding the sales of our products and our growth may be limited.
While these companies do not sell or distribute our products, we believe that
many of our direct sales are the result of leads generated by vendors of
e-business and enterprise applications that work with our products. Our
marketing and technology relationships are generally not documented in writing,
or are governed by agreements that can be terminated by either party with little
or no prior notice. Some of these agreements specify that payments are to be
made by us to these companies for providing us with qualifying customer leads.
The generation of leads to date by these companies has not generally satisfied
the specified criteria and therefore payments for leads have been immaterial in
amount.
In addition, we have distribution relationships with companies located in the
United States, Japan and the Netherlands that distribute or resell our products
- -- our indirect sales channel. Sales through our indirect sales channel
accounted for approximately 28.7% of our total revenue for 1998, 35.3% for 1999
and 17.3% for the first three months of 2000. Sales of our products to Indus,
which integrates Foundation into certain of its enterprise solutions for the
energy and utility industries, represented 18.4% of our total revenue in 1998,
11.2% in 1999 and 5.1% in the first three months of 2000. Substantially all of
our sales in Japan have been made through distributors. If we cannot maintain
successful relationships with our indirect sales channel, we may have difficulty
expanding the sales of our products and our growth may be limited.
Companies with which we have a marketing, technology or distribution
relationship may promote products of several different companies, including, in
some cases, products that compete with our products. These companies may not
devote adequate resources to selling our products. We may not be able to
maintain these relationships and enter into additional relationships that will
provide timely and cost-effective customer support and service.
CUSTOMER SATISFACTION AND DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO
EXPAND OUR PROFESSIONAL SERVICES GROUP, WHICH ASSISTS OUR CUSTOMERS WITH THE
IMPLEMENTATION OF OUR PRODUCTS.
We believe that growth in our product sales depends on our ability to provide
our customers with professional services to assist with support, training,
consulting and initial implementation of our products and to educate third-party
systems integrators in the use of our products. As a result, we plan to increase
the number of professional services personnel to meet these needs. New
professional services personnel will require training and take time to reach
full productivity. We may not be able to attract or retain a sufficient number
of highly qualified professional services personnel. Competition for qualified
professional services personnel with the appropriate knowledge is intense. We
are in a new market and there is a limited number of people who have the
necessary skills. To meet our customers' needs for professional services, we may
also need to use more costly third-party consultants to supplement our own
professional services group. In addition, we could experience delays in
recognizing revenue if our professional services group falls behind schedule in
connecting our products to customers' systems and data sources.
WE MAY BE UNABLE TO ATTRACT NEW CUSTOMERS IF WE DO NOT DEVELOP NEW PRODUCTS AND
ENHANCEMENTS.
If we do not continue to improve our products and develop new products that
keep pace with competitive product introductions and technological developments,
satisfy diverse and rapidly evolving customer requirements and achieve market
acceptance, we may be unable to attract new customers. For example, we are
developing new applications as well as new versions of a number of our existing
applications, which are scheduled for release in 2000. In particular, we are
currently developing an enhanced version of eMA, which we plan to introduce in
the first half of 2000. The actual features and introduction date of this new
version could differ materially from those anticipated as a result of a number
of factors, many of which are beyond our control. We may not be successful in
developing and marketing these applications and new versions, or other product
enhancements and new products that respond to technological advances and market
changes, on a timely or cost-effective basis. In addition, even if these
products are developed and released, they may not achieve market acceptance. We
have in the past experienced delays in releasing new products and product
enhancements and may experience similar delays in the future. These delays or
problems in the installation or implementation of our new releases may cause
customers to forego purchases of our products.
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MARKET ACCEPTANCE OF OUR PRODUCTS MAY SUFFER IF WE ARE UNABLE TO KEEP PACE WITH
RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY.
Rapidly changing technology and operating system standards may impede market
acceptance of our products. Our new applications have been designed based upon
currently prevailing Internet technology. If new Internet technologies emerge
that are incompatible with our applications, our key products may become
obsolete and our existing and potential customers may seek alternatives to our
products. We may not be able to quickly adapt our products to any new Internet
technology.
Additionally, we have designed our products to work with databases such as
Oracle and Microsoft SQL Server. Any changes to those databases, or increasing
popularity of other databases, could require us to modify our products, and
could cause us to delay releasing future products and enhancements. Furthermore,
software adapters are necessary to integrate our products with other systems and
data sources used by our customers. We must develop and update these adapters to
reflect changes to these systems and data sources in order to maintain the
functionality provided by our products. As a result, uncertainties related to
the timing and nature of new product announcements, introductions or
modifications by vendors of operating systems, databases, customer relationship
management software, web servers and other enterprise and Internet-based
applications could delay our product development, increase our product
development expense or cause customers to delay evaluation, purchase and
deployment of our products.
FAILURE TO LICENSE NECESSARY THIRD PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS
MAY CAUSE DELAYS OR REDUCTIONS IN OUR SALES.
We license third party software which we incorporate into our products. These
licenses may not continue to be available on commercially reasonable terms or at
all. The loss of any such license could result in delays or reductions of our
applications until equivalent software is identified, licensed and integrated or
developed by us.
WE FACE INTENSE COMPETITION WHICH COULD MAKE IT DIFFICULT TO ACQUIRE AND RETAIN
CUSTOMERS.
Our market is intensely competitive, and we expect competition to intensify
in the future. Our failure to maintain and enhance our competitive position
could seriously harm our business. Our customers' requirements and the
technology available to satisfy those requirements are continually changing.
Therefore, we must be able to respond to these changes in order to remain
competitive. Our competitors vary in size and in the scope and breadth of
products and services offered.
We currently face competition from providers of consulting-based analysis
solutions, vendors of point technologies that provide website analysis and
in-house development efforts by potential customers. In addition, we face
potential competition from vendors of other enterprise applications as they
expand the functionality of their product offerings, including companies that
design software for decision support, management of customer relationships or of
organizations' operational information, as well as vendors of database
applications. Accordingly, it is possible that new competitors may emerge and
acquire our market share.
Some of our current and potential competitors have longer operating histories
and significantly greater financial, technical, marketing and other resources
than we do, and thus may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Also, many current and
potential competitors have wider name recognition and more extensive customer
bases that they could leverage, thereby gaining market share to our detriment.
They may be able to undertake more extensive promotional activities, adopt more
aggressive pricing strategies, and offer purchasers more attractive terms than
we can. Our competitors may develop products that are superior to ours or that
achieve greater market acceptance. In addition, current and potential
competitors may establish cooperative relationships among themselves or with
third parties to enhance their products to address customer needs.
Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our products. We cannot be
certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully against current or future
competitors, our business would be seriously harmed.
17
<PAGE> 18
BARRIERS TO INTERNATIONAL EXPANSION COULD LIMIT OUR FUTURE GROWTH.
We intend to expand our international operations, but we may face significant
barriers to this expansion. Our failure to manage our international operations
effectively could limit the future growth of our business. International sales
represented approximately 5.1% of our total revenue for the year ended December
31, 1998, 23.2% of our total revenue in 1999 and 25.8% of our total revenue for
the first three months of 2000, substantially all of which consisted of sales to
customers in Canada, Europe and Japan. We conduct our international sales
primarily through direct sales offices in Germany, the Netherlands and the
United Kingdom, through our Canadian subsidiary and through distributors in
Japan. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources.
Our international operations face numerous risks. Our products must be
localized -- customized to meet local user needs -- in order to be sold in
particular foreign countries. Developing local versions of our products for
foreign markets is difficult and can take longer than we anticipate. We
currently have limited experience in localizing products and in testing whether
these localized products will be accepted in the targeted countries. For
example, we are currently marketing localized products only in Germany and
Japan. We cannot assure you that our localization efforts will be successful. In
addition, we have only a limited history of marketing, selling and supporting
our products and services internationally. As a result, we must hire and train
experienced personnel to staff and manage our foreign operations. However, we
may experience difficulties in recruiting and training an international staff.
We must also be able to enter into strategic relationships with companies in
international markets, particularly in Japan where all of our sales have been
made through distributors. If we are not able to maintain successful strategic
relationships internationally or recruit additional companies to enter into
strategic relationships, our future growth could be limited.
We also face certain other risks inherent in conducting business
internationally, such as:
- difficulties and costs of staffing and managing international operations;
18
<PAGE> 19
- language and cultural differences;
- difficulties in collecting accounts receivable and longer collection
periods;
- seasonal business activity in certain parts of the world;
- fluctuations in currency exchange rates;
- legal and governmental regulatory requirements;
- trade barriers; and
- potentially adverse tax consequences.
Any of these factors could seriously harm our international operations and,
consequently, our business.
To date, a majority of our international revenue and costs have been
denominated in foreign currencies. We have not engaged in any foreign exchange
hedging transactions, and we are therefore subject to foreign currency risk.
WE ARE GROWING RAPIDLY, AND THE FAILURE TO MANAGE OUR GROWTH, INCLUDING
EXPANSION OF OUR MANAGEMENT SYSTEMS, COULD HARM OUR BUSINESS.
We have grown rapidly and will need to continue to grow in all areas of
operation in order to execute our business strategy. Our total number of
full-time employees grew from 75 at December 31, 1998 to 131 at December 31,
1999 to 214 at March 31, 2000, and we anticipate further significant increases
in the number of our employees. Our growth has placed significant demands on
management as well as on our administrative, operational and financial resources
and controls. We expect our future growth to cause similar, and perhaps
increased, strain on our systems and controls. In particular, we need to
implement several new information systems. If we cannot effectively establish
and improve our processes, we may not be able to manage our growth successfully
or sustain and manage the growth rates we have experienced in the past.
IF WE ACQUIRE ADDITIONAL COMPANIES, PRODUCTS OR TECHNOLOGIES, WE MAY FACE RISKS
SIMILAR TO THOSE THAT WE CURRENTLY FACE IN CONNECTION WITH OUR ACQUISITION OF
RUBRIC.
We entered into a definitive agreement to acquire Aperio in March 2000. In
addition, if we are presented with appropriate opportunities, we intend to make
other investments in complementary companies, products or technologies. We may
not realize the anticipated benefits of Aperio or any other acquisition or
investment. In connection with our proposed acquisition of Aperio and with
future acquisitions, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to our acquisition of Rubric.
Furthermore, we may have to incur debt or issue equity securities to pay for any
additional future acquisitions or investments, the issuance of which could be
dilutive to us or our existing stockholders. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING, IF REQUIRED, ARE UNCERTAIN AND
FAILURE TO OBTAIN NEEDED FINANCING COULD AFFECT OUR ABILITY TO PURSUE FUTURE
GROWTH.
We expect that our cash on hand, cash equivalents and proceeds from our
initial and secondary public offerings will be sufficient to meet our working
capital and capital expenditure needs for at least the next 12 months. However,
we may need to raise additional funds to fund expansion, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. We cannot assure you that we would be able to obtain additional
financing on favorable terms, if at all. If we issue additional equity
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise necessary additional funds
on acceptable terms, we may not be able to develop or enhance our products, fund
expansion, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements.
19
<PAGE> 20
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO DROP SIGNIFICANTLY,
EVEN IF OUR BUSINESS IS DOING WELL.
Our common stock began trading on the Nasdaq National Market on September 22,
1999. The number of shares of common stock available for sale in the public
market is limited by restrictions under federal securities laws and under
agreements that our stockholders have entered into with the underwriters of our
initial and secondary public offerings and with us. For instance, approximately
11.4 million shares will become eligible for sale beginning May 16, 2000 (the
expiration date of the remaining lock-up agreements related to our secondary
public offering) and approximately 5.1 million shares will become eligible for
sale on subsequent dates after May 16, 2000, subject in most cases to volume
limitations.
