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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25871
INFORMATICA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0333710
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3350 WEST BAYSHORE
PALO ALTO, CALIFORNIA 94303
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(650) 687-6200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 29, 2000 there were approximately 33,037,714 shares of the
Registrant's Common Stock outstanding. The aggregate market value of the Common
Stock held by non-affiliates of the Registrant (based on the closing price for
the Common Stock on the Nasdaq National Market on February 29, 2000) was
approximately $2,054,066,819.
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INFORMATICA CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
Item 6. Selected Consolidated Financial Data........................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 25
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 50
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 50
Item 11. Executive Compensation...................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 50
Item 13. Certain Relationships and Related Transactions.............. 50
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules and Reports on
Form 8-K.................................................. 50
SIGNATURES............................................................ 52
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PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a leading provider of analytic applications, infrastructure software
and related services that help give eBusinesses the ability to evaluate and
fine-tune the performance of their key operational areas for more effective
decision making. While eBusiness has emerged as the new context for global
commerce, one of the most vexing problems facing organizations building their
eBusinesses is how to integrate and analyze the wealth of customer, partner and
supplier information across both online and offline sales channel. Compounding
this problem, businesses have historically suffered from technical complexity
and system incompatibility. Our products help streamline and simplify the
integration and analysis of information by providing a packaged, integrated
solution.
While existing software tools and applications are helping companies access
data directly from specific transactional systems, by themselves they have
several key limitations:
- they do not address the volume of data generated on behalf of today's
eBusinesses;
- they cannot interoperate within an enterprise deployment without
specialized programming;
- they cannot access all critical data sources inside and outside an
enterprise and
- the analytic applications themselves are not integrated with one another
and, thus, are unable to share information across the enterprise value
chain linking customers, suppliers, operations and partners.
These challenges point to the need for a software solution that offers the
following capabilities:
- Robust data integration -- In addition to integrating current sources,
from mainframe, relational and Enterprise Resource Planning (ERP)
operational systems, an eBusiness analytic solution must be able to
accommodate wide-ranging new sources, from Web transaction servers to
integrated supply chain ERP systems;
- Vast scalability -- An eBusiness analytic solution must be able to scale
in two dimensions: in sheer volume, to handle ever-greater numbers of
transactions; and geographically, to be able to distribute processing
close to the users -- many of whom now are more mobile and web-based than
ever before -- who need the analytical output;
- Fine granularity -- An eBusiness analytic solution must also be able to
aggregate information both horizontally, to identify trends across entire
customer populations, and vertically, to drill down for any given
customer record, in order to determine important "personalization"
details, such as buying habits and key demographic information and
- Real-time refresh -- Perhaps the most daunting need is for real-time
processing of source data, which fuels the level of instantaneous
decision making that will one day power closed-loop analytic solutions.
With such an analytic solution in place, decision-makers will be able to
gain better insight into business trends and will be able to make more accurate
and informed business decisions that reflect activity across their entire
eBusiness value chain.
INFORMATICA'S SOLUTION
We provide a highly adaptable, functionally rich software solution for
deploying, managing and maintaining products that enable more effective business
decision making. Our solution consists of an enterprise data integration
platform which automates the process of retrieving, organizing and consolidating
data from multiple systems, and a suite of analytic applications to evaluate the
performance of a corporation's entire value-chain of customer, partner and
supplier relationships.
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We believe our solution offers the following key benefits:
Complete Analytic Solution
Informatica delivers an integrated solution that automates key processes
for system deployment and management, including the steps required for accessing
ERP and other transaction systems. Our solution includes a data integration
platform as well as a set of analytic applications that cover the following key
business areas: Customer Relationship Management (CRM), Business Operations and
Procurement. We believe this packaged, complete approach significantly reduces
the cost and time associated with deployment and management.
Our packaged solutions help extend our customers' systems investment by
protecting them from discontinuous changes in their technology environment
related to obsolescence and upgrades in hardware, operating systems, networks
and applications. Over the lifetime of a solution deployed using our platform
and business analytic products, these benefits are compounded, because ongoing
system modifications and project-scope expansions can be addressed with minimal
requirements for custom programming and consulting.
Informatica's analytic solution is based on our data-integration
infrastructure software. Informatica Applications(TM) provide an analytic
solution for gaining real-time business insight across the entire eBusiness
value chain. Because our data integration platform provides the foundation for
the analytic applications, customers can focus on deploying and enhancing our
analytic tools without worrying about data access issues. Our integrated
approach and our rules-based software allows our customers with systems to adapt
to business changes, such as those resulting from mergers and acquisitions,
currency fluctuations and ongoing regulatory change.
Incremental Deployment; Rapid Return on Investment
Unlike traditional, hand-coded decision support systems that are expensive
and time-intensive to deploy, and unlike analytic tools targeted to niche
transactions systems, we believe our solution allows users to achieve a faster
return on investment through incremental, business-unit-size deployments and the
ability to build analytic data models on top of proven data integration
technology. These successful deployments can then be extended across the
enterprise via a data integration hub.
The integrated analytic application suites permit customers to deploy
analytic products independently but leverage the functionality in subsequent
deployments -- the key business information that would be embedded in one
analytic suite could be cross-referenced in any subsequent analytic application
deployment. Today's Business to Business (B2B) eBusiness market requires
scalable and integrated solutions for helping companies gain insight into key
relationships and related activities that can determine profitability across
both traditional "brick and mortar" and online sales channels. Our analytic
solution permits the Global 2000 companies to perform cross-channel data
analysis and establish full value chain "cause-effect" analysis between customer
sales, supplier efficiency, and corporate profitability.
Multi-level Scalability
Our analytic solution addresses decision support scalability on many
levels. This includes scaling from an early-stage, data mart-based analytic
application to an enterprise-wide analytic solution deployment enabling the
large data volume, high throughput, and heterogeneous source systems
requirements for robust enterprise-wide analytic computing. Taking advantage of
distributed, parallel processing technologies, our platform is designed to
significantly improve performance by allowing users to bring multiple clusters
of servers to bear on large, complex analytic problems.
Architecture Openness and Extensibility
Our open architecture gives users seamless access to data locked in various
transactional systems, and enables our customers to address many different types
of analytical requirements. Informatica's products permit users to add
customized functions to extend our pre-programmed general purpose functions to
address
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specific business problems. Our analytic applications provide a solution that
utilizes data integration capabilities of the platform product set and permits
end-user extension of our analytic models.
Deployment Flexibility
Our solution is designed to support a wide range of computing platforms and
applications typically found in large organizations, and to collect data from
transaction sources employing varying combinations of computer hardware and
database software. Our rules-based transformation engine resolves the
idiosyncrasies of different operating systems, hardware and database platforms.
In addition, our high-performance, customized software drivers are designed to
leverage the strengths and mitigate the weaknesses of different vendors'
platforms. All of our products run on UNIX (HP-UX, IBM AIX, Sun Solaris) and
Microsoft NT servers, use Windows 95, Windows 98, and Windows NT clients, and
support all major relational databases, including Oracle, IBM DB2/UDB, Informix,
Sybase, and Microsoft SQL Server.
PRODUCTS AND SERVICES
Our products enable large, global organizations to build the necessary
infrastructure for deploying and managing business intelligence and analytic
applications across the enterprise. Since the acquisition of Influence Software
in December 1999, our complete analytic solution enables companies to deploy
integration analytic applications that leverage our data integration
infrastructure. These products are designed to reduce the complexities of
deploying, maintaining, and designing the required analytic solutions and to
enhance the quality and performance of information analysis. Informatica is
providing a complete solution for our customers to deploy a total solution for
business analysis.
Our solution enables enterprises to implement multi-tier decision support
architecture that can be as sophisticated -- or as simple -- as necessary. We
provide our customers with the capabilities to deploy a complete analytic
solution encompassing proven data integration platform along with integrated
analytic applications that span CRM, Business Operations, and Procurement. Our
customers can deploy our complete suite of analytic applications to examine the
impact of suppliers' on time delivery, in the eProcurement suite, on corporate
profitability, in the eBusiness Operations, and the correlation to customer
satisfaction, within the eCRM solution. Large enterprises can use
PowerCenter(TM), for instance, to create a data integration hub that will
synchronize and manage wide-ranging decision support resources. Other
organizations can start small, through PowerMart,(R) by creating independent
line-of-business data warehouses and analytic systems. Then, as business needs
grow and change, they can add the synchronization and sophisticated management
capabilities of PowerCenter.
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The following table summarizes the key features and benefits of our
products:
Infrastructure Software
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PRODUCT DESCRIPTION BENEFIT
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POWERCENTER(TM) An enterprise data integration hub for Reduces the complexity of implementing
deploying and managing scalable systems solutions that enable more effective
[POWERCENTER GRAPHIC] that enable more effective business business decision making
decision making - Integrates decision support
- Manages consolidation, cleansing and components and tools
customization of data - Creates and enforces consistent data
- Enables integration of operational definitions throughout the
systems and analytic applications architecture
- Allows centralized management of - Synchronizes disparate data marts and
distributed resources data warehouses
- Enables optimized performance and - Re-uses transformation logic and
reliability other important analytical formulas
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POWERCENTER.E(TM) A PowerCenter extension supporting Builds on the PowerCenter capabilities
customers' eBusiness data integration to provide a robust eBusiness data
[POWERCENTERe GRAPHIC] requirements for enterprise-wide integration platform
decision support - Enables a comprehensive data
- Provides real-time integration with integration environment
native access to MQSeries - Provides a robust platform for cross-
- Integrates e-business specific data channel analysis
such as XML and server log files - Eliminates "stove pipes" of analytic
- Enables integration of syndicated data access
data
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POWERMART(R) An integrated product suite for Enables rapid deployment of data marts
building and managing line-of-business and analytic applications
[POWERMART GRAPHIC] data marts and analytic applications - Enables faster reporting cycles and
- Addresses the complete life-cycle for more sophisticated business analysis
data mart development, production and to improve return on investment
ongoing management - Enables high ongoing productivity and
- Provides a rules-based engine that ease of maintenance
accelerates data mart and analytic
application deployment
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POWERCONNECT(TM) PowerConnect for SAP(TM) R/3(R) Allows difficult to access ERP and
legacy data to be more easily and
[POWERCONNECT GRAPHIC] - Software product extension for native quickly integrated into systems that
SAP R/3 system access enabling enable more effective business decision
complete access to the ERP system making
data - Enables native access to SAP R/3
pooled, clustered, and transparent
PowerConnect for PeopleSoft(R) tables
- Enables complete access to PeopleSoft
- PeopleSoft-access product allowing data as well as the ability to
our customers to access and navigate navigate through associated menu
through the PeopleSoft data tables hierarchies
and hierarchies - Supports native DB2 access for
integration of mainframe data into
PowerConnect for DB2 the decision support environment
- A mainframe-compatibility bridge that
facilitates high-speed access to DB2
databases running on IBM MVS and
OS/390 systems
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ANALYTIC BUSINESS Predefined extraction and Enables the separation of SAP R/3
COMPONENTS(TM) FOR SAP R/3 transformation mappings for SAP R/3 system knowledge from data warehousing
data access architectural issues
[ANALYTIC BUSINESS GRAPHIC] - Provides a re-usable business logic
for accessing SAP R/3's MM, FI, CO,
and SD modules
- Delivers fully documented extraction
templates for the most
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Informatica Applications
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PRODUCT DESCRIPTION BENEFIT
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ECRM An integrated analytic suite for Provides insight into key relationships
analyzing CRM effectiveness, including that impact business performance across
[eCRM GRAPHIC] the functions of sales, marketing and the global enterprise
customer service - Provides an analytic environment for
- Provides key performance indicators complete data evaluation and
including customer profitability and customer-centric business analysis
churn - Enables complete analysis of customer
- Common business foundation profitability and web-site
- Based on Informatica's data effectiveness
integration platform
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EBUSINESS OPERATIONS An integrated analytic suite for Enables an understanding and
complete business operations analysis streamlining of customers' business
[eBUSINESS OPERATIONS GRAPHIC] - Addresses complete business operations to support
operations metrics including - Provides an analytic solution for
profitability, receivables analysis, complete information evaluation and
and employee revenue contributions business operation analysis
- Seamless integration with - Establishes and tracks business-
Informatica's data integration critical metrics to enable management
platform by objective
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EPROCUREMENT An integrated analytic suite Provides a common analytic application
encompassing supply chain management, for complete procurement and supplier
[ePROCUREMENT GRAPHIC] and the acquisition, construction and analysis
delivery of products - Enables the complete evaluation of
- Analytics include materials supplier efficiency
management, sales order management, - Provides an integrated environment
logistics, and inventory management for "cause-effect" analysis
- Ensures the analytic functionality to
correlate supplier on-time delivery
with customer satisfaction and
corporate profitability
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PowerCenter
As part of our solution, PowerCenter serves as an enterprise data
integration hub for deploying and managing scalable decision support systems.
Within PowerCenter, a global repository functions as the central synchronization
point, extracting data from diverse operational sources, including mainframe,
relational database and popular enterprise resource planning applications.
PowerCenter transforms and distributes that data downstream to data warehouses
and data marts in preparation for end-user analysis. PowerCenter includes
software to design and manage the global repository, to set up data extraction
processes from operational databases and to synchronize data sharing among
distributed analytic applications.
PowerCenter has a number of innovative and essential features that enable
it to function effectively as an enterprise data integration hub. PowerCenter's
robust native mainframe file support allows mainframe database files to be
imported directly into the PowerCenter hub, eliminating the need for, and the
added expense of, additional software. Parallel processing capabilities within
this product allow users to roll-out multiple instances of PowerCenter's
transformation engine to maximize system performance for the most complex data
extractions and transformations. PowerCenter's systems management capabilities
are designed to allow administrators to more efficiently manage, monitor and
control multiple repositories and servers in the network from a central console.
PowerCenter.e
PowerCenter.e offers a set of unique capabilities that extend the reach of
PowerCenter to address eBusiness market requirements. PowerCenter.e has been
designed to enable Informatica's customers to leverage their investment in our
data integration infrastructure for their emerging eBusiness applications.
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In addition to the features and functionality that have established
Informatica software as a platform of choice for business insight, Informatica
PowerCenter.e offers a set of key features that effectively extend PowerCenter's
reach to address the eBusiness market:
- Near real-time eBusiness analytics -- By adding support for IBM's
MQSeries, the industry's most widely adopted messaging product,
PowerCenter.e provides near real-time support for extraction and loading
of data from a company's message queue infrastructure.
- Business-to-business data exchange through support for XML
standard -- XML (Extensible Markup Language) is rapidly emerging as the
de facto standard for data exchange over the Internet. Because XML data
is a hierarchically structured data type, it has been difficult to
incorporate into an enterprise decision support system. With
PowerCenter.e, eBusinesses can import their XML data into a relational
format while importing the metadata about that XML file into the data
warehouse repository.
- Ability to read Web log data -- PowerCenter.e eases the process of
retrieving data from Web logs by providing tools to import and
consolidate Web logs, and transform proprietary Web-log formats into
standard, readable structures. PowerCenter.e supports sourcing and
parsing of data from today's three leading Web server products from
Microsoft, Netscape and Apache.
- Demographic profiling of customers -- Acxiom's Data Network service
enables companies to access the most comprehensive collection of data on
U.S. consumers, businesses, properties and telephone information
available via the Internet. PowerCenter.e provides eBusinesses with a
direct connection to this network, helping them achieve a greater amount
of insight into their online customers.
- Support for popular Web language -- The most widely used language
implemented by Web developers today is Practical Extraction Report
Language (PERL). PowerCenter.e lets companies embed PERL within
Informatica's transformation logic, allowing the reuse of pre-defined
PERL scripts.
PowerMart
PowerMart is an integrated product suite for building and managing
line-of-business data marts and analytic applications. PowerMart can be used in
conjunction with PowerCenter, or it can be employed to create independent,
standalone data marts and data warehouses. PowerMart features integrated
warehouse-design, repository-design and management components that share a
common, intuitive graphical user interface. Through a variety of software
wizards and other productivity-enhancing tools, PowerMart supports the full
life-cycle for data mart/data warehouse deployment, development, production and
ongoing management.
The PowerMart integrated product suite includes five standard components:
- PowerMart Designer is a powerful, multi-faceted tool for visually
defining mappings and transformations;
- PowerMart Repository is an open metadata store for definitions about
mappings, transformations and other data mart details;
- PowerMart Repository Manager is a facility for managing user activities
and metadata storage in the repository;
- PowerMart Server is a pipelined, multi-threaded server engine that is
able to overlap data extraction, transformation and loading and
- PowerMart Server Manager is an administrative interface to the PowerMart
Server for configuring data marts and scheduling jobs.
PowerMart includes a number of key features that enable organizations to
implement data marts and analytic applications for a fraction of the cost of a
large, centralized data warehouse. For example, PowerMart gives users the option
of combining disk staging with in-memory server-side caching to fully leverage
system resources and achieve peak performance during any stage of data
processing. PowerMart also provides a "Deploy Folder" wizard that guides
developers through a step-by-step process for moving from test to
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development to full production. In addition, advanced session management
facilities help data warehouse administrators maintain operational efficiency.
Analytic Business Components for SAP R/3
Our Analytic Business Components are pre-defined templates that provide
fully documented building blocks, which include mappings, mapplets, source
objects, targets and transformations, that support the rapid and easy
development of data marts and analytic applications. These building blocks
insulate data warehouse designers from the complexities of the operational
system, and greatly simplify the tasks of data mart construction.
Complete Data Integration
We also market and sell two additional software products which extend the
capabilities of our data integration platform. PowerConnect for DB2 is a
mainframe software bridge that facilitates access to IBM DB2 databases running
on IBM MVS and OS/390 systems. PowerConnect for SAP R/3 and PowerConnect for
PeopleSoft provide our customers with native access to the two Enterprise
Resource Planning (ERP) software products. With PowerConnect, organizations get
fast, transparent access to operational data regardless of whether it resides on
a mainframe or inside of an enterprise resource planning application.
PowerPlugs(TM) are third-party software programs that add functionality via
open application programming interfaces that permit exchange of metadata and
data transformation information.
Pricing Model
We have a server-based pricing model in which PowerCenter and PowerMart are
priced according to the capabilities of the server upon which they will be
running. Informatica's analytic applications are packaged and sold as complete
product suites. Our value-based pricing produces higher license fees from a
customer who will be using our products on higher capacity servers and higher
license fees from those customers who deploy multiple analytic application
suites.
Technology Differentiators
The following key technologies differentiate our products from other
industry offerings, and we believe they are critical to deploying and managing
systems that enable more effective business decision making:
- COMPLETE, INTEGRATED ANALYTICS -- The power of our analytic applications
is that all data models are fully integrated and permit extensive
"cause-effect" analysis and cross-channel business evaluations. The
analytic applications are integrated at the analytic model and
presentation layer as well as through our data integration platform and
by reliance and utilization of Analytic Business Components.
- METADATA-BASED ARCHITECTURE -- Metadata is "data about data," in that it
describes the business rules and cataloging information needed for the
decision support applications to function. It also enables users to
understand the context and meaning of data that they are analyzing.
Through the global repository, PowerCenter permits synchronization and
sharing of metadata among distributed repositories that are located in
various enterprise departments and are used for different decision
support applications. The global repository employs a system of shared
folders and hotlinked pointers, available to all registered local
repositories, to enable sharing of public metadata and specific data
transformations.
For example, the enterprise customer may define certain key values, such
as "customer" or "revenue," for use throughout all analytic applications.
By keeping these values in shared folders, the system ensures that users
throughout the enterprise will be working with consistent data
definitions. Through the system of hotlinked pointers, shared information
is automatically kept up to date.
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Our products also feature open, distributed metadata exchange with other
decision support products, such as back-end data modeling tools, front-end
query and reporting tools and analytic applications. This contributes
greatly to interoperability, quality of analysis and scalability.
- NATIVE CONNECTIVITY TO OPERATIONAL SOURCES -- We are an industry leader
in source-database access capabilities. Through PowerCenter and
PowerMart, users can access UNIX and Windows NT databases, IBM DB2
databases and leading enterprise resource planning systems. For instance,
PowerCenter extends the effectiveness of SAP Business Information
Warehouse(TM) by giving users access to all non-SAP data throughout their
enterprise. In addition, PowerMart provides a similar capability to users
of PeopleSoft's Enterprise Performance Management suite, giving users
access to both PeopleSoft and non-PeopleSoft operational data.
- CENTRALIZED MANAGEMENT -- Architectures that enable more effective
business decision making require the power of distributed, parallel
servers combined with the convenience of centralized management.
PowerCenter supports multiple parallel servers and provides a single
interface for configuring and monitoring them. Additionally, PowerCenter
provides a single interface for viewing and configuring metadata in the
PowerCenter repository and any local, registered repositories.
- ENGINE-BASED PERFORMANCE -- The heart of our solution is a high-end
performance server, or engine, that automates data movement and
transformation. The server employs advanced techniques, such as parallel,
overlapped operations, to give users the high-performance data throughput
required for enterprise-class implementations. Our platform's
engine-based high performance allows users to construct analytic
applications and perform analyses according to their real business needs,
without having to hand-code transformations or continually modify their
objectives because of technology limitations.
Services
We offer comprehensive professional services in implementation consulting,
as well as in customer support and training. As of December 31, 1999, we
employed 77 people worldwide in services related activities.
Our professional services range from designing and deploying architectures
that enable more effective business decision making to data transformation and
performance tuning. Our professional services consultants possess expertise in
databases and operating systems, enterprise resource systems, business process
design and management and major vertical industry issues.
We offer high-quality, timely technical support to customers via phone,
e-mail and the Internet. We also publish a comprehensive web-based journal on
infrastructure issues, with technical detail that expands on existing
documentation and presents implementation options. Additionally, we publish
online versions of manuals, release notes and updates to existing documentation.
We provide a number of customer training programs in the United States and
Europe. Courses cover topics such as designing target data tables, analyzing
operational sources, tuning and troubleshooting and understanding systems used
to support business decision making.
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STRATEGIC PARTNERS
Our partners include industry leaders in enterprise software,
query/analysis applications and systems integration. We pursue a comprehensive
partnership program with major vendors in these areas so that they can provide
complementary products and services to our joint customers with effective
best-of-breed enterprise solutions. Our partnership program is called the
PowerPartner Program, and our strategic partners include:
eBusiness Platform Partners
Ariba
Broadvision
InterWorld
Kana Communications
Enterprise Software Partners
BMC Software
NEON Systems
IBM
PeopleSoft
Microsoft
SAP
Query/Analysis Partners
Brio Technology
Business Objects
Hyperion Solutions
Cognos
MicroStrategy
Systems Integration Partners
American Management Systems
Application Consulting Group
Application Partners
Apex Solutions
Andersen Consulting
Archer Decision Sciences
Active Interest
Advanced Paradigm Solutions
Advisa Group
Braun Technology Group
BTG Technology Systems
C3i
Systems Integration Partners (continued)
Cambridge Technology Partners
Case Logical Data
Cap Gemini
Clark Information Systems
Client Server Associates
Connect Systems
Core Integration Partners
Cotelligent
CSC Ploenzke
Daman Consulting
Descartes Systems Group
DEC
Deloitte Touche
DMR Consulting
DSS Solution
EDS
Epsilon
Encompass Business Solutions
Gamut Technologies
Geac Computers
Grace Technologies
Infocrest Solutions
IPI GrammTech
Knightsbridge Solutions
KnowledgeBase Marketing
KPMG
Lancet Software Development
LGS Group
Logan/Britton
Metamor
Migration Software
Systems Integration Partners (continued)
NetBase Computing
New Technology Management
Newport Technology Group
NexGen SI
Octet Consulting
Parallogic
Perot Systems
PricewaterhouseCoopers
Profound Solutions
Retail Dynamics Inc.
The Revere Group
REZsolutions
R&Z Software
Saphir
Saturn Business Systems
Siemens Nixdorf
Softmaster
Software House International
Softworks Consulting
Solution Builders
SQLiason
Strategic Technologies
Strategic Information Systems
Sybertech
Sysix Technologies
Talent Software Services
Tessera Enterprise Systems
WebSoft
Xenon
Yaletown Technology
ZYGA
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CUSTOMERS
Our customers represent a wide, cross-industry spectrum of large global
organizations, plus major governmental and educational institutions. A
representative sampling of customers who have purchased at least $100,000 of
software license since January 1996 includes:
Communications
AirTouch Cellular*
AT&T Corp.*
Lucent Technologies*
Pacific Bell Directory
Qualcomm*
Sprint
Tele-Communications, Inc.* (TCI)
Telenor*
Government
Bureau of Land Management
State of Texas
U.S. Navy*
US Postal Service*
Financial Services
The Capital Group Companies*
Charles Schwab
SG Cowen*
First Union National Bank*
GM Acceptance Corp.*
Invesco Funds Group
Merrill Lynch*
Oppenheimer Funds*
J.P. Morgan*
Providian Financial*
Prudential Insurance*
Salomon Smith Barney*
Stein, Roe & Farnham
UBS
High Technology
3Com*
Autodesk*
Automatic Data Processing*
LSI Logic*
Gateway*
National Semiconductor
Silicon Graphics*
Internet Software-Service
CompuServe
e.spire
Priceline.com*
Netcentives
Inktomi*
C/NET
StoreRunner.com
Netscape*
UUNET*
Insurance
Abbey National*
Allstate Insurance*
The Equitable Companies*
Hartford Insurance*
John Hancock*
Liberty Mutual Insurance Companies*
MassMutual*
MetLife Insurance*
Mutual of Omaha*
Zurich Insurance*
Utilities/Energy
Commonwealth Edison
Company*
Chevron Corporation
Entergy Services/Entergy
Corporation*
KN Energy*
Philadelphia Power and Light*
Southern Company
Manufacturing/Distribution
ABB*
Avery-Dennison*
Boeing*
General Electric*
Honeywell
Lockheed Martin*
Motorola*
Thomson Publishing
Toyota USA*
Media/Entertainment/ Hospitality
Carlson Wagonlit Travel*
Fox Entertainment Group*
Hearst Corporation*
Ultramar Diamond Shamrock*
Warner Brothers*
Yorkshire Cable
Pharmaceuticals/Health Care
Amgen*
American Home Products
Corporation*
Blue Cross Blue Shield*
Dura Pharmaceuticals
Genentech
MedData Health
Pharmacia & Upjohn*
Zeneca (ICI)*
Retail/Consumer Packaged Goods
Campbell Soup
Dial*
First Brands
Benjamin Moore
Long's Drug Stores*
The Gap*
Liz Claiborne
Polo Ralph Lauren*
Transportation
BAX Global*
Roadway Express
Ryder
Other
Stanford University*
* Over $200,000 since January 1996.
12
<PAGE> 13
RESEARCH AND DEVELOPMENT
As of December 31, 1999, we employed 74 people in our research and
development organization. This team is responsible for the design, development
and release of our products. The group is organized into four disciplines:
development, quality assurance, documentation and program management. Members
from each discipline, along with a product marketing manager from our marketing
department, form separate product teams that work closely with sales, marketing,
services, customers and prospects to better understand market needs and user
requirements.
When appropriate, we also utilize third-parties to expand the capacity and
technical expertise of our internal research and development team. On occasion,
we have licensed third-party technology. We believe this approach shortens time
to market without compromising competitive position or product quality, and we
plan to continue to draw on third-party resources as needed in the future.
We have a well-defined software development methodology that we believe
enables us to deliver products that satisfy real business needs for the global
market while also meeting commercial quality expectations. Our methodology
involves specifying and reviewing business requirements, functional
requirements, prototypes, technical designs, test plans and documentation plans.
We then perform iterative, scheduled quality assurance of code and
documentation, followed by frequent stabilization of code and documentation. We
test automation definition, instrumentation and execution as well as functions,
components, systems, integration, performance, stress and international and Year
2000 compliance. A key component of our methodology is full product regression
testing before beta or general availability releases and trial deployments in an
internal production environment prior to release, external beta releases and
general availability release. Failure to develop and introduce new products, or
enhancements to existing products, in a timely manner in response to changing
market conditions or customer requirements, may materially adversely affect our
business, results of operations and financial condition.
We emphasize quality assurance throughout the software development
life-cycle. We believe that a strong emphasis placed on analysis and design
early in the project life reduces the number and costs of defects that may be
found in later stages.
SALES, MARKETING AND DISTRIBUTION
We market and sell software and services through a direct sales force in
the United States, the United Kingdom and Germany, as well as through
distributors. As of December 31, 1999, we employed 145 people worldwide in our
sales and marketing organization.
Marketing programs are focused on creating awareness as well as lead
generation and customer references for our products. These programs are targeted
at key executives such as chief executive officers, chief information officers
and presidents of engineering, research and development, sales, service and
marketing. Our marketing personnel engage in a variety of activities, including
positioning our software products and services, conducting public relations
programs, establishing and maintaining relationships with industry analysts and
generating qualified sales leads, among others.
Our sales process consists of several phases: lead generation, initial
contact, lead qualification, needs assessment, enterprise overview, product
demonstration, proposal generation and contract negotiation. Although the
typical sales cycle has been up to 120 days, certain sales cycles in the past
have lasted substantially longer. In a number of instances, our relationships
with systems integrators and other strategic partners have reduced sales cycles
by generating qualified sales leads, making initial customer contacts and
assessing needs prior to our introduction to the customer. Also, partners have
assisted in the creation of presentations and demonstrations, which we believe
enhances our competitive position.
We distribute our products through system integrators in the United States
and distributors in Europe. Systems integrators typically possess expertise in
vertical markets. They resell our products, bundling them in some cases with
system-wide solutions. In other cases, they influence direct sales of our
products. Distributors sublicense our products and provide service and support
within their territories.
13
<PAGE> 14
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. We have three patent applications pending and two patent
applications allowed in the United States. It is possible that our pending
applications will not be allowed or that competitors will successfully challenge
the validity or scope of our allowed patent or any future allowed patents. Our
patents alone may not provide us with any significant competitive advantage.
As part of our confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, distributors and corporate
partners and into license agreements with respect to our software, documentation
and other proprietary information. Despite these precautions, third parties
could copy or otherwise obtain and use our products or technology without
authorization, or develop similar technology independently. It is difficult for
us to police unauthorized use of our products, and, although we are unable to
determine the extent to which piracy of our software products exists, software
piracy is a prevalent problem in our industry in general. Effective protection
of intellectual property rights is unavailable or limited in certain foreign
countries. The protection of our proprietary rights may be inadequate and our
competitors could independently develop similar technology, duplicate our
products or design around any patents or other intellectual property rights we
hold.
As is common in the software industry, we may from time to time receive
notices from third parties claiming infringement by our products of third-party
patent and other proprietary rights. On April 7, 1999, we were notified by
another company that it is evaluating our products to determine whether our
products infringe its U.S. patent and has requested that we enter into
discussions with them as to whether it is necessary or appropriate for us to
obtain a license. Although this company has not filed litigation against us,
this company has filed litigation against one of our competitors, alleging
infringement of its patent. Third parties, including the company that has
contacted us regarding our products, could claim that our current or future
products infringe their patent or other proprietary rights. Any claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect upon our business,
financial condition and operating results. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to us, or at all. Legal
action claiming patent infringement could be commenced against us, and we may
not prevail in such litigation given the complex technical issues and inherent
uncertainties in patent litigation. Moreover, the cost of defending patent
litigation could be substantial, regardless of the outcome. In the event a
patent claim against us was successful and we could not obtain a license on
acceptable terms or license a substitute technology or redesign to avoid
infringement, our business, financial condition and operating results would be
materially adversely affected.
COMPETITION
The market for our products is highly competitive, rapidly evolving and
subject to rapidly changing technology. We compete principally against providers
of decision support, data warehousing and enterprise application software. Such
competitors include Acta Technology, Inc., Informix Corporation, Broadbase
Information Systems, Inc., E.piphany, Inc., Information Builders, Inc., and
Sagent Technology, Inc. In addition, we compete or may compete against database
vendors that currently offer, or may develop, products with functionalities that
compete with our solutions. These products typically operate specifically with
these competitors' proprietary databases. Such competitors include IBM
Corporation, Microsoft Corporation and Oracle Corporation.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements.
Competition could seriously impede our ability to sell additional products and
services on terms favorable to us. Our current and potential competitors may
develop and market new technologies that render our existing or future products
obsolete, unmarketable or less competitive. We currently compete more on the
basis of our
14
<PAGE> 15
products' functionality than on the basis of price. If our competitors develop
similar or superior functionality, we may have difficulty competing more
substantially on the basis of price. Our current and potential competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with other solution providers, thereby increasing the ability of
their products to address the needs of our prospective customers. Our current
and potential competitors may establish or strengthen cooperative relationships
with our current or future channel or strategic partners, thereby limiting our
ability to sell products through these channels. Competitive pressures could
reduce our market share or require us to reduce our prices, either of which
could materially and adversely affect our business, results of operations or
financial condition.
We compete on the basis of certain factors, including:
- product performance;
- product features;
- user scalability;
- open architecture;
- ease of use;
- product reliability;
- analytical capabilities;
- time to market;
- customer support and
- product pricing.
EMPLOYEES
As of December 31, 1999, we had a total of 332 employees, including 74
people in research and development, 145 people in sales and marketing, 77 people
in consulting, customer support and training and 36 people in general and
administrative services. None of our employees is represented by a labor union,
and we consider employee relations to be good.
ITEM 2. PROPERTIES
Our headquarters are located in Palo Alto, California and consist of
approximately 60,000 square feet of office space leased through January 2001. We
signed a new lease and plan to occupy additional office space in June 2000 in a
building near our headquarters which consists of approximately 30,000 square
feet of office space and is leased through June 2007. To help meet our future
expansion needs, we recently signed leases for two buildings in Redwood City,
California which will become our new corporate headquarters in July 2001. These
buildings are leased through 2013 and consist of approximately 286,000 square
feet of office space.
The Company leases approximately 19,000 square feet of office space in San
Francisco, California primarily for sales, marketing and professional services
activities. This facility is leased through November 2006.
We also lease other office space in the United States and other various
countries under operating leases.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1999.
15
<PAGE> 16
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our executive
officers and directors as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Gaurav S. Dhillon............................ 34 Chief Executive Officer, Secretary and Director
Diaz H. Nesamoney............................ 35 Chief Operating Officer and Director
Clive A. Harrison............................ 42 Executive Vice President, Worldwide Sales
Earl E. Fry.................................. 41 Chief Financial Officer, Senior Vice President
David W. Pidwell(2).......................... 52 Director
A. Brooke Seawell(1)......................... 52 Director
Vincent R. Worms(1).......................... 47 Director
</TABLE>
- ---------------
(1) Member of audit committee.
(2) Member of compensation committee.
Mr. Dhillon is one of the founders of Informatica and has been our Chief
Executive Officer, our Secretary and a member of our board of directors since
our inception. Prior to co-founding Informatica in February 1993, Mr. Dhillon
was employed by Sterling Software, a software company, from December 1991 to
November 1992, where his last position was project manager. Prior to that, he
was a systems architect with Unisys Corporation. Mr. Dhillon holds a B.S.E.E.
from Punjab University, India.
Mr. Nesamoney is also one of the founders of Informatica and has been a
member of our board of directors and an officer since our inception. He is
currently our Chief Operating Officer. Prior to co-founding Informatica in
February 1993, Mr. Nesamoney was employed by Unisys Corporation from May 1988 to
February 1993, where his last position was a development manager. Mr. Nesamoney
holds an M.S.C.S. degree from Birla Institute of Technology & Science.
Mr. Harrison joined us in January 1996 as Senior Vice President, Sales and
became Executive Vice President, Worldwide Sales in January 1999. Mr. Harrison
held sales management responsibility at Oracle Systems from June 1995 to January
1996. From September 1989 to June 1995, he was Regional Vice President of Sales
at Information Resources, an enterprise decision support software company. Mr.
Harrison holds a B.S. degree in Operational Research and Economics from Aston
University in England.
Mr. Fry has been our Chief Financial Officer and a Senior Vice President
since December 1999. From November 1995 to November 1999, Mr. Fry was Vice
President and Chief Financial Officer at Omnicell.com. From July 1994 to
November 1995, he was Vice President and Chief Financial Officer at C*ATS
Software, Inc. Mr. Fry holds a B.A. degree in Business Administration from the
University of Hawaii and an M.B.A. degree in Finance and Marketing from Stanford
University.
Mr. Pidwell has been one of our directors since February 1996. From January
1988 to January 1996, Mr. Pidwell was President and Chief Executive Officer of
Rasna Corporation, a software company. Mr. Pidwell is currently a venture
partner with Asset Management Associates and serves on the boards of directors
of a number of private companies. Mr. Pidwell holds a B.S.E.E. in Electrical
Engineering and an M.S.I.S.E. degree in Computer Systems Engineering from Ohio
University.
Mr. Seawell has been one of our directors since December 1997. From January
1997 to August 1998, Mr. Seawell was Executive Vice President of NetDynamics, an
internet applications server company. From March 1991 to January 1997, Mr.
Seawell was Senior Vice President and Chief Financial Officer of Synopsys. Mr.
Seawell holds a B.A. degree in Economics and an M.B.A. degree in Finance and
Accounting from Stanford University. Mr. Seawell serves on the board of
directors of NVIDIA Corporation, a 3D (three-dimensional) graphics processor
company, and several privately held companies.
16
<PAGE> 17
Mr. Worms has been one of our directors since September 1995. From 1982 to
the present, Mr. Worms has served as Co-President of Partech International
Capital Management, a venture capital firm that manages one of our investors.
Mr. Worms holds an M.S. degree in Science from the Ecole Polytechnique in Paris,
France and the Massachusetts Institute of Technology. Mr. Worms serves on the
boards of directors of SangStat Medical Corporation and Business Objects, a
software company, in addition to serving on the board of a number of private
companies.
There are no family relationships among any of our directors or officers.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq National Market under
the symbol "INFA." The following table sets forth, for the periods indicated,
the high and low sales prices of the common stock as reported by the Nasdaq
National Market since the Company's initial public offering of common stock at
$8.00 per share on April 29, 1999. Prior to April 29, 1999, there was no public
trading market for the common stock.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1999:
Second Quarter (from April 29, 1999).................... $ 18.00 $ 9.50
Third Quarter........................................... $ 32.50 $16.07
Fourth Quarter.......................................... $ 54.69 $25.25
</TABLE>
As of December 31, 1999, there were approximately 223 stockholders of
record. The last reported sale price per share of the Company's common stock on
December 31, 1999 on the Nasdaq National Market was $53.19.
