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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to .
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Commission File Number: 000-25781
NET PERCEPTIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1844584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7901 FLYING CLOUD DRIVE
MINNEAPOLIS, MINNESOTA 55344
(Address of principal executive offices, Zip Code)
(612) 903-9424
(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 [ ]
The number of shares of the registrant's common stock outstanding as of April
30, 2000 was 26,651,645.
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NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended March 31, 2000
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INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 17
EXHIBIT INDEX 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NET PERCEPTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
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March 31, December 31,
2000 1999
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(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 102,767 $ 17,457
Short-term investments 13,413 19,397
Accounts receivable, net 8,792 7,663
Royalties receivable, net 1,061 1,135
Prepaid expenses and other current assets 1,703 1,373
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Total current assets 127,736 47,025
Marketable securities 3,964 6,317
Investment in joint venture 269 197
Property and equipment, net 6,778 4,749
Goodwill & other intangible assets 114,960 -
Other assets 396 460
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Total assets $ 254,103 $ 58,748
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,491 $ 2,550
Accrued expenses 5,025 3,296
Deferred revenue 4,128 3,336
Current portion of long-term liabilities 743 471
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Total current liabilities 11,387 9,653
Long-term liabilities, net of current portion 917 707
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Total liabilities 12,304 10,360
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Commitments and contingencies
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 272,226 71,231
Accumulated other comprehensive loss (92) (89)
Accumulated deficit (30,337) (22,756)
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Total stockholders' equity 241,799 48,388
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Total liabilities and
stockholders' equity $ 254,103 $ 58,748
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</TABLE>
See accompanying notes to the financial statements.
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NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
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Three Months Ended
March 31,
2000 1999
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(Unaudited)
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Revenues:
Product $ 7,524 $ 1,561
Service and maintenance 1,968 334
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Total revenues 9,492 1,895
Cost of revenues:
Product 274 36
Service and maintenance 1,809 313
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Total cost of revenues 2,083 349
Gross profit 7,409 1,546
Operating expenses:
Sales and marketing 5,901 1,737
Research and development 3,658 1,536
General and administrative 2,259 574
Amortization of intangibles 3,628 -
Stock compensation expense 193 503
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Total operating expenses 15,639 4,350
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Loss from operations (8,230) (2,804)
Other income (loss), net 649 (72)
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Net loss $ (7,581) $ (2,876)
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Net loss per share:
Basic and diluted $ (0.34) $ (0.64)
Shares used in computing basic and diluted net loss per share 22,499,002 4,518,784
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Pro forma basic and $ (0.34) $ (0.19)
diluted net loss per share
Shares used in computing pro forma basic and diluted net loss per
share 22,499,002 15,187,484
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</TABLE>
See accompanying notes to the financial statements.
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NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Three Months Ended
March 31,
2000 1999
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(Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,581) $ (2,876)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization 4,384 135
Provision for doubtful accounts 441 39
Stock compensation expense 193 503
Equity in gains of joint venture (72) --
Changes in operating assets and liabilities, net of effect from
acquisition:
Accounts receivable (433) (705)
Royalties receivable 74 (228)
Prepaid expenses & other current assets (152) (80)
Other noncurrent assets 84 --
Accounts payable (2,102) 645
Accrued expenses 961 851
Deferred offering costs -- (700)
Deferred revenue 275 440
Other long-term liabilities (5) --
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Total adjustments 3,648 900
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Net cash used in operating activities (3,933) (1,976)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,967) (626)
Purchase of short-term investments (974) --
Sales of short-term investments 9,308 --
Net cash paid in acquisition, net of cash acquired (1,156) --
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Net cash provided by (used in) investing activities 5,211 (626)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 84,840 --
Proceeds from exercise of stock options and warrants, net of
redemptions 322 22
Proceeds from issuance of short-term debt -- 4,000
Repayment of short-term bank loan (1,000) --
Principal payments under capital leases and notes payable (130) (61)
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Net cash provided by financing activities 84,032 3,961
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Net increase in cash and cash equivalents 85,310 1,359
Cash and cash equivalents at beginning of period 17,457 972
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Cash and cash equivalents at end of period $ 102,767 $ 2,331
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</TABLE>
See accompanying notes to the financial statements.
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NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position, results of
operations and cash flows for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the Company's financial statements and notes thereto for the
year ended December 31, 1999, which are contained in the Company's Annual Report
on Form 10-K (File No. 000-25781). The results of operations for the interim
periods presented are not necessarily indicative of results that may be expected
for any other interim period or for the full fiscal year.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The equity method of accounting is used to
account for the Company's equity investment in a Japanese joint venture.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The new
statement establishes accounting and reporting standards for derivative
instruments and hedging activities related to those instruments, as well as
other hedging activities. SFAS No. 133, as amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133," is effective for the Company beginning January
1,2001. The Company does not expect SFAS No. 133 to materially affect its
financial position or results of operations.
NOTE 3. NET LOSS PER SHARE
Net loss per share is computed under SFAS No. 128, "Earnings Per Share." Basic
net loss per share is computed using the weighted-average number of shares of
common stock outstanding, excluding shares of common stock subject to
repurchase. Such shares of common stock subject to repurchase, which consist
primarily of founders' shares, aggregated 754,699 and 1,908,510 at March 31,
2000 and 1999, respectively. Diluted net loss per share does not differ from
basic net loss per share since potential shares of common stock from the
exercise of stock options and warrants and outstanding shares of common stock
subject to repurchase are anti-dilutive for all periods presented. Unaudited
pro- forma basic and diluted net loss per share have been calculated assuming
the conversion of all outstanding shares of preferred stock into shares of
common stock, as if the shares had converted immediately upon their issuance.
All preferred stock outstanding was converted to common stock in connection with
the Company's initial public offering in April, 1999 (See Note 4).
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NOTE 4. PUBLIC STOCK OFFERINGS
In April and May 1999, the Company completed an initial public offering, selling
4,197,500 shares of common stock at a price of $14 per share, including 547,500
shares sold pursuant to the exercise of an over-allotment option, raising a
total of $53,213 in net proceeds after payment of underwriting discounts,
commissions and offering expenses. Concurrent with the initial public offering,
all shares of preferred stock outstanding were converted on a 1-to-1 basis into
10,668,700 shares of common stock.
In March 2000, the Company completed a public stock offering, selling 2,000,000
shares of common stock at a price of $45.25 per share, raising a total of
$84,840 in net proceeds after payment of underwriting discounts, commissions and
estimated offering expenses.
NOTE 5. ACQUISITION
In February 2000, the Company completed the acquisition of Knowledge Discovery
One, Inc. ("KD1"). KD1 is a leading supplier of advanced data analysis solutions
for multi-channel retailers. In this transaction, the Company acquired all of
the outstanding securities of KD1 in exchange for 1,969,630 shares of common
stock. As part of the acquisition, the Company also assumed all outstanding
options to purchase KD1 common stock. The Company has reserved 268,297 shares of
its common stock for issuance upon the exercise of these options. The
transaction was accounted for under the purchase method of accounting. The total
purchase price was $117.8 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The statements contained in this Report
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially from
those described in our forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
under the heading "Risk Factors" in our Registration Statement on Form S-1
declared effective on March 23, 2000 by the Securities and Exchange Commission
(File No. 333-31230).
OVERVIEW
Net Perceptions is a leading provider of real time personalization and precision
marketing software solutions for Internet and multi-channel retailers. Our
solutions are designed to help retailers understand customers individually,
optimize product assortments, prices and inventories and offer the right product
to the right customer at the right price.
Through March 31, 2000, we focused on providing solutions to electronic commerce
retailers, and most of our product revenues through March 31, 2000 were
attributable to our Net Perceptions for E-commerce product. In 1999, we expanded
our product suite by introducing new applications for Internet sales channels
and other markets, including Net Perceptions for Marketing Campaigns, Net
Perceptions for Call Centers and Net Perceptions for Knowledge Management. In
addition, in 1999, we introduced the Net Perceptions Recommendation Engine,
which is a product designed for original equipment manufacturers.
We incorporated in Delaware in July 1996 and shipped our initial product in
January 1997. In the period from our inception through 1999, we expanded our
organization by hiring personnel in key areas, particularly marketing, sales and
research and development. We grew from 34 employees at December 31, 1997, to 70
employees at December 31, 1998, to 213 employees at December 31, 1999 and to 335
employees at March 31, 2000.
Prior to the third quarter of 1999, substantially all of our product revenues
were attributable to Net Perceptions for E-commerce and the Net Perceptions
Recommendation Engine and their predecessor products. In the third quarter of
1999, we recognized initial product revenues from our Net Perceptions for Call
Centers and Net Perceptions for Knowledge Management products. In 2000, we
expect to recognize initial product revenues from Net Perceptions for Marketing
Campaigns, although we anticipate Net Perceptions for E-commerce will continue
to account for a substantial portion of our revenues in this period.
We sell our products and services worldwide through a direct sales force,
original equipment manufacturers and resellers. Sales derived through indirect
channels accounted for approximately 28% of our total revenues for the first
quarter of 2000 compared to 15% of our total revenues for the first quarter of
1999. We are seeking to increase sales derived through indirect channels as a
percentage of total revenues. Sales through indirect channels have lower average
selling prices and gross margins than direct sales. As a result, we expect that
our gross margins on product sales will decline if sales through indirect
channels increase.
We license our products under various pricing plans, such as per stored profile,
per user, per e-mail, per CPU, per site and per enterprise. We grant licenses on
both a term and perpetual basis. License fees for our products range from
$50,000 to in excess of $500,000. The price of our annual maintenance contracts
is based on a percentage of the related product license price and is generally
paid in advance. Professional service fees for implementation support and
training are generally priced on a per hour or per class basis.
We recognize revenues in accordance with the Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-4,
"Deferral of the Effective Date of a Provision of Statement of Position 97-2"
and Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions." We derive revenues from
software licenses, software maintenance and professional services. Maintenance
includes telephone and Web-based technical support, bug fixes and rights to
unspecified upgrades on a when-and-if available basis. Professional services
include implementation, training and consulting. In multiple-element software
arrangements that include rights to multiple software products, maintenance or
services, we allocate the total
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arrangement fee using the residual method. Under the residual method, the fair
value of the undelivered maintenance and services elements, as determined based
on vendor-specific objective evidence, is deferred and the remaining (residual)
arrangement fee is recognized as software product revenue. In software
arrangements in which we do not have vendor-specific objective evidence, we
defer revenue until the earlier of when vendor-specific objective evidence is
determined for the undelivered elements or when all elements have been
delivered. We recognize revenues from license fees when persuasive evidence of
an agreement exists, delivery of the product has occurred, no significant
company obligations with regard to implementation remain, the fee is fixed or
determinable and collection is probable. If the fee due from the customer is not
fixed or determinable, we recognize revenues as payments become due from the
customer. If we do not consider collection to be probable, then we recognize
revenues when the fee is collected. We recognize revenues allocable to
maintenance on a straight-line basis over the periods in which it is provided.
We evaluate arrangements that include professional services to determine whether
those services are essential to the functionality of other elements of the
arrangement. When professional services are considered essential, we recognize
revenues from the arrangement using contract accounting, generally on a
percentage of completion basis. When we do not consider the professional
services to be essential, we recognize the revenues allocable to the services as
they are performed.
We have sustained losses on a quarterly and an annual basis since inception. As
of March 31, 2000, we had an accumulated deficit of $30.3 million. Our net loss
was $7.6 million for the first quarter ended March 31, 2000 (including
amortization of intangibles of $3.8 million) compared to $2.9 million for the
first quarter of 1999. These losses resulted from significant costs incurred in
the development and sale of our products and services. We expect to experience
significant increases in our operating expenses for the foreseeable future,
particularly research and development and sales and marketing expenses.
Accordingly, we anticipate that our operating expenses, as well as planned
capital expenditures, will constitute a material use of our cash resources. We
also expect to incur additional losses and continued negative cash flow from
operations for the foreseeable future, and these losses may increase
significantly from current levels. We do not expect to achieve profitability in
2000 or 2001.
Our limited operating history makes the prediction of future operating results
very difficult. We believe that period-to-period comparisons of our operating
results should not be relied upon as predictive of future performance. Our
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies at an early stage of development, particularly
companies in new and rapidly evolving markets. We may not be successful in
addressing these risks and difficulties. We have experienced significant
percentage growth in revenues in recent periods; however, we do not believe that
prior growth rates are sustainable or indicative of future growth rates.
THE KD1 ACQUISITION
We acquired Knowledge Discovery One, Inc. (KD1) in February 2000, as a result of
which KD1 is now our wholly owned subsidiary. In connection with the
transaction, we acquired all of the outstanding shares of KD1 in exchange for
1,969,630 shares of our common stock. In addition, options of KD1 were converted
into options to purchase approximately 268,297 shares of our common stock.
KD1 was incorporated in Delaware in December 1996 and was in the development
stage from inception through December 1997. KD1 shipped its first products in
May 1998. KD1 had total revenues of $3.5 million in 1999 and $3.2 million in
1998. KD1's cost of revenues increased to $2.8 million in 1999 from $2.0 million
in 1998, and its operating expenses increased to $8.8 million in 1999 from $5.7
million in 1998. As of December 31, 1999, KD1 had accumulated net losses,
excluding accretion on redeemable convertible preferred stock, of $16.2 million
since inception. KD1 grew to 51 employees as of December 31, 1999 from 38
employees as of December 31, 1998.
We expect to incur additional expenses across all departments to build and
integrate our direct sales force and our professional service organization,
increase our indirect sales activities, increase our investment in the
development of technology and expand general and administrative infrastructure.
We expect that these investments will cause all operating expense categories to
increase in absolute dollars and could result in an increase in expense
categories as a percentage of revenues. In addition, this expansion will place
significant demands on our management and operational resources.
We accounted for the KD1 acquisition using the purchase method of accounting.
Under the purchase method, the purchase price of KD1 was allocated to the assets
and liabilities that we acquired from KD1. As a result, we will record non-cash
charges against our future operating results, which will adversely affect our
reported financial results. Net Perceptions recorded approximately $118.8
million in goodwill and other intangible assets in connection with the
acquisition. We recorded related amortization expense on these intangibles of
$3.8 million in the first quarter of 2000
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and will record total amortization expense of $26.5 million in 2000, $30.4
million in 2001, $30.4 million in 2002, $28.0 million in 2003 and $3.5 million
in the first quarter of 2004.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's statements of
operations as a percentage of total revenues for the periods indicated:
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Three Months Ended March 31,
2000 1999
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Revenues:
Product 79% 82%
Service and maintenance 21 18
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Total revenues 100 100
Cost of revenues:
Product 3 2
Service and maintenance 19 16
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Total cost of revenues 22 18
Gross margin 78 82
Operating expenses:
Sales and marketing 62 92
Research and development 39 81
General and administrative 24 30
Amortization of Intangibles 38 --
Stock compensation expense 2 27
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Total operating expenses 165 230
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Loss from operations (87) (148)
Other income (loss), net 7 (4)
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Net loss (80%) (152%)
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RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2000 AND MARCH 31, 1999
REVENUES
Total revenues. Our revenues increased 401% to $9.5 million in the quarter ended
March 31, 2000, from $1.9 million in the first quarter of 1999. The increase in
total revenues is primarily the result of increased sales of our cornerstone
product, Net Perceptions for E-commerce and, to a lesser extent, increased sales
of our Net Perceptions for Call Centers and Net Perceptions for Knowledge
Management products, both of which were introduced in 1999.
Revenues from sales in the United States were $5.9 million in the first quarter
of 2000 compared to $1.6 million in the first quarter of 1999, representing 62%
and 83% of total revenues, respectively. Revenues from international sales were
$3.6 million in the first quarter of 2000 compared to $320,000 in the first
quarter of the prior year, representing 38% of total revenues in 2000 and 17% in
1999. The majority of international sales were made in Europe and Asia by our
direct sales force located in the United States and the United Kingdom.
International sales are generally denominated in United States dollars.
Purchases by one customer represented 11% of our revenues in 1999. We do not
expect any single customer to account for 10% or more of total revenues in 2000.
Product revenues. Product revenues increased 382% to $7.5 million in the first
quarter of 2000 compared to $1.6 million for same period in the prior year.
While we continue to derive the majority of our product revenues from our Net
Perceptions for E-commerce product, we achieved significant product
diversification during the first quarter. In the first quarter of 2000, 61% of
product revenue was derived from our E-Commerce product, compared to 85% in the
first quarter of the prior year. The growth of product revenues in absolute
dollars is attributable to an increase in the average size of license
transactions recognized, increased sales and marketing efforts, specifically the
expansion of our direct sales force, and increased sales volumes of our
products. We anticipate that revenues from product licenses will continue to
represent the majority of our total revenues in the foreseeable future. In
addition, we expect that prior percentage growth rates of our product revenues
will not be sustainable in the future.
Service and maintenance revenues. Service and maintenance revenues consist
primarily of professional and maintenance services. Our professional service
revenues include business consulting, implementation support and educational
services and are generally offered on a time and material basis. Maintenance
revenues are generally derived from annual service agreements and are recognized
ratably over the period of the agreement. Total service and maintenance revenues
increased 489% to $2.0 million in the first quarter of 2000 from $334,000 in the
first quarter of 1999. Service and maintenance revenues were 21% of total
revenues in the first quarter of 2000 compared to 18% in the first quarter of
1999.
