<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-25687
===============================================================================
PHONE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3219054
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
800 Chesapeake Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 562-0200
(Registrant's telephone number, including area code)
===============================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No [_]
As of April 30, 2000, there were 78,711,840 shares of the registrant's
Common Stock outstanding.
1
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INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed consolidated balance sheets at March 31, 2000 and
June 30, 1999
Condensed consolidated statements of operations for the three
and nine month periods ended March 31, 2000 and 1999
Condensed consolidated statements of cash flows for the nine
month periods ended March 31, 2000 and 1999
Notes to condensed consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHONE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................... $ 123,782 $ 79,803
Short-term investments....................................... 373,157 33,283
Accounts receivable.......................................... 33,061 20,474
Prepaid expenses and other current assets.................... 4,888 865
----------- ------------
Total current assets................................ 534,888 134,425
Property and equipment, net....................................... 17,172 3,014
Deposits and other assets......................................... 3,153 1,494
Goodwill and intangible assets, net............................... 934,126 --
----------- ------------
$ 1,489,339 $ 138,933
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of equipment loans
and capital lease obligations............................. $ 1,014 $ 424
Accounts payable............................................. 4,259 1,749
Accrued liabilities - acquisition related ................... 30,764 --
Other accrued liabilities.................................... 23,101 7,173
Deferred revenue............................................. 62,993 36,797
----------- ------------
Total current liabilities........................... 122,131 46,143
Equipment loans and capital lease obligations,
less current portion........................................... 1,766 498
----------- ------------
Total liabilities................................... 123,897 46,641
----------- ------------
Stockholders' equity:
Common stock................................................. 75 62
Additional paid-in capital................................... 1,515,199 136,178
Deferred stock-based compensation............................ (7,322) (1,318)
Treasury stock............................................... (196) (196)
Notes receivable from stockholders........................... (837) (484)
Accumulated deficit.......................................... (141,477) (41,950)
----------- ------------
Total stockholders' equity.......................... 1,365,442 92,292
----------- ------------
$ 1,489,339 $ 138,933
=========== ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
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PHONE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
License.................................... $11,833 $ 1,264 $ 24,751 $ 1,530
Maintenance and support services........... 3,939 1,454 9,448 3,786
Consulting services........................ 2,889 814 5,791 1,401
---------- ----------- ---------- ---------
Total revenues....................... 18,661 3,532 39,990 6,717
---------- ----------- ---------- ---------
Cost of revenues:
License.................................... 567 84 1,086 172
Maintenance and support services........... 2,613 767 6,862 1,876
Consulting services........................ 1,689 511 3,433 646
---------- ----------- ---------- ---------
Total cost of revenues............... 4,869 1,362 11,381 2,694
---------- ----------- ---------- ---------
Gross profit......................... 13,792 2,170 28,609 4,023
---------- ----------- ---------- ---------
Operating expenses:
Research and development................... 11,351 3,468 25,051 8,406
Sales and marketing........................ 11,418 2,629 21,958 6,504
General and administrative................. 3,400 1,092 8,113 2,731
Stock-based compensation................... 1,861 280 3,581 784
Amortization of goodwill and
Intangible assets....................... 49,297 -- 62,939 --
In-process research and development........ 18,080 -- 18,190 --
---------- ----------- ---------- ---------
Total operating expenses............. 95,407 7,469 139,832 18,425
---------- ----------- ---------- ---------
Operating loss....................... (81,615) (5,299) (111,223) (14,402)
Interest and other income, net.................. 7,199 359 12,791 1,139
---------- ----------- ---------- ---------
Loss before income taxes............. (74,416) (4,940) (98,432) (13,263)
Income taxes.................................... 170 710 1,095 710
---------- ----------- ---------- ---------
Net loss............................. ($74,586) ($5,650) ($99,527) ($13,973)
========== =========== ========== =========
Basic and diluted net loss per share............ ($1.05) ($0.50) ($1.51) ($1.24)
========== =========== ========== =========
Shares used in computing basic and
diluted net loss per share................. 71,003 11,398 66,051 11,236
========== =========== ========== =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
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PHONE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ ($99,527) ($13,973)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization...................................... 65,960 699
Amortization of deferred stock-based compensation.................. 3,581 784
In-process research and development................................ 18,190 --
Changes in operating assets and liabilities:
Accounts receivable............................................ (7,543) (2,737)
Prepaid expenses and other assets.............................. (3,571) (698)
Accounts payable............................................... (407) 153
Accrued liabilities............................................ 10,567 2,980
Deferred revenue............................................... 24,181 11,746
------------- -------------
Net cash provided by (used for) operating
activities................................................ 11,431 (1,046)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment, net................................ (13,050) (1,073)
Businesses acquired, net of cash received............................... (8,908) --
Purchases of short-term investments..................................... (459,384) (30,735)
Proceeds from sales and maturities
Of short-term investments............................................ 119,510 23,921
------------- -------------
Net cash used for investing activities....................... (361,832) (7,887)
------------- -------------
Cash flows from financing activities:
Issuance of common stock................................................ 394,804 83
Net proceeds from sale of convertible preferred stock................... -- 16,700
Repayment of notes receivable from stockholders......................... -- 11
Repayment of equipment loans and capital lease
Obligations.......................................................... (424) (308)
------------- -------------
Net cash provided by financing activities.................... 394,380 16,486
------------- -------------
Net increase in cash and cash equivalents.................................... 43,979 7,553
Cash and cash equivalents at beginning of period............................. 79,803 12,677
------------- -------------
Cash and cash equivalents at end of period................................... $ 123,782 $ 20,230
============= =============
Supplemental disclosures of cash flow information:
Acquisition-related accrued liabilities................................. $ 30,764 $ --
============= =============
Common stock issued to officers and employees for
Notes receivable..................................................... $ -- $ 223
============= =============
Deferred stock-based compensation....................................... $ 9,585 $ 543
============= =============
Common stock issued and options assumed in acquisitions................. $ 974,645 $ --
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
Company's financial position as of March 31, 2000, and the results of its
operations and cash flows for the three and nine month periods ended March 31,
2000 and 1999. These financial statements should be read in conjunction with the
Company's audited financial statements as of June 30, 1999 and 1998 and for each
of the years in the three-year period ended June 30, 1999, including notes
thereto, included in the Company's 1999 Annual Report on Form 10-K. Operating
results for the three and nine month periods ended March 31, 2000, are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2000.
On November 15, 1999, the Company completed a two-for-one stock split of its
common stock for stockholders of record as of October 29, 1999. The accompanying
unaudited condensed consolidated financial statements have been retroactively
restated to give effect to the stock split.
NOTE 2 - Revenue Recognition
Effective July 1, 1998, the Company adopted SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9. SOP 97-2, as amended,
generally requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair value of the
elements.
The Company licenses its UP.Link Server Suite and related server-based
software products to network operators through its direct sales force and
indirectly through its channel partners. The Company's license agreements do not
provide for a right of return. Allowances for future estimated warranty costs
are provided at the time revenue is recognized. Licenses can be purchased under
a perpetual license model either on an as-deployed basis or on a prepaid basis,
or alternatively under a quarterly time-based license model under which no
perpetual license is acquired. For licenses purchased on an as-deployed basis,
license revenue is generally recognized quarterly as subscribers are activated
to use the services that are based on the Company's UP.Link Server Suite and
related server-based software products. For licenses purchased on a prepaid
basis, prepaid license fees are recognized under either subscription accounting
due to the Company's commitment to provide standards-compliant products for each
license covered by the prepaid arrangement or ratably over the period that
maintenance and support services are expected to be provided. For customers that
license the Company's products under the quarterly time-based license model,
revenues are recognized over the respective quarterly term based on the number
of the customer's subscribers using the services that are based on the Company's
products. Subscriptions are recognized ratably over the contractual term of the
prepaid arrangement (i.e., the date the prepaid licenses expire if not used),
generally 12 to 30 months, commencing at the beginning of the month delivery and
acceptance occur by the network operator. The Company recognizes its other
prepaid licenses, including the related maintenance and support services
provided to network operators, ratably over the lesser of the estimated life of
the software or the contractual term of the arrangement, generally 12 to 30
months, commencing at the beginning of the month delivery and acceptance occur
by the network operator. Revenues from consulting services provided to network
operators are recognized as the services are performed.
The Company recognizes revenues from UP.Browser agreements with wireless
telephone manufacturers ratably over the period during which the services are
performed, generally one year. The Company provides its wireless telephone
manufacturer customers with support associated with their efforts to port its
UP.Browser software to their wireless telephones, software error corrections,
and new releases as they become commercially available.
NOTE 3 - Comprehensive Income
The Company has no material components of other comprehensive income (loss)
for all periods presented.
NOTE 4 - Net Loss Per Share
7
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Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock excluding shares of restricted stock subject
to repurchase summarized below. Diluted net loss per share is computed using the
weighted-average number of shares of common stock outstanding and, when
dilutive, potential shares of restricted common stock subject to repurchase,
common stock from exercise of options and warrants to purchase common stock,
using the treasury stock method, and from convertible securities on an "as if
converted" basis. The following potential shares of common stock have been
excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been antidilutive (in thousands):
<TABLE>
<CAPTION>
Three and Nine Months Ended
March 31,
--------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Shares issuable under stock options 11,075 6,642
Shares of restricted stock subject
to repurchase.................. 465 1,094
Shares issuable pursuant to
warrants to purchase common stock 18 62
Shares of convertible preferred
stock on an "as if converted"
basis.......................... - 40,348
</TABLE>
The weighted-average exercise price of stock options outstanding was $29.77
and $0.94 as of March 31, 2000 and 1999, respectively. The weighted-average
purchase price of restricted stock subject to repurchase was $0.91 and $0.24 as
of March 31, 2000 and 1999, respectively. The weighted-average exercise price of
outstanding warrants was $8.92 and $1.91 as of March 31, 2000 and 1999,
respectively. In June 1999, all outstanding shares of the Company's convertible
preferred stock were automatically converted into common stock upon completion
of the Company's initial public offering.
NOTE 5 - Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133, as amended by SFAS No. 137, establishes accounting and reporting
standards for derivative financial instruments and hedging activities related to
those instruments, as well as other hedging activities. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133, as amended,
will not have a material impact on its consolidated financial position, results
of operations, or cash flows. The Company will be required to adopt SFAS No. 133
in fiscal 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
The company does not expect the adoption of SAB 101 to have a material effect on
its consolidated financial position or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-2,
Accounting for Web Site Development Costs, which outlines the accounting
criteria for costs related to the development of web sites. The Company will be
required to adopt EITF Issue No. 00-2 in fiscal quarters beginning after
June 30, 2000. The Company is in the process of assessing any impact that the
adoption of EITF Issue No. 00-2 will have on its consolidated financial position
or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-3,
Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware. EITF Issue No. 00-3 outlines the accounting criteria for
hosting arrangements. The Company does not expect the adoption of EITF Issue No.
00-3 to have material effect on its consolidated financial position or results
of operations.
In March 2000, The FASB issued Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25. This Interpretation clarifies the application of Opinion 25 for certain
issues: (a) the definition of employee for purposes of applying Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. Generally, this
Interpretation is effective July 1, 2000. The Company does not expect the
adoption of Interpretation No. 44 to have a material effect on its consolidated
financial position or results of operations.
NOTE 6 - Geographic, Segment, and Significant Customer Information
During 1999, the Company adopted the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information about
revenues by geographic region and by product for purposes of making operating
decisions and assessing financial performance. Therefore, the Company operates
in a single operating segment: software that enables the delivery of
Internet-based services to mass-market wireless telephones and related
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services. The disaggregated information reviewed on a product basis by the CEO
is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
UP.Link Server Suite and
related server-based
products..................... $ 12,439 $ 1,424 $ 26,360 $ 2,382
UP.Browser.................... 3,346 1,294 7,852 2,934
Consulting services........... 2,876 814 5,778 1,401
--------------- --------------- -------------- --------------
Total revenues............ $ 18,661 $ 3,532 $ 39,990 $ 6,717
=============== =============== ============== ==============
</TABLE>
The Company markets its products primarily from its operations in the United
States. International sales are primarily to customers in Asia Pacific and
Europe. Information regarding the Company's revenues in different geographic
regions is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
North America................. $ 5,190 $ 1,355 $ 11,904 $ 2,425
Europe........................ 4,253 1,069 8,777 2,221
Asia Pacific.................. 9,218 1,108 19,309 2,071
--------------- --------------- -------------- --------------
Total revenues............ $ 18,661 $ 3,532 $ 39,990 $ 6,717
=============== =============== ============== ==============
</TABLE>
Significant customer information is as follows:
<TABLE>
<CAPTION>
% of Total Revenue % of Total
-------------------------------------------------------- Accounts
Three Months Ended Nine Months Ended Receivable
March 31, March 31, -------------------
--------------------------- -------------------------- March 31,
2000 1999 2000 1999 2000
------------ ------------ ------------ ----------- -------------------
<S> <C> <C> <C> <C> <C>
Customer A 2% 22% 7% 14% 2%
Customer B 24% 1% 25% 1% 3%
Customer C 1% 10% 1% 13% -
Customer D - 15% 4% 11% -
</TABLE>
Note 7 - Acquisitions
On October 26, 1999, the Company acquired all of the outstanding capital
stock of APiON Telecom Limited ("APiON") in exchange for 2,393,026 shares of its
common stock. In addition, the Company also agreed to issue cash and common
stock with an aggregate value of up to approximately $14,100,000 to current and
former employees of APiON. APiON is a provider of WAP software products to GSM
network operators in Europe and has expertise in GSM Intelligent Networks,
wireless data and WAP technology. Former employees of APiON will receive
consideration totaling up to approximately $6.5 million of which one third was
paid in cash (approximately $2.2 million) upon the closing of the Company's
secondary offering
9
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in November 1999 and two thirds is payable in common stock of the Company on the
one year anniversary of the closing of the acquisition of APiON and is subject
to forfeiture upon the occurrence of certain events. Current employees of APiON
will receive consideration totaling up to approximately $7.6 million of which
one third was paid in cash upon the closing of the Company's secondary offering
and one third is payable in common stock of the Company on each of the first two
anniversaries of the closing of the acquisition of APiON contingent upon
continued employment. The actual number of Phone.com shares to be issued to
current and former employees of APiON will depend upon the fair value of
Phone.com common stock on the distribution date.
Common stock issued to former shareholders and cash paid to current and
former employees of APiON at the closing of the acquisition was included in the
purchase price. Contingent common stock issuable in the future to former
employees of APiON has been treated as contingent consideration. The then fair
value of the common stock that is issued to the former employees of APiON upon
the satisfaction of certain future events will be added to goodwill and
amortized over the remaining useful life. Common stock issuable in the future to
current employees of APiON has been recorded as deferred stock-based
compensation.
Total consideration given, including direct acquisition costs, aggregated
approximately $245.9 million. The acquisition was accounted for as a purchase
with the results of APiON included from the acquisition date. The excess of the
purchase price over the fair value of tangible net assets acquired amounted to
approximately $243.6 million, with $241.6 million attributable to goodwill, $1.7
million attributable to assembled workforce, $170,000 attributable to developed
technology and $110,000 attributable to in-process research and development. The
in-process research and development has been expensed on the acquisition date,
and the intangible assets are being amortized on a straight-line basis over an
estimated life of 3 years. In connection with the acquisition, the Company
recorded deferred stock-based compensation in the amount of $5.1 million, which
is being amortized on an accelerated basis over the vesting period of 24 months,
consistent with the method described in FASB Interpretation No. 28.
On October 27, 1999, the Company acquired substantially all of the assets of
Angelica Wireless ApS ("Angelica"), including all software technology,
intellectual property and certain customer agreements, and excluding the
assumption of liabilities. Angelica is a developer of WAP software products
complementary to the Company's MyPhone mobile internet portal software, targeted
for customers in Europe. Total consideration paid, including direct acquisition
costs, aggregated $2.0 million. In addition, the Company also agreed to issue
16,000 shares of common stock with an aggregate value of approximately $1.7
million to employees of Angelica, subject to certain forfeiture conditions
dependent on continued employment. The acquisition was accounted for as a
purchase with the results of Angelica included from the acquisition date. The
excess of the purchase price over the fair value of tangible net assets acquired
in the amount of $2.0 million has been attributed to goodwill and is being
amortized on a straight-line basis over an estimated life of 3 years. In
connection with the acquisition, the Company recorded deferred stock-based
compensation in the amount of $1.7 million, which is being amortized on an
accelerated basis over the vesting period of 36 months, consistent with the
method described in FASB Interpretation No. 28.
On February 8, 2000, the Company acquired all of the outstanding common and
redeemable convertible preferred stock of AtMotion, Inc. ("AtMotion"), in
exchange for 2,280,287 shares of its common stock. The Company also assumed all
of the outstanding options and warrants of AtMotion. At the time of the
acquisition, 12.1% of the shares issued by the Company were placed in escrow.
Most of the escrow shares will remain in escrow for a period of at least one
year from the date of the acquisition and will be released upon the occurrence
of certain events. AtMotion is a provider of Voice Portal technology. Total
consideration given aggregated approximately $287.2 million. The acquisition was
accounted for as a purchase with the results of AtMotion included from the
acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to approximately the entire purchase price
of $286.6 million, with $243.4 million attributable to goodwill, $42.5 million
attributable to developed technology and $655,000 attributable to assembled
workforce. The intangible assets are being amortized on a straight-line basis
over an estimated life of 3 years.
On March 4, 2000, the Company acquired all of the outstanding common and
preferred stock of Paragon Software (Holdings) Limited, a private limited
company incorporated in England and Wales, in exchange for 3,015,015 shares of
Phone.com common stock and assumed all of the outstanding options of Paragon for
up to 397,672 shares of Phone.com common stock. Paragon is a provider of
synchronization technology allowing PC-based personal information to be
10
<PAGE>
easily transferred to mobile devices. Total consideration given aggregated
approximately $453.7 million in Company common stock as well as a cash payment
at closing of $3.6 million. An additional $17 million will be paid within one
year, payable in approximately 142,950 common shares of the Phone.com common
stock at the election of the shareholder or in cash with the consent of
Phone.com as well as additional cash payments of $3.9 million to be allocated
among certain employees of Paragon. There were also transaction costs in
connection with the purchase of approximately $11.6 million. The acquisition
was accounted for as a purchase with the results of Paragon included from the
acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to $483.0 million, with $454.5 million
attributable to goodwill, $18.1 million attributable to in-process research
and development, $7.2 million attributable to developed technology, $2.3
million attributable to non-compete agreements and $980,000 attributable to
assembled workforce. The in-process research and development has been expensed
on the acquisition date, and the intangible assets are being amortized on a
straight-line basis over and estimated life of 3 years.
The following summary, prepared on an unaudited pro forma basis, reflects the
condensed consolidated results of operations for the three and nine month
periods ended March 31, 2000 and 1999 assuming APiON, Angelica, AtMotion and
Paragon had been acquired on July 1, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues............................ $19,032 $4,396 $42,444 $8,127
Net loss............................ ($91,871) ($93,487) ($281,158) ($275,540)
Basic and diluted net loss per share ($1.24) ($4.89) ($3.92) ($14.55)
Shares used in pro forma per share
computation...................... 74,258 19,102 71,707 18,940
</TABLE>
On February 14, 2000, the Company signed a definitive agreement to acquire
Onebox.com, Inc. ("Onebox"), a communications application service provider. In
connection with the acquisition, which was completed on April 14, 2000, the
Company agreed to a valuation for Onebox of approximately $800 million, to be
associated with the issuance of approximately 6.5 million shares of the
Company's common stock in exchange for all of the outstanding common stock and
preferred stock of Onebox, and the assumption of options and warrants. The
Company expects to incur approximately $20 million for transaction costs
relating to the acquisition. The stock-for-stock transaction will be accounted
for using purchase accounting.
Note 8 - Subsequent Events
On May 3, 2000, the Company's Board of Directors approved the 2000 Non-
Executive Stock Option Plan (the "Plan") reserving up to 2,000,000 shares of
the Company's common stock for issuance upon the exercise of nonstatutory
stock options at a price no less than 85% of the fair market value of the
Company's common stock on the date of the grant.
In April 2000, the Company filed a lawsuit against Geoworks Corporation in
the U.S. District Court in San Francisco, California, alleging, and seeking a
court order declaring, that U.S. Patent No. 5,327,529, assigned to Geoworks is
not infringed by the Company and that the patent is also invalid and
unenforceable. The Company took this action in response to Geoworks' attempt to
require industry participants to obtain licenses under the Geoworks patent. We
cannot assure you that Geoworks will not bring an action against us claiming
infringement by us of the Geoworks patent. While we intend to pursue our
position vigorously, the outcome of any litigation is uncertain, and we may not
prevail. Should we be found to infringe the Geoworks patent, we may be liable
for potential monetary damages, and could be required to obtain a license from
Geoworks. If we were unable to obtain a license on commercially reasonable
terms, we may not be able to proceed with development and sale of some of our
products.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed or forecasted. Factors that might cause such a difference include, but
are not limited to, those discussed in the section entitled "Factors That May
Affect Future Results" and those appearing elsewhere in this Form 10-Q. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The Company
assumes no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such
forward-looking statements.
Overview
We were incorporated in December 1994 and, from inception until June 1996,
our operations consisted primarily of various start-up activities, including
development of technologies central to our business, recruiting personnel and
raising capital. In 1995, we developed our initial technology, which enables the
delivery of Internet-based services to wireless telephones. In 1996, we
introduced and deployed our first products based on this technology. We first
recognized license revenues in August 1996, and generated license revenues of
approximately $80,000, $522,000 and $5.2 million for the fiscal years ended June
30, 1997, 1998 and 1999, respectively, and $24.8 million for the nine months
ended March 31, 2000. We incurred net losses of approximately $99.5 million for
the nine months ended March 31, 2000 and $8.0 million, $10.6 million and $20.8
million for the fiscal years ended June 30, 1997, 1998 and 1999, respectively.