The above information has been restated to reflect a two-for-one stock
split effected in the form of a stock dividend to each stockholder of record as
of February 18, 2000.
The Company has not paid cash dividends on its common stock and does not
plan to pay cash dividends in the near future.
In April 1999, the Company completed the initial public offering of its
common stock and realized net proceeds from the offering of approximately $43.5
million. The proceeds from this offering have and will continue to be used for
general corporate purchases, including working capital.
On December 15, 1999 and in connection with the acquisition of all of the
outstanding capital stock of Influence Software, Inc. (Influence), the Company
issued 1,299,084 shares of unregistered common stock to the former stockholders
of Influence. As of February 29, 2000, the Company also issued an additional
63,746 shares of unregistered common stock related to the exercise of Influence
stock options.
18
<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues................................ $62,379 $30,346 $12,741 $ 2,060 $ 589
Cost of revenues........................ 10,996 5,389 2,582 158 180
------- ------- ------- ------- ------
Gross profit............................ 51,383 24,957 10,159 1,902 409
Operating expenses:
Research and development............. 11,843 8,385 4,747 2,141 641
Sales and marketing.................. 33,613 22,733 11,219 3,676 203
General and administrative........... 5,012 3,132 2,408 702 89
Merger-related costs................. 2,082 -- -- -- --
Stock-based compensation............. 742 98 2 -- --
------- ------- ------- ------- ------
Total operating expenses........ 53,292 34,348 18,376 6,519 933
Loss before income taxes................ (671) (9,285) (8,018) (4,609) (518)
Income tax provision.................... (824) -- -- -- --
Net loss................................ (1,495) (9,285) (8,018) (4,609) (518)
Basic and diluted net loss per
share(2)............................. $ (0.06) $ (1.21) $ (1.18) $ (0.85) $(0.10)
======= ======= ======= ======= ======
Shares used in computing basic and
diluted net loss per share(2)........ 23,783 7,652 6,777 5,428 5,034
======= ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
------- -------- -------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $57,521 $ 7,167 $ 8,888 $ 3,023 $ 906
Working capital (deficit)............. 39,951 (3,242) 5,376 3,206 896
Total assets.......................... 68,523 12,165 13,356 5,059 1,104
Long-term obligations, net of current
portion............................ 1,438 1,480 1,428 270 --
Redeemable convertible preferred
stock.............................. -- 17,586 17,586 8,593 1,472
Total stockholders' equity
(deficit).......................... 40,124 (21,580) (12,587) (5,022) (469)
</TABLE>
- ---------------
See Note 1 of Notes to Consolidated Financial Statements for an explanation of
the determination of the number of shares used to compute basic and diluted net
loss per share.
(1) Amounts and per share data for all periods presented have been retroactively
restated to reflect the merger of Influence in a pooling-of-interests
transaction effective December 15, 1999.
(2) Amounts have been restated to reflect a two-for-one stock split, effected in
the form of a stock dividend to each stockholder of record as of February
18, 2000.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact are "forward-looking
statements" for purposes of these provisions, including any statements
referencing revenues and operating expenses as a percentage of total revenues;
expected hiring of additional sales and marketing personnel; the sufficiency of
our cash balances and cash flows for the next twelve months; the impact of
recent changes in accounting standards; costs, liabilities, exposure, and plans
related to the Year 2000 problem; our ability to mitigate risks associated with
the Year 2000 problem; and assumptions underlying any of the foregoing. In some
cases, forward-looking statements can be identified by the use of terminology
such as "may," "will," "expects," "intends," "plans," "anticipates,"
"estimates," "potential," or "continue," or the negative thereof or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements contained herein are reasonable, these
expectations or any of the forward-looking statements could prove to be
incorrect, and actual results could differ materially from those projected or
assumed in the forward-looking statements. Our future financial condition and
results of operations, as well as any forward-looking statements, are subject to
risks and uncertainties, including but not limited to the factors set forth
below and in Item 7A hereof. All forward-looking statements and reasons why
results may differ included in this report are made as of the date hereof, and
we assume no obligation to update any such forward-looking statement or reason
why actual results may differ.
OVERVIEW
We are a leading provider of highly adaptable, functionally rich software
solution that help companies deploy, manage and maintain systems that enable
more effective business decision making. Our solution consists of an enterprise
data integration platform which automates the process of retrieving, organizing
and consolidating data from multiple systems and a suite of analytic
applications to evaluate the performance of a corporation's entire value-chain
of customer, partner and supplier relationships.
In December 1999, we acquired Influence, a developer of analytic
applications for eBusiness. The merger was accounted for using the
pooling-of-interests method of accounting and as such our historical financial
results for all dates and periods prior to the merger have been restated to
reflect the merger. In connection with the acquisition, we issued 1,299,084
shares of common stock to Influence's stockholders in exchange for all of the
outstanding capital stock. All outstanding options to purchase Influence's
capital stock were converted into options to purchase 287,052 shares of
Informatica common stock.
SOURCE OF REVENUES AND REVENUE RECOGNITION POLICY
We generate revenues from sales of software licenses and services. Our
license revenues are derived from our PowerCenter, PowerMart and Informatica
Application Products. We receive software license revenues from licensing our
products directly to end users and indirectly through resellers and original
equipment manufacturers. We receive service revenues from maintenance contracts
and training and consulting services that we perform for customers that license
our products either directly from us or indirectly through resellers.
We recognize license revenues when a noncancelable license agreement has
been signed, the product has been shipped, the fees are fixed and determinable,
collectibility is probable and vendor-specific objective evidence exists to
allocate the total fee to elements of the arrangement. Vendor-specific objective
evidence is based on the price charged when an element is sold separately. In
the case of an element not sold separately, the price is established by
authorized management. If an acceptance period is required, we recognize revenue
upon customer acceptance or the expiration of the acceptance period. We also
enter into reseller arrangements that typically provide for sublicense fees
based on a percentage of list price. For direct sales, we recognize revenue upon
shipment to the end user and when collectibility is probable. For sales through
resellers, we recognize revenue upon shipment to the reseller and when
collectibility is probable, or upon cash collections based on credit history
with the reseller. Our agreements with our customers and resellers do not
contain product return rights.
20
<PAGE> 21
We recognize revenues from services, which consist of fees for ongoing
support and product updates ratably over the term of the contract, typically one
year. Consulting revenues are primarily related to implementation services and
product enhancements performed on a time-and-materials basis or a fixed fee
arrangement under separate service arrangements related to the installation of
our software products. We recognize revenues from consulting and training
services as the services are performed or contract milestones are met.
The following table presents certain financial data as a percentage of
total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License............................................ 66% 71% 80% 89% 7%
Service............................................ 34 29 20 11 93
---- ---- ---- ---- ----
Total revenues................................ 100 100 100 100 100
Cost of revenues:
License............................................ 1 1 1 2 --
Service............................................ 17 17 19 6 31
---- ---- ---- ---- ----
Total cost of revenues........................ 18 18 20 8 31
---- ---- ---- ---- ----
Gross profit.......................................... 82 82 80 92 69
Operating expenses:
Research and development........................... 19 28 37 104 109
Sales and marketing................................ 54 75 88 178 34
General and administrative......................... 8 10 19 34 15
Merger-related costs............................... 3 -- -- -- --
Stock-based compensation........................... 1 -- -- -- --
---- ---- ---- ---- ----
Total operating expenses...................... 85 113 144 316 158
---- ---- ---- ---- ----
Loss from operations.................................. (3) (31) (64) (224) (89)
Interest income (expense), net........................ 2 -- 1 -- 1
---- ---- ---- ---- ----
Loss before income taxes.............................. (1) (31) (63) (224) (88)
Income tax provision.................................. (1) -- -- -- --
---- ---- ---- ---- ----
Net loss.............................................. (2)% (31)% (63)% (224)% (88)%
==== ==== ==== ==== ====
Costs of license revenues, as a percentage of license
revenues.............................................. 2% 2% 2% 2% --%
Costs of service revenues, as a percentage of service
revenues.............................................. 49% 57% 96% 57% 33%
</TABLE>
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES
Our total revenues increased to $62.4 million in 1999, from $30.3 million
in 1998 and $12.7 million in 1997, representing growth of 106% from 1998 to 1999
and 138% from 1997 to 1998. Our license revenues increased to $41.2 million in
1999 from $21.6 million and $10.2 million in 1998 and 1997, respectively,
representing growth of 91% from 1998 to 1999 and 111% from 1997 to 1998. These
increases were due primarily to increases in the number of licenses sold and the
average transaction size, reflecting increased acceptance of PowerCenter,
PowerMart and Informatica Application Products as well as expansion of our
direct sales organization and reseller channels. Service revenues increased to
$21.2 million in 1999 from $8.8 million and $2.5 million in 1999, 1998 and 1997,
respectively, representing growth of 142% from 1998 to 1999 and 251% from 1997
to 1998. These increases were due primarily to an increase in consulting,
training and maintenance fees associated with both the increased number of
licenses sold and the increased average transaction size, along with a larger
installed license base in each successive year.
21
<PAGE> 22
Our international revenues increased to $11.2 million in 1999, from $3.6
million in 1998 and $0.8 million in 1997, representing growth of 209% from 1998
to 1999 and 339% from 1997 to 1998. The increase in 1999 was due primarily to
expansion throughout Europe with increased sales being generated by direct
sales, increased volume through existing distributors and new distributors
brought on during the year. Growth in 1998 was primarily driven by increased
sales activities in the United Kingdom and Germany. See Note 9 of Notes to
Consolidated Financial Statements for additional information about revenues in
geographic areas.
Total revenues have been reduced by sales and return allowances of $0.9
million and $0.2 million in 1998 and 1997, respectively. Because management
determined that the reserve at December 31, 1998 was adequate, there were no
additional sales and returns allowances recorded in 1999. The sales and return
allowances recorded in 1998 and 1997 were due primarily to increases in
revenues, the number of customers in our customer base and an increase in our
average transaction size. While our policy is not to accept sales returns,
circumstances can arise in which we accept returns to preserve customer
relationships.
COST OF REVENUES
Cost of License Revenues
Our cost of license revenues consists primarily of product packaging,
documentation, production costs and software royalties. Cost of license revenues
was $0.7 million, $0.4 million and $0.2 million in 1999, 1998 and 1997,
respectively, and was approximately 1% of total revenues in each of these years.
The increase in absolute dollar amount was due primarily to increases in license
revenues and increases in royalty expense. We expect cost of license revenues as
a percentage of total revenues in 2000 to remain at or slightly above the 1999
level.
Cost of Service Revenues
Our cost of service revenues is a combination of costs of maintenance,
training and consulting revenues. Our cost of maintenance revenues consists
primarily of costs associated with software upgrades, telephone support services
and on-site visits. Cost of training revenues consists primarily of the costs of
providing training classes and materials, which are provided both off-site and
at our headquarters. Cost of consulting revenues consists primarily of personnel
costs and expenses incurred in providing consulting services at customers'
facilities. Because we believe that providing a high level of support to
customers is a strategic advantage, we have invested significantly in personnel
and infrastructure. Cost of service revenues was $10.3 million, $5.0 million and
$2.4 million, in 1999, 1998 and 1997, respectively, representing 49%, 57% and
96% of service revenues. Cost of service revenues decreased on a percentage
basis in each of these years due primarily to economies of scale achieved as our
revenues and operations grew. For 2000, we expect our cost of service revenues
as a percentage of total revenues to increase slightly above our 1999 level as
we grow and expand our applications business.
OPERATING EXPENSES
Research and Development
Our research and development expenses consist primarily of salaries and
other personnel-related expenses associated with the development of new
products, the enhancement and localization of existing products, quality
assurance and development of documentation for our products. Research and
development expenses increased to $11.8 million from $8.4 million and $4.7
million in 1999, 1998 and 1997, respectively. The increase in each of these
periods was due primarily to an increase in personnel costs in each such period
for development of future products and enhancement of existing products.
Research and development expenses represented 19%, 28% and 37% of total revenues
in 1999, 1998 and 1997, respectively. The decrease as a percentage of total
revenues was due primarily to growth in our total revenues. To date, all
software and development costs have been expensed in the period incurred because
costs incurred subsequent to the establishment of technological feasibility have
not been significant. We believe that continued investment in research and
development is critical to attaining our strategic objectives, and, as a result,
we expect research
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and development expenses to increase in absolute dollars in future periods. For
2000, we expect research and development expense as a percentage of total
revenue will remain at or slightly below the 1999 level.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel costs,
including commissions, as well as costs of public relations, seminars, marketing
programs, lead generation, travel and trade shows. Sales and marketing expenses
increased to $33.6 million from $22.7 million and $11.2 million in 1999, 1998
and 1997, respectively. The increases reflect the hiring of additional sales and
marketing personnel in connection with building our direct, original equipment
manufacturer and reseller channels, higher sales commissions associated with
increased sales volume, and increased spending associated with trade shows, user
conference and other marketing programs. Sales and marketing expenses
represented 54%, 75% and 88% of our total revenues in 1999, 1998 and 1997,
respectively. The decrease as a percentage of total revenues was due primarily
to growth in total revenues. For 2000, we expect sales and marketing expense as
a percentage of total revenue will remain at or slightly below the 1999 level.
General and Administrative
Our general and administrative expenses consist primarily of personnel
costs for finance, human resources, legal and general management, as well as
professional services expense associated with recruiting, legal and accounting.
General and administrative expenses increased to $5.0 million from $3.1 million
and $2.4 million in 1999, 1998 and 1997, respectively, representing 8%, 10% and
19% of our total revenues in 1999, 1998 and 1997, respectively. Expenses
increased in each period due primarily to increased staffing in finance, human
resources, legal, information technology and administration to manage and
support our growth as well as increased costs paid to outside professional
service providers and increased facilities costs. The decrease as a percentage
of our total revenues was due primarily to the growth in our total revenues. We
expect that for 2000, our general and administrative expenses as a percentage of
total revenue will remain at or slightly above the 1999 level.
Bad debt expense charged to operations was $0.2 million, $0.3 million and
$0.4 million in 1999, 1998 and 1997, respectively, representing less than 1%, 1%
and 3% of total revenues in 1999, 1998 and 1997, respectively. The expense
declined in absolute dollars and as a percentage of revenues in each year due
primarily to an increase in repeat business with existing customers which
contributed to more successful collection efforts.
Merger-Related Costs
In 1999, we recorded estimated one-time costs of $2.1 million related to
the acquisition of Influence Software, Inc., which was accounted for as a
pooling-of-interests. These costs consisted primarily of investment banking and
professional fees and other direct costs associated with the merger. As of
December 31, 1999, there was a balance of $1.8 million remaining in accrued
liabilities which was used for final settlement expenditures in January 2000.
Stock-Based Compensation
The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date for
each stock option with respect to the options granted. From inception through
December 1999, the Company recorded deferred stock-based compensation of $3.7
million for the difference at the grant date between the exercise price and the
fair value of the common stock underlying the options. This amount is included
as a component of stockholders' equity and is being amortized on a graded
vesting method by charges to operations over the vesting period of the options.
Such amortization amounted to approximately $0.7 million, $0.1 million and
$2,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
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NET INTEREST INCOME (EXPENSE)
Interest income (expense) represents interest income earned on our cash and
cash equivalents and interest expense on capital equipment leases and
shareholder loans. Net interest income increased to $1.2 million in 1999, up
from $0.1 million in 1998 and $0.2 million in 1997. The increase in 1999 was
primarily due to increased average cash balance as a result of the completion of
our initial public offering of our common stock with net proceeds of $43.5
million in April 1999.
PROVISION FOR INCOME TAXES
We incurred net operating losses in 1997 and 1998 and consequently paid no
federal, state and foreign income taxes in those years. We recorded an income
tax provision of $0.8 million in 1999, due primarily to foreign income taxes
payable.
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $18.8 million and $4.4 million, respectively. We
also had federal and state research and development tax credit carryforwards of
approximately $1.1 million and $0.7 million, respectively. Our net operating
loss and tax credit carryforwards will expire at various dates beginning in
2000, if not utilized.
As of December 31, 1999 and 1998, we had deferred tax assets of
approximately $12.5 million and $7.8 million, respectively. Our net deferred tax
assets have been fully offset by a valuation allowance. Our net valuation
allowance increased by $4.7 million and $3.4 million during 1999 and 1998,
respectively. Deferred tax assets relate primarily to net operating loss
carryforwards and deferred revenue. See Note 6 of Notes to Consolidated
Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue in Financial Statements. SAB 101 provides
guidance with respect to the recognition, presentation and disclosure of revenue
in financial statements of all public registrants. We have not fully assessed
the impact of the adoption of SAB 101 and have not determined the effect, if
any, that it will have on our reported revenues or results of operations in
future periods.
LIQUIDITY AND CAPITAL RESOURCES
In April 1999, we completed our initial public offering of our common stock
and realized net proceeds from the offering of approximately $43.5 million.
Prior to the offering, we had funded our operations primarily through private
sales of preferred equity securities, promissory notes, and capital equipment
leases. As of December 31, 1999, we had $57.5 million in cash and cash
equivalents.
Net cash provided by operating activities was $7.2 million for the year
ended December 31, 1999. Our operating activities resulted in net cash outflows
of $2.4 million and $3.8 million in 1998 and 1997, respectively. Uses of cash in
operating activities in each period were primarily due to net operating losses
and increases in accounts receivable. The sources of cash in each period were
primarily increases in deferred revenue, increases in accounts payable and
accrued liabilities and increases in accrued compensation and related expenses.
Net cash used in investing activities was $1.4 million in 1999, $1.0
million in 1998 and $0.9 million in 1997, due primarily to the purchase of
property and equipment in all periods.
Net cash provided by financing activities was $44.7 million for the year
ended December 31, 1999, primarily from the proceeds of our initial public
offering of $43.5 million as well as proceeds from the issuance of common stock.
Net cash provided by financing activities for the year ended December 31, 1998
was $1.6 million, primarily from the proceeds of notes payable associated with
financing Influence which was an S corporation prior to the acquisition in
December 1999. Net cash provided by financing activities for the year ended
December 31, 1997 was $10.6 million, primarily through the issuance of preferred
stock and from the proceeds of notes payable.
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As of December 31, 1999, our principal commitments consisted of obligations
under operating and capital leases and promissory notes. In 1997 and 1998, we
issued promissory notes to three shareholders in exchange for cash advances and
payment for services. These notes bear interest at the bank's prime rate (8.5%
at December 31, 1999) plus 2% per annum, with a maximum rate of 10% per annum.
Principal and accrued interest on these notes at December 31, 1999, 1998 and
1997 was $3.4 million, $3.1 million and $1.3 million, respectively. The
principal and accrued interest on these notes were repaid in February 2000. As
of December 31, 1999, we had $0.2 million in outstanding borrowings under
capital lease agreements which are payable through 2001. During 1998, we
maintained a revolving line of credit which provided for borrowings of up to
$3.0 million based on 80% of eligible accounts receivable. Borrowings under this
line of credit bore interest, payable monthly, at 0.25% above prime rate.
Borrowings were secured by substantially all of our assets, and the agreement
also required us to comply with certain financial covenants. We chose not to
renew this line of credit when it expired in December 1998. See Notes 2 and 3 of
Notes to Consolidated Financial Statements.
On February 22, 2000, we entered into two lease agreements for new
corporate headquarters in Redwood City, California. The facility is under
construction and is expected to be complete in June 2001. The lease expires
twelve years after occupancy. As part of these leases, we have agreed to provide
letters of credit totaling $12.0 million as a security deposit for the first
year's lease payments until certain financial covenants are met.
We believe that our current cash balances and the cash flows generated by
operations will be sufficient to satisfy our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter, we
may require additional funds to support our working capital requirements, or for
other purposes, and may seek to raise such additional funds through public or
private equity financings or from other sources. We may not be able to obtain
adequate or favorable financing at that time. Any financing we obtain may dilute
your ownership interests.
A portion of our cash may be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
From time to time, in the ordinary course of business, we may evaluate potential
acquisitions of such businesses, products or technologies.
IMPACT OF YEAR 2000
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. During 1999, we did not
incur any material costs directly associated with our Year 2000 compliance
efforts, except for the compensation expense associated with our salaried
employees who devoted some of their time to our Year 2000 assessments and
remediation efforts. We are not aware of any material problems resulting from
Year 2000 issues with our products, our internal systems, or the products and
services of third parties. We will continue to monitor our mission critical
computer applications throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, foreign currency exchange rates and equity prices. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in "Factors That May Affect Future Results".
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INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. The primary objective of our investment activities is
to preserve principal while maximizing yields without significantly increasing
risk. Our investments consist primarily of commercial paper. Due to the nature
of our investments, we believe that there is no material risk exposure. All
investments are carried at market value, which approximates cost.
FOREIGN CURRENCY RISK
We develop products in the United States and market our products in North
and South America, Europe and the Asia-Pacific region. As a result, our
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As our
sales are primarily in U.S. dollars, a strengthening of the dollar could make
our products less competitive in foreign markets.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information contained in this Form 10-K, we have
identified the following risks and uncertainties that may have a material
adverse affect on our business, financial condition or results of operation.
This section should be read in conjunction with the audited Consolidated
Financial Statements and Notes thereto, and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in this Form 10-K.
THE EXPECTED FLUCTUATION OF OUR QUARTERLY RESULTS COULD CAUSE OUR STOCK PRICE TO
EXPERIENCE SIGNIFICANT FLUCTUATIONS OR DECLINES
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future. These fluctuations could cause our stock price to also
significantly fluctuate or experience declines. Some of the factors which could
cause our operating results to fluctuate include:
- the size and timing of customer orders, which can be affected by customer
order deferrals in anticipation of future new product introductions or
product enhancements and customer budgeting and purchasing cycles;
- market acceptance of our products;
- the length and variability of our sales cycle for our products;
- introduction or enhancement of our products or our competitors' products
and changes in our or our competitors' pricing policies;
- our ability to develop, introduce and market new products on a timely
basis;
- the mix of our products and services sold and the mix of distribution
channels utilized;
- our success in expanding our sales and marketing programs;
- technological changes in computer systems and environments and
- general economic conditions, which may affect our customers' capital
investment levels.
Our product revenues are not predictable with any significant degree of
certainty. Historically, we have recognized a substantial portion of our
revenues in the last month of the quarter. If customers cancel or delay orders,
it can have a material adverse impact on our revenues and results of operations
for the quarter. To the extent any such cancellations or delays are for large
orders, this impact will be greater. To the extent that the average size of our
orders increases, customers' cancellations or delays of orders will more likely
have a material adverse impact on our revenues and results of operations.
Our quarterly product license revenues are difficult to forecast because we
historically have not had a substantial backlog of orders, and therefore
revenues in each quarter are substantially dependent on orders
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booked and shipped in that quarter. Our product license revenues are also
difficult to forecast because the market for our products is rapidly evolving,
and our sales cycles, which may last many months, vary substantially from
customer to customer and vary in general due to a number of factors over which
we have little or no control. Nonetheless, our short-term expense levels are
relatively fixed and based, in part, on our expectations of future revenues. The
difficulty we have in predicting our quarterly revenue means revenues shortfalls
are likely to occur at some time, and our inability to adequately reduce
short-term expenses means such shortfalls will affect not only our revenue, but
also our overall business, results of operations and financial conditions.
Due to the uncertainty surrounding our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. While we achieved significant
quarter-to-quarter revenue growth in 1997, 1998 and 1999, you should not take
these recent quarterly results to be indicative of our future performance. We do
not expect to sustain this same rate of sequential quarterly revenue growth in
future periods. Moreover, it is likely that in some future quarter, our
operating results will fall below the expectations of stock analysts and
investors. If this happens, the price of our common stock may fall.
IF THE MARKET IN WHICH WE SELL OUR PRODUCTS AND SERVICES DOES NOT GROW AS WE
ANTICIPATE, IT WILL ADVERSELY AFFECT OUR REVENUES
The market for software solutions, including analytic applications, that
enable more effective business decision making by helping companies aggregate
and utilize data stored throughout an organization is relatively new and still
emerging. Substantially all of our revenues are attributable to the sale of
products and services in this market. If this market does not grow at the rate
we anticipate, our business, results of operations and financial condition will
be adversely affected. One of the reasons this market might not grow as we
anticipate is that many companies are not yet fully aware of the benefits of
using these software solutions to help make business decisions or the benefits
of our specific product solutions. As a result, we believe large companies to
date have deployed these software solutions to make business decisions on a
relatively limited basis. Although we have devoted and intend to continue to
devote significant resources promoting market awareness of the benefits of these
solutions, our efforts may be unsuccessful or insufficient.
WE EXPECT SEASONAL TRENDS TO CAUSE OUR QUARTERLY REVENUES TO FLUCTUATE
We have experienced, and expect to continue to experience, seasonality with
respect to product license revenues. In recent years, there has been a
relatively greater demand for our products in the fourth quarter than in each of
the first three quarters of the year, particularly the first quarter. As a
result, we have historically experienced relatively higher bookings in the
fourth quarter and relatively lighter bookings in the first quarter. While some
of this effect can be attributed to the rapid growth of revenues in recent
years, we believe that these fluctuations are caused by customer buying patterns
(often influenced by year-end budgetary pressures) and the efforts of our direct
sales force to meet or exceed year-end sales quotas. In addition, European sales
may tend to be relatively lower during the summer months than during other
periods. We expect that seasonal trends will continue for the foreseeable
future. This seasonal impact may increase as we continue to focus our sales
efforts on large corporations.
We were incorporated in 1993 and therefore have a limited operating history
upon which investors can evaluate our operations, products and prospects. We
have incurred significant net losses since our inception, and it is possible we
may not achieve profitability. We incurred net losses of $1.5 million, $9.3
million and $8.0 million in 1999, 1998 and 1997, respectively. As of December
31, 1999, we had an accumulated deficit of $23.9 million. In addition, we intend
to increase our operating expenses significantly in 2000; therefore, our
operating results will be adversely affected if revenues do not increase
significantly.
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BECAUSE WE SELL A FEW MAIN PRODUCTS, IF THEY DO NOT ACHIEVE BROAD MARKET
ACCEPTANCE, OUR REVENUES WILL BE ADVERSELY AFFECTED
In 1999 substantially all of our revenues were derived from our
PowerCenter, PowerMart, PowerConnect, Analytic Business Components for SAP R/3,
and Informatica Application Products and related services. We expect revenues
derived from these products and related services to comprise substantially all
of our revenues for the foreseeable future. Even if the emerging software market
in which these products are sold grows substantially, if either of these
products does not achieve market acceptance, our revenues will be adversely
affected. Market acceptance of our products could be materially adversely
affected if, among other things, applications suppliers integrate their products
to such a degree that the utility of the data integration functionality that our
products provide is minimized or rendered unnecessary.
RISKS ASSOCIATED WITH STRATEGIC ACQUISITIONS AND INVESTMENTS
In December 1999, we acquired Influence, a developer of analytic
applications for e-business, in a transaction accounted for as a
pooling-of-interests. There can be no assurance that this acquisition will be
effectively assimilated into our business. The integration of Influence will
place a burden on our management and infrastructure. Such integrations are
subject to risks commonly encountered in making such acquisitions, including,
among others, loss of key personnel of the acquired company, loss of key
customers and business relationships of the acquired company, the difficulty
associated with assimilating and integrating the personnel, operations and
technologies of the acquired company, the potential disruption of our ongoing
business, the maintenance of uniform standards, controls, procedures, employees
and clients. There can be no assurance that we will be successful in overcoming
these risks or any other problems encountered in connections with our
acquisition of Influence.
From time to time, in the ordinary course of business, we may evaluate
potential acquisitions of such businesses, products or technologies. In
addition, future acquisitions could result in the issuance of dilutive equity
securities, the incurrence of debt or contingent liabilities. Furthermore, there
can be no assurance that any strategic acquisition of investment will succeed.
Any future acquisition or investment could have a material adverse effect on our
business, financial condition and results of operation.
Recently, the Financial Accounting Standards Board ("FASB") voted to
eliminate pooling of interests accounting for acquisitions and the ability to
write-off in-process research and development has been limited by recent
pronouncements. The effect of these changes would be to increase the portion of
the purchase price for any future acquisitions that must be charged to our cost
of revenues and operating expenses in the periods following any such
acquisitions. As a consequence, our results of operations in periods following
any such acquisitions could be materially adversely affected. Although these
changes would not directly affect the purchase price for any of these
acquisitions, they would have the effect of increasing the reported expenses
associated with any of these acquisitions. To that extent, these changes may
make it more difficult for us to acquire other companies, product lines or
technologies.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS
We believe our future success will depend upon our ability to attract and
retain highly skilled personnel, including Gaurav S. Dhillon, our Chief
Executive Officer, and Diaz H. Nesamoney, our Chief Operating Officer, and other
key members of management. We currently do not have any key-man life insurance
relating to our key personnel, and these employees are at-will and not subject
to employment contracts. We may not be successful in attracting, assimilating
and retaining key personnel in the future.
As we seek to expand our operations, the hiring of qualified sales and
technical personnel will be difficult due to the limited number of qualified
professionals. Competition for these types of employees is intense. We have in
the past experienced difficulty in recruiting qualified sales and technical
personnel. Failure to attract, assimilate and retain personnel, particularly
sales and technical personnel, would have a material adverse effect on our
business, results of operations and financial condition.
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OUR MARKET IS HIGHLY COMPETITIVE
The market for our products is highly competitive, rapidly evolving and
subject to rapidly changing technology. Many of our competitors have longer
operating histories, substantially greater financial, technical, marketing or
other resources, or greater name recognition than we do. Our competitors may be
able to respond more quickly than we can to new or emerging technologies and
changes in customer requirements. Competition could seriously impede our ability
to sell additional products and services on terms favorable to us. Our current
and potential competitors may develop and market new technologies that render
our existing or future products obsolete, unmarketable or less competitive. We
believe we currently compete more on the basis of our products' functionality
than on the basis of price. If our competitors develop products with similar or
superior functionality, we may have difficulty competing on the basis of price.
Our current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with other solution
providers, thereby increasing the ability of their products to address the needs
of our prospective customers. Our current and potential competitors may
establish or strengthen cooperative relationships with our current or future
channel or strategic partners, thereby limiting our ability to sell products
through these channels. Competitive pressures could reduce our market share or
require us to reduce our prices, either of which could materially and adversely
affect our business, results of operations or financial condition.
We compete principally against providers of decision support, data
warehousing and enterprise application software. Such competitors include Acta
Technology, Inc., Informix Corporation, Broadbase Information Systems, Inc.,
E.piphany, Inc., Information Builders, Inc., and Sagent Technology, Inc. In
addition, we compete or may compete against database vendors that currently
offer, or may develop, products with functionalities that compete with our
solutions. These products typically operate specifically with these competitors'
proprietary databases. Such competitors include IBM Corporation, Microsoft
Corporation and Oracle Corporation. See "Business -- Competition."
IF WE DO NOT MAINTAIN AND STRENGTHEN OUR RELATIONSHIPS WITH OUR CHANNEL AND
STRATEGIC PARTNERS, OUR ABILITY TO GENERATE REVENUE WILL BE ADVERSELY AFFECTED
We believe that our ability to increase the sales of our products and our
future success will depend in part upon maintaining and strengthening successful
relationships with our current or future partners. In addition to our direct
sales force, we rely on established relationships with a variety of channel
partners, such as systems integrators, resellers and distributors, for
marketing, licensing and support of our products in the United States and
internationally. We also rely on relationships with strategic technology
partners, such as enterprise resource planning providers, for the promotion of
our solutions. In particular, our ability to market our products depends
substantially on our relationships with such significant partners as KPMG,
PeopleSoft, PricewaterhouseCoopers and Andersen Consulting. In addition, our
channel partners may offer products of several different companies, including,
in some cases, products that compete with our products. We have limited control,
if any, as to whether these strategic partners devote adequate resources to
promoting and selling our products.
We may not be able to maintain our channel or strategic partnerships or
attract sufficient additional channel or strategic partners who are able to
market our products effectively or who are qualified to provide timely and
cost-effective customer support and service. Further, we can give no assurance
that our relationships with our channel and strategic partners will generate
enough revenue to offset the significant resources used to develop these
channels.
THE LENGTHY SALES CYCLE FOR OUR PRODUCTS MAKES OUR REVENUES SUSCEPTIBLE TO
FLUCTUATIONS
Our sales cycle is generally long because the expense, complexity, broad
functionality and company-wide deployment of our products typically requires
executive-level approval for investment in our products. In addition, to
successfully sell our products, we frequently must educate our potential
customers about the full benefits of our products, which can require significant
time. Due to these factors, the sales cycle associated
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with the purchase of our products is subject to a number of significant risks
over which we have little or no control, including:
- customers' budgetary constraints and internal acceptance review
procedures;
- the timing of budget cycles;
- concerns about the introduction of our or our competitors' new products
or
- product enhancements and potential downturns in general economic
conditions.
If our sales cycle lengthens unexpectedly, it could adversely affect the
timing of our revenues. Our sales cycle may lengthen as we continue to focus our
sales efforts on large corporations. To the extent that potential customers
divert resources and attention to Year 2000 issues, the sales cycle could be
further lengthened.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS
We have experienced a period of rapid and substantial growth that has
placed and, if such growth continues, will continue to place a strain on our
administrative and operational infrastructure. If we are unable to manage this
growth effectively, our business, results of operations or financial condition
may be materially adversely affected. We increased the number of our employees
from 50 at December 31, 1996, to approximately 332 at December 31, 1999. Our
revenues increased from $2.1 million in 1996 to $62.4 million in 1999. Our
ability to manage our operations and growth effectively requires us to continue
to improve our operational, financial and management controls, reporting systems
and procedures and hiring programs. We may not be able to successfully implement
improvements to our management information and control systems in an efficient
or timely manner and may discover deficiencies in existing systems and controls.
TECHNOLOGICAL ADVANCES AND EVOLVING INDUSTRY STANDARDS COULD ADVERSELY IMPACT
OUR FUTURE PRODUCT SALES
The market for our products is characterized by continuing technological
development, evolving industry standards and changing customer requirements. The
introduction of products by our direct competitors or others embodying new
technologies, the emergence of new industry standards or changes in customer
requirements could render our existing products obsolete, unmarketable or less
competitive. In particular, an industry-wide adoption of uniform open standards
across heterogeneous analytic applications could minimize the importance of the
integration functionality of our products and materially adversely affect the
competitiveness and market acceptance of our products. Our success depends upon
our ability to enhance existing products, to respond to changing customer
requirements and to develop and introduce in a timely manner new products that
keep pace with technological and competitive developments and emerging industry
standards. We have in the past experienced delays in releasing new products and
product enhancements and may experience similar delays in the future. As a
result, some of our customers deferred purchasing the PowerMart product until
this upgrade was released. Future delays or problems in the installation or
implementation of our new releases may cause customers to forego purchases of
our products and purchase those of our competitors instead. Failure to develop
and introduce new products, or enhancements to existing products, in a timely
manner in response to changing market conditions or customer requirements, will
materially and adversely affect our business, results of operations and
financial condition.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO GREATER INTELLECTUAL PROPERTY,
COLLECTIONS, REGULATORY AND OTHER RISKS
International revenues accounted for 18%, 12% and 6% of our total
consolidated revenues in 1999, 1998 and 1997, respectively. Our international
business is subject to a number of risks, including the following:
- greater difficulty in protecting intellectual property;
- greater difficulty in staffing and managing foreign operations;
- greater risk of uncollectible accounts;
- longer collection cycles;
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- potential unexpected changes in regulatory practices and tariffs;
- potential unexpected changes in tax laws;
- sales seasonality;
- the impact of fluctuating exchange rates between the U.S. dollar and
foreign currencies in markets where we do business and
- general economic and political conditions in these foreign markets.
It is difficult to predict the extent of the future impact of these
conditions. These factors and other factors could have a material adverse effect
on our future international revenues and consequently on our business, results
of operations and financial condition.
RISK ASSOCIATED WITH GEOGRAPHIC EXPANSION
A majority of our revenue historically has been derived from clients
located in the United States. Our ability to achieve significant future revenue
growth will in large part depend on our ability to get new customers in the
United States and internationally.
Growth and geographic expansion have resulted in new and increased
responsibilities for management personnel and have placed and continue to place
a strain on our management and operating and financial systems. We will be
required to continue to implement and accommodate the increased complexities of
international and multi currency transactions. Any failure to implement and
improve our operating and financial systems or to hire appropriate personnel to
manage the operations would have a material adverse effect on our business,
financial condition and result of operations.
IF OUR PRODUCTS CONTAIN SIGNIFICANT DEFECTS, THESE DEFECTS COULD CAUSE US TO
LOSE REVENUE AND EXPOSE US TO PRODUCT LIABILITY CLAIMS
The software products we offer are inherently complex and, despite
extensive testing and quality control, have in the past and may in the future
contain errors or defects, especially when we first introduce them. These
defects and errors could cause damage to our reputation, loss of revenue,
product returns, order cancellations or lack of market acceptance of our
products. Accordingly, these defects and errors could have a material adverse
effect on our business, results of operations or financial condition. We have in
the past and may in the future need to issue corrective releases of our software
products to fix these defects or errors.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in our
license agreements may not be effective as a result of existing or future
national, federal, state or local laws or ordinances or unfavorable judicial
decisions. Although we have not experienced any product liability claims to
date, sale and support of our products entails the risk of such claims, which
could be substantial in light of the use of our products in enterprise-wide
applications. If a claimant successfully brings a product liability claim
against us, it could have a material adverse effect on our business, results of
operations or financial condition.
OUR INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. It is possible that our pending patent applications will
not be allowed or that competitors will successfully challenge the validity or
scope of our allowed patent or any future allowed patents. Our patents alone may
not provide us with any significant competitive advantage.
Third parties could copy or otherwise obtain and use our products or
technology without authorization, or develop similar technology independently.
It is difficult for us to police unauthorized use of our products, and,
31
<PAGE> 32
although we are unable to determine the extent to which piracy of our software
products exists, software piracy is a prevalent problem in our industry in
general. Effective protection of intellectual property rights is unavailable or
limited in certain foreign countries. The protection of our proprietary rights
may be inadequate and our competitors could independently develop similar
technology, duplicate our products or design around any patents or other
intellectual property rights we hold.