Professional service revenues increased 668% to $1.2 million in the first
quarter of 2000 from $151,000 in 1999. Professional service revenues were 59% of
total service and maintenance revenues in the first quarter of 2000 and 45% in
the prior year. The increase in professional service revenues in 2000 is a
result of higher product sales volumes and additional personnel in our
professional services group. Our professional service revenues as a percentage
of total revenues may decline to the extent our strategy of developing alliances
with systems integrators continues to expand. Maintenance revenues increased
340% to $805,000 in the first quarter of 2000 from $183,000 in 1999.
Maintenance revenues were 41% of total service and maintenance revenues in the
first quarter of 2000 compared to 55% in the prior year. The increase in
maintenance revenues is a result of expanded product sales and corresponding
maintenance fees relating to a larger installed base of software licenses. Our
maintenance revenues as a percentage of total revenues may continue to increase
as the installed license base increases.
COST OF REVENUES
Cost of product revenues. Cost of product revenues consists primarily of the
cost of royalties paid to third-party vendors, amortization of acquired
technology costs, product media and duplication, manuals, packaging materials
and shipping expenses. Cost of product revenues increased 661% to $274,000 in
the first quarter of 2000 from $36,000 for the first quarter of 1999,
representing 3% and 2% of the related product revenues, respectively. The
increase in cost of product revenues in absolute dollars and as a percentage of
total product revenues from 1999 to 2000 is primarily attributable to
amortization of acquired technology in connection with the acquisition of KD1.
Because all development costs incurred in the research and development of new
software products and enhancements to existing software products have been
expensed as incurred, cost of product revenues includes no amortization of
capitalized software development costs. We believe that the cost of product
revenues will increase in dollar amounts and as a percentage of product revenues
in the future.
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Cost of service and maintenance revenues. Cost of service and maintenance
revenues consists primarily of personnel-related costs incurred in providing
telephone and Web-based support, as well as professional and educational
services to customers. Cost of service and maintenance revenues increased 478%
to $1.8 million in the first quarter of 2000, from $313,000 in the first quarter
of the prior year, representing 92% and 94% of the related services and
maintenance revenues, respectively. The increase in cost of services and
maintenance revenues in absolute dollars, and as a percentage of revenues, is
due primarily to recruiting and training costs associated with increased
personnel in our service organization, as well as to increased costs for
third-party contractors used to staff consulting engagements. We believe that
the cost of service and maintenance revenues will increase in dollar amounts in
the future as we expand our service capacity to meet anticipated demand. In
addition, cost of service and maintenance revenues may vary significantly from
quarter to quarter depending upon the mix of services that we provide and the
utilization rate of our service personnel.
OPERATING EXPENSES
Sales and marketing. Sales and marketing expenses consist primarily of salaries,
other employee related costs, commissions and other incentive compensation,
travel and entertainment and expenditures for marketing programs such as
collateral materials, trade shows, public relations and creative services. Sales
and marketing expenses were $5.9 million in the first quarter of 2000 compared
to $1.7 million in the first quarter of 1999, an increase of 240%. Sales and
marketing expenses were 62% and 92% of total revenues in the first quarters of
2000 and 1999, respectively. The overall increase in sales and marketing
expenses in absolute dollar amounts reflects the cost of hiring additional sales
and marketing personnel, developing and expanding our sales and distribution
channels, launching new products and expanding promotional activities. We
believe that sales and marketing expenses will continue to increase in absolute
dollar amounts in the future as we continue to expand our direct sales and
marketing efforts for all of our product lines.
Research and development. Research and development expenses consist primarily of
salaries, other employee related costs and consulting fees relating to the
development of our products. Research and development expenses were $3.7 million
in the first quarter of 2000, an increase of 138% from the $1.5 million in
research and development expenses in the first quarter of 1999. Research and
development expenses were 39% and 81% of total revenues in the first quarters of
2000 and 1999, respectively. The increase in research and development expenses
in absolute dollars is primarily due to the cost of hiring additional research
and development personnel for the enhancement of existing products and the
development of new products. We believe that continued investment in research
and development is critical to attaining our strategic objectives and, as a
result, expect research and development expenses to increase in absolute dollars
in future periods.
General and administrative. General and administrative expenses consist
primarily of salaries, other employee related costs and professional service
fees. General and administrative expenses were $2.3 million in the first quarter
of 2000, an increase of 294% from $574,000 in the first quarter of the prior
year. General and administrative expenses were 24% and 30% of total revenues in
the first quarters of 2000 and 1999, respectively. The overall increase in
general and administrative expenses in absolute dollar amounts reflects the cost
of hiring additional general and administrative personnel, increased
professional fees, additional provision for doubtful accounts and additional
infrastructure to support our expanding operations. We expect to continue to add
administrative staff to support broadened operations. As a result, general and
administrative expenses will increase in absolute dollar amounts in the future.
Amortization of intangibles. Amortization of intangibles, related to goodwill
and other intangibles acquired in the acquisition of KD1, was $3.6 million for
the first quarter of 2000, or 38% of total revenues. Total amortization charges
will be approximately $7.6 million per quarter for the balance of 2000, with
amortization charges continuing into early 2004.
Stock compensation. Compensation charges related to granted stock options were
$193,000 in the first quarter of 2000 and $503,000 in the first quarter of 1999,
representing 2% and 27% of total revenues, respectively. These amounts represent
the difference between the exercise price of certain stock option grants and the
deemed fair value of the common stock at the time of the grants. Stock
compensation expense is recognized over the vesting period of the options, which
is generally four years. As a result, the recognition of stock compensation will
impact our reported results of operations through early 2003.
Other income (loss), net. Other income (loss), net consists of interest income,
interest expense, equity losses or gains of a joint venture and other expense
and was $649,000 in the first quarter of 2000, compared to other expense of
$72,000 in the first quarter of the prior year. Other income (loss), net
increased substantially due to interest income on the proceeds
12
<PAGE> 13
from our initial public offering in April 1999. Other expense in the prior year
consisted primarily of interest expense on a convertible note payable.
PROVISION FOR INCOME TAXES
We have incurred significant operating losses for all periods from inception
through March 31, 2000. As of December 31, 1999, we had net operating loss
carryforwards of approximately $18.1 million available to reduce future taxable
income expiring at various dates beginning in 2011. In addition, as of December
31, 1999, we had $140,000 of tax credit carryforwards expiring at various dates
beginning in 2011. Under the provisions of the Internal Revenue Code, certain
substantial changes in our ownership may limit in the future the amount of net
operating loss and tax credit carryforwards that could be utilized annually to
offset future taxable income.
We have recorded a valuation allowance for the full amount of our net deferred
tax assets, as the realization of the future tax benefit is presently not
likely.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Net Perceptions has financed its operations primarily through
the sale of equity securities, and to a lesser extent, loans and capital
equipment leases. At March 31, 2000, we had $120.1 million of cash, cash
equivalents and short-term investments, compared to $43.2 million at December
31, 1999. In March 2000, we completed a public stock offering, selling 2,000,000
shares of common stock at a price of $45.25 per share, raising a total of $84.8
million in net proceeds after payment of underwriting discounts and commissions
and estimated offering expenses. Cash used in operations was $3.9 million in the
first quarter of 2000 compared to $2.0 million in the first quarter of 1999.
Cash used in operations resulted primarily from net losses, pay down of accounts
payable, and increases in our accounts receivable, offset in part by growth in
accrued liabilities, deferred revenues and non-cash expenses, particularly
depreciation and amortization.
We generated $6.4 million in net cash from investing activities in the first
quarter of 2000 compared to a use of $626,000 in investing activities in the
first quarter last year. Our investing activities consisted primarily of
purchases and sales of short-term investments and property and equipment. To
date, we have not invested in financial instruments that involve a high level of
complexity or risk. We expect that, in the future, cash in excess of current
requirements will be continue to be invested in investment grade, interest
bearing securities.
Net cash provided by financing activities was $82.9 million in the first quarter
of 2000, reflecting the receipt of stock offering net proceeds of $84.8 million.
Cash provided by financing activities was $4.0 million in the first quarter of
1999, reflecting borrowings under a short-term convertible note payable.
Capital expenditures were $2.0 million in the first quarter of 2000 compared to
$626,000 for the first quarter of 1999. Our capital expenditures consisted of
leasehold improvements and purchases of property and equipment, primarily
computer equipment and software, for our growing employee base. Since 1999, we
have purchased property and equipment with cash balances. From inception through
1998, we generally funded the purchase of property and equipment with capital
leases. At March 31, 2000, we had approximately $1.3 million in current and
non-current loans, including $1.1 million in current and non-current capital
lease obligations. This amount includes installment loans with third-party
financing sources that are secured by the equipment financed by the third
parties. The loans bear interest at rates between 14.4% and 16.8% and mature
between November 2000 and August 2002.
Although we have no material long-term commitments for capital expenditures, we
anticipate substantial increases in our operating expenses, capital
expenditures, facilities and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel. In April the company signed
a ten year lease for a new corporate facility. As a result, we will incur
increased rent expense in the future. The move to the new facility will be
completed in the summer of 2000 and will require an investment of approximately
$2.5 million in leasehold improvements, furniture and equipment. We intend to
fund this planned increase in operating expenses and capital expenditures with
the proceeds of our public offering, as well as with existing cash, cash
equivalents and short-term investments. We believe that these funds will be
sufficient to meet our working capital needs for at least the next 12 months.
However, we may need to raise additional funds in order to support more rapid
expansion of our sales force, develop new or enhanced products or services,
respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. If we seek to raise
additional funds, we may not be able to obtain funds on terms which are
favorable or otherwise acceptable to us. If we raise additional funds through
the issuance of equity securities, the percentage ownership of our stockholders
would be reduced.
13
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through March 31, 2000 substantially all of our recognized revenues were
denominated in United States dollars and primarily from customers in the United
States, and our exposure to foreign currency exchange rate changes has been
immaterial. We expect, however, that future product license and service revenues
may also be derived from international markets and may be denominated in the
currency of the applicable market. As a result, our operating results may become
subject to significant fluctuations based upon changes in the exchange rates of
certain currencies in relation to the United States dollar. Furthermore, to the
extent that we engage in international sales denominated in United States
dollars, an increase in the value of the United States dollar relative to
foreign currencies could make our products less competitive in international
markets. Although we will continue to monitor our exposure to currency
fluctuations, and, when appropriate, may use financial hedging techniques in the
future to minimize the effect of these fluctuations, exchange rate fluctuations
may adversely affect our financial results in the future.
Our exposure to market risk is otherwise limited to interest income sensitivity,
which is affected by changes in the general level of United States interest
rates, particularly because the majority of our investments are in short-term
debt securities issued by corporations. We place our investments with
high-quality issuers and limit the amount of credit exposure to any one issuer.
Due to the nature of our short-term investments, we believe that we are not
subject to any material market risk exposure. We do not have any derivative
financial instruments.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the quarter ended March 31, 2000, we issued and sold 1,969,630
shares of common stock in connection with our acquisition of KD1. The
issuance of these securities was deemed to be exempt from registration
under the Securities Act (the "Act") in reliance on section 4(2) of Act as
a transaction by an issuer not involving any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2.1**. Agreement and Plan of Merger, dated as of January 15, 2000,
as amended February 3, 2000, by and among Net Perceptions, Inc., Kentucky
Acquisition Corporation and Knowledge Discovery One, Inc.
Exhibit 3.1*. Amended and Restated Certificate of Incorporation.
Exhibit 3.2*. Amended and Restated Bylaws.
Exhibit 4.1*. Amended and Restated Investor Rights Agreement, dated
December 18, 1997, among Net Perceptions, Inc. and the investors and
founders named therein, as amended.
Exhibit 4.2**. Registration Rights Agreement, dated February 14, 2000, by
and among Net Perceptions, Inc. and the stockholders named therein.
Exhibit 4.3*. Specimen Common Stock Certificate.
Exhibit 10.1. Office Lease Agreement between DRF Holdings LLC and Net
Perceptions, Inc. dated April 5, 2000.
Exhibit 10.2**. Knowledge Discovery One, Inc. 1996 Stock Option/Stock
Issuance Plan.
Exhibit 27. Financial Data Schedule.
===========================================================================
* Incorporated by reference to Net Perceptions' Registration Statement on
Form S-1 (Registration No. 333-71919).
** Incorporated by reference to Net Perceptions' Registration Statement on
Form S-1 (Registration No. 333-31230).
15
<PAGE> 16
(b) Reports on Form 8-K
One report on Form 8-K was filed by Net Perceptions during the quarter
ended March 31, 2000. This filing was made under Item 2 of Form 8-K in
connection with the Company's acquisition of Knowledge Discovery One, Inc.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NET PERCEPTIONS, INC.
Date: May 15, 2000 By: /s/ Thomas M. Donnelly
------------------------
Thomas M. Donnelly
Chief Financial Officer
(Duly authorized officer and
principal financial and accounting
officer)
17
<PAGE> 18
NET PERCEPTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
EXHIBIT INDEX
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Exhibit Number Description of Exhibit
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
2.1** Agreement and Plan of Merger, dated as of January 15, 2000, as amended February
3, 2000, by and among Net Perceptions, Inc., Kentucky Acquisition Corporation and
Knowledge Discovery One, Inc.
- -------------------------------------------------------------------------------------------------------------------
3.1* Amended and Restated Certificate of Incorporation.
- -------------------------------------------------------------------------------------------------------------------
3.2* Amended and Restated Bylaws.
- -------------------------------------------------------------------------------------------------------------------
4.1* Amended and Restated Investor Rights Agreement, dated December 18, 1997, among Net
Perceptions, Inc. and the investors and founders named therin, as amended.
- -------------------------------------------------------------------------------------------------------------------
4.2** Registration Rights Agreement, dated February 14, 2000, by and among Net
Perceptions, Inc. and the stockholders named therein.
- -------------------------------------------------------------------------------------------------------------------
4.3* Specimen Common Stock Certificate.
- -------------------------------------------------------------------------------------------------------------------
10.1 Office Lease Agreement between DRF Holdings LLC and Net Perceptions, Inc., dated
April 5, 2000 (filed herewith).
- -------------------------------------------------------------------------------------------------------------------
10.2** Knowledge Discovery One, Inc. 1996 Stock Option/Stock Issuance Plan.
- -------------------------------------------------------------------------------------------------------------------
27 Exhibit 27. Financial Data Schedule (filed herewith).
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
* Incorporated by reference to Net Perceptions' Registration Statement on Form S-1
(Registration No. 333-71919).
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
** Incorporated by reference to Net Perceptions' Registration
Statement on Form S-1 (Registration No. 333-31230).
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 1
EXHIBIT 10.1
OFFICE LEASE AGREEMENT
DATE: APRIL 5, 2000
BETWEEN: DRF HOLDINGS LLC
(address) c/o Frauenshuh Companies
7101 West 78th Street, Suite 100
Bloomington, MN 55439 ("Landlord")
AND: NET PERCEPTIONS, INC.
(address) 11200 West 78th Street
Eden Prairie, MN 55344 ("Tenant")
LOCATION: INTERNET CENTER
7700 FRANCE AVENUE SOUTH
EDINA, MINNESOTA
LANDLORD AND TENANT hereby covenant and agree as follows:
BASIC 1. (a) PREMISES: The area containing
PROVISIONS approximately 118,072 square feet of Rentable Area
located on the first, second, fourth and fifth levels
of the Building, as generally indicated on Exhibit C.
On or about the Commencement Date, Landlord will
recalculate the Rentable Area of the Premises and the
Building based to the extent practicable on
construction and Building drawings, and Landlord and
Tenant will execute a supplement to this Lease
confirming the Rentable Area.
(b) DELIVERY DATE: As to any portion of the
Premises, the date Landlord delivers such space to
Tenant with all office furniture removed (other than
the office furniture being leased to Tenant under
Section 12 of Exhibit E), ready for construction of
Tenant's Work therein under Exhibit D. Landlord will
give not less than two business days' notice of the
Delivery Date, and prior to the Delivery Date Tenant
will walk-through the space with Landlord to confirm
that the space is ready for construction of Tenant's
Work.
(c) OCCUPANCY DATE: As to any portion of the
Premises, the earlier of (i) 75 days after the
Delivery Date, or (ii) the date Tenant begins to
operate its business in such portion of the Premises.
(d) COMMENCEMENT DATE: The earlier of (i)
October 1, 2000, or (ii) the date when the Occupancy
Date for all portions of the Premises has occurred.
Landlord and Tenant will execute a supplement to this
Lease confirming the Commencement Date, when
determined.
<PAGE> 2
EXHIBIT 10.1
(e) TERM: The period of ten years beginning on
the Commencement Date. If the last day of such period
is not the last day of the calendar month, the Term
will extend to the last day of such calendar month.
(f) USE: General business offices.
(g) BASE RENT:
(i) $11.75 per year for each square foot of
Rentable Area of the Premises for the first
year of the Term,
(ii) $12.04 per year for each square foot
of Rentable Area of the Premises for the second
year of the Term,
(iii) $12.34 per year for each square foot
of Rentable Area of the Premises for the third
year of the Term,
(iv) $12.65 per year for each square foot
of Rentable Area of the Premises for the fourth
year of the Term,
(v) $12.97 per year for each square foot of
Rentable Area of the Premises for the fifth
year of the Term,
(vi) $13.29 per year for each square foot
of Rentable Area of the Premises for the sixth
year of the Term,
(vii) $13.63 per year for each square foot
of Rentable Area of the Premises for the
seventh year of the Term,
(viii) $13.97 per year for each square foot
of Rentable Area of the Premises for the eighth
year of the Term,
(ix) $14.32 per year for each square foot
of Rentable Area of the Premises for the ninth
year of the Term; and
(x) $14.67 per year for each square foot of
Rentable Area of the Premises for the remainder
of the Term.