As of March 31, 2000, we had an accumulated deficit of approximately $141.5
million.
To provide a worldwide standard for the delivery of Internet-based services
over mass-market wireless telephones, we formed the WAP Forum in close
cooperation with Ericsson, Motorola and Nokia, the world's three largest
manufacturers of wireless telephones. In February 1998, the WAP Forum published
technical specifications for application development and product
interoperability based substantially on Phone.com's technology and on Internet
standards. Leading network operators, telecommunications device and equipment
manufacturers and software companies worldwide have sanctioned the
specifications promulgated by the WAP Forum.
We generate revenues from licenses, maintenance and support services and
consulting services. We receive license revenues primarily from licensing our
UP.Link Server Suite and related server-based software products directly to
network operators and indirectly through value-added resellers. Maintenance and
support services revenues also include engineering and support services provided
to wireless telephone manufacturers. Consulting services revenues are derived
from consulting services provided to network operator customers either directly
by us or indirectly through resellers.
In September 1999, we introduced MyPhone, our mobile Internet portal
platform. We continue to expect to incur significant additional expenses in
developing and commercializing our MyPhone wireless Internet portal framework
software and our related communications applications as well as sales and
marketing and research and development expenses. We expect to incur these costs
and expenses in advance of generating revenues from this service and cannot be
certain that our business model for the MyPhone service will result in
sufficient revenues to achieve profitability.
In October 1999, we completed the acquisition of the outstanding share
capital of APiON Telecoms Ltd. ("APiON"), a company based in Belfast, Northern
Ireland. APiON is a provider of WAP software products to GSM network operators
in Europe and has expertise in GSM Intelligent Networks, wireless data and WAP
technology. In connection with this transaction, we acquired all of the
outstanding shares of capital stock of APiON in exchange for an aggregate of
approximately 2,393,026 shares of our common stock. A portion of these shares
are held in escrow for a period of one year to indemnify us against potential
liabilities of APiON and its former shareholders.
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In addition, we also agreed to issue cash and common stock to current and
former employees of APiON. Current employees of APiON received cash in the
aggregate amount of approximately $2.5 million, less applicable withholdings for
taxes and insurance, upon the closing of the Company's secondary offering in
November 1999, and will receive shares of common stock equal in value to
approximately $2.5 million, less applicable withholdings for taxes and
insurance, on each of the first two anniversaries of the closing of the APiON
acquisition, subject to their continued employment. Former employees of APiON
who were engaged in APiON's services business, which we did not acquire in the
transaction, received cash in the aggregate amount of approximately $2.2
million, less applicable withholdings for taxes and insurance, upon the closing
of the Company's secondary offering in November 1999, and will receive shares of
common stock equal in value to approximately $4.3 million, less applicable
withholdings for taxes and insurance, on the anniversary of the closing of the
APiON acquisition, subject to forfeiture upon the occurrence of certain events.
In connection with the APiON acquisition, we recorded goodwill and other
intangible assets of approximately $243.6 million and deferred stock-based
compensation of approximately $5.1 million, to be amortized over a three-year
period and a two-year period, respectively, which will significantly increase
our net loss for the foreseeable future. We also recorded expense of $110,000
relating to in-process research and development in connection with the
acquisition. In addition, we expect that operating expenses will increase as a
result of the acquisition, due primarily to the additional personnel and the
costs of operating a European subsidiary. For example, as a result of the
addition of APiON's technical, sales and customer engineering personnel, we
expect that research and development expenses and sales and marketing expenses
may increase by as much as $5 million in the aggregate for the fiscal year ended
June 30, 2000.
In October 1999 we also acquired substantially all of the assets of Angelica
Wireless ApS ("Angelica"), including all software technology, intellectual
property and certain customer agreements, and excluding the assumption of
liabilities. Angelica is a developer of WAP software products targeted for
customers in Europe which are complementary to our MyPhone mobile internet
portal software. Total consideration paid, including direct acquisition costs,
aggregated $2.0 million. In addition, we also agreed to issue 16,000 shares of
common stock with an aggregate value of approximately $1.7 million to employees
of Angelica, subject to certain forfeiture conditions dependent on continued
employment. The acquisition was accounted for as a purchase with the results of
Angelica included from the acquisition date. The excess of the purchase price
over the fair value of tangible net assets acquired in the amount of $2.0
million has been attributed to goodwill and is being amortized on a
straight-line basis over 3 years. In connection with the acquisition, the
Company recorded deferred stock-based compensation in the amount of $1.7
million, which is being amortized on an accelerated basis over the vesting
period of 36 months, consistent with the method described in FASB Interpretation
No. 28.
On February 8, 2000, we acquired AtMotion Inc. ("AtMotion"), an emerging
provider of Voice Portal technology. Our intention is to integrate AtMotion's
technology to voice-enable both our MyPhone mobile portal and our UP.Link
Server Suite. In connection with the acquisition, we acquired all of the
outstanding common and redeemable convertible preferred stock of AtMotion in
exchange for 2,280,287 common shares. We also assumed all of the outstanding
options and warrants of AtMotion. Total consideration given aggregated
approximately $287.2 million. The stock-for-stock transaction was accounted
for using purchase accounting. The excess of the purchase price over the fair
value of tangible net assets acquired amounted to approximately $286.6
million, with $243.4 million attributable to goodwill, $42.5 million
attributable to developed technology and $655,000 attributable to assembled
workforce. The intangible assets are being amortized on a straight-line basis
over an estimated useful life of 3 years. Amortization of goodwill and other
intangible assets is expected to significantly increase our net loss for the
foreseeable future. We expect to incur significant additional expenses in
developing, integrating and commercializing the acquired technology, as well
as sales and marketing and research and development expenses. We expect to
incur these costs and expenses in advance of generating revenues and cannot be
certain that our business model for the incorporation of the AtMotion
technology will result in significant revenues or profitability.
On March 4, 2000, we acquired Paragon Software Ltd ("Paragon"), a leading
provider of synchronization technology allowing PC-based personal information
to be easily transferred to mobile devices. We plan to extend the Paragon
technology to WAP-based over-the-air synchronization to meet phone users needs
for simpler synchronization of information between the mobile phone, PC
applications, and Internet information services, whether or not the phone
users are on-line.
In connection with the acquisition, we acquired all of the outstanding
common and preferred stock of Paragon in exchange for 3,015,015 shares of
Phone.com common stock and assumed all of the outstanding options of Paragon
for up to 397,672 shares of Phone.com common stock. Total consideration given
aggregated approximately $453.7 million in Company common stock as well as a
cash payment of $3.6 million. An additional $17 million will be paid within
one year, payable in approximately 142,950 common shares of the Phone.com
common stock at the election of the shareholder or in cash with the consent of
Phone.com as well as additional cash payments of $3.9 million to be allocated
among certain employees of Paragon. There were also transaction costs in
connection with the purchase of approximately $11.6 million. The acquisition
was accounted for as a purchase with the results of Paragon included from the
acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to $483.0 million, with $454.5 million
attributable to goodwill, $18.1 million attributable to in-process research
and development, $7.2 million attributable to developed technology, $2.3
million attributable to non-compete agreements and $980,000 attributable to
assembled workforce. The in-process research and development has been expensed
on the acquisition date since the in-process technology has not yet reached
technological feasibility and had no alternative future uses. The goodwill and
the intangible assets are being amortized on a straight-line basis over an
estimated life of 3 years. Amortization of goodwill and other intangible
assets is expected to significantly increase our net loss for the foreseeable
future. We expect to incur significant additional expenses in developing,
integrating and commercializing the acquired technology, as well as sales and
marketing and research and development expenses. We expect to incur these
costs and expenses in advance of generating revenues and cannot be certain
that our business model from the incorporation of the Paragon technology will
result in significant revenues or profitability.
The in-process research and development expensed in our acquisition of
Paragon represented the estimated fair value based on risk-adjusted cash flows
related to the incomplete research and development project. At the time of the
acquisition, the project was considered to be 40% complete. The estimated fair
value of the in-process research and development was arrived at by an
independent valuation which forecasted total in-process project revenues
expected from sales of the first generation of the in-process product and
removed 9% of those revenues to account for core technology to be leveraged by
the in-process product to arrive at net total in-process project revenues. Net
total in-process project revenues were then reduced by 60% for the incomplete
portion of the product to arrive at net in-process revenues. Net in-process
revenues were then adjusted by deducting operating expenses, cash flow
adjustments and other items to arrive at forecasted net returns based on the
completed portion of the in-process technology. The net returns thus arrived at
were then discounted to a present value at a discount rate of 25%. We expect to
complete development of this project during fiscal 2001, at a total cost to
complete of approximately $395,000. Though the Company currently expects that
the acquired in-process technology will be successfully developed, there can be
no assurance that commercial or technical viability of this product will be
achieved. Furthermore, future industry developments, changes in other product
offerings or other developments may cause the Company to alter or abandon these
plans.
On February 14, 2000, we entered into a definitive agreement to acquire
Onebox.com, Inc. ("Onebox"), a communications application service provider
offering users unified email, voicemail, fax, and wireless-enabled communication
applications. In connection with the acquisition, which was completed April 14,
2000, we agreed to the issuance of up to approximately 6.5 million shares of
the Company's common stock associated with a value of approximately $800 million
in exchange for all of the outstanding common stock and preferred stock of
Onebox, and the assumption of options and warrants. We expect to incur
approximately $20 million for transaction costs relating to the acquisition.
The stock-for-stock transaction will be accounted for using purchase accounting
and is subject to customary closing conditions. Amortization of goodwill and
other intangible assets is expected to significantly increase our net loss for
the forseeable future. We expect to incur significant additional expenses in
developing, integrating and commercializing the acquired technology, as well as
sales and marketing and research and development expenses. We expect to incur
these costs and expenses in advance of generating revenues and cannot be certain
that our business model for the incorporation of the Onebox technology will
result in significant revenues or profitability.
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Our future success depends on our ability to increase revenues from sales of
products and services to new and existing network operator customers. If the
market for Internet-based services via wireless telephones develops more slowly
than expected, then our business would be materially and adversely affected. In
addition, because there is a relatively small number of network operators
worldwide, any failure to sell our products to network operator customers
successfully could result in a shortfall in revenues that could not be readily
offset by other revenue sources.
Our business strategy also relies to a significant extent on the widespread
propagation of UP.Browser-enabled telephones through our relationships with
network operators and wireless telephone manufacturers. In order to encourage
adoption of UP.Browser-enabled wireless telephones, we license our UP.Browser
software to wireless telephone manufacturers free of per-unit royalties and
other license fees and provide maintenance and support services for an annual
flat fee.
Effective July, 1 1998, the Company adopted SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9. SOP 97-2, as amended,
generally requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair value of the
elements.
The Company licenses its UP.Link Server Suite and related server-based
software products to network operators through its direct sales force and
indirectly through its channel partners. The Company's license agreements do not
provide for a right of return. Allowances for future estimated warranty costs
are provided at the time revenue is recognized. Licenses can be purchased under
a perpetual license model either on an as-deployed basis or on a prepaid basis,
or alternatively under a quarterly time-based license model under which no
perpetual license is acquired. For licenses purchased on an as-deployed basis,
license revenue is generally recognized quarterly as subscribers are activated
to use the services that are based on the Company's UP.Link Server Suite and
related server-based software products. For license purchased on a prepaid
basis, prepaid license fees are recognized under either subscription accounting
due to the Company's commitment to provide standards-compliant products for each
license covered by the prepaid arrangement or ratably over the period that
maintenance and support services are expected to be provided. For customers that
license the Company's products under the quarterly time-based license model,
revenues are recognized over the respective quarterly term based on the number
of the customer's subscribers using the services that are based on the Company's
products. Subscriptions are recognized ratably over the contractual term of the
prepaid arrangement ( i.e. the date the prepaid license expire if not used),
generally 12 to 30 months, commencing at the beginning of the month delivery and
acceptance occur by the network operator. The Company recognizes its other
prepaid licenses, including the related maintenance and support services
provided to network operators, ratably over the lesser of the estimated life of
the software or the contractual term of the arrangement, generally 12 to 30
months, commencing at the beginning of the month delivery and acceptance occur
by the network operator. Revenues from consulting services provided to network
operators are recognized as the services are performed.
The Company recognizes revenues from UP.Browser agreements with wireless
telephone manufacturing ratably over the period during which the services are
performed, generally one year. The Company provides its wireless telephone
manufacturer customers with support associated with their efforts to port its UP
Browser software to their wireless telephones, software error corrections, and
new releases as they become commercially available.
Deferred revenue was $63.0 million as of March 31, 2000, comprised of $57.1
million in prepaid fees charged to wireless network operators and $5.9 million
in prepaid maintenance and other service fees charged to wireless telephone
manufacturers. Although deferred revenues increased from $46.6 million as of
December 31, 1999, we expect that deferred revenue will decline in the long term
as network operators deploy services based on our products. Deferred revenues
relating to prepayments by wireless network operators as of March 31, 2000 in
the amount of approximately $39 million will be recognized over the next
fifteen months. The remainder of deferred revenues relating to wireless network
operators will generally be recognized over the next twelve to thirty months.
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We expect that our gross profit on revenues derived from sales through
indirect channel partners will be less than the gross profit on revenues from
direct sales. Our success, in particular in international markets, depends in
part on our ability to increase sales of our products and services through
value-added resellers and to expand our indirect distribution channels. In
addition, our agreements with our distribution partners generally do not
restrict the sale of products that are competitive with our products and
services, and each of our partners can cease marketing our products and services
at their option.
International sales of products and services accounted for 72% and 62% of our
total revenues for the quarters ended March 31, 2000 and 1999, respectively. We
expect international sales to continue to account for a significant portion of
our revenues, although the percentage of our total revenues derived from
international sales may vary. Risks inherent in our international business
activities include:
. failure by us and/or third parties to develop localized content and
applications that are used with our products;
. costs of localizing our products for foreign markets;
. difficulties in staffing and managing foreign operations;
. longer accounts receivable collection time;
. political and economic instability;
. fluctuations in foreign currency exchange rates;
. reduced protection of intellectual property rights in some foreign
countries;
. contractual provisions governed by foreign laws;
. export restrictions on encryption and other technologies;
. potentially adverse tax consequences; and
. the burden of complying with complex and changing regulatory requirements.
Since early 1997, we have invested substantially in research and development,
marketing, domestic and international sales channels, professional services and
our general and administrative infrastructure. These investments have
significantly increased our operating expenses, contributing to net losses in
each fiscal quarter since our inception. Our limited operating history makes it
difficult to forecast future operating results. Although our revenues have grown
in recent quarters, our revenues may not increase at a rate sufficient to
achieve and maintain profitability, if at all. We anticipate that our operating
expenses will increase substantially in absolute dollars for the foreseeable
future as we expand our product development, sales and marketing, professional
services and administrative staff. Even if we were to achieve profitability in
any period, we may not sustain or increase profitability on a quarterly or
annual basis.
RESULTS OF OPERATIONS
License Revenues
License revenues increased from $1.3 million for the three months ended March
31, 1999 to $11.8 million for the three months ended March 31, 2000, and
increased from $1.5 million for the nine months ended March 31, 1999 to $24.8
million for the nine months ended March 31, 2000. The increase in license
revenues was primarily due to the recognition of revenues associated with the
licensing of our products to AT&T Wireless Services and Sprint in the United
States, DDI and IDO in Japan, Shinsegi Telecom in Korea, Cegetel/SFR in France
and other recently licensed network operators in Europe, Korea and Hong Kong.
Maintenance and Support Services Revenues
Maintenance and support services revenues increased from $1.5 million for the
three months ended March 31, 1999 to $3.9 million for the three months ended
March 31, 2000, and increased from $3.8 million for the nine months ended March
31, 1999 to $9.4 million for the nine months ended March 31, 2000. The increase
in maintenance and support services revenues was attributable primarily to
increased demand for maintenance and engineering support services by an
increased number of wireless telephone manufacturers, and to a lesser extent
from increased maintenance and support services provided to wireless network
operators.
Consulting Services Revenues
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Consulting services revenues increased from $814,000 for the three months
ended March 31, 1999 to $2.9 million for the three months ended March 31, 2000,
and increased from $1.4 million for the nine months ended March 31, 1999 to $5.8
million for the nine months ended March 31, 2000. The increase in consulting
services revenues was primarily due to the increased number of wireless network
operators who have licensed our technology and engaged us to perform integration
services relating to their commercial launches of our technology.
Cost of License Revenues
Cost of license revenues consists primarily of third-party license and
support fees. Cost of license revenues increased from $84,000 for the three
months ended March 31, 1999 to $567,000 for the three months ended March 31,
2000, and increased from $172,000 for the nine months ended March 31, 1999 to
$1.1 million for the nine months ended March 31, 2000. The growth in cost of
license revenues was attributable primarily to the increase in license revenues.
As a percentage of license revenues, cost of license revenues for the three
months ended March 31, 1999 and 2000 was 7% and 5%, respectively. Cost of
license revenues as a percentage of license revenues for the nine months ended
March 31, 1999 and 2000 was 11% and 4%, respectively. The decrease as a
percentage of license revenues was attributable primarily to higher license
revenues for the three and nine months ended March 31, 2000 and to the
amortization of fixed maintenance fees relating to third party software
licenses. We expect that cost of license revenues will increase as a percentage
of license revenues stemming from the acquisition of Onebox and the inclusion of
its costs associated with the operation of its data center in cost of license
revenues.
Cost of Maintenance and Support Services Revenues
Cost of maintenance and support services revenues consists of compensation
and related overhead costs for personnel engaged in the delivery of
installation, training and support services to network operators, and
engineering and support services to wireless telephone manufacturers. The
engineering and support services performed for wireless telephone manufacturers
includes assistance relating to integrating our UP.Browser software into the
manufacturers' wireless telephones. Cost of maintenance and support services
revenues increased from $767,000 for the three months ended March 31, 1999 to
$2.6 million for the three months ended March 31, 2000, and from $1.9 million
for the nine months ended March 31, 1999 to $6.9 million for the nine months
ended March 31, 2000. As a percentage of maintenance and support service
revenues, cost of maintenance and support services revenues for the three months
ended March 31, 1999 and 2000 was 53% and 66%, respectively. Cost of maintenance
and support services revenues as a percentage of the related revenues for the
nine months ended March 31, 1999 and 2000 was 50% and 73%, respectively. The
margin decreases associated with the growth in cost of maintenance and support
services revenues were attributable primarily to an increase in personnel
dedicated to support a larger number of wireless telephone manufacturer
customers and to increased staffing in anticipation of growth in the number of
network operator customers. We anticipate that the cost of maintenance and
support services revenues will increase in absolute dollars in future operating
periods.
Cost of Consulting Services Revenues
Cost of consulting services revenues consists of compensation and independent
consultant costs for personnel engaged in our consulting services operations and
related overhead. Cost of consulting services revenues increased from $511,000
for the three months ended March 31, 1999 to $1.7 million for the three months
ended March 31, 2000, and increased from $646,000 for the nine months ended
March 31, 1999 to $3.4 million for the nine months ended March 31, 2000. As a
percentage of consulting services revenues, cost of consulting services revenues
for the three months ended March 31, 1999 and 2000 was 63% and 58%,
respectively. Cost of consulting services revenues as a percentage of the
related revenues for the nine months ended March 31, 1999 and 2000 was 46% and
59%, respectively. For the comparative three-months periods, the increase in
margins reflects a higher mix of consulting services performed on a time and
materials basis, while the decrease in margins for the comparative nine-month
periods reflects a higher mix of consulting services under fixed contractual
arrangements. Gross profit on consulting services revenues is impacted by the
mix of company personnel and independent consultants assigned to projects. The
gross profit we achieve is also impacted by the contractual terms of the
consulting assignments we undertake, and the gross profit on fixed price
contracts typically is more susceptible to fluctuation than contracts
performed on a time-and-materials basis. We anticipate that the cost of
consulting services revenues will
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increase in absolute dollars as we continue to invest in the growth of our
consulting services operations.
Research and Development Expenses
Research and development expenses consist primarily of compensation and
related costs for research and development personnel. Research and development
expenses increased 227% from $3.5 million, or 98% of revenues, for the three
months ended March 31, 1999, to $11.4 million, or 61% of revenues, for the three
months ended March 31, 2000. Research and development expenses increased 198%
from $8.4 million, or 125% of revenues, for the nine months ended March 31,
1999, to $25.1 million, or 63% of revenues, for the nine months ended March 31,
2000. These increases were attributable primarily to the addition of personnel
in our research and development organization associated with product
development. We expect to continue to make substantial investments in research
and development and anticipate that research expenses will continue to increase
in absolute dollars. In particular, we anticipate that research and development
expenses will increase significantly due to product development efforts for the
MyPhone service and the addition of research and development personnel in
connection with the acquisitions of APiON, AtMotion, Paragon and Onebox.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel, sales commissions, marketing programs,
public relations, promotional materials, travel expenses and trade show exhibit
expenses. Sales and marketing expenses increased 334% from $2.6 million, or 74%
of revenues, for the three months ended March 31, 1999, to $11.4 million, or 61%
of revenues, for the three months ended March 31, 2000. Sales and marketing
expenses increased 238% from $6.5 million, or 97% of revenues, for the nine
months ended March 31, 1999, to $22.0 million, or 55% of revenues, for the nine
months ended March 31, 2000. These increases resulted from the addition of
personnel in our sales and marketing organizations, reflecting our increased
selling effort to develop market awareness of our products and services. We
anticipate that sales and marketing expenses will increase in absolute dollars
as we increase our investment in these areas. In addition, we expect that sales
and marketing expenses will increase as a result of the addition of sales and
marketing personnel in connection with the acquisitions of APiON, AtMotion,
Paragon and Onebox.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related
expenses, accounting, legal and administrative expenses, professional service
fees and other general corporate expenses. General and administrative expenses
increased 211% from $1.1 million, or 31% of revenues, for the three months ended
March 31, 1999, to $3.4 million, or 18% of revenues, for the three months ended
March 31, 2000. General and administrative expenses increased 197% from $2.7
million, or 41% of revenues, for the nine months ended March 31, 1999, to $8.1
million, or 20% of revenues, for the nine months ended March 31, 2000. These
increases were due primarily to the addition of personnel performing general and
administrative functions, additional expenses in connection with our operation
as a public company and, to a lesser extent, legal expenses associated with
increased product licensing and patent activity. We expect general and
administrative expenses to increase in absolute dollars as we add personnel and
incur additional expenses related to the anticipated growth of our business, the
management of our international operations and our operation as a public
company.