As is common in the software industry, we may from time to time receive
notices from third parties claiming infringement by our products of third-party
patent and other proprietary rights. On April 7, 1999, we were notified by
another company that it is evaluating our products to determine whether our
products infringe its U.S. patent and has requested that we enter into
discussions with them as to whether it is necessary or appropriate for us to
obtain a license. Although no litigation has been filed by this company against
us this company has filed litigation against one of our competitors, alleging
infringement of its patent. Third parties, including the company that has
contacted us regarding our products, could claim that our current or future
products infringe their patent or other proprietary rights. Any claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect upon our business,
financial condition and operating results. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to us, or at all. Legal
action claiming patent infringement could be commenced against us, and we may
not prevail in such litigation given the complex technical issues and inherent
uncertainties in patent litigation. Moreover, the cost of defending patent
litigation could be substantial, regardless of the outcome. In the event a
patent claim against us was successful and we could not obtain a license on
acceptable terms or license a substitute technology or redesign to avoid
infringement, our business, financial condition and operating results would be
materially adversely affected. See "Business -- Intellectual Property and Other
Proprietary Rights."
YEAR 2000 ISSUES COULD NEGATIVELY AFFECT OUR BUSINESS
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. During 1999, we did not
incur any material costs directly associated with our Year 2000 compliance
efforts, except for the compensations expense associated with our salaried
employees who devoted some of their time to our Year 2000 assessments and
remediation efforts. We are not aware of any material problems resulting from
Year 2000 issues, either with our products, our internal systems, or the
products and services of third parties. We will continue to monitor our mission
critical computer applications throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
CERTAIN EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER INFORMATICA
Our officers, directors and principal stockholders (i.e., greater than 5%
stockholders) will together control approximately 27% of our outstanding common
stock as of February 29, 2000. As a result, these stockholders, if they act
together, will be able to control the management and affairs of Informatica and
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change in control of
Informatica and might affect the market price of our common stock.
OUR STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY
The market price for the common stock will be affected by a number of
factors, including the following:
- the announcement of new products or product enhancements by us or our
competitors;
- quarterly variations in our or our competitors' results of operations;
- changes in earnings estimates or recommendations by securities analysts;
32
<PAGE> 33
- developments in our industry and
- general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been unrelated
to the operating performance of such companies. Such factors and fluctuations,
as well as general economic, political and market conditions, may materially
adversely affect the market price of our common stock.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT COULD
DISCOURAGE A TAKEOVER
Our basic corporate documents and Delaware law contain provisions that
might enable our management to resist a takeover. These provisions might
discourage, delay or prevent a change in the control of Informatica or a change
in our management. Our amended and restated certificate of incorporation filed
in connection with this offering provides that when we are eligible, we will
have a classified board of directors, with each class of directors subject to
re-election every three years. This classified board when implemented will have
the effect of making it more difficult for third parties to insert their
representatives on our board of directors and gain control of Informatica. These
provisions could also discourage proxy contests and make it more difficult for
you and other stockholders to elect directors and take other corporate actions.
The existence of these provisions could limit the price that investors might be
willing to pay in the future for shares of the common stock.
CHANGES IN ACCOUNTING STANDARDS COULD AFFECT THE CALCULATION OF OUR FUTURE
OPERATING RESULTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue in Financial Statements. SAB 101 provides
guidance with respect to the recognition, presentation and disclosure of revenue
in financial statements of all public registrants. We have not fully assessed
the impact of the adoption of SAB 101 and has not determined the effect, if any,
that it will have on our reported revenues or results of operations in future
periods.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Quantitative and Qualitative Disclosure About
Market Risk," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Form 10-K constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. Such factors include, among other things,
those listed under "Quantitative and Qualitative Disclosure About Market Risk"
and elsewhere in this Form 10-K.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this Form 10-K.
33
<PAGE> 34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Informatica Corporation
We have audited the accompanying consolidated balance sheets of Informatica
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Informatica Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 24, 2000
34
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INFORMATICA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 57,521 $ 7,167
Accounts receivable, net of allowances of $1,977 and
$1,731 in 1999 and 1998, respectively.................. 8,119 3,707
Prepaid expenses and other current assets................. 1,272 563
-------- --------
Total current assets.............................. 66,912 11,437
Property and equipment, net................................. 1,482 592
Other assets................................................ 129 136
-------- --------
Total assets...................................... $ 68,523 $ 12,165
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................. $ 7,999 $ 4,354
Accrued compensation and related expenses................. 6,264 3,589
Income taxes payable...................................... 813 --
Current portion of capital lease obligations.............. 150 242
Current portion of notes payable to stockholders.......... 2,075 1,921
Deferred revenue.......................................... 9,660 4,573
-------- --------
Total current liabilities......................... 26,961 14,679
Capital lease obligations, less current portion............. 66 217
Notes payable to stockholders, less current portion......... 1,372 1,263
Commitments
Redeemable convertible preferred stock, no par value,
issuable in series:
2,000,000 shares authorized in 1999 and 16,340,000 shares
authorized in 1998; 15,880,000 issued and outstanding
at December 31, 1998................................... -- 17,586
Stockholders' equity (deficit):
Common stock, $0.001 par value; 100,000,000 shares
authorized; 31,998,618 and 8,160,348 shares issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 67,020 1,213
Notes receivable from stockholders........................ (40) (40)
Deferred stock-based compensation......................... (2,888) (383)
Accumulated deficit....................................... (23,884) (22,389)
Accumulated other comprehensive income (loss)............. (84) 19
-------- --------
Total stockholders' equity (deficit).............. 40,124 (21,580)
-------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity
(deficit)....................................... $ 68,523 $ 12,165
======== ========
</TABLE>
See accompanying notes.
35
<PAGE> 36
INFORMATICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
License................................................... $41,184 $21,582 $10,242
Service................................................... 21,195 8,764 2,499
------- ------- -------
Total revenues.................................... 62,379 30,346 12,741
Cost of revenues:
License................................................... 686 376 190
Service................................................... 10,310 5,013 2,392
------- ------- -------
Total cost of revenues............................ 10,996 5,389 2,582
------- ------- -------
Gross profit................................................ 51,383 24,957 10,159
Operating expenses:
Research and development.................................. 11,843 8,385 4,747
Sales and marketing....................................... 33,613 22,733 11,219
General and administrative................................ 5,012 3,132 2,408
Merger-related costs...................................... 2,082 -- --
Stock-based compensation.................................. 742 98 2
------- ------- -------
Total operating expenses.......................... 53,292 34,348 18,376
------- ------- -------
Loss from operations........................................ (1,909) (9,391) (8,217)
Interest income (expense), net.............................. 1,238 106 199
------- ------- -------
Loss before income taxes.................................... (671) (9,285) (8,018)
Income tax provision........................................ (824) -- --
------- ------- -------
Net loss.................................................... $(1,495) $(9,285) $(8,018)
======= ======= =======
Net loss per share:
Basic and diluted......................................... $ (0.06) $ (1.21) $ (1.18)
======= ======= =======
Shares used in calculation of net loss per share:
Basic and diluted......................................... 23,783 7,652 6,777
======= ======= =======
</TABLE>
See accompanying notes.
36
<PAGE> 37
INFORMATICA CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------
REDEEMABLE CONVERTIBLE
---------------------- NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE DEFERRED
---------------------- -------------------- FROM STOCK-BASED
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION
----------- -------- ---------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996....... 11,380,000 $ 8,593 5,603,920 $ 104 $(40) $ --
Components of comprehensive loss:
Net loss...................... -- -- -- -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- --
----------- -------- ---------- ------- ---- -------
Comprehensive loss................
Issuance of common stock.......... -- -- 1,115,094 450 -- --
Repurchase of common stock........ -- -- (4,956) (2) -- --
Common stock options exercised.... -- -- 288,610 14 -- --
Issuance of Series D preferred
stock, net of issuance costs.... 4,500,000 8,993 -- -- -- --
Deferred stock-based
compensation.................... -- -- -- 85 -- (85)
Amortization of stock-based
compensation.................... -- -- -- -- -- 2
----------- -------- ---------- ------- ---- -------
BALANCES AT DECEMBER 31, 1997....... 15,880,000 17,586 7,002,668 651 (40) (83)
Components of comprehensive loss:
Net loss...................... -- -- -- -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- --
Comprehensive loss................
Repurchase of common stock........ -- -- (6,194) (3) -- --
Common stock options exercised.... -- -- 1,163,874 167 -- --
Deferred stock-based
compensation.................... -- -- -- 398 -- (398)
Amortization of stock-based
compensation.................... -- -- -- -- -- 98
----------- -------- ---------- ------- ---- -------
BALANCES AT DECEMBER 31, 1998....... 15,880,000 17,586 8,160,348 1,213 (40) (383)
Components of comprehensive loss:
Net loss........................ -- -- -- -- -- --
Foreign currency translation
adjustment.................... -- -- -- -- -- --
Comprehensive loss................
Issuance of common stock in
connection with initial public
offering, net of offering
costs........................... -- -- 6,000,000 43,514 -- --
Conversion of redeemable
convertible preferred stock into
common stock.................... (15,880,000) (17,586) 15,880,000 17,586 -- --
Repurchase of common stock........ -- -- (8,672) (3) -- --
Common stock options exercised.... -- -- 1,569,396 1,251 -- --
Exercise of warrants.............. -- -- 397,546 212 -- --
Deferred stock-based
compensation.................... -- -- -- 3,247 -- (3,247)
Amortization of stock-based
compensation.................... -- -- -- -- 742
----------- -------- ---------- ------- ---- -------
BALANCES AT DECEMBER 31, 1999....... -- $ -- 31,998,618 $67,020 $(40) $(2,888)
=========== ======== ========== ======= ==== =======
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
ACCUMULATED INCOME EQUITY
DEFICIT (LOSS) (DEFICIT)
----------- ------------- -------------
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996....... $ (5,086) $ -- $ (5,022)
Components of comprehensive loss:
Net loss...................... (8,018) -- (8,018)
Foreign currency translation
adjustment.................. -- (11) (11)
-------- ----- --------
Comprehensive loss................ (8,029)
Issuance of common stock.......... -- -- 450
Repurchase of common stock........ -- -- (2)
Common stock options exercised.... -- -- 14
Issuance of Series D preferred
stock, net of issuance costs.... -- -- --
Deferred stock-based
compensation.................... -- -- --
Amortization of stock-based
compensation.................... -- -- 2
-------- ----- --------
BALANCES AT DECEMBER 31, 1997....... (13,104) (11) (12,587)
Components of comprehensive loss:
Net loss...................... (9,285) -- (9,285)
Foreign currency translation
adjustment.................. -- 30 30
--------
Comprehensive loss................ (9,255)
Repurchase of common stock........ -- -- (3)
Common stock options exercised.... -- -- 167
Deferred stock-based
compensation.................... -- -- --
Amortization of stock-based
compensation.................... -- -- 98
-------- ----- --------
BALANCES AT DECEMBER 31, 1998....... (22,389) 19 (21,580)
Components of comprehensive loss:
Net loss........................ (1,495) -- (1,495)
Foreign currency translation
adjustment.................... -- (103) (103)
--------
Comprehensive loss................ (1,598)
Issuance of common stock in
connection with initial public
offering, net of offering
costs........................... -- -- 43,514
Conversion of redeemable
convertible preferred stock into
common stock.................... -- -- 17,586
Repurchase of common stock........ -- -- (3)
Common stock options exercised.... -- -- 1,251
Exercise of warrants.............. -- -- 212
Deferred stock-based
compensation.................... -- -- --
Amortization of stock-based
compensation.................... -- -- 742
-------- ----- --------
BALANCES AT DECEMBER 31, 1999....... $(23,884) $ (84) $ 40,124
======== ===== ========
</TABLE>
See accompanying notes.
37
<PAGE> 38
INFORMATICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(1,495) $(9,285) $(8,018)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation.............................................. 550 1,716 516
Sales and returns allowances.............................. -- 886 241
Other receivable allowances............................... 246 320 440
Amortization of stock-based compensation.................. 742 98 2
Interest expense related to notes payable................. 289 167 34
Changes in operating assets and liabilities:
Accounts receivable..................................... (4,658) (1,756) (2,554)
Prepaid expenses and other assets....................... (702) (305) (208)
Accounts payable and accrued liabilities................ 3,645 1,838 2,128
Income taxes payable.................................... 813 -- --
Accrued compensation and related expenses............... 2,675 2,017 1,216
Deferred revenue........................................ 5,087 1,887 2,364
------- ------- -------
Net cash provided by (used in) operating activities......... 7,192 (2,417) (3,839)
INVESTING ACTIVITIES
Purchase of property and equipment, net..................... (1,440) (954) (869)
------- ------- -------
Net cash used in investing activities....................... (1,440) (954) (869)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock................... -- -- 8,993
Proceeds from initial public offering, net.................. 43,514 -- --
Proceeds from issuance of common stock, net of payments for
repurchases............................................... 1,248 164 462
Proceeds exercise of warrants............................... 212 -- --
Proceeds from notes payable to stockholders................. 1,286 1,691 1,293
Payments on notes payable to stockholders................... (1,312) -- --
Payments on capital lease obligations....................... (243) (235) (164)
------- ------- -------
Net cash provided by (used in) financing activities......... 44,705 1,620 10,584
------- ------- -------
Effect of foreign currency translation on cash and cash
equivalents............................................... (103) 30 (11)
------- ------- -------
Increase (decrease) in cash and cash equivalents............ 50,354 (1,721) 5,865
------- ------- -------
Cash and cash equivalents at beginning of year.............. 7,167 8,888 3,023
------- ------- -------
Cash and cash equivalents at end of year.................... $57,521 $ 7,167 $ 8,888
======= ======= =======
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................. $ 29 $ 48 $ 40
======= ======= =======
Income taxes paid......................................... $ 10 -- --
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations incurred........................ $ -- $ 437 $ --
======= ======= =======
Conversion of redeemable convertible preferred stock into
common stock............................................ $17,586 $ -- $ --
======= ======= =======
Deferred stock-based compensation related to options
granted................................................. $ 3,247 $ 398 $ 85
======= ======= =======
</TABLE>
See accompanying notes.
38
<PAGE> 39
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF THE COMPANY
Informatica Corporation (the "Company") was incorporated in California in
February 1993 and reincorporated in Delaware in March 1999. The Company operates
in one business segment which provides software solutions that help large
companies deploy, manage, maintain and grow systems that enable more effective
business decision making.
On December 15, 1999, the Company acquired all of the outstanding stock of
Influence Software, Inc. (Influence), a developer of analytic applications for
eBusiness. The transaction was recorded using the pooling-of-interests method of
accounting, and as such, financial information for all dates and periods prior
to the acquisition has been restated to reflect the acquisition.
BASIS OF PRESENTATION
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 functional currency of the Company's foreign subsidiaries is the local
currency. The Company translates all assets and liabilities to U.S. dollars at
the current exchange rates as of the applicable balance sheet date. Revenue and
expenses are translated at the average exchange rate prevailing during the
period. Gains and losses resulting from the translation for the foreign
subsidiaries' financial statements are reported as a separate component of
stockholders' equity. Net gains and losses resulting from foreign exchange
transactions were not significant during any of the periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Changes in these estimates and assumptions may have a
material impact on the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist of cash and highly liquid
short-term government securities with insignificant interest rate risk and
original maturities of three months or less at date of purchase, are stated at
cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over estimated useful
lives of the related assets, generally three years or less.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Financial Accounting Standards Board ("FASB") Statement No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed", under
which certain software development costs incurred subsequent to the
39
<PAGE> 40
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
establishment of technological feasibility are capitalized and amortized over
the estimated lives of the related products. Technological feasibility is
established upon completion of a working model. Through December 31, 1999, costs
incurred subsequent to the establishment of technological feasibility have not
been significant and all software development costs have been charged to
research and development expense in the accompanying consolidated statements of
operations.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable. The Company performs
ongoing credit evaluations of its customers, which are primarily located in the
U.S., Europe and Canada, and generally does not require collateral. Allowances
for credit risks and for estimated future returns are provided upon shipment.
Returns to date have not been material. Actual credit losses and returns may
differ from the Company's estimates and such differences could be material to
the financial statements.
REVENUE RECOGNITION
The Company generates revenues through two sources, software licenses and
services. The Company's license revenues are generated from licensing the
Company's products directly to end users and indirectly through resellers and
original equipment manufacturers. Service revenues are generated from
maintenance contracts and training and consulting services performed for
customers that license the Company's products directly and indirectly through
resellers.
License revenues are recognized when a noncancelable license agreement has
been signed, the product has been shipped, the fees are fixed and determinable,
collectibility is probable and vendor-specific objective evidence exists to
allocate the total fee to elements of the arrangement. Vendor-specific objective
evidence is based on the price charged when an element is sold separately. In
the case of an element not sold separately, the price is established by
authorized management. If an acceptance period is required, revenue is
recognized upon customer acceptance or the expiration of the acceptance period.
The Company also enters into reseller arrangements that typically provide for
sublicense fees based on a percentage of list price. For direct sales, revenue
is recognized upon shipment to the end user and when collectibility is probable.
For sales through resellers, revenue is recognized upon shipment to the reseller
and when collectibility is probable or upon cash collections based on credit
history with the reseller. The Company's agreements with its customers and
resellers do not contain product return rights.
Revenues from services, which consist of fees for ongoing support and
product updates, are recognized ratably over the term of the contract, typically
one year. Consulting revenues are primarily related to implementation services
and product enhancements performed on a time-and-materials basis under separate
service arrangements related to the installation of the Company's software
products. Training revenues are generated from classes offered both on-site and
at customer locations. Revenues from consulting and training services are
recognized as the services are performed.
Deferred revenue includes deferred maintenance revenue and prepaid training
and consulting fees. Deferred license revenue amounts do not include items which
are both deferred and unbilled. The Company's practice is to net such deferred
items against the related receivables balances. As of December 31, 1999 and
1998, there were $9.2 million and $3.3 million of unbilled receivables netted
against deferred license revenue, respectively.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in
40
<PAGE> 41
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and, accordingly, recognizes no compensation
expense for the stock option grants.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflects
the potential dilution of securities by adding other common stock equivalents,
including stock options, warrants and convertible preferred stock, to the
weighted average number of common shares outstanding during the period, if
dilutive. Potentially dilutive securities have been excluded from the
computation of diluted net loss per share as their inclusion would be
antidilutive.
The calculation of basic and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss.............................................. $(1,495) $(9,285) $(8,018)
======= ======= =======
Weighted average shares of common stock outstanding
used in calculation of basic and diluted net loss
per share........................................... 23,783 7,652 6,777
======= ======= =======
Basic and diluted net loss per share................ $ (0.06) $ (1.21) $ (1.18)
======= ======= =======
</TABLE>
If the Company had reported net income, the calculation of diluted earnings
per share would have included the shares used in the computation of basic net
loss per share as well as an additional 6,144,000, 4,480,000 and 3,372,000
common equivalent shares related to outstanding stock options and warrants not
included in the calculations above (determined using the treasury stock method)
for 1999, 1998 and 1997, respectively.
COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. The only item of other
comprehensive income (loss) which the Company currently reports is foreign
currency translation adjustments, which are included in accumulated other
comprehensive income (loss) in the consolidated statements of redeemable
convertible preferred stock and stockholders' equity (deficit). Tax effects of
comprehensive income (loss) are not considered material.
INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement No.
109, "Accounting for Income Taxes", which requires the use of the liability
method in accounting for income taxes. Under this method, deferred tax assets
and liabilities are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce the deferred tax assets to the amounts
expected to be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. SAB
101 provides guidance with respect to the recognition, presentation and
disclosure of revenue in financial statements of all public registrants. The
company has not fully assessed the impact of the adoption of SAB 101 and has not
determined the effect, if any, that it will have on the Company's reported
revenues or results of operations in future periods.
41
<PAGE> 42
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Computer and office equipment............................... $ 2,540 $1,100
Furniture and fixtures...................................... 125 125
------- ------
2,665 1,225
Less accumulated depreciation and amortization.............. (1,183) (633)
------- ------
$ 1,482 $ 592
======= ======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $927,000 as of December 31,
1999 and 1998. Accumulated amortization of these assets was $342,000 and
$146,000 at December 31, 1999 and 1998, respectively. The related amortization
is included with depreciation expense.
3. LEASE OBLIGATIONS
The Company had an equipment financing agreement which provided up to
$564,000 for the purchase of property and equipment and expired in January 1998.
In February 1998, the Company entered into another equipment financing agreement
with the same lender which increased the line to $1,510,000 for the purchase of
property and equipment. Borrowings under these agreements bear interest at a
rate of 3.07% and 3.19%, respectively, for 36 months. The Company is also
required to choose to either pay a supplemental additional interest portion of
20% of the original purchase price due and payable at the end of the agreement
term or to extend the agreement term for an additional year at a monthly
interest rate of 2.05% of the original purchase amount. As of December 31, 1999,
total borrowings under these agreements amounted to $927,000 of which $216,000
was outstanding.
The Company leases its office facilities and certain office equipment under
noncancelable lease agreements which require the Company to pay operating costs,
including property taxes, normal maintenance and insurance. Rent expense
amounted to $2,005,000, $1,653,000 and $501,000 for 1999, 1998 and 1997,
respectively.
Future minimum lease payments under noncancelable operating and capital
leases are summarized as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Years ending December 31:
2000.................................................... $ 3,824 $161
2001.................................................... 2,446 67
2002.................................................... 2,314 --
2003.................................................... 2,364 --
2004.................................................... 2,415 --
Thereafter................................................ 5,674 --
------- ----
Total minimum lease payments.............................. $19,037 228
=======
Less interest............................................. 12
----
Present value of minimum lease payments................... 216
Less current portion...................................... 150
----
$ 66
====
</TABLE>
42
<PAGE> 43
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY
BRIDGE FINANCING AND WARRANTS
In connection with the issuance of short-term promissory notes in May 1996,
the Company granted warrants to the lenders to purchase up to 410,000 shares of
Series C preferred stock at $1.25 per share. The warrants expire May 1, 2001.
The Company deemed the fair value of the warrants to be $55,000, which was
recorded as a discount on the notes. The fair value was determined using a
Black-Scholes option pricing model with the following assumptions: a risk-free
interest rate of 6.0%, no dividend yield or volatility factor, and an expected
life of the warrant of five years. This discount was amortized to interest
expense over the term of the notes during 1996. Upon the Company's initial
public offering the warrants were converted into warrants to purchase 410,000
shares of common stock. In fiscal 1999, the Company issued a net of 397,546
shares of common stock upon the exercise of warrants, a portion of which were
exercised pursuant to net exercise provisions, for a total of $212,000.
COMMON STOCK
At December 31, 1999, the Company has reserved the following shares of its
common stock for future issuance:
<TABLE>
<S> <C>
Outstanding stock options................................... 8,206,659
Reserved for future stock option grants..................... 886,200
---------
9,092,859
=========
</TABLE>
On April 29, 1999 the Company completed an initial public offering in which
it sold 6,000,000 shares of Common Stock, including 500,000 shares in connection
with the exercise of the underwriters' over-allotment option, at $8 per share.
The Company received $43.5 million in cash, net of underwriting discounts,
commissions and other offering costs.
STOCK SPLIT
On January 26, 2000, the Board of Directors approved a two-for-one split of
its $.001 par value common stock to be effected in the form of a stock dividend.
The stock split was effected by distribution to each stockholder of record as of
February 18, 2000 of one share of the Company's common stock for each share of
common stock held. All references in the financial statements to number of
shares, per share amounts, stock option data and market prices of the Company's
common stock have been restated for the effect of the stock split.
1993 AND 1996 FLEXIBLE STOCK INCENTIVE PLANS
The Company's 1993 and 1996 Flexible Stock Plans (the "Stock Plans"), in
effect through our initial public offering, authorized the granting of 8,454,500
incentive and nonstatutory common stock options to employees, directors, and
consultants at exercise prices no less than 100% and 85%, respectively, of the
fair market value of the common stock on the grant date, as determined by the
Board of Directors. Options granted are exercisable over a maximum term of ten
years and generally vest over a period of up to four years. In the event
optionholders cease to be employed by the Company, all unvested options are
forfeited and all vested options may be exercised within a 90 day period after
termination; under the restricted portion of the plans, the Company also has the
right to repurchase at the original purchase price any unvested shares if the
holder is no longer employed by the Company. As of December 31, 1999, no
outstanding common shares are subject to such repurchase rights. Options that
are canceled under the 1996 Stock Plan will be available for future grants under
the 1999 Stock Incentive Plan. There were no shares available for option grants
under the 1996 Stock Plan at December 31, 1999.
43
<PAGE> 44
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999 STOCK INCENTIVE PLAN
The stockholders approved the 1999 Stock Incentive Plan (the "Incentive
Plan") in April 1999 under which 1,300,000 shares have been reserved for
issuance. In addition, any shares not issued under the 1996 Flexible Stock
Incentive Plan will also be available for grant. The number of shares reserved
under the Incentive Plan will automatically increase annually beginning on
January 1, 2000 by the lesser of 8,000,000 shares or 5% of the total amount of
fully diluted shares of common stock outstanding as of such date. Under the
Incentive Plan, eligible employees may purchase stock options, stock
appreciation rights, restricted shares and stock units. The exercise price for
incentive stock options and non-qualified options may not be less than 100% and
85%, respectively, of the fair value of common stock at the option grant date.
Options granted are exercisable over a maximum term of 10 years from the date of
the grant and generally vest over a period of four years. As of December 31,
1999, the Company has 386,200 options available for grant under the Incentive
Plan.
In connection with the acquisition of Influence, as discussed in Note 10,
the Company converted options to purchase shares of Influence common stock into
options to purchase shares of the Company's common stock. The number of shares
of the Company's common stock issuable under each option and the exercise price
for each grant were adjusted by an exchange ratio. The Company assumed the Stock
Incentive Plan ("Influence plan") under which the options had been originally
granted, however, no further options will be granted under the Influence plan.
The converted options continue to be subject to the terms of the Influence plan.
The Influence plan provided for the granting of incentive stock options and
nonstatutory stock options. The exercise price of all options granted prior to
the acquisition were determined by the Influence board of directors and were not
less than the fair market value on the date of the grant. The options generally
expire seven years from the date of the grant and vest over a period of four
years from the date of the grant.
1999 NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
The stockholders adopted the 1999 Non-Employee Director Stock Option Plan
(the "Directors Plan") in April 1999 under which 500,000 shares have been
reserved for issuance. Each non-employee joining the Board of Directors
following the completion of the initial public offering will automatically
receive options to purchase 50,000 shares of common stock at an exercise price
per share equal to the fair market value of the common stock. These options are
exercisable over a maximum term of five years and will vest in four equal annual
installments on each yearly anniversary from the date of the grant. In addition,
each non-employee director, who has been a member of the Board for at least six
months prior to each annual stockholders meeting, will automatically receive
options to purchase 10,000 shares of common stock at each such meeting. Each
option will have an exercise price equal to the fair value of the common stock
on the automatic grant date, a maximum term of five years and will vest on the
first anniversary of the grant date. As of December 31, 1999, there have been no
shares issued under the Directors Plan and 500,000 shares are available for
future issuance.
EMPLOYEE STOCK PURCHASE PLAN
The stockholders adopted the Employee Stock Purchase Plan (the "Purchase
Plan") in April 1999 under which 800,000 shares have been reserved for issuance.
The number of shares reserved under the Purchase Plan will automatically
increase beginning on January 1 of each year by the lesser of 3,200,000 shares
or 2% of the total amount of fully diluted common stock shares outstanding on
such date. Under the Purchase Plan, eligible employees may purchase common stock
in an amount not to exceed 10% of the employees' cash compensation. The purchase
price per share will be 85% of the lesser of the common stock fair market value
either at the beginning of a rolling two-year offering period or at the end of
each 6 month purchase period within the two year offering period. As of December
31, 1999, there have been no shares issued under the Purchase Plan and 800,000
shares are available for future issuance.
44
<PAGE> 45
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1996........................... 3,171,184 $ .08
Granted.................................................. 2,480,286 .35
Exercised................................................ (288,610) .05
Canceled................................................. (202,700) .19
---------- ------
Outstanding at December 31, 1997........................... 5,160,160 .20
Granted.................................................. 3,469,992 2.81
Exercised................................................ (1,163,874) .15
Canceled................................................. (1,170,588) .95
---------- ------
Outstanding at December 31, 1998........................... 6,295,690 1.47
Granted.................................................. 4,167,191 20.97
Exercised................................................ (1,569,396) .80
Canceled................................................. (686,826) 5.26
---------- ------
Outstanding at December 31, 1999........................... 8,206,659 $11.21
========== ======
Exercisable at December 31, 1999........................... 2,153,202 $ 1.11
========== ======
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE PRICE EXERCISE PRICE
EXERCISE PRICES NUMBER LIFE (YEARS) PER SHARE NUMBER PER SHARE
- --------------- --------- ------------ -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 0.15.. 1,350,154 5.85 $ 0.08 1,145,704 $0.07
$ 0.23 - $ 2.00.. 1,451,409 7.48 $ 1.44 583,910 $1.40
$ 2.75 - $ 3.50.. 1,230,470 8.25 $ 3.19 312,904 $3.17
$ 3.75 - $ 5.38.. 1,263,626 9.07 $ 5.15 108,393 $4.47
$ 5.50 - $25.38.. 1,248,500 9.36 $10.68 2,291 $9.51
$26.08 - $37.50.. 1,078,100 9.79 $33.12 -- --
$51.32 - $53.19.. 584,400 9.97 $51.87 -- --
--------- ---- ------ --------- -----
8,206,659 8.34 $11.21 2,153,202 $1.11
========= =========
</TABLE>
The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date for
each stock option with respect to the options granted. From inception through
December 1999, the Company recorded deferred stock based compensation of
$3,730,000 for the difference at the grant date between the exercise price and
the deemed fair value of the common stock underlying the options. This amount is
included as a component of stockholders' equity and is being amortized on a
graded vesting method by charges to operations over the vesting period of the
options. Such amortization amounted to approximately $742,000, $98,000 and
$2,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
45
<PAGE> 46
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro Forma Effect of Stock-based Compensation
Pro forma information regarding results of operations and net loss per
share is required by FASB Statement No. 123, "Accounting for Stock-Based
Compensation," which also requires that the information be determined as if the
Company had accounted for its employee stock options under the fair value method
of FASB 123. For all grants that were granted prior to the Company's initial
public offering in April 1999, the fair value of these options was estimated at
the date of the grant using a Black-Scholes option pricing model with the
following weighed average assumptions: a risk-free interest rate of 5.5%, 5.0%
and 6.0% for 1999, 1998 and 1997, respectively, no dividend yield or volatility
factors of the expected market price of the Company's common stock and a
weighted average expected life of the option of 5 years. The fair value for the
options granted subsequent to the Company's initial public offering was
estimated at the date of grant using a Black-Scholes option pricing model using
the following weighted-average assumptions: a risk-free interest rate of 5.5%,
no dividend yield, volatility factor of the expected market price of the
Company's common stock of 100% and a weighted average expected life of the
option of five years.
The option valuation models are developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the options. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value method of FASB 123, the Company's net loss
and basic and diluted net loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Pro forma net loss (in thousands).................... $ (9,989) $(9,637) $(8,046)
======== ======= =======
Pro forma basic and diluted net loss per share....... $ (0.45) $ (1.26) $($1.19)
======== ======= =======
</TABLE>
The weighted average fair value of options granted, which is the value
assigned to the options under FASB 123, was $18.16, $0.43, and $0.06 for options
granted during the years ended December 31, 1999, 1998 and 1997, respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 1999, 1998 and 1997 is not representative of the effects on net
loss for future years, as future years will include the effects of additional
years of stock option grants.
5. NOTES RECEIVABLE FROM STOCKHOLDERS
During 1995, certain officers of the Company purchased a total of 800,000
shares of the Company's common stock in exchange for promissory notes. The notes
bear interest at 7.12% per annum, with interest and principal payable on May 5,
2000. The notes are secured by the common shares purchased by these officers.
6. NOTES PAYABLE TO STOCKHOLDERS
In 1997 and 1998, the Company issued promissory notes to stockholders in
exchange for cash advances and payment for services. These notes bear interest
at the bank's prime interest rate (8.5% at December 31,
46
<PAGE> 47
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999) plus 2% per annum, with a maximum rate of 10% per annum. Principal and
accrued interest on these notes at December 31, 1999 and 1998 was $3.4 million
and $3.1 million, respectively. The principal and accrued interest on these
notes was repaid in February 2000.
7. INCOME TAXES
The federal, state and foreign income tax provision for the year ended
December 31, 1999 is summarized as follows (in thousands):
<TABLE>
<S> <C>
Current:
Federal...................................... $100
State........................................ 185
Foreign...................................... 539
----
$824
----
</TABLE>
Due to operating losses and the inability to recognize the benefits
therefrom, there is no income tax provision for 1997 and 1998.
Influence elected to be taxed as an S-corporation under Subchapter S of the
Internal Revenue Code through December 15, 1999. Consequently, Influence's
stockholders were taxed on their proportionate share of the taxable income and
no provision for income taxes has been provided in the statement of operations
for the period beginning January 1, 1999 through December 15, 1999 and for the
years ended December 31, 1998 and 1997. Influence's S-corporation status was
terminated on December 15, 1999 when it was acquired by the Company.
A reconciliation of the provision computed at the statutory federal income
tax rate to the income tax provision is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision computed at statutory rate......... $(235) $(3,250) $(2,367)
Federal alternative minimum taxes....................... 100 -- --
State taxes............................................. 185 -- --
Foreign income tax...................................... 539 -- --
Valuation allowance..................................... 235 3,250 2,367
----- ------- -------
$ 824 $ -- $ --
===== ======= =======
</TABLE>
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 6,788 $ 3,400
Tax credit carryforwards.................................. 1,530 700
Deferred revenue.......................................... 1,653 1,100
Reserves and accrued costs and expenses not currently
deductible............................................. 2,576 2,400
Other..................................................... -- 200
-------- -------
Total deferred tax assets................................... 12,547 7,800
Valuation allowance......................................... (12,547) (7,800)
-------- -------
Net deferred tax assets..................................... $ -- $ --
======== =======
</TABLE>
47
<PAGE> 48
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FASB 109 provides for the recognition of deferred tax assets if realization
of such assets is more likely than not. Based upon the weight of available
evidence, which includes the Company's historical operating performance and the
reported cumulative net losses in all prior years, the Company has provided a
full valuation allowance against its net deferred tax assets. The valuation
allowance increased by $4,747,000 and $3,360,000 during the years ended December
31, 1999 and 1998, respectively.
As of December 31, 1999, approximately $4,600,000 of the valuation
allowance reflected above relates to the tax benefits of stock option deductions
which will be credited to equity when realized.
At December 31, 1999, the Company had net operating loss carryforwards for
federal and state tax purposes of approximately $18,800,000 and $4,400,000,
respectively. The Company also had federal and state research and development
tax credit carryforwards of approximately $1,072,000 and $692,000, respectively.
The net operating loss and tax credit carryforwards will expire at various dates
beginning in 2000, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of the net operating loss and
credit carryforwards before utilization.
8. PROFIT SHARING PLAN
The Company has a profit sharing plan and trust under Section 401(k) of the
Internal Revenue Code which covers substantially all employees. Eligible
employees may contribute amounts to the plan via payroll withholdings, subject
to certain limitations. Contributions by the Company are at the discretion of
the Board of Directors. No discretionary contributions have been made by the
Company to date.
9. MAJOR CUSTOMERS AND REVENUES BY GEOGRAPHIC AREA
Revenue was derived from customers in the following geographic areas:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
North America................................. $51,180 $26,713 $11,916
Europe........................................ 11,055 3,633 825
Other......................................... 144 -- --
------- ------- -------
$62,379 $30,346 $12,741
======= ======= =======
</TABLE>
10. BUSINESS COMBINATION
In December 1999, the Company acquired Influence, a developer of analytic
applications for eBusiness. The merger was accounted for using the
pooling-of-interests method of accounting and as such the Company's historical
financial results for all dates and periods prior to the merger have been
restated to reflect the merger. In connection with the acquisition, the Company
issued 1,299,084 shares of its common stock to Influence's shareholders in
exchange for all of the outstanding common stock. All outstanding options to
purchase Influence's capital stock were converted into options to purchase
287,052 shares of Informatica common stock. In connection with the business
combination, the Company incurred merger related costs of approximately
$2,082,000, which consisted primarily of fees for investment banking, legal and
accounting services incurred in conjunction with the merger. Of this amount,
$310,000 was paid before December 31, 1999. The balance of $1,772,000 is
included in current liabilities on the consolidated balance sheet.
48
<PAGE> 49
INFORMATICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following information represents revenue and net loss of the separate
companies for the periods preceding the business combination:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1999 1998 1997
------------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Informatica...................................... $39,522 $28,895 $12,186
Influence........................................ 2,292 1,451 555
------- ------- -------
Combined........................................... $41,814 $30,346 $12,741
======= ======= =======
Net income (loss):
Informatica...................................... $ 9 $(7,915) $(6,764)
Influence........................................ (492) (1,370) (1,254)
------- ------- -------
Combined........................................... $ (483) $(9,285) $(8,018)
======= ======= =======
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
On February 11, 2000, the Company signed a definitive agreement to acquire
Delphi Solutions AG, a distributor of Informatica products in Switzerland. The
agreement is structured as a share purchase and will be accounted for as a
purchase transaction. The purchase price includes payments associated with 1999
revenues and projections for 2000 revenues, and the first payment of
approximately $3.6 million was paid in February 2000.
On February 22, 2000, the Company entered into two lease agreements for new
corporate headquarters in Redwood City, California. The facility is under
construction and is expected to be completed in June 2001. The lease expires
twelve years after occupancy. As part of these leases, the Company agreed to
provide letters of credit totaling $12.0 million as a security deposit for the
first year's lease payments until certain financial covenants are met.
49
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors is included under the caption
"Proposal One-Election of Directors" in Informatica's Notice of Annual Meeting
to be held on May 25, 2000 (the "Proxy Statement") and is incorporated herein by
reference. Information with respect to Executive Officers is included under the
heading "Executive Officers and Directors" in Part I hereof after Item 4.