(h) ADDITIONAL RENT: For each calendar year
during the Term, the sum of (i) the lesser of (A)
Tenant's Share of the Actual Operating Cost for such
calendar year, and (B) the Operating Cost Cap for
such calendar year, and (ii) Tenant's Share of the
Actual Tax Cost for such calendar year. If any
portion of Tenant's Share of Actual Operating Cost
for any year is not paid because it exceeds the
Operating Cost Cap, such portion will be added to and
included in Tenant's Share of Actual Operating Cost
for subsequent years and will be paid as Additional
Rent in such subsequent years to the extent Tenant's
Share of Actual
2
<PAGE> 3
EXHIBIT 10.1
Operating Cost for such subsequent years as so
adjusted does not exceed the Operating Cost Cap for
such subsequent years. Additional Rent (and the
Operating Cost Cap) will not include any amounts
payable by Tenant for utilities or services
separately metered to the Premises under Section
23(b) or for any additional services provided by
Landlord under Section 23(d), which amounts will be
separately payable by Tenant as a separate Rent
obligation under this Lease.
(i) OPERATING COST CAP: $5.50 per square foot
of Rentable Area for calendar year 2000, increased by
7.0% per year for each subsequent calendar year.
(j) SECURITY DEPOSIT: $201,706.33
EXHIBITS 2. The exhibits to this document are a part of
this Lease and consist of:
Exhibit A Description of Land
Exhibit B Building Regulations
Exhibit C Plan of Premises
Construction Procedures
Exhibit E Additional Provisions
Exhibit F Location of Office Furniture
DEFINITIONS 3. In this Lease:
(a) "Rent" means the aggregate of the Base
Rent, Additional Rent, and all other amounts payable
by Tenant to Landlord under this Lease.
(b) "Land" means the property described in
Exhibit A.
(c) "Building" means the building located on
the Land within which the Premises are located, and
any areas and improvements servicing such building
for which Landlord may from time to time have
obligations, such as lobby areas, access areas,
arcades, atriums, loading docks, public sidewalks,
and other Common Areas.
(d) "Project" means that portion of the Land
and Building owned or leased by Landlord, and any
equipment and personal property of Landlord
exclusively used on-site in connection with the Land
or Building.
(e) "Common Areas" means those areas and
facilities of the Project which are from time to time
provided by Landlord for use in common by or for the
benefit of the tenants and occupants of the Project
and their employees, clients, customers, and
invitees, whether or not such areas and facilities
are accessible by the public. The Common Areas
include the
3
<PAGE> 4
EXHIBIT 10.1
lobbies, corridors, elevators, toilet rooms, atriums,
auditoriums, cafeteria areas, kitchen areas, exercise
rooms, loading and delivery facilities, driveways,
sidewalks, and parking areas.
(f) "Actual Operating Cost" means all costs
reasonably incurred by Landlord attributable to the
maintenance, operation and repair of the Project and
the Common Areas therein as determined by standard
accounting practices with accruals appropriate to the
general practices of the commercial real estate
industry, calculated as though the Building were
fully complete and fully occupied, including but not
limited to (i) premiums for casualty, public
liability, rent loss and other insurance which
Landlord maintains with respect to the Project; (ii)
all out-of-pocket costs incurred in managing the
Project (including reasonable office rent or rental
value of the management office serving the Project),
plus a management fee or charge equal to 4.0% of the
amount which for purposes of gross-up would be
Landlord's total revenue for the Project (excluding
such management fee) if the Building were fully
leased at the average rental rate; (iii)
recordkeeping, accounting and auditing costs for
budgeting and determination of Actual Operating Cost
and Actual Tax Cost and any Operating Cost or Tax
Cost Adjustment; (iv) all other costs which may be
expensed rather than capitalized reasonably incurred
by Landlord in owning, maintaining or operating the
Project and the Common Areas therein; (v) a reserve
for replacement of the fitness equipment in the
exercise room in the Project as reasonably determined
by Landlord; and (vi) capital expenditures, amortized
over the useful life or estimated "pay-back" period,
whichever is shorter, reasonably determined by
Landlord using reasonable interest charges, for any
repair, replacement or improvement to the Project, or
purchase of equipment, that is incurred to improve
the operating efficiency or reduce the cost of
owning, maintaining or operating the Project or
required under the Americans with Disabilities Act
("ADA") or otherwise by any governmental authority or
insurance carrier. Actual Operating Cost excludes,
however, (i) capital expenditures for replacement of
more than 25% of the roofing on the Building in any
one job, replacement of heating, cooling and
ventilation equipment other than heat pumps,
replacement of any structural elements of the
Building, or other capital expenditures not
specifically set out in the preceding sentence; (ii)
Actual Tax Cost; (iii) tenant improvements, leasing
commissions, and advertising and marketing costs for
leasing of space; (iv) ground rent, depreciation, and
principal and interest on debt; (v) expenses for
which Landlord is reimbursed (net of cost of
collection) by insurance or from any tenant (other
than pursuant to an operating expense clause in such
tenant's lease); (vi) the cost of operating the
entity which constitutes Landlord (as distinguished
from the cost of operation and maintenance of the
Project), including, without limitation, legal
expenses for disputes with tenants, internal
accounting (other than budgeting and accounting of
Actual Operating Cost and Actual Tax Cost and any
Operating Cost or Tax Cost Adjustment), costs of
selling any interest of Landlord in the Project or
any part thereof, and costs of any disputes between
Landlord and any employee or agent of Landlord; and
(vii) executive salaries above the grade of general
manager for the Project and other management overhead
4
<PAGE> 5
EXHIBIT 10.1
costs (other than the costs and fees included in
Actual Operating Cost as specified in the preceding
sentence). The cost of the general manager and any
employees below the rank of general manager whose
duties include work on other properties and the cost
of any management office which serves other
properties will be reasonably allocated between the
Project and other properties.
(g) "Estimated Operating Cost" means, for any
calendar year, Landlord's good faith estimate of the
Actual Operating Cost (or the Operating Cost Cap, if
applicable) for such year. For purposes of this
Lease, the Estimated and Actual Operating Cost for
calendar year 2000 will not exceed $5.50 per square
foot of Rentable Area.
(h) "Operating Cost Adjustment" means the
difference between Tenant's Share of Estimated
Operating Cost and Tenant's Share of Actual Operating
Cost computed as set out in Article 7.
(i) "Actual Tax Cost" means all taxes and
installments of special assessments (and interest
thereon), general and special, ordinary and
extraordinary, assessed, levied, charged or imposed
upon or against the Project and all taxes, excises,
fees, charges, levies or assessments which are
assessed levied, charged or imposed on Landlord in
lieu of those taxes and assessments. Actual Tax Cost
excludes, however, income or franchise taxes payable
by Landlord except to the extent imposed in lieu of
real property taxes or special assessments. Landlord
will use commercially reasonable judgment in
determining whether to contest any real estate taxes
and will endeavor to keep the real estate taxes for
the Project consistent with those of similar
buildings within the taxing jurisdiction.
(j) "Estimated Tax Cost" means for any calendar
year Landlord's good faith estimate of the Actual Tax
Cost for such year. The Estimated Tax Cost for
calendar year 2000 is $3.25 per square foot of
Rentable Area.
(k) "Tax Cost Adjustment" means the difference
between Tenant's Share of Estimated Tax Cost and
Tenant's Share of Actual Tax Cost computed as set out
in Article 7.
(l) "Rentable Area" means the rentable area of
the Premises and other portions of the Building
determined as set out in the American National
Standard Method for Measuring Floor Area in Office
Buildings, ANSI/BOMA Z65.1-1996.
(m) "Tenant's Share" means that portion of the
Estimated or Actual Operating Cost or Estimated or
Actual Tax Cost which the Rentable Area of the
Premises bears to the Rentable Area of the Project,
except that (i) if a service is provided by Landlord
to tenants of the Project in their premises but is
not provided by Landlord in the Premises under this
Lease, the cost of the service (except as it relates
to Common Areas) will be excluded from the
5
<PAGE> 6
EXHIBIT 10.1
Estimated Operating Cost and Actual Operating Cost;
or (ii) if a service is provided by Landlord in the
Premises but is not provided to another portion of
the Project, the divisor will be the Rentable Area of
that portion of the Project in which the service is
provided; or (iii) if the Premises or any other
portion of the Project is exempt from any real estate
or other tax or imposition, the exempt portion will
not be included in the Rentable Area of the Project
in determining Tenant's Share of such tax or
imposition.
(n) The terms defined in Article 1 have the
meanings ascribed to them therein.
GRANT OF 4. Landlord hereby leases the Premises to Tenant and
LEASE Tenant hereby accepts the Premises from Landlord to
have and to hold during the Term, subject to the
terms and conditions of this Lease.
RENT 5. (a) Tenant will pay the Rent in lawful money
PAYMENT of the United States to Landlord at the address set
out in the heading of this Lease or at such other
place as Landlord from time to time designates,
without demand and without any reduction, abatement,
counterclaim or setoff, as follows:
(i) Base Rent will be paid in advance and without
notice on or before the first day of each month
during the Term in monthly installments, each equal
to one-twelfth of the annual Base Rent.
(ii) Prior to the Commencement Date and prior to
the beginning of each calendar year thereafter,
Landlord will compute and deliver to Tenant a
statement of the Estimated Operating Cost and
Estimated Tax Cost for such calendar year and the
monthly payments as would fully recover Tenant's
Share of the Estimated Operating Cost and Estimated
Tax Cost in such calendar year. From time to time
during the calendar year, Landlord may compute and
deliver to Tenant an updated statement of the
Estimated Operating Cost and Estimated Tax Cost for
such year and the monthly payments for the remainder
of the calendar year as would fully recover Tenant's
Share of Estimated Operating Cost and Estimated Tax
Cost as so revised. Tenant's Share of the Estimated
Operating Cost (or the Operating Cost Cap, if less)
and Tenant's Share of Estimated Tax Cost will be paid
in advance and without further notice on the first
day of each month during the Term in monthly
installments, each based on Landlord's most current
statement.
(iii) If the Term begins on other than the first
day of a month or ends on other than the last day of
a month, the monthly installments of Base Rent and
Additional Rent for that month will be prorated and
paid in advance.
(iv) Other charges will be paid on or before the
first day of the month following notice of the
charge, unless a different time for payment is
specified in this Lease.
6
<PAGE> 7
EXHIBIT 10.1
(b) All amounts payable by Tenant to Landlord
under this Lease will be deemed Rent and Landlord
will have all rights against Tenant for default in
any payment as in the case of arrears of rent. The
obligation to pay Rent accruing prior to the
expiration or earlier termination of this Lease and
the obligation to pay any damages and costs arising
out of a default by Tenant under this Lease will
survive the expiration or earlier termination of this
Lease.
SERVICE 6. In addition to Landlord's right to apply any
CHARGES Security Deposit to late payments under Article 37,
Tenant will pay Landlord an administrative fee of
$100.00 for any payment of Rent which is not made
within five days after it becomes due, and $35.00 for
each check presented by Tenant which is returned
unpaid due to insufficient funds or other reason. In
addition, any Rent not paid within five days after it
becomes due will bear interest from the date due to
the date paid at 12.5% per annum.
COST 7. (a) If Tenant's Share of Actual Operating Cost
ADJUSTMENTS for any calendar year during the Term exceeds
Tenant's Share of Estimated Operating Cost paid by
Tenant for the calendar year, Tenant will pay to
Landlord a sum equal to the difference between
Tenant's Share of Actual Operating Cost for the year
and Tenant's Share of Estimated Operating Costs for
the year. If Tenant's Share of Estimated Operating
Cost paid by Tenant for any calendar year during the
Term exceeds Tenant's Share of Actual Operating Cost
for the calendar year, Landlord will pay to Tenant a
sum equal to the difference between Tenant's Share of
Estimated Operating Cost for the year and Tenant's
Share of Actual Operating Cost for the year.
Notwithstanding anything herein to the contrary,
however, the Actual Operating Cost for any year will
not exceed the Operating Cost Cap for such year.
(b) If Tenant's Share of Actual Tax Cost for any
calendar year during the Term exceeds Tenant's Share
of Estimated Tax Cost paid by Tenant for the calendar
year, Tenant will pay to Landlord a sum equal to the
difference between Tenant's Share of Actual Tax Cost
for the year and Tenant's Share of Estimated Tax Cost
for the year. If Tenant's Share of Estimated Tax Cost
paid by Tenant for any calendar year during the Term
exceeds Tenant's Share of Actual Tax Cost for the
calendar year, Landlord will pay to Tenant a sum
equal to the difference between Tenant's Share of
Estimated Tax Cost for the year and Tenant's Share of
Actual Tax Cost for the year.
(c) Within 120 days after the end of each calendar
year or as soon thereafter as reasonably possible,
Landlord will give written notice to Tenant of any
Operating Cost or Tax Cost Adjustment. The notice
will contain or be accompanied by a statement of the
Actual Operating Cost and Actual Tax Cost for that
calendar year and a computation of the Operating Cost
and Tax Cost Adjustment. Tenant will pay to Landlord
any amount due under this Article within 30 days
after delivery of the annual notice, but failure to
so notify Tenant within a reasonable period after any
calendar year for which additional rent is due will
not release Tenant from paying nor diminish
7
<PAGE> 8
EXHIBIT 10.1
Tenant's obligation to pay such amount. Landlord will
pay Tenant any amount due under this Article within
30 days after delivery of the annual notice or credit
such amount against the next Rent coming due under
this Lease.
(d) Tenant may examine Landlord's books relating
to the Actual Operating Cost and Actual Tax Cost for
any calendar year if requested within 60 days of
receipt of the notice of the Operating Cost and Tax
Cost Adjustment for such calendar year. The Actual
Operating Cost, Actual Tax Cost, and any Operating
Cost or Tax Cost Adjustment set out in Landlord's
notice will be considered as final and binding on
Tenant except to the extent of any written exception
delivered to Landlord within 120 days of Tenant's
receipt of Landlord's notice. No examination of
Landlord's books or written exception made by Tenant
will extend the due date of any payment of Operating
Cost or Tax Cost Adjustment or any other amount due
under this Lease.
(e) If based on Tenant's examination of Landlord's
books Tenant raises any exception to the Actual
Operating Cost, Actual Tax Cost, or any Operating
Cost or Tax Cost Adjustment, such exception will be
made in writing and Tenant will provide Landlord with
a full copy of the results of its examination. If
Landlord disputes Tenant's written exception,
Landlord and Tenant will in good faith attempt to
resolve the dispute. If not resolved within 60 days
of Landlord's receipt of the written exception, the
dispute will be resolved by a mutually acceptable
nationally recognized accounting firm. Landlord and
Tenant will bear equally the cost of such an
accounting firm. If the resolution reasonably
establishes the aggregate of Tenant's Share of Actual
Operating Cost and Tenant's Share of Actual Tax Cost
for such calendar year has been overstated by more
than 4%, Landlord shall promptly reimburse Tenant for
the reasonable out-of-pocket cost of Tenant's
examination (excluding any "contingency" fee which is
measured by the reduction in the Additional Rent).
Landlord will promptly refund to Tenant or Tenant
will promptly pay to Landlord, as the case may be,
the amount of any overstatement or understatement.
(f) If this Lease does not begin or end at the
first day of a calendar year, any Operating Cost or
Tax Cost Adjustment for the year will be adjusted pro
rata, based upon the number of days of the Term
falling within such calendar year.
ADDITIONAL 8. Tenant will pay to Landlord the amount of any
OCCUPANCY taxes (other than income tax), excises, charges,
TAXES levies, fees or assessments payable by Landlord upon
or by reason of any Rent reserved to Landlord, the
renting of any part of the Project to Tenant,
Tenant's use or occupancy of any part of the Project,
or any fixture or personal property in the Premises
which does not belong to Landlord.
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EXHIBIT 10.1
COMPLETION 9. Tenant will take possession of the Premises in
OF PREMISES their "as-is" condition without any warranty or
representation by Landlord of their condition or
suitability for Tenant's use. Tenant will be
responsible for construction of any improvements in
the Premises in accordance with the Construction
Procedures set out in Exhibit D.
OCCUPANCY OF 10.(a) Upon surrender and vacation of the Premises by
PREMISES the existing occupant, Tenant will have access to
the Premises to complete the Premises for occupancy.
Entry for the period prior to the Commencement Date
will be at Tenant's risk, and Tenant will pay any
costs incurred by Landlord as a result of Tenant's
early access to the Premises. All of the provisions
of this Lease apply during the period of Tenant's
access prior to the Commencement Date, except that
Tenant will have no obligation to pay Base Rent or
Additional Rent for any portion of the Premises until
the Occupancy Date for such portion has occurred.
From the Occupancy Date for such portion of the
Premises until the Commencement Date, Tenant will pay
in respect of such portion of the Premises Base Rent
(at the rate of $11.75 per annum for each square foot
of Rentable Area) and Additional Rent for such
portion of the Premises.