Stock-Based Compensation
Stock-based compensation expense totaled $280,000 and $1.9 million for the
three months ended March 31, 1999 and 2000, respectively, and totaled $784,000
and $3.6 million for the nine months ended March 31, 1999 and 2000,
respectively. Some stock options granted and restricted stock sold during the
fiscal years ended June 30, 1998 and June 30, 1999 have been deemed to be
compensatory. Total deferred stock-based compensation associated with these
equity arrangements amounted to $2.4 million related to stock options granted
and restricted stock issued from October 1997 through March 2000. These amounts
are being amortized over the respective vesting periods of these equity
arrangements in a manner consistent with Financial Accounting Standards Board
Interpretation No. 28. The amortization of deferred stock-based compensation for
these equity arrangements was $280,000 and $138,000 for the three months ended
March 31, 1999 and 2000, respectively, and
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$784,000 and $562,000 for the nine months ended March 31, 1999 and 2000,
respectively. We expect amortization in the remainder of fiscal 2000 of
approximately $0.1 million and $0.4 million, $0.2 million and $0.1 million in
the fiscal years ending June 30, 2001, 2002 and 2003, respectively, relating to
the amortization of the deferred stock-based compensation associated with stock
options granted and restricted stock issued from October 1997 through March
2000. In connection with our acquisition of APiON in October 1999, we recorded
additional deferred stock-based compensation of approximately $5.1 million,
which is being amortized over two years in a manner consistent with Financial
Accounting Standards Board Interpretation No. 28. For the three and nine months
ended March 31, 2000, we recognized stock-based compensation expense related to
APiON in the amount of $955,000 and $1.6 million, respectively, and we expect
amortization in the remainder of fiscal 2000 of approximately $1.0 million,
and $2.1 million and $0.4 million in the fiscal years ending June 30, 2001 and
2002, respectively. In connection with our acquisition of Angelica in October
1999, we recorded additional deferred stock-based compensation of
approximately $1.7 million, which is being amortized over three years in a
manner consistent with Financial Accounting Standards Board Interpretation No.
28. For the three months and nine months ended March 31, 2000, we recognized
stock-based compensation expense related to Angelica in the amount of $307,000
and $511,000, respectively, and we expect amortization in the remainder of
fiscal 2000 of approximately $0.3 million, and $0.7 million and $0.2 million
in the fiscal years ending June 30, 2001 and 2002, respectively. In November
1999 a stock option award was made to a new employee at a price discounted
from the then-current fair market value of our stock, giving rise to deferred
stock-based compensation in the amount of $2.8 million, which is being
amortized over four years in a manner consistent with Financial Accounting
Standards Board Interpretation No. 28. For the three and nine months ended
March 31, 2000 we recognized stock-based compensation expense related to this
award in the amount of $457,000 and $912,000, respectively, and we expect
amortization in the remainder of fiscal 2000 of approximately $0.3 million,
and $0.9 million, $0.4 million and $0.2 million in the fiscal years ending
June 30, 2001, 2002 and 2003, respectively.
Amortization of Goodwill and Intangible Assets and In-Process Research and
Development
Amortization of goodwill and intangible assets relating to our October 1999
acquisitions of APiON and Angelica and our acquisitions of AtMotion in February
2000 and Paragon in March 2000 aggregated $49.3 million for the three-month
period ended March 31, 2000 and $62.9 million for the nine-month period ended
March 31, 2000. In connection with the APiON acquisition, we recorded goodwill
and other intangible assets of approximately $243.6 million which is being
amortized on a straight-line basis over a three-year period. We also recorded an
immediate expense of $110,000 relating to in-process research and development in
connection with the APiON acquisition. In connection with the Angelica
acquisition, we recorded goodwill of $2.0 million, which is being amortized on a
straight-line basis over a three-year period. In connection with the AtMotion
acquisition, we recorded goodwill and other intangible assets of approximately
$286.6 million which is being amortized on a straight-line basis over a
three-year period. In connection with the Paragon acquisition, we recorded
goodwill and other intangible assets of approximately $464.9 million which is
being amortized on a straight-line basis over a three-year period. We also
recorded an immediate expense of $18.1 relating to in-process research and
development in connection with the Paragon acquisition. We anticipate that the
amortization of goodwill and intangible assets will increase significantly due
to the acquisition of Onebox, which was completed April 14, 2000.
Interest and Other Income, Net
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Net interest and other income is comprised primarily of interest earned on
cash and cash equivalents and short-term investments, offset by interest expense
related to obligations under capital leases and our equipment loan. Net interest
and other income increased from $359,000 to $7.2 million for the three months
ended March 31, 1999 and 2000, respectively, and increased from $1.1 million to
$12.8 million for the nine months ended March 31, 1999 and 2000, respectively.
The increases were due primarily to increased cash balances as a result of our
secondary public offering in November 1999, our initial public offering in June
1999 and our private placement financing in March 1999.
Income Taxes
Income tax expense was $710,000 and $170,000 for the three months ended March
31, 1999 and 2000, respectively, and $710,000 and $1.1 million for the nine
months ended March 31, 1999 and 2000, respectively. Income tax expense for the
three and nine months ended March 31, 2000 consisted primarily of foreign
withholding taxes.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock which totaled $66.0 million in aggregate
net proceeds through March 31, 1999, through our initial public offering in June
1999 which generated net proceeds of $66.8 million, and through our secondary
public offering in November 1999 which generated net proceeds of approximately
$390 million. As of March 31, 2000, we had $496.9 million of cash, cash
equivalents and short-term investments and working capital of $412.8 million.
Net cash provided by operating activities was $11.4 million for the nine
months ended March 31, 2000. The net cash provided was attributable primarily to
increases in deferred revenue and accrued liabilities of $24.2 million and $10.6
million, respectively, offset in part by the net loss of $99.5 million and after
consideration of non-cash amortization expenses principally relating to
goodwill, in-process research and development, and other intangibles as a result
of the acquisitions of Paragon, AtMotion, APiON and Angelica.
Net cash used for investing activities was $361.8 million for the nine months
ended March 31, 2000, primarily reflecting net purchases of short-term
investments, purchases of property and equipment and cash paid for acquisitions.
Net cash provided by financing activities was $394.4 million for the nine
months ended March 31, 2000, primarily reflecting the net proceeds from our
secondary public offering in November 1999.
As of March 31, 2000, our principal commitments consisted of obligations
outstanding under operating leases and our equipment loans and capital lease
obligations. On March 30, 2000, we entered into a lease for approximately
280,000 square feet of office space in Redwood City, California that is under
construction and is expected to be completed in the year 2001. Lease terms
require a base rent of $3.25 per square foot as provided by the lease agreement
and will increase by 3.5% annually on the anniversary of the initial month of
the commencement of the lease. The lease term is for a period of twelve years
from the commencement date of the lease. The agreement requires that we will
provide a letter of credit in the amount of $16.5 million. The lease further
requires that we pay leasehold improvements which are expected to be at least
$15 million over the next year. We also expect to increase capital expenditures
and lease commitments consistent with our anticipated growth in operations,
infrastructure and personnel in international markets.
We believe that our current cash, cash equivalents and short-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months. If cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or debt securities or to obtain a credit
facility. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and terms of any debt could impose
restrictions on our operations. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders, and
additional financing may not be available in amounts or on terms acceptable to
us, if at all. If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned product development and marketing
efforts, which could harm our business, financial condition and operating
results.
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Year 2000 Readiness Disclosure
With the changeover to the year 2000, the Company did not experience any
disruption to its operations, as a result of the issues associated with the
limitations of the programming code in many existing computer systems, whereby
the computer systems may not properly recognize or process date-sensitive
information. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. There can be no assurance
that there will not be future complications arising from Year 2000 issues.
The Company's program for addressing Year 2000 concerns included an
assessment and evaluation of internal systems, which resulted in testing and
remediation efforts for Year 2000 compliance. In addition, the Company evaluated
its customers, vendors and service providers to determine the extent to which
the Company was vulnerable to any failure by these third-party providers and to
ascertain their readiness for the Year 2000.
The total estimated cost of assessing Year 2000 issues is difficult to
determine with accuracy, but total costs did not have a material adverse impact
on the Company's operating results or financial condition. Although the Company
believes that it has successfully addressed any significant disruption from Year
2000, it will continue to monitor all critical systems for the appearance of
delayed complications or disruptions, as well as continue to monitor its
suppliers and customers.
Factors That May Affect Future Results
In addition to the other information in this report, the following factors
should be considered carefully in evaluating the Company's business and
prospects.
Our future profitability is uncertain because we have a limited operating
history.
Because we commenced operations in December 1994 and commercially released
our first products in June 1996, we only have a limited operating history on
which you can base your evaluation of our business. We may not continue to grow
or achieve profitability. We face a number of risks encountered by early stage
companies in the wireless telecommunications and Internet software industries,
including:
. our need for network operators to launch and maintain commercial services
utilizing our products;
. the uncertainty of market acceptance of commercial services utilizing our
products;
. our substantial dependence on products with only limited market
acceptance to date;
. our need to introduce reliable and robust products that meet the demanding
needs of network operators and wireless telephone manufacturers;
. our need to expand our marketing, sales, consulting and support
organizations, as well as our distribution channels;
. our ability to anticipate and respond to market competition;
. our need to manage expanding operations; and
. our dependence upon key personnel.
Our business strategy may not be successful, and we may not successfully
address these risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
We may not achieve or sustain our revenue or profit goals.
Because we expect to continue to incur significant product development, sales
and marketing, and administrative expenses, we will need to generate significant
revenues to become profitable and sustain profitability on a quarterly or annual
basis. We may not achieve or sustain our revenue or profit goals, and our
ability to do so depends on a number of factors outside of our control,
including the extent to which:
. there is market acceptance of commercial services utilizing our products;
. our competitors announce and develop, or lower the prices of, competing
products; and
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. our strategic partners dedicate resources to selling our products and
services.
As a result, we may not be able to increase revenue or achieve profitability
on a quarterly or annual basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
Our quarterly operating results are subject to significant fluctuations, and our
stock price may decline if we do not meet expectations of investors and
analysts.
Our quarterly revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter due to a number of factors, some
of which are outside of our control. These factors include, but are not limited
to:
. delays in market acceptance or implementation by our customers of our
products and services;
. changes in demand by our customers for additional products and services;
. our lengthy sales cycle, our concentrated target market and the potentially
substantial effect on total revenues that may result from the gain or loss
of business from each incremental network operator customer;
. introduction of new products or services by us or our competitors;
. delays in developing and introducing new products and services;
. changes in our pricing policies or those of our competitors or customers;
. changes in our mix of domestic and international sales;
. risks inherent in international operations;
. changes in our mix of license, consulting and maintenance and support
services revenues; and
. changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation.
Our sales cycle, which is lengthy--typically between six and twelve
months--contributes to fluctuations in our quarterly operating results. Many
factors outside our control add to the lengthy education and customer approval
process for our products. For example, many of our prospective customers have
neither budgeted expenses for the provision of Internet-based services to
wireless subscribers nor specifically dedicated personnel for the procurement
and implementation of our products and services. Further, the emerging and
evolving nature of the market for Internet-based services via wireless
telephones may lead prospective customers to postpone their purchasing
decisions.
Most of our expenses, such as employee compensation and lease payments for
facilities and equipment, are relatively fixed. In addition, our expense levels
are based, in part, on our expectations regarding future revenues. As a result,
any shortfall in revenues relative to our expectations could cause significant
changes in our operating results from quarter to quarter. Due to the foregoing
factors, we believe period to period comparisons of our revenue levels and
operating results are not meaningful. You should not rely on our quarterly
revenues and operating results to predict our future performance.
We may be unable to successfully integrate AtMotion,Paragon or Onebox into our
business or achieve the expected benefits of the acquisitions.
Our acquisitions of AtMotion and Paragon, which were completed in February
2000 and March 2000, respectively, and our acquisition of Onebox, which was
completed in April 2000, will require integrating the products, business and
operations of these companies with our company. We may not be able to
successfully assimilate the personnel, operations and customers of these
companies into our business. Additionally, we may fail to achieve the
anticipated synergies from the acquisitions, including product integration,
marketing, product development, distribution and other operational synergies.
The integration process may further strain our existing financial and
managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from our core business
objectives. In addition, we are not experienced in managing significant
facilities or operations in geographically distant areas. Finally, we cannot be
certain that we will be able to retain these companies' key employees.
Any future acquisitions of companies or technologies may result in disruptions
to our business and/or the distraction of our management.
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To date we have completed acquisitions of five companies, APiON, Angelica
Wireless, AtMotion, Paragon and Onebox. We may acquire or make investments in
other complementary businesses and technologies in the future. We may not be
able to identify other future suitable acquisition or investment candidates, and
even if we do identify suitable candidates, we may not be able to make these
acquisitions or investments on commercially acceptable terms, or at all. If we
do acquire or invest in other companies, we may not be able to realize the
benefits we expected to achieve at the time of entering into the transaction. In
any future acquisitions we will likely face the same risks as discussed above
with respect to the integration of the businesses of AtMotion, Paragon and
Onebox. Further, we may have to incur debt or issue equity securities to pay for
any future acquisitions or investments, the issuance of which could be dilutive
to our existing stockholders.
Our sales cycle is long, and our stock price could decline if sales are delayed
or cancelled.
Quarterly fluctuations in our operating performance are exacerbated by our
sales cycle, which is lengthy, typically between six and twelve months, and
unpredictable. Because our products represent a significant capital investment
for our customers, we spend a substantial amount of time educating customers
regarding the use and benefits of our products and they in turn spend a
substantial amount of time performing internal reviews and obtaining capital
expenditure approvals before purchasing our products. Any delay in sales of our
products could cause our quarterly operating results to vary significantly from
projected results, which could cause our stock price to decline.
Our success depends on acceptance of our products and services by network
operators and their subscribers.
From inception through March 31, 2000, we have generated a significant
portion of our total cumulative revenues from fees paid to us by wireless
telephone manufacturers that embed our browser in their wireless telephones.
However, our future success depends on our ability to increase revenues from
sales of our UP.Link Server Suite and related server-based software and services
to new and existing network operator customers and on market acceptance of new
products and services, including our MyPhone wireless Internet portal framework
and related server-based communications applications software products, and we
may not be able to achieve widespread adoption by these customers. This
dependence is exacerbated by the relatively small number of network operators
worldwide. To date, we currently have only a limited number of network operator
customers that have implemented and deployed services based on our products. We
cannot assure you that network operators will widely deploy or successfully
market services based on our products, or that large numbers of subscribers will
use these services. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
The market for the delivery of Internet-based services through wireless
telephones is rapidly evolving, and we may not be able to adequately address
this market.
The market for the delivery of Internet-based services through wireless
telephones is rapidly evolving and is characterized by an increasing number of
market entrants that have introduced or developed, or are in the process of
introducing or developing, products that facilitate the delivery of
Internet-based services through wireless telephones. As a result, the life cycle
of our products is difficult to estimate. We may not be able to develop and
introduce new products, services and enhancements that respond to technological
changes or evolving industry standards on a timely basis, in which case our
business would suffer. In addition, we cannot predict the rate of adoption by
wireless subscribers of these services or the price they will be willing to pay
for these services. As a result, it is extremely difficult to predict the
pricing of these services and the future size and growth rate of this market.
Our network operator customers face implementation and support challenges in
introducing Internet-based services via wireless telephones, which may slow
their rate of adoption or implementation of the services our products enable.
Historically, network operators have been relatively slow to implement new
complex services such as Internet-based services. In addition, network operators
may encounter greater customer service demands to support Internet-based
services via wireless telephones than they do for their traditional voice
services. We have limited or no control over the pace at which network operators
implement these new services. The failure of network operators to introduce and
support services
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utilizing our products in a timely and effective manner could harm our business.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
To date, we have relied on sales to a small number of customers, and the failure
to retain these customers or add new customers may harm our business.
To date, a significant portion of our revenues in any particular period has
been attributable to a limited number of customers, comprised primarily of
network operators and wireless telephone manufacturers. We believe that we will
continue to depend upon a limited number of customers for a significant portion
of our revenues for each quarter for the foreseeable future. Any failure by us
to capture a significant share of those customers could materially harm our
business. For example, during the fiscal year ended June 30, 1999, AT&T Wireless
Services accounted for approximately 17% of our total revenues, and DDI
Corporation accounted for approximately 14% of our total revenues. For the nine
months ended March 31, 2000, DDI Corporation and AT&T Wireless Services
accounted for 21% and 7%, respectively, of our total revenues. The foregoing
calculations are based on revenues derived from direct and indirect sales to
these customers.
If wireless telephones are not widely adopted for mobile delivery of
Internet-based services, our business could suffer.
We have focused our efforts on mass-market wireless telephones as the
principal means of delivery of Internet-based services using our products. If
wireless telephones are not widely adopted for mobile delivery of Internet-based
services, our business would suffer materially. Mobile individuals currently use
many competing products, such as portable computers, to remotely access the
Internet and email. These products generally are designed for the visual
presentation of data, while wireless telephones historically have been limited
in this regard. If mobile individuals do not adopt wireless telephones as a
means of accessing Internet-based services, our business would suffer. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
If widespread integration of browser technology does not occur in wireless
telephones, our business could suffer.
Because our current UP.Link Server Suite and related server-based software
offers enhanced features and functionality that are not currently covered by the
specifications promulgated by the WAP Forum, subscribers currently must use
UP.Browser-enabled wireless telephones in order to fully utilize these features
and functionality. Additionally, we expect that future versions of our UP.Link
Server Suite and related server-based software will offer features and
functionality that are compatible with the specifications promulgated by the WAP
Forum. Our business could suffer materially if widespread integration of
UP.Browser or WAP-compliant third party browser software in wireless telephones
does not occur. All of our agreements with wireless telephone manufacturers are
nonexclusive, so they may choose to embed a browser other than ours in their
wireless telephones. We may not succeed in maintaining and developing
relationships with telephone manufacturers, and any arrangements may be
terminated early or not renewed at expiration. In addition, wireless telephone
manufacturers may not produce products using UP.Browser in a timely manner and
in sufficient quantities, if at all. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
Our strategy for the MyPhone service is subject to uncertainties, and we may not
be able to generate sufficient revenues to achieve profitability.
In September 1999, we announced our MyPhone service. We offer MyPhone as an
OEM service to enable network operators to create branded mobile Internet
portals for their subscribers, and we do not currently intend to develop our
own branded portal site. We have limited experience in developing mobile
Internet portals, and we may not be successful in executing our business
strategy for the MyPhone service. The success of MyPhone will depend on a
number of factors, including the adoption of MyPhone by network operators, our
ability to establish strong relationships with content and information service
providers, our ability to provide compelling applications and services through
MyPhone and the acceptance by
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wireless subscribers of the MyPhone service. Developing these capabilities and
commercializing this service will require us to incur significant additional
expenses, including costs relating to operating the portal, as well as sales and
marketing and research and development expenses. We expect to incur these costs
and expenses in advance of generating revenues from this service. Furthermore,
our business model for MyPhone is new and evolving. Even if we are successful in
executing this strategy, we cannot be certain that our business model for the
MyPhone service will result in sufficient revenues to achieve profitability.
The market for our products and services is highly competitive.
The market for our products and services is becoming increasingly
competitive. The widespread adoption of open industry standards such as the WAP
specifications may make it easier for new market entrants and existing
competitors to introduce products that compete with our software products. In
addition, a number of our competitors, including Nokia, have announced or are
expected to announce enhanced features and functionality as proprietary
extensions to the WAP protocol. Furthermore, some of our competitors, such as
NTT, have introduced or may introduce services based on proprietary wireless
protocols that are not compliant with the WAP specifications.
We expect that we will compete primarily on the basis of price, time to
market, functionality, quality and breadth of product and service offerings. Our
current and potential competitors include the following:
. Wireless equipment manufacturers, such as Ericsson and Nokia;
. Microsoft;
. Wireless Knowledge, a joint venture of Microsoft and Qualcomm as well as a
similar European joint venture of Microsoft and Ericsson;
. Systems integrators, such as CMG plc, and software companies, such as
Oracle Corporation;
. Wireless network operators, such as NTT DoCoMo; and
. Providers of Internet software applications and content, electronic
messaging applications and personal information management software
solutions.