Sales of a substantial number of shares of our common stock in the future
could cause our stock price to fall. In addition, the sale of shares by our
stockholders could impair our ability to raise capital through the sale of
additional stock.
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD LEAD TO LOSSES BY INVESTORS AND TO
SECURITIES LITIGATION.
The market price of our common stock has been and is likely to continue to be
highly volatile due to several factors, such as:
- variations in our actual and anticipated operating results;
- changes in our earnings estimates by analysts;
- our failure to meet analysts' performance expectations; and
- the volume of trading in our common stock.
In addition, stock markets, particularly the Nasdaq National Market, have
experienced extreme price and volume fluctuations, and the market prices of
securities of technology companies, particularly Internet-related companies,
have been highly volatile. These fluctuations have often been unrelated to the
operating performance of such companies. Fluctuations such as these may affect
the market price of our common stock. Substantial sales of our common stock
could also cause our stock price to decline.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in their stock price. This
type of litigation could result in substantial costs and could divert our
management's attention and resources.
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
During the first three Months of 2000, our exposure to market risk for
changes in interest rates related primarily to our investment portfolio and
long-term debt obligations. The primary objective of our investment activities
is to preserve principal while at the same time maximizing yields without
significantly increasing risk. At March 31, 2000, our portfolio includes money
market funds, commercial paper, short-term taxable municipals, government
agencies, and corporate bonds. The diversity of the portfolio helps us to
achieve our investment objective. As of March 31, 2000 the weighted average
maturity of our portfolio was less than 90 days.
Our debt obligations are primarily used to support general corporate
requirements including capital expenditures and working capital needs. We
continue to have interest rate exposure on borrowings under our equipment
line-of-credit which bears interest at variable rates based on the prime
interest rate (9.0% at March 31, 2000). At March 31, 2000 there was
approximately $583,000 outstanding on this line-of-credit. We have no interest
rate exposure on our notes payable to a financial institution and a term loan
and capital lease obligation assumed in connection with our acquisition of
Rubric as the interest rates on these obligations are fixed.
We are exposed to market risk from fluctuations in foreign currency exchange
rates. We manage exposure to variability in foreign currency exchange rates
primarily through the use of natural hedges, as both liabilities and assets are
denominated in the local currency. However, different durations in our funding
obligations and assets may expose us to the risk of foreign exchange rate
fluctuations. We have not entered into any derivative instrument transactions to
manage this risk. Based on our overall foreign currency rate exposure at March
31, 2000 we do not believe that a hypothetical 10% change in foreign currency
rates would materially harm our financial position.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
21
<PAGE> 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On February 1, 2000, in connection with our acquisition of Rubric, we
issued 5,984,192 shares of our common stock and options and warrants to purchase
1,215,800 shares of our common stock to the security holders of Rubric in
exchange for all outstanding securities of Rubric. We obtained a permit for the
issuance of these securities after a fairness hearing conducted by the
California Department of Corporations, and therefore this transaction was exempt
from registration under the Securities Act pursuant to Section 3(a)(10) of the
Securities Act of 1933.
Use of Proceeds from Sale of Registered Securities
Broadbase's Registration Statement on Form S-1 (File No. 333-82251) was
declared effective by the SEC on September 21, 1999. A total of 9,200,000 shares
of the our common stock were registered with the SEC with an aggregate
registered offering price of $64.4 million, all of which were registered on
behalf of Broadbase. The offering commenced on September 21, 1999 and all
9,200,000 shares of common stock were sold for the aggregate registered offering
price through a syndicate of underwriters managed by Deutsche Banc Alex. Brown,
Dain Rauscher Wessels, Thomas Weisel Partners LLC and E*Offering. The sale of
8,000,000 of such shares closed on September 27, 1999 and the sale of the
remaining 1,200,000 of such shares closed on October 18, 1999.
We paid the underwriters underwriting discounts and commissions totaling $4.5
million in connection with the offering. In addition, we incurred additional
expenses of approximately $2.1 million in connection with the offering, which
when added to underwriting discounts and commissions paid by us amounts to total
expenses of $6.6 million. Thus the net offering proceeds to Broadbase (after
deducting underwriting discounts and commissions and estimated offering
expenses) were approximately $57.8 million. No offering expenses were made
directly or indirectly to any directors or officers of Broadbase (or their
associates), persons owning ten percent (10%) or more of any class of equity
securities of Broadbase, or to any other of our affiliates.
As of March 31, 2000, we had used the estimated aggregate net proceeds of
$57.8 million that it had received from our initial public offering as follows:
<TABLE>
<S> <C>
Construction of plant, building and facilities: $0
Purchase and installation of machinery and equipment: $0
Purchases of real estate: $0
Acquisition of other businesses: $0
Repayment of indebtedness: $0
Working capital: $19.3 million
Temporary investments (short term, interest bearing securities): $38.5 million
Other purposes: $0
</TABLE>
The foregoing amounts represent our best estimate of the use of proceeds for
the period indicated. No such payments were made to directors or officers of
Broadbase or their associates, holders of 10% or more of any class of equity
securities of ours or to affiliates of ours.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Effective January 2000, Chuck Bay was named our Chief Executive Officer and a
member of the Board of Directors. Mr. Bay also continues as our President. Mark
Kremer continues to serve as our Chairman of the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits have been filed with this report:
22
<PAGE> 23
10.1 Broadbase Software, Inc. Non-Plan Stock Option Agreement between
us and Rusty Thomas dated January 4, 2000 (incorporated into
this report by reference to Exhibit 4.13 to the Registrant's
registration statement on Form S-8 (File No. 333-32120) filed
with the Commission on March 10, 2000).
10.2 Broadbase Software, Inc. Non-Plan Stock Option Agreement between
us and Greg Martin dated January 4, 2000 (incorporated into this
report by reference to Exhibit 4.12 to the Registrant's
registration statement on Form S-8 (File No. 333-32120) filed
with the Commission on March 10, 2000).
10.3 Lease agreement between the Registrant and Bohannon Trusts
Partnership II dated December 23, 1999.
27.1 Financial Data Schedule
b. Reports on Form 8-K.
On February 11, 2000, we filed a current report on Form 8-K reporting
under Item 2, relating to our acquisition of Rubric, including historical
financial statements of Rubric and pro forma financial information for
the combined company.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BROADBASE SOFTWARE, INC.
Dated: May 11, 2000 By: /s/ Rusty Thomas
-------------------------------------
Rusty Thomas
Executive Vice President and
Chief Financial Officer
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.3 Lease agreement between the Registrant and Bohannon Trusts
Partnership II dated December 23, 1999
27.1 Financial Data Schedule
</TABLE>
25
<PAGE> 1
EXHIBIT 10.3
TENANT: BROADBASE SOFTWARE, INC.
LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE TITLE PAGE
- ------- ----- ----
<S> <C> <C>
1 PREMISES AND TERM 1
2 RENT 3
3 LANDLORD'S WORK - TENANT'S WORK 5
4 STREETS 5
5 UTILITY SERVICES 5
6 ASSIGNMENT - CHANGE OF OWNERSHIP 5
7 TENANT'S ADDITIONAL AGREEMENTS 8
8 USE OF PREMISES 10
9 INDEMNITY AND PUBLIC LIABILITY INSURANCE 10
10 FIRE INSURANCE AND CASUALTY 11
11 REPAIR 14
12 FIXTURES & ALTERATIONS 17
13 REMEDIES 18
14 BANKRUPTCY 19
15 SURRENDER OF PREMISES 20
16 EMINENT DOMAIN 20
17 REAL PROPERTY TAXES 21
18 PARKING AND ACCOMMODATION AREAS 23
19 MISCELLANEOUS 24
</TABLE>
<PAGE> 2
BUSINESS PARK LEASE
THIS LEASE is made this 23'rd day of December, 1999, between BOHANNON
TRUSTS PARTNERSHIP II, a California partnership, herein referred to as
"Landlord," and BROADBASE SOFTWARE, INC., a Delaware corporation, herein
referred to as "Tenant".
WITNESSETH:
ARTICLE 1 - PREMISES AND TERM
Section 1.1. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord the demised premises, including the building and other
improvements thereon commonly known as 181 and 185 Constitution Drive, Menlo
Park, California, the total area of which is approximately 44,723 square feet
(as more fully described in Exhibit "A" and located substantially as shown on
Exhibit "B" attached hereto) upon and subject to the terms and provisions of
this Lease for a demised term of seven (7) years three (3) months commencing on
February 1, 2000, and ending on April 30, 2007.
Section 1.2. The demised premises are currently occupied by existing
tenants pursuant to leases which are currently in full force and effect. This
Lease and the obligations of Tenant and Landlord hereunder are expressly
conditioned upon Landlord obtaining satisfactory termination agreements from the
existing tenants and the vacation of the demised premises by the existing
tenants. In the event Landlord does not deliver all or any portion of the
demised premises to Tenant on the commencement of the term, Landlord shall not
be in default hereunder and the term of this Lease shall not be extended
thereby, but the Base Rent Commencement Date, as defined in Section 2.1, for the
portion of the demised premises not so delivered shall be deferred by one day
for each day of delay in delivering said portion of the demised premises to
Tenant, provided that if Landlord does not deliver the entire demised premises
to Tenant on or before April 1, 2000, Tenant shall have the right to terminate
this Lease by written notice given to Landlord at any time after April 1, 2000,
but prior to delivery of the entire demised premises to Tenant.
Upon vacation of any portion of the demised premises by either of the
existing tenants, Tenant shall have the right to occupy such portions of the
building prior to the commencement of the demised term hereof. From and after
the date Tenant first occupies any portion of the demised premises, all of the
provisions of this Lease shall be applicable to said portion notwithstanding
that the demised term has not yet commenced. Specifically, but without
limitation, Tenant's and Landlord's obligations with respect to insurance and
indemnities shall be operable as of the date Tenant occupies any portion of the
demised premises and, notwithstanding any provision of this Lease to the
contrary, commencing May 1, 2000, and continuing until one (1) day before the
Base Rent Commencement Date (for the entire demised premises), Tenant shall pay
to Landlord monthly base rent on all of such portion occupied calculated by
multiplying $2.16 by the number of square feet in the portion of the demised
premises occupied by Tenant. In addition to the above, in the event Tenant makes
any alterations, decorations, additions or improvements to any portion of the
demised
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<PAGE> 3
premises occupied by Tenant and subsequently terminates the Lease pursuant to
the above provisions, then Tenant shall restore such portion of the demised
premises to the condition existing at the time of delivery of possession of any
such portion of the demised premises to Tenant in accordance with the provisions
of Section 12.2. hereinbelow.