(b) Upon the Delivery Date for each portion of the
Premises, Tenant will have access to such portion of
the Premises pursuant to Exhibit D to complete the
Premises for occupancy. If Landlord is unable to
deliver legal possession of any portion of the
Premises to Tenant for occupancy by the Commencement
Date, this Lease will not be void or voidable nor
will Landlord be liable to Tenant for any loss or
damage resulting from the failure to deliver, but no
Base Rent or Additional Rent will be payable in
respect of such portion for the period expiring 75
days after the date Landlord delivers possession for
occupancy or the date Tenant begins to conduct
business in such portion, whichever first occurs. If
Landlord is unable to deliver legal possession of any
part of the Premises within 120 days after the
Occupancy Date therefor, either Landlord or Tenant
may by written notice to the other cancel this Lease
as it relates to such part of the Premises, in which
case a pro-rata portion of the Security Deposit and
any interest accrued thereon will be returned to
Tenant and neither Landlord nor Tenant will have any
further obligations in respect of such part of the
Premises under this Lease
CARE OF 11. (a) At its expense, Tenant will keep the
PREMISES interior portions and entrance of the Premises in
good order and condition, including but not limited
to (i) maintaining the Premises in a clean and
sanitary condition, (ii) maintaining and repairing
all mechanical, electrical, and plumbing systems,
facilities, and equipment (other than heat pumps)
exclusively serving the Premises (it being understood
that Landlord is responsible under Article 23 for
mechanical, electrical and plumbing systems,
facilities and equipment which serves more than the
Premises and any heat pumps in the Premises) and all
non-structural improvements within the Premises; and
(iii) repainting and redecorating at reasonable
intervals as needed.(b) If Tenant fails to perform
any work set out in this Article within 20 days after
notice
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<PAGE> 10
EXHIBIT 10.1
from Landlord or such shorter period as may be
appropriate in an emergency, Landlord may enter the
Premises and perform the work. If Landlord performs
the work (whether or not due to an emergency), Tenant
will pay to Landlord the cost of the work, plus 10%
for Landlord's overhead and coordination.
ALTERATIONS 12. Tenant will not make or allow to be made any
BY TENANT alteration, addition or improvement to the Premises
without first obtaining Landlord's written consent.
However, no consent will be required for any
alteration, addition or improvement to the Premises
which costs less than $10,000 in the aggregate and
does not affect the structural, mechanical,
electrical, plumbing or life-safety systems or
facilities or the entry area of the Premises,
provided Landlord is given not less than 15 days
advance written notice specifying such work and the
work is otherwise carried out in conformance with
this Lease. All work will be performed at Tenant's
expense in a first class skillful manner by one or
more licensed, bonded contractors approved by
Landlord and in accordance with plans and
specifications approved by Landlord. Tenant and
Tenant's contractors and subcontractors, and their
respective trades and workers, will work in harmony
with other labor working in the Building, and will
not conflict with any union or other contracts or
affiliations to which Landlord or Landlord's
contractors or subcontractors, or their respective
trades or workers, may be a party. Tenant will
forthwith remove from the Project any contractor,
subcontractor, trade or worker causing or creating
any such conflict. Tenant will cause each contractor
to carry workers' compensation insurance in
accordance with statutory requirements and commercial
public liability insurance, with Landlord (and other
parties reasonably requested by Landlord) named as
additional insured, in amounts at least equal to
those set out in Article 21, and will submit evidence
of the coverage to Landlord prior to commencement of
the work. Tenant will be responsible for the payment
of any direct expense incurred by Landlord in
connection with any alteration, addition or
improvement made to the Premises (including
Landlord's direct cost of administration). Tenant
will also provide such security as Landlord may
reasonably require to assure that the work will be
performed in a reasonable period free and clear of
all liens and encumbrances. Any alteration, addition
or improvement made to the Premises (other than
movable equipment, furniture and other trade fixtures
owned by Tenant) will at once become the property of
Landlord and will be surrendered to Landlord upon
expiration or earlier termination of this Lease.
MECHANICS' 13. (a) Tenant will not permit any liens to stand
LIENS against the Premises or the Project for any labor,
skill, material or equipment furnished or claimed to
be furnished to or on account of Tenant in connection
with any work in or about the Premises. Tenant will
give notice to Landlord of the filing of any such
lien within five days of Tenant's receipt of it and
cause it to be discharged within ten days of its
filing. If Tenant fails to so discharge the lien,
Landlord may (but will not be obligated to) discharge
the lien by paying the amount claimed to be due, and
the amount paid and all Landlord's
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EXHIBIT 10.1
expenses including reasonable attorneys' fees will be
paid by Tenant to Landlord.
(b) Notwithstanding anything in Section 13(a) to
the contrary, so long as Tenant is not in default of
this Lease and complies with the requirements of any
mortgages, deeds of trust and ground and underlying
leases on the Project, Tenant may in good faith
contest any mechanics' lien or claim thereof upon
notification to Landlord of its intent and, within
ten days of filing of the lien, providing Landlord
with a bond or other security reasonably satisfactory
to Landlord in an amount not less than 150% of the
claim, or complying with such statutory procedures as
may be available to release the lien. If Tenant fails
to satisfy such lien claim upon entry of final
judgment or in the reasonable opinion of Landlord the
Project or any part thereof is or becomes subject to
imminent loss or forfeiture, Landlord may use the
security to pay such claim or otherwise obtain a
discharge or release of the lien and to pay
Landlord's reasonable expenses in connection
therewith.
USE OF 14. (a) Tenant will not occupy or use the Premises
PREMISES or permit them to be occupied or used for any
purpose other than the Use set out in Article 1, or
in a manner which is unlawful, disreputable or
creates any nuisance or fire hazard or which would
invalidate or increase the rate for insurance
coverage on the Building or its contents or which
would interfere with, annoy, or disturb any employee
or occupant of the Premises, any other tenant or
occupant of the Building in the use of its premises,
or the Landlord or other operator or manager of the
Building.
(b) Tenant will comply with all laws, ordinances,
orders, rules, regulations and restrictions relating
to the use, condition or occupancy of the Premises
(including any restroom facilities exclusively
accessible to Tenant), including without limitation
the provisions of ADA relating to accessibility
within the Premises. Landlord will be responsible for
any improvements or alterations outside the Premises
to comply with the ADA unless the same are related to
any improvements or alterations voluntarily
undertaken by Tenant or to Tenant's unique status
under the ADA, provided that the cost of such
improvements and alterations will be included in the
Actual Operating Cost under clause (vi) of Section
3(f).
(c) Tenant will comply with rules and regulations
adopted by Landlord from time to time in good faith
for the safety, care and cleanliness and preservation
of good order in the Premises and the Building,
including but not limited to those set out in Exhibit
B. Landlord will use reasonable efforts to enforce
the rules and regulations in a non-discriminating
manner, but will not be liable to Tenant for
violation of such rules and regulations by any other
party.
(d) Tenant will not cause or permit the storage,
use, generation, or disposition of any explosives,
radioactive materials, asbestos, urea formaldehyde,
polychlorinated biphenyl, petroleum products, or
other
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EXHIBIT 10.1
dangerous, toxic or hazardous substances in or about
the Premises (other than the storage and use in full
compliance with all laws and regulations of
incidental amounts of such common hazardous materials
as may be reasonably required for the normal
operation of Tenant's business in the Premises).
(e) Landlord will indemnify and hold harmless
Tenant from and against any costs, liabilities,
claims and expenses incurred by Tenant as a result of
claims by third parties arising out of the presence
of any such hazardous materials in the Project as of
the date of this Lease in quantities which violate
any laws or regulations currently in effect and any
such hazardous materials which are brought into the
Project by or under the direction of Landlord.
SIGNS AND 15. Any sign, advertisement, design or other graphic
GRAPHICS on the windows or doors or on the outside of the
perimeter walls of the Premises or visible from
outside the Premises is subject to Landlord's
approval. It will conform to the uniform pattern of
identification signs for tenants as prescribed by
Landlord. Any such graphic not approved may be
removed by Landlord without liability to Tenant for
any loss or damage Tenant may incur. If so removed,
Tenant will pay to Landlord the cost of removal and
restoration.
TRADE 16. Movable equipment, furniture and other trade
FIXTURES fixtures owned by Tenant and installed in the
Premises remain Tenant's property. Any such property
may be removed by Tenant in the ordinary course of
its business and will be removed at the expiration or
earlier termination of this Lease, except that if
Tenant is in default of this Lease, Landlord will
have a lien on the property as security against loss
or damage from the default and the property will not
be removed by Tenant until the default is cured.
Tenant will promptly repair at its expense any damage
to the Premises or any other part of the Building
caused by the removal of the property.
ASSIGNMENT 17. (a) Tenant will not assign or otherwise transfer
OR SUBLEASE this Lease or any interest in this Lease, nor sublet
BY TENANT all or any part of the Premises, nor permit
occupancy of the Premises by anyone other than Tenant
without Landlord's prior written consent. If Tenant
is a corporation, limited liability company or
partnership, transfer of effective control of the
Tenant constitutes an assignment under this Article.
The transfer of effective control will not include
any sale of the outstanding capital stock of Tenant
affected through any recognized stock exchange or
"over-the-counter" market. In determining whether to
give consent, Landlord may consider all relevant
factors, including but not limited to covenants made
by Landlord in any other lease, financing agreement,
or master agreement and the financial background and
status and business history of the proposed assignee,
sublessee or occupant. Consent by Landlord to any
assignment of this Lease or any subletting of the
Premises will not operate as a waiver of Landlord's
rights under this Article. No assignment or
subletting will release Tenant of any of its
obligations or waive any of Landlord's rights under
this Lease. The acceptance of rent from someone other
than Tenant will not be deemed to
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<PAGE> 13
EXHIBIT 10.1
be a waiver of any of the provisions of this Lease or
consent to any assignment of this Lease or subletting
of the Premises.
(b) Notwithstanding the foregoing, if Tenant is
not in default of this Lease no consent will be
required for any merger, consolidation or assignment
to an entity purchasing all or substantially all of
the business of Tenant so long as Tenant gives
Landlord not less than 15 days prior written notice
of the transaction and the surviving Tenant or
assignee has a tangible net worth equal to or greater
than the tangible net worth of the Tenant prior to
such transaction. Landlord will use commercially
reasonable efforts to hold information regarding any
such merger, consolidation or purchase of Tenant
which has not been publicly announced in confidence,
subject to any disclosure required under any mortgage
or other financing for the Project or in enforcement
of this Lease. In addition, Landlord will not
unreasonably withhold its consent to a subletting of
portions of the Premises to a subtenant who in
Landlord's good faith judgment is not inconsistent
with the character of the Building and its other
tenants.
(c) Neither Tenant's rights nor Tenant's interest
in this Lease will pass to any trustee or receiver in
bankruptcy or assignee for the benefit of creditors,
or by operation of law, and this Lease will terminate
automatically upon the happening of any of those
events.
(d) Tenant will reimburse Landlord for any costs
and legal fees reasonably incurred by Landlord in
connection with any proposed transfer of sublease.
Tenant will also pay over to Landlord upon receipt
50% of any rent or other consideration received by
Tenant in connection with any such sublease which
(after deducting the out-of-pocket cost to Tenant, if
any, in effecting the sublease, including reasonable
alteration costs, commissions and legal fees) is in
excess of the Rent for the comparable period (or, if
the sublease is for less than all of the Premises, in
excess of the pro rata portion of the Rent for the
comparable period) and 50% of any consideration
received by Tenant in connection with any other
transfer or this Lease to any third party under
Section 17(a) (after deducting the out-of-pocket cost
to Tenant, if any, in effecting the transfer).
(e) No transfer of this Lease will be effective
unless it is in compliance with this Article and the
transferee has agreed with Landlord in writing to
perform and comply with all of Tenant's obligations
under this Lease. No subletting of all or any part of
the Premises will be effective unless it is in
compliance with this Article and the subtenant has
agreed with Landlord in writing to attorn to Landlord
at Landlord's written request upon any termination of
this Lease prior to the expiration of the sublease.
SUBORDINATION 18. (a) This Lease is subject and subordinate to all
ground or underlying leases now or hereafter
affecting all or any part of the Project and to the
lien of any mortgage or deed of trust in any amount
now or hereafter placed on all of any part of the
Project or on any interest in the Project, and any
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EXHIBIT 10.1
renewal, modification, consolidation, replacement or
extension of any of those encumbrances. However, any
such subordination will not be effective unless the
holder of such encumbrance has delivered to Tenant a
written agreement that this Lease and Tenant's rights
under this Lease will not be disturbed by such holder
so long as Tenant is not in default of this Lease
beyond any applicable notice and cure periods, and
Landlord will use commercially reasonable efforts to
cause the holder of the initial financing on the
Project to enter into a subordination,
non-disturbance and attornment agreement in form
reasonably acceptable to Tenant. Moreover, if the
holder of any first mortgage or first deed of trust
on the Project so elects, this Lease will in whole or
in part be deemed prior in lien to such first
mortgage or first deed of trust regardless of the
date of recording. Tenant will within 20 days after
Landlord's request execute and deliver without
further consideration any instruments desired by
Landlord or the lessor of any ground or underlying
lease or holder of any mortgage or deed of trust on
the Project evidencing the priority or subordination
of this Lease to such ground or underlying lease or
to the lien of such mortgage or deed of trust.
(b) Tenant will upon the request of the successor
in interest of Landlord following termination of any
ground or underlying lease or repossession in lieu of
termination, or foreclosure of any mortgage or deed
of trust or conveyance in lieu of foreclosure,
whether voluntary or by operation of law, attorn to
and become the tenant of the successor in interest,
but the successor in interest will not be liable for
any act or omission of Landlord, or subject to any
offsets or defenses Tenant may have against Landlord,
or subject to any repayment of the Security Deposit
made to Landlord except to the extent such Security
Deposit is transferred to such successor in interest,
or bound by any prepayment of Rent more than one
month in advance or by any amendment or modification
of this Lease made without the consent of the lessor
of the ground or underlying lease or holder of the
mortgage or deed of trust.
ACKNOWL- 19. Within 20 days after the request of Landlord or
EDGEMENT Tenant, the other party will execute, acknowledge
and deliver a statement addressed to the requesting
party or any prospective mortgagee, assignee,
transferee or others designated by the requesting
party certifying that this Lease is in full force and
effect and has not been modified or amended except as
set out in the statement, the date of commencement
and expiration of the Term, the date to which Rent
has been paid, that there are no current defaults by
Landlord or Tenant except as set out in the
statement, and as to any other matters pertaining to
this Lease as may be reasonably requested. Any
mortgagee, assignee, transferee or others designated
by the requesting party will be entitled to rely upon
the statement given under this Article.
INSURANCE 20. (a) Tenant will procure and maintain, at its own
cost and expense, commercial public liability
insurance with contractual liability coverage
insuring Tenant and Landlord (and any other parties
reasonably requested by Landlord) from all claims,
demands or actions for injury or death or
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EXHIBIT 10.1
property damage in or about the Premises in amounts
which are from time to time reasonably required by
Landlord, but not less than $2,000,000 combined
single limit for injury or death and damage to
property, workers' compensation insurance within
statutory limits covering Tenant's employees in the
Premises, and fire insurance with extended coverage
and water damage insurance in amounts sufficient to
fully cover all improvements in or about the Premises
installed by or on behalf of Tenant and all property
in the Premises not owned by Landlord. The insurance
will be in a form and with an insurer reasonably
acceptable to Landlord and will not be subject to
cancellation or material change except after at least
10 days' written notice to Landlord. Each policy or a
duly executed certificate, together with satisfactory
evidence of the payment of premiums, will be
deposited with Landlord before the Commencement Date
and at least 30 days before the expiration of the
policy.
(b) Landlord will procure and maintain at
Landlord's cost (subject to Tenant's participation by
payment of Tenant's Share of Estimated Operating Cost
and any Operating Cost Adjustment) fire and extended
coverage insurance covering the Building and all
property of Landlord in the Building and commercial
liability insurance, with coverage and in amounts not
less than those which from time to time are
customarily carried by prudent owners of comparable
buildings in metropolitan Minneapolis-Saint Paul. At
the request of Tenant, Landlord will provide Tenant
with a certificate evidencing such insurance.
SURRENDER OF 21. Upon the expiration or earlier termination
PREMISES of this Lease, Tenant at its expense will immediately
(i) remove Tenant's goods and effects and those of
all persons claiming under Tenant; and (ii) surrender
the Premises to Landlord peaceably and quietly in as
good order and condition as they were in on the
Commencement Date or were thereafter placed by
Landlord, reasonable wear and tear excepted. If
Landlord so requests, Tenant at its cost will remove
any alterations, additions or improvements which
require Landlord's approval and were made to the
Premises without Landlord's written approval and
restore the Premises to the same condition as the
Premises was in prior to the unapproved alteration,
addition or improvement. Any property of Tenant left
in the Premises after expiration or 10 days after any
earlier termination of this Lease will be deemed
abandoned and may at Tenant's expense be disposed of
by Landlord as Landlord deems expedient.
QUIET 22. Tenant, on paying the rent and performing its
ENJOYMENT obligations under this Lease, will peacefully have,
hold and enjoy the Premises subject to the terms of
this Lease.