In particular, Microsoft Corporation has announced its intention to introduce
products and services that may compete directly with our UP.Link, UP.Browser and
UP.Application products. In addition, Microsoft has announced that it intends to
enable its Windows CE operating system to run on wireless handheld devices,
including wireless telephones. Microsoft has announced its own browser, called
Mobile Explorer, for these devices. Furthermore, Nokia is marketing a WAP server
to corporate customers and content providers. This WAP server is designed to
enable wireless telephone subscribers to directly access applications and
services provided by these customers, rather than through gateways provided by
network operators' WAP servers. If Nokia's WAP server is widely adopted by
corporate customers and content providers, it could undermine the need for
network operators to purchase WAP servers. Many of our existing competitors, as
well as potential competitors, have substantially greater financial, technical,
marketing and distribution resources than we do.
As we enter new markets and introduce new services, such as the MyPhone
service, we will face additional competitors. As we enter the Unified Messaging
market, we will face competition from established voicemail providers such as
Comverse, and Internet-based unified messaging providers such as Critical Path.
In the Portal Framework market, a number of companies have introduced products
and services relating to mobile portals that compete with our MyPhone service.
These existing and potential competitors may include telecommunications
companies such as Lucent Technologies, traditional Internet portals such as AOL,
InfoSpace, Microsoft and Yahoo!, Internet infrastructure software companies and
several private mobile Internet portal companies. Our Fonesync synchronization
product will face competition from Motorola's TrueSync product, and product from
Puma, as well as from emerging synchronization companies such as Fusion One.
Our software products may contain defects or errors, and shipments of our
software may be delayed.
The software we develop is complex and must meet the stringent technical
requirements of our customers. We must develop our products quickly to keep pace
with the rapidly changing Internet software and telecommunications markets.
Software products and services as complex as ours are likely to contain
undetected errors or defects, especially when first introduced or when new
versions are released. We have in the past experienced delays in releasing some
versions of our products until software problems were corrected. Our products
may not be free from errors or defects after commercial shipments have begun,
which could result in the rejection of our products and damage to our
reputation, as well
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as lost revenues, diverted development resources, and increased service and
warranty costs, any of which could harm our business.
We depend on recruiting and retaining key management and technical personnel
with telecommunications and Internet software experience.
Because of the technical nature of our products and the dynamic market in
which we compete, our performance depends on attracting and retaining key
employees. In particular, our future success depends in part on the continued
services of each of our current executive officers. We currently maintain key
person life insurance policies for Alain Rossmann, our Chief Executive Officer,
and Charles Parrish, our Executive Vice President. Competition for qualified
personnel in the telecommunications and Internet software industries is intense,
and finding qualified personnel with experience in both industries is even more
difficult. We believe that there are only a limited number of persons with the
requisite skills to serve in many key positions, and it is becoming increasingly
difficult to hire and retain these persons. Competitors and others have in the
past, and may in the future, attempt to recruit our employees.
We may fail to support our anticipated growth in operations.
To succeed in the implementation of our business strategy, we must rapidly
execute our sales strategy and further develop products and expand service
capabilities, while managing anticipated growth by implementing effective
planning and operating processes. If we fail to manage our growth effectively,
our business could suffer materially. To manage anticipated growth, we must:
. continue to implement and improve our operational, financial and management
information systems; for example, we are currently in the process of
implementing Oracle financial software;
. hire, train and retain additional qualified personnel;
. continue to expand and upgrade core technologies; and
. effectively manage multiple relationships with various network operators,
wireless telephone manufacturers, content providers, applications developers
and other third parties.
Our systems, procedures and controls may not be adequate to support our
operations, and our management may not be able to achieve the rapid execution
necessary to exploit the market for our products and services.
Our success, particularly in international markets, depends in part on our
ability to maintain and expand our distribution channels.
Our success depends in part on our ability to increase sales of our products
and services through value-added resellers and systems integrators and to expand
our indirect distribution channels. If we are unable to maintain the
relationships that we have with our existing distribution partners, increase
revenues derived from sales through our indirect distribution channels, or
increase the number of distribution partners with whom we have relationships,
then we may not be able to increase our revenues or achieve profitability.
We expect that many network operators in international markets will require
that our products and support services be supplied through value-added resellers
and systems integrators. Thus, we expect that a significant portion of
international sales will be made through value-added resellers and systems
integrators, and the success of our international operations will depend on our
ability to maintain productive relationships with value-added resellers and
systems integrators.
In addition, our agreements with our distribution partners do not restrict
the sale by them of products and services that are competitive with our products
and services, and each of our partners generally can cease marketing our
products and services at their option and, in some circumstances, with little
notice and with little or no penalty.
We depend on others to provide content and develop applications for wireless
telephones.
In order to increase the value to customers of our product platform and
encourage subscriber demand for Internet-based services via wireless telephones,
we must successfully promote the development of Internet-based applications and
content for this market. If content providers and application developers fail to
create sufficient applications and
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content for Internet-based services via wireless telephones, our business could
suffer materially. Our success in motivating content providers and application
developers to create and support content and applications that subscribers find
useful and compelling will depend, in part, on our ability to develop a customer
base of network operators and wireless telephone manufacturers large enough to
justify significant and continued investments in these endeavors.
If we are unable to integrate our products with third-party technology, such as
network operators' systems, our business may suffer.
Our products are integrated with network operators' systems and wireless
telephones. If we are unable to integrate our platform products with these
third-party technologies, our business could suffer materially. For example, if,
as a result of technology enhancements or upgrades of these systems or
telephones, we are unable to integrate our products with these systems or
telephones, we could be required to redesign our software products. Moreover,
many network operators use legacy, or custom-made, systems for their general
network management software. Legacy systems are typically very difficult to
integrate with new server software such as our UP.Link Server Suite. We may not
be able to redesign our products or develop redesigned products that achieve
market acceptance.
An interruption in the supply of software that we license from third parties
could cause a decline in product sales.
We license technology that is incorporated into our products from third
parties, such as RSA Data Security, Inc. and other companies. Any significant
interruption in the supply of any licensed software could cause a decline in
product sales, unless and until we are able to replace the functionality
provided by this licensed software. We also depend on these third parties to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis, and respond to emerging
industry standards and other technological changes. The failure of these third
parties to meet these criteria could materially harm our business.
We may be unable to adequately protect our proprietary rights.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which could harm our business.
We rely on patent protection, as well as a combination of copyright and
trademark laws, trade secrets, confidentiality provisions and other contractual
provisions, to protect our proprietary rights, but these legal means afford only
limited protection.
We may be sued by third parties for infringement of their proprietary rights.
The telecommunications and Internet software industries are characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of entrants into our market increases, the possibility of
an intellectual property claim against us grows. Any intellectual property
claims, with or without merit, could be time-consuming and expensive to litigate
or settle and could divert management attention from administering our core
business.
In April 2000, we filed a lawsuit against Geoworks Corporation in the U.S.
District Court in San Francisco, California, alleging, and seeking a court
order declaring, that U.S. Patent No. 5,327,529, assigned to Geoworks is not
infringed by Phone.com and that the patent is also invalid and unenforceable.
We took this action in response to Geoworks' attempt to require industry
participants to obtain licenses under the Geoworks patent. We cannot assure
you that Geoworks will not bring an action against us claiming infringement by
us of the Geoworks patent. While we intend to pursue our position vigorously,
the outcome of any litigation is uncertain, and we may not prevail. Should we
be found to infringe the Geoworks patent, we may be liable for potential
monetary damages, and could be required to obtain a license from Geoworks. If
we were unable to obtain a license on commercially reasonable terms, we may
not be able to proceed with development and sale of some of our products.
International sales of products is an important part of our strategy, and this
expansion carries specific risks.
International sales of products and services accounted for 72% and 70% of our
total revenues for the three and nine month periods ended March 31, 2000,
respectively. We expect international sales to continue to account for a
significant portion of our revenues, although the percentage of our total
revenues derived from international sales may vary. Risks inherent in our
international business activities include business risks, economic and political
risks, and legal risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview".
Uncorrected year 2000 problems could harm our business.
Even though the date is now past January 1, 2000 and we have not experienced
any immediate adverse impact from the transition to the Year 2000, we cannot
provide assurance
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that our suppliers and customers have not been affected in a manner that is not
yet apparent. In addition, certain computer programs that were date sensitive to
the Year 2000 may not process the Year 2000 as a leap year and any negative
consequential effects remain unknown. As a result, we will continue to monitor
our Year 2000 compliance and the Year 2000 compliance of our suppliers and
customers. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Readiness Disclosure."
We may acquire technologies or companies in the future, and these acquisitions
could result in the dilution of our stockholders and disruption of our business.
We may acquire technologies or companies in the future. Entering into an
acquisition entails many risks, any of which could materially harm our business,
including:
. diversion of management's attention from other business concerns;
. failure to assimilate the acquired company with our pre-existing
business;
. potential loss of key employees from either our pre-existing business or
the acquired business;
. dilution of our existing stockholders as a result of issuing equity
securities; and
. assumption of liabilities of the acquired company.
Our stock price, like that of many companies in the Internet and
telecommunications software industries, may be volatile.
Since our initial public offering in June 1999, our stock price has
experienced significant volatility. We expect that the market price of our
common stock also will fluctuate in the future as a result of variations in our
quarterly operating results. These fluctuations may be exaggerated if the
trading volume of our common stock is low. In addition, due to the
technology-intensive and emerging nature of our business, the market price of
our common stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order; and
. changes in estimates of our financial performance or changes in
recommendations by securities analysts.
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring stockholder
approval.
Our executive officers and directors and their respective affiliates,
currently own a significant portion of our outstanding common stock.
Accordingly, these stockholders may, as a practical matter, be able to exert
significant influence over matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combinations. This concentration could have the effect of delaying or
preventing a change in control.
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could discourage a takeover.
Provisions of our certificate of incorporation and bylaws and Delaware law
may discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These provisions include the following:
. establishing a classified board in which only a portion of the total board
members will be elected at each annual meeting;
. authorizing the board to issue preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
27
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Hedging Instruments
We transact business in various foreign currencies and, accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
To date, the effect of changes in foreign currency exchange rates on revenues
and operating expenses have not been material. Substantially all of our revenues
are earned in U.S. dollars. Operating expenses incurred by our U.K., Danish and
Japanese subsidiaries are denominated primarily in U.K. pounds sterling, Danish
kroner and Japanese yen, respectively.
We currently do not use financial instruments to hedge operating expenses in
the U.K., Denmark or Japan denominated in their respective local currency. We
intend to assess the need to utilize financial instruments to hedge currency
exposures on an ongoing basis.
We do not use derivative financial instruments for speculative trading
purposes, nor do we currently hedge our foreign currency exposure to offset the
effects of changes in foreign exchange rates.
Fixed Income Investments
Our exposure to market risks for changes in interest rates relates primarily
to corporate debt securities. We place our investments with high credit quality
issuers and, by policy, limit the amount of the credit exposure to any one
issuer.
Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents; all investments with maturities of three
months or greater are classified as available-for-sale and considered to be
short-term investments.
28
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In April 2000, we filed a lawsuit against Geoworks Corporation in the U.S.
District Court in San Francisco, California, alleging, and seeking a court order
declaring, that U.S. Patent No. 5,327,529, assigned to Geoworks is not infringed
by Phone.com and that the patent is also invalid and unenforceable. We took this
action in response to Geoworks' attempt to require industry participants to
obtain licenses under the Geoworks patent. We cannot assure you that Geoworks
will not bring an action against us claiming infringement by us of the Geoworks
patent. While we intend to pursue our position vigorously, the outcome of any
litigation is uncertain, and we may not prevail. Should we be found to infringe
the Geoworks patent, we may be liable for potential monetary damages, and could
be required to obtain a license from Geoworks. If we were unable to obtain a
license on commercially reasonable terms, we may not be able to proceed with
development and sale of some of our products.
Item 2. Changes in Securities and Use of Proceeds.
In June 1999, in connection with the Company's initial public offering, a
Registration Statement on Form S-1 (No. 333-75219) was declared effective by the
Securities and Exchange Commission, pursuant to which 9,200,000 shares of the
Company's Common Stock were offered and sold for the account of the Company at a
price of $8.00 per share, generating gross offering proceeds of $73.6 million.
The managing underwriters were Credit Suisse First Boston Corporation,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp Piper
Jaffray Inc. After deducting approximately $5.2 million in underwriting
discounts and $1.4 million in other related expenses, the net proceeds of the
offering were approximately $67 million.
In November 1999, in connection with the Company's secondary public offering,
a Registration Statement on Form S-1 (No. 333-89879) was declared effective by
the Securities and Exchange Commission, pursuant to which 3,041,500 shares of
the Company's Common Stock were offered and sold for the account of the Company
at a price of $135.00 per share, generating gross offering proceeds of
$410,602,500. The managing underwriters were Credit Suisse First Boston
Corporation, Goldman, Sachs & Co., Hambrecht & Quist, BancBoston Robertson
Stephens Inc., U.S. Bancorp Piper Jaffray Inc., and Bank of America Securities
LLC. After deducting approximately $19.2 million in underwriting discounts and
$974,000 in other related expenses, the net proceeds of the offering were
approximately $390 million.
The Company has not yet used the funds from the initial or secondary public
offerings, and the net proceeds have been invested in investment grade, interest
bearing securities. The Company intends to use such remaining proceeds for
capital expenditures, including the acquisition of computer and communication
systems, and for general corporate purposes, including working capital to fund
increased accounts receivable and inventory levels.
Item 3. Defaults Upon Senior Securities - Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Ex-10.19 Lease Agreement dated February 4, 2000 for
offices at Pacific Shores Center by and between
Registrant and Pacific Shores Center, LLC.
Ex-27.1 Financial Data Schedule
(b) Reports on Form 8-K
(1) On February 24, 2000, Phone.com, Inc. filed a report on
Form 8-K to report that it had consummated its
acquisition of AtMotion, Inc.
(2) On March 17, 2000, Phone.com, Inc. filed a report on
Form 8-K to report that it had consummated its
acquisition of Paragon Software (Holdings) Limited, a
private limited company incorporated in England and
Wales.
(3) On April 24, 2000, Phone.com, Inc. filed a report on
Form 8-K/A to provide certain financial information as
required in conjunction with its acquisition of
AtMotion, Inc.
(4) On May 12, 2000, Phone.com, Inc. filed a report on Form
8-K/A to provide certain financial information as
required in conjunction with its acquisition of Paragon
Software (Holdings) Limited.
(5) On May 15, 2000, Phone.com, Inc. filed a report on Form
8-K to report that it had consummated its acquisition
of Onebox, Inc.
29
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Phone.com, Inc.
By: /s/ ALAN BLACK
--------------------------------------------
Alan Black
Vice President of Finance and
Administration, Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
Date: May 15, 2000
30
<PAGE>
EXHIBIT 10.19
TRIPLE NET BUILDING LEASE
Between
PACIFIC SHORES CENTER LLC,
as
LESSOR
and
PHONE.COM, INC.
a California corporation
as
LESSEE
for
PREMISES
at
Pacific Shores Center
Building 9
Redwood City, California
<PAGE>
ARTICLE I
---------
PARTIES
-------
Section 1.01. Parties. This Lease, dated for reference purposes, and
----------------------
effective as of February 4, 2000, is made by and between PACIFIC SHORES CENTER
LLC, or assignee (provided that such assignee is an entity controlled or
managed, directly by Jay Paul) ("Lessor") and PHONE.COM, INC., a California
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 five stories tall and will consist of approximately two
hundred seventy-nine thousand five hundred eighty-four (279,584) 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 provided that, Lessee shall have the
right, to be exercised prior to Commencement Date, to measure the "as-built"
Building to confirm that the aforesaid dripline methodology was accurately
utilized by Lessor's architect. The Buildings 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 is commonly
known as Building 9 - 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, provided further, that
Lessor will continue to maintain the baseball and soccer fields and the
amenities/athletic facility or replacement items of like kind for so long as
Lessor is legally able to do so during the Lease Term. Lessor further reserves
the right to establish, repeal and amend from time to time rules and regulations
for the use of the Common Area (provided that, to the extent that any conflict
between any new Rules and Regulations and this Lease (including the Rules and
Regulations attached hereto as Exhibit "L") would materially and adversely
affect Lessee's use of the Premises, this Lease shall govern, and to grant
reciprocal easements or other rights to use the
2
<PAGE>
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 and amenities/athletic facility, as well as baseball and soccer
fields, 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 Tenant in common
with others.
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. 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 Buildings 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 Buildings 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," and further provided that
all revisions to the plans and specifications which may materially and adversely
affect the use, accessibility, safety or design of the Premises shall be subject
to the review and (unless imposed by law or any governmental agency) consent of
Lessee, which shall not be unreasonably withheld, conditioned or delayed,
provided further that any delay to the construction schedule caused by such
review and giving or withholding of consent shall be Lessee Delay.
(b) Construction of Shell Buildings. 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.
3
<PAGE>
(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. Notwithstanding the foregoing, Lessee may select a
general contractor other than Lessor's General Contractor to construct the
Tenant Improvements by giving written notice to Lessor on or before April 1,
2000, provided that (i) such general contractor has sufficient financial
strength and experience in constructing first class quality improvements of the
type to be constructed in the Premises to reasonably satisfy Lessor and any
lender whose loan is secured by the Project or any part thereof and, (ii) Lessee
agrees in such notice that the Tenant Improvements identified on Exhibit N
hereto as "Early Construction Improvements" shall be constructed by Lessor's
General Contractor to facilitate construction of the balance of the Tenant
Improvements by the Lessee selected general contractor (that the Early
Construction Improvements shall retain concurrent status as Tenant Improvements,
the cost of which is to be charged to the Tenant Improvement Allowance), and
(iii) such general contractor is ready, willing and able and agrees to construct
the Tenant Improvements in accordance with Lessor's General Contractor's
construction schedule, and (iv) any failure by such Lessee selected general
contractor to construct the Tenant Improvements in accordance with Lessor's
General Contractor's construction schedule shall be Lessee Delay. If Lessor's
General Contractor constructs the Tenant Improvements, or if Lessee selects a
general contractor other than Lessor's General Contractor, but Lessor's General
Contractor nonetheless contracts with Lessor to construct the "Early
Construction Improvements," in each case the contract shall be a guaranteed
maximum price contract based upon the successful bids of subcontractors and/or
negotiated prices as provided in Section 2.04(f). The total compensation to the
General Contractor under such contract shall be equal to a contractor's fee not
to exceed an amount equal to 2.5% of the contract (provided that a contractor's
fee shall not be payable for change orders required due to coordination errors
caused by the General Contractor or any of its subcontractors) and an amount not
to exceed an amount equal to 2 1/2% of the contract for general conditions plus
an amount equal to .75% of the contract for insurance.
(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 Tenant Improvements no later
than June 6, 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 paid by Lessee. Based on this information, Lessee shall cause
the General Contractor to 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 fourteen (14) days thereafter. The
Working Drawings and Budget must be approved by Lessor and Lessee (neither of
whom shall unreasonably withhold or delay such consent) in writing and must
provide for Tenant Improvements 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 ("GMP") contract with the General Contractor for
the construction of the Tenant Improvements, and any
4
<PAGE>
additional costs for Tenant Improvements in excess of the GMP contract shall
be Lessor's responsibility except for Lessee initiated change orders which
shall be Lessee's responsibility.
(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.
(f) Tenant Improvement Allowance. Lessor shall provide to Lessee a
----------------------------
semi-improved "cold" shell facility as described in Exhibit "D" attached and a
Tenant Improvement Allowance of $27.50 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 first three (3) months of the
construction schedule (together with the cost of any Tenant Improvements
already made), with Lessor's construction lender to be held in an escrow
account. Until the Tenant Improvements are completed, Lessee shall deposit, on
the first day of the third calendar month of the construction schedule,
Lessee's share of the amount budgeted for the following three (3) months and
on the first day of the sixth calendar month of the construction schedule
Lessee's share of all remaining budgeted amounts. 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 supervision fee of 4% of the
Budget (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. At least thirty (30) days prior to such
-------------------------
date that is estimated by Lessor to be forty-five (45) days prior to the
Commencement Date, Lessor shall notify Lessee of the date that is estimated to
be forty-five (45) days prior to the Commencement Date. Lessor shall provide
Lessee access to the Premises during the forty-five (45) day period prior to the
estimated Commencement Date ("Lessee's Fixturing Period") for the purpose of
installing furnishings and equipment, e.g. security system, furniture system and
phone and data
5
<PAGE>
system, provided, that Lessee and Lessee's employees and 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.
(i) Construction of Offsite and Onsite Improvements. In addition to the
-----------------------------------------------
Building Shell and Tenant Improvements, and concurrently with its construction
schedule Lessor shall construct both offsite and onsite improvements required
as a condition to the Certificate of Occupancy for the Building which are (i)
(onsite) shoreline park, baseball field, soccer field and an
amenities/athletic facility, and (ii) (offsite) Seaport Boulevard improvements
and deep water slough restoration.
(j) Lessee Termination Rights. In the event that either (i) Lessor is not
-------------------------
the fee owner of the Property on or before April 1, 2000, or (ii) Lessor has not
presented Lessee with reasonable evidence on or before June 1, 2000, that it has
closed a loan with one or more lenders and obtained financing in an amount
sufficient to purchase the Property, to complete the construction of the
Building Shell and all onsite and offsite improvements described in subparagraph
(i) above, and to 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 April 1, 2000 or June 15, 2000, as applicable. If Lessee
terminates this Lease in accordance with this paragraph, neither party shall
have any further rights or obligations hereunder.