Notwithstanding anything herein to the contrary, Tenant shall have the
right, unless restricted by local ordinance, during the demised term to install
two (2) microwave antennae and related equipment (collectively, the "Antennae")
on the roof ("Roof") of the building to serve Tenant exclusively, which Antennae
shall be comparable to the antenna on the building located at 173 Constitution
Drive, subject to reasonable requirements as determined by Landlord and
Landlord's roofing consultant, which will include, without limitation, the
following: (i) the size and dimensions of the Antennae shall be approved by
Landlord, in Landlord's sole discretion; (ii) the Antennae shall be installed
and screened in a manner approved in advance by Landlord and in locations on the
Roof such that one of such Antennae shall be in line of sight to an antenna on
the building located at 173 Constitution Drive and the other shall be in line of
sight to an antenna on the building located at 172 Constitution Drive, as
reasonably approved by Landlord; (iii) Tenant shall submit to Landlord detailed
plans on the Antennae and the installation procedures and shall make use of roof
mount assemblies, including, without limitation, hardware to be used in
attaching any support pole to the Roof and the type and application of the
sealant to be used, as approved by Landlord; (iv) the installation, repair,
maintenance and removal of the Antennae shall be performed at Tenant's sole cost
and expense in a good and workmanlike manner in accordance with all applicable
governmental requirements, including, without limitation, FCC licensing
requirements; (v) Tenant shall give Landlord at least forty eight (48) hours'
prior notice of the dates and times Tenant requires access to the Roof for the
installation, repair, maintenance and removal of the Antennae (except in the
case of an emergency); (vi) upon removal of the Antennae, Tenant shall return
all areas affected by the installation thereof to their original condition,
ordinary wear and tear and damage from fire or other casualty not caused by
Tenant and/or condemnation excepted; (vii) any damage to the building or the
Roof caused by the installation, operation, maintenance or removal of the
Antennae will be repaired at Tenant's sole cost and expense by a contractor
approved by Landlord; (viii) if Tenant should fail to properly maintain or
repair the Antennae, and such failure continues for twenty (20) days after
Tenant's receipt of written notice of such failure from Landlord (or such
shorter notice period as is appropriate in the event such failure has caused, or
is likely to cause, a Roof leak or other problem which requires an immediate
response), then Landlord shall have the right to cancel Tenant's use of the Roof
for placement of Tenant's Antennae and, in such event, Tenant shall remove the
Antennae from the Roof; and (ix) Tenant agrees, at its expense, to relocate the
Antennae to another location suitable to Landlord in the event construction,
Roof repairs or other similar work is undertaken by or for Landlord which
necessitates such relocation. Additionally, Tenant shall defend, indemnify and
hold Landlord harmless from and against any claims, costs or expenses incurred
by Landlord as a result of such installation by Tenant.
-2-
<PAGE> 4
ARTICLE 2 - RENT
Section 2.1. (A) Commencing May 1, 2000 (the "Base Rent Commencement
Date") and continuing for the term of this Lease, Tenant shall pay to Landlord
base rent as follows:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
From the Base Rent Commencement
Date through April 30, 2001 $ 96,528.00 per month
May 1, 2001 through April 30, 2002 $100,389.12 per month
May 1, 2002 through April 30, 2003 $104,404.69 per month
May 1, 2003 through April 30, 2004 $108,580.87 per month
May 1, 2004 through April 30, 2005 $112,924.11 per month
May 1, 2005 through April 30, 2006 $117,441.07 per month
May 1, 2006 through April 30, 2007 $122,138.71 per month
</TABLE>
Base rent shall be paid monthly in advance on the first (1st) day of
each calendar month. If the Base Rent Commencement Date is not the first day of
a calendar month, the base rent attributable to the first partial month shall be
appropriately prorated.
(B) Tenant covenants and agrees to pay rent to Landlord without
set-off, recoupment, deduction or demand of any nature whatsoever except as
otherwise expressly provided herein.
Section 2.2. For the purpose of this Lease, a year shall be twelve (12)
calendar months, commencing with the first day of May and ending on the last day
of the next succeeding April, and the succeeding anniversaries thereof. The
first year shall commence on May 1, 2000, and shall end on April 30, 2001.
Section 2.3. All sums payable by Tenant under this Lease shall be paid
at 60 Hillsdale Mall, San Mateo, California 94403-3497, or at such other place
as Landlord may from time to time direct by notice to Tenant and all such sums
shall be paid in lawful money of the United States.
Section 2.4. Upon execution of this Lease, Tenant shall pay to the
Landlord the following:
(A) Ninety Six Thousand Five Hundred Twenty Eight Dollars ($96,528.00)
which shall be applied by Landlord to the first base rent to become due and
payable under this Lease, and
-3-
<PAGE> 5
(B) A letter of credit in the amount of Five Hundred Eighty Thousand
Dollars ($580,000.00) which shall be held as a Security Deposit pursuant to the
terms of Section 19.9.
Tenant shall deliver said letter of credit in the amount of $580,000.00
(the "Initial Amount") to Landlord concurrently with Tenant's execution of this
Lease. Such letter of credit shall be issued by and drawn on an institution
reasonably acceptable to Landlord and otherwise upon conditions acceptable to
Landlord and shall be renewed at least thirty (30) days prior to any scheduled
expiration during the entire demised term hereof and shall, subject to Tenant's
right to retire the letter of credit if Tenant elects to replace same with cash
as provided hereinbelow, remain in effect without expiration for a term ending
sixty (60) days after the scheduled expiration or sooner termination of the
demised term of this Lease. Provided that no material default beyond applicable
cure periods has occurred under the Lease at any time prior to the scheduled
reduction in the amount of the letter of credit as provided herein, the Initial
Amount may be reduced to the following amounts at the commencement of the
following years of the demised term:
<TABLE>
<CAPTION>
Year Amount of Letter of Credit
---- --------------------------
<S> <C>
2 $464,000.00
3 $348,000.00
4 $232,000.00
5 $116,000.00
</TABLE>
At the election of Tenant, at the beginning of the sixth (6th) year of
the demised term the letter of credit shall be retired and replaced by a cash
security deposit in the amount of $116,000.00.
Section 2.5. In addition to base rent under Section 2.1., all other
payments to be made under this Lease by Tenant to Landlord shall be deemed to be
and shall become additional rent hereunder, whether or not the same to be
designated as such, and shall be included in the term "rent" wherever used in
this Lease; and, unless another time shall be expressly provided for the payment
thereof, all rent and additional rent shall be due and payable together with the
next succeeding installment of base rent; and Landlord shall have the same
remedies for failure to pay the same as for a nonpayment of base rent.
Section 2.6. Any amount due from Tenant to Landlord that is not paid
within five (5) days after the date due shall bear interest from the due date at
the highest rate then permitted to be charged on late payments under leases
under California law; provided, however, the payment of any such interest shall
not excuse or cure the default upon which such interest accrued. Tenant
acknowledges and agrees that payment of such interest on late payments is
reasonable compensation to Landlord for the additional costs incurred by
Landlord caused by such late payment, including, but not limited to, collection
and administration expenses and the loss of the use of the money that was late
in payment.
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<PAGE> 6
ARTICLE 3 - LANDLORD'S WORK - TENANT'S WORK
Section 3.1. Landlord shall not be required to perform any work in the
demised premises except as necessary to satisfy the provisions of Section 11.5;
and, subject to the provisions of Section 11.5. hereinbelow, Tenant accepts the
demised premises in an "as is" condition.
Section 3.2. Any additional work to be performed other than that
provided for in Section 3.1. and designated as Landlord's Work shall be
performed at the sole cost of Tenant in accordance with detailed plans and
specifications therefor which must be approved, in writing, by Landlord or
Landlord's architect before work is commenced. Tenant shall furnish Landlord
with a set of "as built" plans therefor in IBM-compatible AutoCAD format or such
other format which is compatible to Landlord's computer aided design software
after any such work is completed. Tenant shall provide insurance during the
course of Tenant's construction in accordance with Landlord's standard
requirements.
ARTICLE 4 - STREETS
Section 4.1. Tenant agrees to require employees, and to direct
customers and other persons visiting Tenant, to park in the parking area
provided in the Parking and Accommodation Areas. Tenant agrees that it will not
oppose any measures undertaken to restrict or eliminate on street parking in
front of the demised premises.
ARTICLE 5 - UTILITY SERVICES
Section 5.1. Landlord has at its own cost and expense secured the
installation of water, gas, sanitary sewers and electrical services to the
demised premises and made all necessary connections thereof to the building.
Tenant shall pay all meter or service charges made by public utilities companies
and shall pay for the water, gas and/or electricity used on the demised premises
and sewer use fees and charges whether ad valorum or not and any so called
"sewer connection charges" based on increased wastewater discharge from the
demised premises exclusively. Tenant shall maintain such connections of
utilities to the building.
Section 5.2. Landlord shall not be liable to Tenant for the failure of
any utility services, provided that in the event of any interruption or failure
of utility services to the demised premises rendering the demised premises
unsuitable for Tenant's use, if Landlord carries off-premises services coverage
as part of its rental insurance, Tenant shall be entitled to an abatement of
rent to the extent of the proceeds available to Landlord from such insurance as
a result of such interruption or failure.
ARTICLE 6 - ASSIGNMENT - CHANGE OF OWNERSHIP
Section 6.1.
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<PAGE> 7
A. Except as otherwise provided herein, Tenant shall not, by operation
of law or otherwise, transfer, assign, sublet, enter into license or concession
agreements, mortgage or hypothecate this Lease or the Tenant's interest in and
to the demised premises without first procuring the written consent of Landlord.
Any attempted transfer, assignment, subletting, license or concession agreement,
mortgage or hypothecation without Landlord's written consent shall be void and
confer no rights upon any third person. Landlord's consent to a proposed
assignment or sublease shall not be unreasonably withheld provided that in
connection with an assignment, the proposed assignee shall have: (i) a net
worth, at the time of the assignment, determined in accordance with good
accounting principles, equal to or in excess of the net worth of Tenant at the
date of the Lease; (ii) been active in its current business for a minimum of
three (3) years immediately prior to the assignment; and (iii) a good reputation
in the business community; provided further that Tenant shall give Landlord not
less than thirty (30) days notice prior to the effective date of any such
assignment, and any sublease of all or any portion of the demised premises for a
term ending after June 30, 2002, and Landlord shall have (subject to the
provisions hereinbelow) the option to terminate this Lease with respect to the
space to be so assigned or subleased by notice to Tenant given within twenty
(20) days of Landlord's receipt of Tenant's notice. Unless Landlord and Tenant
otherwise agree, the termination date of this Lease with respect to the space to
be so assigned or subleased shall be the date the assignment or sublease
otherwise would have become effective. Nothing herein contained shall relieve
Tenant and any Guarantor from its covenants and obligations for the demised term
except as to space as to which the Lease is terminated. Tenant agrees to
reimburse Landlord for Landlord's reasonable outside attorneys' fees incurred in
conjunction with the processing and documentation of any such requested
transfer, assignment, subletting, licensing or concession agreement, mortgage or
hypothecation of this Lease or Tenant's interest in and to the demised premises.
Notwithstanding anything to the contrary contained herein, Landlord's consent
shall not be required for any assignment or sublease to any corporation that
controls, is controlled by or is under common control with Tenant, or for any
assignment in connection with a merger, consolidation or sale of all or
substantially all of the assets of Tenant, provided that in all instances the
assignee shall satisfy the net worth requirement set forth above and provided
that the assignee agrees in writing for the benefit of Landlord to assume, to be
bound by, and to perform the terms, covenants and conditions of this Lease to be
done, kept and performed by Tenant, including the payment of all amounts due or
to become due under this Lease directly to Landlord. If Landlord consents to any
assignment or sublease pursuant to this Article, Tenant shall pay Landlord, as
additional rent:
(a) in the case of each and every assignment requiring
Landlord's consent, an amount equal to ALL monies, property, and other
consideration of every kind whatsoever paid or payable to Tenant by the
assignee for such assignment and for all property of Tenant transferred
to the assignee as part of the transaction (including, but not limited
to, fixtures, other leasehold improvements, furniture, equipment, and
furnishings); and
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(b) in the case of each and every sublease, one-half (1/2) of
all rent, and/or other monies, property, and consideration of every
kind whatsoever paid or payable to Tenant by the subtenant under the
sublease, LESS
(i) all base rent and additional rent under this Lease
accruing during the term of the sublease in respect of the subleased space (as
reasonably determined by Landlord, taking into account the useable area of the
premises demised under the sublease);
(ii) commissions actually paid by Tenant to procure the
sublease to an independent third party licensed real estate broker, amortized
over the term of the sublease, commencing with the date on which the sublease
term commences; and
(iii) the actual cost of leasehold improvements undertaken by
Tenant (subject to Landlord's prior written consent) solely to prepare the
sublease space for the subtenant, amortized over the period of the term of the
sublease, commencing with the date on which the sublease commences.