BUILDING 23. (a) Subject to participation by Tenant by payment
OPERATION of Additional Rent, Landlord will provide during
Tenant's occupancy of the Premises the following
services in accordance with standards for first-class
buildings of similar age and use in the community:
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EXHIBIT 10.1
(i) standard janitorial service in
the Premises Monday through Friday exclusive of
legal holidays,
(ii) heating, cooling, and ventilation for
normal use and occupancy of the Premises during
normal business hours for the Building,
(iii) electric power in the Premises for normal
office lighting and for standard office
equipment not in excess of Tenant's pro rata
share of the Building electrical capacity and
service,
(iv) replacement of Building standard
fluorescent tubes, light bulbs and ballasts in the
Premises,
(v) access to and egress from the Premises,
including elevator service in common with other
tenants if the Premises is located above street
level,
(vi) domestic running water and necessary
supplies in common washrooms for general use by
occupants of the Building, and
(vii) maintenance of Common Areas.
(b) If Landlord from time to time reasonably
determines that the use of any utility or service
provided by Landlord in the Premises is
disproportionate to the use of other occupants,
Landlord will separately charge Tenant for the excess
cost attributable to such disproportionate use. If
the utility or service is not metered or is supplied
to the Premises through meters common to other space,
Landlord will determine such excess use by
engineering calculations taking into account the load
factor, hours of use, and portion of the space to
which such utility or service is provided. Landlord
will deliver to Tenant Landlord's good faith estimate
of the excess cost of providing such utility or
service and Tenant will pay to Landlord monthly in
advance and without notice the amount of Landlord's
estimate. Landlord's cost will include the cost of
separately measuring and billing the utility service.
At the end of each calendar year, Landlord will
determine the actual cost of providing such utility
or service and adjustments will be made in the same
manner as an Operating Cost Adjustment and Tenant
will have the same rights to dispute such excess
costs in the same manner as provided for Additional
Rent. The excess cost of any such disproportionate
use will not be included in the Operating Cost Cap.
(c) Tenant will not install in the Premises
without Landlord's prior written consent any
equipment which generates sufficient heat to affect
the temperature otherwise maintained in the Premises.
If the equipment requires additional air conditioning
capacity above that provided by the
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EXHIBIT 10.1
Building system, the additional installation and
operating cost will be the obligation of Tenant and
will not be included in the Operating Cost Cap.
(d) Landlord will make available 24-hour
heating and cooling to the Premises subject to such
reasonable advance notice and regulations as Landlord
may adopt from time to time. Landlord will provide
any other service requested by Tenant in amounts in
excess of Building standard if Landlord is reasonably
able to provide the additional amounts from existing
equipment or otherwise agrees to provide the
additional amounts. Tenant will pay Landlord's cost
of providing any such additional services (including
a reasonable charge based on Landlord's cost of
administration) in the same manner as payment of
Additional Rent, and Tenant will have the same rights
to dispute such costs in the same manner as provided
for Additional Rent. The cost of any such additional
service will not be included in the Operating Cost
Cap.
(e) Landlord will keep the existing cafeteria,
exercise room and auditorium in the Common Areas in
operation for use by tenants and occupants during
reasonable hours, provided as to the cafeteria at
least 60% of the Building is occupied and that
operation of such cafeteria by the cafeteria operator
remains commercially viable.
(f) Landlord will not be liable in damages or
otherwise if any service to be provided by Landlord,
or other supplier is interrupted or terminated
because of necessary repairs, installations or
improvements or any cause beyond the control of
Landlord, nor will any such event be construed as an
eviction of Tenant, work an abatement of rent, or
relieve Tenant from fulfilling any obligation of the
Lease. Under no circumstances will Landlord be liable
for consequential damages arising from the failure to
provide any service or the interruption or
termination of any service. However, to the extent
all or any portion of the Premises is rendered
unusable by reason of any such event, the Base Rent
and Additional Rent will be proportionally reduced
from three days after notice from Tenant that the
Premises are unusable until the Premises are again
able to be used. If any of the equipment or machinery
used by Landlord in supplying the services breaks
down or for any cause ceases to function properly,
Landlord will use reasonable diligence to make the
necessary repair or replacement.
(g) Landlord will be entitled to cooperate
voluntarily in any reasonable manner with the efforts
of any governmental agency or utility supplier in
reducing energy or other resource consumption or in
coordinating other services so long as Tenant's use
of the Premises in its business is not materially
affected thereby.
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EXHIBIT 10.1
RIGHTS 24. (a) Landlord, its agents, representatives or
RESERVED TO designees, may enter the Premises at all reasonable
LANDLORD hours to inspect the Premises, to make repairs,
alterations or additions to the Premises, the
Building or other improvements, to show the Premises
to prospective tenants, purchasers or mortgagees, or
for other reasonable purposes as Landlord deems
necessary or desirable. Except in an emergency or for
routine services such as cleaning and janitorial
services, Landlord will consult with or give Tenant
reasonable notice at the Premises prior to such
entry. Entry for showing the Premises to prospective
tenants may only be made when Tenant is in default or
during the last six months of the Term.
(b) Landlord may install, use, maintain,
repair, and replace above the finished ceiling
surface, below the finished floor surface, and in the
walls and mechanical shafts within the Premises any
pipes, ducts, conduits, wires, and other equipment
for service to other parts of the Building or other
improvements.
(c) Landlord may make changes in or additions
to any part of the Building or other improvements
outside the Premises and may alter or relocate any
public areas and special service areas in or serving
the Building, provided that such changes will not in
any material way permanently impair access to or
usability of the Premises and, so long as Tenant
occupies the largest square footage of Rentable Area
of any tenant in the Building, any such changes or
additions will be reviewed with Tenant. The parties
contemplate making certain renovations to the
Building lobby area or other public spaces as
provided under and subject to the terms of Article 9
of Exhibit E.
(d) Landlord may change the name or address of
the Building on 30 days' notice to Tenant, provided
that so long as Tenant occupies the largest square
footage of Rentable Area of any tenant in the
Building the name will not be changed without the
prior written consent of Tenant, which consent will
not be unreasonably withheld, delayed or conditioned.
(e) In entering the Premises or carrying out
any work under this Article, Landlord will not
interfere with Tenant's use of the Premises and
operation of its business any more than is reasonably
necessary under the circumstances and will repair any
damage to the Premises caused by the work. Landlord
will not be liable in damages or otherwise for
interference with Tenant's use of the Premises or
operation of its business, nor will the entry or work
be construed as an eviction of Tenant, work an
abatement of rent, or relieve Tenant from fulfilling
any obligation under this Lease.
ASSIGNMENT 25. Landlord may sell, convey, transfer or assign,
BY LANDLORD in whole or in part, its rights and obligations under
this Lease and in the Project subject to the rights
of Tenant under this Lease, and Tenant will attorn to
the transferee. In connection with such transaction,
Landlord will also transfer any Security Deposit to
the transferee.
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EXHIBIT 10.1
CONDEMNA- 26. If the entire Premises are taken or condemned for
TION any public purpose (or purchased under threat of
taking) this Lease will terminate as of the date of
taking. If part of the Project is so taken or
condemned and Landlord determines that substantial
alteration, reconstruction or demolition of a
substantial part of the Building or of that portion
of the Building in which the Premises are located is
necessary or desirable, whether or not the Premises
are affected thereby, or that sufficient proceeds
from the condemnation award are not made available
for Landlord to restore the remainder of the
Premises, Landlord may terminate this Lease as of the
date of taking upon giving notice to Tenant within 60
days after the date of taking. If more than 25% of
the Rentable Area of the Premises (or a substantial
part of the parking or other Common Areas) is so
taken or condemned and as a result thereof the
Premises remaining are not reasonably able to be used
by Tenant for the purposes for which the Premises
were leased, Tenant may terminate this Lease as of
the date of taking upon giving notice to Landlord
within 60 days after the date of taking. If a portion
of the Premises is affected by such taking or
condemnation and this Lease is not so terminated,
Landlord will promptly restore the remainder of the
Premises to as near the condition which existed prior
to the taking as reasonably possible, the Rentable
Area used to calculate the Base Rent and Additional
Rent will be reduced for the period following the
date of taking to reflect the reduction in the
Rentable Area of the Premises and the Building, and
Tenant will promptly repair and replace any
merchandise, movable equipment, furniture, and other
trade fixtures and personal property to as near the
condition as which existed prior to the taking as
reasonably possible. The entire award or other
compensation for any taking or purchase of the fee
and leasehold will belong to Landlord, but Landlord
will not be entitled to any award made to Tenant for
movable equipment, furniture and other trade fixtures
owned by Tenant or for Tenant's relocation or moving
expenses.
DAMAGE TO 27. If that portion of the Building in which the
BUILDING Premises are located is damaged or destroyed by fire
or other casualty and Landlord is unable to obtain
the necessary approvals, consents and permits which
would enable Landlord to repair and restore the
Premises within 180 days after the damage or
destruction, either Landlord or Tenant may terminate
this Lease by giving written notice to the other
within 90 days after the damage or destruction. If
all or a substantial part of the Building is damaged
or destroyed (whether or not the Premises are
affected thereby) and Landlord determines that
substantial alteration, reconstruction or demolition
of a substantial part of the Building is necessary or
desirable, or that sufficient insurance proceeds are
not made available for Landlord to repair any such
damage or destruction, Landlord may terminate this
Lease by giving written notice to Tenant within 90
days after the damage or destruction. If a portion of
the Premises is damaged by fire or other casualty and
this Lease is not so terminated, Landlord will
promptly restore the Premises to as near the
condition which existed prior to such damage or
destruction as reasonably
19
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EXHIBIT 10.1
possible, and the Base Rent and Additional Rent will
be reduced during the time the Premises are
untenantable in the proportion that the untenantable
portion of the Premises bears to the entire Premises.
Landlord will not be responsible to Tenant for
damages to or destruction of merchandise, movable
equipment, furniture and other trade fixtures and
personal property in or about the Premises regardless
of the cause of damage or destruction, and Tenant
will promptly repair and replace those items to as
near the condition which existed prior to the damage
or destruction as reasonably possible. Landlord will
have the exclusive right to all insurance proceeds
relating to any improvements (other than Tenant's
trade fixtures and personal property) installed by or
on behalf of Tenant.
HOLDING OVER 28. (a) If Tenant holds over after expiration or
earlier termination of this Lease without written
consent of Landlord, Tenant will become a tenant at
sufferance only at a rental rate equal to 150% of the
Base Rent in effect for the month immediately
preceding the expiration or termination (but in no
event less than the fair rental value) plus all other
Rent which would be payable had the Term remained in
effect and otherwise subject to the terms of this
Lease. No unauthorized holding over will operate to
extend the Term and Tenant will indemnify Landlord
against all claims for damages of any kind resulting
from the holdover.
(b) Any holding over with the consent of
Landlord in writing will be deemed an occupancy of
the Premises as a tenant from month to month, at a
monthly rental equal to the installment of Base Rent
in effect for the month preceding the expiration or
termination plus all other Rent which would be
payable had the Term remained in effect, or such
other amount as is set out in the consent, and
subject to all other terms and conditions of this
Lease to the extent they are applicable to a month to
month lease terminable by either party on 30 days
written notice to the other.
LEGAL COSTS 29. If Landlord or Tenant places the enforcement of
this Lease, the collection of any amount due or to
become due, or the recovery of possession of the
Premises in the hands of an attorney or files suit
upon the other party, the prevailing party will be
entitled to reimbursement of its reasonable
attorneys' fees and court costs.
DEFAULT BY 30. (a) Tenant will be in default of this Lease if
TENANT (i) Tenant fails to pay any sum owing by it under
this Lease within five days after the due date; or
(ii) Tenant fails to comply with the assignment and
subletting provisions under Article 17; or (iii)
Tenant fails to observe or perform any other
provision of this Lease within 30 days after notice
of such failure (or if such breach cannot reasonably
be cured within such 30-day period such additional
period as may be required using all due diligence),
or (iv) Tenant abandons the Premises or fails to take
possession of the Premises when available for
occupancy or fails to begin conducting business in
the Premises as soon as
20
<PAGE> 21
EXHIBIT 10.1
practicable after taking possession, or (v) the
interest of Tenant under this Lease is levied on
under execution or other legal process, or any
petition filed by or against Tenant to declare Tenant
a bankrupt or to delay, reduce or modify Tenant's
debts or obligations, or any petition is filed or
other action taken to reorganize or modify Tenant's
capital structure (if Tenant is a corporation or
other entity) or Tenant is declared insolvent
according to law, or any assignment of Tenant's
property is made for the benefit of creditors, or a
receiver or trustee is appointed for Tenant or its
property (provided that no levy, execution, legal
process or petition filed against Tenant constitutes
a breach of this Lease if Tenant vigorously contests
by appropriate proceedings and it is removed or
vacated within 60 days from the date of its creation,
service or filing). Vacation of the Premises will not
be deemed to be an abandonment so long as Tenant pays
the Rent and performs all of its other obligations as
and when required under this Lease, but Landlord will
have the right to terminate this Lease upon written
notice to Tenant if all or substantially all of the
Premises are vacated for more than 90 consecutive
days and upon such termination and subject to return
of any Security Deposit held by Landlord neither
Landlord or Tenant will have any further obligation
or liability under this Lease for matters arising or
accruing after the date of such termination.
(b) If Tenant is in default of this Lease,
Landlord may (i) terminate this Lease and recover
forthwith as damages the amounts provided in this
Article; or (ii) terminate Tenant's right of
possession and repossess the Premises and remove all
persons or property from the Premises, without demand
or notice to Tenant and without terminating this
Lease, and recover forthwith as damages the amounts
provided in this Article; or (iii) whether or not
this Lease is terminated or Landlord repossesses the
Premises for default by Tenant, exercise any other
rights or remedies provided at law or in equity. If
this Lease is terminated or Landlord repossesses the
Premises for default by Tenant, Landlord may (but
will not be obligated to) relet all or any part of
the Premises for the account of Tenant for the rent
and upon the terms Landlord deems advisable and may
make changes, additions, improvements, redecorations,
and repairs to the Premises as Landlord deems
advisable, without affecting Tenant's liability under
this Lease.
(c) If this Lease is terminated or Landlord
repossesses the Premises for default by Tenant,
Tenant will pay to Landlord on demand the sum of (i)
the unpaid Rent owing at the time of termination or
repossession, as the case may be; and (ii) all
expenses reasonably incurred by Landlord in
terminating, repossessing, and reletting including
but not limited to costs of changes, additions,
improvements, redecorations and repairs, brokerage
and legal fees, and the collection of rent; and (iii)
any deficiency between the Rent for the remainder of
the Term and the payments, if any, received by
Landlord from any reletting of the Premises or, if
elected by Landlord as liquidated and final damages
for lost rent, in addition to the monthly
deficiencies accruing through the date of such
election, a lump sum equal to the present value
(calculated by discounting at the stated rate of
interest
21
<PAGE> 22
EXHIBIT 10.1
payable under any first mortgage or deed of trust on
the Project, or 1% per annum over the discount rate
of the Federal Reserve Bank of Minneapolis, whichever
is less) as of the date of such election of the
amount by which Rent for the remainder of the Term
exceeds the then reasonable rental value of the
Premises over the remainder of the Term, and (iv) any
other sums, interest, or damages owed by Tenant to
Landlord under this Lease. In determining the Rent
for the remainder of the Term, Tenant's Share of
Actual Operating Costs and similar charges will be
assumed to be the same as for the calendar year
immediately preceding the date of such election or
such shorter period as may have elapsed since the
Building was first occupied by tenants.
(d) Failure of Landlord to declare a default
immediately upon occurrence or any delay in taking
any action in connection with the default will not
waive the default, and Landlord may declare the
default at any time thereafter.
(e) If Tenant defaults in the observance or
performance of any of its obligations under this
Lease, Landlord may (but without obligation and
without limiting any other remedies which it may have
by reason of the default) cure the default, and
Tenant will pay the costs of curing the default to
Landlord upon demand.
LANDLORD 31. In the event of any alleged default in the
DEFAULT obligation of Landlord under this Lease, Tenant will
deliver to Landlord written notice listing the
reasons for Landlord's default and Landlord will have
30 days following receipt of such notice to cure such
alleged default or, in the event the alleged default
cannot reasonably be cured within a 30-day period, to
commence action and proceed diligently to cure such
alleged default. A copy of such notice to Landlord
will be sent to any lessor of any ground or
underlying lease or holder of any mortgage or deed of
trust of which Tenant has been notified in writing,
and any such lessor or holder will also have the same
period of time and the same rights to cure such
alleged default. Notwithstanding the foregoing,
Tenant may upon such notice exercise any right or
remedy Tenant may have to retain possession of the
Premises on account of a breach of Landlord's
covenant of quiet enjoyment whether or not such
30-day notice period has expired.
INDEMNITY 32. (a) Landlord and its agents, officers and
employees will not be liable for any damage to the
property of Tenant or its subtenants or their
respective agents, officers, employees, customers or
invitees to the extent such damage is caused by any
reason other than the negligence or willful
misconduct of Landlord, its agents, officers or
employees, or for any injury or damage to person or
property occurring in the Premises or caused by any
negligence or willful misconduct of Tenant, its
agents, officers, employees, customers and invitees.
Tenant will indemnify, defend and hold harmless
Landlord from all claims, costs and liabilities
arising out of any such injury or damage.
22
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EXHIBIT 10.1
(b) Subject to Section 32(a), Landlord will
indemnify, defend and hold harmless Tenant from all
claims, costs and liabilities arising out of any
injury or damage to person or property occurring
within the Common Areas or to the extent caused by
the negligence or willful misconduct of Landlord, its
agents, officers or employees.