Information regarding delinquent filers pursuant to Item 405 of Regulation
S-K is included under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" under the caption "Additional Information" in the Proxy Statement
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation and Other Information" in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the heading
"Security Ownership of Certain Beneficial Owners and Management" under the
caption "Proposal One-Election of Directors" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"Proposal One-Election of Directors" in the Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. FINANCIAL STATEMENTS
The following documents are included as Part II, Item 8, of this Annual
Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 34
Consolidated Balance Sheets................................. 35
Consolidated Statements of Operations....................... 36
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit).................. 37
Consolidated Statements of Cash Flows....................... 38
Notes to Consolidated Financial Statements.................. 39
</TABLE>
2. FINANCIAL STATEMENT SCHEDULE
The following schedule of the Company is included herein:
Valuation and Qualifying Accounts and Reserves (Schedule II)
50
<PAGE> 51
All other schedules are omitted because they are not applicable or the
amounts are immaterial or the required information is presented in the
Consolidated Financial Statements or Notes thereto.
The following documents are included in Exhibit 23 hereto:
Exhibit 23.2 Consent of Ernst & Young LLP, Independent Auditors
3. EXHIBITS
See Item 14(c) below.
(b) REPORTS ON FORM 8-K
Report on Form 8-K, filed on December 29, 1999 for the purpose of filing
the Company's press release announcing the Agreement and Plan of Merger dated
December 15, 1999 by and among Informatica Corporation, I-1 Merger Corp., and
Influence Software, Inc.
(c) EXHIBITS
See Exhibit Index.
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, State of California on this 30th day of March, 2000.
INFORMATICA CORPORATION
By: /s/ GAURAV S. DHILLON
------------------------------------
Gaurav S. Dhillon
Chief Executive Officer, Secretary
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GAURAV S. DHILLON Chief Executive Officer,
- ----------------------------------------------------- Secretary and Director
Gaurav S. Dhillon
/s/ DIAZ H. NESAMONEY Chief Operating Officer and
- ----------------------------------------------------- Director
Diaz H. Nesamoney
/s/ EARL E. FRY Senior Vice President and Chief
- ----------------------------------------------------- Financial Officer (Principal
Earl E. Fry Financial and Accounting
Officer)
/s/ VINCENT WORMS Director
- -----------------------------------------------------
Vincent Worms
</TABLE>
52
<PAGE> 53
INFORMATICA CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
PROVISION FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCES AT CHARGED TO BALANCES AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999................... $691 $246 $ -- $937
==== ==== ==== ====
Year ended December 31, 1998................... $420 $320 $(49) $691
==== ==== ==== ====
Year ended December 31, 1997................... $ 21 $440 $(41) $420
==== ==== ==== ====
</TABLE>
SALES AND RETURN ALLOWANCES
<TABLE>
<CAPTION>
BALANCES AT BALANCES AT
BEGINNING CHARGED TO END OF
OF PERIOD REVENUE DEDUCTIONS PERIOD
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999................... $1,040 $ -- $ -- $1,040
====== ==== ==== ======
Year ended December 31, 1998................... $ 200 $886 $(46) $1,040
====== ==== ==== ======
Year ended December 31, 1997................... $ -- $241 $(41) $ 200
====== ==== ==== ======
</TABLE>
53
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
<C> <S>
1.1 Form of Underwriting Agreement.(1)
2.1 Agreement and Plan of Merger By and Among the Company and
Influence Software, Inc. dated December 15, 1999.(3)
3.1 Certificate of Incorporation of the Company, as currently in
effect.(1)
3.2 Form of Company's Amended and Restated Certificate of
Incorporation.(1)
3.3 Company's Amended and Restated Bylaws.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2 and 3.3.
10.1 Form of Restricted Stock Purchase Agreement with Gaurav S.
Dhillon and Diaz H. Nesamoney, respectively, dated as of May
5, 1995.(2)
10.2 Series D Preferred Stock Purchase Agreement with the
investors listed on Exhibit A thereto, dated as of June 3,
1997.(2)
10.3 Seconded Amended and Restated Investor Rights Agreement with
the investors listed on Exhibits A and B thereto, dated as
of June 3, 1997.(2)
10.4 Loan and Warrant Agreement with the investors listed on
Schedule of Lenders attached thereto, dated as of May 7,
1996.(2)
10.5 Form of Warrant issued by the Company to Bay Partners SBIC,
L.P., Discovery Ventures I, LLC, Parvest U.S. Partners II
C.V., Tradeinvest Limited, Multinvest Limited C.V., Partech
U.S. Partners III C.V., David Pidwell and Partech
International Profit Sharing Plan U/A, respectively, dated
January 1, 1992 FBO: Thomas G. McKinley in connection with
loan principal amounts of $800,000, $400,000, $360,000,
$42,000, $28,000, $360,000, $50,000 and $10,000,
respectively.(2)
10.6 Form of Indemnification Agreement between the Company and
each of its executive officers and directors.(1)
10.7 Form of Secured Promissory Note by each of Gaurav S. Dhillon
and Diaz H. Nesamoney, respectively, each dated May 5,
1995.(1)
10.8 Lease Agreement regarding Sublease, dated January 29, 1998,
by and among the Company, Informix Corporation and Palo Alto
Bayshore Investors, LLC.(2)
10.9 Company's 1993 Flexible Stock Incentive Plan, including
forms of agreements thereunder.(2)
10.10 Company's 1996 Flexible Stock Incentive Plan, including
forms of agreements thereunder.(2)
10.11 Company's 1999 Stock Incentive Plan.(1)
10.12 Company's 1999 Employee Stock Purchase Plan, including forms
of agreements thereunder.(1)
10.13 Company's 1999 Non-Employee Director Stock Incentive
Plan.(1)
10.14 Lease Agreement regarding Building 1 Lease, dated February
22, 2000, by and among the Company and Pacific Shores Center
LLC.
10.15 Lease Agreement regarding Building 2 Lease, dated February
22, 2000, by and among the Company and Pacific Shores Center
LLC.
21.1 List of Significant Subsidiaries.(2)
23.2 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to identically numbered Exhibit to Amendment No.
1 of the Company's Registration Statement on Form S-1/A (Commission File
No. 333-72677), which was filed on April 8, 1999.
(2) Incorporated by reference to identically numbered Exhibit to the Company's
Registration Statement on Form S-1 (Commission File No. 333-72677), which
was filed on February 19, 1999.
(3) Incorporated by reference to identically numbered Exhibit to the Company's
Current Report on Form 8-K (Commission File No. 333-72677), which was filed
on December 29, 1999.
54
<PAGE> 1
EXHIBIT 10.14
TRIPLE NET BUILDING LEASE
Between
PACIFIC SHORES CENTER LLC,
as
LESSOR
and
INFORMATICA CORP.
A DELAWARE CORPORATION
as
LESSEE
for
PREMISES
at
PACIFIC SHORES CENTER
BUILDING 1
REDWOOD CITY, CALIFORNIA
<PAGE> 2
ARTICLE I
PARTIES
Section 1.01. Parties. This Lease, dated for reference purposes, and
effective as of February 22, 2000, is made by and between PACIFIC SHORES CENTER
LLC, or assignee, ("Lessor") and INFORMATICA CORP., a Delaware corporation
("Lessee").
ARTICLE II
PREMISES
Section 2.01. Demise of Premises. Lessor hereby leases to Lessee and
Lessee leases from Lessor for the term, at the rental, and upon all of the terms
and conditions set forth herein, Premises consisting of one building
("Building") of ten free standing, office and research and development buildings
("Buildings") to be constructed by Lessor on real property situated in Redwood
City, County of San Mateo, State of California and commonly known as Pacific
Shores Center which Lessor is in the process of acquiring (the "Property"). The
Building will be four stories tall and will consist of approximately one hundred
forty-two thousand fifteen (142,015) rentable square feet, as more particularly
described and depicted herein in Exhibit "A." The actual rentable square footage
of the Building (the "Rentable Area") will be determined and certified by
Lessor's architect by a method described as "dripline," whereby the measurement
encompasses the outermost perimeter of the constructed building, including every
projection thereof and all area beneath each such projection, whether or not
enclosed, with no deduction for any inward deviation of structure and with the
measurement being made floor by floor, beginning from the top of the Building.
The Building and appurtenances described herein, the Property, and all other
improvements to be built on the Property are together designated as the
"Project." The Building leased hereunder, commonly known as Building 1 - Pacific
Shores Center, Redwood City, California, and its appurtenances described herein
are herein designated as the "Premises."
Section 2.02. Common Area. During the Lease Term, Lessee shall have the
non-exclusive right to use the Common Area defined herein. Lessor reserves the
right to modify the Common Area, including reducing the size or changing the
use, configuration and elements thereof in its sole discretion and to close or
restrict access from time to time for repair, maintenance or to prevent a
dedication thereof, provided that Lessee nonetheless shall have access to
parking and the Premises during such activities and there shall be no material,
adverse impact on Lessee's use of the Premises. Lessor further reserves the
right to establish, repeal and amend from time to time rules and regulations for
the use of the Common Area and to grant reciprocal easements or other rights to
use the Common Area to owners of other property. "Common Area" includes, without
limitation, landscaping, sidewalks, walkways, driveways, curbs, parking lots
(including striping), sprinkler systems, lighting, surface water drainage
systems as well as baseball and soccer fields, an amenities/athletic facility
and, to the extent required by government authorities having jurisdiction over
Lessor's development of the Project, a waterfront park, perimeter walking/biking
trail, amphitheater, marine life resource center, retreat and conference center,
child care center and such further portions of the Project or additional or
different facilities as Lessor may from time to time designate or install or
make available for the use by Lessee in common with others.
2
<PAGE> 3
Section 2.03. Parking. Lessor shall provide Lessee with parking spaces
within the Common Area in the ratio to space within the Building as required by
law, which is three (3) spaces per one thousand (1,000) square feet of interior
space within the Building. In the event Lessor elects or is required by any law
to limit or control parking at the Premises, whether by validation of parking
tickets or any other method of assessment, Lessee agrees to participate in such
validation or assessment program under such reasonable rules and regulations as
are from time to time established by Lessor. Said parking shall be provided at
no additional cost except as expressly provided herein in Article VI for
reimbursement of repair, replacement and maintenance, and except for any
governmental or public authority charges, fees or impositions of any nature
hereafter imposed.
Section 2.04. Construction.
(a) Government Approvals. Lessor shall diligently pursue obtaining
governmental approval of a Site Plan and Building design and elevations with
respect to the development of the Premises, copies of which are attached hereto
as Exhibit "A." The parties acknowledge and agree that the final footprint and
elevations of the Building may vary from those attached as Exhibit "A" because
the plans and specifications will undergo a plancheck process with the City of
Redwood City and Lessor will make such revisions as are required or are
otherwise deemed necessary or appropriate by Lessor, provided however, that
nothing herein shall be deemed to relieve Lessor from the duty to develop the
Building substantially in compliance with Exhibit "A."
(b) Construction of Shell Building. Lessor, utilizing Rudolph & Sletten
(or such alternate as Lessor in its sole discretion may select) as general
contractor ("General Contractor"), shall construct the "Building Shell" (as
defined in the attached Exhibit "D") in accordance with (i) plans and
specifications to be attached as Exhibit "B" and (ii) all existing applicable
municipal, local, state and federal laws, statutes, rules, regulations and
ordinances. Lessor shall pay all costs of constructing the Building Shell.
(c) Construction of Tenant Improvements. All improvements not included
within the scope of the Building Shell shall be deemed "Tenant Improvements."
Lessor, using the General Contractor, shall construct the Tenant Improvements
and shall contribute the Tenant Improvement Allowance towards the payment of
same and Lessee shall pay all costs associated with same in excess of the Tenant
Improvement Allowance.
(d) Tenant Improvement Plans and Cost Estimate. Lessee shall work with
Lessor's architect to develop interior schematic drawings and Lessee shall
approve final interior schematic drawings for the Building Tenant Improvements
no later than May 15, 2000. Lessee shall work with Lessor's architect to develop
working drawings outlining, among other things, Lessee's wall layout, detailed
electrical and air conditioning requirements and finishes ("Working Drawings")
and Lessee shall approve final Working Drawings on or before July 15, 2000. The
cost of the interior schematic drawings and Working Drawings shall be a Tenant
Improvement cost. Based on this information, Landlord shall cause the General
Contractor to
3
<PAGE> 4
prepare and deliver to Lessee a budget for the Tenant Improvements ("Budget").
Lessee shall approve the Budget (or modify the same with Lessor's consent), in
writing, within ten (10) business days thereafter. The Working Drawings and
Budget must be approved by Lessor in writing and be of quality equal to or
greater than the Interior Specifications Standards set forth in Exhibit "C" and
must encompass the build-out of the entire Premises. Once the Budget is
approved, Lessor shall enter into a guaranteed maximum price contract with the
General Contractor for the construction of the Tenant Improvements.
(e) Cost Responsibilities. Attached as Exhibit "C" to this Lease is a Work
Letter Agreement for Tenant Improvements, and Exhibit "D," Cost Responsibilities
of Lessor and Lessee, which together with this Section 2.04, describe the
planning and payment responsibilities of the Lessor and Lessee with respect to
the construction of the Shell Building and Tenant Improvements at the Premises.
All approved Tenant Improvements shall be constructed in accordance with a
construction schedule approved by Lessor and no portion of the Building interior
shall remain unimproved.
(f) Tenant Improvement Allowance. Lessor shall provide to Lessee
semi-improved "cold shell" facilities as described in Exhibit "D" attached and a
Tenant Improvement Allowance of $25.00 per square foot to be used for the Tenant
Improvements outlined in Exhibit "D," all as outlined in the Tenant Improvement
Work Letter attached as Exhibit "C." Subcontracts for all Tenant Improvement
Work shall be obtained by a sealed competitive bid process (involving at least
two qualified bidders) wherever practical and as to work done without such
process, Lessor or the General Contractor shall provide reasonable assurance to
Lessee that the cost and expense of same is competitive in the industry for
first-class workmanship and materials.
(g) Payment for Tenant Improvements. Within five (5) business days after
the Budget is approved by Lessor and Lessee, Lessee shall deposit Lessee's share
of the amount budgeted for the entire Tenant Improvement construction schedule
(together with the cost of any Tenant Improvements already made) with Lessor's
construction lender to be held in an escrow account. Lessee's share is the
portion of the budgeted amount not paid from the Tenant Improvement Allowance as
described in the following sentence. Said construction lender shall issue
payments from said account pursuant to the construction contract for the Tenant
Improvements with a portion of each payment being taken from the Tenant
Improvement Allowance (in the same ratio as the Tenant Improvement Allowance
bears to the entire Budget total) and the balance being paid from Lessee's
deposit, until the Tenant Improvement Allowance is exhausted, whereupon any
remaining payments shall be made 100% by Lessee. Lessor shall manage the
construction of the Tenant Improvements for a construction management fee of
2.5% of the Tenant Improvement Contract amount (as the same may change by
agreement of the parties) due and payable in nine equal monthly installments
beginning on the first day of the calendar month following the calendar month in
which the Budget is first approved.
(h) Lessee's Fixturing Period. Lessor shall provide Lessee access to the
Premises during the thirty (30) day period prior to the Commencement Date
("Lessee's Fixturing Period") for the purpose of installing furnishings and
equipment, e.g. security system, furniture system and phone and data system,
provided, that Lessee and Lessee's employees and
4
<PAGE> 5
contractors shall at all times avoid interfering with Lessor's ongoing work to
bring the Premises to a substantially completed condition. Except for payment of
Base Rent, all terms and provisions of this Lease shall apply during Lessee's
Fixturing Period, including, without limitation, Lessee's indemnity and other
obligations set forth in Sections 7.07., 7.08. and 17.22. hereof and payment of
Additional Rent pursuant to Section 4.05 hereof.
ARTICLE III
TERM
Section 3.01. Lease Term.
(a) Commencement Date. The term of this Lease ("Lease Term") shall be for
twelve (12) years beginning on the earlier of (i) the date a Certificate of
Occupancy first is issued affecting the Building, or (ii) the date on which
Lessee first occupies or conducts business at the Premises (the "Commencement
Date") provided that, (i) for each day of delay by Lessee in failing to approve
the interior schematic drawings or the Working Drawings when required under
Section 2.04(d), or (ii) for each day of delay by Lessee in failing to approve
the Budget, in writing, within fourteen (14) days after delivery by the General
Contractor as provided in Section 2.04(d), or (iii) for each day of delay caused
by any changes to the approved Working Drawings requested by Lessee, or (iv) for
each day that any other act or omission by Lessee causes the construction
schedule for Tenant Improvements to be delayed (collectively "Lessee Delay"),
the Commencement Date shall occur one (1) day in advance of the date of the
Certificate of Occupancy for each such day of delay. For example, if seven (7)
days of Lessee Delay causes the date of issuance of the Certificate of Occupancy
to occur on July 8, 2001 rather than July 1, 2001, the Commencement Date shall
be July 1, 2001 for all purposes, including payment of Base Rent. The Lease Term
shall expire, unless sooner terminated or extended as provided herein, on the
date which completes twelve (12) years after the Commencement Date occurs, e.g.
if the date on which the Commencement Date occurs is July 1, 2001, the Lease
Term shall expire on June 30, 2013 and if the Commencement Date is July 3, 2001,
the Lease Term shall expire on July 2, 2013 ("Expiration Date"). The parties
shall execute a "Memorandum of Commencement of Lease Term" when the Commencement
Date becomes known, which shall include a certification of the actual Rentable
Area of the Building determined by the methodology described in Section 2.01.
and the actual monthly installments of Base Rent to be paid pursuant to Section
4.01., and shall be substantially in the form attached hereto as Exhibit "E."
(b) Scheduled Commencement Date. Lessor shall use commercially reasonable
efforts to cause the Certificate of Occupancy for the Building to be issued no
later than July 1, 2001 ("Scheduled Commencement Date"). If a Certificate of
Occupancy is not issued for the Building on or before the Scheduled Commencement
Date, this failure shall not affect the validity of this Lease or the
obligations of Lessee under it. If the Commencement Date is adjusted for delay
from any cause, the Expiration Date shall be likewise adjusted for a like
period.
5
<PAGE> 6
(c) Termination in Event of Delay. If for any reason Lessor is unable to
cause the issuance of a Certificate of Occupancy for the Building, on or before
the date which is one hundred forty-five (145) days after the Scheduled
Commencement Date (for a reason other than Lessee Delay or delay excused under
Section 17.21.), Lessee, at its sole election, may terminate this Lease upon
giving notice within ten (10) days thereafter. Failure to give such notice
within said time period constitutes an irrevocable waiver of the foregoing right
to terminate under this Section 3.01(c).
(d) Lessee Termination Rights. In the event that either (i) Lessor is not
the fee owner of the Property on or before May 15, 2000, or (ii) Lessor has not
presented Lessee with reasonable evidence on or before July 15, 2000, that it
has obtained a commitment letter for financing in an amount sufficient to
complete the construction of the Building Shell and fund the Tenant Improvement
Allowance, then Lessee shall have the right to terminate this Lease upon written
notice to Lessor within sixty (60) days after either May 15, 2000 or July 15,
2000, as applicable. If Lessee terminates this Lease in accordance with this
paragraph, neither party shall have any further rights or obligations hereunder.
Section 3.02. Option to Extend.
(a) Exercise. Lessee is given one (1) option to extend the Lease Term
("Option to Extend") for a five (5) year period ("Extended Term") following the
date on which the initial Lease Term would otherwise expire, which option may be
exercised only by written notice ("Option Notice") from Lessee to Lessor given
not less than twelve (12) months prior to the end of the initial Lease Term
("Option Exercise Date"); provided, however, if Lessee is in material default
under this Lease (beyond the expiration of any applicable notice period) on the
Option Exercise Date or on any day thereafter on or before the last day of the
initial Lease Term, the Option Notice shall be totally ineffective, and this
Lease shall expire on the last day of the initial Lease Term, if not sooner
terminated. The right of Lessee to exercise an Option to Extend shall not be
affected by any sublease or assignment of this Lease previously entered into by
Lessee pursuant to the provisions of this Lease.
(b) Extended Term Rent. In the event Lessee exercises its Option to Extend
set forth herein, all the terms and conditions of this Lease shall continue to
apply except that the Base Rent payable by Lessee during each Option Term shall
be equal to one hundred percent (100%) of Fair Market Rent (defined below), as
determined under subparagraph (c) below with annual three and five tenths
percent (3.5%) increases pursuant to Section 4.02 below. "Fair Market Rent"
shall mean the effective rate being charged (including periodic adjustments
thereto as applicable during the period of the Extended Term), for comparable
space in similar buildings in the vicinity, i.e. of a similar age and quality
considering any recent renovations or modernization, and floor plate size or, if
such comparable space is not available, adjustments shall be made in the
determination of Fair Market Rent to reflect the age and quality of the Building
and Premises as contrasted to other buildings used for comparison purposes, with
similar amenities, taking into consideration: size, location, floor level,
leasehold improvements or allowances provided or to be provided, term of the
lease, extent of services to be provided, the time that the particular rate
under consideration became or is to become effective, and any other relevant
terms or conditions
6
<PAGE> 7
applicable to both new and renewing tenants, but in no event less than the
monthly Base Rent prevailing during the last year of the initial Lease Term.
(c) Determination of Fair Market Rent.
(i) Negotiation. If Lessee so exercises its Option to Extend in a
timely manner, the parties shall then meet in good faith to negotiate the Base
Rent for the Premises for the Extended Term, during the first thirty (30) days
after the date of the delivery by Lessee of the Option Notice (the "Negotiation
Period"). If, during the Negotiation Period, the parties agree on the Base Rent
applicable to the Premises for the Extended Term, then such agreed amount shall
be the Base Rent payable by Lessee during the Extended Term.
(ii) Arbitration. In the event that the parties are unable to agree
on the Base Rent for the Premises within the Negotiation Period, then within ten
(10) days after the expiration of the Negotiation Period, each party shall
separately designate to the other in writing an appraiser to make this
determination. Each appraiser designated shall be a member of MAI and shall have
at least ten (10) years experience in appraising commercial real property, of
similar quality and use as the Premises, in San Mateo County. The failure of
either party to appoint an appraiser within the time allowed shall be deemed
equivalent to appointing the appraiser appointed by the other party, who shall
then determine the Fair Market Rent for the Premises for the Extended Term.
Within five (5) business days of their appointment, the two designated
appraisers shall jointly designate a third similarly qualified appraiser. Within
thirty (30) days after their appointment, each of the two appointed appraisers
shall submit to the third appraiser a sealed envelope containing such appointed
appraiser's good faith determination of the Fair Market Rent for the Premises
for the Extended Term; concurrently with such delivery, each such appraiser
shall deliver a copy of his or her determination to the other appraiser. The
third appraiser shall within ten (10) days following receipt of such
submissions, then determine which of the two appraisers' determinations most
closely reflects Fair Market Rent as defined above. The determination most
closely reflecting the third appraiser's determination shall be deemed to be the
Fair Market Rent for the Premises during the Extended Term; the third appraiser
shall have no rights to adjust, amend or otherwise alter the determinations made
by the appraiser selected by the parties, but must select one or the other of
such appraisers' submissions. The determination by such third appraiser shall be
final and binding upon the parties. Said third appraiser shall, upon selecting
the determination which most closely resembles Fair Market Rent, concurrently
notify both parties hereto. The Base Rent for the Extended Term shall be the
determination so selected. The parties shall share the appraisal expenses
equally. If the Extended Term begins prior to the determination of Fair Market
Rent, Lessee shall pay monthly installments of Base Rent equal to one hundred
ten percent (110%) of the monthly installment of Base Rent in effect for the
last year of the initial Lease Term. Once a determination is made, any over
payment or under payment shall be reimbursed as a credit against, or paid by
adding to, the monthly installment of Base Rent next falling due.
ARTICLE IV
RENT: TRIPLE NET LEASE
7
<PAGE> 8
Section 4.01. Base Rent. Lessee shall pay to Lessor as Base Rent an
initial monthly installment of Three Dollars and Fifty Cents ($3.50) per square
foot of Rentable Area as determined under Section 2.01., in advance, on the
first day of each calendar month of the Lease Term, commencing on the
Commencement Date. Base Rent for any period during the Lease Term which is for
less than one month shall be a pro rata portion of the monthly installment
(based on the actual days in that month).
Section 4.02. Rent Adjustment. The Base Rent set forth in Section 4.01.
above shall be adjusted upward by an annual compounded increase of three and
five tenths percent (3.5%), as of the first day of the thirteenth (13th) full
calendar month following the Commencement Date and as of each anniversary of
that date thereafter during the Lease Term, as shown on Exhibit "E" attached
hereto.
Section 4.03. First Payment of Base Rent. The first payment of Base Rent
shall be due within five (5) days after Lessee's execution of this Lease. Base
Rent payments shall resume on the first day of the calendar month immediately
succeeding the Commencement Date. If the Commencement Date is other than the
first day of a calendar month, the first payment of Base Rent subsequent to the
Commencement Date, but only that payment of Base Rent, shall be reduced by any
excess of the first Base Rent installment paid in advance over the prorated
amount actually due for such partial first month of the Lease Term.
Section 4.04. Absolute Triple Net Lease. This Lease is what is commonly
called a "Absolute Triple Net Lease," it being understood that Lessor shall
receive the Base Rent set forth in Section 4.01. free and clear of any and all
expenses, costs, impositions, taxes, assessments, liens or charges of any nature
whatsoever. Lessee shall pay all rent in lawful money of the United States of
America to Lessor at the notice address stated herein or to such other persons
or at such other places as Lessor may designate in writing on or before the due
date specified for same without prior demand, set-off or deduction of any nature
whatsoever. It is the intention of the parties hereto that this Lease shall not
be terminable for any reason by Lessee, and that except as herein expressly
provided in Articles III, VIII and XIII, concerning delay, destruction and
condemnation, Lessee shall in no event be entitled to any abatement of or
reduction in rent payable under this Lease. Any present or future law to the
contrary shall not alter this agreement of the parties.
Section 4.05. Additional Rent. In addition to the Base Rent reserved by
Section 4.01., Lessee shall pay, as Additional Rent, all taxes, assessments,
fees and other impositions in accordance with the provisions of Article IX,
insurance premiums in accordance with the provisions of Article VII, operating
charges, and Common Area facility use privilege charges with respect to the
amenities/athletic facility equating to Lessee's share of said facilities
allocation of Base Rent and Additional Rent as well as, maintenance, repair and
replacement costs and expenses, utility charges, and other costs and charges
allocable to the Common Area and the Common Area facilities and the Outside
Areas of the Premises, all in accordance with the provisions of Article VI and
any other charges, costs and expenses (including appropriate reserves therefor)
which are contemplated or which may arise under any provision of this Lease
during the Lease Term, plus a Management Fee to Lessor equal to 3% of the Base
Rent. The Management Fee is due and payable, in advance, with each installment
of Base Rent. All of such
8
<PAGE> 9
charges, costs, expenses, Management Fee and all other amounts payable by Lessee
hereunder, shall constitute Additional Rent, and upon the failure of Lessee to
pay any of such charges, costs or expenses, Lessor shall have the same rights
and remedies as otherwise provided in this Lease for the failure of Lessee to
pay Base Rent. To the extent any of the aforesaid amounts are fairly allocable
to the Common Area or to other portions of the Project, Lessee's obligation is
to pay only its proportionate share as determined by Lessor based upon the ratio
of the Rentable Area of the Premises to the Rentable Area of other office and
research and development buildings at the Project.
(b) Payment. To the extent not paid pursuant to other provisions of this
Lease, and at Lessor's sole election, Lessor may submit invoices and Lessee
shall pay Lessee's share of Additional Rent in monthly installments on the first
day of each month in advance in an amount to be estimated by Lessor, based on
Lessor's experience in managing office/research and development projects. Within
ninety (90) days following the end of the period used by Lessor in estimating
Additional Rent, Lessor shall furnish to Lessee a statement (hereinafter
referred to as "Lessor's Statement") of the actual amount of Lessee's
proportionate share of such Additional Rent for such period. Within fifteen (15)
days thereafter, Lessee shall pay to Lessor, as Additional Rent, or Lessor shall
remit or credit to Lessee, as the case may be, the difference between the
estimated amounts paid by Lessee and the actual amount of Lessee's Additional
Rent for such period as shown by such statement. Monthly installments for the
ensuing year shall be adjusted upward or downward as set forth in Lessor's
Statement.
Section 4.06. Security Deposit. Upon the date this Lease is executed by
Lessee, Lessee shall deposit with Lessor a Security Deposit equal to twelve (12)
month's estimated Base Rent in the amount of Five Million, Nine Hundred
Sixty-Four Thousand, Six Hundred Thirty and no cents ($5,964,630.00) in the form
of cash or an unconditional, irrevocable letter of credit without documents,
with Lessor as beneficiary, drawable in whole or in part, and providing for
payment in San Francisco on presentation of Lessee's drafts on sight, drawable
and otherwise from a bank and in a form acceptable to Lessor (the "Security
Deposit"). The Security Deposit shall be held by Lessor as security for the
faithful performance by Lessee of all of the terms, covenants, and conditions of
this Lease applicable to Lessee. If Lessee is in breach of this Lease (beyond
any applicable cure period provided herein) with respect to any provision of
this Lease, including but not limited to the provisions relating to the
condition of the Premises upon Lease Termination, Lessor may (but shall not be
required to) use, apply or retain all or any part of the Security Deposit for
the payment of any amount which Lessor may spend by reason of Lessee's default
or to compensate Lessor for any loss or damage which Lessor may suffer by reason
of Lessee's default. If any portion of the Security Deposit is so used or
applied, Lessee shall, within ten days after written demand therefor, deposit
cash with Lessor in an amount sufficient to restore the Security Deposit to its
original amount. Lessee's failure to do so shall be a Default by Lessee. The
rights of Lessor pursuant to this Section 4.06. are in addition to any rights
which Lessor may have pursuant to Article 12 below. If Lessee fully and
faithfully performs every provision of this Lease to be performed by it, the
Security Deposit or any balance thereof shall be returned (without interest) to
Lessee (or, at Lessor's option, to the last assignee of Lessee's interests
hereunder) at Lease expiration or termination and after Lessee has vacated the
Premises. Lessor shall not be required to keep the Security Deposit separate
from Lessor's general funds or be
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deemed a trustee of same. Subject to the prior written approval of Lessor and
Lessor's lender(s), the letter of credit may be reduced to an amount not less
than the total of three (3) months of Base Rent at the then current rate, if
Lessee establishes through financial statements prepared in accordance with
generally accepted accounting principles and in a form acceptable to Lessor that
Lessee has achieved annual revenue for a period of at least one (1) fiscal year
of at least Seven Hundred Fifty Million Dollars ($750,000,000) and has further
achieved quarterly operating profit of at least One Hundred Million Dollars
($100,000,000) for not less than four (4) consecutive calendar quarters. If the
Security Deposit is in whole or in part in the form of a Letter of Credit,
failure of Lessee to deliver a replacement Letter of Credit to Lessor at least
forty-five (45) days prior to the expiration date of any current Letter of
Credit shall constitute a separate default entitling Lessor to draw down
immediately and entirely on the current Letter of Credit and the proceeds shall
constitute a cash Security Deposit.
ARTICLE V
USE
Section 5.01. Permitted Use and Limitations on Use. The Premises shall be
used and occupied only for office, research and development, together with such
ancillary uses which do not cause excessive wear of the Premises or increase the
potential liability of Lessor, and for no other use, without Lessor's prior
written consent. Lessee shall not use, suffer or permit the use of the Premises
in any manner that will tend to create or constitute waste, nuisance or unlawful
acts. In no event shall it be unreasonable for Lessor to withhold its consent as
to uses which it determines would tend to increase materially the wear of the
Premises or any part thereof or increase the potential liability of Lessor or
decrease the marketability, financability, leasability or value of the Premises
or Project. Lessee shall not do anything in or about the Premises which will (i)
cause structural injury to the Building or Premises, or (ii) cause damage to any
part of the Building or Premises except to the extent reasonably necessary for
the installation of Lessee's trade fixtures and Lessee's Alterations, and then
only in a manner which has been first approved by Lessor in writing. Lessee
shall not operate any equipment within the Building or Premises which will (i)
materially damage the Building or the Common Area, (ii) overload existing
electrical systems or other mechanical equipment servicing the Building, (iii)
impair the efficient operation of the sprinkler system or the heating,
ventilating or air conditioning ("HVAC") equipment within or servicing the
Building, (iv) damage, overload or corrode the sanitary sewer system, or (v)
damage the Common Area or any other part of the Project. Lessee shall not
attach, hang or suspend anything from the ceiling, roof, walls or columns of the
Building or set any load on the floor in excess of the load limits for which
such items are designed nor operate hard wheel forklifts within the Premises.
Any dust, fumes, or waste products generated by Lessee's use of the Premises
shall be contained and disposed so that they do not (i) create an unreasonable
fire or health hazard, (ii) damage the Premises, or (iii) result in the
violation of any law. Except as approved by Lessor, Lessee shall not change the
exterior of the Building, or the outside area of the Premises, or install any
equipment or antennas on or make any penetrations of the exterior or roof of the
Building. Lessee shall not conduct on any portion of the Premises any sale of
any kind, including any public or private auction, fire sale,
going-out-of-business sale, distress sale or other liquidation sale. No
materials, supplies, tanks or containers, equipment, finished products or
semifinished products, raw materials, inoperable vehicles or articles of any
nature shall be stored upon or permitted to remain within the outside areas of
the Premises except
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in fully fenced and screened areas outside the Building which have been designed
for such purpose and have been approved in writing by Lessor for such use by
Lessee.
Section 5.02. Compliance with Law.
(a) Lessor shall deliver the Premises to Lessee on the Commencement Date
(without regard to the use for which Lessee will use the Premises) free of
violations of any covenants or restrictions of record, or any applicable law,
building code, regulation or ordinance in effect on such Commencement Date,
including without limitation, the Americans with Disability Act, and free of
Year Two Thousand computer programming defects.
(b) Except as provided in paragraph 5.02.(a), Lessee shall, at Lessee's
cost and expense, comply promptly with all statutes, ordinances, codes, rules,
regulations, orders, covenants and restrictions of record, and requirements
applicable to the Premises and Lessee's use and occupancy of same in effect
during any part of the Lease Term, whether the same are presently foreseeable or
not, and without regard to the cost or expense of compliance.
(c) By executing this Lease, Lessee acknowledges that it has reviewed and
satisfied itself as to its compliance, or intended compliance with the
applicable zoning and permit laws, hazardous materials and waste requirements,
and all other statutes, laws, or ordinances relevant to the uses stated in
Section 5.01., above.
Section 5.03. Condition of Premises at Commencement Date. Subject to all
of the terms of this Lease for the construction of Tenant Improvements, Lessor
shall deliver the Building to Lessee on the Commencement Date with the Building
plumbing, lighting, heating, ventilating, air conditioning, gas, electrical, and
sprinkler systems and loading doors as set forth in Exhibit "D" in proper
operating condition and built substantially in accordance with the approved
plans therefor, and in a workmanlike manner. Except as otherwise provided in
this Lease, Lessee hereby accepts the Premises in their condition existing as of
the Commencement Date, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use and
condition of the Premises, and any covenants or restrictions, liens,
encumbrances and title exceptions of record, and accepts this Lease subject
thereto and to all matters disclosed thereby and by any exhibits attached
hereto. Lessee acknowledges that neither Lessor nor any agent of Lessor has made
any representation or warranty as to the present or future suitability of the
Premises for the conduct of Lessee's business.
Section 5.04. Defective Condition at Commencement Date. In the event that
it is determined, and Lessee notifies Lessor in writing within one year after
the Commencement Date, that any of the obligations of Lessor set forth in
Section 5.02.(a) or Section 5.03.(a) were not performed, then it shall be the
obligation of Lessor, and the sole right and remedy of Lessee, after receipt of
written notice from Lessee setting forth with specificity the nature of the
failed performance, to promptly, within a reasonable time and at Lessor's sole
cost, correct same. Except as to certain defects which remain Lessor's
responsibility under Section 6.01(b) Lessee's failure to give such written
notice to Lessor within one year after the Commencement Date shall
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constitute a conclusive presumption that Lessor has complied with all of
Lessor's obligations under the foregoing sections 5.02. and 5.03., and any
required correction after that date shall be performed by Lessee, at its sole
cost and expense. At the end of the first year of the Lease Term, Lessor shall
promptly assign to Lessee all of Lessor's contractor's, and/or manufacturer's
guarantees, warranties, and causes of action which do not relate to Lessor's
obligations under Section 6.01(b).
Section 5.05. Building Security. Lessee acknowledges and agrees that it
assumes sole responsibility for security at the Premises for its agents,
employees, invitees, licensees, contractors, guests and visitors and will
provide such systems and personnel for same including, without limitation, any
portion of the Common Area located on the legal parcel on which the Building is
located as it deems necessary or appropriate and at its sole cost and expense.
Lessee acknowledges and agrees that Lessor does not intend to provide any
security system or security personnel at the Premises or Project, including,
without limitation, at the Common Areas, provided, however, that nothing herein
shall be deemed to prevent Lessor from providing such system or personnel in the
future, the cost of which will be included in those items for which Lessee pays
Additional Rent.
Section 5.06. Rules and Regulations. Lessor may from time to time
promulgate reasonable and nondiscriminatory rules and regulations applicable for
the care and orderly management of the Premises. Such rules and regulations
shall be binding upon Lessor upon delivery of a copy thereof to Lessor, and
Lessor agrees to abide by such rules and regulations. A copy of the initial
Rules and Regulations is attached hereto as Exhibit "L." If there is a conflict
between the rules and regulations and any of the provisions of this Lease, the
provisions of this Lease shall prevail. Lessor shall not be responsible for the
violation of any such rules and regulations by any person, including, without
limitation, Lessee or its employees, agents, invitees, licensees, guests,
visitors or contractors.
ARTICLE VI
MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. Maintenance of Premises.
(a) Throughout the Lease Term, Lessee, at its sole cost and expense, shall
keep, maintain, repair and replace the Premises (except as provided in 6.01.(b))
and all improvements and appurtenances in or serving the Premises, including,
without limitation, all interior and exterior walls, all doors and windows, the
roof membrane, all elevators and stairways, all wall surfaces and floor
coverings, all Tenant Improvements and alterations, additions and improvements
installed during the Lease Term, all sewer, plumbing, electrical, lighting,
heating, ventilation and cooling systems, fire sprinklers, fire safety and
security systems, fixture and appliances and all wiring and glazing, in the same
good order, condition and repair as they are in on the Commencement Date, or may
be put in during the Lease Term, reasonable wear excepted, provided that wear
which could be prevented by first class maintenance shall not be deemed
reasonable.