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 first date on which
Lessee occupies or conducts business at the Premises or (ii) the date on which a
Certificate of Occupancy is issued affecting the Building and the Seaport
Boulevard improvements, the baseball and soccer fields and the
amenities/athletic facility have been substantially completed (the "Commencement
Date") provided that, (A) 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 (B) 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 (C) for each day of delay caused
by any changes to the approved Working Drawings requested by Lessee, or (D) for
each day that any other act or omission by Lessee causes the construction
schedule for Tenant Improvements to be delayed provided that Lessor gives Lessee
written notice of such Lessee Delay within five (5) business days after its
occurrence (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 April 8, 2001 rather than
April 1, 2001, the Commencement Date shall be April 1, 2001 for all purposes,
including payment of Base Rent and Additional Rent. The Lease Term shall
expire, unless sooner terminated or
6
<PAGE>
extended as provided herein, on the date which completes twelve years after
the Commencement Date occurs or is deemed to have occurred, e.g. if the date
on which the Certificate of Occupancy is issued or deemed to be issued for the
Building is April 1, 2001, the Lease Term shall expire on March 31, 2013 and
if that date is April 3, 2001, the Lease Term shall expire on April 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 April 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.
(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 eighty (180) days after the Scheduled
Commencement Date (for a reason other than Lessee Delay or delay excused under
Section 20.01.), 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).
Section 3.02. Option to Extend.
-------------------------------
(a) Exercise. Lessee is given two (2) options to extend the Lease
--------
Term ("Option to Extend"), each for a five (5) year period ("Extended Term")
following the date on which the initial Lease Term of first Extended 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 or the first Extended Term, as the case may
be, ("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 of the first Extended Term, the Option Notice shall be
totally ineffective, and this Lease shall expire on the last day of the initial
Lease Term or the first Extended 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. "Fair Market Rent" shall
mean the effective rate being charged (including periodic adjustments thereto as
7
<PAGE>
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 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 or first Extended Term, as applicable.
(c) Determination of Fair Market Rent.
---------------------------------
(i) Negotiation. If Lessee so exercises an 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 in
question 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
8
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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 or the first Extended Term, as
applicable, (in lieu of "holdover rent" payable under Section 17.09(b)). 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
----------------------
Section 4.01. Base Rent. Lessee shall pay to Lessor as Base Rent an
------------------------
initial monthly installment of Three Dollars and twenty-five Cents ($3.25) 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 the first day of
every thirteenth (13th) calendar month thereafter during the Lease Term, as
shown on Exhibit "E" attached hereto.
Section 4.03. First Payment of Base Rent. If the Commencement Date is
-----------------------------------------
other than the first day of a calendar month, the first installment of Base Rent
shall be paid on the first day of the calendar month immediately succeeding the
Commencement Date and shall include pro rata payment for the calendar month in
which the Commencement Date occurs.
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.
-----------------------------
(a) Defined. 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,
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operating charges, and Common Area facility use privilege charges with respect
to the amenities/athletic facility (in lieu of any separate use charge to
Lessee's employees who use said facility the baseball and soccer fields) 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 4% of the Base Rent. The Management Fee is
due and payable, in advance, with each installment of Base Rent. All of such
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 that have been approved for development which share is presently
determined to be seventeen percent (17%).
(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. Within two (2) business days after the
-------------------------------
first date when Lessor is both the fee owner of the Property and has obtained
financing in an amount sufficient both to purchase the Property and to complete
the construction of the Building Shell, the offsite and offsite improvements
described in subsection 2.04(j) and to fund the Tenant Improvement Allowance,
Lessee shall deposit with Lessor a Security Deposit equal to eighteen (18)
month's of Base Rent in the amount of Sixteen Million, Five Hundred Forty Five
Thousand Dollars and no Cents ($16,545,000) in the form of cash or an
unconditional, irrevocable letter of credit without documents, i.e. no
obligation on Lessor's part to present anything but a sight draft, with Lessor
as beneficiary and providing for payment in San Francisco on presentation of
Lessee's drafts on sight and drawable in whole or in part San Francisco 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 defaults with respect to any
provision of this Lease, including but not limited to the provisions relating to
the condition of the Premises
10
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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 (or a
replacement Letter of Credit in form and substance subject to the same
requirements as the original Letter of Credit) 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 deemed a trustee of same. 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)
business 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.
Section 4.07. Lessee's Right to Review Supporting Data.
--------------------------------------------------------
(1) Exercise of Right by Lessee. Provided that Lessee is not in
---------------------------
default under this Lease and provided further that Lessee strictly complies with
the provisions of this Paragraph, Lessee shall have the right to reasonably
review supporting data for any portion of a Lessor's statement that Lessee
claims is incorrect. In order for Lessee to exercise its right under this
Paragraph, Lessee shall, within thirty (30) days after any such Lessor's
statement is sent, deliver a written notice to Lessor specifying the portions of
the Lessor's statement that are claimed to be incorrect, and Lessee shall
simultaneously pay to Lessor all amounts due from Lessee to Lessor as specified
in the Lessor's statement. Except as expressly set forth in subparagraph 3
below, in no event shall Lessee be entitled to withhold, deduct, or offset any
monetary obligation of Lessee to Lessor under the Lease including, without
limitation, Lessee's obligation to make all Base Rent payments and all payments
for Additional Rent pending the completion of, and regardless of the results of,
any review under this Paragraph. The right to review granted to Lessee under
this Paragraph may only be exercised once for any Lessor's statement, and if
Lessee fails to meet any of the above conditions as a prerequisite to the
exercise of such right, the right of Lessee under this Paragraph for a
particular Lessor's statement shall be deemed waived.
(2) Procedures for Review. Lessee acknowledges that Lessor maintains
---------------------
its records for the Building and Project at its offices in San Francisco, and
Lessee therefore agrees that any review of supporting data under this
Paragraph shall occur at such location. Any review to be conducted under this
Paragraph shall be at the sole expense of Lessee and shall be conducted by an
independent firm of certified public accountants of national standing. Lessee
acknowledges and agrees that any supporting data reviewed under this Paragraph
constitute confidential information of Lessor, which shall not be disclosed to
anyone other than the accountants performing the review and the principals of
Lessee who receive the results of the review. The disclosure of such
11
<PAGE>
information to any other person, whether or not caused by the conduct of
Lessee, shall constitute a material breach of this Lease.
(3) Finding of Error. Any errors disclosed by the review of
----------------
supporting data under this Paragraph shall be promptly corrected, provided
that Lessor shall have the right to cause another review of the supporting
data to be made by an independent firm of certified public accountants of
national standing. In the event of a disagreement between the two accounting
firms, the review that discloses the least amount of deviation from the
Lessor's statement shall be deemed to be correct and its review shall be final
and binding on both Lessor and Lessee. If the results of the review of
supporting data taking into account, if applicable, the results of any
additional review caused by Lessor reveal that Lessee has overpaid obligations
for a preceding period, the amount of such overpayment shall be credit against
Lessee's subsequent installment obligations to pay its share of Additional
Rent. In the event that such results show that Lessee has underpaid its
obligations for a preceding period, the amount of such underpayment shall be
paid by Lessee to Lessor with the next succeeding installment obligation of
Additional Rent or, if the Lease has terminated, in cash within thirty (30)
days after the determination of underpayment is delivered to Lessee. Each
party shall pay the cost and expense of its chosen accounting firm.
(4) Effect of Lessee's Default. In the event that Lessee becomes in
--------------------------
default of its obligations under this Lease at any time during the pendency of
a review of records under this Paragraph, said right to review shall
immediately cease and the matters originally set forth in the Lessor's
statement shall be deemed to be correct.
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 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. 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 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, or (iv) damage, overload or corrode the sanitary sewer system. 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
12
<PAGE>
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 install any equipment or fixtures on or make any penetrations of the
exterior or roof of the Building, provided that Lessee may install rooftop
antennae or other communication devices on the roof of the Building with
Lessor's prior written consent which shall not be unreasonably withheld or
delayed. 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 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, for office use, 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, provided that Lessor represents that the Premises, when
certified for occupancy, may legally be used for general office purposes.
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
13
<PAGE>
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 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 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, that
portion of the Common Area located on the legal parcel 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.
14
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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.
(b) Lessor, at its sole cost and expense, shall repair defects in the
Building Shell, including, exterior walls (including all exterior glass which is
damaged by structural defects in such exterior walls), floors installed as part
of the Building Shell, supporting pillars, structural walls, roof structure and
foundations of the Building and sewer and plumbing systems outside the Building
as well as any defects in the offsite and onsite improvements listed in Section
2.04(i), provided that the need for repair is not caused by Lessee, in which
event Lessor shall repair same, at Lessee's sole cost and expense (to the extent
not insured) and Lessee shall reimburse Lessor for same upon demand. 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
15
<PAGE>
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 refuses or neglects to commence such repairs and/or
maintenance for which Lessee is responsible under this Article VI (including
with respect to that 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 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"), 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 Seventy-five
Thousand Dollars ($75,000) 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 third party
16
<PAGE>
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, 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.
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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 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
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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
Lessee's proportionate share of the premium(s) 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 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 thirty (30) 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. Within ten (10) business days
after Lessee's written request for same, Lessor shall furnish once during any
calendar year, certificates indicating that the property insurance and liability
insurance required to be kept by Lessor is in full force and effect.
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.
19
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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 the active negligence or
willful acts of misconduct of Lessor or its agents, employees or contractors or
which is or could be covered by the insurance Lessor 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 Lessee is required to carry under this
Lease.
(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.
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
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<PAGE>
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, acts of God, strikes and delays
beyond Lessor's control excepted, 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 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 (except to the extent Lessor receives insurance proceeds to
repair damage to same) in or upon the Premises by Lessee.
21
<PAGE>
ARTICLE IX
----------
REAL PROPERTY TAXES
-------------------
Section 9.01. Payment of Taxes. 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 taxes"), 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 a period of time included within the Lease Term 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 at least ten (10) days prior to the
delinquency date for such payment or ten (10) days after Lessee's receipt of the
tax bill, whichever is later. 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 any 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, or any other political
entity or public corporation of this state, levies or assesses against Lessor a
tax, fee, charge or imposition, 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. A good faith estimate of anticipated real property taxes is
attached hereto as Exhibit M.
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,
22
<PAGE>
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.
Section 9.04. Lessee's Right to Contest Real Property Taxes. Lessee at
-------------------------------------------------------------
its sole cost and expense shall have the right, at any time, to seek a reduction
in the assessed valuation of the Premises or to contest any real property taxes
that are to be paid by Lessee with respect to the Premises. If Lessee seeks a
reduction or contests any such real property taxes, the failure on Lessee's part
to pay such real property taxes shall not constitute a default as long as Lessee
complies with the provisions of this Section. Lessor shall not be required to
join in any proceeding or contest brought by Lessee unless the provisions of any
law require that the proceeding or contest be brought by or in the name of
Lessor or any owner of the Premises. In that case Lessor shall join in the
proceeding or contest or permit it to be brought in Lessor's name as long as
Lessor is not required to bear any cost or expense. Lessor, on final
determination of the proceeding or contest, shall immediately pay or discharge
any decision or judgment rendered, together with all costs, fees, charges,
interest, penalties and all other amounts incidental to the decision or
judgment. If Lessor does not pay the real property taxes when due and Lessor
seeks a reduction or contests them as provided in this Section, before the
commencement of such proceeding or contest Lessee shall furnish to Lessor a
surety bond issued by an insurance company qualified to do business in
California provided that said bond and company are both reasonably satisfactory
to Lessor. The amount of the bond shall equal one hundred thirty three percent
(133%) of the total amount of real property taxes in dispute. The bond shall
hold Lessor and the Premises harmless from any damage arising out of the
proceeding or contest and shall insure the payment of any judgment that may be
rendered.
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, provided that, Lessor shall credit Lessee to the extent of
any rental interruption proceeds Lessor receives as a result of such disruption,
failure, lack or shortage of services or utility.
23
<PAGE>
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 which Lessor shall not unreasonably
withhold or delay. 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 (but not necessarily
financial strength as great as that of Lessee), (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
("Affiliate"), 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 reasonable leasing commissions and the cost of any Tenant Improvements
paid by Lessee with respect to such sublease or assignment.
24
<PAGE>
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 to sublease or assign or
otherwise transfer (to anyone other than an Affiliate) 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") for the major portion 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. To determine the new 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 the square feet within the
Building, shall be reduced to reflect Lessee's proportionate share based on the
square feet of the Building retained by Lessee after Lessor's recapture. 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:
(a) The vacation of the Premises by Lessee for a period of time which would
thereafter terminate Lessor's insurance coverage at the Premises or cause an
increase of Lessor's insurance coverage at the Project or which for a period of
more than six consecutive calendar months (other than vacation caused by damage
or destruction and during the repair of same) or
25
<PAGE>
the commission of waste at the Premises or the making of an assignment or
subletting in violation of Article XI;
(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.
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
26
<PAGE>
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 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.
27
<PAGE>
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 by the later
of two (2) days after written notice of such failure is given or five (5) days
after such amount is due and owing, Lessee shall pay to Lessor a late charge
equal to ten percent (10%) 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.
Section 12.05. Impounds. In the event that a late charge is payable
------------------------
hereunder, whether or not collected, for three (3) installments of rent or any
other monetary obligation of Lessee under the terms of this Lease within a
twelve (12) month period, Lessee shall pay to Lessor, if Lessor shall so request
in writing, in addition to any other payments required under this Lease, a
monthly advance installment, payable at the same time as the monthly rent, as
estimated by Lessor, for real property tax and insurance expenses on the
Premises which are payable by Lessee under the terms of this Lease. Such fund
shall be established to insure payment when due, before delinquency, of any or
all such real property taxes and insurance premiums. If the amounts paid to
Lessor by Lessee under the provisions of this paragraph are insufficient to
discharge the obligations of Lessee to pay such real property taxes and
insurance premiums as the same become due, Lessee shall pay to Lessor, upon
Lessor's demand, such additional sums necessary to pay such obligations. All
moneys paid to Lessor under this paragraph may be intermingled with other moneys
of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums.
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
28
<PAGE>
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.
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, provided that Lessee shall have the right to make a separate claim
in the condemnation proceeding, as long as the award payable to Lessor is not
reduced thereby, for (i) the taking of the unamortized or undepreciated value of
any leasehold improvements owned by Lessee that Lessee has the right to remove
at the end of the Lease Term and that Lessee elects not to remove, (ii)
reasonable removal and relocation costs for any leasehold improvements that
Lessee has the right to remove and elects to remove (if condemnor approves of
the removal), and (iii) relocation costs under Government Code section 7262, the
claim for which Lessee may pursue by separate action independent of this Lease.
29
<PAGE>
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 pursuant to Section 6.01(d); 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 "To Lease"
signs for the purposes of reletting during the last twelve (12) 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 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. Lessee shall have the right to
accompany Lessor on any entry, provided that Lessor shall not be required to
give Lessee any notice of an emergency entry and shall not be required to delay
any noticed entry to accommodate Lessee's exercise of its right to so accompany.
ARTICLE XV
----------
ESTOPPEL CERTIFICATE
--------------------
Section 15.01. Estoppel Certificate.
------------------------------------
(a) Either party shall at any time upon not less than fifteen (15) days'
prior written request from the other party execute, acknowledge and deliver to
the other party 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 such party's knowledge, any uncured defaults on the part of the other
party 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) Either party's failure to deliver such statement within such time
shall be conclusive upon the other party (i) that this Lease is in full force
and effect, without modification except as may be represented by the requesting
party in the statement, (ii) that there are no uncured defaults in requesting
party's performance, and (iii) that not more than one month's rent has been paid
in advance.
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<PAGE>
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 (i) the interest of Lessor, and Lessor's successors in interest, in
and to the Premises including any sales proceeds or condemnation awards received
by Lessor from the sale or condemnation of the Premises after said breach and
(ii) any insurance coverage pertaining to such breach provided by policies
caused pursuant to this Lease. 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
------------------
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
31
<PAGE>
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 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
32
<PAGE>
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 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 as to such holding over, then such
occupancy shall be a tenancy from month to month at a monthly Base Rent
equivalent to one hundred fifty percent (150%) 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 all charges owing hereunder
other than rent shall remain in force and effect on said month to month basis.
33
<PAGE>
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 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 which consent is hereby given to the
signage described in Exhibit "G" hereto. 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.
34
<PAGE>
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 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. Each party
shall provide the other with a certified copy of its resolution within ten (10)
days after execution hereof, but failure to do so shall in no manner (i) be
evidence of the absence of authority or (ii) affect the representation or
warranty.
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
35
<PAGE>
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:
"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, licensees, 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. Prior to the expiration or earlier termination of the
Lease, Lessee shall remove from the Project all Hazardous Materials used or
brought onto the Premises during the Lease Term by anyone other than Lessor,
its agents, employees or contractors.
(d) Lessee's and Lessor's Environmental Indemnities. 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
36
<PAGE>
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. Lessor agrees to indemnify and hold Lessee 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 Premises, and/or subsurface or ground water, after the Commencement
Date from an act or omission of Lessor (or Lessor's successor), its agents or
employees.
(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.
(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
Premises.
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.
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. Right of First Offer to Lease Building 10.
---------------------------------------------------------
(a) During the Lease Term, Lessee shall have a right of first offer ("Right
of First Offer") to lease the adjacent Building 10 as shown on Exhibit A
("Building 10") subject to Paragraphs (b) through (g).
37
<PAGE>
(b) At the time Lessee exercises the Right of First Offer: (i) The Lease
must be in full force and effect; (ii) Lessee shall not be in Default under the
Lease; nor shall Lessee be in Default under the Lease at the Commencement Date
(defined in paragraph g(1)) for the Offer Building, (defined in Paragraph c);
and (iii) Lessee's then current financial condition, as revealed by its most
recent financial statements (which shall include quarterly and annual financial
statements, including income statements, balance sheets, and cash flow
statements), must demonstrate that either: (1) Lessee's net worth is at least
equal to its net worth at the time this Lease was signed; or (2) Lessee meets
the financial criteria reasonably acceptable to Lessor.
(c) Lessor shall not lease Building10 to another lessee unless and until
Lessor has first offered Building 10 to Lessee in writing (the "Offer Notice")
and Lessee either rejects such offer or a period of ten (10) business days has
elapsed from the date that Lessor has delivered the Offer Notice without Lessee
having notified Lessor in writing of its acceptance of such Offer Notice and
supplied Lessor with current financial statements pursuant to Paragraph b(3),
which ever event occurs first. The Offer Notice shall contain the following
information: (i) The date on which the Lessor expects Building 10 to become
available; (ii) The Base Rent; (iv) The pro rata share of Additional Rent; and
(v) Such other terms and conditions upon which Lessor wishes to lease Building
10.
(d) If Lessee timely delivers to Lessor, in accordance with the conditions
of this Section, written notice of Lessee's exercise of the Right of First Offer
(along with Lessee's financial statements pursuant to Paragraph b(3)) and Lessor
determines that Lessee meets all of the conditions provided in this Section,
then Building 10 shall be deemed added to the Premises and subject to the then
applicable terms and conditions in the Lease, as modified by the terms and
conditions set forth in the Offer Notice.
(e) If Lessee declines or fails to duly and timely exercise its Right of
First Offer or fails to meet all of the conditions provided in this Section,
Lessor shall thereafter be free to lease the Building 10 in portions or in its
entirety to any third-party tenant at any time without regard to the
restrictions in this Section 17.25 and on whatever terms and conditions Lessor
may decide in its sole discretion, without again complying with all the
provisions of this Section 17.25.
(f) Within ten (10) business days after the Commencement Date for the Offer
Building, Lessor and Lessee shall confirm the foregoing in a written amendment
to the Lease.
(g) This Right of First Offer is personal to the Lessee and shall become
null and void upon the occurrence of an assignment of the Lease or a sublet of
all or a major part of the Premises.
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.
38
<PAGE>
Section 17.27. List of Exhibits.
---------------------------------
Ref. Page
---------
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
EXHIBIT M: Estimate of Real Property Taxes
39
<PAGE>
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: /s/ Jay Paul
-----------------------------
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:
Phone.Com, Inc.
a California corporation _______________________
_______________________
By: /s/ Alain Rossmann (Before Commencement Date)
-----------------------
(Type or print name) Pacific Shores Center
Its: _______________________ Building 9
Redwood City, CA
(After Commencement Date)
40
<PAGE>
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 Boulevard
Suite 120
Santa Clara, California 95054
By: ___________________________
___________________________
(Type or print name)
Its: Executive Vice President
--------------------------
LESSEE'S BROKER: ADDRESS:
Wayne Mascia ___________________________
___________________________
By: ___________________________
___________________________
(Type or print name)
Its: ___________________________
41
<PAGE>
February 10, 2000
Mr. Tim Hennessey
Jay Paul Company
353 Sacramento Street, Suite 1740
San Francisco, CA 94111
Re: Pacific Shores Lease
____________________
[LOGO:phone.com]
Dear Tim:
Enclosed are two (2) execution copies of the Pacific Shores
lease executed by Phone.com. These leases are being sent to
you on the condition that you properly attach the Exhibits
referred to in Exhibit I. Please have executed and initialed
and return one copy to me with the exhibits completed.
If you have any questions, please feel free to call me.
Very truly yours,
/s/ Joseph Chen
Joseph Chen
<PAGE>
EXHIBIT A
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
REAL PROPERTY LEGAL DESCRIPTION,
SITE PLAN AND BUILDING ELEVATIONS
---------------------------------
(See Attached)
<PAGE>
Exhibit A
[MAP Page 1]
<PAGE>
Exhibit A
[MAP Page 2]
<PAGE>
EXHIBIT B
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
SHELL BUILDING PLANS AND SPECIFICATIONS
_______________________________________
(To be provided)
NOTE: Shell Building Plans and Specifications shall be consistent with DES
Development Progress Plans dated February 7, 2000 for (a) exterior skin and (b)
structural steel.