WAIVER OF 33. Anything in this Lease to the contrary
SUBROGATION notwithstanding, Landlord and Tenant each waive any
right of recovery, claim, action or cause of action
against the other and the agents, officers and
employees of the other for any loss or damage that
may occur to the Premises or any improvements or
property of Tenant in or about the Premises or to the
Building or any improvements or property of Landlord
in or about the Building by reason of fire or other
cause which would be insured under the terms of
standard fire and extended coverage insurance
policies, regardless of cause or origin, including
negligence of the other party, its agents, officers
or employees, and agrees that no insurer will hold
any right of subrogation against the other party.
Each party will cause each insurance policy obtained
by it to provide that the insurer waives all right of
recovery by way of subrogation against either party
in connection with any damage covered by the policy.
SEVERABILITY 34. If any term or provision of this Lease or the
application of it to any person or circumstance is
invalid or unenforceable, the remainder of this Lease
or the application of provision to other persons or
circumstances will not be affected, and each
provision of this Lease will be valid and enforceable
to the extent permitted by law.
WAIVER OF 35. Failure of Landlord to insist in any one or more
COVENANTS instances upon strict performance of any obligation
of Tenant under this Lease or to exercise any right
available to it under this Lease will not be
construed as a waiver or a relinquishment for the
future of the obligation or right and the obligation
or right will continue and remain in full force and
effect. The receipt by Landlord of rent with
knowledge of a breach in any obligation of Tenant
under this Lease will not be deemed a waiver of the
breach, and Landlord will not be deemed to have
waived any provision of this Lease until expressed in
writing and signed by Landlord.
NOTICES 36. All notices, demands, consents and approvals
given under this Lease will be in writing and will be
deemed to have been fully given to Tenant when
personally delivered to Tenant or Tenant's agent
(including but not limited to delivery by messenger
or courier with evidence of receipt) or when
deposited in the United States mail, certified or
registered, return receipt requested, postage
prepaid, and addressed to Tenant at the Premises, or
to Landlord when deposited in the United States mail,
certified or registered, return receipt requested,
postage prepaid, and addressed to Landlord at the
same address as Rent is then to be paid. Either party
may designate a different address on at least 15
days' written notice to the other.
23
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EXHIBIT 10.1
SECURITY 37. If Tenant has deposited with Landlord a Security Deposit,
DEPOSIT the Security Deposit will be held without liability to secure
the faithful performance by Tenant of its obligations under this
Lease. The Security Deposit will be deposited by Landlord in an
interest-bearing account and so long as Tenant is not in default
of this Lease any interest accrued on such account will be paid
to Tenant at the end of each calendar year during the Term.
Landlord may apply or retain the Security Deposit to cure any
default or reimburse Landlord for any sum expended for the
default, and Tenant will upon demand restore the security to the
original sum deposited. However, if Tenant has defaulted on its
obligation to pay Rent twice in any twelve-month period, Tenant
will upon demand increase the Security Deposit to an amount
equal to two months' installments of the Rent then-currently
payable under this Lease. The Security Deposit will not be
mortgaged, assigned, transferred or encumbered by Tenant without
Landlord's prior written consent. If Tenant faithfully performs
its obligations under this Lease, the Security Deposit will be
returned to the then holder of Tenant's interest under this
Lease at the expiration of the Term except that Landlord may
retain one-half of the Security Deposit until the final amount
due for any Operating Cost Adjustment has been determined and
paid in full.
MISCELLA- 38. (a) This Lease is binding upon and inures to the benefit
NEOUS of Landlord, its successors and assigns, and is binding upon and
inures to the benefit of Tenant, its successors and any assigns
approved by Landlord under this Lease. The obligations of this
Lease run with the Land, except that the Landlord and each
successor in interest of Landlord will be liable for obligations
accruing only during its period of ownership.
(b) The rights and remedies of Landlord under this Lease
are cumulative and none will exclude any other rights or
remedies allowed by law or equity. This Lease is declared to be
a Minnesota contract, and all of its terms will be construed
according to the laws of the State of Minnesota.
(c) Time is of the essence of each obligation of this
Lease in which time is a factor.
(d) The captions in this Lease are for convenience only
and are not part of this Lease.
(e) This Lease may be simultaneously executed in several
counterparts, each of which will be an original and all of which
will constitute but one and the same instrument.
(f) The officers or managers executing this Lease on
behalf of Tenant or Landlord will have no personal liability for
the obligations of Tenant or Landlord under this Lease.
(g) The submission of this document for examination and
negotiation
24
<PAGE> 25
EXHIBIT 10.1
does not constitute an offer to lease or a reservation of or
option for the Premises. This document becomes effective and
binding only upon the execution and delivery of it by Landlord
and Tenant.
(h) All negotiations, considerations, representations
and understandings between Landlord and Tenant are incorporated
in this Lease and may be modified or altered only by agreement
in writing between Landlord and Tenant. No act or omission of
any employee or agent of Landlord or of Landlord's broker will
alter, change or modify any of the provisions of this Lease.
(i) Landlord, its partners, beneficiaries of trust,
members, officers, agents and employees and any estate, heirs,
personal representatives, successors or assigns of any of them
will have no personal liability as to any of the obligations of
Landlord under this Lease. If Landlord defaults or breaches any
of its obligations under this Lease, Tenant will look solely to
the estate and property of Landlord in the Project for the
collection of any judgment (or any other judicial procedure
requiring the payment of money by Landlord) and no other
property or asset will be subject to levy, execution or other
procedure for satisfaction of Tenant's remedies.
(j) Landlord will pay any brokerage commissions owing to
Frauenshuh Companies in connection with this Lease. Landlord and
Tenant will indemnify and hold harmless the other from all
claims for compensation, commissions and charges by any other
broker or agent engaged to represent it in connection with this
Lease or the negotiation of it.
(k) Landlord and Tenant disclaim any intention to create
a joint venture, partnership or agency relationship.
IN WITNESS OF THIS LEASE, Landlord and Tenant have properly executed it as of
the date set out in the heading.
LANDLORD: DRF HOLDINGS LLC
By s/s David Frauenshuh
---------------------------------
- ---
Its Manager
TENANT: NET PERCEPTIONS, INC.
By s/s Thomas Donnelly
---------------------------------
- ---
Its Chief Financial Officer
25
<PAGE> 26
EXHIBIT 10.1
And by
-----------------------------
Its
--------------------------
26
<PAGE> 27
EXHIBIT 10.1
EXHIBIT A
DESCRIPTION OF LAND
Lot 2, Block 1, Edina Office Center, except that part thereof lying Southerly
and Westerly of the Westerly right-of-way of West 77th Street as described in
Document No. 1321642, according to the recorded plat thereof, Hennepin County,
Minnesota;
Together with appurtenant easements and rights and subject to easements, rights,
reservations and restrictions burdening said land.
A-1
<PAGE> 28
EXHIBIT 10.1
EXHIBIT B
BUILDING REGULATIONS
ACCESS 1. Landlord may from time to time establish security
regulations for the purpose of regulating access to the
Building. Tenant will abide by all security regulations
so established. During other than normal Building hours,
access to the Building or to the halls, corridors,
elevators and stairways in the Building may be
restricted so long as reasonable access to the Premises
is available at all times.
COMMON 2. Tenant will not place or store anything in or
AREAS obstruct in any way any sidewalk, entrance, exit,
loading or shipping area, hall, corridor, elevator,
stairway or other common or special service area. The
entrances, exits, loading or shipping areas, halls,
corridors, elevators, stairways and other common or
special service areas are not for the use of the general
public and Landlord will in all cases retain the right
to control and prevent access to them by all persons
whose presence in the judgment of Landlord will be
prejudicial to the safety or security of the Building or
its occupants.
PARKING AREAS 3. Use of any parking area will be subject to such rules
as may be promulgated from time to time by Landlord. The
parking areas are made available only as a convenience
to Tenant and its employees, customers and invitees, and
Landlord will not be liability for any theft of or loss
or damage to any vehicle using the parking areas or the
accessories to or contents of any such vehicle. Tenant
will not use or permit use of the parking areas for the
overnight storage of automobiles or other vehicles
without the prior written consent of Landlord.
DIRECTORIES 4. The directories of the Building will be provided by
Landlord for displaying the name and location of the
tenants of the Building. Any additional names requested
by Tenant to be displayed in the directories must be
approved by Landlord in writing and, if so approved,
will be provided at the sole expense of the Tenant.
SIGNS 5. No sign, advertisement or other visual aid will be
painted, affixed or otherwise exposed on the windows,
doors or any part of the exterior of the Building, on
the Land or in the parking area or other Common Areas,
without the prior written approval of the Landlord. All
interior identification signs will be in accordance with
the Building standards and submitted to Landlord for
written approval.
LARGE & HEAVY 6. Tenant will be solely responsible for furniture,
ARTICLES freight and other large or heavy articles brought into
the Building. Such articles may be brought into or
removed from the Premises only at times and in the
manner designated by Landlord, using service doors and
freight elevators designated for such
B-1
<PAGE> 29
EXHIBIT 10.1
purpose. All damage done by moving such articles will be
repaired at the expense of Tenant. Tenant will not
overload any floor while moving or maintaining any heavy
articles. Landlord may direct the location of heavy
articles and, if considered necessary by Landlord,
require supplementary supports at the expense of Tenant
to properly distribute the weight.
APPEARANCE 7. Articles will not be placed in the Premises near the
glass of any door, wall or window which may be unsightly
from outside the Premises. No articles will be placed on
any window ledge. No awnings or similar devices will be
placed on the outside windows in the Premises. No
blinds, shades, draperies or other forms of inside
window covering other than those provided by Landlord
may be installed in the Premises. Tenant will not paint
or decorate the Premises or install any floor coverings
without in each instance obtaining the prior written
consent of Landlord. No nails, screws or other fasteners
will be driven into exterior walls or other vapor
barrier.
PROTECTING 8. Before leaving the Premises unattended, Tenant will
PREMISES close and securely lock all windows, doors or other
means of entry to the Premises and shut off all
utilities, lights and equipment in the Premises. Tenant
will be responsible for keeping the Premises secure and
protecting the Premises and all property and persons in
the Premises from theft, robbery, pilferage and other
crimes.
LOCKS 9. No additional or replacement locks will be placed on
any of the doors or windows without the prior written
consent of Landlord. No keys for the Premises will be
made other than those provided by Landlord. Upon
termination of this Lease or of Tenant's possession,
Tenant will surrender all keys to the Premises and all
keys for offices, rooms or toilet rooms which have been
furnished to Tenant.
UTILITIES 10. Tenant will not waste or overuse any utilities
furnished to the Premises, and will cooperate fully with
Landlord to assure the most effective and energy
efficient operation of the Building. Tenant will not
install or change any signal, communication, alarm or
other utility or similar service connections without the
prior written approval of Landlord. Tenant will not
install in the Premises any equipment (including
computer or data processing equipment) which requires a
substantial amount of electrical current without the
advance written consent of Landlord. Tenant will
ascertain from Landlord the maximum amount of electrical
load which can safely be permitted in the Premises, and
will not connect a greater load than such safe capacity.
Tenant will keep corridor doors closed and will not open
any windows. Tenant will lower and adjust any venetian
blinds, shades or draperies on the windows in the
Premises in accordance with Landlord's directions.
Toilets, urinals, wash bowls and the other toilet room
apparatus will not be used for any purpose other than
that for which they were constructed, and no foreign
substance will be thrown therein.
B-2
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EXHIBIT 10.1
OUTSIDE 11. Tenant may obtain commercially-supplied ice, food,
SERVICES beverage, towel or other similar services on the
Premises from reputable third-party vendors selected by
Tenant so long as such vendors abide by reasonable
regulations fixed by Landlord concerning the manner of
deliveries. No vending machines of any description will
be installed, maintained or operated in the Premises or
the Building without the prior written consent of
Landlord. Landlord hereby consents to installation of
vending machines within the kitchenette area of the
Premises for the purpose of dispensing to Tenant's
employees beverages and snack items provided by outside
vendors.
INTOXICATION 12. Landlord reserves the right to exclude or expel from
the building any person who, in the judgment of
Landlord, is intoxicated or under the influence of
liquor or other drugs, or who will in any manner do any
act in violation of any of the rules and regulations of
the Building.
FIXTURE 13. Any and all movable furniture, fixtures and goods
MOVEMENT will be moved by Tenant and at Tenant's expense whenever
such moving is necessitated for the purpose of Building
repair or maintenance to be performed by Landlord. Any
other fixtures installed by Tenant at locations by
Landlord will be moved by Landlord at Landlord's cost.
PROHIBITIONS 14. Tenant will not (a) conduct itself in a manner
inconsistent with the comfort or convenience of other
tenants and the character of the Building, (b) install
or operate any mechanical device or space heater in or
about the Premises, (c) permit preparation, warming, or
dispensing of food or beverages in the Premises except
in accordance with arrangements approved by Landlord,
(d) use the Premises for housing, lodging or sleeping
purposes, (e) place any radio or television antennae on
the roof or on or in any part of the inside or outside
of the Building other than the inside of the Premises,
(f) operate any radio, television, or other sound
producing instrument or device inside or outside the
Premises which may be heard outside the Premises, (g)
use any illumination or power for the operation of any
equipment other than electricity, (h) operate any
electrical device from which may emanate electrical
waves which may interfere with or impair computer
equipment or radio or television broadcasting or
reception from or in the Building or elsewhere, (i)
bring or permit to be in the Building any bicycle or
other vehicle, or dog (except specially trained dogs in
the company of a blind or deaf person) or other animal
or bird, (j) permit any objectionable noise or odor to
emanate from the Premises, (k) disturb, solicit or
canvass other tenants or occupants of the Building
(except that Tenant will be permitted to reasonably
market use of its conference space in the Premises by
other tenants), (l) do anything in or about the Premises
tending to create or maintain a nuisance or do any act
tending to injure the reputation of the Building, (m)
use the name or picture of the Building in any
letterheads, envelopes, or advertisements except with
Landlord's prior written consent, which consent is
hereby granted, or (n) throw or drop any article from
any window or other opening in the Building.
B-3
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EXHIBIT 10.1
MANAGEMENT 15. Service requirements of Tenant will be attended to
OFFICE only upon application at the management office serving
the Building (except that Tenant will be permitted to
market use of the conference space in the Premises by
other tenants).
APPLICATION 16. Tenant will use commercially reasonable efforts to
ensure that its agents and subtenants and the employees,
agents, subtenants, licensees, invitees and contractors
of it and its agents and subtenants comply with these
regulations. These regulations may be added to or
amended by Landlord for the benefit of all tenants of
the Project, and such amendments will become affective
immediately upon notification.
B-4
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EXHIBIT 10.1
EXHIBIT C
PLAN OF PREMISES
C-1
<PAGE> 33
EXHIBIT 10.1
EXHIBIT D
CONSTRUCTION PROCEDURES
(TENANT COORDINATED - EXISTING BUILDING)
CONSTRUCTION 1. In this Exhibit D and the Lease:
DEFINITIONS
(a) "Lease" means the Lease of which this
Exhibit D is a part.
(b) "Building Standard" means the quantity and
quality of materials, equipment, finishing, artisanship
and other elements from time to time specified for the
Building.
(c) "Space Planner" means the professional
architect(s) or engineer(s) from time to time engaged by
Tenant at its expense and approved by Landlord for
preparation of the Space Plan.
(d) "Space Plan" means the plans and
specifications (including structural, architectural,
mechanical, and electrical working drawings) prepared by
the Space Planner at Tenant's expense for the supply,
installation, and finishing of improvements in the
Premises such as partitions, doors and hardware,
ceilings, floor covering, window coverings, wall
coverings, and built-ins, wiring, lights and switches,
heating, ventilation and cooling equipment and controls,
telephone and electrical outlets, plumbing and fixtures,
fire protection, fire warning and security systems, and
other mechanical and electrical equipment and facilities
which are attached to and form part of the Building.
(e) "Tenant's Work" means the items supplied,
installed and finished by Tenant at no cost to Landlord
under Article 4.
PREPARATION OF SPACE 2. (a) The design, layout, finishes and equipment
PLAN for the Premises will be compatible with the character
and capacity of the Building, will be determined by
Tenant in accordance with this Exhibit D (subject to
Landlord's approval), and will be set out in the Space
Plan.
(b) As soon as practicable, Landlord will
deliver copies of floor plans, structural drawings,
mechanical drawings and electrical drawings available to
Landlord which provide basic information about the
Premises. Landlord will have no responsibility or
liability for the completeness or reliability of such
plans and drawings.
(c) The Space Planner is responsible to become
familiar with the Building, the plans and drawings
provided by Landlord for the Premises, and the design
criteria and construction procedures adopted by Landlord
to permit completion of proper and adequate structural,
architectural, mechanical and electrical working
drawings as part of the Space Plan for Tenant's Work.
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EXHIBIT 10.1
Tenant will impose and enforce all terms of this Exhibit
on the Space Planner.
(d) The drawings included in the Space Plan will
be blueline drawings and will include floor plans,
interior elevations, structural, architectural,
mechanical and electrical working drawings, and details
of any special installations which will affect the
Building or perimeter walls of the Premises. The
specifications included in the Space Plan will include
all materials and finishes to be used and performance
characteristics for fixtures and equipment. All
materials, equipment, finishes and other elements will
conform with and be of a quality at least equal to
Building Standard. Where applicable, the Space Plan will
include section and elevations for Tenant entries,
details of entry signage (which will conform to
Landlord's sign criteria), reflected ceiling plans, and
mechanical work in the ceiling area. Unless otherwise
agreed by Landlord, all drawings provided by Tenant will
be of uniform size not exceeding 24" x 36" and to a
minimum scale of 1/8" = 1'0". In addition, drawings and
specifications included in the Space Plan will be
provided to Landlord in an electronic format which is
Autocad compatible with layering to match specifications
to be supplied by Landlord.