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(b) Lessor, at its sole cost and expense, shall repair defects in the
exterior walls (including all exterior glass which is damaged by structural
defects in such exterior walls), supporting pillars, structural walls, roof
structure and foundations of the Building and sewer and plumbing systems outside
the Building, provided that the need for repair is not caused by Lessee, in
which event Lessor shall, at Lessee's sole cost and expense, repair same. Lessor
shall replace the roof membrane of the Building, the parking lot surface,
landscaping, drainage, irrigation, sprinkler and sewer and plumbing systems
outside the Building systems when the useful life of each has expired, and
Lessee shall pay that portion of the cost of each replacement, together with
annual interest at the Agreed Rate which shall be amortized over the useful life
of each such replacement applicable to the balance of the Lease Term, in equal
monthly installments due and payable with installments of Base Rent provided
that as to repairs and replacements within the Common Area, Lessee shall pay its
proportionate share. Lessee shall give Lessor written notice of any need of
repairs which are the obligation of Lessor hereunder and Lessor shall have a
reasonable time to perform same. Should Lessor default as provided in Section
12.03 with respect to its obligation to make any of the repairs assumed by it
hereunder with respect to the Building, Lessee shall have the right to perform
such repairs and Lessor agrees that within thirty (30) days after written demand
accompanied by detailed invoice(s), it shall pay to Lessee the cost of any such
repairs together with accrued interest from the date of Lessee's payment at the
Agreed Rate. Lessor shall not be liable to Lessee, its employees, invitees, or
licensees for any damage to person or property, and Lessee's sole right and
remedy shall be the performance of said repairs by Lessee with right of
reimbursement from Lessor of the reasonable fair market cost of said repairs,
not exceeding the sum actually expended by Lessee, together with accrued
interest from the date of Lessee's payment at the Agreed Rate, provided that
nothing herein shall be deemed to create a right of setoff or withholding by
Lessee of Base Rent or Additional Rent or any other amounts due herein. Lessee
hereby expressly waives all rights under and benefits of Sections 1941 and 1942
of the California Civil Code or under any similar law, statute or ordinance now
or hereafter in effect to make repairs and offset the cost of same against rent
or to withhold or delay any payment of rent or any other of its obligations
hereunder as a result of any default by Lessor under this Section 6.01.(b).
(c) Lessee agrees to keep the Premises, both inside and out, clean and in
sanitary condition as required by the health, sanitary and police ordinances and
regulations of any political subdivision having jurisdiction and to remove all
trash and debris which may be found in or around the Premises. Lessee further
agrees to keep the interior surfaces of the Premises, including, without
limitation, windows, floors, walls, doors, showcases and fixtures clean and neat
in appearance.
(d) If Lessee refused or neglects to commence such repairs and/or
maintenance for which Lessee is responsible under this Article VI (including
with respect to any portion of the Common Area located on the legal parcel on
which the Building is located) within a thirty (30) day period (or as soon as
practical and in no event later than five (5) days, if the failure to initiate
the repair threatens to cause further damage to the Premises) after written
notice from Lessor and thereafter diligently prosecute the same to completion,
then Lessor may (i) enter the Premises (except in an emergency, upon at least 24
hours advanced written notice) during Lessor's business hours and cause such
repairs and/or maintenance to be made and shall not be
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responsible to Lessee for any loss or damage occasioned thereby and Lessee
agrees that upon demand, it shall pay to Lessor the reasonable cost of any such
repairs, not exceeding the sum actually expended by Lessor, together with
accrued interest from the date of Lessor's payment at the Agreed Rate and (ii)
elect to enter into a maintenance contract at a market rate for first-rate
maintenance with a third party for the performance of all or a part of Lessee's
maintenance obligations, whereupon, Lessee shall be relieved from its
obligations to perform only those maintenance obligations covered by such
maintenance contract, and Lessee shall bear the entire cost of such maintenance
contract which shall be paid in advance, as Additional Rent, on a monthly basis
with Lessee's Base Rent payments.
Section 6.02. Maintenance of Common Areas and Outside Areas. Subject to
6.01.(c) and subject to Lessee paying Lessee's share of the cost and expense for
same pursuant to Section 4.05, Lessor shall maintain, repair and replace all
landscape, hardscape and other improvements within the Common Areas and shall
operate and manage the amenities/athletic facility and other Common Area
features and facilities described in Section 2.02 and Lessor shall also
maintain, repair and replace all landscape, hardscape and other improvements
within the outside areas of the Premises ("Outside Areas") whether or not all or
any portion thereof has been designated by Lessor as Common Area, including
without limitation, walkways, driveways, parking areas and lighting and
sprinkler systems.
Section 6.03. Alterations, Additions and Improvements. No alterations,
additions, or improvements ("Alterations") shall be made to the Premises by
Lessee without the prior written consent of Lessor which Lessor will not
unreasonably withhold, provided, however, that Lessee may make Alterations which
do not affect the Building systems, exterior appearance, structural components
or structural integrity and which do not exceed collectively One Hundred
Thousand Dollars ($100,000) in cost within any twelve (12) month period, without
Lessor's prior written consent. As a condition to Lessor's obligation to
consider any request for consent hereunder, Lessee shall pay Lessor upon demand
for the reasonable costs and expenses of consultants, engineers, architects and
others for reviewing plans and specifications and for monitoring the
construction of any proposed Alterations. Lessor may require Lessee to remove
any such Alterations at the expiration or termination of the Lease Term and to
restore the Premises to their prior condition by written notice given on or
before the earlier of (i) the expiration of the Lease Term or (ii) thirty (30)
days after termination of the Lease or (iii) thirty (30) days after a written
request from Lessee for such notice from Lessor provided, that, if Lessee
requests same from Lessor, Lessor will notify Lessee within five (5) business
days after receipt of Lessee's request and a copy of all plans and
specifications for the proposed Alteration whether it will require removal. All
Alterations to be made to the Premises shall be made under the supervision of a
competent, California licensed architect and/or competent California licensed
structural engineer (each of whom has been approved by Lessor) and shall be made
in accordance with plans and specifications which have been furnished to and
approved by Lessor in writing prior to commencement of work. All Alterations
shall be designed, constructed and installed at the sole cost and expense of
Lessee by California licensed architects, engineers, and contractors approved by
Lessor, in compliance with all applicable law, and in good and workmanlike
manner. Any Alteration except furniture and trade fixtures, shall become the
property of Lessor at the expiration, or sooner termination of the Lease, unless
Lessor directs otherwise, provided that Lessee shall retain title to all
furniture and trade fixtures placed on the Premises. All heating,
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lighting, electrical, air conditioning, full height partitioning (but not
moveable, free standing cubicle-type partitions which do not extend to the
ceiling or connect to Building walls), drapery and carpeting installations made
by Lessee together with all property that has become an integral part of the
Premises, shall be and become the property of Lessor upon the expiration, or
sooner termination of the Lease, and shall not be deemed trade fixtures. Within
thirty (30) days after completion of any Alteration, Lessee, Lessee shall
provide Lessor with a complete set of "as built" plans for same.
Section 6.04. Covenant Against Liens. Lessee shall not allow any liens
arising from any act or omission of Lessee to exist, attach to, be placed on, or
encumber Lessor's or Lessee's interest in the Premises or Project, or any
portion of either, by operation of law or otherwise. Lessee shall not suffer or
permit any lien of mechanics, material suppliers, or others to be placed against
the Premises or Project, or any portion of either, with respect to work or
services performed or claimed to have been performed for Lessee or materials
furnished or claimed to have been furnished to Lessee or the Premises. Lessor
has the right at all times to post and keep posted on the Premises any notice
that it considers necessary for protection from such liens. At least seven (7)
days before beginning construction of any Alteration, Lessee shall give Lessor
written notice of the expected commencement date of that construction to permit
Lessor to post and record a notice of nonresponsibility. If any such lien
attaches or Lessee received notice of any such lien, Lessee shall cause the lien
to be immediately released and removed of record. Despite any other provision of
this Lease, if the lien is not released and removed within twenty (20) days
after Lessor delivers notice of the lien to Lessee, Lessor may immediately take
all action necessary to release and remove the lien, without any duty to
investigate the validity of it. All expenses (including reasonable attorney fees
and the cost of any bond) incurred by Lessor in connection with a lien incurred
by Lessee or its removal shall be considered Additional Rent under this Lease
and be immediately due and payable by Lessee.
Section 6.05 Reimbursable Capital Expenditures. Except for items of
capital expenditures which are to be made at Lessor's sole cost and expense
pursuant to the first sentence of Section 6.01(b) above, capital expenditures,
together with interest thereon at the Agreed Rate, for any replacement item at
the Premises made by Lessor in excess of Ten Thousand Dollars ($10,000.00)
during the Lease Term shall be amortized over the remaining Lease Term for the
useful life of such replacement item within the numerator being the number of
months remaining in the Lease Term and the denominator being the number of
months of the "useful life" of the improvements. Lessee shall be obligated for
such amortized portion of any such expenditure in equal monthly installments due
and payable with each installment of Base Rent.
ARTICLE VII
INSURANCE
Section 7.01. Property/Rental Insurance for Premises: At all times during
the Lease Term, Lessor shall keep the Premises insured against loss or damage by
fire and those risks normally included in the term "all risk," including,
without limitation, coverage for (i) earthquake and earthquake sprinkler
leakage, (ii) flood, (iii) loss of rents and extra expense for
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eighteen (18) months, including scheduled rent increases, (iv) boiler and
machinery, (v) Tenant Improvements and (vi) fire damage legal liability form,
including waiver of subrogation. Any deductibles shall be paid by Lessee. The
amount of such insurance shall not be less than 100% of replacement cost.
Insurance shall include a Building Ordinance and Increased Cost of Construction
Endorsement insuring the increased cost of reconstructing the Premises incurred
due to the need to comply with applicable statutes, ordinances and requirements
of all municipal, state and federal authorities now in force, which or may be in
force hereafter. Any recovery received from said insurance policy shall be paid
to Lessor and thereafter applied by Lessor to the reconstruction of the Premises
in accordance with the provisions of Article VIII below. Lessee, in addition to
the rent and other charges provided herein, shall reimburse Lessor for the cost
of the premiums for all such insurance covering the Premises in accordance with
Article IV. Such reimbursement and shall be made within (15) days of Lessee's
receipt of a copy of Lessor's statement therefor. Lessee shall pay to Lessor any
deductible (subject to the above conditions) owing within fifteen (15) days
after receipt of notice from Lessor of the amount owing. To the extent
commercially available, Lessor's insurance shall have a deductible not greater
than fifteen percent (15%) for earthquake and ten percent (10%) for the basic
"all risk" coverage.
Section 7.02. Property Insurance for Fixtures and Inventory. At all times
during the Lease Term, Lessee shall, at its sole expense, maintain insurance
with "all risk" coverage on any fixtures, furnishings, merchandise equipment or
personal property in or on the Premises, whether in place as of the date hereof
or installed hereafter. The amount of such insurance shall not be less than one
hundred percent (100%) of the replacement cost thereof, and Lessor shall not
have any responsibility nor pay any cost for maintaining any types of such
insurance. Lessee shall pay all deductibles.
Section 7.03. Lessor's Liability Insurance. During the Lease Term, Lessor
shall maintain a policy or policies of comprehensive general liability insurance
naming Lessor (and such others as designated by Lessor) against liability for
bodily injury, property damage on our about the Project, with combined single
limit coverage of not less than Thirty Million Dollars ($30,000,000.00). Lessee,
in addition to the rent and other charges provided herein, agrees to pay to
Lessor, Lessor's proportionate share of the premiums for all such insurance
pursuant to Section 4.05. The insurance premiums shall be paid in accordance
with Article IV, within (15) days of Lessee's receipt of a copy of Lessor's
statement therefore.
Section 7.04. Liability Insurance Carried by Lessee. At all times during
the Lease Term (and any holdover period) Lessee shall obtain and keep in force a
commercial general liability policy of insurance protecting Lessee, Lessor and
any Lender(s) whose names are provided to Lessee as Additional Insureds against
claims from bodily injury, personal injury and property damage based upon
involving or arising out of ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing a single limit coverage in amount of not less than
Ten Million Dollars ($10,000,000) per occurrence with an Additional Lessors or
Premises Endorsements and containing an "Amendment of the Pollution Exclusion
Endorsement" for damage caused by heat, smoke, fumes from a hostile fire. The
limits of said insurance required by this Lease as carried by Lessee shall not,
however limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All
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insurance to be carried by the Lessee shall be primary to and not contributory
with, any similar insurance carried by Lessor whose insurance shall be
considered excess insurance only.
Section 7.05. Lessee to Furnish Proof of Insurance. Lessee shall furnish
to Lessor prior to the Commencement Date, and at least fifteen (15) days prior
to the expiration date of any policy, certificates indicating that the property
insurance and liability insurance required to be maintained by Lessee is in full
force and effect for the twelve (12) month period following such expiration
date; that Lessor has been named as an additional insured to the extent of
contractual liability assumed in Section 7.07. "indemnification" and Section
7.08. "Lessor as Party Defendant"; and that all such policies will not be
canceled unless thirty (30) days' prior written notice of the proposed
cancellation has been given to Lessor. The insurance shall be with insurers
approved by Lessor, provided, however, that such approval shall not be
unreasonably withheld so long as Lessee's insurance carrier has a Best's
Insurance Guide rating not less than A+ VIII.
Section 7.06. Mutual Waiver of Claims and Subrogation Rights. Lessor and
Lessee hereby release and relieve the other, and waive their entire claim of
recovery for loss or damage to property arising out of or incident to fire,
lightning, and the other perils included in a standard "all risk" insurance
policy of a type described in Sections 7.01 and 7.02 above, when such property
constitutes the Premises, or is in, on or about the Premises, whether or not
such loss or damage is due to the negligence of Lessor or Lessee, or their
respective agents, employees, guests, licensees, invitees, or contractors.
Lessee and Lessor waive all rights of subrogation against each other on behalf
of, and shall obtain a waiver of all subrogation rights from, all property and
casualty insurers referenced above.
Section 7.07. Indemnification and Exculpation.
(a) Except as otherwise provided in Section 7.07.(b), Lessee shall
indemnify and hold Lessor free and harmless from any and all liability, claims,
loss, damages, causes of action (whether in tort or contract, law or equity, or
otherwise), expenses, charges, assessments, fines, and penalties of any kind,
including without limitation, reasonable attorney fees, expert witness fees and
costs, arising by reason of the death or injury of any person, including any
person who is an employee, agent, invitee, licensee, permittee, visitor, guest
or contractor of Lessee, or by reason of damage to or destruction of any
property, including property owned by Lessee or any person who is an employee,
agent, invitee, permitee, visitor, or contractor of Lessee, caused or allegedly
caused (1) while that person or property is in or about the Premises; (2) by
some condition of the Premises; (3) by some act or omission by Lessee or its
agent, employee, licensee, invitee, guest, visitor or contractor or any person
in, adjacent, on, or about the Premises with the permission, consent or
sufferance of Lessee; (4) by any matter connected to or arising out of Lessee's
occupation and use of the Premises, or any breach or default in timely
observance or performance of any obligation on Lessee's part to be observed or
performed under this Lease.
(b) Notwithstanding the provisions of Section 7.07.(a) of this Lease,
Lessee's duty to indemnify and hold Lessor harmless shall not apply to any
liability, claims, loss or damages arising because of Lessor's sole active
negligence or willful acts of misconduct.
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(c) Lessee hereby waives all claims against Lessor for damages to goods,
wares and merchandise and all other personal property in, on or about the
Premises and for injury or death to persons in, on or about the Premises from
any cause arising at any time to the fullest extent permitted by law and in no
event shall Lessor be liable for lost profits or other consequential damages
arising from any cause or for any damage which is or could be covered by the
insurance Lessee is required to carry under this Lease. Lessor hereby waives all
claims against Lessee for any damage which is or could be covered by the
insurance Lessor is required to carry under this Lease.
Section 7.08. Lessor as Party Defendant. If by reason of an act or
omission of Lessee or any of its employees, agents, invitees, licensee,
visitors, guests or contractors, Lessor is made a party defendant or a
cross-defendant to any action involving the Premises or this Lease, Lessee shall
hold harmless and indemnify Lessor from all liability or claims of liability,
including all damages, attorney fees and costs of suit.
ARTICLE VIII
DAMAGE OR DESTRUCTION
Section 8.01. Destruction of the Premises.
(a) In the event of a partial destruction of the Premises during the Lease
Term from any cause, Lessor, upon receipt of, and to the extent of, insurance
proceeds paid in connection with such casualty, shall forthwith repair the same,
provided the repairs can be made within a reasonable time under state, federal,
county and municipal applicable law, but such partial destruction shall in no
way annul or void this Lease, (except as provided in Section 8.01.(b) below)
provided that Lessee shall be entitled to a proportionate credit for rent equal
to the payment of Rental Income Insurance received by Lessor. Lessor shall use
diligence in making such repairs within a reasonable time period, subject to the
Force Majeure provisions of Section 17.21, in which instance the time period
shall be extended accordingly, and this Lease shall remain in full force and
effect, with the rent to be proportionately reduced as provided in this Section.
If the Premises are damaged by any peril within twelve (12) months prior to the
last day of the Lease Term and, in the reasonable opinion of the Lessor's
architect or construction consultant, the restoration of the Premises cannot be
substantially completed within ninety (90) days after the date of such damage
and such damage renders unusable more than thirty percent (30%) of the Premises,
Lessor may terminate this Lease on sixty (60) days written notice to Lessee.
(b) If the Building is damaged from any cause, Lessor shall promptly
furnish Lessee with the written opinion of Lessor's architect of when the
restoration work to repair the damage may be complete. Lessee shall have the
option to terminate this Lease if the time estimated to substantially complete
the restoration exceeds fifteen (15) months from the date Lessor's architect's
opinion is delivered to Lessee, which shall be (i) exercised by written notice
to Lessor delivered within thirty (30) days after delivery to Lessee of Lessor's
architect's opinion or (ii) irrevocably and automatically waived if not so
timely exercised. In the event of termination, Lessee shall pay to Lessor all
insurance proceeds, if any, received by Lessee as a result of the
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damage or destruction except to the extent allocable to the unamortized (over
the Lease Term) cost of (i) Tenant Improvements paid for by Lessee over and
above the Tenant Improvement Allowance and (ii) or other Alterations installed
therein at Lessee's sole cost and expense.
Section 8.02. Waiver of Civil Code Remedies. Lessee hereby expressly
waives any rights to terminate this Lease upon damage or destruction to the
Premises, including without limitation any rights pursuant to the provisions of
Section 1932, Subdivisions 1 and 2 and Section 1933, Subdivision 4, of the
California Civil Code, as amended from time-to-time, and the provisions of any
similar law hereinafter enacted.
Section 8.03. No Abatement of Rentals. The Rentals and other charges due
under this Lease shall not be reduced or abated by reason of any damage or
destruction to the Premises (except to the extent of proceeds received by Lessor
from the Rental Loss Insurance), and Lessor shall be entitled to all proceeds of
the insurance maintained pursuant to Section 7.01. above during the period of
rebuilding pursuant to Section 8.01.(a) above, or if the Lease is terminated
pursuant to Section 8.01.(a) above. Lessee shall have no claim against Lessor,
including, without limitation, for compensation for inconvenience or loss of
business, profits or goodwill during any period of repair or reconstruction.
Section 8.04. Liability for Personal Property. In no event shall Lessor
have any liability for, nor shall it be required to repair or restore, any
injury or damage to Lessee's personal property or to any other personal property
or to Alterations in or upon the Premises by Lessee.
ARTICLE IX
REAL PROPERTY TAXES
Section 9.01. Payment of Taxes. Subject to Lessee timely paying Lessor the
same in advance as provided below, Lessee shall pay all real property taxes,
including any escaped or supplemental tax and any form of real estate tax or
assessment, general, special, ordinary or extraordinary, and any license, fee,
charge, excise or imposition ("real property tax"), imposed, assessed or levied
on or with respect to the Premises (and Lessee shall pay its proportionate share
of real property taxes imposed, assessed or levied on or with respect to the
Common Area) by any Federal, State, County, City or other political subdivision
or public authority having the direct or indirect power to tax, including,
without limitation, any improvement district or any community facilities
district, as against any legal or equitable interest of Lessor in the Premises
or against the Premises or any part thereof applicable to the Premises for all
periods of time included within the Lease Term (as the same may be extended and
during any holdover period), as well as any government or private cost sharing
agreement assessments made for the purpose of augmenting or improving the
quality of services and amenities normally provided by government agencies. All
such payments shall be made by Lessee directly pursuant to Section 4.05 hereof
no later than ten (10) days after Lessor's delivery to Lessee of a statement of
the real property tax due, together with a copy of the applicable tax bill.
Notwithstanding the foregoing, Lessee shall not be required to pay any net
income taxes, franchise taxes, or any succession or inheritance taxes of Lessor.
If at anytime during the Lease Term, the State of California or any political
subdivision of the state, including any county, city, city and county, public
corporation, district,
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or any other political entity or public corporation of this state, levies or
assesses against Lessor a tax, fee, charge, imposition or excise on rents under
the Lease, the square footage of the Premises, the act of entering into this
Lease, or the occupancy of Lessee, or levies or assesses against Lessor any
other tax, fee, or excise, however described, including, without limitation, a
so-called value added, business license, transit, commuter, environmental or
energy tax fee, charge or excise or imposition related to the Premises as a
direct substitution in whole or in part for, or in addition to, any real
property taxes on the Premises, Lessee shall pay ten (10) days before
delinquency or ten (10) days after receipt of the tax bill, whichever is later,
that tax, fee, charge, excise or imposition.
Section 9.02. Pro Ration for Partial Years. If any such taxes paid by
Lessee shall cover any period prior to the Commencement Date or after the
Expiration Date of the Lease Term, Lessee's share of such taxes shall be
equitably prorated to cover only the period of time within the tax fiscal year
during which this Lease shall be in effect, and Lessor shall reimburse Lessee to
any extent required. If Lessee shall fail to pay any such taxes, Lessor shall
have the right to pay the same in which case Lessee shall repay such amount to
Lessor within ten (10) days after written demand, together with interest at the
Agreed Rate.
Section 9.03. Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes imposed, assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
(c) If Lessee shall fail to pay any such taxes, Lessor shall have the
right to pay the same, in which case Lessee shall repay such amount to Lessor
with Lessee's next rent installment together with interest at the Agreed Rate.
ARTICLE X
UTILITIES
Section 10.01. Lessee to Pay. Lessee shall pay prior to delinquency and
throughout the Lease Term, all charges for water, gas, heating, cooling, sewer,
telephone, electricity, garbage, air conditioning and ventilation, janitorial
service, landscaping and all other materials and utilities supplied to the
Premises. The disruption, failure, lack or shortage of any service or utility
due to any cause whatsoever shall not affect any obligation of Lessee hereunder,
and Lessor shall faithfully keep and observe all the terms, conditions and
covenants of this Lease and pay all rent due hereunder, all without diminution,
credit or deduction.
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ARTICLE XI
ASSIGNMENT AND SUBLETTING
Section 11.01. Lessor's Consent Required. Except as provided in Section
11.02, Lessee shall not voluntarily or by operation of law assign, transfer,
mortgage, sublet, license or otherwise transfer or encumber all or any part of
Lessee's interest in this Lease or in the Premises or any part thereof, without
Lessor's prior written consent within fifteen (15) business days after Lessor's
receipt of a signed Letter of Intent and complete financial information
concerning the proposed transferee which Lessor shall not unreasonably withhold,
or delay, provided that if Lessor fails to respond within said fifteen (15)
business days, it shall be deemed to have withheld consent. Lessor shall respond
in writing to Lessee's request for consent hereunder in a timely manner and any
attempted assignment, transfer, mortgage, encumbrance, subletting or licensing
without such consent shall be void, and shall constitute a breach of this Lease.
By way of example, but not limitation, reasonable grounds for denying consent
include: (i) poor credit history or insufficient financial strength of
transferee, (ii) transferee's intended use of the Premises is inconsistent with
the permitted use or will materially and adversely affect Lessor's interest.
Lessee shall reimburse Lessor upon demand for Lessor's reasonable costs and
expenses (including attorneys' fees, architect fees and engineering fees)
involved in renewing any request for consent whether or not consent is granted.
Section 11.02. Lessee Affiliates. Lessee may assign or sublet the
Premises, or any portion thereof, to any corporation which controls, is
controlled by, or is under common control with Lessee, or to any corporation
resulting from the merger or consolidation with Lessee, or to any person or
entity which acquires all, or substantially all of the assets of Lessee as a
going concern of the business that is being conducted on the Premises, provided
that said assignee or sublessee assumes, in full, the obligations of Lessee
under this Lease and provided further that the use to which the Premises will be
put does not materially change. Any such assignment shall not, in any way,
affect or limit the liability of Lessee under the terms of this Lease.
Section 11.03. No Release of Lessee. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Lessee or
any successor of Lessee, in the performance of any of the terms hereof, Lessor
may proceed directly against Lessee without the necessity of exhausting remedies
against said assignee.
Section 11.04. Excess Rent. In the event Lessor shall consent to a
sublease or an assignment, Lessee shall pay to Lessor with its regularly
scheduled Base Rent payments, fifty percent (50%) of all sums and the fair
market value of all consideration collected or received by Lessee from a
sublessee or assignee which are in excess of the Base Rent and Additional Rent
due and payable with respect to the subject space pursuant to Article IV for the
time period encompassed by the sublease or assignment term, after first
deducting (i) reasonable leasing commissions paid by Lessee with respect to such
sublease or assignment, and (ii) that portion of
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the cost of Tenant Improvements paid by Lessee (up to $30 per square foot) which
remains unamortized (using an amortization schedule of the first 60 months of
the Lease Term) during any portion of the sublease or assignment term.
Section 11.05. No Impairment of Security. Lessee's written request to
Lessor for consent to an assignment or subletting or other form of transfer
shall be accompanied by (a) the name and legal composition of the proposed
transferee; (b) the nature of the proposed transferee's business to be carried
on in the Premises; (c) the terms and provisions of the proposed transfer
agreement; and (d) such financial and other reasonable information as Lessor may
request concerning the proposed transferee.
Section 11.06. Lessor's Recapture Rights.
(a) Lessor's Recapture Rights. Notwithstanding any other provision of this
Article 11, in the event that Lessee proposes at any time after the first
twenty-four (24) months of the Lease Term to sublease or assign or otherwise
transfer any interest in this Lease or the Premises or any part thereof
affecting (collectively with all other such subleases, assignments, or transfers
then in effect) more than fifty percent (50%) of the square footage of the
Rentable Area of the Building (Recapture Space) more than half of the then
remaining Lease Term, then Lessor shall have the option to recapture the
Recapture Space by written notice to Lessee (Recapture Notice) given within ten
(10) business days after Lessor receives any notice of such proposed assignment
or sublease or other transfer ("Transfer Notice"). A timely Recapture Notice
terminates this Lease for the Recapture Space, effective as of the date
specified in the Transfer Notice. If Lessor declines or fails timely to deliver
a Recapture Notice, Lessor shall have no further right under this Section 11.06
to the Recapture Space unless it becomes available again after transfer by
Lessee.
(b) Consequences of Recapture. Base Rent and Additional Rent shall be
recalculated upon any recapture. To recalculate the Base Rent under this Lease
if Lessor recaptures the Recapture Space, the then current Base Rent
(immediately before Lessor's recapture) under the Lease shall be multiplied by a
fraction, numerator of which is the square feet of the Rentable Area retained by
Lessee after Lessor's recapture and the denominator of which is the total square
feet of the Rentable Area before Lessor's recapture. The Additional Rent, to the
extent that it is calculated on the basis of Rentable Area of the Building,
shall be recalculated in identical fashion. This Lease as so amended shall
continue thereafter in full force and effect. Either party may require written
confirmation of the amendments to this Lease necessitated by Lessor's recapture
of the Recapture Space. If Lessor recaptures the Recapture Space, Lessor shall,
at Lessor's sole expense, construct, paint, and furnish any partitions required
to segregate the Recapture Space from the remaining Premises retained by Lessee.
ARTICLE XII
DEFAULTS; REMEDIES
Section 12.01. Defaults. The occurrence of any one or more of the
following events shall constitute a material default and breach of this Lease by
Lessee:
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(a) The abandonment of the Premises by Lessee or the commission of waste
at the Premises or the making of an assignment or subletting in violation of
Article XI, provided however, abandonment shall be considered to not occur if
the Premises are maintained and occupied to the extent necessary to maintain the
insurance on each and every portion of the Premises;
(b) The failure by Lessee to make any payment of rent or any other payment
required to be made by Lessee hereunder, as and when due, if such failure
continues for a period of five (5) business days after written notice thereof
from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to
Pay Rent or Quit in the form required by applicable Unlawful Detainer statutes
such Notice shall constitute the notice required by this paragraph, provided
that the cure period stated in the Notice shall be five (5) business days rather
than the statutory three (3) days;
(c) Lessee's failure to provide (i) any instrument or assurance as
required by Section 7.05 or (ii) estoppel certificate as required by Section
15.01 or (iii) any document subordinating this Lease to a Lender's deed of trust
if such failure continues for five (5) business days after written notice of the
failure. In the event Lessor serves Lessee with a Notice to Perform Covenant or
Quit in the form required by applicable Unlawful Detainer Statutes, such Notice
shall constitute the notice required by this paragraph, provided that the cure
period stated in the Notice shall be five (5) business days rather than the
statutory three (3) days;
(d) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph (a) (b) or (c) above, if such failure
continues for a period of ten (10) days after written notice thereof from Lessor
to Lessee; provided, however, that if the nature of Lessee's default is such
that more than ten (10) days are reasonably required for its cure, then Lessee
shall not be deemed to be in default if Lessee commences such cure within said
ten (10) day period and thereafter diligently prosecutes such cure to
completion;
(e) (i) The making by Lessee of any general arrangement or assignment for
the benefit of creditors; (ii) the filing by Lessee of a voluntary petition in
bankruptcy under Title 11 U.S.C. or the filing of an involuntary petition
against Lessee which remains uncontested for a period of sixty days; (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease;
or (iv) the attachment, execution or other judicial seizure of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, provided, however, in the event that any provisions of this Section
12.01(e) is contrary to any applicable law, such provision shall be of no force
or effect;
(f) The discovery by Lessor that any financial statement given to Lessor
by Lessee, or any guarantor of Lessee's obligations hereunder, was materially
false.
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(g) The occurrence of a material default and breach by Lessee under any
other Lease between Lessee and Lessor (or any affiliate of Lessor) for Premises
in Pacific Shores Center.
Section 12.02. Remedies. In the event of any such material default and
breach by Lessee, Lessor may at any time thereafter, and without limiting Lessor
in the exercise of any right or remedy which Lessor may have by reason of such
default and breach:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means including by way of unlawful detainer (and without any further notice if a
notice in compliance with the unlawful detainer statutes and in compliance with
paragraphs (b), (c) and (d) of Section 12.01 above has already been given), in
which case this Lease shall terminate and Lessee shall immediately surrender
possession of the Premises to Lessor. In such event Lessor shall be entitled to
recover from Lessee all damages incurred by Lessor by reason of Lessee's default
including, but not limited to, (i) the cost of recovering possession of the
Premises including reasonable attorney's fees related thereto; (ii) the worth at
the time of the award of any unpaid rent that had been earned at the time of the
termination, to be computed by allowing interest at the Agreed Rate but in no
case greater than the maximum amount of interest permitted by law, (iii) the
worth at the time at the time of the award of the amount by which the unpaid
rent that would have been earned between the time of the termination and the
time of the award exceeds the amount of unpaid rent that Lessee proves could
reasonably have been avoided, to be computed by allowing interest at the Agreed
Rate but in no case greater than the maximum amount of interest permitted by
law, (iv) the worth at the time of the award of the amount by which the unpaid
rent for the balance of the Lease Term after the time of the award exceeds the
amount of unpaid rent that Lessee proves could reasonably have been avoided, to
be computed by discounting that amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of the award plus one per cent (1%),
(v) any other amount necessary to compensate Lessor for all the detriment
proximately caused by Lessee's failure to perform obligations under this Lease,
including brokerage commissions and advertising expenses, expenses of remodeling
the Premises for a new tenant (whether for the same or a different use), and any
special concessions made to obtain a new tenant, and (vi) any other amounts, in
addition to or in lieu of those listed above, that may be permitted by
applicable law.
(b) Maintain Lessee's right to possession as provided in Civil Code
Section 1951.4 in which case this Lease shall continue in effect whether or not
Lessee shall have abandoned the Premises. In such event Lessor shall be entitled
to enforce all of Lessor's rights and remedies under this Lease, including the
right to recover the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under the
laws or judicial decisions of the state of California. Unpaid amounts of rent
and other unpaid monetary obligations of Lessee under the terms of this Lease
shall bear interest from the date due at the Agreed Rate.
Section 12.03. Default by Lessor. Lessor shall not be in default under
this Lease unless Lessor fails to perform obligations required of Lessor within
a reasonable time, but in no event later than thirty (30) days after written
notice by Lessee to Lessor and to the holder of any first mortgage or deed of
trust covering the Premises whose name and address shall have theretofore
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been furnished to Lessee in writing, specifying that Lessor has failed to
perform such obligation; provided, however, that if the nature of Lessor's
obligation is such that more than thirty (30) days are required for performance
then Lessor shall not be in default if Lessor commences performance within such
thirty day period and thereafter diligently prosecutes the same to completion.
In the event Lessor does not commence performance within the thirty (30) day
period provided herein, Lessee may perform such obligation and will be
reimbursed for its expenses by Lessor together with interest thereon at the
Agreed Rate. Lessee waives any right to terminate this Lease or to vacate the
Premises on Lessor's default under this Lease. Lessee's sole remedy on Lessor's
default is an action for damages or injunctive or declaratory relief.
Notwithstanding the foregoing, nothing herein shall be deemed applicable in the
event of Lessor's delay in delivery of the Premises. In that situation, all
rights and remedies shall be determined under Section 3.01 above.
Section 12.04. Late Charges. Lessee hereby acknowledges that late payment
by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designated agent within five (5) business
days after such amount is due and owing, Lessee shall pay to Lessor a late
charge equal to five percent (5%) of such overdue amount. The parties hereby
agree that such late charge represents a fair and reasonable estimate of the
costs Lessor will incur by reason of late payment by Lessee. Acceptance of such
late charge by Lessor shall in no event constitute a waiver of Lessee's default
with respect to such overdue amount, nor prevent Lessor from exercising any of
the other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding Section 4.01 or any
other provision of this Lease to the contrary. Lease provided that if no further
late payments (and no other default) occur for a continuous six (6) month
period, payment of Base Rent shall return to the original payment schedule.
ARTICLE XIII
CONDEMNATION OF PREMISES.
Section 13.01. Total Condemnation. If the entire Premises, whether by
exercise of governmental power or the sale or transfer by Lessor to any
condemnor under threat of condemnation or while proceedings for condemnation are
pending, at any time during the Lease Term, shall be taken by condemnation such
that there does not remain a portion suitable for occupation, this Lease shall
then terminate as of the date transfer of possession is required. Upon such
condemnation, all rent shall be paid up to the date transfer of possession is
required, and Lessee shall have no claim against Lessor or the award for the
value of the unexpired portion of this Lease Term.
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Section 13.02. Partial Condemnation. If any portion of the Premises is
taken by condemnation during the Lease Term, whether by exercise of governmental
power or the sale for transfer by Lessor to an condemnor under threat of
condemnation or while proceedings for condemnation are pending, this Lease shall
remain in full force and effect except that in the event a partial taking leaves
the Premises unfit for the conduct of the business of Lessee, then Lessee shall
have the right to terminate this Lease effective upon the date transfer of
possession is required. Moreover, Lessor shall have the right to terminate this
Lease effective on the date transfer of possession is required if more than
thirty-three percent (33%) of the total square footage of the Premises is taken
by condemnation. Lessee and Lessor may elect to exercise their respective rights
to terminate this Lease pursuant to this Section by serving written notice to
the other within thirty (30) days after receipt of notice of condemnation. All
rent shall be paid up to the date of termination, and Lessee shall have no claim
against Lessor for the value of any unexpired portion of the Lease Term. If this
Lease shall not be canceled, the rent after such partial taking shall be that
percentage of the adjusted base rent specified herein, equal to the percentage
which the square footage of the untaken part of the Premises, immediately after
the taking, bears to the square footage of the entire Premises immediately
before the taking. If Lessee's continued use of the Premises requires
alterations and repair by reason of a partial taking, all such alterations and
repair shall be made by Lessee at Lessee's expense. Lessee waives all rights it
may have under California Code of Civil Procedure Section 1265.130 or otherwise,
to terminate this Lease based on partial condemnation.
Section 13.03. Award to Lessee. In the event of any condemnation, whether
total or partial, Lessee shall have the right to claim and recover from the
condemning authority such compensation as may be separately awarded or
recoverable by Lessee for loss of its business fixtures, or equipment belonging
to Lessee immediately prior to the condemnation. The balance of any condemnation
award shall belong to Lessor (including, without limitation, any amount
attributable to any excess of the market value of the Premises for the remainder
of the Lease Term over the then present value of the rent payable for the
remainder of the Lease Term) and Lessee shall have no further right to recover
from Lessor or the condemning authority for any claims arising out of such
taking.
ARTICLE XIV
ENTRY BY LESSOR
Section 14.01. Entry by Lessor Permitted. Lessee shall permit Lessor and
its employees, agents and contractors to enter the Premises and all parts
thereof (i) upon twenty-four (24) hours notice (or without notice in an
emergency), including without limitation, the Building and all parts thereof at
all reasonable times for any of the following purposes: to inspect the Premises;
to maintain the Premises; to make such repairs to the Premises as Lessor is
obligated or may elect to make; to make repairs, alterations or additions to any
other portion of the Project and (ii) upon twenty-four (24) hours notice to show
the Premises and post no more than two "To Lease" signs which are customary in
size and location for similarly situated and sized buildings (without blocking
windows or access) for the purposes of reletting during the last nine (9) months
of the Lease Term (provided that Lessee has failed to exercise its option to
extend) or extended Lease Term to show the Premises as part of a prospective
sale by Lessor or to post
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notices of nonresponsibility. Lessor shall have such right of entry without any
rebate of rent to Lessee for any loss of occupancy or quiet enjoyment of the
Premises hereby occasioned.