<PAGE>
EXHIBIT C
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
WORK LETTER AGREEMENT FOR TENANT IMPROVEMENTS
AND INTERIOR SPECIFICATION STANDARDS
------------------------------------
This agreement supplements the above referenced Lease executed concurrently
herewith and is as follows:
1. Lessee shall devote such time and may be necessary to enable Lessor to
complete and obtain by the respective dates specified in Section 2.04(d) of the
Lease Lessee's written approval, and approval by appropriate government
authorities, of the final Working Drawings. The Working Drawings, as they may
be modified or provided herein, shall be prepared by Lessor in accordance with
the design specified by Lessee and reasonably approved by Lessor. Lessee shall
be responsible for the suitability, for Lessee's needs and business, of the
design and function of all Tenant Improvements. All improvements to be
constructed by Lessor as shown on the Working Drawings, standard or special,
shall be defined as "Tenant Improvements." All Tenant Improvements materials
shall be of a quality equal to or greater than the quality of materials
described on the Interior Specification Standards attached hereto as Schedule
One.
2. Lessor shall cause General Contractor to complete the construction of
the Tenant Improvements in a good and workmanlike manner and in substantial
accordance with the Working Drawings. Lessor shall not, however, be responsible
for procuring or installing in the Premises any trade fixtures, equipment,
furniture, furnishings, telephone equipment or other personal property
("Personal Property") to be used in the Premises by Lessee, and the cost of such
Personal Property shall be paid by Lessee. Lessee shall conform to all Project
standards in installing any Personal Property and shall be subject to any and
all rules of the site during construction.
3. Payment for the Tenant Improvements shall be pursuant to Section 2.04(g)
of the Lease.
4. Lessee shall, by signing the Working Drawings within the time set forth
in Section 2.04(d) of the Lease, give Lessor authorization to complete the
Tenant Improvements in accordance with such Working Drawings. If Lessee shall
request any change, addition or alteration in the approved Working Drawings,
Lessor shall promptly give Lessee a written
<PAGE>
estimate of the cost of engineering and design services to prepare a change
order (the "Change Order") in accordance with such request and the time delay
expected because of such request. If Lessee, in writing, approves such written
estimate, Lessor shall have the Change Order prepared and Lessee shall
concurrently reimburse Lessor for the cost thereof. Promptly upon the
completion of such Change Order, Lessor shall notify Lessee in writing of the
cost and delay which will be chargeable to Lessee by reason of such change,
addition or deletion. Lessee shall within three (3) business days notify Lessor
in writing whether it desires to proceed with such change, addition or deletion,
and in the absence of such written authorization, the Change Order will be
deemed canceled and Lessee shall be chargeable with any delay in the completion
of the Premises resulting from the processing of such Change Order, including
the three (3) business day approval period.
5. If the completion of the Tenant Improvements in the Premises is delayed
(i) at the request of Lessee, (ii) by Lessee's failure to comply with the
foregoing provisions, (iii) by changes in the work ordered by Lessee or by extra
work ordered by Lessee, or (iv) because Lessee chooses to have additional work
performed by Lessor, then Lessee shall be responsible for all costs and any
expenses occasioned by such delay including, without limitation, any costs and
expenses attributable to increases in labor or materials; and there shall be no
delay in the commencement of Lessee's obligation to pay Rent because of Lessor's
failure to complete the Tenant Improvements on time and any such delay in
completion shall constitute Lessee Delay for purposes of Section 3.01(a) of the
Lease.
Each person executing this Work Letter Agreement certifies that he or she
is authorized to do so on behalf of and as the act of the entity indicated.
Executed as of , at Mountain View (Santa Clara County), California.
[initials]
PACIFIC SHORES CENTER LLC PHONE.COM, Inc.
a California corporation
By: /s/ Jay Paul By: /s/ Alain Rossmann
---------------------- ---------------------------
Jay Paul
---------------------------
Its: Manager (Type or print name)
Its:
----------------------------
By:
----------------------------
----------------------------
(Type or print name)
Its:
----------------------------
<PAGE>
SCHEDULE ONE
TO
EXHIBIT C
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
INTERIOR SPECIFICATION STANDARDS
--------------------------------
ABBREVIATED BUILDING STANDARDS
------------------------------
For Pacific Shores
------------------
Note: The Tenant Improvements shall be a Class "A" and their quality must be at
a minimum, per the following standards:
GENERAL OFFICE
- --------------
CUSTOM CABINETRY
SCOPE: All materials and labor for the construction and installation of
Cabinetry and all related accessories per WIC Standards.
A. Trade Standards: Woodworking Institute of California (WIC) latest edition
Section 15 and 16 for plastic laminated casework and plastic laminated
countertops. Color of plastic laminate to be selected by Architect.
B. All cabinetry to be constructed to "Custom-Grade" Specifications. Cabinetry
to be flush overlay construction.
C. Plastic Laminate: High Pressure thermoset laminated plastic surfacing
material to equal or surpass NEMA LD3, Nevamar, WilsonArt or approved
equal.
1. Countertops, shelf-tops, splashes, and edges: Grade GP 50, 0.050 inches
thick.
2. All other exposed vertical surfaces: Grade GP 28, 0.028 inches thick
3. Semi-exposed backing sheet: Grade CI, 20, 0.020 inches thick
4. Concealed backing sheet: Grade BK 20, 0.020 inches thick
D. Adhesives: Bond surfaces to Type 11 as recommended by Plastic Laminate
Manufacturer.
<PAGE>
E. Hinges: Heavy-duty concealed self-closing hinges. Amount of hinges per Door
per WIC. Stanley or approved equal
F. Door and Drawer Pulls: Wire-pull with 4-inch centers; Dull chrome finish;
Stanley 4483 or approved equal.
G. Drawer slides: Heavy-duty grade with ball-bearings. Stanley, Klein or
approved equal
H. Door Catches: Heavy-duty commercial friction type.
1. Recessed Adjustable Shelf Standards: Aluminum or zinc-plated recessed
type; Knape & Vogt with clips or approved equal.
J. Base and Wall Cabinets including doors: 3/4-inch thick medium-density
particleboard;
1. Conceal all fastenings.
2. Provide clear spaces as required for mechanical and electrical
fittings
3. Plastic laminate and self-edge all shelves.
4. Provide 3/4-inch thick doors and drawer faces.
5. Unless indicated otherwise, all shelving to be adjustable.
6. Provide back and ends on all cabinets.
7. All exposed cabinet faces to be plastic laminated.
K. Countertops and Shelving: 3/4-inch thick medium density particleboard.
Backsplash to be 3/4 inches thick, glued and screwed into top with
scribed edges. Joints in countertop to be not closer that 24 inches from
sinks. Joints shall be shop fitted, spined, glued and mechanically
fastened.
L. Installation of Cabinetry shall be per WIC instructions, Custom Grade.
WOOD DOORS
SCOPE: All materials and labor necessary for the installation of Wood Doors,
required accessories and preparations for hardware.
A. Non-rated Wood Doors: 1-3/4 inch thick, flush, solid core, plain sliced
Birch veneer with Birch edge. Cores may be either of the following: Glued
block Hardwood Core per NWMA or Particleboard Core per NWMA. Manufacturer:
Algoma, Weyerhaeuser, or approved equal.
B. Fire-rated Wood Doors: 1-3/4 inch thick, flush, solid core, plain sliced
Birch face veneer with Birch Edge with mineral core per rating.
Manufacturer: Algoma, Weyerhaeuser, or approved equal. Doors shall have a
permanent UL label.
C. Vision Panels (where applies): Fire rated vision panel where required. Set
in square metal stop to match metal doorstops as provided by doorframe
manufacturer.
D. Doors shall be 8'-0" x 3'-0" leafs typical.
ALUMINUM DOOR AND WINDOW FRAMES
SCOPE: All materials and labor necessary for the installation of Aluminum Door
Frames.
A. Frame Manufacturers: Raco, or Ragland Manufacturing Company, Inc.
B. Door Frames: Non-rated and 20-minute label, Raco "Trimstyle" frame with
Trim 700 (3/8 inch by 1-1/2 inch) with no exposed fasteners.
C. Finish, Door and Window Frame Extrusions, Wall Trim:
1. Painted and oven-cured with "Duralaq" finish.
2. Color: Clear.
3. Finish shall meet or exceed requirements of AAMA Specifications 603.
4. Coat inside of frame profile with bituminous coating to a thickness of
1/16 inch where in contact with dissimilar materials.
DOOR HARDWARE
SCOPE: All materials and labor for the installation of all Door Hardware,
locksets, closers, hinges,
<PAGE>
miscellaneous door hardware.
A. Swinging Door Lockset and Cylinder: Schlage "L" series with lever
handle with 6 pin cylinder.
B. Keyway: Furnish blank keyways to match existing master-key system.
Match existing keyways.
C. Finishes: Satin Chrome, 626 finish. Paint closers to match.
D. Kickplates: 16 gauge stainless steel; 10 inches high: width to equal
door width less 2 inches.
<TABLE>
<CAPTION>
HARDWARE SCHEDULE
Hardware Group A (Typical, rated, single door)
<S> <C> <C> <C>
1 Lockset Schlage L9050PD
1-1/2 pair Butt Hinges Hager BB1279
1 Closer Norton 700 Series
1 Stop Quality (332 @ carpet)
1 Smoke Seal Pemko
Hardware Group B (Typical, rated, closet/service door)
1 Lockset Schlage L9080PD
1-1/2 pair Butt hinges Hager BB1279
1 Closer Norton 700 Series w/ hold-open
1 Stop Quality (332 @ carpet)
1 Smoke Seal Pemko
Hardware Group C (Typical, non-rated door)
1 Lockset Schlage L9050PD
1-1/2 pair Butt hinges Hager BB1279
1 Stop Quality (332 @ carpet)
Hardware Group D (Typical, non-rated, closet/service door)
1 Lockset Schlage L9080PD
1-1/2 pair Butt hinges Hager BB1279
1 Stop Quality (332 @ carpet)
Hardware Group E (Card-access door)
1 Electric Lockset Schlage L9080PDGU
1-1/2 pair Butt hinges Hager BB1279 - NRP
(2 pr @ 8' door)
1 Electric Butt Hager
1 Closer Norton 700 Series w/ hold-open
1 Stop Quality (332 @ carpet)
Hardware Group F (typical, double door)
1 Electric Lockset Schlage L9050PD
3 pair Butt hinges Hager BB1270
1 Auto Flush Bolt Glyn Johnson FB-8
1 Dustproof Strike Glyn Johnson DP2
2 Closer Norton 700 Series
2 Stop Quality (332 @ carpet)
1 Astragal Pemko
1 Coordinator Glyn Johnson
1 Smoke Seal Pemko
</TABLE>
<PAGE>
GLAZING
SCOPE: All materials and labor for the installation of Glass.
A. Manufacturers: PPG Industries, or Viracom, Inc. See glazing schedule
below.
B. Shop prepares all glazing. Edges to have no chips or fissures.
C. Glazing Materials:
1. Safety Glass: ASTM C1048, fully tempered with horizontal tempering.
Condition A uncoated, Type 1 transparent flat, Class 1 clear, Quality
q3 glazing select, conforming to ANSI Z97.1
2. Mirror Glass: Clear float type with copper and silver coating, organic
overcoating, square polished edges, 1/4-inch thick.
3. Wire Glass: Clear, polished both sides, square wire mesh of woven
stainless steel wire 1/2 inch x 1/2 inch grid: 1/4 inch thick.
4. Tempered Glass: 1/4 inch thick, no tong marks. UL rated for 1-hour
rating.
5. Spacers: Neoprene.
6. Tape to be poly-iso-butylene.
D. Schedule:
1. Type A: 1/4-inch thick mirror, annealed, heat strengthened, or full
tempered as required.
2. Type B: 1/4 inch thick clear float glass, annealed, heat strengthened,
or full tempered as required.
3. Type C: 1/4-inch thick wire glass plate, square pattern "Baroque"
LIGHT GAUGE METAL FRAMING
SCOPE: All materials and labor necessary for the installation of metal framing
and related accessories.
A. Structural Studs: 14 gauge punched channel studs with knurled screw-type
flanges, prime-coated steel. Manufacturer: United States Gypsum SJ or
approved equal: Submit cut-sheet of material.
B. Partition Studs: 20 gauge studs with key-hole shaped punch-outs at 24
inches on center. Manufacturer: United States Gypsum ST or approved equal.
C. Fasteners for Structural Studs: Metal screws as recommended by metal system
manufacturer. Weld at all structural connection points.
D. Reinforce framed door and window openings with double studs at each jamb
(flange-to-flange and weld) and fasten to runners with screws and weld.
Reinforce head with 14 gauge double stud same width as wall. Screw and
weld.
E. Provide all accessories as required to fasten metal-framing per
manufacturers recommendations.
F. Provide and install flat-strapping at all structural walls (walls with
concrete footings beneath the walls). Minimum bracing shall be 25% of
structural walls shall be braced with flat-strapping per Manufacturer's
recommendations. Weld at all strap ends and at all intermediate studs.
G. Provide foundation clips at 4'-0" on center at structural walls. Anchor
with 1/2 inch diameter by 10 inch long anchor bolts.
H. Non-structural interior partitions shall be anchored with power-driven
fasteners at 4'-0" on center at the concrete slab.
ACOUSTIC CEILING SYSTEM
SCOPE: All materials and labor for the installation of the Acoustic Ceiling
System including T-bar system, Acoustic Ceiling Panels, Suspension
wiring and fastening devices and Glued-down Ceiling Panels.
<PAGE>
A. Manufacturer: Armstrong, or approved equal. Exposed T-bar system; factory
painted; steel construction; rated for the intermediate duty.
D. Acoustical Tile: "Second Look", conforming to the following:
1. Size: 24 x 48 inches.
2. Thickness: 3/4 inches.
3. Composition: Mineral.
4. NRC Range: .55 to .60.
5. STC Range: 35 to 39.
6. Flame Spread: ASTME84,0-25, UL Label, 25 or under.
7. Edge: Tegular, Lay-in.
8. Surface Color: White.
9. Surface Finish: Factory-applied washable vinyl latex paint.
G. Installation to be per ASTM C636 structural testing. Lateral support for
each 96 square feet of ceiling flared at 45 degrees in 4 directions.
H. Provide clips for panel uplift restraints at all panels, 2 per panel.
GYPSUM WALLBOARD
SCOPE: Provide all materials and labor for the installation of Gypsum Wallboard
including all accessories and finishes.
A. Standard Gypsum Wallboard: ASTM C36; Ends square cut, tapered edges.
B. Fire Restraint Gypsum Wallboard: ASTM C36, 5/8 inches thick Type X. Ends
square cut, tapered edges. See Drawings for locations.
C. Moisture-resistant gypsum wallboard: ASTM C630-90.
D. Joint-reinforcing Tape and Joint Compound: ASTM C475, as manufactured by or
recommended by wallboard manufacturer. Minimum 3 coat application for a
smooth finish.
E. Corner Bead: Provide at all exposed outside corners;
F. L-shaped edge trim: Provide at all exposed intersections with different
materials.
G. All work shall be done in accordance with the USG recommended method of
installation.
1. Finish: smooth.
PAINTING
A. Paint Manufacturers: ICI, Dunn-Edwards Corporation, Kelly Moore.
B. Paint colors shall be selected by the Architect.
C. Painting Schedule: Provide for 4 different color applications
1. P-1: "Field". Color to be selected.
2. P-2: "Accent". Color to be selected.
3. P-3: "Accent". Color to be selected.
4. P-4: "Accent". Color to be selected.
D. Interior Gypsum Wallboard:
1. Primer: Vinyl Wall Primer/Sealer.
2. 1 stand 2nd Coat: Eggshell Acrylic Latex.
E. Metal Framing:
1. Primer: Red Oxide, shop-primed (for non-galvanized) if exposed.
F. Wood Work, Wood Doors:
1. Two coats of transparent finish. Sand lightly between coats with steel
wool.
INSULATION
A. R-15 in exterior walls.
B. R-25 on Roof.
<PAGE>
C. Sound batts in conference, restroom and lobby walls.
ROOF EQUIPMENT
A. Stainless steel mechanical platform and associated access stairs and
guard rail system
B. EIFS roof screen to match detail of exterior GFRC Panel.
FULL HEIGHT GLAZED PARTITION
A. 1/4" glazed partition, in building standard aluminum frame
FINISHES
A. Vinyl Composite Tile: Armstrong stonetex, 12" x 12"
B. Resilient Base: Burke rubber wall base, 4" top set or cove, as appropriate
for VCT or carpet.
C. Window Coverings: Miniblinds, Levelor, color: TBD
D. Carpet:
Option 1: Designweave, Windswept Classic 30 oz. (Direct
glue installation) or equal
Option2: (cut pile) Designweave, Tempest Classic 32 oz. (Direct glue
Upgrade installation) or equal.
Option 3: (cut pile) Designweave, Sabre Classic, 38 oz. (Direct glue
Upgrade installation) or equal.
KITCHEN FIXTURES
A. Sink: Ekkay stainless steel, GECR-2521-L&R, 20 gauge, 25"w x 21 1/4"D x
5 3/8" D, ADA compliant.
B. Kitchen Faucet: American Standard, Silhouette Single control, #4205 series,
spout 9 3/4".
KITCHEN APPLIANCES
A. Dishwasher
Option 1: GE GSD463DZWW, 24" W x 24 3/4" D x 34-35" H, 9 gallons/wash
Option 2: Bosch, SHU5300 series, 5.4 gallons/wash-with water heater
B. Refrigerator:
Full Size: GE, "S" series top-mount, TBX16SYZ, 16.4 cubic feet,
recessed, recessed handles, 28" W x 29 1/8" D x 66 3/4"
H, white, optional factory installed ice-maker.
Under-counter:
Option 1: U-Line, #29R, 3.5 cubic feet, white
Option 2: U-Line, Combo 29FF, Frost Free with factory
installed icemaker, 2.1 cubic feet, white
C. Microwave: GE, Spacemaker II JEM25WY, Midsize, 9 cubic feet, 800 watts,
23 13/16" W x 11 13/16" D x 12 5/16" H
<PAGE>
Option 1: Under counter Mounting Kit, #4AD19-4
Option 2: Accessory Trim Kit # JXB37WN, 26 1/8" W X 18 1/4" H
(built-in application)
D. Garbage Disposal: ISE #77, 3/4" horsepower
E. Water Heater: To be selected by DES.
PUBLIC SPACES
- -------------
FRONT BUILDING LOBBY
Walk off Matts: Design Materials, Sisel, Calcetta #68, Natural, 100%
coir
Floor Tile: 3/8" x 18" x 18" Stone or Marble set in mortar bed in
recessed slab as approved by Owner
Transition Strips: 5/16" x 1 1/2" x random length strips, cherry wood
flooring
Corridor Carpeting: Carpet over pad, Atlas, New Vista or as approved by
Owner
Lobby Ceiling: Suspended gypsum board ceiling, Painted
Building Lobby: Akari shades hanging #J1-9 3/4" x 5'-2" or equal as
Pendant Fixture approved by owner.
Stairs & P & P Railing, Modesto with custom cherry guard rail
Mezzanine Railing: Rep: Oliver Capp (805) 241-8810. Hand and guard railing
P & P Railings, Modesto stainless steel railing with
horizontal spirals and custom cherry guard rail cap by
others, fittings dark gray metallic or equal as
approved by Owner.
BACK BUILDING LOBBY & EMERGENCY STAIRS
Walk off Matts: Design Materials, Sisal, Calcutta #68, Natural, 100%
coir.
Treads & Landings: Carpet covered concrete, as approved by Owner
Stringers, Risers Painted steel stringer, eggshell
& Handrails finish enamel.
Ceiling: Suspended gypsum board ceiling.
ELEVATORS
Cars: (1) 2800 lb, (1) 3500 lb 150 ft/min by Otis
Elevator Doors: Stainless Steel
Elevator
Interior Paneling: Cherry veneer with stainless steel reveals and railing
Elevator Floor: Slate 3/8" x 18" x 18" tile as approved by Owner.
<PAGE>
RESTROOMS
Counter tops: Stone/marble or equal as approved by Owner
Walls at Lavatories: Eggshell finish, latex paint, Benjamin Moore
Floor at Toilets: 2" x 2" matte porcelain ceramic floor tiles, thin
set, Dal-tile.
Walls at Toilets: 2" x 2" matte porcelain ceramic floor tiles, thin
set, Dal-tile.
Ceiling: Suspended gypsum board ceiling.
Toilet compartments:
A. Manufactured floor-anchored metal toilet compartments and wall-
hung urinal screens.
B. Approved Manufacturer, Global Steel Products Corp, or approved
equal.
C Toilet Partitions: Stainless Steel finish.
D. Hardware: Hinges: Manufacturer's standard self-closing type that
can be adjusted to hold door open at any angle up to 90 degrees.
Latch and Keeper: Surface-mounted latch unit, designed for
emergency access, with combination rubber-faced door strike and
keeper. Coat Hook: Combination hook and rubber-tipped bumper. Door
Pull: Manufacturer's standard.
Ceramic Tile
A. Manufacturer: Dal-Tile or approved equal.
B. Size: 4-1/4" x 4-1/4" for walls, 8 x 8 for floors, 3/4" liner
strip as accent.
C. Glaze: Satin glaze for walls, unglazed tile for floors.
D. Color: As selected by Architect.
E. Accessories: Base, corners, coved cap and glazed to
match
F. Wall and floor installation: per applicable TCA
G. Waterproof Membrane: Chloraloy or approved equal:
H. Tile Backer Board: 1/2 inch thick wonderboard
I. Grout: Commercial Portland Cement Grout; Custom Building Products
or approved equal
J. Mortar: Latex-Portland cement mortar; Custom Building Products or
approved equal.