APPROVAL 3. (a) As soon as practicable after execution of
OF SPACE PLAN the Lease, Tenant will deliver to Landlord six copies of
the complete Space Plan, together with a materials board
and any other information reasonably requested by
Landlord.
(b) Not more than five business days after
receiving the Space Plan, Landlord will notify Tenant
either of its approval of the Space Plan or of the
changes required. If Landlord notifies Tenant that
changes are required, Tenant will within five business
days of that notification submit to Landlord for its
approval the Space Plan amended in accordance with the
changes so required. Tenant will deliver to Landlord
four copies of the approved Space Plan plus one sepia
copy of all drawings included therein. The times
provided in this Article for preparation, delivery and
approval of the Space Plan may be extended upon written
approval of both Landlord and Tenant. After approval of
the Space Plan, Tenant may amend the Space Plan and
deliver the amendments to Landlord and Landlord will
review those amendments, all in accordance with the
procedures previously set out in this Article. No work
will be performed pursuant to the amended Space Plan
until approved by Landlord.
TENANT'S WORK 4. (a) All work involved in completion of the
Premises for occupancy will be carried out by Tenant at
no cost to Landlord. Tenant's Work will be (i) of a
quality at least equal to Building Standard, (ii)
completed in accordance with the Space Plan, (iii)
carried out by contractors approved by Landlord without
unduly interfering with Landlord or the other tenants,
(iv) performed in compliance with Articles 12 and 13 of
the Lease, and (v) carried out with all due diligence
and (subject to circumstances over which Tenant has no
control) completed prior to the Commencement Date.
(b) Notwithstanding anything to the contrary,
the following Tenant's
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EXHIBIT 10.1
Work will be performed by Landlord at Tenant's expense:
(i) all approved modifications to the
base Building structural, heating, cooling,
ventilation, mechanical, electrical, sprinklers
and life safety systems,
(ii) all patching of Building
fireproofing,
(iii) all drilling, cutting, coring or
patching for conduit, pipe sleeves, chases, duct
equipment or openings in any floor, wall, column
or roof of the Building which is approved by
Landlord, and
(iv) all connections to base Building
systems other than low pressure ductwork
connections.
COMPLETION 5. (a) From and after the date Landlord notifies
OF WORK Tenant that the Premises are available for completion of
Tenant's Work, and subject to the terms of the Lease and
this Article, Tenant and the contractors and workers
employed by it will have access to and non-exclusive use
of the Premises to perform Tenant's Work.
(b) To assure that work proceeds efficiently on
the Building, Landlord may from time to time make rules
for coordination of construction work. Tenant will
ensure that all contractors and workers employed by it
are informed of and observe such rules.
(c) Prior to commencement of Tenant's Work,
Tenant and the contractors and workers employed by it
will make appropriate arrangements with Landlord for
performance of Tenant's Work, including arrangements for
material handling and hoisting, material and equipment
storage, time and place of deliveries, hours of work,
power, heating, washroom facilities, scheduling,
security and clean-up.
(d) Tenant will at all times keep the Premises
and adjacent areas free from accumulations of waste
material or rubbish caused by its suppliers, contractors
or workers. If any parts of the Building are occupied,
such waste material and rubbish will in any event be
removed at least daily. At the completion of Tenant's
Work, Tenant will forthwith remove all waste material
and rubbish and all tools, equipment and surplus
materials from the Premises and adjacent areas and will
leave them clean to Landlord's satisfaction. This final
clean-up will include the light fixtures, windows,
heating, cooling and ventilation units, entries and
public spaces affected by Tenant's Work.
(e) Landlord will have no responsibility or
liability with respect to Tenant's Work or attendant
tools, equipment and materials left or installed in the
Building. Landlord may require that neat screens or
hoardings as designed or prescribed by Landlord be
erected at Tenant's expense around Tenant's Work, and
that all work be conducted and all tools, equipment and
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EXHIBIT 10.1
materials be kept behind such screens or hoardings.
(f) Any damage to the Building or other property
of Landlord or others which may be caused by Tenant, any
contractor or worker employed by Tenant, or any other
party engaged in Tenant's Work will be forthwith
repaired by Tenant at Tenant's expense to the
satisfaction of Landlord.
(g) Tenant will reimburse Landlord for any
additional costs and expenses of Landlord caused by
Tenant's failure to carry out Tenant's Work in the
manner required under this Article or resulting directly
or indirectly from any delays caused to Landlord by any
such failure.
(h) Upon completion of Tenant's Work, Tenant at
its cost will prepare and provide to Landlord a copy of
"as-built" drawings and an Autocad diskette of the Space
Plan, marked to show changes made during construction.
RECOVERY OF 6. Tenant will be responsible for the following
COSTS costs incurred by Landlord in connection with Tenant's
Work:
(a) any fees and charges payable by Landlord to
Landlord's architect, engineers or other consultants for
examination of the Space Plan or any amendments thereto;
and
(b) if Landlord performs any of Tenant's Work,
whether at the request of or by agreement with Tenant or
as otherwise provided in this Exhibit D, the direct cost
to Landlord for such work plus 10% of such direct cost
as an administration fee for such work.
Such amounts will be deducted from the cash allowance
payable by Landlord under Article 7. If such amounts
exceed the cash allowance, such excess will be paid in
progress payments as the work proceeds, payable within
10 days of invoice therefor.
CONSTRUC- 7. Tenant will submit to Landlord upon completion
TION of Tenant's Work a sworn statement that Tenant's
ALLOWANCE designers, contractors, subcontractors, workers and
suppliers are paid in full for all work performed and
materials and equipment supplied by them on the
Premises, copies of all invoices received by Tenant for
such work, lien waivers executed by Tenant's
contractors, subcontractors and suppliers for such work,
and such other information as Landlord may reasonably
request to evidence payment for all such work. If Tenant
has completed the Premises in accordance with Tenant's
obligations under this Exhibit D, provided the
"as-built" Space Plan, and is not otherwise in default
of the Lease, Landlord will pay to Tenant within 30 days
after the date of such submittal a cash allowance equal
to the lesser of (i) the amount expended by Tenant for
design and construction of the Premises (including
amounts paid to Landlord in connection therewith under
this Exhibit but excluding any movable equipment,
furniture or other trade fixtures), or (ii) $15.00 for
each square foot of Rentable Area of the Premises.
D-4
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EXHIBIT 10.1
EXHIBIT E
ADDITIONAL PROVISIONS
ACQUISITION 1. This Lease is subject to acquisition of the
OF PROJECT Project by Landlord or its affiliate. If Landlord or its
affiliate has not acquired the Project by May 31, 2000,
or 60 days after full execution of this Lease, whichever
is later, either Landlord or Tenant may terminate this
Lease, and upon such termination the Security Deposit
and any interest accrued thereon will be returned to
Tenant and neither party will have any further rights or
obligations under this Lease. If in connection with such
purchase of the Project Landlord assigns this Lease and
the Security Deposit and any interest accrued thereon to
another entity which assumes the obligations of Landlord
under this Lease, the Landlord executing this Lease will
be relieved and released from all further obligations
under this Lease and Tenant will look to the assignee as
successor to Landlord under this Lease. Subject to any
restrictions on assignment as may be provided under the
terms of Landlord's purchase agreement for the Project,
if for any reason Landlord or its affiliate elects not
to acquire the Project Landlord will assign to Tenant at
Tenant's option the interest of Landlord and its
affiliate in such purchase agreement in consideration
for payment by Tenant to Landlord of any out-of-pocket
costs incurred by Landlord and its affiliate in
connection with the Project (including any earnest money
paid by Landlord under the purchase agreement, any
expenses incurred by Landlord in its due diligence
investigations, and any costs incurred by Landlord in
negotiating leases and other contracts in respect of the
Project). Landlord in connection with such assignment
will provide Tenant with copies of all due diligence
items in its possession related to acquisition of
Project.
EXPANSION 2. The Premises will be expanded on July 15, 2001,
SPACE to include between 18,000 and 31,000 square feet of
Rentable Area ("Expansion Space") as determined by
Landlord in one or more (but not more than three)
locations on the second and fourth levels of the
Building for a term coterminous with the Term of this
Lease. The Expansion Space will be identified by notice
from Landlord given by January 15, 2001. The Expansion
Space will be delivered to Tenant in its "as-is"
condition by no later than May 1, 2001, and Tenant will
have access to the Expansion Space to prepare the
Expansion Space for occupancy. On July 15, 2001, or such
earlier date as Tenant occupies the Expansion Space for
conduct of business, the Rent payable under this Lease
will be increased to include the Rentable Area of the
Expansion Space and all of the terms and provisions of
this Lease will be applicable to the Expansion Space
thereby included in the Premises; provided that the
construction allowance payable in respect of the
Expansion Space under Article 7 of Exhibit D will be the
lesser of (i) the amount expended by Tenant for design
and construction of the Expansion Space (including
amounts paid to Landlord in connection therewith), or
(ii) $15.00 for each square foot of Rentable Area of the
Expansion Space. Landlord and Tenant will execute and
deliver an amendment of this Lease confirming the
inclusion of the Expansion Space in the Premises on the
terms provided above.
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EXHIBIT 10.1
STORAGE 3. [Intentionally Omitted]
SPACE
PARKING 4. So long as Tenant is not in default of this
Lease beyond any applicable notice or grace period,
Landlord will make available to Tenant during the Term
up to ten parking spaces in the climate controlled
parking facilities in the Project. The parking spaces
will be on an unallocated basis and for the sole use of
Tenant's employees. The parking agreement will be on the
standard parking agreement and at a rental rate for each
space of $100 per month during the first five years of
the Term and thereafter at the monthly market rental
rate from time to time in effect. If at any time Tenant
terminates the parking contract for any parking space
for any period of time, Tenant will have no further
right under this Lease to rent such space.
MONUMENT 5. Subject to obtaining all necessary governmental
SIGN approvals, Tenant will have the right at its expense to
place its name on the upper 50% of each face of the
existing monument sign for the Project and Landlord will
have the right to place the name of any other tenant
leasing at least 75,000 square feet of Rentable Area on
the lower 50% of each face of such sign. The lettering,
display and coloring of Tenant's name will be subject to
Landlord's approval, which not be unreasonably withheld
or delayed. Tenant shall pay for all costs of its
placing and maintaining its name on the sign and its
proportionate share of the cost of fabrication,
installation, operation, maintenance, repair and
replacement of such sign, such proportionate share to be
calculated for such sign by dividing the area of the
Tenant's name by the total area of all tenant names on
such sign. Tenant's name will be removed from the
monument sign at Tenant's cost upon expiration or
earlier termination of the Lease, Landlord's
repossession of the Premises for default, or Tenant's
vacation of the Premises for any reason.
FACADE SIGN 6. Subject to obtaining all necessary governmental
approvals, Landlord will install one or more signs on
the facade of the Building. Subject to the rights of
Federated Insurance or its assign as tenant under its
existing lease for space in the Project, Tenant will
have the only right to signage on the France Avenue
frontage of the Building. Subject to the rights of
Federated Insurance or its assign as tenant under its
existing lease for space in the Project, Landlord may
place signage on the other faces of the Building naming
other tenants leasing at least 75,000 square feet of
Rentable Area. The design of Tenant's sign will be
subject to Landlord's approval, which approval will not
be unreasonably withheld or delayed. Tenant shall pay
for all costs of fabrication, installation, operation,
maintenance, repair and replacement of Tenant's sign.
Tenant's sign will be removed from the facade at
Tenant's cost upon expiration or earlier termination of
the Lease, Landlord's repossession of the Premises for
default, or Tenant's vacation of the Premises for any
reason.
FIRST OFFER 7. (a) For purposes of this Section, "Offer Space"
means any space in the
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EXHIBIT 10.1
Building which becomes available to Landlord for
releasing after the first year of the Term and any
additional space which may become available by expansion
of the Building or construction of a new building on the
Land. If any then-existing tenant or occupant of such
space or adjoining space on the same floor elects to
continue or expand its tenancy or occupancy under a
renewal or new lease or amendment of an existing lease,
whether by right or otherwise, the space so leased by
such tenant or occupant will not be deemed to be
available for releasing (provided that this sentence
will not apply to the initial lease-up of any additional
space which may result from expansion of the Building or
construction of a new building).
(b) Prior to Landlord entering into any binding
lease after the first year of the Term for any Offer
Space with a third party tenant, Landlord will give
Tenant written notice of such desire (the "Offer
Notice"), which notice will specify (i) the Base Rent,
including any fixed or indexed rental adjustments, which
Landlord desires to charge for such Offer Space for a
term coterminous with the remainder of the Term of this
Lease, (ii) the basis for inclusion of operating
expenses and taxes as part of the rent payable for the
Offer Space if it differs from the terms of this Lease,
(iii) any tenant concessions (such as rent abatements
and improvement allowances) which Landlord is willing to
provide for such Offer Space for such term, and (iv) any
other terms and conditions on which Landlord is willing
to lease such Offer Space for such term.
(c) If Landlord gives Tenant an Offer Notice for
any Offer Space, Tenant will then have a right (an
"Offer Right") to include in the Premises all, but not
less than all, of such Offer Space upon all of the terms
set forth in the Offer Notice for a term which is
coterminous with the Term of this Lease, subject to the
following conditions:
(i) Tenant gives Landlord written notice of
its election to exercise such Offer Right within
five business days after Landlord gives Tenant
the Offer Notice; and
(ii) Tenant is not in default under this
Lease either on the date Tenant exercises such
Offer Right or on the proposed effective date of
inclusion of such Offer Space in the Premises,
unless waived in writing by Landlord; and
(iii) any party having a right to lease all
or part of the Offer Space under its lease fails
to lease all or such part of the Offer Space
pursuant to such right.
(d) If Tenant timely and properly exercises such Offer
Right, Landlord and Tenant will execute and deliver an
amendment of this Lease reflecting the inclusion of such
Offer Space in the Premises on the terms provided in the
Offer Notice. (e) If Tenant does not timely or properly
exercise such Offer Right, Landlord may within 180 days
thereafter lease such Offer Space to any
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EXHIBIT 10.1
third party tenant on economic terms and conditions
which taken as a whole are not more than 5% more
favorable to such tenant than those set out in the Offer
Notice, without again complying with the provisions of
this Section and affording Tenant the right to again
exercise the Offer Right with respect to such Offer
Space.
(f) The Offer Rights granted in this Lease are
recurring rights. If any Offer Space which is leased to
a third party tenant again becomes available to
Landlord for releasing, Landlord must again comply with
the provisions of this Section and afford Tenant the
right to again exercise its Offer Right for such Offer
Space before entering into any binding lease for such
Offer Space.
(g) The Offer Rights hereby granted will
automatically terminate and become null and void upon
the earliest to occur of (i) the expiration or earlier
termination of this Lease or of Tenant's right to
possession of the Premises, (ii) the assignment of this
Lease or sublease of more than 25% of the Premises by
Tenant, and (iii) 18 months prior to the end of the
Term.
RENEWAL 8. (a) Tenant will have two successive options
OPTION (each, a "Renewal Option") to renew the Lease with
respect to all (but not less than all) of the Premises
for an additional term (the "Renewal Term") of five
years commencing on the date immediately after the
expiration date of the preceding Term, subject to the
following terms and conditions:
(i) Tenant gives Landlord not less than 18
months' prior written notice of its election to
exercise the Renewal Option; and
(ii) Tenant is not in default under this
Lease either on the date Tenant exercises the
Renewal Option or on the commencement of the
Renewal Term, unless waived in writing by
Landlord.
(b) If Tenant exercises the Renewal Option, all
terms and conditions of the Lease will be applicable to
the Renewal Term, except that
(i) the Base Rent for the Renewal Term will
be the Market Rate or the rate last payable by
Tenant during the preceding Term, whichever is
greater;
(ii) the Additional Rent will be determined
as provided in this Lease, with the Operating
Cost Cap and any accumulated amounts included in
Tenant's Share of Actual Operating Cost which
have not been paid because they exceed the
Operating Cost Cap continuing as though the term
of the Lease had not expired;
(iii) all other Rent for the Renewal Term
will be determined as provided in this Lease;
(iv) Tenant agrees to accept the Premises
in an "as-is" condition on the commencement date
of the Renewal Term, and Tenant will not be
entitled to any credit or allowance from Landlord
for the
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EXHIBIT 10.1
improvement thereof;
(v) Tenant will not be entitled to any
rental concessions such as "free rent" or other
inducements for the Renewal Term; and
(vi) Tenant will have no further options
to renew the Term of this Lease beyond the
Renewal Options hereby granted.
(c) If Tenant exercises the Renewal Option,
Landlord and Tenant will execute and deliver an
amendment to this Lease reflecting the lease of the
Premises by Landlord to Tenant for the Renewal Term on
the terms provided above.
(d) The Renewal Options hereby granted will
automatically terminate and become null and void upon
the earliest to occur of (i) the expiration or earlier
termination of this Lease or of Tenant's right to
possession of the Premises, (ii) any assignment of this
Lease or sublease of more than 25% of the Premises by
Tenant, and (iii) any failure of Tenant to timely or
properly exercise such Renewal Option.