During the period ending June 30. 2002, Tenant shall have the right to
sublease all or portions of the demised premises for sublease term(s) ending no
later than June 30, 2002, subject to Landlord's prior consent and otherwise
pursuant to the provisions of this Article, without Landlord having the right to
terminate this Lease with respect to the space to be subleased. However, in the
event the sublease term of any space subleased by Tenant continues beyond June
30, 2002, Landlord shall have the right to terminate this Lease with respect to
any such subleased space the term of which continues beyond June 30, 2002, upon
thirty (30) days' advance written notice to Tenant given at any time after such
date or at the time the sublease is presented if the sublease is initially
scheduled to extend beyond June 30, 2002.
B. Each transfer, assignment, subletting, license, concession
agreement, mortgage and hypothecation to which there has been consent shall be
by an instrument in writing in form satisfactory to Landlord, and shall be
executed by the transferor, assignor, sublessor, licensor, concessionaire,
hypothecator or mortgagor and the transferee, assignee, sublessee, licensee,
concessionaire or mortgagee in each instance, as the case may be; and each
transferee, assignee, sublessee, licensee, concessionaire or mortgagee shall
agree in writing for the benefit of Landlord herein to assume, to be bound by,
and to perform the terms, covenants and conditions of this Lease to be done,
kept and performed by Tenant, including the payment of all amounts due or to
become due under this Lease directly to Landlord. One (1) executed copy of such
written instrument shall be delivered to Landlord. Failure to first obtain in
writing Landlord's consent or failure to comply with the provisions of this
Article shall operate to prevent any such transfer, assignment, subletting,
license, concession agreement, mortgage, or hypothecation from becoming
effective.
C.
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D. Landlord's rights to assign this Lease are and shall remain
unqualified. Upon any sale of the demised premises and provided the purchaser
assumes all obligations under this Lease, Landlord shall thereupon be entirely
released of all obligations of Landlord hereunder accruing under this Lease from
and after such sale and shall not be subject to any liability resulting from any
act or omission or event occurring after such sale.
E. The consent of Landlord to any transfer, assignment, sublease,
license or concession agreement, mortgage or hypothecation of this Lease is not
and shall not operate as a consent to any future or further transfer,
assignment, sublease, license or concession agreement, mortgage or
hypothecation, and Landlord specifically reserves the right to refuse to grant
any such consents except as otherwise provided in this Section 6.1.
ARTICLE 7 - TENANT'S ADDITIONAL AGREEMENTS
Section 7.1. Tenant agrees at all times during the demised term to: (A)
Keep the demised premises in a neat and clean condition. (B) Promptly remove all
waste, garbage or refuse from the demised premises. (C) Promptly comply with all
laws and ordinances and all rules and regulations of duly constituted
governmental authorities affecting the demised premises, and the cleanliness,
safety, use and occupation thereof, but this clause (C) shall not be construed
to require Tenant to comply with any such laws, ordinances, rules or regulations
which require structural changes in the demised premises unless the same are
made necessary by act or work performed by Tenant or the nature of Tenant's
business. (D) Prevent the escape from the demised premises of all fumes, odors
and other substances which are offensive or may constitute a nuisance or
interfere with other tenants.
Section 7.2. Tenant agrees that it will not at any time during the
demised term without first obtaining the Landlord's written consent: (A) Conduct
or permit any fire, bankruptcy or auction sale in the demised premises. (B)
Place on the exterior walls (including both interior and exterior surfaces of
windows and doors), the roof of any buildings or any other part of the demised
premises, any sign, symbol, advertisement, neon light, other light or other
object or thing visible to public view outside of the demised premises. (C)
Change the exterior color of the building on the demised premises, or any part
thereof, or the color, size, location or composition of any sign, symbol or
advertisement that may have been approved by Landlord. (D) Park, operate, load
or unload, any truck or other delivery vehicle on any place other than the
loading area designated for Tenant's use. (E) Use the plumbing facilities for
any purpose other than that for which they were constructed or dispose of any
foreign substance therein. (F) Install any exterior lighting or plumbing
facilities, shades or awnings, amplifiers or similar devices, or use any
advertising medium which may be heard or experienced outside the demised
premises, such as loudspeakers, phonographs, or radio broadcasts. (G) Deface any
portion of the building or improvements on the demised premises, normal usage
excepted. In the event any portion of the building is defaced or
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damaged, Tenant agrees to repair such damage. (H) Permit any rubbish or garbage
to accumulate on the demised premises, or any part thereof, unless confined in
metal containers so located as not to be visible to members of the public. (I)
Install, maintain or operate any sign except as approved in writing by Landlord.
(J) Store materials, supplies, equipment, finished products, raw materials or
articles of any nature outside of the demised premises. (K) Use the demised
premises for retail, commercial or residential purposes.
Section 7.3. Tenant agrees that it will not at any time during the
demised term: (A) Perform any act or carry on any practice which may injure the
demised premises. (B) Burn anything in or about the demised premises. (C) Keep
or display any merchandise or other object on or otherwise obstruct any
sidewalks, walkways or areaways. (D) Use or permit the use of any portion of the
demised premises as living quarters, sleeping apartments, lodging rooms, or for
any unlawful purpose. (E) Use or permit the demised premises to be used for any
purpose which is or shall not then be allowed under the Zoning Ordinance of the
City of Menlo Park, California, in that area.
Section 7.4. Tenant shall, at its expense, comply with all applicable
laws, regulations, rules and orders relating to the demised premises and the use
thereof, regardless of when they become or became effective, including, without
limitation, those relating to health, safety, noise, environmental protection,
waste disposal, and water and air quality, and furnish satisfactory evidence of
such compliance upon request of Landlord.
Should any discharge, leakage, spillage, emission or pollution of any
type occur upon or from the demised premises due to Tenant's use and occupancy
thereof, Tenant, at its expense, shall be obligated to remedy the same to the
satisfaction of Landlord and any governmental body having jurisdiction
thereover. Tenant agrees to indemnify, hold harmless, and defend Landlord
against all liability, cost, and expense (including without limitation any
fines, penalties, judgments, litigation costs, and attorneys' fees) incurred by
Landlord as a result of Tenant's breach of this section, or as a result of any
such discharge, leakage, spillage, emission, or pollution during the demised
term of this Lease that is attributable to Tenant's use and occupancy of the
demised premises, regardless of whether such liability, cost, or expense arises
during or after the demised term, except to the extent such liability, cost or
expense is proximately caused by the negligence of Landlord.
Tenant shall pay all amounts due Landlord under this section, as
additional rent, within ten (10) days after any such amounts become due.
Tenant shall, at least thirty (30) days prior to the termination of the
demised term, or any earlier termination of this Lease, submit a plan to the
Menlo Park Fire Protection District in accordance with applicable provisions of
the Uniform Fire Code, with a copy to Landlord, demonstrating how any hazardous
materials which were stored, dispensed, handled or used in, at or upon the
demised premises will be transported, disposed of or reused at the expiration or
sooner termination of the demised term of this Lease; and Tenant shall, at the
expiration or sooner termination of the demised term, comply with all applicable
laws, regulations, rules and orders of any governmental
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body having jurisdiction thereover (including without limitation the Menlo Park
Fire Protection District) regarding the disposal of any such hazardous
materials.
Tenant's obligations under this Section 7.4. shall survive the
expiration or earlier termination of this Lease, including without limitation
any termination resulting from any default by Tenant under the Lease.
ARTICLE 8 - USE OF PREMISES
Section 8.1. Tenant shall use the demised premises solely for general
office, research and development, and for no other purposes without Landlord's
written consent.
ARTICLE 9 - INDEMNITY AND PUBLIC LIABILITY INSURANCE
Section 9.1. Tenant agrees to indemnify and save harmless Landlord from
and against all claims arising from any act, omission or negligence of Tenant,
or its contractors, licensees, agents, servants, invitees or employees, or
arising from any accident, injury or damage whatsoever caused to any person, or
to the property of any person occurring during the demised term in or about the
demised premises, the sidewalks (if any) adjoining the same and from and against
all costs, expenses and liabilities incurred in or in connection with any such
claim or proceeding brought thereon, including, but not limited to, reasonable
attorneys' fees and court costs, except to the extent any such claim arises from
the willful misconduct, omission or gross negligence of Landlord's contractors,
licensees, agents, servants or employees. The foregoing indemnity shall not
apply to any discharge, leakage, spillage, emission or pollution occurring upon
or from the demised premises which is addressed by Section 7.3.
Landlord agrees to indemnify and save harmless Tenant from and against
all claims arising from any willful misconduct, omission or gross negligence of
Landlord, or its contractors, licensees, agents, servants, or employees.
Section 9.2. Tenant agrees to maintain in full force during the demised
term a policy of public liability and property damage insurance under which
Landlord (and such other persons, firms or corporations as are designated by
Landlord and are properly includible as additional insureds under the terms of
any such policies of insurance) and Tenant are named as insureds, and the
insurer agrees to indemnify and hold Landlord and Landlord's said designees
harmless from and against all cost, expense and/or liability arising out of or
based upon any and all claims, accidents, injuries and damage mentioned in
Section 9.1. All public liability and property damage policies shall contain a
provision that Landlord, although named as an insured, shall nevertheless be
entitled to recovery under said policies for any loss occasioned to it, its
servants, agents and employees, by reason of the negligence of Tenant. Each such
policy shall be approved as to form and insurance company by Landlord, such
approval not to be unreasonably withheld, be noncancelable with respect to the
Landlord and Landlord's said designees without twenty (20) days' written notice
to the Landlord and Landlord's said designees,
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and a duplicate original or certificate thereof shall be delivered to Landlord
prior to commencement of the demised term and thereafter thirty (30) days prior
to expiration of the term of each policy. The limits of liability of such
comprehensive general liability insurance shall be Two Million Dollars
($2,000,000.00) for injury or death to one or more persons and damage to
property, combined single limit. All public liability, property damage and other
casualty policies shall be written as primary policies, not contributing with
and not in excess of coverage which Landlord may carry.
If Tenant shall not comply with its covenants to maintain insurance
made above, or if Tenant fails to provide duplicate originals or certificates
thereof to Landlord as is provided above, Landlord may, but shall not be
required to, obtain any such insurance; and if Landlord does obtain any such
insurance, Tenant shall, on demand, reimburse Landlord for the premium for any
such insurance.
Section 9.3. Tenant agrees to use and occupy the demised premises, the
Parking and Accommodation Areas and to use all other portions of the Business
Park (which it is herein given the right to use) at its own risk and hereby
releases to the full extent permitted by law the Landlord, and its agents,
servants, contractors, and employees, from all claims and demands of every kind
resulting from any accident, damage or injury occurring therein.