RESTROOM:
Toilet: Kohler/American Standard, commercial quality.
Urinal: Kohler/American Standard, commercial quality.
Lavatory: Kohler/American Standard, undercounter.
Lavatory Faucet: Kroin handicap lavatory faucet #HV1LH, polished chrome.
Soap Dispenser Bobrick, 8226, Lavatory mounted for soaps, 34 fl oz.
Counter:
Toilet accessories:
A. Manufacturer: Bobrick Washroom Equipment, or approved equal.
<PAGE>
B. Schedule: Model numbers used in this schedule are Bobrick (134)
unless otherwise noted.
C. Combination Paper Towel Dispenser/Waste Receptacle: Recessed Model
B-3944, one per restroom #7151 and 7152, and two per restroom
#7050 and 7061.
D. Feminine Napkin Vendor: Recessed, combination napkin/tampon
vendor, Model B-3500 with 25 cent operation, one per each women's
toilet room.
E. Soap Dispenser: Lavatory mounted dispenser, Model B-822, one per
each lavatory.
F. Toilet Paper Dispenser: Surface-mounted, Model JRT, JR Escort,
"In-Sight" by Scott Paper Company, one per stall.
G. Toilet Seat Cover Dispenser: Recessed, wall-mounted, Model B-301,
one per stall.
H. Sanitary Napkin Disposal: Recessed, wall-mounted, Model B-353, one
per each women's handicapped and odd stall.
I. Sanitary Napkin Disposal: Partition-mounted, Model B-354 (serves
two stalls).
J. Grab Bars: Horizontal 36" B6206-36: 42", B62-6-42: one per each
handicapped stall.
K. Mop/Broom Holders: B223-24 (one per janitor closet).
L. Paper Towel Dispensers: Recessed mounted, Model B-359, one at side
wall adjacent to sink.
TENANT CORRIDORS
Walls: Eggshell finish, latex paint, Benjamin Moore.
Floors: Level loop carpet over pad with 4" resilient base as
approved by Owner.
Ceiling 4" x 24" x 3/4" thick fine fissures type mineral fiber,
Armstrong Circus acoustical tile (beveled regular edge)
in a 24" x 24" Donn Fineline suspended grid, white
finish.
Water Fountain: Haws Model #1114 Stainless Steel #4.
Cross Corridor 3'-6" x full height, 20 minute rated, pocket assembly,
Smoke Detector: on magnetic hold opens.
Corridor Carpyen "Berta" 35 cm x 33 cm, engraved curved opaque
Wall Sconce glass, 2 x 7-9W, #G-23 or equal as approved by owner
ELECTRICAL
A. 50 foot candles at working surface.
B. 3 Bulb 2x4 parbolic fixtures
C. 1/2 20 Amp circuit for each hard wall office
D. Electrical Devices: Recessed wall mounted devices with plastic cover plate.
Color: white, multi-gang plate 80400 Series duplex wall outlets.
E. Telephone/Data Outlets: Recessed wall mounted, Standard 2x4 wall box with
3/4" EMT conduit from box to sub out above ceiling walls pull string,
cabling, terminations and cover-plates, color: white, provided by tenants
vendor. Tenant shall furnish telephone backboard.
F. Light Switches: Dual level rocker type, mounted at standard locations, with
plastic cover plate, 5325-W cover plate single switch B0401-W, double
switch B0409-W. Decors by Leviton, colors: white, and will comply with
Title 24 Energy Codes. Decors by Leviton.
<PAGE>
MECHANICAL
A. VAV Reheat system - design/build. Each floor to have a minimum of thirty
zones. Provide reheat boxes on all zones on top floor and at all exterior
zones on lower floor. System shall meet T-24 for ventilation. Design shall
be for 73 deg. Ambient interior temperature and 2 1/2 watts per sq. ft.
min.
FIRE SPRINKLER SYSTEM
As required by NFPA & factory mutual standard hazard, seismically braced.
END
<PAGE>
EXHIBIT D
TO
PACIFIC SHORES CENTER LLC
LEASE TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
COST RESPONSIBILITIES OF LESSOR AND LESSEE
------------------------------------------
FOR SHELL TENANT IMPROVEMENTS
-----------------------------
(See Attached)
<PAGE>
Exhibit D.
----------
COST RESPONSIBILITIES OF LESSOR AND LESSEE
------------------------------------------
A. Lessor is responsible for the construction of the building shell
improvements which shall include the following items.
Soils Engineer
Civil Engineer
Architectural and Structural Engineer
Landscaping
Empty Electrical Conduits will be provided from the street to the
future electrical room for a 2500 Amp. Service 277/480 volt
service capability for each building. The electrical conduits
will be stubbed up above the floor level
Lessor to provide two vertical risers for fire sprinklers.
Testing and Inspection for the shell.
Building Permits for the Shell and exterior Premises.
Utility Connection Fee (Fire Protection).
Area Fees
Construction Insurance
Construction Interest
Construction Taxes
Land Interest (if any)
Temporary Facilities
All site work to include:
Site clearing and grading
Excavating/Fill
Soil compaction
Site drainage
Site utilities
Paving
Curbs and gutters
Sidewalks
Parking lot lights
Curb painting and parking lot striping and markings as required
by the City.
Fences, to include special enclosures for trash
Irrigation System
Lawns and planting
Building Shells to include:
Concrete Formwork
Concrete Reinforcement (if used)
Case in pace concrete (if used)
Metal decking (if used)
<PAGE>
Metal framing (if used)
Rough carpentry as related to the Shell
Millworks as related to Shell
Glue-Lam structure (if used)
Building roof installation
Roofing tiles
Flashing
Drainage Systems for Roof
Roof Pitch Pans
Caulking/Sealants
Exterior Metal Door/Frames related to the Shell
Wood or Glass Doors as designated as related to the Shell
Exterior Shell
Overhead Doors
Anodized Aluminum Windows
Finish Hardware as related to the Shell Doors
Glass Glazing as specific on plans
Storefront if desired
Gutters over front and rear entrances
Exterior Loading Docks as specific on plans
Water Supply stubbed to the ground floor (first floor of each Building
only)
Roof drainage
Gas piping to face of building at First Floor
Telephone and computer conduits between Buildings
All Government fees applying to the exterior premises and shell.
B. The following shall be considered interior improvements costs and shall
be the responsibility of the Lessee subject to the tenant improvement allowance
as provided in the Lease:
Interior Building Permits
Gypsum drywall
Ceramic File or elate Tile in Lobbies
Quarry Tile as specified
Flag Pole
Metal door framing
All interior Wood doors and Hardware
Custom Woodwork
Specialized Security Construction
Interior Glass doors 2nd windows Acoustical Treatment (suspended
ceiling)
Resilient flooring
Any special flooring
Carpeting
Sprayed fire proofing if required by the code on structural
Steel and metal deck surfaces
2
<PAGE>
Lift and Lift Operator
Interior Painting
Wall Coverings including Ceramic Tiles
Grease Interceptor if required
Drapery, Blinds or Shades
Pedestal floors
Toilet Compartments
Demountable partitions
Firefighting devices (Extinguishers)
Toilet and bath accessories
Lift (dock levelers)
Plumbing fixtures, trims and vertical piping
Interior electrical distribution
Lighting
Electrical controls
Electrical Power Equipment
Built in Audio-Visual facilities
Built in Projection screens
Water Treatment Discharge
Sinks in Coffee Rooms
Lunch Room plumbing for vending machines
Specialized security systems
Specialized Halon fire Extinguishing systems
Fire sprinkler head drops and horizontal distribution
Piping off owner-installed vertical risers
Specialized caging
Special piping for Tank Farm (If installed)
Hot water heating system
Cool water system
HVAC units
Ducting controls
Air Tempering Systems
Elevators and elevator pits (Otis Elevator Lessor Specs)
Mechanical platforms, screens and associated roof accessories
Stairs
Electrical service (Lessor to provide exterior conduits)
3
<PAGE>
EXHIBIT E
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
MEMORANDUM
OF
COMMENCEMENT OF LEASE TERM
--------------------------
Pursuant to Article III, Section 3.01, paragraph (a) of the above-
referenced Lease, the parties to said Lease agree to the following:
1. The Commencement Date of the Lease is , 2001 and the Lease Term
commenced on said date. The Expiration Date for the initial Lease
Term is , 2013.
2. The date for commencement of rent for the Building is , 2001.
3. Attached hereto as a part hereof is a true and correct schedule of
Base Rent.
4. The total Rentable Area of the Building is ( ) rentable square
feet.
Each person executing this memorandum certifies that he or she is
authorized to do so on behalf of and as the act of the entity indicated.
Executed as of , 2000 at Redwood City (San Mateo County),
California.
PACIFIC SHORES CENTER LLC PHONE.COM, Inc.
a California corporation
By: By:
----------------------------- -----------------------------
Jay Paul
-----------------------------
Its: Manager (Type or print name)
Its:
-----------------------------
By:
-----------------------------
-----------------------------
(Type or print name)
Its:
------------------------------
<PAGE>
EXHIBIT F
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
SNDA
----
(See Construction And Permanent SNDA Samples Attached)
<PAGE>
RECORDING REQUESTED AND WHEN
RECORDED RETURN TO:
KEYBANK NATIONAL ASSOCIATION
Real Estate Division
Mailcode WA-31-10-5285
700 Fifth Avenue, 52nd Floor
Seattle, WA 98104-5099
Attn:
-------------------
Loan No.
----------------
- --------------------------------------------------------------------------------
SUBORDINATION, ACKNOWLEDGEMENT OF LEASE ASSIGNMENT,
NONDISTURBANCE AND ATTORNMENT AGREEMENT
AND ESTOPPEL CERTIFICATE
(Lease to Deed of Trust)
NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR LEASE BECOMING SUBJECT TO
AND OF LOWER PRIORITY THAN THE LIEN OF THE DEED OF TRUST (DEFINED
BELOW).
THIS AGREEMENT AND CERTIFICATE is made this day of , 1990, between
KEYBANK NATIONAL ASSOCIATION, a national banking association ("Lender")
and , a ("Tenant").
Recitals
A. ("Landlord"), is the owner of real property ("Property")
located in County, California, and legally described on Exhibit A.
B. Tenant is a tenant of a portion of the Property ("Premises") under a
lease ("Lease") with Landlord dated .
C. Lender has agreed to make a loan ("Loan") to Landlord. In connection
therewith, Landlord has executed or proposes to execute, a Construction Deed of
Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing
("Deed of Trust") encumbering the Property and securing, among other things, a
promissory note ("Note") in the principal sum of DOLLARS
($ ), of even date herewith, in favor of Lender, which Note is payable with
interest and upon the terms described therein. The Deed of Trust is to be
recorded concurrently herewith.
D. The Deed of Trust constitutes a present assignment to Lender of all
rights, title, and interest of Landlord under the Lease.
<PAGE>
E. Lender's agreement to make the Loan is conditioned on Tenant's specific
and unconditional subordination of the Lease to the lien of the Deed of Trust
such that the Deed of Trust at all times remains a lien on the Property, prior
and superior to all the rights of Lessee under the Lease, and Tenant's agreement
to attorn to Lender if Lender obtains possession of the Property by foreclosure
or deed in lieu of foreclosure. Tenant is willing to do so in consideration of
the benefits to Tenant from the Loan and the Lease and Lender's agreement not to
disturb Tenant's possession of the Premises under the Lease.
NOW, THEREFORE, Lender and Tenant agree as provided below.
1. Subordination. Tenant hereby intentionally and unconditionally
subordinates the Lease and all of Lessee's right, title and interest thereunder
an in an to the Property to the lien of the Deed of Trust and all of Lender's
rights thereunder, including any and all renewals, modifications and extensions
thereof and agrees that the Deed of Trust and any and all renewals,
modifications and extensions thereof shall unconditionally be an at all times
remain a lien on the Property prior and superior to the Lease. Without limiting
the generality of the foregoing, such subordination shall include all rights of
Tenant in connection with any insurance or condemnation proceeds with respect to
the Premises or Property.
2. Acknowledgment. Tenant understands that Lender would not make the Loan
without this Agreement and the subordination of the Lease to the lien of the
Deed of Trust as set forth herein and that in reliance upon, and in
consideration of, this subordination, specific loans and advances are being
and will be made by Lender and, as part and parcel thereof, specific monetary
other obligations are being and will be entered into which would not be made
or entered into but for reliance upon this subordination. This Agreement is
and shall be the sole and only agreement with regard to the subordination of
the Lease to the lien of the Deed of Trust and shall supersede and cancel, but
only insofar as would affect the priority between the Deed of Trust and the
Lease, any prior agreement as to such subordination, including, without
limitation, those provisions, if any, contained in the Lease which provide for
the subordination of the Lease to a deed or deeds of trust or to a mortgage or
mortgages.
3. Use of Proceeds. Lender, in making disbursement pursuant to the Note,
the Deed of Trust or any loan agreement with respect to the Property, is under
no obligation or duty to, nor has Lender represented that it will, see to the
application of such proceeds by the person or persons to whom Lender disburses
such proceeds, and any application or use of such proceeds for purposes other
than those provided for in such agreement or agreements shall not defeat this
agreement to subordinate in whole or in part.
4. Nondisturbance. Lender agrees that Tenant's possession of the Premises
shall not be disturbed by Lender during the term of the Lease, and Lender shall
not join Tenant in any action or proceeding for the purposes of terminating the
Lease, except upon the occurrence of a default by Tenant under the Lease and the
continuance of such default beyond any cure period given to Tenant under the
Lease.
5. Attornment. If Lender obtains possession of the Property by foreclosure
or deed in lieu of foreclosure, Tenant shall attorn to Lender, be bound to
Lender in accordance with all of the provisions of the Lease for the balance of
the term thereof, and recognize Lender as the landlord
-2-
<PAGE>
under the Lease for the unexpired term of the Lease. Such attornment shall be
effective without Lender being (i) subject to any offsets or defenses or
otherwise liable, for any prior act or omission of Landlord, (ii) bound by any
amendment, modification, or waiver of any of the provisions of the Lease, or by
any separate agreement between Landlord and Tenant relating to the Premises or
Property, unless any such action was taken with the prior written consent of
Lender, (iii) liable for the return of any security or other deposit unless the
deposit has been paid to Lender, (iv) bound by any payment of rent or other
monthly payment under the Lease made by tenant more then one (1) month in
advance of the due date, or (v) bound by any option, right of first refusal, or
similar right of Tenant to Lease any portion of the Property (other than the
Premise) or to purchase all or any portion of the Property. Lender's
obligations as landlord under the Lease after obtaining possession of the
Property by foreclosure or deed in lieu of foreclosure shall terminate upon
Lender's subsequent transfer of its interest in the Property.
6. Termination of Lease. Notwithstanding any other provision of this
Agreement, in the event Lender obtains ownership of the Property by foreclosure
of deed in lieu of foreclosure and the Lease requires the landlord to construct
any improvements on the Premises or Property, the Lease shall terminate unless
(i) Lender delivers written notice to Tenant expressly assuming such obligation
with ten (10) days after the foreclosure sale or acceptance of the deed in lieu
of foreclosure, or (ii) Tenant waives such obligation by delivery of written
notice to Lender within ten (10) days after receiving notice of foreclosure or
deed in lieu of foreclosure.
7. Covenants of Tenant. Tenant covenants and agrees with Lender as
follows:
(a) Tenant shall pay to Lender all rent and other payments otherwise
payable to Landlord under the Lease upon written demand form Lender. the consent
and approval of Landlord to this Agreement shall constitute an express
authorization for Tenant to make such payments to Lender and a release and
discharge of all liability of Tenant to Landlord for any such payments made to
Lender.
(b) Tenant shall enter into no material amendment or modification of
any of the provisions of the Lease without Lender's prior written consent.
(c) Tenant shall not subordinate its rights under the Lease to any
other mortgage deed of trust, or security instrument without the prior written
consent of Lender.
(d) In the event the Lease is rejected or deemed rejected in any
bankrupt proceeding with respect to Landlord, Tenant shall not exercise it
option to treat the Lease as terminated under 11 U.S.C. (S) 365(h), as amended.
(e) Tenant shall not accept any waiver or release of Tenant's
obligations under the Lease by Landlord, or any termination of the lease by
Landlord, without Lender's prior written consent.
(f) Tenant shall promptly deliver written notice to Lender of any
default by Landlord under the Lease. Lender shall have the right to cure such
default within thirty (30) days after the receipt of such notice. Tenant
further agrees not to invoke any of its remedies under the Lease until the
thirty (30) days have elapsed, or during any period that Lender is proceeding to
cure
-3-
<PAGE>
the default with due diligence, or is attempting to obtain the right to enter
the Premises and cure the default
8. Effect of Assignment. Notwithstanding that Landlord has made a
present assignment of all of its rights under the Lease to Lender, Lender shall
not be liable for any of the obligations of Landlord to Tenant under the Lease
until Landlord has obtained possession of the Property by foreclosure or deed in
lieu of foreclosure, and then only to the extent provided in paragraph 3 above.
9. Estoppel Certifications. Tenant hereby certifies and represents
to Lender as provided below.
(a) The Lease constitutes the entire agreement between Landlord
and Tenant relating to the Premises and the Property.
(b) The Lease is in full force and effect, and has not been
amended, modified, or assigned by Tenant, either orally or in writing.
(c) No Payments to become due under the Lease have been paid more
than one (1) month in advance of the due date.
(d) Tenant has no present claim, offset or defense under the
Lease, and Tenant has no knowledge of any uncured breach or default by Landlord
or Tenant under the Lease or of any event or condition which, with the giving of
notice or the passage of time or both, could constitute a breach or default
under the lease.
(e) Tenant has no knowledge of any prior sale, transfer,
assignment, hypothecation or pledge of Landlord's interest under the Lease or of
the rents due under the Lease.
(f) Except as otherwise provided in the Lease, Tenant has made
no agreements with Landlord concerning free rent, partial rent, rebate or rental
payments, setoff, or any other type of rental concession.
10. Costs and Attorney's Fees. In the event of any claim or dispute
arising out of this Agreement, the party that substantially prevails shall be
awarded , in addition to all other relief, all attorneys' fees and other costs
and expenses incurred in connection with such claim or dispute; including
without limitation those fees, costs, and expenses incurred before or after
suit, and in any arbitration, and any appeal, any proceedings under any present
or future bankruptcy act or state receivership, and any post-judgement
proceedings.
11. Notices. All notices to be given under this Agreement shall be in
writing and personally delivered or mailed, postage prepaid, certified or
registered mail, return receipt requested, to Lender at the address indicated on
the first page of this Agreement, and to Tenant at its address indicated below.
All notices which are mailed shall be deemed given three (3) days after the
postmark thereof. Either party may change their address by delivery of written
notice to the other party.
-4-
<PAGE>
12. Miscellaneous. This agreement may not be modified except in writing
and executed by the parties hereto or their successors in interest. This
agreement shall inure to the benefit of and be binding upon the parties hereto
and their successors and assigns. As used herein, "Landlord" shall include
Landlord's predecessors and successors in interest under the Lease, and "Lender"
shall include any purchaser of the Property at any foreclosure sale. All rights
of Lender herein to collect rents on behalf of Landlord under the Lease are
cumulative and shall be in addition to any and all other rights and remedies
provided by law and by other agreements between Lender and Landlord or others.
If any provision of this Agreement is determined to be invalid, illegal or
unenforceable, such provision shall be considered severed from the rest of
this Agreement and the remaining provisions shall continue in full force and
effect as if such provision had not been included. This Agreement shall be
governed by the laws of the State of California. This Agreement may be
executed in one or more counterparts, all of which together shall constitute
one and the same original.
DATED this day of , 1999
NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR LEASE BECOMING SUBJECT TO
AND OF LOWER PRIORITY THAN THE LIEN OF THE DEED OF TRUST (DEFINED
ABOVE).
IT IS RECOMMENDED THAT, PRIOR TO THE EXECUTION OF THIS
AGREEMENT, THE PARTIES CONSULT WITH THEIR ATTORNEYS WITH RESPECT
HERETO.
"LENDOR"
KEYBANK NATIONAL ASSOCIATION,
a National banking association
By:
------------------------------------
Its
-------------------------------
-5-
<PAGE>
"TENANT"
------------------------------------
a
-----------------------------------
By:
---------------------------------
Its
------------------------------
Address:
----------------------------
----------------------------
----------------------------
CONSENTED AND AGREED TO:
"LANDLORD"
- ----------------------------- ,
a
---------------------------
By:
-------------------------
Its
----------------------
ALL SIGNATURES MUST BE ACKNOWLEDGED
-6-
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On , 1999, before me, the undersigned, a notary public in and
for said state, personally appeared , personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the person, or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
Notary Public
-7-
<PAGE>
EXHIBIT A
TO
SUBORDINATION, NONDISTURBANCE AND
ATTORNMENT AGREEMENT AND ESTOPPEL CERTIFICATE
Legal Description
The Property is located in County, California and is legally described as
follows:
-8-
<PAGE>
SCHEDULE TWO
TO
EXHIBIT F
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
SNDA
----
(See Construction and Permanent SNDA Samples Attached)
These samples are subject to negotiation by Tenant.
<PAGE>
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
------------------------
THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this
"Agreement") made as of the [ ] day of [ ], 1997, by and among Nomura Asset
Capital Corporation ("Leader"), ("Tenant") and ("Landlord").