MARKET RATE 9. (a) As used in this Lease, "Market Rate"
means the annual rent per square foot of Rentable Area
of the space in question as of the commencement of the
term in question that a willing tenant would pay, and a
willing landlord would accept, in arms-length bona fide
negotiations if the space in question were leased for a
period equal to the term in question on the terms and
conditions of this Lease.
(b) Whenever Market Rate is to be determined
under this Lease, Landlord will give Tenant notice
("Landlord's Rate Notice") of Landlord's determination
of the Market Rate and the basis on which Landlord has
made its determination. If Tenant does not agree with
Landlord's determination of the Market Rate, Tenant will
give Landlord written notice of that disagreement within
15 days of receipt of Landlord's Rate Notice, stating
the amount which Tenant believes Market Rate should be
and the basis for such belief. If Tenant fails to timely
give such notice of disagreement, the Market Rate will
be the amount set out in Landlord's Rate Notice. If
Tenant gives Landlord such notice of disagreement,
Landlord and Tenant will endeavor in good faith to agree
on the Market Rate.
(c) If Landlord and Tenant have not agreed as to
the Market Rate within 30 days of Tenant's notice of
disagreement, the Market Rate will be determined by a
panel of appraisers using the following procedures:
(i) Landlord will appoint an appraiser by
written notice to the Tenant. Within 15 days
after receipt of notice of appointment of an
appraiser, Tenant will by notice to Landlord
appoint a second appraiser. Within 15 days after
appointment of the second appraiser, the two
appraisers will appoint a third appraiser.
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EXHIBIT 10.1
(ii) If the second appraiser is not duly
appointed within the specified period, the report
of the first appraiser will be conclusive upon
Landlord and Tenant. If the third appraiser is
not duly appointed within the specified period,
either Landlord or Tenant may apply to the senior
judge of the District Court for the County in
which the Project is located (or, if such does
not then exist, the then-existing court of
comparable jurisdiction) and that judge or a
person selected by that judge will appoint the
third appraiser.
(iii) All appraisers appointed under this
provision will be members of the American
Institute of Real Estate Appraisers (or such
successor body exercising similar functions) with
experience in comparable office space rentals in
the Minneapolis-Saint Paul metropolitan area and
with no direct or indirect financial or other
business interest in or in common with Landlord
or Tenant or any affiliate of either. Landlord
and Tenant will each pay the fees charged by the
appraiser appointed by it and will each pay
one-half the fee charged by the third appraiser.
(iv) As expeditiously as possible after
appointment of the third appraiser, the panel of
appraisers will execute in duplicate a report
stating the Market Rate. The report of the
appraisers or, if the appraisers cannot agree,
the report of the majority of the appraisers will
be deemed to be the Market Rate. If the
determinations of all three appraisers differ in
amount, the Market Rate will be deemed to be:
(A) the average of the three
appraisals if neither the highest nor the
lowest differs from the middle appraisal by
more than 10%,
(B) the average of the middle
appraisal and the appraisal nearest in
amount to the middle appraisal if either
the highest or the lowest appraisal, but
not both, differs from the middle appraisal
by more than 10%, and
(C) determined by a new appraisal
panel appointed and functioning in the same
manner if both the highest and lowest
appraisals differ from the middle appraisal
by more than 10%.
PURCHASE 10. (a) Prior to Landlord entering into any binding
RIGHT agreement (other than a mortgage) to sell or convey its
interest in the Project, Landlord will give Tenant
written notice of such desire (the "Sale Notice"), which
notice will specify the terms and conditions on which
Landlord is willing to sell the Project.
(b) If Landlord gives Tenant a Sale Notice,
Tenant will then have a right (a "Purchase Right") to
purchase the Project upon all of the terms set forth in
the Sale Notice, subject to the following conditions:
(i) Tenant gives Landlord written notice of
its election to exercise such Purchase Right
within five business days after Landlord gives
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EXHIBIT 10.1
Tenant the Sale Notice; and
(ii) Tenant is not in default under this
Lease on the date Tenant exercises such Purchase
Right, unless waived in writing by Landlord.
(c) If Tenant timely and properly exercises such
Purchase Right, Landlord and Tenant will execute and
deliver a purchase agreement reflecting the terms
provided in the Sale Notice.
(d) If Tenant does not timely or properly
exercise such Purchase Right, Landlord may within 180
days thereafter enter into an agreement to sell the
Project to any third party on economic terms and
conditions which taken as a whole are not more than 5%
more favorable to the purchaser than those set out in
the Sale Notice, without again complying with the
provisions of this Section and affording Tenant the
right to again exercise the Purchase Right with respect
to the Project.
(e) The Purchase Right hereby granted will
automatically terminate and become null and void upon
the earliest to occur of (i) the expiration or earlier
termination of this Lease or of Tenant's right to
possession of the Premises, (ii) the assignment of this
Lease or sublease of more than 25% of the Premises by
Tenant, and (iii) any sale or conveyance by Landlord of
its interest in the Premises as permitted under this
Article.
BUILDING ENHANCEMENT 11. By February, 2001, Landlord and Tenant will select
AND LOBBY an architect for renovation of the Building lobby area
RENOVATION or other public spaces to enhance the image of the
Project. Upon approval of the plans and specifications
for such renovation, which approval will not be
unreasonably withheld, delayed or conditioned, Landlord
will carry out such renovation, provided that Landlord
will not be required to pay more than $100,000 in the
aggregate for such renovation. Any such renovation shall
be ADA compliant, and the cost of ADA compliance will be
included in the cost of such work. However, any work
which is carried out solely for the purpose of bringing
existing improvements into ADA compliance will not be
included in the cost of such renovation and instead will
be included in the Actual Operating Cost under clause
(vi) of Section 3(f) of the Lease. The estimated amounts
that Landlord and Tenant will be required to contribute
for the cost of such renovation will be deposited in
escrow prior to the renovation beginning.
OFFICE 12. This Lease will include the lease by Landlord to
FURNITURE Tenant of the office furniture which on the Delivery
Date is located on the fifth floor, on that part of the
second floor shown on Exhibit F, and in the first floor
computer room (not including the telephone switch), if
Landlord has acquired such office furniture in
connection with its acquisition of the Project. Landlord
and Tenant will inventory such office furniture upon
delivery of the Premises. No additional rent will be
charged for lease of the office furniture, but the
Tenant will be responsible for any personal property tax
or other charges, fees or assessments payable in respect
of the office furniture during the Term.
E-8
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EXHIBIT 10.1
Tenant will keep the office furniture in good repair and
condition, reasonable wear and tear excepted, and will
include the office furniture in any insurance maintained
by Tenant for the Premises with Landlord named as
additional insured. Tenant may relocate the office
furniture within the Premises, but if Tenant desires to
replace any of the office furniture during the Term
Tenant will pay for the cost of moving the office
furniture to other space in the Building designated by
Landlord or, at Landlord's written option, Landlord may
dispose of the office furniture and retain any proceeds
from the sale thereof. At expiration or earlier
termination of the Lease or vacation of the Premises or
any part thereof by Tenant, Tenant will surrender the
office furniture located in such space to Landlord free
and clear of any liens and encumbrances, whereupon
Tenant's obligations, if any, with respect to such
furniture shall terminate.
TELEPHONE 13. Subject to the rights of National Car Rental
SWITCH Systems, Inc., (whether such rights are currently in
effect or granted in connection with Landlord's
acquisition of the Project), Tenant will have the right
to use the telephone and telecommunications equipment
located in various switching stations or equipment
closets in or around the Project if such equipment is
acquired by Landlord as part of the Project. As National
Car Rental Systems, Inc., releases its right to use the
telephone switch, Tenant will have the first right to
reserve such capacity as Tenant may require for use in
the Premises before Landlord makes such capacity
available to other tenants. Tenant's right to use such
equipment is limited to such portion of the capacity of
such equipment as may be reasonably required by Tenant
for the Premises, and other tenants will be entitled to
use the remaining capacity. The telephone and
telecommunications equipment will be maintained by
Landlord at Landlord's expense, with Tenant paying a
prorata share of the telephone charges and other costs
of operating and maintaining such telephone and
telecommunications equipment. Such costs will not be
included in the Operating Cost Cap.
SECURITY 14. Tenant may install its own security system for the
SYSTEM Premises as may be approved by Landlord, which approval
will not be unreasonably withheld or delayed so long as
it is compatible with Landlord's system and provides
access to the Premises by Landlord or its agents for the
purposes set out in Article 24 of this Lease. Tenant
will be entitled to use Landlord's security system for
access to the Premises and to the extent provided to
other tenants for access to the Building and its Common
Areas.
ROOF RIGHTS 15. So long as Tenant is not in default of this Lease
beyond any applicable notice or grace period, Tenant
will have the right during the Term to install and
maintain a roof deck for its exclusive use on such part
of the roof of the Building as may be reasonably agreed
between Landlord and Tenant. The roof area will be made
available to Tenant at no additional Rent or other
charge, but will otherwise be subject to the terms and
conditions of this Lease and any reasonable rules and
regulations as may from time to time be adopted by
Landlord for use of the roof area. Tenant will be
responsible for
E-9
<PAGE> 45
EXHIBIT 10.1
all costs of installing, maintaining, using, repairing
and replacing roof deck and will promptly repair any
damage to the Building (including damage to the roofing
and roof membrane) resulting therefrom. At the option of
Landlord, Tenant will remove the roof deck at Tenant's
cost upon expiration or earlier termination of this
Lease or of Tenant's right of possession hereunder and
restore the roof area to the condition it was in prior
to installation of the roof deck, reasonable wear and
tear excepted.
EXISTING LEASE 16. (a) Tenant is currently leasing approximately 28,146
square feet of space at 7901 Flying Cloud Drive in Eden
Prairie, Minnesota, under the Lease date November 12,
1998, as amended and supplemented, between The
Protective Group, Inc., and Tenant and subleasing
approximately 8,811 square feet of space located at 9855
West 78th Street in Eden Prairie, Minnesota, under that
certain Sublease dated August 13, 1999, between Eliance
Corporation and Tenant (collectively, the "Exising
Leases"). Landlord hereby agrees to pay Tenant's
existing landlords directly in an amount not to exceed
$2,000,000 in the aggregate for all amounts payable by
Tenant under the Existing Leases from and after the
Commencement Date of this Lease as such amounts become
due and payable. Landlord and Tenant will cooperate in
terminating the Existing Leases or subletting all or
part of the space leased under the Existing Leases, but
Tenant will not amend, terminate, extend or renew the
Existing Leases or exercise any rights of expansion or
sublet any portion of the space leased thereunder
without prior written notice to Landlord. Landlord's
obligation to pay any rent under the Existing Leases
under this Section will be reduced by the amount
received from any subtenant or other users of the space
under the Existing Leases from and after the
Commencement Date. Tenant will provide Landlord with
copies of the Existing Leases and upon request with
copies of any information or records relating to the
Existing Leases and the space leased thereunder for any
periods for which Landlord has paid rent under the
Existing Leases, and will pay to Landlord upon receipt
any amounts paid to Tenant (such as by refund of any
operating costs) in respect of the Existing Leases, or
the space leased thereunder for the period from and
after the Commencement Date. The obligation of Landlord
to pay rent in respect of the space leased under the
Existing Leases will not apply to any portion of such
space which may be occupied by Tenant from and after the
Commencement Date. Nothing herein will affect Tenant's
responsibility to observe and perform all obligations of
Tenant under the Existing Leases.
(b) Prior to the Commencement Date and as a
condition of Landlord's payments of any amounts under
this Section, Tenant will deposit with Landlord the sum
of $2,000,000 in the form of an irrevocable letter of
credit in form acceptable to Landlord and drawn upon a
financial institution acceptable to Landlord as security
for the full and faithful performance by Tenant of its
payment obligations under this Section. Any Rent paid by
Tenant will first be applied to payment of Base Rent,
Additional Rent, and other amounts owing by Tenant under
this Lease before being applied to amounts due under
this Section. In the event that Tenant fails to pay any
amounts payable under this
E-10
<PAGE> 46
EXHIBIT 10.1
Section within five days after the due date or in the
event any letter of credit is not renewed by no later
than 30 days prior to the stated expiration date
thereof, Landlord may draw upon the letter of credit and
use, apply or retain the whole or any part thereof for
the payment of amounts payable by Tenant under this
Section. Tenant will not be obligated to maintain a
letter of credit during any period where Tenant has had
net income during each quarter of the preceding two
fiscal years, but in the event Tenant suffers a loss
during any quarter thereafter a new letter of credit
will be reinstated or, alternatively, Tenant shall
provide a cash escrow in an amount equal to the lesser
of (i) the amount of the remaining lease liability under
the Existing Leases at such time; or (ii) the difference
between $2,000,000 and the amounts previously expended
by Landlord under this Section. If the letter of credit
is not reinstated or cash escrow provided within 10 days
after written notice from Landlord, any principal
balance and all accrued interest owed by Tenant under
this Section will be immediately due and payable, and
Landlord's obligation to pay Tenant's existing landlords
shall cease.
(c) In addition to the other Rent payable by
Tenant under this Lease, Tenant will reimburse Landlord
for all amounts paid by Landlord under this Section
(less any reimbursements for any sublease payments
received by Tenant that are paid to Landlord or other
reimbursements paid by Tenant to Landlord relating to
the Existing Leases) with interest at a rate of 12% per
annum on the unpaid balance thereof. Such amount of
principal and interest will be adjusted each month based
upon the amounts paid or reimbursed by Landlord through
such month and paid in equal installments over the
remainder of the initial Term of this Lease payable with
and in the same manner as the Base Rent payable under
this Lease, with each payment applied first to interest
and then to the principal. If Landlord fails to pay
Tenant's existing landlords prior to the due date
therefor for any amounts in respect of the Existing
Leases, Tenant will have the right to set off such
amount against the monthly payments next coming due
under this Section. If and whenever all or part of the
space demised under the Existing Leases are subleased or
it is otherwise determined that the total amount payable
by Landlord in respect of the Existing Leases shall be
less than $2,000,000, Landlord's obligations to pay any
sums under this Section will be reduced to the total
amount payable in respect of the Existing Leases and the
Tenant's letter of credit will be reduced pro rata.
Tenant will have the option to prepay the principal
amount in whole or in part at any time not less than 30
days' prior written notice.
E-11
<PAGE> 47
EXHIBIT 10.1
NEW 17. (a) So long as Tenant is not in default of this
BUILDING Lease beyond any applicable notice or grace period,
Tenant may, at any time during the Term or any Renewal
Terms so long as at least three years remain in the Term
of this Lease (including any Renewal Terms which Tenant
may have exercised), request that the Building be
expanded or a new building constructed on the Land by
Landlord. If Tenant commits to lease at least 60% of
such expansion or new building and the expansion or new
building is within Landlord's financial capacity and
investment criteria and will be prudent under
then-current market conditions, Landlord will construct
the expansion or new building. Any such expansion or new
building will be subject to any mortgages or other
agreements affecting the Project and all governmental
laws, codes, rules, regulations and ordinances affecting
the Project and the improvement thereof.
(b) If Landlord so expands the Building or
constructs a new building, Landlord will review the site
plan and budget with Tenant before starting
construction. Tenant will lease the portion of the
expansion or new building which Tenant has committed to
lease for a term of ten years, at a monthly rental rate
per square foot of Rentable Area (net of operating costs
and taxes) which would equal the Development Cost per
square foot of Rentable Area for the expansion or new
building amortized over a term of ten years in equal
monthly installments at an interest rate of 550 basis
points over the interest rate for 10-year U.S. Treasury
Bills in affect at the time construction of the
expansion or new building begins, with a tenant
improvement allowance of $20.00 per square foot of
Rentable Area, and otherwise on the terms and conditions
of this Lease.
(c) As used herein, the "Development Cost" means
all costs incurred by Landlord for such expansion or new
building, including without limitation costs of title,
survey, soil and environmental testing, and other
investigations, rezoning, replating, building permits,
land use approvals, SAC and WAC charges and other
governmental fees, cost of demolition and removal of
existing improvements, site preparation, site
improvements and utilities, architectural, engineering,
management, legal and other consulting fees and
expenses, payments to contractors, construction managers
and supplies, appraisal fees, leasing commissions,
prepayment premiums or defeasance charges for existing
financing, costs of arranging new interim and permanent
financing, interest payments and insurance costs during
construction, and any development fees, tenant
improvement allowances, and leasing costs for the
expansion or new building.
(d) Nothing herein will preclude Landlord from
expanding the Building or constructing the new building
on its own volition, provided that Tenant will have the
right of first offer for all space in the expansion or
new building as provided in Section 7 of this Exhibit E.
E-12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 102,767
<SECURITIES> 17,377
<RECEIVABLES> 9,924
<ALLOWANCES> 1,135
<INVENTORY> 0
<CURRENT-ASSETS> 127,736
<PP&E> 9,313
<DEPRECIATION> 2,535
<TOTAL-ASSETS> 254,103
<CURRENT-LIABILITIES> 11,387
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 241,797
<TOTAL-LIABILITY-AND-EQUITY> 254,103
<SALES> 9,492
<TOTAL-REVENUES> 9,492
<CGS> 2,083
<TOTAL-COSTS> 2,083
<OTHER-EXPENSES> 15,639
<LOSS-PROVISION> 441
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> (7,581)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,581)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,581)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