Notwithstanding anything to the contrary contained in Section 9.2. or
Section 9.3, Landlord and Tenant each hereby releases the other and its
respective officers, agents, servants, contractors and employees from any and
all claims or demands for damages, loss, expense or injury to the demised
premises, or to the improvements, furnishings, fixtures, equipment, inventory or
other property of either Landlord or Tenant in, about or upon the demised
premises, caused by or resulting from perils, events or happenings which are the
subject of insurance carried or required to be carried by the respective
parties, that is or is required to be in force at the time of such loss.
The provisions of this Section shall apply during the whole of the
demised term.
ARTICLE 10 - PROPERTY INSURANCE AND CASUALTY
Section 10.1. Landlord shall maintain at all times during the term of
this Lease a Special Perils policy (previously known as "All Risk" coverage);
and, subject to Tenant's approval (or if otherwise deemed appropriate by
Landlord pursuant to the provisions of Section 10.9. hereof), earthquake
coverage insuring the demised premises, including the building constituting the
demised premises and all leasehold improvements therein, against loss, or damage
in an amount equal to the full replacement cost, exclusive of foundations, if
obtainable from responsible insurance companies licensed to do business in the
State of California. If the building on the demised premises should be damaged
or destroyed during the demised term by any insured casualty, Landlord shall
(except as hereinafter provided) repair and/or rebuild the same to substantially
the condition in which the same existed immediately prior to such damage or
destruction. Landlord's obligation under this Section shall in no event exceed
either
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(A) the scope of the work done by Landlord in the original construction of such
building, together with all leasehold improvements therein, or (B) the proceeds
of the insurance policy or policies carried or required to be carried by
Landlord, unless Landlord nevertheless elects to repair and/or rebuild the
building and the demised premises. Tenant shall in the event of any such damage
or destruction, unless this Lease shall be terminated as hereinafter provided,
be responsible for replacing or repairing all exterior signs, trade fixtures,
equipment, display cases, and other installations originally installed by the
Tenant. Tenant shall have no interest in the proceeds of any insurance carried
by Landlord. Tenant shall, in the event of casualty covered by Landlord's
insurance, reimburse Landlord the amount of the deductible thereunder as
follows: (a) in the event of an earthquake covered by insurance carried by
Landlord, (i) said deductible shall not exceed ten percent (10%) of the
replacement value of the building; (ii) Tenant's share of said deductible shall
be forty percent (40%) of the deductible; (iii) Tenant's share of said
deductible shall be paid by Tenant to Landlord on an amortized basis over the
remaining demised term of this Lease; and (iv) if Tenant's share of said
deductible exceeds One Hundred Fifty Thousand Dollars ($150,000.00), Tenant
shall have the right to terminate this Lease by written notice to Landlord
within twenty (20) days after receipt of Landlord's notice of the amount of
Tenant's share of said deductible pursuant to the above provisions; and (b) in
the event of any other casualty covered by insurance carried by Landlord,
Tenant's share of said deductible shall be one hundred percent (100%) of the
deductible.
Section 10.2. Tenant's base rent and all additional rent obligations
which are based on square footage shall be abated proportionately during any
period in which, by reason of any such damage or destruction, the building is
rendered partially or totally untenantable. Such abatement shall continue for
the period commencing with such destruction or damage and ending with the
substantial completion by the Landlord of such work or repair and/or
reconstruction as Landlord is obligated to do.
Section 10.3. If the building on the demised premises should be damaged
or destroyed to the extent of 33-1/3% or more of its then replacement cost by an
event described in Section 10.1., then Landlord may terminate this Lease by
written notice to Tenant given within thirty (30) days after the casualty event.
If the building on the demised premises should be damaged or destroyed
to the extent of fifty percent (50%) or more of its then replacement cost by an
event described in Section 10.1., then Tenant may terminate this Lease by
written notice to Landlord given within thirty (30) days after the casualty
event.
As soon as possible following any casualty to the building on the
demised premises, Landlord shall notify Tenant of Landlord's reasonable estimate
of the time required to repair and/or rebuild the same. In the event such
estimated time is in excess of two hundred seventy (270) days from the date of
the casualty, Tenant may
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terminate this Lease by written notice to Landlord given within (20) days after
receipt of Landlord's notice of the estimated time.
If neither Landlord nor Tenant elects to terminate this Lease then
Landlord shall repair and/or rebuild the same as provided in Section 10.1. If
such damage or destruction occurs and this Lease is not so terminated, this
Lease shall remain in full force and effect and the parties waive the provisions
of any law to the contrary. The Landlord's obligation under this Section shall
in no event exceed the scope of the work to be done by the Landlord in the
original construction of said building and the demised premises together with
all leasehold improvements therein.
Section 10.4. Tenant agrees to comply with all of the regulations and
rules of the Insurance Service Office or any similar body and will not do,
suffer, or permit an act to be done in or about the demised premises which will
increase any insurance rate with respect thereto.
Section 10.5. Tenant agrees, in addition to any rent provided for
herein, to pay to the Landlord the cost of the property insurance carried by
Landlord on the demised premises during the entire demised term or any renewal
or extension thereof pursuant to Section 10.1.
Section 10.6. During the demised term, Tenant shall carry, at its
expense, insurance against loss and damage by fire with an "All Risk"
endorsement for the full insurable value of Tenant's merchandise, trade
fixtures, furnishings, operating equipment and personal property, including wall
coverings, carpeting and drapes, if installed by Tenant. Landlord and Landlord's
mortgagee shall be named as additional insureds under said policy, which shall
be noncancellable with respect to Landlord and Landlord's mortgagee without
twenty (20) days' prior written notice. A certificate evidencing such coverage
shall be delivered to Landlord prior to commencement of the demised term and
thereafter thirty (30) days prior to the expiration of the term of such policy.
Such insurance shall be written as a primary policy, not contributing with and
not in excess of coverage Landlord may carry. If Tenant shall not comply with
its covenants to maintain said insurance, or if Tenant fails to provide a
certificate thereof to Landlord, Landlord may, but shall not be required to,
obtain any such insurance, and if Landlord does obtain any such insurance,
Tenant shall, on demand, reimburse Landlord for the premium for any such
insurance.
Section 10.7. In the event the building on the demised premises shall
be damaged as a result of any flood, earthquake, act of war, nuclear reaction,
nuclear radiation or radioactive contamination, or from any other casualty not
covered by Landlord's property insurance, to any extent whatsoever, subject to
Tenant's termination right pursuant to Section 10.3., Landlord may within ninety
(90) days following the date of such damage, commence repair, reconstruction or
restoration of the building and prosecute the same diligently to completion, in
which event this Lease shall continue in full force and effect, or within said
ninety (90) day period elect not to so repair, reconstruct or restore the
building, in which event this
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Lease shall cease and terminate. In either such event Landlord shall give Tenant
written notice of its intention within said ninety-day period.
Section 10.8. Upon any termination of this Lease under the provisions
of this Article 10, the rent shall be adjusted as of the date of such
termination and the parties shall be released without further obligation to the
other party upon the surrender of possession of the demised premises to
Landlord, except for items that have been theretofore accrued and are then
unpaid, and except for obligations that are designated as surviving such
termination.
Section 10.9. Notwithstanding anything in this Article 10 or elsewhere
in this Lease to the contrary, Landlord may maintain any insurance on the
demised premises that a prudent owner would carry, including, but not limited
to, any rental insurance, owner's protective liability insurance or any
insurance required by any mortgagee of Landlord; and Landlord may include the
amount of the premiums for such insurance in the total of the insurance premiums
which Tenant is required to pay under the terms hereof.
Section 10.10. Landlord and Tenant shall each obtain from their
respective insurers under all policies of property, public liability, worker's
compensation and other insurance maintained by either of them at any time during
the term hereof insuring or covering the demised premises or any portion thereof
or operations therein, a waiver of all rights of subrogation which the insurer
of one party might have against the other party. If either Landlord or Tenant
fails to obtain the requisite subrogation waiver, it shall not thereby be in
default hereunder, but it shall indemnify the other party against any loss or
expense, including reasonable attorneys' fees, resulting from the failure to
obtain such waiver.
ARTICLE 11 - REPAIR
Section 11.1. Landlord agrees, at Landlord's sole expense, to repair
structural defects of the building on the demised premises throughout the life
of the Lease. Structural defects and maintenance shall not be deemed to include
cracks or fissures in walls or floors that do not materially affect the
structural integrity of the walls or floors, nor the requirement of painting or
caulking.
Section 11.2. Tenant agrees during the demised term or any extension
thereof to maintain the interior of the building on the demised premises, and
every part thereof, except as to work to be performed by Landlord under Sections
11.1. and 11.3. Tenant further agrees to clean, inside and out, all of the glass
on the exterior of the building. If Tenant should fail to faithfully perform its
maintenance obligations hereunder then Landlord shall, upon having given notice
to Tenant of the need for said maintenance, have the right to perform, or cause
to be performed, said maintenance and Tenant shall on demand reimburse Landlord
for Landlord's costs of providing such maintenance. Landlord's reservation of
the right to enter upon the demised premises to perform any repairs or
maintenance or other work in, to, or about the demised premises which in the
first instance is the Tenant's obligation pursuant to this Lease shall not be
deemed to impose any obligation on Landlord to do so, nor shall Landlord be
rendered liable to
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Tenant or any third party for the failure to do so, and Tenant shall not be
relieved from any obligation to indemnify Landlord as otherwise provided
elsewhere in this Lease.
Section 11.3 Landlord shall provide the following services and Tenant
shall, in addition to all other payments required to be made under other
provisions of this Lease, within ten (10) days after invoice therefor, reimburse
Landlord for Landlord's gross costs of: (i) maintaining, repairing and replacing
the roof; (ii) painting, maintaining and repairing the exterior of the building;
(iii) maintaining, repairing and replacing the elevator and elevator equipment
room (if any); (iv) maintenance and repair associated with the mechanical and
electrical rooms; (v) maintenance and repair of the trash enclosure utilized in
connection with the building; (vi) maintenance, repair and replacement of the
glass on the exterior of the building and (vii) any other maintenance and repair
other than that which Landlord is required to perform at Landlord's expense per
Section 11.1. Tenant shall also, within ten (10) days after invoice therefor,
reimburse Landlord for Landlord's gross costs of maintaining, repairing and
replacing the heating and air conditioning equipment serving the demised
premises, whether furnished by Landlord or Tenant. Landlord's said gross costs
as used in this Section 11.3. shall include all costs and expenses of every kind
or nature reasonably incurred by Landlord in the performance of such
maintenance, repair or replacements.
Notwithstanding the provisions of Sections 11.3. and 18.3 hereof to the
contrary, Tenant's obligation to reimburse Landlord for (i) costs associated
with the replacement (as opposed to repairs and maintenance) of the roof
membrane and underlayment and the heating, ventilating and air-conditioning
units furnished by Landlord and (ii) the cost of any capital improvement
required to be made by Landlord pursuant to Article 11 and/or Article 18 of this
Lease during the demised term and required under good accounting practice to be
amortized, shall be limited to a proportionate share of such replacement costs
(the "Reimbursement Amounts") calculated as follows:
(a) if such costs are incurred during the initial demised term
of this Lease, by multiplying such replacement costs by a fraction, the
numerator of which is the number of days in the original demised term and the
denominator of which is the number of days in the estimated useful life of the
replacement; and
(b) if such costs are incurred during any extended term of this
Lease, by multiplying such replacement costs by a fraction, the numerator of
which is the number of days in the demised term of this Lease (including any
extended term) and the denominator of which is the number of days in the
estimated useful life of the replacement.