ARTICLE XV
ESTOPPEL CERTIFICATE
Section 15.01. Estoppel Certificate.
(a) Lessee shall at any time upon not less than fifteen (15) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying, if true, that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying, if true, that this Lease, as so modified, is in
full force and effect) and the date to which the rent and other charges are paid
in advance, if any, and (ii) acknowledging, if true, that there are not, to
Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or
specifying such defaults if any are claimed and (iii) certifying or
acknowledging such other matters as are requested by any prospective lender or
buyer which are reasonably related to the loan or sale transaction. Any such
statement may be conclusively relied upon by any prospective purchaser or
encumbrancer of the Premises.
(b) Lessee's failure to deliver such statement within such time shall be
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance.
ARTICLE XVI
LESSOR'S LIABILITY
Section 16.01. Limitations on Lessor's Liability. The term "Lessor" as
used herein shall mean only the owner or owners at the time in question of the
fee title of the Premises. In the event of any transfer of such title or
interest, Lessor herein named (and in case of any subsequent transfers then the
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership. For any breach of this Lease by Lessor, the
liability of Lessor (including all persons and entities that comprise Lessor,
and any successor Lessor) and any recourse by Lessee against Lessor shall be
limited to the interest of Lessor, and Lessor's successors in interest, in and
to the Premises. On behalf of itself and all persons claiming by, through, or
under Lessee, Lessee expressly waives and releases Lessor and each member, agent
and employee of Lessor from any personal liability for breach of this Lease.
ARTICLE XVII
GENERAL PROVISIONS
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Section 17.01. Severability. The invalidity of any provision of this Lease
as determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
Section 17.02. Agreed Rate Interest on Past-Due Obligations. Except as
expressly herein provided, any amount due to either party not paid when due
shall bear interest at the Bank of America prime rate plus one percent (1%)
("Agreed Rate"). Payment of such interest shall not excuse or cure any default
by Lessee under this Lease. Despite any other provision of this Lease, the total
liability for interest payments shall not exceed the limits, if any, imposed by
the usury laws of the State of California. Any interest paid in excess of those
limits shall be refunded to the payor by application of the amount of excess
interest paid against any sums outstanding in any order that payee requires. If
the amount of excess interest paid exceeds the sums outstanding, the portion
exceeding those sums shall be refunded in cash to the payor by the payee. To
ascertain whether any interest payable exceeds the limits imposed, any
nonprincipal payment (including late charges) shall be considered to the extent
permitted by law to be an expense or a fee, premium, or penalty rather than
interest.
Section 17.03. Time of Essence. Time is of the essence in the performance
of all obligations under this Lease.
Section 17.04. Additional Rent. Any monetary obligations of Lessee to
Lessor under the terms of this Lease shall be deemed to be Additional Rent and
Lessor shall have all the rights and remedies for the nonpayment of same as it
would have for nonpayment of Base Rent, except that the one year requirement of
Code of Civil Procedure Section 1161(2) shall apply only to scheduled
installments of Base Rent and not to any Additional Rent. All references to
"rent" (except specific references to either Base Rent or Additional Rent) shall
mean Base Rent and Additional Rent.
Section 17.05. Incorporation of Prior Agreements, Amendments and Exhibits.
This Lease (including Exhibits A, B, C, D, E, F, G, H, I, J, K and L) contains
all agreements of the parties with respect to any matter mentioned herein. No
prior agreement or understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, signed by the parties in
interest at the time of the modification. Except as otherwise stated in this
Lease, Lessee hereby acknowledges that neither the Lessor nor any employees or
agents of the Lessor has made any oral or written warranties or representations
to Lessee relative to the condition or use by Lessee of said Premises and Lessee
acknowledges that Lessee assumes all responsibility regarding the Occupational
Safety Health Act, the legal use and adaptability of the Premises and the
compliance thereof with all applicable laws and regulations in effect during the
Lease Term except as otherwise specifically stated in this Lease. Neither party
has been induced to enter into this Lease by, and neither party is relying on,
any representation or warranty outside those expressly set forth in this Lease.
Section 17.06. Notices.
(a) Written Notice. Any notice required or permitted to be given hereunder
shall be in writing and shall be given by a method described in paragraph (b)
below and shall be
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<PAGE> 29
addressed to Lessee or to Lessor at the addresses noted below, next to the
signature of the respective parties, as the case may be. Either party may by
notice to the other specify a different address for notice purposes. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by notice to Lessee, but delay or
failure of delivery to such person shall not affect the validity of the delivery
to Lessor or Lessee.
(b) Methods of Delivery:
(i) When personally delivered to the recipient, notice is effective
on delivery. Delivery to the person apparently designated to receive deliveries
at the subject address is personally delivered if made during business hours
(e.g. receptionist).
(ii) When mailed by certified mail with return receipt requested,
notice is effective on receipt if delivery is confirmed by a return receipt.
(iii) When delivery by overnight delivery Federal
Express/Airborne/United Parcel Service/DHL WorldWide Express with charges
prepaid or charged to the sender's account, notice is effective on delivery if
delivery is confirmed by the delivery service.
(c) Refused, Unclaimed or Undeliverable Notices. Any correctly addressed
notice that is refused, unclaimed, or undeliverable because of an act or
omission of the party to be notified shall be considered to be effective as of
the first date that the notice was refused, unclaimed, or considered
undeliverable by the postal authorities, messenger, or overnight delivery
service.
Section 17.07. Waivers. No waiver of any provision hereof shall be deemed
a waiver of any other provision hereof or of any subsequent breach of the same
or any other provisions. Any consent to, or approval of, any act shall not be
deemed to render unnecessary the obtaining of consent to or approval of any
subsequent act. The acceptance of rent hereunder by Lessor shall not be a waiver
of any preceding breach by Lessee of any provision hereof, other than the
failure of Lessee to pay the particular rent so accepted, regardless of Lessor's
knowledge of such preceding breach at the time of acceptance of such rent.
Section 17.08. Recording. Either Lessor or Lessee shall, upon request of
the other, execute, acknowledge and deliver to the other a "short form"
memorandum of this Lease for recording purposes, provided that Lessee shall also
simultaneously execute in recordable form and delivering to Lessor a Quit Claim
Deed as to its leasehold and any other interest in the Premises and hereby
authorizes Lessor to date and record the same only upon the expiration or sooner
termination of this Lease.
Section 17.09. Surrender of Possession; Holding Over.
(a) At the expiration of the Lease, Lessee agrees to deliver up and
surrender to Lessor possession of the Premises and all improvements thereon
broom clean and, in as good order and
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<PAGE> 30
condition as when possession was taken by Lessee, excepting only ordinary wear
and tear (wear and tear which could have been avoided by first class maintenance
practices and in accordance with industry standards shall not be deemed
"ordinary"). Upon expiration or sooner termination of this Lease, Lessor may
reenter the Premises and remove all persons and property therefrom. If Lessee
shall fail to remove any personal property which it is entitled or obligated to
remove from the Premises upon the expiration or sooner termination of this
Lease, for any cause whatsoever, Lessor, at its option, may remove the same and
store or dispose of them, and Lessee agrees to pay to Lessor on demand any and
all expenses incurred in such removal and in making the Premises free from all
dirt, litter, debris and obstruction, including all storage and insurance
charges. If the Premises are not surrendered at the end of the Lease Term,
Lessee shall indemnify Lessor against loss or liability resulting from delay by
Lessee in so surrendering the Premises, including, without limitation, actual
damages for lost rent and with respect to any claims of a successor occupant.
(b) If Lessee, with Lessor's prior written consent, remains in possession
of the Premises after expiration of the Lease Term and if Lessor and Lessee have
not executed an express written agreement for payment of rent during such
consented to holdover, then such occupancy shall be a tenancy from month to
month at a monthly Base Rent equivalent to one hundred twenty-five percent
(125%) (for the first month and 150% thereafter) of the monthly rental in effect
immediately prior to such expiration, such payments to be made as herein
provided for Base Rent. In the event of such holding over, all of the terms of
this Lease, including the payment of Additional Rent and all charges owing
hereunder other than rent shall remain in force and effect on said month to
month basis.
Section 17.10. Cumulative Remedies. No remedy or election hereunder by
Lessor shall be deemed exclusive but shall, wherever possible, be cumulative
with all other remedies at law or in equity, provided that notice and cure
periods set forth in Article XII are intended to extend and modify statutory
notice provisions to the extent expressly stated in Section 12.01.
Section 17.11. Covenants and Conditions. Each provision of this Lease to
be observed or performed by Lessee shall be deemed both a covenant and a
condition.
Section 17.12. Binding Effect; Choice of Law. Subject to any provisions
hereof restricting assignment or subletting by Lessee and subject to the
provisions of Article XVI, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State of California and any legal or equitable action or proceeding
brought with respect to the Lease or the Premises shall be brought in Santa
Clara County, California.
Section 17.13. Lease to be Subordinate. Lessee agrees that this Lease is
and shall be, at all times, subject and subordinate to the lien of any mortgage
or other encumbrances which Lessor may create against the Premises including all
renewals, replacements and extensions thereof provided, however, that regardless
of any default under any such mortgage or encumbrance or any sale of the
Premises under such mortgage, so long as Lessee timely performs all covenants
and conditions of this Lease and continues to make all timely payments
hereunder, this Lease and Lessee's possession and rights hereunder shall not be
disturbed by the
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<PAGE> 31
mortgagee or anyone claiming under or through such mortgagee. Lessee shall
execute any documents subordinating this Lease within ten (10) days after
delivery of same by Lessor so long as the Lender agrees therein that this Lease
will not be terminated if Lessee is not in default following a foreclosure,
including, without limitation, any Subordination Non-Distribution and Attornment
Agreement ("SNDA") which is substantially in the form attached hereto as Exhibit
"F."
Section 17.14. Attorneys' Fees. If either party herein brings an action to
enforce the terms hereof or to declare rights hereunder, the prevailing party in
any such action, on trial or appeal, shall be entitled to recover its reasonable
attorney's fees, expert witness fees and costs as fixed by the Court.
Section 17.15. Signs. Lessee shall not place any sign upon the exterior of
the Building without Lessor's prior written consent, which consent shall not be
unreasonably withheld and subject to approval by the City of Redwood. Lessee, at
its sole cost and expense, after obtaining Lessor's prior written consent, shall
install, maintain and remove prior to expiration of this Lease (or within ten
(10) days after any earlier termination of this Lease) all signage in full
compliance with (i) all applicable law, statutes, ordinances and regulations and
(ii) all provisions of this Lease concerning alterations.
Section 17.16. Merger. The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not
work a merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
Section 17.17. Guarantor. [Intentionally Omitted]
Section 17.18. Quiet Possession. Upon Lessee timely paying the rent for
the Premises and timely observing and performing all of the covenants,
conditions and provisions on Lessee's part to be observed and performed
hereunder, Lessee shall have quiet possession of the Premises for the entire
Lease Term, subject to all of the provisions of this Lease.
Section 17.19. Easements. Lessor reserves to itself the right, from time
to time, to grant such easements, rights and dedications that Lessor deems
necessary or desirable, and to cause the recordation of Parcel Maps and
conditions, covenants and restrictions, so long as such easements, rights,
dedications, Maps and conditions, covenants and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned or other documents, and take such other actions, which are
reasonably necessary or appropriate to accomplish such granting recordation and
subordination of the Lease to same, upon request of Lessor, and failure to do so
within ten (10) business days of a written request to do so shall constitute a
material breach of this Lease.
Section 17.20. Authority. Each individual executing this Lease on behalf
of a corporation, limited liability company or partnership represents and
warrants that he or she is duly authorized to execute and deliver this Lease on
behalf of such entity in accordance with a
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<PAGE> 32
duly adopted resolution of the governing group of the entity empowered to grant
such authority, and that this Lease is binding upon said entity in accordance
with its terms.
Section 17.21. Force Majeure Delays. In any case where either party hereto
is required to do any act (other than the payment of money), delays caused by or
resulting from Acts of God or Nature, war, civil commotion, fire, flood or other
casualty, labor difficulties, shortages of labor or materials or equipment,
government regulations, delay by government or regulatory agencies with respect
to approval or permit process, unusually severe weather, or other causes beyond
such party's reasonable control the time during which act shall be completed,
shall be deemed to be extended by the period of such delay, whether such time be
designated by a fixed date, a fixed time or "a reasonable time."
Section 17.22. Hazardous Materials.
(a) Definition of Hazardous Materials and Environmental Laws. "Hazardous
Materials" means any (a) substance, product, waste or other material of any
nature whatsoever which is or becomes listed regulated or addressed pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. sections 9601, et seq. ("CERCLA"); the Hazardous Materials Transportation
Act ("HMTA") 49 U.S.C. section 1801, et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. section 6901, et seq. ("RCRA"); the Toxic Substances
Control Act, 15 U.S.C. sections 2601, et seq. ("TSCA"); the Clean Water Act, 33
U.S.C. sections 1251, et seq.; the California Hazardous Waste Control Act,
Health and Safety Code sections 25100, et seq.; the California Hazardous
Substances Account Act, Health and Safety Code sections 26300, et seq.; the
California Safe Drinking Water and Toxic Enforcement Act, Health and Safety Code
sections 25249.5, et seq.; California Health and Safety Code sections 25280, et
seq.; (Underground Storage of Hazardous Substances); the California Hazardous
Waste Management Act, Health and Safety Code sections 25170.1, et seq.;
California Health and Safety Code sections 25501. et seq. (Hazardous Materials
Response Plans and Inventory); or the Porter-Cologne Water Quality Control Act,
California Water Code sections 13000, et seq., all as amended, or any other
federal, state or local statute, law, ordinance, resolution, code, rule,
regulation, order or decree regulating, relating to or imposing liability
(including, but not limited to, response, removal and remediation costs) or
standards of conduct or performance concerning any hazardous, toxic or dangerous
waste, substance or material, as now or at any time hereafter may be in effect
(collectively, "Environmental Laws"); (b) any substance, product, waste or other
material of any nature whatsoever whose presence in and of itself may give rise
to liability under any of the above statutes or under any statutory or common
law theory based on negligence, trespass, intentional tort, nuisance, strict or
absolute liability or under any reported decisions of a state or federal court,
(c) petroleum or crude oil, including but not limited to petroleum and petroleum
products contained within regularly operated motor vehicles and (d) asbestos.
(b) Lessor's Representations and Disclosures. Lessor represents that it
has provided Lessee with a description of the Hazardous Materials on or beneath
the Property as of the date hereof, attached hereto as Exhibit I and
incorporated herein by reference. Lessee acknowledges that in providing the
attached Exhibit I, Lessor has satisfied its obligations of disclosure pursuant
to California Health & Safety Code Section 25359.7 which requires:
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<PAGE> 33
"Any owner of nonresidential real property who knows, or has
reasonable cause to believe, that any release of hazardous substances has come
to be located on or beneath that real property shall, prior to the sale, lease
or rental of the real property by that owner, give written notice of that
condition to the buyer, lessee or renter of the real property."
(c) Use of Hazardous Materials. Lessee shall not cause or permit any
Hazardous Materials to be brought upon, kept or used in, on or about the Project
by Lessee, its agents, employees, contractors, licensee, guests, visitors or
invitees without the prior written consent of Lessor. Lessor shall not
unreasonably withhold such consent so long as Lessee demonstrates to Lessor's
reasonable satisfaction that such Hazardous Materials are necessary or useful to
Lessee's business and will be used, kept and stored in a manner that complies
with all applicable Environmental Laws. Lessee shall, at all times, use, keep,
store, handle, transport, treat or dispose all such Hazardous Materials in or
about the Property in compliance with all applicable Environmental Laws. Lessee
shall remove all Hazardous Materials used or brought onto the Premises during
the Lease Term from the Project prior to the expiration or earlier termination
of the Lease.
(d) Lessee's Environmental Indemnity. Lessee agrees to indemnify and hold
Lessor harmless from any liabilities, losses, claims, damages, penalties, fines,
attorney fees, expert fees, court costs, remediation costs, investigation costs,
or other expenses resulting from or arising out of the use, storage, treatment,
transportation, release, presence, generation, or disposal of Hazardous
Materials on, from or about the Project, and/or subsurface or ground water,
after the Commencement Date from an act or omission of Lessee (or Lessee's
successor), its agents, employees, invitees, vendors, contractors, guests or
visitors.
(e) Lessee's Obligation to Promptly Remediate. If the presence of
Hazardous Materials on the Premises after the Commencement Date results from an
act or omission of Lessee (or Lessee's successors), its agents, employees,
invitees, vendors, contractors, guests, or visitors results in contamination or
deterioration of the Premises or Project or any water or soil beneath the
Premises or Project, Lessee shall promptly take all action necessary or
appropriate to investigate and remedy that contamination, at its sole cost and
expense, provided that Lessor's consent to such action shall first be obtained.
Lessor's consent shall not be unreasonably withheld. In no event shall Lessee be
responsible for the remediation of Hazardous Materials identified in Exhibit I
at the Project prior to Commencement Date.
(f) Notification. Lessor and Lessee each agree to promptly notify the
other of any communication received from any governmental entity concerning
Hazardous Materials or the violation of Environmental Laws that relate to the
Property.
Section 17.23. Modifications Required by Lessor's Lender. If any lender of
Lessor requires a modification of this Lease that will not increase Lessee's
cost or expense or materially and adversely change Lessee's rights and
obligations, this Lease shall be so modified and Lessee shall execute whatever
documents are required by such lender and deliver them to Lessor within ten (10)
days after the request.
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Section 17.24. Brokers. Lessor and Lessee each represents to the other
that it has had no dealings with any real estate broker or agent in connection
with the negotiation of this Lease, except for the real estate brokers or agents
identified on the signature page hereof ("Brokers") and that they know of no
other real estate broker or agent who is entitled to a commission or finder's
fee in connection with this Lease. Each party shall indemnify, protect, defend,
and hold harmless the other party against all claims, demands, losses,
liabilities, lawsuits, judgments, and costs and expenses (including reasonable
attorney fees) for any leasing commission, finder's fee, or equivalent
compensation alleged to be owning on account of the indemnifying party's
dealings with any real estate broker or agent other than the Brokers. The terms
of this Section 17.24 shall survive the expiration or earlier termination of the
Lease Term.
Section 17.25. [Intentionally Deleted]
Section 17.26. Acknowledgment of Notices. Lessor has provided and Lessee
hereby acknowledges receipt of the Notices attached as Exhibits J and K hereto,
concerning the presence of certain uses and operations of neighboring parcels of
land.
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Section 17.27. List of Exhibits.
<TABLE>
<CAPTION>
Ref. Page
---------
<S> <C> <C>
EXHIBIT A: Real Property Legal Description, Site Plan, and Building Elevations
EXHIBIT B: Plans and Specifications for Shell Building
EXHIBIT C: Work Letter Agreement for Tenant Improvements and Interior
Specification Standards
EXHIBIT D: Cost Responsibilities of Lessor and Lessee
EXHIBIT E: Memorandum of Commencement of Lease Term and Schedule of Base Rent
EXHIBIT F: SNDA
EXHIBIT G: Signage Exhibit
EXHIBIT H: Guaranty of Lease [Intentionally Omitted]
EXHIBIT I: Hazardous Materials Disclosure
EXHIBIT J: Notice to Tenants
EXHIBIT K: Notice to Tenants
EXHIBIT L: Rules and Regulations
</TABLE>
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LESSOR AND LESSEE EACH HAS CAREFULLY READ AND HAS REVIEWED THIS LEASE AND BEEN
ADVISED BY LEGAL COUNSEL OF ITS OWN CHOOSING AS TO EACH TERM AND PROVISION
CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOWS ITS INFORMED AND
VOLUNTARY CONSENT THERETO. EACH PARTY HEREBY AGREE THAT, AT THE TIME THIS LEASE
IS EXECUTED, THE TERMS AND CONDITIONS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
Executed at San Jose, California, as of the reference date.
LESSOR: ADDRESS:
c/o Jay Paul Company
353 Sacramento Street, Suite 1740
- ---------------------------------------, San Francisco, California 94111
- ---------------------------------------
By:
---------------------------------
Jay Paul, President
With a copy to:
Thomas G. Perkins, Esq.
99 Almaden Blvd., 8th Floor
San Jose, CA 95113
Telephone: 408-993-9911
Facsimile: 408-286-3312
LESSEE: ADDRESS:
INFORMATICA CORP.
a corporation
-------- --------------------------------------
--------------------------------------
By: (Before Commencement Date)
---------------------------------
(Type or print name) Pacific Shores Center
Its: Building 1
--------------------------------- Redwood City, CA
(After Commencement Date)
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<PAGE> 37
BROKER EXECUTION
By signing below, the indicated real estate broker or agent is not being
made a party hereto, but is signifying its agreement with the provisions hereof
concerning brokerage.
LESSOR'S BROKER: ADDRESS:
Cornish & Carey Commercial 2804 Mission College Blvd., Suite 120
Santa Clara, California 95054
By:
--------------------------------
--------------------------------
(Type or print name)
Its: Executive Vice President
LESSEE'S BROKER: ADDRESS:
BT Commercial 2445 Faber Place, Suite 250
Palo Alto, CA 94303-4226
By:
--------------------------------
--------------------------------
(Type or print name)
Its:
--------------------------------
<PAGE> 1
EXHIBIT 10.15
TRIPLE NET BUILDING LEASE
Between
PACIFIC SHORES CENTER LLC,
as
LESSOR
and
INFORMATICA CORP.
A DELAWARE CORPORATION
as
LESSEE
for
PREMISES
at
PACIFIC SHORES CENTER
BUILDING 2
REDWOOD CITY, CALIFORNIA
<PAGE> 2
ARTICLE I
PARTIES
Section 1.01. Parties. This Lease, dated for reference purposes, and
effective as of February 22, 2000, is made by and between PACIFIC SHORES CENTER
LLC, or assignee, ("Lessor") and INFORMATICA CORP., a Delaware corporation
("Lessee").
ARTICLE II
PREMISES
Section 2.01. Demise of Premises. Lessor hereby leases to Lessee and
Lessee leases from Lessor for the term, at the rental, and upon all of the terms
and conditions set forth herein, Premises consisting of one building
("Building") of ten free standing, office and research and development buildings
("Buildings") to be constructed by Lessor on real property situated in Redwood
City, County of San Mateo, State of California and commonly known as Pacific
Shores Center which Lessor is in the process of acquiring (the "Property"). The
Building will be four stories tall and will consist of approximately one hundred
forty-four thousand ninety-two (144,092) rentable square feet, as more
particularly described and depicted herein in Exhibit "A." The actual rentable
square footage of the Building (the "Rentable Area") will be determined and
certified by Lessor's architect by a method described as "dripline," whereby the
measurement encompasses the outermost perimeter of the constructed building,
including every projection thereof and all area beneath each such projection,
whether or not enclosed, with no deduction for any inward deviation of structure
and with the measurement being made floor by floor, beginning from the top of
the Building. The Building and appurtenances described herein, the Property, and
all other improvements to be built on the Property are together designated as
the "Project." The Building leased hereunder, commonly known as Building 1 -
Pacific Shores Center, Redwood City, California, and its appurtenances described
herein are herein designated as the "Premises."
Section 2.02. Common Area. During the Lease Term, Lessee shall have the
non-exclusive right to use the Common Area defined herein. Lessor reserves the
right to modify the Common Area, including reducing the size or changing the
use, configuration and elements thereof in its sole discretion and to close or
restrict access from time to time for repair, maintenance or to prevent a
dedication thereof, provided that Lessee nonetheless shall have access to
parking and the Premises during such activities and there shall be no material,
adverse impact on Lessee's use of the Premises. Lessor further reserves the
right to establish, repeal and amend from time to time rules and regulations for
the use of the Common Area and to grant reciprocal easements or other rights to
use the Common Area to owners of other property. "Common Area" includes, without
limitation, landscaping, sidewalks, walkways, driveways, curbs, parking lots
(including striping), sprinkler systems, lighting, surface water drainage
systems as well as baseball and soccer fields, an amenities/athletic facility
and, to the extent required by government authorities having jurisdiction over
Lessor's development of the Project, a waterfront park, perimeter walking/biking
trail, amphitheater, marine life resource center, retreat and conference center,
child care center and such further portions of the Project or additional or
different facilities as Lessor may from time to time designate or install or
make available for the use by Lessee in common with others.
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<PAGE> 3
Section 2.03. Parking. Lessor shall provide Lessee with parking spaces
within the Common Area in the ratio to space within the Building as required by
law, which is three (3) spaces per one thousand (1,000) square feet of interior
space within the Building. In the event Lessor elects or is required by any law
to limit or control parking at the Premises, whether by validation of parking
tickets or any other method of assessment, Lessee agrees to participate in such
validation or assessment program under such reasonable rules and regulations as
are from time to time established by Lessor. Said parking shall be provided at
no additional cost except as expressly provided herein in Article VI for
reimbursement of repair, replacement and maintenance, and except for any
governmental or public authority charges, fees or impositions of any nature
hereafter imposed.
Section 2.04. Construction.
(a) Government Approvals. Lessor shall diligently pursue obtaining
governmental approval of a Site Plan and Building design and elevations with
respect to the development of the Premises, copies of which are attached hereto
as Exhibit "A." The parties acknowledge and agree that the final footprint and
elevations of the Building may vary from those attached as Exhibit "A" because
the plans and specifications will undergo a plancheck process with the City of
Redwood City and Lessor will make such revisions as are required or are
otherwise deemed necessary or appropriate by Lessor, provided however, that
nothing herein shall be deemed to relieve Lessor from the duty to develop the
Building substantially in compliance with Exhibit "A."
(b) Construction of Shell Building. Lessor, utilizing Rudolph & Sletten
(or such alternate as Lessor in its sole discretion may select) as general
contractor ("General Contractor"), shall construct the "Building Shell" (as
defined in the attached Exhibit "D") in accordance with (i) plans and
specifications to be attached as Exhibit "B" and (ii) all existing applicable
municipal, local, state and federal laws, statutes, rules, regulations and
ordinances. Lessor shall pay all costs of constructing the Building Shell.
(c) Construction of Tenant Improvements. All improvements not included
within the scope of the Building Shell shall be deemed "Tenant Improvements."
Lessor, using the General Contractor, shall construct the Tenant Improvements
and shall contribute the Tenant Improvement Allowance towards the payment of
same and Lessee shall pay all costs associated with same in excess of the Tenant
Improvement Allowance.
(d) Tenant Improvement Plans and Cost Estimate. Lessee shall work with
Lessor's architect to develop interior schematic drawings and Lessee shall
approve final interior schematic drawings for the Building Tenant Improvements
no later than May 15, 2000. Lessee shall work with Lessor's architect to develop
working drawings outlining, among other things, Lessee's wall layout, detailed
electrical and air conditioning requirements and finishes ("Working Drawings")
and Lessee shall approve final Working Drawings on or before July 15, 2000. The
cost of the interior schematic drawings and Working Drawings shall be a Tenant
Improvement cost. Based on this information, Landlord shall cause the General
Contractor to
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<PAGE> 4
prepare and deliver to Lessee a budget for the Tenant Improvements ("Budget").
Lessee shall approve the Budget (or modify the same with Lessor's consent), in
writing, within ten (10) business days thereafter. The Working Drawings and
Budget must be approved by Lessor in writing and be of quality equal to or
greater than the Interior Specifications Standards set forth in Exhibit "C" and
must encompass the build-out of the entire Premises. Once the Budget is
approved, Lessor shall enter into a guaranteed maximum price contract with the
General Contractor for the construction of the Tenant Improvements.
(e) Cost Responsibilities. Attached as Exhibit "C" to this Lease is a Work
Letter Agreement for Tenant Improvements, and Exhibit "D," Cost Responsibilities
of Lessor and Lessee, which together with this Section 2.04, describe the
planning and payment responsibilities of the Lessor and Lessee with respect to
the construction of the Shell Building and Tenant Improvements at the Premises.
All approved Tenant Improvements shall be constructed in accordance with a
construction schedule approved by Lessor and no portion of the Building interior
shall remain unimproved.
(f) Tenant Improvement Allowance. Lessor shall provide to Lessee
semi-improved "cold shell" facilities as described in Exhibit "D" attached and a
Tenant Improvement Allowance of $25.00 per square foot to be used for the Tenant
Improvements outlined in Exhibit "D," all as outlined in the Tenant Improvement
Work Letter attached as Exhibit "C." Subcontracts for all Tenant Improvement
Work shall be obtained by a sealed competitive bid process (involving at least
two qualified bidders) wherever practical and as to work done without such
process, Lessor or the General Contractor shall provide reasonable assurance to
Lessee that the cost and expense of same is competitive in the industry for
first-class workmanship and materials.
(g) Payment for Tenant Improvements. Within five (5) business days after
the Budget is approved by Lessor and Lessee, Lessee shall deposit Lessee's share
of the amount budgeted for the entire Tenant Improvement construction schedule
(together with the cost of any Tenant Improvements already made) with Lessor's
construction lender to be held in an escrow account. Lessee's share is the
portion of the budgeted amount not paid from the Tenant Improvement Allowance as
described in the following sentence. Said construction lender shall issue
payments from said account pursuant to the construction contract for the Tenant
Improvements with a portion of each payment being taken from the Tenant
Improvement Allowance (in the same ratio as the Tenant Improvement Allowance
bears to the entire Budget total) and the balance being paid from Lessee's
deposit, until the Tenant Improvement Allowance is exhausted, whereupon any
remaining payments shall be made 100% by Lessee. Lessor shall manage the
construction of the Tenant Improvements for a construction management fee of
2.5% of the Tenant Improvement Contract amount (as the same may change by
agreement of the parties) due and payable in nine equal monthly installments
beginning on the first day of the calendar month following the calendar month in
which the Budget is first approved.
(h) Lessee's Fixturing Period. Lessor shall provide Lessee access to the
Premises during the thirty (30) day period prior to the Commencement Date
("Lessee's Fixturing Period") for the purpose of installing furnishings and
equipment, e.g. security system, furniture system and phone and data system,
provided, that Lessee and Lessee's employees and
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contractors shall at all times avoid interfering with Lessor's ongoing work to
bring the Premises to a substantially completed condition. Except for payment of
Base Rent, all terms and provisions of this Lease shall apply during Lessee's
Fixturing Period, including, without limitation, Lessee's indemnity and other
obligations set forth in Sections 7.07., 7.08. and 17.22. hereof and payment of
Additional Rent pursuant to Section 4.05 hereof.
ARTICLE III
TERM
Section 3.01. Lease Term.
(a) Commencement Date. The term of this Lease ("Lease Term") shall be for
twelve (12) years beginning on the earlier of (i) the date a Certificate of
Occupancy first is issued affecting the Building, or (ii) the date on which
Lessee first occupies or conducts business at the Premises (the "Commencement
Date") provided that, (i) for each day of delay by Lessee in failing to approve
the interior schematic drawings or the Working Drawings when required under
Section 2.04(d), or (ii) for each day of delay by Lessee in failing to approve
the Budget, in writing, within fourteen (14) days after delivery by the General
Contractor as provided in Section 2.04(d), or (iii) for each day of delay caused
by any changes to the approved Working Drawings requested by Lessee, or (iv) for
each day that any other act or omission by Lessee causes the construction
schedule for Tenant Improvements to be delayed (collectively "Lessee Delay"),
the Commencement Date shall occur one (1) day in advance of the date of the
Certificate of Occupancy for each such day of delay. For example, if seven (7)
days of Lessee Delay causes the date of issuance of the Certificate of Occupancy
to occur on July 8, 2001 rather than July 1, 2001, the Commencement Date shall
be July 1, 2001 for all purposes, including payment of Base Rent. The Lease Term
shall expire, unless sooner terminated or extended as provided herein, on the
date which completes twelve (12) years after the Commencement Date occurs, e.g.
if the date on which the Commencement Date occurs is July 1, 2001, the Lease
Term shall expire on June 30, 2013 and if the Commencement Date is July 3, 2001,
the Lease Term shall expire on July 2, 2013 ("Expiration Date"). The parties
shall execute a "Memorandum of Commencement of Lease Term" when the Commencement
Date becomes known, which shall include a certification of the actual Rentable
Area of the Building determined by the methodology described in Section 2.01.
and the actual monthly installments of Base Rent to be paid pursuant to Section
4.01., and shall be substantially in the form attached hereto as Exhibit "E."
(b) Scheduled Commencement Date. Lessor shall use commercially reasonable
efforts to cause the Certificate of Occupancy for the Building to be issued no
later than July 1, 2001 ("Scheduled Commencement Date"). If a Certificate of
Occupancy is not issued for the Building on or before the Scheduled Commencement
Date, this failure shall not affect the validity of this Lease or the
obligations of Lessee under it. If the Commencement Date is adjusted for delay
from any cause, the Expiration Date shall be likewise adjusted for a like
period.
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(c) Termination in Event of Delay. If for any reason Lessor is unable to
cause the issuance of a Certificate of Occupancy for the Building, on or before
the date which is one hundred forty-five (145) days after the Scheduled
Commencement Date (for a reason other than Lessee Delay or delay excused under
Section 17.21.), Lessee, at its sole election, may terminate this Lease upon
giving notice within ten (10) days thereafter. Failure to give such notice
within said time period constitutes an irrevocable waiver of the foregoing right
to terminate under this Section 3.01(c).
(d) Lessee Termination Rights. In the event that either (i) Lessor is not
the fee owner of the Property on or before May 15, 2000, or (ii) Lessor has not
presented Lessee with reasonable evidence on or before July 15, 2000, that it
has obtained a commitment letter for financing in an amount sufficient to
complete the construction of the Building Shell and fund the Tenant Improvement
Allowance, then Lessee shall have the right to terminate this Lease upon written
notice to Lessor within sixty (60) days after either May 15, 2000 or July 15,
2000, as applicable. If Lessee terminates this Lease in accordance with this
paragraph, neither party shall have any further rights or obligations hereunder.
Section 3.02. Option to Extend.
(a) Exercise. Lessee is given one (1) option to extend the Lease Term
("Option to Extend") for a five (5) year period ("Extended Term") following the
date on which the initial Lease Term would otherwise expire, which option may be
exercised only by written notice ("Option Notice") from Lessee to Lessor given
not less than twelve (12) months prior to the end of the initial Lease Term
("Option Exercise Date"); provided, however, if Lessee is in material default
under this Lease (beyond the expiration of any applicable notice period) on the
Option Exercise Date or on any day thereafter on or before the last day of the
initial Lease Term, the Option Notice shall be totally ineffective, and this
Lease shall expire on the last day of the initial Lease Term, if not sooner
terminated. The right of Lessee to exercise an Option to Extend shall not be
affected by any sublease or assignment of this Lease previously entered into by
Lessee pursuant to the provisions of this Lease.
(b) Extended Term Rent. In the event Lessee exercises its Option to Extend
set forth herein, all the terms and conditions of this Lease shall continue to
apply except that the Base Rent payable by Lessee during each Option Term shall
be equal to one hundred percent (100%) of Fair Market Rent (defined below), as
determined under subparagraph (c) below with annual three and five tenths
percent (3.5%) increases pursuant to Section 4.02 below. "Fair Market Rent"
shall mean the effective rate being charged (including periodic adjustments
thereto as applicable during the period of the Extended Term), for comparable
space in similar buildings in the vicinity, i.e. of a similar age and quality
considering any recent renovations or modernization, and floor plate size or, if
such comparable space is not available, adjustments shall be made in the
determination of Fair Market Rent to reflect the age and quality of the Building
and Premises as contrasted to other buildings used for comparison purposes, with
similar amenities, taking into consideration: size, location, floor level,
leasehold improvements or allowances provided or to be provided, term of the
lease, extent of services to be provided, the time that the particular rate
under consideration became or is to become effective, and any other relevant
terms or conditions
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applicable to both new and renewing tenants, but in no event less than the
monthly Base Rent prevailing during the last year of the initial Lease Term.
(c) Determination of Fair Market Rent.
(i) Negotiation. If Lessee so exercises its Option to Extend in a
timely manner, the parties shall then meet in good faith to negotiate the Base
Rent for the Premises for the Extended Term, during the first thirty (30) days
after the date of the delivery by Lessee of the Option Notice (the "Negotiation
Period"). If, during the Negotiation Period, the parties agree on the Base Rent
applicable to the Premises for the Extended Term, then such agreed amount shall
be the Base Rent payable by Lessee during the Extended Term.
(ii) Arbitration. In the event that the parties are unable to agree
on the Base Rent for the Premises within the Negotiation Period, then within ten
(10) days after the expiration of the Negotiation Period, each party shall
separately designate to the other in writing an appraiser to make this
determination. Each appraiser designated shall be a member of MAI and shall have
at least ten (10) years experience in appraising commercial real property, of
similar quality and use as the Premises, in San Mateo County. The failure of
either party to appoint an appraiser within the time allowed shall be deemed
equivalent to appointing the appraiser appointed by the other party, who shall
then determine the Fair Market Rent for the Premises for the Extended Term.
Within five (5) business days of their appointment, the two designated
appraisers shall jointly designate a third similarly qualified appraiser. Within
thirty (30) days after their appointment, each of the two appointed appraisers
shall submit to the third appraiser a sealed envelope containing such appointed
appraiser's good faith determination of the Fair Market Rent for the Premises
for the Extended Term; concurrently with such delivery, each such appraiser
shall deliver a copy of his or her determination to the other appraiser. The
third appraiser shall within ten (10) days following receipt of such
submissions, then determine which of the two appraisers' determinations most
closely reflects Fair Market Rent as defined above. The determination most
closely reflecting the third appraiser's determination shall be deemed to be the
Fair Market Rent for the Premises during the Extended Term; the third appraiser
shall have no rights to adjust, amend or otherwise alter the determinations made
by the appraiser selected by the parties, but must select one or the other of
such appraisers' submissions. The determination by such third appraiser shall be
final and binding upon the parties. Said third appraiser shall, upon selecting
the determination which most closely resembles Fair Market Rent, concurrently
notify both parties hereto. The Base Rent for the Extended Term shall be the
determination so selected. The parties shall share the appraisal expenses
equally. If the Extended Term begins prior to the determination of Fair Market
Rent, Lessee shall pay monthly installments of Base Rent equal to one hundred
ten percent (110%) of the monthly installment of Base Rent in effect for the
last year of the initial Lease Term. Once a determination is made, any over
payment or under payment shall be reimbursed as a credit against, or paid by
adding to, the monthly installment of Base Rent next falling due.