WITNESSETH:
----------
WHEREAS, Lender has agreed to make a loan (the "Loan") of up to [ ] to
Landlord;
WHEREAS, the Loan will be evidenced by a deed of trust note (the "Note") of
even date herewith made by Landlord to order of Lender and will be secured by,
among other things, a deed of trust, assignment of leases and rents and security
agreement (the "Deed of Trust") of even date herewith made by Landlord to Lender
covering the land (the "Land") described on Exhibit A attached hereto and all
improvements (the "Improvements") now or hereafter located on the land (the Land
and the Improvements hereinafter collectively referred to as the "Property");
and
WHEREAS, by a lease dated as of [ ] (which lease, as the same may have
been amended and supplemented, is hereinafter called the "Lease"), Landlord
leased to Tenant approximately [ ] square feet of space located in the
Improvements (the "Premises"); and
WHEREAS, the parties hereto desire to make the Lease subject and
subordinate to the Deed of Trust.
NOW, THEREFORE, the parties hereto, in consideration of the covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, hereby agree as follows:
1. The Lease, as the same may hereafter be modified, amended or
extended, and all of Tenant's right, title and interest in and to the Premises
and all rights, remedies and options of Tenant under the Lease, are and shall be
unconditionally subject and subordinate to the Deed of Trust and the lien
thereof, to all the terms, conditions and provisions of the Deed of Trust, to
each and every advance made or hereafter made under the Deed of Trust, and to
all renewals, modifications, consolidations, replacements, substitutions and
extensions of the Deed of Trust, so that at all times the Deed of Trust shall be
and remain a lien on the Property prior and superior to the Lease for all
purposes; provided, however, and Lender agrees, that so long as (A) no event has
occurred and no condition exists, which would entitle Landlord to terminate
the Lease or would cause, without further action of Landlord, the termination
of the Lease or would entitle Landlord to dispossess Tenant from the Premises,
(B) the term of the Lease has commenced and Tenant is in possession of the
Premises, (C) the Lease shall be in full force and effect and shall
<PAGE>
not have been otherwise modified or supplemented in any way without Lender's
prior written consent, (D) Tenant shall duly confirm its attornment to Lender or
its successor or assign by written instrument as set forth in Paragraph 3
hereof, (E) neither Lender nor its successors or assigns shall be liable under
any warranty of construction contained in the Lease or may implied warranty of
construction, and (F) all representations and warranties made herein by Tenant
shall be true and correct as of the date of such attornment; then, and in such
event Tenant's leasehold estate under the Lease shall not be terminated,
Tenant's possession of the Premises shall not be disturbed by Lender and Lender
will accept the attornment of Tenant.
2. Notwithstanding anything to the contrary contained in the Lease, Tenant
hereby agrees that in the event of any act, omission or default by Landlord or
Landlord's agents, employees, contractors, licensees or invitees which would
give Tenant the right, either immediately or after the lapse of a period of
time, to terminate the Lease, or to claim a partial or total eviction, or to
reduce the rent payable thereunder or credit or offset any amounts against
future rents payable thereunder, Tenant will not exercise any such right (i)
until it has given written notice of such act, omission or default to Lender by
delivering notice of such act, omission or default, in accordance with Paragraph
8 hereof, and (ii) until a period of not less than sixty (60) days for remedying
such act, omission or default shall have elapsed following the giving of such
notice. Notwithstanding the foregoing, in the case of any default of Landlord
which cannot be cared within such sixty (60) day period, if Lender shall within
such period proceed promptly to cure the same (including such time as may be
necessary to acquire possession of the Premises if possession is necessary to
effect such cure) and thereafter shall prosecute the curing of such default with
diligence, then the time within which such default may be cured by Lender shall
be extended for such period as may be necessary to complete the curing of the
same with diligence. Lender's cure of Landlord's default shall not be
considered an assumption by Lender of Landlord's other obligations under the
Lease. Unless Lender otherwise agrees in writing, Landlord shall remain solely
liable to perform Landlord's obligations under the Lease (but only to the extent
required by and subject to the limitation included with the Lease), both before
and after Lender's exercise of any right or remedy under this Agreement. If
Lender or any successor or assign becomes obligated to perform as Landlord under
the Lease, such person or entity will be released from those obligations when
such person or entity assigns, sells or otherwise transfers its interest in the
Premises or the Property.
3. Without limitation of any of the provisions of the Lease, in the
event that Lender succeeds to the interest of Landlord or any successor to
Landlord, then subject to the provisions of this Agreement including, without
limitation, Paragraph 1 above, the Lease shall nevertheless continue in full
force and effect and Tenant shall and does hereby agree to attorn to and accept
Lender and to recognize Lender as its Landlord under the Lease for the then
remaining balance of the term thereof, and upon request of Lender, Tenant shall
execute and deliver to Lender an agreement of attornment reasonably satisfactory
to Lender.
4. If Lender succeeds to the interest of Landlord or any successor to
Landlord, in no event shall Lender have any liability for any act or omission of
any prior landlord under the Lease which occurs prior to the date Lender
succeeds to the rights of Landlord under the Lease, nor any liability for
claims, offsets or defenses which Tenant might have had against Landlord.
2
<PAGE>
In no event shall Lender have any personal liability as sucessor to Landlord and
Tenant shall look only to the estate and property of Lender in the Land and the
Improvements for the satisfaction of Tenant's remedies for the collection of a
judgment (or other judicial process) requiring payment of money in the event of
any default by Lender as Landlord under the Lease, and no other property assets
of Lender shall be subject to levy, execution or other enforcement procedure for
the satisfaction of Tenant's remedies under or with respect to the Lease.
5. Tenant agrees that no prepayment of rent or additional rent due under
the Lease of more than one month in advance, and no amendment, modification,
surrender or cancellation of the Lease, and no waiver or consent by Landlord
under the terms of the Lease, shall be binding upon or as against Lender, as
holder of the Deed of Trust, and as Landlord under the Lease if it succeeds to
that portion, unless consented to in writing by Lender. In addition, and
notwithstanding anything to the contrary set forth in this Agreement, Tenant
agrees that Lender, as holder of the Deed of Trust, and as Landlord under the
Lease if it succeeds to that position, shall in no event have any liability
for the performance or completion of any initial work or installations or for
any loan or contribution or rent concession towards initial work, which are
required to be made by Landlord (A) under the Lease or under any related Lease
documents or (B) for any space which may hereafter become part of said
Premises, and any such requirement shall be inoperative in the event Lender
succeeds to the position of Landlord prior to the completion or performance
thereof. Tenant further agrees with Lender that Tenant will not voluntarily
subordinate the Lease to any lien or encumbrance without Lender's prior
written consent.
6. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute and
be construed as one and the same instrument.
7. All remedies which Lender may have against Landlord provided herein,
if any, are cumulative and shall be in addition to any and all other rights
and remedies provided by law and by other agreements between Lender and
Landlord or others. If any party consists of multiple individuals or entities,
each of same shall be jointly and severally liable for the obligations of such
party hereunder.
8. All notices to be given under this Agreement shall be in writing and
shall be deemed served upon receipt by the addressee if served personally or, if
mailed, upon the first to occur of receipt or the refusal of delivery as shown
on a return receipt, after deposit in the United States Postal Service certified
mail, postage prepaid, addressed to the address of Landlord, Tenant or Lender
appearing below, or, if sent by telegram, when delivered by or refused upon
attempted delivery by the telegraph office. Such addresses may be changed by
notice given in the same manner. If any party consists of multiple individuals
or entities, then notice to any one of same shall be deemed notice to such
party.
3
<PAGE>
Lender's Address:
----------------
Nomura Asset Capital Corporation
Two World Financial Center, Building B
New York, New York 10281-1198
Attention: Ms. Sheryl McAfee
Tenant's Address:
- ----------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
Attention:
-------------------------------
Landlord's Address:
- ------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
Attention:
-------------------------------
9. This Agreement shall be interpreted and construed in accordance with
and governed by the laws of the State of California.
10. This Agreement shall apply to, bind and inure to the benefit of the
parties hereto and their respective successors and assigns. As used herein
"Lender" shall include any subsequent holder of the Deed of Trust.
11. Tenant acknowledges that Landlord has assigned to Lender its right,
title and interest in the Lease and to the rents, issues and profits of the
Property and the Property pursuant to the Deed of Trust, and that Landlord has
been granted the license to collect such rents provided no Event of Default has
occurred under, and as defined in, the Deed of Trust. Tenant agrees to pay all
rents and other amounts due under the Lease directly to Lender upon receipt of
written demand by Lender, and Landlord hereby consents thereto. The assignment
of the Lessee to Lender, or the collection of rents by Lender pursuant to such
assignment, shall not obligate Lender to perform Landlord's obligations under
the Lease.
[NO FURTHER TEXT ON THIS PAGE]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
NOMURA ASSET CAPITAL CORPORATION,
a Delaware corporation
By:
----------------------------------
Name:
Title:
[LANDLORD]
By:
----------------------------------
[TENANT]
By:
----------------------------------
5
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On , before me, a Notary Public in and for said
state, personally appeared , personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
- ----------------------------------
(SEAL)
6
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On , before me, a Notary Public in and for said
state, personally appeared , personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
- ----------------------------------
(SEAL)
7
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On , before me, a Notary Public in and for said
state, personally appeared , personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
- ----------------------------------
(SEAL)
8
<PAGE>
EXHIBIT G
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
SIGNAGE EXHIBIT
---------------
(To be provided)
<PAGE>
EXHIBIT H
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
Guaranty of Lease
(Intentionally Omitted)
<PAGE>
EXHIBIT I
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
HAZARDOUS MATERIALS DISCLOSURE
------------------------------
Lessor has provided Lessee, and Lessee acknowledges that it has received
and pursuant to Section 17.22(b) of the Lease, reviewed same, a copy of each of
those certain documents entitled: (i) PHASE I, ENVIRONMENTAL SITE ASSESSMENT
PACIFIC SHORES CENTER, REDWOOD CITY, CALIFORNIA, Prepared for: The Jay Paul
Company, San Francisco, California, Prepared by: IRIS ENVIRONMENTAL, Oakland,
California, December 20, 1999, Job No. 99-122A; and (ii) PHASE II, ENVIRONMENTAL
SITE ASSESSMENT, PACIFIC SHORES CENTER, 1000 SEAPORT BOULEVARD, REDWOOD CITY,
CALIFORNIA, Prepared for: The Jay Paul Company, San Francisco, California,
Prepared by: IRIS ENVIRONMENTAL, Oakland, California, January 14, 1999, Job No.
99-122-B
LESSEE
Phone.com, Inc.
A California corporation
By:
---------------------------
---------------------------
(Type or print name)
Its:
---------------------------
By:
---------------------------
---------------------------
(Type or print name)
Its:
---------------------------
<PAGE>
EXHIBIT J
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
NOTICE TO TENANTS AND TRANSFEREES OF
CURRENT OR FUTURE USES OF ADJACENT PORT PROPERTY
------------------------------------------------
Notice is hereby given to all lessees, tenants and transferees of land or
interests in land located within Pacific Shores Center of the presence or
potential future presence of Port related industrial activities on Port property
adjacent to and west of Pacific Shores Center. All recipients of this notice
should be aware of the following facts:
1. The parcel of Port property adjacent to Pacific Shores Center to the
northwest shown on the Exhibit____ attached hereto (the "Port Parcel") is now or
may be developed for Port related maritime and industrial uses similar to those
occupying other properties along the west side of Seaport Boulevard and to the
west of Pacific Shores Center.
2. Such Port related maritime and industrial activities are those which
are permitted by the general industrial zoning of the City of Redwood City and
may include heavy industrial land uses, including uses which involve the
receipt, transport, storage or management of hazardous wastes, aggregates,
cement, gravel and similar materials, including the outdoor storage and handling
of such materials.
3. Pacific Shores Center Limited Partnership, on behalf of itself, its
successors and assigns, has recognized, accepted and approved such uses of the
<PAGE>
Port Parcel subject to the utilization of Best Available Management Practices in
the development and use of the Port Parcel. Best Available Management Practices
are defined on Exhibit _____ attached hereto.
4. Despite the use of Best Available Management Practices on the Port
Parcel by the Port and its lessees and licensees and despite Pacific Shores
Center Limited Partnership's efforts to ensure compatibility between such uses
and those in Pacific Shores Center, it is possible that such uses will cause
emissions into the air of dust or other particulate matter, or noise or odorous
substances which may be offensive to or be perceived as a nuisance by occupants
of Pacific Shores Center.
5. Pursuant to covenants made by Pacific Shores Center Limited
Partnership on behalf of its successors and assigns, tenants and lessees, the
tenants, lessees and transferees of Pacific Shores Center Limited Partnership
have approved and accepted such neighboring uses subject to their utilization of
Best Available Management Practices.
6. Any actions to enjoin the continuation of such uses or to recover any
damages to persons or property related to their operations are subject to a
requirement for prior notice found in recorded covenants by Pacific Shores
Center Limited Partnership. The following language is excerpted from such
covenants:
"In the event that either party hereto believes that the other has failed
to perform any covenant made herein in favor of the other, at least ten
(10) days prior to the commencement of any action to enforce the covenants
hereunder or to recover damages for the breach thereof, that party who
believes that a failure to perform has occurred (the "Complaining Party")
shall give written notice (the "Notice") to the party alleged not to have
performed the covenant (the "Non-Complaining Party") of the specific nature
of the alleged failure and of the intent of the complaining Party to take
action to remedy the breach by the Non-Complaining Party. In the event
that the nature of the alleged failure to perform is such that the same
cannot reasonably be cured within ten (10) days after receipt of the Notice
(the "Notice Period"), the Non-Complaining Party shall not be deemed to be
in violation of its covenants and no action shall be commenced by the
Complaining Party if, within the
<PAGE>
Notice Period, the Non-Complaining Party commences such cure and thereafter
diligently and continuously prosecutes the same to completion within a
reasonable time. Provided, however, that the Complaining Party shall not
be precluded from recovering any actual damages suffered by reason of the
alleged failure to perform prior to or after delivery of the Notice,
whether or not such failure is thereafter cured."
<PAGE>
EXHIBIT K
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
NOTICE TO PACIFIC SHORES TENANTS, LESSEES,
SUCCESSORS, ASSIGNS AND TRANSFEREES REGARDING
CURRENT OR FUTURE USES OF ADJACENT RMC LONESTAR
AND PORT PROPERTY
-----------------
Notice is hereby given to all tenants, lessees, successors, assigns and
transferees of land or interest in land located within the Pacific Shores Center
of the presence or potential future presence of maritime and industrial
activities on RMC Lonestar and Port of Redwood City property west and adjacent
to Pacific Shores Center. Recipients of this notice should be aware of the
following:
1. The RMC Lonestar property and parcels of port property adjacent to and
west of Pacific Shores Center are shown on the map attached to this notice. The
RMC Lonestar and Port properties are now devoted to, or will be developed for,
maritime and industrial uses.
2. These maritime and industrial uses are those which are permitted by the
"Heavy Industry" General Plan designation and general industrial zoning of the
City of Redwood City. These uses include, by way of example and not limitation,
uses involving the receipt, transport, storage, handling, processing or
management of aggregates, cement, concrete, asphalt, soil or other landscaping
materials, recyclable metals and plastics, recyclable concrete and asphalt,
chemicals, petroleum products, hazardous wastes, and
<PAGE>
similar materials, including indoor storage, mixing and handling of these
materials.
3. These uses may cause, on either a regular or intermittent basis,
air emissions, including without limitation, dust and other particles, odors,
vibrations, loud noises, and heavy truck, rail or marine vessel traffic. These
uses may have a visual, aesthetic or other aspects that may be offensive or
perceived as a nuisance by occupants of Pacific Shores Center.
<PAGE>
EXHIBIT L
TO
PACIFIC SHORES CENTER LLC
LEASE
TO
PHONE.COM, INC.
FOR
Pacific Shores Center
Building 9
Redwood City, California
RULES AND REGULATIONS
---------------------
1. Lessee and Lessee's employees shall not in any way obstruct the
sidewalks, entry passages, pedestrian passageways, driveways, entrances and
exits to the Project or the Building, and they shall use the same only as
passageways to and from their respective work areas.
2. Any sash doors, sashes, windows, glass doors, lights and skylights
that reflect or admit light into the Common Area of the Project shall not be
covered or obstructed by the Lessee. Water closets, urinals and wash basins
shall not be used for any purpose other than those for which they were
constructed, and no rubbish, newspapers, food or other substance of any kind
shall be thrown into them. Lessee shall not mark, drive nails, screw or drill
into, paint or in any way deface the exterior walls, roof, foundations, bearing
walls or pillars without the prior written consent of Lessor, which consent may
be withheld in Lessor's sole discretion. The expense of repairing any breakage,
stoppage or damage resulting from a violation of this rule shall be borne by
Lessee.
3. No awning or shade shall be affixed or installed over or in the
windows or the exterior of the Premises except with the consent of Lessor, which
may be withheld in Lessor's discretion.
4. No boring or cutting for wires shall be allowed, except with the
consent of Lessor, which consent may be withheld in Lessor's discretion.
5. Lessee shall not do anything in the Premises, or bring or keep
anything therein, which will in any way increase or tend to increase the risk
<PAGE>
of fire or the rate of fire insurance or which shall conflict with the
regulations of the fire department or the law or with any insurance policy on
the Premises or any part thereof, or with any rules or regulations established
by any administrative body or official having jurisdiction, and it shall not use
any machinery therein, even though its installations may have been permitted,
which may cause any unreasonable noise, jar, or tremor to the floors or walls,
or which by its weight might injure the floors of the Premises.
6. Lessor may reasonably limit weight, size and position of all safes,
fixtures and other equipment used in the Premises. If Lessee shall require extra
heavy equipment, Lessee shall notify Lessor of such fact and shall pay the cost
of structural bracing to accommodate it. All damage done to the Premises or
Project by installing, removing or maintaining extra heavy equipment shall be
repaired at the expense of the Lessee.
7. Lessee and Lessee's officers, agents and employees shall not make nor
permit any loud, unusual or improper noises nor interfere in any way with other
Lessees or those having business with them, nor bring into or keep within the
Project any animal or bird or any bicycle or other vehicle, except such vehicle
as Lessor may from time to time permit.
8. No machinery of any kind will be allowed in the Premises without the
written consent of Lessor. This shall not apply, however, to customary
office equipment or trade fixtures or package handling equipment.
9. All freights must be moved into, within and out of the Project only
during such hours and according to such reasonable regulations as may be posted
from time to time by Lessor.
10. No aerial or satellite dish or similar device shall be erected on the
roof or exterior walls of the Premises, or on the grounds, without in each
instance, the written consent of Lessor. Any aerial installed without such
written consent shall be subject to removal without notice at any time. Lessor
may withhold consent in its sole discretion.
11. All garbage, including wet garbage, refuse or trash shall be placed by
the Lessee in the receptacles appropriate for that purpose and only at locations
prescribed by the Lessor.
<PAGE>
12. Lessee shall not burn any trash or garbage at any time in or about the
Premises or any area of the Project.
13. Lessee shall observe all security regulations issued by the Lessor and
comply with instructions and/or directions of the duly authorized security
personnel for the protection of the Project and all tenants therein.
14. Any requirements of the Lessee will be considered only upon written
application to Lessor at Lessor's address set forth in the Lease.
15. No waiver of any rule or regulation by Lessor shall be effective
unless expressed in writing and signed by Lessor or its authorized agent.
16. Lessor reserves the right to exclude or expel from the Project any
person who, in the judgment of the Lessor, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of the
law or the rules and regulations of the Project.
17. Lessor reserves the right at any time to change or rescind any one or
more of these rules and regulations or make such other and further reasonable
rules and regulations as in Lessor's judgment may from time to time be necessary
for the operation, management, safety, care, and cleanliness of the Project and
the Premises, and for the preservation of good order therein, as well as for the
convenience of other occupants and tenants of the Project. Lessor shall not be
responsible to Lessee or the any other person for the non-observance or
violation of the rules and regulations by any other tenant or person. Lessee
shall be deemed to have read these rules and have agreed to abide by them as a
condition to its occupancy of the Premises.
18. Lessee shall abide by any additional rules or regulations which are
ordered or requested by any governmental or military authority.
19. In the event of any conflict between these rules and regulations, or
any further or modified rules and regulations from time to time issued by
Lessor, and the Lease provisions, the Lease provisions shall govern and control.
20. Lessor specifically reserves to itself or to any person or firm it
selects, (i) the right to place in and upon the Project, coin-operated machines
for the
<PAGE>
sale of cigarettes, candy and other merchandise or service, and (ii) the revenue
resulting therefrom.
<PAGE>
EXHIBIT M
---------
ESTIMATED TAX ASSESSMENT FOR PACIFIC SHORES
-------------------------------------------
$12,000,000 @ 6% with 15-year amortization divided by 1,641,534 SF
= $0.06 (1)
For Phone.com:
- --------------
279,584 x $0.06 = $16,775 per month
- -------------------------------------------------------
(1) Interest rate subject to change.
1
<PAGE>
EXHIBIT N
---------
EARLY CONSTRUCTION ITEMS
------------------------
* Shell Fire Protection
* Perimeter Stairs
* Fireproofing of Steel
* Elevator Pits
* Elevator Penthouse Structure
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 123,782
<SECURITIES> 373,157
<RECEIVABLES> 33,061
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 534,888
<PP&E> 22,397
<DEPRECIATION> 5,225
<TOTAL-ASSETS> 1,489,339
<CURRENT-LIABILITIES> 122,131
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 1,365,361
<TOTAL-LIABILITY-AND-EQUITY> 1,489,339
<SALES> 0
<TOTAL-REVENUES> 39,990
<CGS> 0
<TOTAL-COSTS> 11,381
<OTHER-EXPENSES> 139,832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,791
<INCOME-PRETAX> (98,432)
<INCOME-TAX> 1,095
<INCOME-CONTINUING> (99,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,527)
<EPS-BASIC> (1.51)
<EPS-DILUTED> (1.51)
</TABLE>