If a Reimbursement Amount has been determined under subsection
(a) above with respect to any replacement costs, and Landlord and Tenant
subsequently agree to extend the term of this Lease, Tenant shall also be
responsible for another Reimbursement Amount with respect to such replacement
costs determined by multiplying such replacement costs by a fraction, the
numerator of which is the number of days in the extended term of this Lease and
the denominator of which is the number of days in the estimated useful life of
the replacement.
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The foregoing limitation shall not apply to equipment furnished by
Tenant and maintained by Landlord. Tenant shall pay any Reimbursement Amounts,
as additional rent, monthly on a straight-line basis amortized over the
remaining demised term of the Lease using an interest rate equal to ten percent
(10%) per annum.
The limitations on Tenant's liability for expenses hereunder shall in
no event apply to any costs for repairs or replacements occasioned by (x)
Tenant's negligent acts or omissions or those of its employees, contractors,
agents, invitees or servants, or (y) the particular nature of Tenant's business,
all of which costs shall be borne solely by Tenant.
Landlord shall bill Tenant monthly for one-twelfth of the estimated
costs to be reimbursed by Tenant under this Section 11.3. (except for repairs
and replacements which shall be billed as incurred), subject to an annual
reconciliation within ninety (90) days after the end of each lease year. In
connection with the annual reconciliation, Landlord shall, at Tenant's request,
furnish to Tenant a statement showing the costs incurred, in reasonable detail,
the estimated payments made by Tenant, and the amount of any overpayment or
underpayment. Tenant shall pay to Landlord the amount of any underpayment within
thirty (30) days after receipt of the statement, and Tenant shall be entitled to
credit the amount of any overpayment against the next payments of rent due
hereunder, except that following the expiration of the term hereof, Landlord
shall pay to Tenant the amount of any overpayment at the time it furnishes the
statement to Tenant.
Section 11.4. If during the term of this Lease Landlord or Landlord's
insurance carrier requires the installation of an Ansul Fire Control System or
its equivalent, or any fire detection device, because of the nature of the
particular activities being carried on by Tenant in the demised premises, then
said system or device shall be installed at the sole cost of the Tenant within
the time specified.
Section 11.5. Landlord agrees that it will deliver the demised premises
to Tenant with the existing electrical, HVAC and plumbing systems of the
building on the demised premises in good working order and the roof of the
building in good repair. In addition, Landlord shall, prior to the Base Rent
Commencement Date, repair and stain the fascia boards along the front of the
building or reimburse Tenant in an amount not to exceed Three Thousand Dollars
($3,000.00) towards Tenant's replacement of such fascia boards with stucco,
subject to Landlord's approval.
Section 11.6. Notwithstanding the above provisions to the contrary, on
or before July 1, 2000 (subject to Unavoidable Delay, as that term is defined in
Section 19.19. hereinbelow), Landlord shall replace the roof membrane of the
building and Tenant shall, in addition to all other payments required to be made
by Tenant hereunder, reimburse Landlord as Additional Rent the amount of Fifty
Five Thousand Dollars ($55,000.00) within ten (10) days after invoice therefor.
Landlord agrees to use reasonable efforts to cooperate with Tenant's contractor
to replace said roof membrane at the same time as Tenant's contractor is
performing Tenant's improvement work within the demised premises; however, the
final determination as to the timing of the replacement of said roof membrane
shall remain with Landlord, in Landlord's sole discretion.
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ARTICLE 12 - FIXTURES & ALTERATIONS
Section 12.1. All trade fixtures owned by Tenant and installed in the
demised premises shall remain the property of Tenant and may be removed from
time to time and shall be removed at the expiration of the demised term. Tenant
shall repair any damage to the demised premises caused by the removal of said
fixtures. If Tenant fails to remove such fixtures on or before the last day of
the demised term, all such fixtures shall become the property of Landlord,
unless Landlord elects to require their removal, in which case Tenant shall
promptly remove them and restore the demised premises to its condition prior to
such removal. Landlord may also, at Landlord's sole discretion, store such
fixtures at Tenant's expense.
Section 12.2. Tenant shall not make any alterations, additions or
improvements in or to the demised premises or the building without submitting
plans and specifications therefor for the prior written consent of Landlord,
which consent shall not be unreasonably withheld so long as any such
alterations, additions or improvements do not affect the exterior of the
building or materially affect the sprinkler system and/or mechanical/electrical
systems or require removal or modification of improvements installed by
Landlord, and so long as Tenant notifies Landlord of any such alterations and
provides Landlord with plans therefor in advance, and which consent, if granted,
may be subject to such reasonable conditions as Landlord may deem appropriate.
Any such alterations, additions or improvements consented to by Landlord shall
be made at Tenant's sole cost and expense in accordance with the plans and
specifications therefor and Tenant agrees to provide Landlord with an "as built"
set of plans and specifications after any such work is completed. Tenant shall
secure any and all governmental permits, approvals or authorizations required in
connection with any such work, and shall hold Landlord harmless from any and all
liability, costs, damages, expenses (including attorneys' fees) and any and all
liens resulting therefrom. All alterations, decorations, additions and
improvements (and expressly including all light fixtures and floor coverings
installed by Tenant), except furniture, removable paneling, wall fixtures, trade
fixtures, appliances and equipment which do not become a part of the demised
premises, shall be deemed to belong to Tenant, but shall be deemed to have been
attached to the demised premises or the building and to have become the property
of Landlord upon the termination of the demised term. Upon the expiration or
sooner termination of the demised term hereof, Tenant shall, upon written demand
by Landlord, at Tenant's sole cost and expense, forthwith remove any
alterations, decorations, additions or improvements made by Tenant which were
designated by Landlord to be removed at the time of Landlord's approval of the
plans and specifications therefor, or any alterations, decorations, additions or
improvements made by Tenant without Landlord's consent and designated by
Landlord prior to the termination of the demised term to be removed, and Tenant
shall forthwith at its sole cost and expense repair any damage to the demised
premises or the building caused by such removal. The parties acknowledge and
agree that, in addition to those alterations, decorations, additions or
improvements designated by Landlord to be removed as provided hereinabove,
Tenant shall perform all the necessary work to reinstall the t-bar ceiling
(including ceiling tiles), lighting (including fixtures), skylight wells, and
electrical and HVAC distribution systems throughout the demised premises as they
existed at the time of delivery of possession of the demised premises to Tenant,
all in accordance with the applicable building codes in effect at the time.
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ARTICLE 13 - REMEDIES
Section 13.1. Should Tenant default in the performance of any of its
obligations under this Lease with reference to the payment of rent and such
default continue for five (5) days after receipt of written notice of nonpayment
from Landlord, or should Tenant default in the performance of any other
obligations under this Lease and such default continue for thirty (30) days
after receipt of written notice from Landlord specifying such default or beyond
the time reasonably necessary to cure if such default is of a nature to require
more than thirty (30) days to remedy, then, in addition to all other rights and
remedies Landlord may have under this Lease or under applicable law, Landlord
shall have the following rights and remedies:
(1) The Landlord has the remedy described in California Civil Code
Section 1951.4 (Landlord may continue the lease in effect after Tenant's breach
and abandonment and recover rent as it becomes due, if Tenant has the right to
sublet or assign, subject only to reasonable limitations). If Tenant breaches
any covenants of this Lease or if any event of default occurs, whether or not
Tenant abandons the demised premises, this Lease shall continue in effect until
Landlord terminates Tenant's right to possession, and Tenant shall remain liable
to perform all of its obligations under this Lease and Landlord may enforce all
of Landlord's rights and remedies, including the right to recover rent as it
falls due. If Tenant abandons the demised premises or fails to maintain and
protect the same as herein provided, Landlord shall have the right to do all
things necessary or appropriate to maintain, preserve and protect the demised
premises, including the installation of guards, and may do all things
appropriate to a re-letting of the demised premises, and none of said acts shall
be deemed to terminate Tenant's right of possession, unless Landlord elects to
terminate the same by written notice to Tenant. Tenant agrees to reimburse
Landlord on demand for all amounts reasonably expended by Landlord in
maintaining, preserving and protecting the demised premises, together with
interest on the amounts expended from time to time at the maximum legal rate.
Landlord shall also have the right to repair the demised premises at the expense
of Tenant to the extent necessary to put the demised premises in the condition
required under this Lease.
(2) Landlord shall have the right to terminate Tenant's possession of
the demised premises, and if Tenant's right to possession of the demised
premises is terminated by Landlord by reason of a breach of this Lease by
Tenant, or by reason of the happening of an event of default, or by reason of
abandonment of the demised premises by Tenant, Tenant agrees to pay to Landlord
on demand (i) all unpaid rent earned at the time of termination, together with
interest on all unpaid installments from the times they were due to the date of
termination at the maximum legal rate; (ii) the amounts by which the unpaid rent
which would have been due and payable by Tenant since the date of termination
exceeds the amount of any rental loss that Tenant proves could have been
avoided, together with interest on said amounts from the dates they were due at
the maximum legal rate; (iii) the worth at the time of demand of the amount by
which the unpaid rent for the balance of the term of this Lease exceeds the
amount of rental loss that Tenant proves may reasonably be avoided, together
with interest on such amount at the maximum legal rate from the date of demand
until paid; (iv) all other amounts due Landlord from Tenant under the terms of
this Lease, or necessary to
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compensate Landlord for all detriment caused by Tenant's failure to perform its
obligations under this Lease. The right to possession of the demised premises by
Tenant should not be deemed terminated until Landlord gives Tenant written
notice of such termination or until Landlord re-lets all or a portion of the
demised premises. In the event that Landlord seeks to recover the amount due,
Landlord shall be entitled to recover the amounts specified in paragraphs (a)
(1), (a) (2) and (a) (4) of Section 1951.2 of the Civil Code of California as
such section reads at the date of this Lease, together with interest on said
amounts at the maximum legal rate from the dates they were due, computed as of
the date of the award, together with the worth at the time of the award of the
amount by which the unpaid rent for the balance of the term exceeds the amount
of such rental loss that Tenant proves could reasonably have been avoided.
Landlord shall be required to mitigate damages by making a good faith effort to
re-let the demised premises.
(3) No right or remedy herein conferred upon or reserved to Landlord is
intended to be exclusive of any other right or remedy herein or by law, provided
that each shall be cumulative and in addition to every other right or remedy
given herein or now hereafter existing at law or in equity or by statute.
Section 13.2. Landlord shall in no event be in default in the
performance of any of its obligations hereunder unless and until Landlord shall
have failed to perform such obligations within thirty (30) days or such
additional times as is reasonably required to correct any such default after
notice by Tenant to the Landlord properly specifying wherein the Landlord has
failed to perform any such obligation.
ARTICLE 14 - BANKRUPTCY
Section 14.1. Tenant shall give written notice to Landlord of its
intention to commence proceedings under any state or federal insolvency or
bankruptcy law, or any comparable law that is now or hereafter may be in effect,
whereby Tenant seeks to be, or would be, discharged of its debts or the payment
of its debts is sought to be delayed, at least thirty (30) days prior to the
commencement of such proceedings.
Section 14.2. If any of the following events occur:
(1) The entry of an order for relief under Title 11 of the United
States Code as to Tenant or its executors, administrators or assigns, if any, or
the adjudication of Tenant or its executors, administrators or assigns, if any,
as insolvent or bankrupt pursuant to the provisions of any state insolvency or
bankruptcy act;
(2) The appointment of a receiver, trustee or other custodian of the
property of Tenant by reason of the insolvency or inability of Tenant to pay its
debts;
(3) The assignment of the property of Tenant for the benefit of
creditors;
(4) The commencement of any proceedings under any state or federal
insolvency or bankruptcy law, or any comparable law that is now or hereafter may
be in effect, whereby Tenant seeks to be, or would be, discharged of its debts
or the payment of its debts is sought to be delayed;
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(5) The failure of Tenant to give written notice to Landlord provided
for in Section 14.1. above;
then Landlord may, at any time thereafter, in addition to any and all
other rights or remedies of Landlord under this Lease or under applicable law,
upon written notice to Tenant, terminate this Lease, and upon such notice this
Lease shall cease and terminate with the same force and effect as though the
date set forth in said notice were the date originally set forth herein and
fixed for the expiration of the demised term. Tenant shall thereupon vacate and
surrender the demised premises, but shall remain liable as herein provided.