ARTICLE IV
RENT: TRIPLE NET LEASE
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Section 4.01. Base Rent. Lessee shall pay to Lessor as Base Rent an
initial monthly installment of Three Dollars and Fifty Cents ($3.50) per square
foot of Rentable Area as determined under Section 2.01., in advance, on the
first day of each calendar month of the Lease Term, commencing on the
Commencement Date. Base Rent for any period during the Lease Term which is for
less than one month shall be a pro rata portion of the monthly installment
(based on the actual days in that month).
Section 4.02. Rent Adjustment. The Base Rent set forth in Section 4.01.
above shall be adjusted upward by an annual compounded increase of three and
five tenths percent (3.5%), as of the first day of the thirteenth (13th) full
calendar month following the Commencement Date and as of each anniversary of
that date thereafter during the Lease Term, as shown on Exhibit "E" attached
hereto.
Section 4.03. First Payment of Base Rent. The first payment of Base Rent
shall be due within five (5) days after Lessee's execution of this Lease. Base
Rent payments shall resume on the first day of the calendar month immediately
succeeding the Commencement Date. If the Commencement Date is other than the
first day of a calendar month, the first payment of Base Rent subsequent to the
Commencement Date, but only that payment of Base Rent, shall be reduced by any
excess of the first Base Rent installment paid in advance over the prorated
amount actually due for such partial first month of the Lease Term.
Section 4.04. Absolute Triple Net Lease. This Lease is what is commonly
called a "Absolute Triple Net Lease," it being understood that Lessor shall
receive the Base Rent set forth in Section 4.01. free and clear of any and all
expenses, costs, impositions, taxes, assessments, liens or charges of any nature
whatsoever. Lessee shall pay all rent in lawful money of the United States of
America to Lessor at the notice address stated herein or to such other persons
or at such other places as Lessor may designate in writing on or before the due
date specified for same without prior demand, set-off or deduction of any nature
whatsoever. It is the intention of the parties hereto that this Lease shall not
be terminable for any reason by Lessee, and that except as herein expressly
provided in Articles III, VIII and XIII, concerning delay, destruction and
condemnation, Lessee shall in no event be entitled to any abatement of or
reduction in rent payable under this Lease. Any present or future law to the
contrary shall not alter this agreement of the parties.
Section 4.05. Additional Rent. In addition to the Base Rent reserved by
Section 4.01., Lessee shall pay, as Additional Rent, all taxes, assessments,
fees and other impositions in accordance with the provisions of Article IX,
insurance premiums in accordance with the provisions of Article VII, operating
charges, and Common Area facility use privilege charges with respect to the
amenities/athletic facility equating to Lessee's share of said facilities
allocation of Base Rent and Additional Rent as well as, maintenance, repair and
replacement costs and expenses, utility charges, and other costs and charges
allocable to the Common Area and the Common Area facilities and the Outside
Areas of the Premises, all in accordance with the provisions of Article VI and
any other charges, costs and expenses (including appropriate reserves therefor)
which are contemplated or which may arise under any provision of this Lease
during the Lease Term, plus a Management Fee to Lessor equal to 3% of the Base
Rent. The Management Fee is due and payable, in advance, with each installment
of Base Rent. All of such
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charges, costs, expenses, Management Fee and all other amounts payable by Lessee
hereunder, shall constitute Additional Rent, and upon the failure of Lessee to
pay any of such charges, costs or expenses, Lessor shall have the same rights
and remedies as otherwise provided in this Lease for the failure of Lessee to
pay Base Rent. To the extent any of the aforesaid amounts are fairly allocable
to the Common Area or to other portions of the Project, Lessee's obligation is
to pay only its proportionate share as determined by Lessor based upon the ratio
of the Rentable Area of the Premises to the Rentable Area of other office and
research and development buildings at the Project.
(b) Payment. To the extent not paid pursuant to other provisions of this
Lease, and at Lessor's sole election, Lessor may submit invoices and Lessee
shall pay Lessee's share of Additional Rent in monthly installments on the first
day of each month in advance in an amount to be estimated by Lessor, based on
Lessor's experience in managing office/research and development projects. Within
ninety (90) days following the end of the period used by Lessor in estimating
Additional Rent, Lessor shall furnish to Lessee a statement (hereinafter
referred to as "Lessor's Statement") of the actual amount of Lessee's
proportionate share of such Additional Rent for such period. Within fifteen (15)
days thereafter, Lessee shall pay to Lessor, as Additional Rent, or Lessor shall
remit or credit to Lessee, as the case may be, the difference between the
estimated amounts paid by Lessee and the actual amount of Lessee's Additional
Rent for such period as shown by such statement. Monthly installments for the
ensuing year shall be adjusted upward or downward as set forth in Lessor's
Statement.
Section 4.06. Security Deposit. Upon the date this Lease is executed by
Lessee, Lessee shall deposit with Lessor a Security Deposit equal to twelve (12)
month's estimated Base Rent in the amount of Six Million, Fifty-One Thousand,
Eight Hundred Sixty-Four and no cents ($6,051,864.00) in the form of cash or an
unconditional, irrevocable letter of credit without documents, with Lessor as
beneficiary, drawable in whole or in part, and providing for payment in San
Francisco on presentation of Lessee's drafts on sight, drawable and otherwise
from a bank and in a form acceptable to Lessor (the "Security Deposit"). The
Security Deposit shall be held by Lessor as security for the faithful
performance by Lessee of all of the terms, covenants, and conditions of this
Lease applicable to Lessee. If Lessee is in breach of this Lease (beyond any
applicable cure period provided herein) with respect to any provision of this
Lease, including but not limited to the provisions relating to the condition of
the Premises upon Lease Termination, Lessor may (but shall not be required to)
use, apply or retain all or any part of the Security Deposit for the payment of
any amount which Lessor may spend by reason of Lessee's default or to compensate
Lessor for any loss or damage which Lessor may suffer by reason of Lessee's
default. If any portion of the Security Deposit is so used or applied, Lessee
shall, within ten days after written demand therefor, deposit cash with Lessor
in an amount sufficient to restore the Security Deposit to its original amount.
Lessee's failure to do so shall be a Default by Lessee. The rights of Lessor
pursuant to this Section 4.06. are in addition to any rights which Lessor may
have pursuant to Article 12 below. If Lessee fully and faithfully performs every
provision of this Lease to be performed by it, the Security Deposit or any
balance thereof shall be returned (without interest) to Lessee (or, at Lessor's
option, to the last assignee of Lessee's interests hereunder) at Lease
expiration or termination and after Lessee has vacated the Premises. Lessor
shall not be required to keep the Security Deposit separate from Lessor's
general funds or be
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deemed a trustee of same. Subject to the prior written approval of Lessor and
Lessor's lender(s), the letter of credit may be reduced to an amount not less
than the total of three (3) months of Base Rent at the then current rate, if
Lessee establishes through financial statements prepared in accordance with
generally accepted accounting principles and in a form acceptable to Lessor that
Lessee has achieved annual revenue for a period of at least one (1) fiscal year
of at least Seven Hundred Fifty Million Dollars ($750,000,000) and has further
achieved quarterly operating profit of at least One Hundred Million Dollars
($100,000,000) for not less than four (4) consecutive calendar quarters. If the
Security Deposit is in whole or in part in the form of a Letter of Credit,
failure of Lessee to deliver a replacement Letter of Credit to Lessor at least
forty-five (45) days prior to the expiration date of any current Letter of
Credit shall constitute a separate default entitling Lessor to draw down
immediately and entirely on the current Letter of Credit and the proceeds shall
constitute a cash Security Deposit.
ARTICLE V
USE
Section 5.01. Permitted Use and Limitations on Use. The Premises shall be
used and occupied only for office, research and development, together with such
ancillary uses which do not cause excessive wear of the Premises or increase the
potential liability of Lessor, and for no other use, without Lessor's prior
written consent. Lessee shall not use, suffer or permit the use of the Premises
in any manner that will tend to create or constitute waste, nuisance or unlawful
acts. In no event shall it be unreasonable for Lessor to withhold its consent as
to uses which it determines would tend to increase materially the wear of the
Premises or any part thereof or increase the potential liability of Lessor or
decrease the marketability, financability, leasability or value of the Premises
or Project. Lessee shall not do anything in or about the Premises which will (i)
cause structural injury to the Building or Premises, or (ii) cause damage to any
part of the Building or Premises except to the extent reasonably necessary for
the installation of Lessee's trade fixtures and Lessee's Alterations, and then
only in a manner which has been first approved by Lessor in writing. Lessee
shall not operate any equipment within the Building or Premises which will (i)
materially damage the Building or the Common Area, (ii) overload existing
electrical systems or other mechanical equipment servicing the Building, (iii)
impair the efficient operation of the sprinkler system or the heating,
ventilating or air conditioning ("HVAC") equipment within or servicing the
Building, (iv) damage, overload or corrode the sanitary sewer system, or (v)
damage the Common Area or any other part of the Project. Lessee shall not
attach, hang or suspend anything from the ceiling, roof, walls or columns of the
Building or set any load on the floor in excess of the load limits for which
such items are designed nor operate hard wheel forklifts within the Premises.
Any dust, fumes, or waste products generated by Lessee's use of the Premises
shall be contained and disposed so that they do not (i) create an unreasonable
fire or health hazard, (ii) damage the Premises, or (iii) result in the
violation of any law. Except as approved by Lessor, Lessee shall not change the
exterior of the Building, or the outside area of the Premises, or install any
equipment or antennas on or make any penetrations of the exterior or roof of the
Building. Lessee shall not conduct on any portion of the Premises any sale of
any kind, including any public or private auction, fire sale,
going-out-of-business sale, distress sale or other liquidation sale. No
materials, supplies, tanks or containers, equipment, finished products or
semifinished products, raw materials, inoperable vehicles or articles of any
nature shall be stored upon or permitted to remain within the outside areas of
the Premises except
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in fully fenced and screened areas outside the Building which have been designed
for such purpose and have been approved in writing by Lessor for such use by
Lessee.
Section 5.02. Compliance with Law.
(a) Lessor shall deliver the Premises to Lessee on the Commencement Date
(without regard to the use for which Lessee will use the Premises) free of
violations of any covenants or restrictions of record, or any applicable law,
building code, regulation or ordinance in effect on such Commencement Date,
including without limitation, the Americans with Disability Act, and free of
Year Two Thousand computer programming defects.
(b) Except as provided in paragraph 5.02.(a), Lessee shall, at Lessee's
cost and expense, comply promptly with all statutes, ordinances, codes, rules,
regulations, orders, covenants and restrictions of record, and requirements
applicable to the Premises and Lessee's use and occupancy of same in effect
during any part of the Lease Term, whether the same are presently foreseeable or
not, and without regard to the cost or expense of compliance.
(c) By executing this Lease, Lessee acknowledges that it has reviewed and
satisfied itself as to its compliance, or intended compliance with the
applicable zoning and permit laws, hazardous materials and waste requirements,
and all other statutes, laws, or ordinances relevant to the uses stated in
Section 5.01., above.
Section 5.03. Condition of Premises at Commencement Date. Subject to all
of the terms of this Lease for the construction of Tenant Improvements, Lessor
shall deliver the Building to Lessee on the Commencement Date with the Building
plumbing, lighting, heating, ventilating, air conditioning, gas, electrical, and
sprinkler systems and loading doors as set forth in Exhibit "D" in proper
operating condition and built substantially in accordance with the approved
plans therefor, and in a workmanlike manner. Except as otherwise provided in
this Lease, Lessee hereby accepts the Premises in their condition existing as of
the Commencement Date, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use and
condition of the Premises, and any covenants or restrictions, liens,
encumbrances and title exceptions of record, and accepts this Lease subject
thereto and to all matters disclosed thereby and by any exhibits attached
hereto. Lessee acknowledges that neither Lessor nor any agent of Lessor has made
any representation or warranty as to the present or future suitability of the
Premises for the conduct of Lessee's business.
Section 5.04. Defective Condition at Commencement Date. In the event that
it is determined, and Lessee notifies Lessor in writing within one year after
the Commencement Date, that any of the obligations of Lessor set forth in
Section 5.02.(a) or Section 5.03.(a) were not performed, then it shall be the
obligation of Lessor, and the sole right and remedy of Lessee, after receipt of
written notice from Lessee setting forth with specificity the nature of the
failed performance, to promptly, within a reasonable time and at Lessor's sole
cost, correct same. Except as to certain defects which remain Lessor's
responsibility under Section 6.01(b) Lessee's failure to give such written
notice to Lessor within one year after the Commencement Date shall
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constitute a conclusive presumption that Lessor has complied with all of
Lessor's obligations under the foregoing sections 5.02. and 5.03., and any
required correction after that date shall be performed by Lessee, at its sole
cost and expense. At the end of the first year of the Lease Term, Lessor shall
promptly assign to Lessee all of Lessor's contractor's, and/or manufacturer's
guarantees, warranties, and causes of action which do not relate to Lessor's
obligations under Section 6.01(b).
Section 5.05. Building Security. Lessee acknowledges and agrees that it
assumes sole responsibility for security at the Premises for its agents,
employees, invitees, licensees, contractors, guests and visitors and will
provide such systems and personnel for same including, without limitation, any
portion of the Common Area located on the legal parcel on which the Building is
located as it deems necessary or appropriate and at its sole cost and expense.
Lessee acknowledges and agrees that Lessor does not intend to provide any
security system or security personnel at the Premises or Project, including,
without limitation, at the Common Areas, provided, however, that nothing herein
shall be deemed to prevent Lessor from providing such system or personnel in the
future, the cost of which will be included in those items for which Lessee pays
Additional Rent.
Section 5.06. Rules and Regulations. Lessor may from time to time
promulgate reasonable and nondiscriminatory rules and regulations applicable for
the care and orderly management of the Premises. Such rules and regulations
shall be binding upon Lessor upon delivery of a copy thereof to Lessor, and
Lessor agrees to abide by such rules and regulations. A copy of the initial
Rules and Regulations is attached hereto as Exhibit "L." If there is a conflict
between the rules and regulations and any of the provisions of this Lease, the
provisions of this Lease shall prevail. Lessor shall not be responsible for the
violation of any such rules and regulations by any person, including, without
limitation, Lessee or its employees, agents, invitees, licensees, guests,
visitors or contractors.
ARTICLE VI
MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. Maintenance of Premises.
(a) Throughout the Lease Term, Lessee, at its sole cost and expense, shall
keep, maintain, repair and replace the Premises (except as provided in 6.01.(b))
and all improvements and appurtenances in or serving the Premises, including,
without limitation, all interior and exterior walls, all doors and windows, the
roof membrane, all elevators and stairways, all wall surfaces and floor
coverings, all Tenant Improvements and alterations, additions and improvements
installed during the Lease Term, all sewer, plumbing, electrical, lighting,
heating, ventilation and cooling systems, fire sprinklers, fire safety and
security systems, fixture and appliances and all wiring and glazing, in the same
good order, condition and repair as they are in on the Commencement Date, or may
be put in during the Lease Term, reasonable wear excepted, provided that wear
which could be prevented by first class maintenance shall not be deemed
reasonable.
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(b) Lessor, at its sole cost and expense, shall repair defects in the
exterior walls (including all exterior glass which is damaged by structural
defects in such exterior walls), supporting pillars, structural walls, roof
structure and foundations of the Building and sewer and plumbing systems outside
the Building, provided that the need for repair is not caused by Lessee, in
which event Lessor shall, at Lessee's sole cost and expense, repair same. Lessor
shall replace the roof membrane of the Building, the parking lot surface,
landscaping, drainage, irrigation, sprinkler and sewer and plumbing systems
outside the Building systems when the useful life of each has expired, and
Lessee shall pay that portion of the cost of each replacement, together with
annual interest at the Agreed Rate which shall be amortized over the useful life
of each such replacement applicable to the balance of the Lease Term, in equal
monthly installments due and payable with installments of Base Rent provided
that as to repairs and replacements within the Common Area, Lessee shall pay its
proportionate share. Lessee shall give Lessor written notice of any need of
repairs which are the obligation of Lessor hereunder and Lessor shall have a
reasonable time to perform same. Should Lessor default as provided in Section
12.03 with respect to its obligation to make any of the repairs assumed by it
hereunder with respect to the Building, Lessee shall have the right to perform
such repairs and Lessor agrees that within thirty (30) days after written demand
accompanied by detailed invoice(s), it shall pay to Lessee the cost of any such
repairs together with accrued interest from the date of Lessee's payment at the
Agreed Rate. Lessor shall not be liable to Lessee, its employees, invitees, or
licensees for any damage to person or property, and Lessee's sole right and
remedy shall be the performance of said repairs by Lessee with right of
reimbursement from Lessor of the reasonable fair market cost of said repairs,
not exceeding the sum actually expended by Lessee, together with accrued
interest from the date of Lessee's payment at the Agreed Rate, provided that
nothing herein shall be deemed to create a right of setoff or withholding by
Lessee of Base Rent or Additional Rent or any other amounts due herein. Lessee
hereby expressly waives all rights under and benefits of Sections 1941 and 1942
of the California Civil Code or under any similar law, statute or ordinance now
or hereafter in effect to make repairs and offset the cost of same against rent
or to withhold or delay any payment of rent or any other of its obligations
hereunder as a result of any default by Lessor under this Section 6.01.(b).
(c) Lessee agrees to keep the Premises, both inside and out, clean and in
sanitary condition as required by the health, sanitary and police ordinances and
regulations of any political subdivision having jurisdiction and to remove all
trash and debris which may be found in or around the Premises. Lessee further
agrees to keep the interior surfaces of the Premises, including, without
limitation, windows, floors, walls, doors, showcases and fixtures clean and neat
in appearance.
(d) If Lessee refused or neglects to commence such repairs and/or
maintenance for which Lessee is responsible under this Article VI (including
with respect to any portion of the Common Area located on the legal parcel on
which the Building is located) within a thirty (30) day period (or as soon as
practical and in no event later than five (5) days, if the failure to initiate
the repair threatens to cause further damage to the Premises) after written
notice from Lessor and thereafter diligently prosecute the same to completion,
then Lessor may (i) enter the Premises (except in an emergency, upon at least 24
hours advanced written notice) during Lessor's business hours and cause such
repairs and/or maintenance to be made and shall not be
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responsible to Lessee for any loss or damage occasioned thereby and Lessee
agrees that upon demand, it shall pay to Lessor the reasonable cost of any such
repairs, not exceeding the sum actually expended by Lessor, together with
accrued interest from the date of Lessor's payment at the Agreed Rate and (ii)
elect to enter into a maintenance contract at a market rate for first-rate
maintenance with a third party for the performance of all or a part of Lessee's
maintenance obligations, whereupon, Lessee shall be relieved from its
obligations to perform only those maintenance obligations covered by such
maintenance contract, and Lessee shall bear the entire cost of such maintenance
contract which shall be paid in advance, as Additional Rent, on a monthly basis
with Lessee's Base Rent payments.
Section 6.02. Maintenance of Common Areas and Outside Areas. Subject to
6.01.(c) and subject to Lessee paying Lessee's share of the cost and expense for
same pursuant to Section 4.05, Lessor shall maintain, repair and replace all
landscape, hardscape and other improvements within the Common Areas and shall
operate and manage the amenities/athletic facility and other Common Area
features and facilities described in Section 2.02 and Lessor shall also
maintain, repair and replace all landscape, hardscape and other improvements
within the outside areas of the Premises ("Outside Areas") whether or not all or
any portion thereof has been designated by Lessor as Common Area, including
without limitation, walkways, driveways, parking areas and lighting and
sprinkler systems.
Section 6.03. Alterations, Additions and Improvements. No alterations,
additions, or improvements ("Alterations") shall be made to the Premises by
Lessee without the prior written consent of Lessor which Lessor will not
unreasonably withhold, provided, however, that Lessee may make Alterations which
do not affect the Building systems, exterior appearance, structural components
or structural integrity and which do not exceed collectively One Hundred
Thousand Dollars ($100,000) in cost within any twelve (12) month period, without
Lessor's prior written consent. As a condition to Lessor's obligation to
consider any request for consent hereunder, Lessee shall pay Lessor upon demand
for the reasonable costs and expenses of consultants, engineers, architects and
others for reviewing plans and specifications and for monitoring the
construction of any proposed Alterations. Lessor may require Lessee to remove
any such Alterations at the expiration or termination of the Lease Term and to
restore the Premises to their prior condition by written notice given on or
before the earlier of (i) the expiration of the Lease Term or (ii) thirty (30)
days after termination of the Lease or (iii) thirty (30) days after a written
request from Lessee for such notice from Lessor provided, that, if Lessee
requests same from Lessor, Lessor will notify Lessee within five (5) business
days after receipt of Lessee's request and a copy of all plans and
specifications for the proposed Alteration whether it will require removal. All
Alterations to be made to the Premises shall be made under the supervision of a
competent, California licensed architect and/or competent California licensed
structural engineer (each of whom has been approved by Lessor) and shall be made
in accordance with plans and specifications which have been furnished to and
approved by Lessor in writing prior to commencement of work. All Alterations
shall be designed, constructed and installed at the sole cost and expense of
Lessee by California licensed architects, engineers, and contractors approved by
Lessor, in compliance with all applicable law, and in good and workmanlike
manner. Any Alteration except furniture and trade fixtures, shall become the
property of Lessor at the expiration, or sooner termination of the Lease, unless
Lessor directs otherwise, provided that Lessee shall retain title to all
furniture and trade fixtures placed on the Premises. All heating,
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lighting, electrical, air conditioning, full height partitioning (but not
moveable, free standing cubicle-type partitions which do not extend to the
ceiling or connect to Building walls), drapery and carpeting installations made
by Lessee together with all property that has become an integral part of the
Premises, shall be and become the property of Lessor upon the expiration, or
sooner termination of the Lease, and shall not be deemed trade fixtures. Within
thirty (30) days after completion of any Alteration, Lessee, Lessee shall
provide Lessor with a complete set of "as built" plans for same.
Section 6.04. Covenant Against Liens. Lessee shall not allow any liens
arising from any act or omission of Lessee to exist, attach to, be placed on, or
encumber Lessor's or Lessee's interest in the Premises or Project, or any
portion of either, by operation of law or otherwise. Lessee shall not suffer or
permit any lien of mechanics, material suppliers, or others to be placed against
the Premises or Project, or any portion of either, with respect to work or
services performed or claimed to have been performed for Lessee or materials
furnished or claimed to have been furnished to Lessee or the Premises. Lessor
has the right at all times to post and keep posted on the Premises any notice
that it considers necessary for protection from such liens. At least seven (7)
days before beginning construction of any Alteration, Lessee shall give Lessor
written notice of the expected commencement date of that construction to permit
Lessor to post and record a notice of nonresponsibility. If any such lien
attaches or Lessee received notice of any such lien, Lessee shall cause the lien
to be immediately released and removed of record. Despite any other provision of
this Lease, if the lien is not released and removed within twenty (20) days
after Lessor delivers notice of the lien to Lessee, Lessor may immediately take
all action necessary to release and remove the lien, without any duty to
investigate the validity of it. All expenses (including reasonable attorney fees
and the cost of any bond) incurred by Lessor in connection with a lien incurred
by Lessee or its removal shall be considered Additional Rent under this Lease
and be immediately due and payable by Lessee.
Section 6.05 Reimbursable Capital Expenditures. Except for items of
capital expenditures which are to be made at Lessor's sole cost and expense
pursuant to the first sentence of Section 6.01(b) above, capital expenditures,
together with interest thereon at the Agreed Rate, for any replacement item at
the Premises made by Lessor in excess of Ten Thousand Dollars ($10,000.00)
during the Lease Term shall be amortized over the remaining Lease Term for the
useful life of such replacement item within the numerator being the number of
months remaining in the Lease Term and the denominator being the number of
months of the "useful life" of the improvements. Lessee shall be obligated for
such amortized portion of any such expenditure in equal monthly installments due
and payable with each installment of Base Rent.
ARTICLE VII
INSURANCE
Section 7.01. Property/Rental Insurance for Premises: At all times during
the Lease Term, Lessor shall keep the Premises insured against loss or damage by
fire and those risks normally included in the term "all risk," including,
without limitation, coverage for (i) earthquake and earthquake sprinkler
leakage, (ii) flood, (iii) loss of rents and extra expense for
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eighteen (18) months, including scheduled rent increases, (iv) boiler and
machinery, (v) Tenant Improvements and (vi) fire damage legal liability form,
including waiver of subrogation. Any deductibles shall be paid by Lessee. The
amount of such insurance shall not be less than 100% of replacement cost.
Insurance shall include a Building Ordinance and Increased Cost of Construction
Endorsement insuring the increased cost of reconstructing the Premises incurred
due to the need to comply with applicable statutes, ordinances and requirements
of all municipal, state and federal authorities now in force, which or may be in
force hereafter. Any recovery received from said insurance policy shall be paid
to Lessor and thereafter applied by Lessor to the reconstruction of the Premises
in accordance with the provisions of Article VIII below. Lessee, in addition to
the rent and other charges provided herein, shall reimburse Lessor for the cost
of the premiums for all such insurance covering the Premises in accordance with
Article IV. Such reimbursement and shall be made within (15) days of Lessee's
receipt of a copy of Lessor's statement therefor. Lessee shall pay to Lessor any
deductible (subject to the above conditions) owing within fifteen (15) days
after receipt of notice from Lessor of the amount owing. To the extent
commercially available, Lessor's insurance shall have a deductible not greater
than fifteen percent (15%) for earthquake and ten percent (10%) for the basic
"all risk" coverage.
Section 7.02. Property Insurance for Fixtures and Inventory. At all times
during the Lease Term, Lessee shall, at its sole expense, maintain insurance
with "all risk" coverage on any fixtures, furnishings, merchandise equipment or
personal property in or on the Premises, whether in place as of the date hereof
or installed hereafter. The amount of such insurance shall not be less than one
hundred percent (100%) of the replacement cost thereof, and Lessor shall not
have any responsibility nor pay any cost for maintaining any types of such
insurance. Lessee shall pay all deductibles.
Section 7.03. Lessor's Liability Insurance. During the Lease Term, Lessor
shall maintain a policy or policies of comprehensive general liability insurance
naming Lessor (and such others as designated by Lessor) against liability for
bodily injury, property damage on our about the Project, with combined single
limit coverage of not less than Thirty Million Dollars ($30,000,000.00). Lessee,
in addition to the rent and other charges provided herein, agrees to pay to
Lessor, Lessor's proportionate share of the premiums for all such insurance
pursuant to Section 4.05. The insurance premiums shall be paid in accordance
with Article IV, within (15) days of Lessee's receipt of a copy of Lessor's
statement therefore.
Section 7.04. Liability Insurance Carried by Lessee. At all times during
the Lease Term (and any holdover period) Lessee shall obtain and keep in force a
commercial general liability policy of insurance protecting Lessee, Lessor and
any Lender(s) whose names are provided to Lessee as Additional Insureds against
claims from bodily injury, personal injury and property damage based upon
involving or arising out of ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing a single limit coverage in amount of not less than
Ten Million Dollars ($10,000,000) per occurrence with an Additional Lessors or
Premises Endorsements and containing an "Amendment of the Pollution Exclusion
Endorsement" for damage caused by heat, smoke, fumes from a hostile fire. The
limits of said insurance required by this Lease as carried by Lessee shall not,
however limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All
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insurance to be carried by the Lessee shall be primary to and not contributory
with, any similar insurance carried by Lessor whose insurance shall be
considered excess insurance only.
Section 7.05. Lessee to Furnish Proof of Insurance. Lessee shall furnish
to Lessor prior to the Commencement Date, and at least fifteen (15) days prior
to the expiration date of any policy, certificates indicating that the property
insurance and liability insurance required to be maintained by Lessee is in full
force and effect for the twelve (12) month period following such expiration
date; that Lessor has been named as an additional insured to the extent of
contractual liability assumed in Section 7.07. "indemnification" and Section
7.08. "Lessor as Party Defendant"; and that all such policies will not be
canceled unless thirty (30) days' prior written notice of the proposed
cancellation has been given to Lessor. The insurance shall be with insurers
approved by Lessor, provided, however, that such approval shall not be
unreasonably withheld so long as Lessee's insurance carrier has a Best's
Insurance Guide rating not less than A+ VIII.
Section 7.06. Mutual Waiver of Claims and Subrogation Rights. Lessor and
Lessee hereby release and relieve the other, and waive their entire claim of
recovery for loss or damage to property arising out of or incident to fire,
lightning, and the other perils included in a standard "all risk" insurance
policy of a type described in Sections 7.01 and 7.02 above, when such property
constitutes the Premises, or is in, on or about the Premises, whether or not
such loss or damage is due to the negligence of Lessor or Lessee, or their
respective agents, employees, guests, licensees, invitees, or contractors.
Lessee and Lessor waive all rights of subrogation against each other on behalf
of, and shall obtain a waiver of all subrogation rights from, all property and
casualty insurers referenced above.
Section 7.07. Indemnification and Exculpation.
(a) Except as otherwise provided in Section 7.07.(b), Lessee shall
indemnify and hold Lessor free and harmless from any and all liability, claims,
loss, damages, causes of action (whether in tort or contract, law or equity, or
otherwise), expenses, charges, assessments, fines, and penalties of any kind,
including without limitation, reasonable attorney fees, expert witness fees and
costs, arising by reason of the death or injury of any person, including any
person who is an employee, agent, invitee, licensee, permittee, visitor, guest
or contractor of Lessee, or by reason of damage to or destruction of any
property, including property owned by Lessee or any person who is an employee,
agent, invitee, permitee, visitor, or contractor of Lessee, caused or allegedly
caused (1) while that person or property is in or about the Premises; (2) by
some condition of the Premises; (3) by some act or omission by Lessee or its
agent, employee, licensee, invitee, guest, visitor or contractor or any person
in, adjacent, on, or about the Premises with the permission, consent or
sufferance of Lessee; (4) by any matter connected to or arising out of Lessee's
occupation and use of the Premises, or any breach or default in timely
observance or performance of any obligation on Lessee's part to be observed or
performed under this Lease.
(b) Notwithstanding the provisions of Section 7.07.(a) of this Lease,
Lessee's duty to indemnify and hold Lessor harmless shall not apply to any
liability, claims, loss or damages arising because of Lessor's sole active
negligence or willful acts of misconduct.
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(c) Lessee hereby waives all claims against Lessor for damages to goods,
wares and merchandise and all other personal property in, on or about the
Premises and for injury or death to persons in, on or about the Premises from
any cause arising at any time to the fullest extent permitted by law and in no
event shall Lessor be liable for lost profits or other consequential damages
arising from any cause or for any damage which is or could be covered by the
insurance Lessee is required to carry under this Lease. Lessor hereby waives all
claims against Lessee for any damage which is or could be covered by the
insurance Lessor is required to carry under this Lease.
Section 7.08. Lessor as Party Defendant. If by reason of an act or
omission of Lessee or any of its employees, agents, invitees, licensee,
visitors, guests or contractors, Lessor is made a party defendant or a
cross-defendant to any action involving the Premises or this Lease, Lessee shall
hold harmless and indemnify Lessor from all liability or claims of liability,
including all damages, attorney fees and costs of suit.
ARTICLE VIII
DAMAGE OR DESTRUCTION
Section 8.01. Destruction of the Premises.
(a) In the event of a partial destruction of the Premises during the Lease
Term from any cause, Lessor, upon receipt of, and to the extent of, insurance
proceeds paid in connection with such casualty, shall forthwith repair the same,
provided the repairs can be made within a reasonable time under state, federal,
county and municipal applicable law, but such partial destruction shall in no
way annul or void this Lease, (except as provided in Section 8.01.(b) below)
provided that Lessee shall be entitled to a proportionate credit for rent equal
to the payment of Rental Income Insurance received by Lessor. Lessor shall use
diligence in making such repairs within a reasonable time period, subject to the
Force Majeure provisions of Section 17.21, in which instance the time period
shall be extended accordingly, and this Lease shall remain in full force and
effect, with the rent to be proportionately reduced as provided in this Section.
If the Premises are damaged by any peril within twelve (12) months prior to the
last day of the Lease Term and, in the reasonable opinion of the Lessor's
architect or construction consultant, the restoration of the Premises cannot be
substantially completed within ninety (90) days after the date of such damage
and such damage renders unusable more than thirty percent (30%) of the Premises,
Lessor may terminate this Lease on sixty (60) days written notice to Lessee.
(b) If the Building is damaged from any cause, Lessor shall promptly
furnish Lessee with the written opinion of Lessor's architect of when the
restoration work to repair the damage may be complete. Lessee shall have the
option to terminate this Lease if the time estimated to substantially complete
the restoration exceeds fifteen (15) months from the date Lessor's architect's
opinion is delivered to Lessee, which shall be (i) exercised by written notice
to Lessor delivered within thirty (30) days after delivery to Lessee of Lessor's
architect's opinion or (ii) irrevocably and automatically waived if not so
timely exercised. In the event of termination, Lessee shall pay to Lessor all
insurance proceeds, if any, received by Lessee as a result of the
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damage or destruction except to the extent allocable to the unamortized (over
the Lease Term) cost of (i) Tenant Improvements paid for by Lessee over and
above the Tenant Improvement Allowance and (ii) or other Alterations installed
therein at Lessee's sole cost and expense.
Section 8.02. Waiver of Civil Code Remedies. Lessee hereby expressly
waives any rights to terminate this Lease upon damage or destruction to the
Premises, including without limitation any rights pursuant to the provisions of
Section 1932, Subdivisions 1 and 2 and Section 1933, Subdivision 4, of the
California Civil Code, as amended from time-to-time, and the provisions of any
similar law hereinafter enacted.
Section 8.03. No Abatement of Rentals. The Rentals and other charges due
under this Lease shall not be reduced or abated by reason of any damage or
destruction to the Premises (except to the extent of proceeds received by Lessor
from the Rental Loss Insurance), and Lessor shall be entitled to all proceeds of
the insurance maintained pursuant to Section 7.01. above during the period of
rebuilding pursuant to Section 8.01.(a) above, or if the Lease is terminated
pursuant to Section 8.01.(a) above. Lessee shall have no claim against Lessor,
including, without limitation, for compensation for inconvenience or loss of
business, profits or goodwill during any period of repair or reconstruction.
Section 8.04. Liability for Personal Property. In no event shall Lessor
have any liability for, nor shall it be required to repair or restore, any
injury or damage to Lessee's personal property or to any other personal property
or to Alterations in or upon the Premises by Lessee.
ARTICLE IX
REAL PROPERTY TAXES
Section 9.01. Payment of Taxes. Subject to Lessee timely paying Lessor the
same in advance as provided below, Lessee shall pay all real property taxes,
including any escaped or supplemental tax and any form of real estate tax or
assessment, general, special, ordinary or extraordinary, and any license, fee,
charge, excise or imposition ("real property tax"), imposed, assessed or levied
on or with respect to the Premises (and Lessee shall pay its proportionate share
of real property taxes imposed, assessed or levied on or with respect to the
Common Area) by any Federal, State, County, City or other political subdivision
or public authority having the direct or indirect power to tax, including,
without limitation, any improvement district or any community facilities
district, as against any legal or equitable interest of Lessor in the Premises
or against the Premises or any part thereof applicable to the Premises for all
periods of time included within the Lease Term (as the same may be extended and
during any holdover period), as well as any government or private cost sharing
agreement assessments made for the purpose of augmenting or improving the
quality of services and amenities normally provided by government agencies. All
such payments shall be made by Lessee directly pursuant to Section 4.05 hereof
no later than ten (10) days after Lessor's delivery to Lessee of a statement of
the real property tax due, together with a copy of the applicable tax bill.
Notwithstanding the foregoing, Lessee shall not be required to pay any net
income taxes, franchise taxes, or any succession or inheritance taxes of Lessor.
If at anytime during the Lease Term, the State of California or any political
subdivision of the state, including any county, city, city and county, public
corporation, district,
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or any other political entity or public corporation of this state, levies or
assesses against Lessor a tax, fee, charge, imposition or excise on rents under
the Lease, the square footage of the Premises, the act of entering into this
Lease, or the occupancy of Lessee, or levies or assesses against Lessor any
other tax, fee, or excise, however described, including, without limitation, a
so-called value added, business license, transit, commuter, environmental or
energy tax fee, charge or excise or imposition related to the Premises as a
direct substitution in whole or in part for, or in addition to, any real
property taxes on the Premises, Lessee shall pay ten (10) days before
delinquency or ten (10) days after receipt of the tax bill, whichever is later,
that tax, fee, charge, excise or imposition.
Section 9.02. Pro Ration for Partial Years. If any such taxes paid by
Lessee shall cover any period prior to the Commencement Date or after the
Expiration Date of the Lease Term, Lessee's share of such taxes shall be
equitably prorated to cover only the period of time within the tax fiscal year
during which this Lease shall be in effect, and Lessor shall reimburse Lessee to
any extent required. If Lessee shall fail to pay any such taxes, Lessor shall
have the right to pay the same in which case Lessee shall repay such amount to
Lessor within ten (10) days after written demand, together with interest at the
Agreed Rate.
Section 9.03. Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes imposed, assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
(c) If Lessee shall fail to pay any such taxes, Lessor shall have the
right to pay the same, in which case Lessee shall repay such amount to Lessor
with Lessee's next rent installment together with interest at the Agreed Rate.
ARTICLE X
UTILITIES
Section 10.01. Lessee to Pay. Lessee shall pay prior to delinquency and
throughout the Lease Term, all charges for water, gas, heating, cooling, sewer,
telephone, electricity, garbage, air conditioning and ventilation, janitorial
service, landscaping and all other materials and utilities supplied to the
Premises. The disruption, failure, lack or shortage of any service or utility
due to any cause whatsoever shall not affect any obligation of Lessee hereunder,
and Lessor shall faithfully keep and observe all the terms, conditions and
covenants of this Lease and pay all rent due hereunder, all without diminution,
credit or deduction.
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ARTICLE XI
ASSIGNMENT AND SUBLETTING
Section 11.01. Lessor's Consent Required. Except as provided in Section
11.02, Lessee shall not voluntarily or by operation of law assign, transfer,
mortgage, sublet, license or otherwise transfer or encumber all or any part of
Lessee's interest in this Lease or in the Premises or any part thereof, without
Lessor's prior written consent within fifteen (15) business days after Lessor's
receipt of a signed Letter of Intent and complete financial information
concerning the proposed transferee which Lessor shall not unreasonably withhold,
or delay, provided that if Lessor fails to respond within said fifteen (15)
business days, it shall be deemed to have withheld consent. Lessor shall respond
in writing to Lessee's request for consent hereunder in a timely manner and any
attempted assignment, transfer, mortgage, encumbrance, subletting or licensing
without such consent shall be void, and shall constitute a breach of this Lease.
By way of example, but not limitation, reasonable grounds for denying consent
include: (i) poor credit history or insufficient financial strength of
transferee, (ii) transferee's intended use of the Premises is inconsistent with
the permitted use or will materially and adversely affect Lessor's interest.
Lessee shall reimburse Lessor upon demand for Lessor's reasonable costs and
expenses (including attorneys' fees, architect fees and engineering fees)
involved in renewing any request for consent whether or not consent is granted.
Section 11.02. Lessee Affiliates. Lessee may assign or sublet the
Premises, or any portion thereof, to any corporation which controls, is
controlled by, or is under common control with Lessee, or to any corporation
resulting from the merger or consolidation with Lessee, or to any person or
entity which acquires all, or substantially all of the assets of Lessee as a
going concern of the business that is being conducted on the Premises, provided
that said assignee or sublessee assumes, in full, the obligations of Lessee
under this Lease and provided further that the use to which the Premises will be
put does not materially change. Any such assignment shall not, in any way,
affect or limit the liability of Lessee under the terms of this Lease.
Section 11.03. No Release of Lessee. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Lessee or
any successor of Lessee, in the performance of any of the terms hereof, Lessor
may proceed directly against Lessee without the necessity of exhausting remedies
against said assignee.
Section 11.04. Excess Rent. In the event Lessor shall consent to a
sublease or an assignment, Lessee shall pay to Lessor with its regularly
scheduled Base Rent payments, fifty percent (50%) of all sums and the fair
market value of all consideration collected or received by Lessee from a
sublessee or assignee which are in excess of the Base Rent and Additional Rent
due and payable with respect to the subject space pursuant to Article IV for the
time period encompassed by the sublease or assignment term, after first
deducting (i) reasonable leasing commissions paid by Lessee with respect to such
sublease or assignment, and (ii) that portion of
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the cost of Tenant Improvements paid by Lessee (up to $30 per square foot) which
remains unamortized (using an amortization schedule of the first 60 months of
the Lease Term) during any portion of the sublease or assignment term.
Section 11.05. No Impairment of Security. Lessee's written request to
Lessor for consent to an assignment or subletting or other form of transfer
shall be accompanied by (a) the name and legal composition of the proposed
transferee; (b) the nature of the proposed transferee's business to be carried
on in the Premises; (c) the terms and provisions of the proposed transfer
agreement; and (d) such financial and other reasonable information as Lessor may
request concerning the proposed transferee.
Section 11.06. Lessor's Recapture Rights.
(a) Lessor's Recapture Rights. Notwithstanding any other provision of this
Article 11, in the event that Lessee proposes at any time after the first
twenty-four (24) months of the Lease Term to sublease or assign or otherwise
transfer any interest in this Lease or the Premises or any part thereof
affecting (collectively with all other such subleases, assignments, or transfers
then in effect) more than fifty percent (50%) of the square footage of the
Rentable Area of the Building (Recapture Space) more than half of the then
remaining Lease Term, then Lessor shall have the option to recapture the
Recapture Space by written notice to Lessee (Recapture Notice) given within ten
(10) business days after Lessor receives any notice of such proposed assignment
or sublease or other transfer ("Transfer Notice"). A timely Recapture Notice
terminates this Lease for the Recapture Space, effective as of the date
specified in the Transfer Notice. If Lessor declines or fails timely to deliver
a Recapture Notice, Lessor shall have no further right under this Section 11.06
to the Recapture Space unless it becomes available again after transfer by
Lessee.
(b) Consequences of Recapture. Base Rent and Additional Rent shall be
recalculated upon any recapture. To recalculate the Base Rent under this Lease
if Lessor recaptures the Recapture Space, the then current Base Rent
(immediately before Lessor's recapture) under the Lease shall be multiplied by a
fraction, numerator of which is the square feet of the Rentable Area retained by
Lessee after Lessor's recapture and the denominator of which is the total square
feet of the Rentable Area before Lessor's recapture. The Additional Rent, to the
extent that it is calculated on the basis of Rentable Area of the Building,
shall be recalculated in identical fashion. This Lease as so amended shall
continue thereafter in full force and effect. Either party may require written
confirmation of the amendments to this Lease necessitated by Lessor's recapture
of the Recapture Space. If Lessor recaptures the Recapture Space, Lessor shall,
at Lessor's sole expense, construct, paint, and furnish any partitions required
to segregate the Recapture Space from the remaining Premises retained by Lessee.
ARTICLE XII
DEFAULTS; REMEDIES
Section 12.01. Defaults. The occurrence of any one or more of the
following events shall constitute a material default and breach of this Lease by
Lessee:
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(a) The abandonment of the Premises by Lessee or the commission of waste
at the Premises or the making of an assignment or subletting in violation of
Article XI, provided however, abandonment shall be considered to not occur if
the Premises are maintained and occupied to the extent necessary to maintain the
insurance on each and every portion of the Premises;
(b) The failure by Lessee to make any payment of rent or any other payment
required to be made by Lessee hereunder, as and when due, if such failure
continues for a period of five (5) business days after written notice thereof
from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to
Pay Rent or Quit in the form required by applicable Unlawful Detainer statutes
such Notice shall constitute the notice required by this paragraph, provided
that the cure period stated in the Notice shall be five (5) business days rather
than the statutory three (3) days;
(c) Lessee's failure to provide (i) any instrument or assurance as
required by Section 7.05 or (ii) estoppel certificate as required by Section
15.01 or (iii) any document subordinating this Lease to a Lender's deed of trust
if such failure continues for five (5) business days after written notice of the
failure. In the event Lessor serves Lessee with a Notice to Perform Covenant or
Quit in the form required by applicable Unlawful Detainer Statutes, such Notice
shall constitute the notice required by this paragraph, provided that the cure
period stated in the Notice shall be five (5) business days rather than the
statutory three (3) days;
(d) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph (a) (b) or (c) above, if such failure
continues for a period of ten (10) days after written notice thereof from Lessor
to Lessee; provided, however, that if the nature of Lessee's default is such
that more than ten (10) days are reasonably required for its cure, then Lessee
shall not be deemed to be in default if Lessee commences such cure within said
ten (10) day period and thereafter diligently prosecutes such cure to
completion;
(e) (i) The making by Lessee of any general arrangement or assignment for
the benefit of creditors; (ii) the filing by Lessee of a voluntary petition in
bankruptcy under Title 11 U.S.C. or the filing of an involuntary petition
against Lessee which remains uncontested for a period of sixty days; (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease;
or (iv) the attachment, execution or other judicial seizure of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, provided, however, in the event that any provisions of this Section
12.01(e) is contrary to any applicable law, such provision shall be of no force
or effect;
(f) The discovery by Lessor that any financial statement given to Lessor
by Lessee, or any guarantor of Lessee's obligations hereunder, was materially
false.
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(g) The occurrence of a material default and breach by Lessee under any
other Lease between Lessee and Lessor (or any affiliate of Lessor) for Premises
in Pacific Shores Center.
Section 12.02. Remedies. In the event of any such material default and
breach by Lessee, Lessor may at any time thereafter, and without limiting Lessor
in the exercise of any right or remedy which Lessor may have by reason of such
default and breach:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means including by way of unlawful detainer (and without any further notice if a
notice in compliance with the unlawful detainer statutes and in compliance with
paragraphs (b), (c) and (d) of Section 12.01 above has already been given), in
which case this Lease shall terminate and Lessee shall immediately surrender
possession of the Premises to Lessor. In such event Lessor shall be entitled to
recover from Lessee all damages incurred by Lessor by reason of Lessee's default
including, but not limited to, (i) the cost of recovering possession of the
Premises including reasonable attorney's fees related thereto; (ii) the worth at
the time of the award of any unpaid rent that had been earned at the time of the
termination, to be computed by allowing interest at the Agreed Rate but in no
case greater than the maximum amount of interest permitted by law, (iii) the
worth at the time at the time of the award of the amount by which the unpaid
rent that would have been earned between the time of the termination and the
time of the award exceeds the amount of unpaid rent that Lessee proves could
reasonably have been avoided, to be computed by allowing interest at the Agreed
Rate but in no case greater than the maximum amount of interest permitted by
law, (iv) the worth at the time of the award of the amount by which the unpaid
rent for the balance of the Lease Term after the time of the award exceeds the
amount of unpaid rent that Lessee proves could reasonably have been avoided, to
be computed by discounting that amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of the award plus one percent (1%),
(v) any other amount necessary to compensate Lessor for all the detriment
proximately caused by Lessee's failure to perform obligations under this Lease,
including brokerage commissions and advertising expenses, expenses of remodeling
the Premises for a new tenant (whether for the same or a different use), and any
special concessions made to obtain a new tenant, and (vi) any other amounts, in
addition to or in lieu of those listed above, that may be permitted by
applicable law.
(b) Maintain Lessee's right to possession as provided in Civil Code
Section 1951.4 in which case this Lease shall continue in effect whether or not
Lessee shall have abandoned the Premises. In such event Lessor shall be entitled
to enforce all of Lessor's rights and remedies under this Lease, including the
right to recover the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under the
laws or judicial decisions of the state of California. Unpaid amounts of rent
and other unpaid monetary obligations of Lessee under the terms of this Lease
shall bear interest from the date due at the Agreed Rate.
Section 12.03. Default by Lessor. Lessor shall not be in default under
this Lease unless Lessor fails to perform obligations required of Lessor within
a reasonable time, but in no event later than thirty (30) days after written
notice by Lessee to Lessor and to the holder of any first mortgage or deed of
trust covering the Premises whose name and address shall have theretofore
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been furnished to Lessee in writing, specifying that Lessor has failed to
perform such obligation; provided, however, that if the nature of Lessor's
obligation is such that more than thirty (30) days are required for performance
then Lessor shall not be in default if Lessor commences performance within such
thirty day period and thereafter diligently prosecutes the same to completion.
In the event Lessor does not commence performance within the thirty (30) day
period provided herein, Lessee may perform such obligation and will be
reimbursed for its expenses by Lessor together with interest thereon at the
Agreed Rate. Lessee waives any right to terminate this Lease or to vacate the
Premises on Lessor's default under this Lease. Lessee's sole remedy on Lessor's
default is an action for damages or injunctive or declaratory relief.
Notwithstanding the foregoing, nothing herein shall be deemed applicable in the
event of Lessor's delay in delivery of the Premises. In that situation, all
rights and remedies shall be determined under Section 3.01 above.
Section 12.04. Late Charges. Lessee hereby acknowledges that late payment
by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designated agent within five (5) business
days after such amount is due and owing, Lessee shall pay to Lessor a late
charge equal to five percent (5%) of such overdue amount. The parties hereby
agree that such late charge represents a fair and reasonable estimate of the
costs Lessor will incur by reason of late payment by Lessee. Acceptance of such
late charge by Lessor shall in no event constitute a waiver of Lessee's default
with respect to such overdue amount, nor prevent Lessor from exercising any of
the other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding Section 4.01 or any
other provision of this Lease to the contrary. Lease provided that if no further
late payments (and no other default) occur for a continuous six (6) month
period, payment of Base Rent shall return to the original payment schedule.
ARTICLE XIII
CONDEMNATION OF PREMISES.
Section 13.01. Total Condemnation. If the entire Premises, whether by
exercise of governmental power or the sale or transfer by Lessor to any
condemnor under threat of condemnation or while proceedings for condemnation are
pending, at any time during the Lease Term, shall be taken by condemnation such
that there does not remain a portion suitable for occupation, this Lease shall
then terminate as of the date transfer of possession is required. Upon such
condemnation, all rent shall be paid up to the date transfer of possession is
required, and Lessee shall have no claim against Lessor or the award for the
value of the unexpired portion of this Lease Term.
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Section 13.02. Partial Condemnation. If any portion of the Premises is
taken by condemnation during the Lease Term, whether by exercise of governmental
power or the sale for transfer by Lessor to an condemnor under threat of
condemnation or while proceedings for condemnation are pending, this Lease shall
remain in full force and effect except that in the event a partial taking leaves
the Premises unfit for the conduct of the business of Lessee, then Lessee shall
have the right to terminate this Lease effective upon the date transfer of
possession is required. Moreover, Lessor shall have the right to terminate this
Lease effective on the date transfer of possession is required if more than
thirty-three percent (33%) of the total square footage of the Premises is taken
by condemnation. Lessee and Lessor may elect to exercise their respective rights
to terminate this Lease pursuant to this Section by serving written notice to
the other within thirty (30) days after receipt of notice of condemnation. All
rent shall be paid up to the date of termination, and Lessee shall have no claim
against Lessor for the value of any unexpired portion of the Lease Term. If this
Lease shall not be canceled, the rent after such partial taking shall be that
percentage of the adjusted base rent specified herein, equal to the percentage
which the square footage of the untaken part of the Premises, immediately after
the taking, bears to the square footage of the entire Premises immediately
before the taking. If Lessee's continued use of the Premises requires
alterations and repair by reason of a partial taking, all such alterations and
repair shall be made by Lessee at Lessee's expense. Lessee waives all rights it
may have under California Code of Civil Procedure Section 1265.130 or otherwise,
to terminate this Lease based on partial condemnation.
Section 13.03. Award to Lessee. In the event of any condemnation, whether
total or partial, Lessee shall have the right to claim and recover from the
condemning authority such compensation as may be separately awarded or
recoverable by Lessee for loss of its business fixtures, or equipment belonging
to Lessee immediately prior to the condemnation. The balance of any condemnation
award shall belong to Lessor (including, without limitation, any amount
attributable to any excess of the market value of the Premises for the remainder
of the Lease Term over the then present value of the rent payable for the
remainder of the Lease Term) and Lessee shall have no further right to recover
from Lessor or the condemning authority for any claims arising out of such
taking.
ARTICLE XIV
ENTRY BY LESSOR
Section 14.01. Entry by Lessor Permitted. Lessee shall permit Lessor and
its employees, agents and contractors to enter the Premises and all parts
thereof (i) upon twenty-four (24) hours notice (or without notice in an
emergency), including without limitation, the Building and all parts thereof at
all reasonable times for any of the following purposes: to inspect the Premises;
to maintain the Premises; to make such repairs to the Premises as Lessor is
obligated or may elect to make; to make repairs, alterations or additions to any
other portion of the Project and (ii) upon twenty-four (24) hours notice to show
the Premises and post no more than two "To Lease" signs which are customary in
size and location for similarly situated and sized buildings (without blocking
windows or access) for the purposes of reletting during the last nine (9) months
of the Lease Term (provided that Lessee has failed to exercise its option to
extend) or extended Lease Term to show the Premises as part of a prospective
sale by Lessor or to post
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notices of nonresponsibility. Lessor shall have such right of entry without any
rebate of rent to Lessee for any loss of occupancy or quiet enjoyment of the
Premises hereby occasioned.
ARTICLE XV
ESTOPPEL CERTIFICATE
Section 15.01. Estoppel Certificate.
(a) Lessee shall at any time upon not less than fifteen (15) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying, if true, that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying, if true, that this Lease, as so modified, is in
full force and effect) and the date to which the rent and other charges are paid
in advance, if any, and (ii) acknowledging, if true, that there are not, to
Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or
specifying such defaults if any are claimed and (iii) certifying or
acknowledging such other matters as are requested by any prospective lender or
buyer which are reasonably related to the loan or sale transaction. Any such
statement may be conclusively relied upon by any prospective purchaser or
encumbrancer of the Premises.
(b) Lessee's failure to deliver such statement within such time shall be
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance.
ARTICLE XVI
LESSOR'S LIABILITY
Section 16.01. Limitations on Lessor's Liability. The term "Lessor" as
used herein shall mean only the owner or owners at the time in question of the
fee title of the Premises. In the event of any transfer of such title or
interest, Lessor herein named (and in case of any subsequent transfers then the
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership. For any breach of this Lease by Lessor, the
liability of Lessor (including all persons and entities that comprise Lessor,
and any successor Lessor) and any recourse by Lessee against Lessor shall be
limited to the interest of Lessor, and Lessor's successors in interest, in and
to the Premises. On behalf of itself and all persons claiming by, through, or
under Lessee, Lessee expressly waives and releases Lessor and each member, agent
and employee of Lessor from any personal liability for breach of this Lease.
ARTICLE XVII
GENERAL PROVISIONS
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Section 17.01. Severability. The invalidity of any provision of this Lease
as determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
Section 17.02. Agreed Rate Interest on Past-Due Obligations. Except as
expressly herein provided, any amount due to either party not paid when due
shall bear interest at the Bank of America prime rate plus one percent (1%)
("Agreed Rate"). Payment of such interest shall not excuse or cure any default
by Lessee under this Lease. Despite any other provision of this Lease, the total
liability for interest payments shall not exceed the limits, if any, imposed by
the usury laws of the State of California. Any interest paid in excess of those
limits shall be refunded to the payor by application of the amount of excess
interest paid against any sums outstanding in any order that payee requires. If
the amount of excess interest paid exceeds the sums outstanding, the portion
exceeding those sums shall be refunded in cash to the payor by the payee. To
ascertain whether any interest payable exceeds the limits imposed, any
nonprincipal payment (including late charges) shall be considered to the extent
permitted by law to be an expense or a fee, premium, or penalty rather than
interest.
Section 17.03. Time of Essence. Time is of the essence in the performance
of all obligations under this Lease.
Section 17.04. Additional Rent. Any monetary obligations of Lessee to
Lessor under the terms of this Lease shall be deemed to be Additional Rent and
Lessor shall have all the rights and remedies for the nonpayment of same as it
would have for nonpayment of Base Rent, except that the one year requirement of
Code of Civil Procedure Section 1161(2) shall apply only to scheduled
installments of Base Rent and not to any Additional Rent. All references to
"rent" (except specific references to either Base Rent or Additional Rent) shall
mean Base Rent and Additional Rent.
Section 17.05. Incorporation of Prior Agreements, Amendments and Exhibits.
This Lease (including Exhibits A, B, C, D, E, F, G, H, I, J, K and L) contains
all agreements of the parties with respect to any matter mentioned herein. No
prior agreement or understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, signed by the parties in
interest at the time of the modification. Except as otherwise stated in this
Lease, Lessee hereby acknowledges that neither the Lessor nor any employees or
agents of the Lessor has made any oral or written warranties or representations
to Lessee relative to the condition or use by Lessee of said Premises and Lessee
acknowledges that Lessee assumes all responsibility regarding the Occupational
Safety Health Act, the legal use and adaptability of the Premises and the
compliance thereof with all applicable laws and regulations in effect during the
Lease Term except as otherwise specifically stated in this Lease. Neither party
has been induced to enter into this Lease by, and neither party is relying on,
any representation or warranty outside those expressly set forth in this Lease.
Section 17.06. Notices.
(a) Written Notice. Any notice required or permitted to be given hereunder
shall be in writing and shall be given by a method described in paragraph (b)
below and shall be
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addressed to Lessee or to Lessor at the addresses noted below, next to the
signature of the respective parties, as the case may be. Either party may by
notice to the other specify a different address for notice purposes. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by notice to Lessee, but delay or
failure of delivery to such person shall not affect the validity of the delivery
to Lessor or Lessee.
(b) Methods of Delivery:
(i) When personally delivered to the recipient, notice is effective
on delivery. Delivery to the person apparently designated to receive deliveries
at the subject address is personally delivered if made during business hours
(e.g. receptionist).
(ii) When mailed by certified mail with return receipt requested,
notice is effective on receipt if delivery is confirmed by a return receipt.
(iii) When delivery by overnight delivery Federal
Express/Airborne/United Parcel Service/DHL WorldWide Express with charges
prepaid or charged to the sender's account, notice is effective on delivery if
delivery is confirmed by the delivery service.
(c) Refused, Unclaimed or Undeliverable Notices. Any correctly addressed
notice that is refused, unclaimed, or undeliverable because of an act or
omission of the party to be notified shall be considered to be effective as of
the first date that the notice was refused, unclaimed, or considered
undeliverable by the postal authorities, messenger, or overnight delivery
service.
Section 17.07. Waivers. No waiver of any provision hereof shall be deemed
a waiver of any other provision hereof or of any subsequent breach of the same
or any other provisions. Any consent to, or approval of, any act shall not be
deemed to render unnecessary the obtaining of consent to or approval of any
subsequent act. The acceptance of rent hereunder by Lessor shall not be a waiver
of any preceding breach by Lessee of any provision hereof, other than the
failure of Lessee to pay the particular rent so accepted, regardless of Lessor's
knowledge of such preceding breach at the time of acceptance of such rent.
Section 17.08. Recording. Either Lessor or Lessee shall, upon request of
the other, execute, acknowledge and deliver to the other a "short form"
memorandum of this Lease for recording purposes, provided that Lessee shall also
simultaneously execute in recordable form and delivering to Lessor a Quit Claim
Deed as to its leasehold and any other interest in the Premises and hereby
authorizes Lessor to date and record the same only upon the expiration or sooner
termination of this Lease.
Section 17.09. Surrender of Possession; Holding Over.
(a) At the expiration of the Lease, Lessee agrees to deliver up and
surrender to Lessor possession of the Premises and all improvements thereon
broom clean and, in as good order and
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condition as when possession was taken by Lessee, excepting only ordinary wear
and tear (wear and tear which could have been avoided by first class maintenance
practices and in accordance with industry standards shall not be deemed
"ordinary"). Upon expiration or sooner termination of this Lease, Lessor may
reenter the Premises and remove all persons and property therefrom. If Lessee
shall fail to remove any personal property which it is entitled or obligated to
remove from the Premises upon the expiration or sooner termination of this
Lease, for any cause whatsoever, Lessor, at its option, may remove the same and
store or dispose of them, and Lessee agrees to pay to Lessor on demand any and
all expenses incurred in such removal and in making the Premises free from all
dirt, litter, debris and obstruction, including all storage and insurance
charges. If the Premises are not surrendered at the end of the Lease Term,
Lessee shall indemnify Lessor against loss or liability resulting from delay by
Lessee in so surrendering the Premises, including, without limitation, actual
damages for lost rent and with respect to any claims of a successor occupant.
(b) If Lessee, with Lessor's prior written consent, remains in possession
of the Premises after expiration of the Lease Term and if Lessor and Lessee have
not executed an express written agreement for payment of rent during such
consented to holdover, then such occupancy shall be a tenancy from month to
month at a monthly Base Rent equivalent to one hundred twenty-five percent
(125%) (for the first month and 150% thereafter) of the monthly rental in effect
immediately prior to such expiration, such payments to be made as herein
provided for Base Rent. In the event of such holding over, all of the terms of
this Lease, including the payment of Additional Rent and all charges owing
hereunder other than rent shall remain in force and effect on said month to
month basis.
Section 17.10. Cumulative Remedies. No remedy or election hereunder by
Lessor shall be deemed exclusive but shall, wherever possible, be cumulative
with all other remedies at law or in equity, provided that notice and cure
periods set forth in Article XII are intended to extend and modify statutory
notice provisions to the extent expressly stated in Section 12.01.
Section 17.11. Covenants and Conditions. Each provision of this Lease to
be observed or performed by Lessee shall be deemed both a covenant and a
condition.
Section 17.12. Binding Effect; Choice of Law. Subject to any provisions
hereof restricting assignment or subletting by Lessee and subject to the
provisions of Article XVI, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State of California and any legal or equitable action or proceeding
brought with respect to the Lease or the Premises shall be brought in Santa
Clara County, California.
Section 17.13. Lease to be Subordinate. Lessee agrees that this Lease is
and shall be, at all times, subject and subordinate to the lien of any mortgage
or other encumbrances which Lessor may create against the Premises including all
renewals, replacements and extensions thereof provided, however, that regardless
of any default under any such mortgage or encumbrance or any sale of the
Premises under such mortgage, so long as Lessee timely performs all covenants
and conditions of this Lease and continues to make all timely payments
hereunder, this Lease and Lessee's possession and rights hereunder shall not be
disturbed by the
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mortgagee or anyone claiming under or through such mortgagee. Lessee shall
execute any documents subordinating this Lease within ten (10) days after
delivery of same by Lessor so long as the Lender agrees therein that this Lease
will not be terminated if Lessee is not in default following a foreclosure,
including, without limitation, any Subordination Non-Distribution and Attornment
Agreement ("SNDA") which is substantially in the form attached hereto as Exhibit
"F."
Section 17.14. Attorneys' Fees. If either party herein brings an action to
enforce the terms hereof or to declare rights hereunder, the prevailing party in
any such action, on trial or appeal, shall be entitled to recover its reasonable
attorney's fees, expert witness fees and costs as fixed by the Court.
Section 17.15. Signs. Lessee shall not place any sign upon the exterior of
the Building without Lessor's prior written consent, which consent shall not be
unreasonably withheld and subject to approval by the City of Redwood. Lessee, at
its sole cost and expense, after obtaining Lessor's prior written consent, shall
install, maintain and remove prior to expiration of this Lease (or within ten
(10) days after any earlier termination of this Lease) all signage in full
compliance with (i) all applicable law, statutes, ordinances and regulations and
(ii) all provisions of this Lease concerning alterations.
Section 17.16. Merger. The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not
work a merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
Section 17.17. Guarantor. [Intentionally Omitted]
Section 17.18. Quiet Possession. Upon Lessee timely paying the rent for
the Premises and timely observing and performing all of the covenants,
conditions and provisions on Lessee's part to be observed and performed
hereunder, Lessee shall have quiet possession of the Premises for the entire
Lease Term, subject to all of the provisions of this Lease.
Section 17.19. Easements. Lessor reserves to itself the right, from time
to time, to grant such easements, rights and dedications that Lessor deems
necessary or desirable, and to cause the recordation of Parcel Maps and
conditions, covenants and restrictions, so long as such easements, rights,
dedications, Maps and conditions, covenants and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned or other documents, and take such other actions, which are
reasonably necessary or appropriate to accomplish such granting recordation and
subordination of the Lease to same, upon request of Lessor, and failure to do so
within ten (10) business days of a written request to do so shall constitute a
material breach of this Lease.
Section 17.20. Authority. Each individual executing this Lease on behalf
of a corporation, limited liability company or partnership represents and
warrants that he or she is duly authorized to execute and deliver this Lease on
behalf of such entity in accordance with a
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duly adopted resolution of the governing group of the entity empowered to grant
such authority, and that this Lease is binding upon said entity in accordance
with its terms.
Section 17.21. Force Majeure Delays. In any case where either party hereto
is required to do any act (other than the payment of money), delays caused by or
resulting from Acts of God or Nature, war, civil commotion, fire, flood or other
casualty, labor difficulties, shortages of labor or materials or equipment,
government regulations, delay by government or regulatory agencies with respect
to approval or permit process, unusually severe weather, or other causes beyond
such party's reasonable control the time during which act shall be completed,
shall be deemed to be extended by the period of such delay, whether such time be
designated by a fixed date, a fixed time or "a reasonable time."
Section 17.22. Hazardous Materials.
(a) Definition of Hazardous Materials and Environmental Laws. "Hazardous
Materials" means any (a) substance, product, waste or other i material of any
nature whatsoever which is or becomes listed regulated or addressed pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. sections 9601, et seq. ("CERCLA"); the Hazardous Materials Transportation
Act ("HMTA") 49 U.S.C. section 1801, et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. section 6901, et seq. ("RCRA"); the Toxic Substances
Control Act, 15 U.S.C. sections 2601, et seq. ("TSCA"); the Clean Water Act, 33
U.S.C. sections 1251, et seq.; the California Hazardous Waste Control Act,
Health and Safety Code sections 25100, et seq.; the California Hazardous
Substances Account Act, Health and Safety Code sections 26300, et seq.; the
California Safe Drinking Water and Toxic Enforcement Act, Health and Safety Code
sections 25249.5, et seq.; California Health and Safety Code sections 25280, et
seq.; (Underground Storage of Hazardous Substances); the California Hazardous
Waste Management Act, Health and Safety Code sections 25170.1, et seq.;
California Health and Safety Code sections 25501. et seq. (Hazardous Materials
Response Plans and Inventory); or the Porter-Cologne Water Quality Control Act,
California Water Code sections 13000, et seq., all as amended, or any other
federal, state or local statute, law, ordinance, resolution, code, rule,
regulation, order or decree regulating, relating to or imposing liability
(including, but not limited to, response, removal and remediation costs) or
standards of conduct or performance concerning any hazardous, toxic or dangerous
waste, substance or material, as now or at any time hereafter may be in effect
(collectively, "Environmental Laws"); (b) any substance, product, waste or other
material of any nature whatsoever whose presence in and of itself may give rise
to liability under any of the above statutes or under any statutory or common
law theory based on negligence, trespass, intentional tort, nuisance, strict or
absolute liability or under any reported decisions of a state or federal court,
(c) petroleum or crude oil, including but not limited to petroleum and petroleum
products contained within regularly operated motor vehicles and (d) asbestos.
(b) Lessor's Representations and Disclosures. Lessor represents that it
has provided Lessee with a description of the Hazardous Materials on or beneath
the Property as of the date hereof, attached hereto as Exhibit I and
incorporated herein by reference. Lessee acknowledges that in providing the
attached Exhibit I, Lessor has satisfied its obligations of disclosure pursuant
to California Health & Safety Code Section 25359.7 which requires:
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"Any owner of nonresidential real property who knows, or has
reasonable cause to believe, that any release of hazardous substances has come
to be located on or beneath that real property shall, prior to the sale, lease
or rental of the real property by that owner, give written notice of that
condition to the buyer, lessee or renter of the real property."
(c) Use of Hazardous Materials. Lessee shall not cause or permit any
Hazardous Materials to be brought upon, kept or used in, on or about the Project
by Lessee, its agents, employees, contractors, licensee, guests, visitors or
invitees without the prior written consent of Lessor. Lessor shall not
unreasonably withhold such consent so long as Lessee demonstrates to Lessor's
reasonable satisfaction that such Hazardous Materials are necessary or useful to
Lessee's business and will be used, kept and stored in a manner that complies
with all applicable Environmental Laws. Lessee shall, at all times, use, keep,
store, handle, transport, treat or dispose all such Hazardous Materials in or
about the Property in compliance with all applicable Environmental Laws. Lessee
shall remove all Hazardous Materials used or brought onto the Premises during
the Lease Term from the Project prior to the expiration or earlier termination
of the Lease.
(d) Lessee's Environmental Indemnity. Lessee agrees to indemnify and hold
Lessor harmless from any liabilities, losses, claims, damages, penalties, fines,
attorney fees, expert fees, court costs, remediation costs, investigation costs,
or other expenses resulting from or arising out of the use, storage, treatment,
transportation, release, presence, generation, or disposal of Hazardous
Materials on, from or about the Project, and/or subsurface or ground water,
after the Commencement Date from an act or omission of Lessee (or Lessee's
successor), its agents, employees, invitees, vendors, contractors, guests or
visitors.
(e) Lessee's Obligation to Promptly Remediate. If the presence of
Hazardous Materials on the Premises after the Commencement Date results from an
act or omission of Lessee (or Lessee's successors), its agents, employees,
invitees, vendors, contractors, guests, or visitors results in contamination or
deterioration of the Premises or Project or any water or soil beneath the
Premises or Project, Lessee shall promptly take all action necessary or
appropriate to investigate and remedy that contamination, at its sole cost and
expense, provided that Lessor's consent to such action shall first be obtained.
Lessor's consent shall not be unreasonably withheld. In no event shall Lessee be
responsible for the remediation of Hazardous Materials identified in Exhibit I
at the Project prior to Commencement Date.
(f) Notification. Lessor and Lessee each agree to promptly notify the
other of any communication received from any governmental entity concerning
Hazardous Materials or the violation of Environmental Laws that relate to the
Property.
Section 17.23. Modifications Required by Lessor's Lender. If any lender of
Lessor requires a modification of this Lease that will not increase Lessee's
cost or expense or materially and adversely change Lessee's rights and
obligations, this Lease shall be so modified and Lessee shall execute whatever
documents are required by such lender and deliver them to Lessor within ten (10)
days after the request.
33
<PAGE> 34
Section 17.24. Brokers. Lessor and Lessee each represents to the other
that it has had no dealings with any real estate broker or agent in connection
with the negotiation of this Lease, except for the real estate brokers or agents
identified on the signature page hereof ("Brokers") and that they know of no
other real estate broker or agent who is entitled to a commission or finder's
fee in connection with this Lease. Each party shall indemnify, protect, defend,
and hold harmless the other party against all claims, demands, losses,
liabilities, lawsuits, judgments, and costs and expenses (including reasonable
attorney fees) for any leasing commission, finder's fee, or equivalent
compensation alleged to be owning on account of the indemnifying party's
dealings with any real estate broker or agent other than the Brokers. The terms
of this Section 17.24 shall survive the expiration or earlier termination of the
Lease Term.
Section 17.25. [Intentionally Deleted]
Section 17.26. Acknowledgment of Notices. Lessor has provided and Lessee
hereby acknowledges receipt of the Notices attached as Exhibits J and K hereto,
concerning the presence of certain uses and operations of neighboring parcels of
land.
34
<PAGE> 35
Section 17.27. List of Exhibits.
<TABLE>
<CAPTION>
Ref. Page
---------
<S> <C> <C>
EXHIBIT A: Real Property Legal Description, Site Plan, and Building Elevations
EXHIBIT B: Plans and Specifications for Shell Building
EXHIBIT C: Work Letter Agreement for Tenant Improvements and Interior
Specification Standards
EXHIBIT D: Cost Responsibilities of Lessor and Lessee
EXHIBIT E: Memorandum of Commencement of Lease Term and Schedule of Base Rent
EXHIBIT F: SNDA
EXHIBIT G: Signage Exhibit
EXHIBIT H: Guaranty of Lease [Intentionally Omitted]
EXHIBIT I: Hazardous Materials Disclosure
EXHIBIT J: Notice to Tenants
EXHIBIT K: Notice to Tenants
EXHIBIT L: Rules and Regulations
</TABLE>
35
<PAGE> 36
LESSOR AND LESSEE EACH HAS CAREFULLY READ AND HAS REVIEWED THIS LEASE AND BEEN
ADVISED BY LEGAL COUNSEL OF ITS OWN CHOOSING AS TO EACH TERM AND PROVISION
CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOWS ITS INFORMED AND
VOLUNTARY CONSENT THERETO. EACH PARTY HEREBY AGREE THAT, AT THE TIME THIS LEASE
IS EXECUTED, THE TERMS AND CONDITIONS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
Executed at San Jose, California, as of the reference date.
LESSOR: ADDRESS:
c/o Jay Paul Company
353 Sacramento Street, Suite 1740
- ---------------------------------------, San Francisco, California 94111
- ---------------------------------------
By:
---------------------------------
Jay Paul, President
With a copy to:
Thomas G. Perkins, Esq.
99 Almaden Blvd., 8th Floor
San Jose, CA 95113
Telephone: 408-993-9911
Facsimile: 408-286-3312
LESSEE: ADDRESS:
INFORMATICA CORP.
a ________ corporation
--------------------------------------
--------------------------------------
By: (Before Commencement Date)
---------------------------------
(Type or print name) Pacific Shores Center
Its: Building 1
--------------------------------- Redwood City, CA
(After Commencement Date)
36
<PAGE> 37
BROKER EXECUTION
By signing below, the indicated real estate broker or agent is not being
made a party hereto, but is signifying its agreement with the provisions hereof
concerning brokerage.
LESSOR'S BROKER: ADDRESS:
Cornish & Carey Commercial 2804 Mission College Blvd., Suite 120
Santa Clara, California 95054
By:
--------------------------------
--------------------------------
(Type or print name)
Its: Executive Vice President
LESSEE'S BROKER: ADDRESS:
BT Commercial 2445 Faber Place, Suite 250
Palo Alto, CA 94303-4226
By:
--------------------------------
--------------------------------
(Type or print name)
Its:
--------------------------------
37
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements
on Form S-8 No. 333-77299 pertaining to the 1999 Employee Stock Purchase Plan
and No. 333-89523 pertaining to the 1996 Flexible Stock Incentive Plan, 1999
Stock Incentive Plan and 1999 Non-Employee Director Stock Incentive Plan, of our
report dated January 24, 2000 with respect to the consolidated financial
statements and financial statement schedule of Informatica Corporation included
in this Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 57,521
<SECURITIES> 0
<RECEIVABLES> 10,096
<ALLOWANCES> 1,977
<INVENTORY> 0
<CURRENT-ASSETS> 66,912
<PP&E> 2,665
<DEPRECIATION> 1,183
<TOTAL-ASSETS> 68,523
<CURRENT-LIABILITIES> 26,961
<BONDS> 0
0
0
<COMMON> 67,020
<OTHER-SE> (26,896)
<TOTAL-LIABILITY-AND-EQUITY> 68,523
<SALES> 62,379
<TOTAL-REVENUES> 62,379
<CGS> 10,996
<TOTAL-COSTS> 10,996
<OTHER-EXPENSES> 355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 319
<INCOME-PRETAX> (671)
<INCOME-TAX> (824)
<INCOME-CONTINUING> (1,495)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,495)
<EPS-BASIC> (0.06)<F1>
<EPS-DILUTED> (0.06)
<FN>
<F1>EPS INFORMATION HAS BEEN RESTATED TO REFLECT A TWO-FOR-ONE STOCK SPLIT,
EFFECTED IN THE FORM OF A STOCK DIVIDEND TO EACH STOCKHOLDER OF RECORD AS OF
FEBRUARY 18, 2000. PRIOR FINANCIAL DATA SCHEDULES HAVE BEEN RESTATED FOR THE
RECAPITALIZATION.
</FN>
</TABLE>