ARTICLE 15 - SURRENDER OF PREMISES
Section 15.1. Tenant shall, upon termination of the demised term, or
any earlier termination of this Lease, surrender to Landlord the demised
premises, including, without limitation, all building equipment and apparatus,
and fixtures (except as provided in Sections 12.1. and 12.2.) then upon the
demised premises without any damage, injury, or disturbance thereto, or payment
therefor, except damages due to ordinary wear and tear, acts of God, fire and
other perils to the extent the demised premises are not required to be repaired
or restored as hereinbefore provided, and Tenant shall dispose of any hazardous
materials stored, dispensed, handled or used in, at or upon the demised premises
in accordance with the provisions of Section 7.4.
ARTICLE 16 - EMINENT DOMAIN
Section 16.1. If (i) more than thirty-three percent (33%) of the floor
area of the building on the demised premises or (ii) a portion of the Parking
and Accommodation Areas shall be taken under the power of eminent domain and the
portion of the building and/or Parking and Accommodation Areas not so taken will
not be reasonably adequate for the operation of Tenant's business after the
Landlord completes such repairs or alterations as the Landlord is obligated or
elects to make, Tenant shall have the right to elect either to terminate this
Lease, or, subject to Landlord's right to terminate the Lease pursuant to
Section 16.4., to continue in possession of the remainder of the demised
premises and shall notify Landlord in writing within ten (10) days after such
taking of Tenant's election. In the event less than thirty-three percent (33%)
of the floor area of the building on the demised premises shall be taken or
Tenant elects to remain in possession, as provided in the first sentence hereof,
all of the terms herein provided shall continue in effect, except that the base
rent shall be reduced in the same proportion that the floor area of the building
on the demised premises taken bears to the original floor area of the building
on the demised premises, and Landlord shall at its own cost and expense make all
necessary repairs or alterations to the building so as to constitute the portion
of the building not taken a complete architectural unit and the demised premises
a complete unit for the purposes allowed by this Lease, but such work shall not
exceed the scope of the work to be done by Landlord in originally constructing
said building.
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Section 16.2. Each party waives the provisions of Code of Civil
Procedure Section 1265.130 allowing either party to petition the Superior Court
to terminate this Lease in the event of a partial taking.
Section 16.3. All damages or awards for any taking under the power of
eminent domain whether for the whole or a part of the demised premises shall
belong to and be the property of Landlord whether such damages or awards shall
be awarded as compensation for diminution in value to the leasehold or to the
fee of the demised premises; provided however, that Landlord shall not be
entitled to the award made to Tenant or Landlord for loss of business,
depreciation to, and cost or removal of stock and fixtures and for leasehold
improvements which have been installed by Tenant at its sole cost and expense
less depreciation which is to be computed on the basis of completely
depreciating such leasehold improvements during the initial term of this Lease,
and any award made to Tenant in excess of the then depreciated value of
leasehold improvements shall be payable to the Landlord.
Section 16.4. If more than thirty-three percent (33%) of the floor
areas of the building on the demised premises shall be taken under power of
eminent domain, or if any part of the Parking and Accommodation Areas shall be
so taken, Landlord may, by written notice to Tenant delivered on or before the
date of surrendering possession to the public authority pursuant to such taking,
terminate this Lease as of such date.
Section 16.5. If this Lease is terminated as provided in this Article,
the rent shall be paid up to the day that possession is so taken by public
authority and Landlord shall make a prorata refund of any rent and all deposits
paid by Tenant in advance and not yet earned.
ARTICLE 17 - REAL PROPERTY TAXES
Section 17.1. Tenant shall reimburse Landlord for all real property
taxes, assessments and ongoing sewer fees applicable to the demised premises
during the entire term of this Lease. Taxes shall be prorated to lease years for
purpose of making this computation. Such payment shall be made by Tenant within
thirty (30) days after receipt of Landlord's written statement setting forth the
amount of such computation thereof. If the demised term of this Lease shall not
expire concurrently with the expiration date of the fiscal tax year, Tenant's
liability for taxes for the last partial lease year shall be prorated on an
annual basis.
Section 17.2. If the demised premises are not separately assessed,
Tenant's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Landlord from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Landlord's reasonable determination thereof, in good
faith, shall be conclusive.
Section 17.3. Tenant shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Tenant contained in the demised premises or elsewhere.
Tenant shall cause said trade
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fixtures, furnishings, equipment and all other personal property to be assessed
and billed separately from the real property of Landlord.
If any of Tenant's said personal property shall be assessed with
Landlord's real property, Tenant shall pay Landlord the taxes attributable to
Tenant within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Tenant's property.
Section 17.4. In addition to all other payments provided for herein,
the Tenant shall on demand reimburse Landlord for any surcharges, fees, and any
similar charges required to be paid by any instrumentality of local, state or
federal government in connection with parking in the parking area, including
policing; supervising with attendants; other costs in connection with providing
charged parking; repairs, replacements and maintenance not properly chargeable
to capital account under good accounting principles; interest and depreciation
of the actual cost of modification or improvements to the areas, facilities and
improvements maintained in this Article either (i) required by any
instrumentality of local, state or federal government, or (ii) installed by
Landlord to facilitate payment of a parking charge by the general public for
parking in the parking area, or both, and other similar costs; and there shall
be excluded (a) cost of construction of such improvements which is properly
chargeable to capital account and (b) depreciation of the original cost of
construction of all items not previously mentioned in this sentence. If Landlord
shall require the payment of a parking charge by the general public for parking
in the parking area, then during any period in which such a charge is made the
total revenue (after deducting excise and similar taxes thereon and taxes, fees
or surcharges imposed by any agency or instrumentality of local, state or
federal government) actually received in cash or its equivalent by Landlord for
such parking charge shall be credited against said gross costs.
Section 17.5. Notwithstanding the provisions of Article 17 hereinabove,
Tenant shall pay any increase in "real property taxes" resulting from any and
all improvements of any kind whatsoever placed on or in the demised premises for
the benefit of or at the request of Tenant regardless of whether said
improvements were installed or constructed either by Landlord or Tenant.
Section 17.6. In addition to all other payments provided for herein,
the Tenant shall on demand reimburse Landlord for any tax (excluding income tax)
and/or business license fee or other levy that may be levied, assessed or
imposed upon the rent or other payments provided for herein or on the square
footage of the demised premises, on the act of entering into this Lease, or on
the occupancy of the Tenant however described, as a direct substitution in whole
or in part for, or in addition to, any real property taxes, whether pursuant to
laws presently existing or enacted in the future.
Section 17. If Tenant is obligated under this Article 17 to pay any
real property taxes, fees or assessments that can be paid over a period of time,
Tenant shall only be obligated to pay the portion thereof at least thirty (30)
days before the date it falls due during the term of this Lease assuming that
Landlord had elected to pay the assessment over the longest permissible period,
whether or not such election had been made.
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ARTICLE 18 - PARKING AND ACCOMMODATION AREAS
Section 18.1. Landlord grants to Tenant during the demised term the
right to use the parking facilities and other areas provided and designated as
"Parking and Accommodation Areas" on Exhibit "B" hereto for the accommodation
and parking of such automobiles of the Tenant, its officers, agents, employees
and its customers and those of any subtenant of Tenant while working or visiting
Tenant or any such subtenant. Landlord shall not extend to any person other than
a tenant of space in the building the right to use such parking facilities and
other areas for such purposes. Tenant agrees that its officers, agents and
employees will park their automobiles only in the parking areas provided in the
Parking and Accommodation Areas, and Tenant specifically agrees that such
officers, agents and employees will not park on any public streets in the
vicinity of the demised premises. Except as provided in Section 17.4., Landlord
shall not charge parking fees for such right to use parking facilities.
Section 18.2. All parking areas and facilities furnished by Landlord
including, but not limited to, pedestrian sidewalks, landscaped areas and
parking areas shall at all times be subject to the control and management of
Landlord so that Landlord will be in a position to make available efficient and
convenient use thereof, and Landlord shall have the right from time to time to
establish, modify and enforce reasonable rules and regulations with respect to
all facilities and areas mentioned in this Article, and Tenant agrees to abide
by and conform therewith. Landlord shall have the right to construct, maintain
and operate lighting facilities on all of said areas and improvements, to police
the same, from time to time to change the area, location and arrangement of
parking areas and facilities, to restrict employee parking to employee parking
areas, to construct surface, subterranean and/or elevated parking areas and
facilities, to establish and from time to time change the level of parking
surfaces, to close (if necessary) all or any portion of said areas or facilities
to such extent as may in the opinion of Landlord's counsel be legally sufficient
to prevent a dedication thereof or the accrual of any rights of any person or of
the public therein, and to do and perform such other acts in and to said areas
and improvements respectively as in the use of good business judgment the
Landlord shall determine to be advisable with a view to the improvement of the
convenience and use thereof by Tenant, and its employees and visitors.
Notwithstanding anything to the contrary contained herein, Landlord shall not
(except if required to comply with applicable laws or regulations) reduce the
number of parking spaces to a ratio of parking spaces to the area of the demised
premises that is less than the ratio in effect on the commencement of the term
of this Lease.
Section 18.3. Tenant agrees during the demised term to pay to Landlord
an annual charge which shall be Landlord's actual gross costs of operating,
maintaining and/or replacing all of the areas and facilities mentioned in this
Article. The annual charge shall be an estimate computed on the basis of periods
of twelve (12) consecutive calendar months, commencing and ending on such dates
as may be designated by Landlord, and shall be paid in monthly installments on
the first day of each calendar month in the amount estimated by Landlord. Within
ninety (90) days after the end of each such annual period, Landlord will
determine (and furnish to Tenant a statement showing in reasonable detail) the
actual annual charge for such period and the amounts so estimated and paid
during such period shall be adjusted
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within such ninety (90) days (including adjustments on a prorata basis of any
partial such period at either end of the demised term) and one party shall pay
to the other on demand whatever amount is necessary to effectuate such
adjustment.
Landlord's said gross costs shall consist of and include all costs and
expenses of every kind or nature incurred by Landlord in the operation,
maintenance and/or replacement of all of the areas, facilities and improvements
mentioned in this Article determined in accordance with good accounting practice
by an accountant employed by Landlord. The determination of such accountant
shall be conclusive. Without otherwise limiting the generality of the foregoing,
there shall be included in such gross costs public liability and property damage
insurance, landscape maintenance, maintenance of utilities, water, cleaning of
areas, facilities and improvements, operation of lighting, common area taxes and
assessments determined in the same manner as taxes and assessments on the
demised premises, policing and sweeping of parking areas, supervising with
attendants, repairs, replacements and maintenance, and an amount equal to ten
percent (10%) of the total of all of the above for administration of the Parking
and Accommodation Areas.
Section 18.4. The Parking and Accommodation Areas included for the
purpose of this Article are those shown on Exhibit "B" outside of the building
area.
ARTICLE 19 - MISCELLANEOUS
Section 19.1. Landlord and its designee shall have the right during
reasonable business hours and on reasonable prior notice to Tenant (except in
the event of an emergency) to enter the demised premises (i) to inspect the
same, or (ii) for any purpose connected with Landlord's rights or obligations
under this Lease. . Except in the event of an emergency, Tenant shall have the
right to require that Landlord be accompanied by a representative of Tenant and
to exclude Landlord from security areas established by Tenant.
Section 19.2. Tenant shall not be entitled to make repairs at
Landlord's expense, and Tenant waives the provisions of Civil Code Sections 1941
and 1942 with respect to Landlord's obligations for tenantability of the demised
premises and Tenant's right to make repairs and deduct the expenses of such
repairs from rent.
Section 19.3. This Lease shall be governed exclusively by the
provisions hereof and by the laws of the State of California as the same from
time to time exist. This Lease expresses the entire understanding and all
agreements of the parties hereto with each other and neither party hereto has
made or shall be bound by any agreement or any representation to the other party
which is not expressly set forth in this Lease.
Section 19.4. If Tenant should hold over after the demised term and any
extension thereof as herein provided for, then such holding over shall be
construed as a tenancy from month to month under all of the terms and conditions
of this Lease except that, effective thirty (30) days after the expiration of
the demised term
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or any extension thereof, the rental shall be 150% of that provided for under
the monthly rental of the principal term of this Lease.
Section 19.5. Tenant agrees to maintain all toilet and washroom
facilities within the demised premises in a neat, clean and sanitary condition.
Section 19.6. Landlord covenants and agrees that Tenant, subject to the
terms and provisions of this Lease, on paying the rent and observing, keeping
and performing all of the terms and provisions of this Lease on its part to be
observed, kept and performed, shall lawfully, peaceably and quietly have, hold,
occupy and enjoy the demised premises during the demised term without hindrance
or ejection by any person lawfully claiming under or against the Landlord.
Section 19.7. Subject to Article 6, the terms and provisions hereof
shall be construed as running with the land and shall be binding upon and inure
to the benefit of heirs, executors, administrators, successors and assigns of
Landlord and Tenant.
Section 19.8.
A. Tenant shall promptly pay all sums of money with respect to any
labor, services, materials, supplies or equipment furnished or alleged to have
been furnished to Tenant in, at or about the demised premises, or furnished to
Tenant's agents, employees, contractors or subcontractors, that may be secured
by any mechanic's, materialmen's, supplier's or other liens against the demised
premises or Landlord's interest therein. In the event any such or similar liens
shall be filed, Tenant shall, within three (3) days of receipt thereof, give
notice to Landlord of such lien, and Tenant shall, within ten (10) days after
receiving notice of the filing of the lien, discharge such lien by payment of
the amount due to the lien claimant. However, Tenant may in good faith contest
such lien provided that within such ten (10) day period Tenant provides Landlord
with a surety bond from a company acceptable to Landlord, protecting against
said lien in an amount at least one and one-half (1-1/2) times the amount
claimed or secured as a lien or such greater amount as may be required by
applicable law; and provided further that Tenant, if it should decide to contest
such lien, shall agree to indemnify, defend and save harmless Landlord from and
against all costs arising from or in connection with any proceeding with respect
to such lien. Failure of Tenant to discharge the lien, or, if contested, to
provide such bond and indemnification, shall constitute a default under this
Lease and in, addition to any other right or remedy of Landlord, Landlord may,
but shall not be obligated, to discharge or secure the release of any lien by
paying the amount claimed to be due, and the amount so paid by Landlord, and all
costs and expenses incurred by Landlord therewith, including, but not limited
to, court costs and reasonable attorneys' fees, shall be due and payable by
Tenant to Landlord forthwith on demand.
B. At least fifteen (15) days before the commencement by Tenant of any
material construction or remodeling work on the demised premises, Tenant shall
give written notice thereof to Landlord. Landlord shall have the right to post
and maintain on the demised premises such Notices of Non-Responsibility, or
similar notices, provided for under applicable laws.
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Section 19.9.
A. Tenant shall deposit with Landlord the letter of credit pursuant to
the terms of Section 2.4.(B) in the sum specified in Section 2.4.(B) hereof as a
"Security Deposit" (the Security Deposit may be converted to cash at the
beginning of the sixth year of the demised term). The Security Deposit shall be
held by Landlord as security for the faithful performance of all the terms of
this Lease to be observed and performed by Tenant. The Security Deposit shall
not be mortgaged, assigned, transferred or encumbered by Tenant without the
written consent of Landlord and any such act on the part of Tenant shall be
without force and effect and shall not be binding upon Landlord.
B. If any of the rents herein reserved or any other sum payable by
Tenant to Landlord shall be overdue and unpaid, or should Landlord make payments
on behalf of Tenant, or should Tenant fail to perform any of the terms of this
Lease, then Landlord may, at its option and without prejudice to any other
remedy which Landlord may have on account thereof, apply so much of the Security
Deposit as may be necessary to compensate Landlord toward the payment of rent or
additional rent, loss, or damage sustained by Landlord due to such breach on the
part of Tenant, and Tenant shall forthwith upon demand restore said Security
Deposit to the original sum deposited. Should Tenant comply with all of said
terms and promptly pay all of the rent and all other sums payable by Tenant to
Landlord, said Security Deposit shall be returned in full to Tenant sixty (60)
days after the end of the demised term.
C. In the event of bankruptcy or other similar proceedings listed in
Article 14 hereof, the Security Deposit shall be deemed to be applied first to
the payment of rent and other charges due Landlord for all periods prior to the
filing of such proceedings.
D. In the event Landlord delivers the Security Deposit to the purchaser
of Landlord's interest in the demised premises, Landlord, after written notice
to Tenant of said delivery and written assumption by the purchaser of the
obligations of Landlord with respect to the Security Deposit, shall be
discharged from any further liability with respect to the Security Deposit. This
provision shall also apply to any subsequent transferees.
Section 19.10. All notices, statements, demands, requests, consents,
approvals, authorizations, offers, agreements, appointments or designations
hereunder by either party to the other shall be in writing and shall be
sufficiently given and served upon the other party or, if sent by overnight
carrier or United States certified mail, return receipt requested, postage
prepaid, and addressed as follows:
If sent to Tenant, the same shall be addressed to the Tenant at
________________________________________or at such other place as Tenant may
from time to time designate by notice to Landlord.
If sent to Landlord, the same shall be addressed to Landlord at 60
Hillsdale Mall, San Mateo, California 94403-3497, or at such other place as
Landlord may from time to time designate by notice to Tenant.
-26-
<PAGE> 28
Any such notice when sent by overnight carrier or certified mail as
above provided shall be deemed duly served on receipt or the refusal of
delivery.
Section 19.11. As used in this Lease and when required by the context,
each number (singular or plural) shall include all numbers, and each gender
shall include all genders; and unless the context otherwise requires, the word
"person" shall include corporation, firm or association.
Section 19.12. In case of litigation with respect to the mutual rights,
obligations, or duties of the parties hereunder, the prevailing party shall be
entitled to reimbursement from the other party of all costs and reasonable
attorneys' fees actually incurred.
Section 19.13. Each term and each provision of this instrument
performable by Tenant shall be construed to be both a covenant and a condition.
Section 19.14. Except as otherwise expressly stated, each payment
provided herein to be made by Tenant to Landlord shall be in addition to and not
in substitution for the other payments to be made by Tenant to Landlord.
Section 19.15. Time is and shall be of the essence of this Lease and
all of the terms, provisions, covenants and conditions hereof.
Section 19.16. The Tenant warrants that Landlord shall not have any
obligation to pay any commissions, charges or other compensation claimed by any
realtor, broker, or agent whom Tenant has dealt with in connection with the
negotiation of this Lease. Each party agrees to hold the other harmless from any
cost, expense or liability for any compensation, commissions or charges claimed
by any realtor, broker, or agent with respect to this Lease and/or the
negotiation thereof with whom the other party has or purportedly has dealt.
Section 19.17. Tenant agrees that its interest in this Lease shall be
subordinate to any mortgage, deed of trust and/or other security indenture
hereafter placed upon the demised premises and to any and all advances made or
to be made thereunder and to the interest thereon made and all renewals,
replacements, and extensions thereof, but nothing herein contained shall be
deemed to alter or limit Tenant's rights as set forth in Section 19.6.; and as a
condition to such subordination the secured party under any such mortgage, deed
of trust or other security indenture shall agree that so long as Tenant is not
in default hereunder beyond any applicable cure period, Tenant shall not be
disturbed in its possession of the demised premises. Subject to the foregoing
non-disturbance condition, Tenant shall, at the request of Landlord or any
mortgagee, trustee or holder of any such security instrument, execute in writing
an agreement subordinating its rights under this Lease to the lien of such
mortgage, deed of trust and/or other security indenture. If any mortgagee,
trustee or holder of such security instrument elects to have the Tenant's
interest in this Lease superior to any such instrument by notice to Tenant, then
this Lease should be deemed superior to the lien of any such mortgage, deed of
trust or security indenture whether
-27-
<PAGE> 29
this Lease was executed before or after said mortgage, deed of trust and/or
security indenture.
Section 19.18. Landlord reserves the right during the last six months
of the demised term of this Lease or the last six months of any extension hereof
to enter the property during normal working hours, with reasonable prior notice
to Tenant, for the purpose of showing the demised premises to prospective
tenants or purchasers. Tenant shall have the right to require that Landlord and
any prospective tenant or purchaser be accompanied by a representative of Tenant
and to exclude Landlord and any prospective tenant or purchaser from security
areas established by Tenant.
Section 19.19. Unavoidable Delay. The time within which any of the
parties hereto shall be required to perform any act or acts under this Lease
shall be extended to the extent that the performance of such act or acts shall
be rendered impossible, reasonably impracticable or delayed by strike(s),
lockout(s), labor dispute(s) (other than disputes involving Tenant or Tenant's
contractor), act(s) of God, inability to obtain labor or materials or reasonable
substitutes therefor, governmental restrictions, governmental regulations,
governmental controls, enemy or hostile governmental action, civil commotion,
fire or other casualty, and other conditions or causes (other than financial
inability) beyond the reasonable control of the party obligated to perform. The
party entitled to such extension hereunder shall give prompt notice to the other
party of the occurrence causing such delay. This provision shall not operate to
excuse Tenant from prompt payment of base rent and additional rent required by
the terms of this Lease.
Section 19.20. Landlord and Tenant acknowledge that Tenant leases
premises at 173 Constitution Drive, Menlo Park, California, from Landlord (as
successor in interest to R & R Properties) pursuant to that certain Lease dated
April 7, 1997, for a term ending July 10, 2002 (the "173 Lease"). Landlord and
Tenant agree to enter into an amendment to amend the 173 Lease to extend the
expiration of the term thereof to April 30, 2007, to set the base rent at $2.30
per square foot effective August 1, 2002, and that such base rent shall
thereafter be subject to 3.5% cumulative annual increases.
IN WITNESS WHEREOF, the parties have executed this instrument.
TENANT: LANDLORD:
BROADBASE SOFTWARE, INC., BOHANNON TRUSTS PARTNERSHIP II,
a Delaware corporation a California corporation
By: By:
------------------------- ---------------------------------
President Managing Partner
-28-
<PAGE> 30
By:
------------------------
Secretary
(Single Tenant -
Land Building)
-29-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED CONSOLIDATED
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TO SUCH FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
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<PERIOD-END> MAR-31-2000
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<SECURITIES> 19,302
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<INCOME-PRETAX> (37,458)
<INCOME-TAX> 0
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